Financial Statement Analysis of Rahimafrooz Batteries Limited

5)      To analyze the Data on the basis of the steps of financial statement analysis.

6)      To recommend how to develop the quality of financial reporting and guide Rahimafrooz Batteries limited to focus on poor line items of the financial statements to increase revenue, profit and market share and to decrease total cost.

Sources of Data:

The report is mainly based on quantitative data. The sources of collecting data are as follows:

Primary Sources:

Internet

Secondary Sources:

The annual report of 2010 of Rahimafrooz Batteries Limited,

The annual report of 2010 Quasem Drycell Limited

The annual report of 2010 Navana Batteries Limited

Methodology:

For the purpose of the study the methods of techniques used:

Using available information

Using available information:

It is inexpensive. But the annual report of Rahimafrooz Batteries not negotiable. So, to collect this copy, I had gone to my friend, who is an employee of this organization and collect this copy. Other three companies are listed. But annual report 2010 of Navana batteries limited collected was not in the market, so to collect that copy I had to go the 125/A, Motijel Commercial Area.

Literature review:

To pinpoint the different directions taken in quantitative ratio based research. By critically considering financial ratio literature, we also aim to help the decision makers to use ratios in an efficient way. (see Foster, 1978, pp. 36-37, and Salmi, Virtanen and Yli-Olli, 1990, pp. 10-11)[1]but here there give no clear practical example to relate these theoretical application. (Jesswein, 2010) explaining the differences between cash and accrual reporting, FASB and IASB presentation differences, and identifies various company ratios based on financial statements from three companies: Toyota, Verizon Communications, and Bed, Bath & Beyond But here no mention of using trend analysis, vertical analysis or using few ratio applications.

Data Analysis:

According to the objectives of the report, I analyzed the factor analysis among the ocean of information and prepared the Analysis of homogeneity (internal consistency), which gives an indication of the reliability of a measurement instrument. The data (each line items/financial statements) selected from the annual report will be analyzed through graphically, horizontal analysis, vertical analysis and ratio analysis. explains the differences between cash and accrual reporting, FASB and IASB presentation differences, and identifies various company ratios based on financial statements from three companies: Toyota, Verizon Communications, and Bed, Bath & Beyond. (Jesswein, 2010)[2]Scope of the report:
To convert the financial statement data into formats that facilitate the evaluation of a firm’s financial condition and performance both over time and in comparison with industry competitors. Rahimafrooz batteries limited is the market leader in the automotive batteries. So, I take other three leading battery manufacturing companies-Quasem Drycell Limited, Olympic Industries limited and Navana Batteries Limited for comparability and performance management.

Limitation of the study:

• As a leading organization, Rahimafrooz all the information regarding accounting treatment and financial information are not disclosed being confidential.
• Due to time constraint and availability of enough information in information regarding the companies, difficult to disclose the detail about the respective companies.
• Some Other leading companies like HAMKO, Rangs, Volvo Batteries; they did not give me their annual report after telling the matter of internship. That’s why I can not show the truth picture of the performance of total automotive battery industry in the Bangladesh.
• The method of data collection is simple but the processing of data is so difficult. So, i tried the most important tools to show the clear scenario of the performance of the four battery companies on the basis of their financial statements.

Items to be discussed:

q Part -1:

• Rahimafrooz Group

q Part-2:

• Rahimafrooz Batteries Limited
• o   Quasem Drycells Limited
• Qlymic Industries Limited (Battery Unit)
• Navana Batteries Limited.

PART-1: INTRODUCTION TO RAHIMAFROOZ GROUP

Origin of the Rahimafrooz Group

Rahimafrooz Bangladesh Limited was established in 1950A.D.  as a trading company. Late A.C. Abdur Rahim was the proprietor in this time. From 1954 it was established as a limited company. In the new environment he had to start afresh. He had little capital. His main assets were self-confidence and a strong faith in the Almighty, which carried him through all the difficulties with a remarkable triumph. He finally established a small proprietary trading company named Rahimafrooz & Co, at Chittagong in 1950 which was later incorporated on 15th April 1954, which is now Rahimafrooz (Bangladesh) Ltd. Rahimafrooz expanded rapidly into various trading items. Within 5 years, Mr. Rahim was able to enter into a joint venture with Lucas (UK) to set up a modern automotive battery factory. He acquired the principal company Lucas Service Ltd in 1980 which is now known as Rahimafrooz Batteries Ltd. Apart from business, he engaged himself in benevolent activities. All through his life he was respected for his values and caring attitude. He passed away on the 14th March 1982 in London leaving behind his dream, Rahimafrooz. After a few years he left that job and ventured into a small partnership business. During early 1940s, he got active in commercial trading of scarce items and gained valuable experience. In 1947, he decided to move to Chittagong to live in an environment of religious freedom. In the new environment he had to start afresh. He had little capital. His main assets were self-confidence and a strong faith in the Almighty, which carried him through all the difficulties with a remarkable triumph. He finally established a small proprietary trading company named Rahimafrooz & Co, at Chittagong in 1950 which was later incorporated on 15th April 1954, which is now Rahimafrooz (Bangladesh) Ltd. Rahimafrooz expanded rapidly into various trading items. Within 5 years, Mr. Rahim was able to enter into a joint venture with Lucas (UK) to set up a modern automotive battery factory. He acquired the principal company Lucas Service Ltd in 1980 which is now known as Rahimafrooz Batteries Ltd. Apart from business, he engaged himself in benevolent activities. Rahimafrooz Bangladesh Limited was started in business agreement with world famous England battery company Lucas from 1959. Later on, they established an ultramodern battery production factory in Nakhalpara Tejgaon, Dhaka with the “Lucas” Brand name. Then from 1980 it got license from the England Lucas Company collaborating technological and information support. At present Rahimafrooz has been producing and marketing various kinds of batteries like automotive battery, storage battery etc. Rahimafrooz Bangladesh Ltd. also has been marketed world famous tire “Dunlop”. Now Rahimafrooz Bangladesh Ltd. is involved with various kinds of production distribution and agency ship business.

 of Rahimafrooz Group

1. Rahimafrooz (Bangladesh) Ltd. (Group Parent Company)
2. Rahimafrooz (Batteries) Ltd.
3. Rahimafrooz Distribution Ltd.
4. Rahimafrooz Energy Services Ltd.
5. Rahimafrooz Renewable Energy Ltd.
6. Rahimafrooz CNG Ltd.
7. Rahimafrooz Superstores Ltd.
8. Excel Resources Ltd.
9.  Rahimafrooz Globatt Ltd

 Rahimafrooz (Bangladesh) Limited (RABL) is the Group Holding and Parent Company including the Group Corporate Center that guides the Strategic Business Units (SBUs). It ensures continuous management innovation, technology adoption, new initiatives, corporate governance and compliance. Rahimafrooz Bangladesh Ltd has imported world famous Dunlop Tire and Tube which is producing in Japan and India.At present Rahimafrooz Bangladesh ltd. Is one of the top most organizations in the country many officer and personnel work hard.

From the development of the organization Rahimafrooz Bangladesh ltd. is mainly work in four divisions

1. Corporate Division
2. Manufacturing Division
3. Marketing and sales division
4. International division

 Increasing  or decreasing the  market share of Lucas Battery:

In the query of increasing or decreasing of market share of Lucas Battery it is found that the market share of LUCAS BATTERY is decreasing proportionately with  the emerging of new competitors in the market like HAMKO, NAVANA, and VOLVO etc and for some other major reasons.

3. Price  of Lucas Battery compared to the competitors:

The survey was conducted to observe the price of lucas battery. And it is found from the survey that 23% respondents believe that the price is very high.

On the other hand, a major part that is 67 percent of respondents believe that the price is competitive and it does not any matter to them if quality is sound. But if the question of quality comes to the customers about Lucas only then they will search for alternative best but till these respondents believe that Lucas is the only leading brand.

4. Suggestions from respondents to sustain market position of Lucas Battery:

During the survey it was asked that how the Lucas Battery can sustain its position and all the respondents answered in one word that it should get back the previous quality that was offered in early year.

Inventory turnover

The idea behind inventory turnover is to determine how quickly the company uses its inventory to generate sales. As an example, an inventory turnover of 3.0 would indicate that a company turns over its inventory three times a year, or approximately every four months. High inventory turnover indicates high usage while low inventory turnover indicates low usage. Inventory can be related to the required investment to finance the inventory. Firms with low turnover generally require additional capital in order to finance their inventory levels. The general idea is to find the turnover

ratio that is optimal for the company.

Calculation of this ratio is: (annualised cost of goods sold /end period of inventor)

Average collection period

The purpose of this ratio is to measure the time it takes (in days) to collect an average credit sale. The average collection period is generally driven by a company’s stated credit period, but may extend significantly beyond that period if the quality of receivables is not properly monitored. As the average collection period increases, so does the investment in accounts receivable and the associated capital requirements and the need for increased borrowing, and hence interest expense (and interest risk). The proper comparison as to whether a ratio is good or bad is against industry averages. A low average collection period indicates aggressive collection of accounts receivable and can be interpreted positively. A low average collection period, however, may indicate a very tight credit policy on behalf of the company, which could mean that possible sales may be lost as marginal (but

ultimately creditworthy) customers are being turned away. The average collection period is of critical interest to cash managers because it provides an indication of the length of time a company must wait for collection of sales proceeds. It represents the major portion of a company’s cash flow time-line.

Calculation of this ratio is: year-end accounts receivable (average revenue/365)

Fixed assets turnover

The purpose of this ratio is to measure the earning power of the company, especially in relation to other companies in the same industry. The higher the figure, the faster the company is turning over its fixed assets and making more efficient use of its fixed asset base. The fixed asset turnover figure can be thought of as a measure of a company’s operating leverage, or ‘‘yield’’ as a measurement of dollar sales per dollar fixed assets. A company’s analyst should have a target or optimal level for this ratio. The proper level of the ratio will be significantly affected by the industry in which it belongs.

Companies in industries with high levels of capital intensity (heavy machinery) will have much lower fixed asset turnover than those industries with low levels of fixed asset investment (services industries). The ratio that analysts should take care to compare the company with is with other companies in the same industry or with appropriate industry averages.

Calculation of this ratio is: (revenues/net fixed assets)

Total asset turnover

The purpose of this ratio is to measure the efficiency with which the company uses its total asset base in generating revenues. The proper level for this ratio is affected significantly by the industry to which it belongs. For both the fixed assets turnover and the total assets turnover, the real measure is the level of revenues/sales supported by a given level of assets.

Calculation of this ratio is: (revenues/total assets)

Debt management ratios

Debt management ratios monitor the use of debt (leverage) by the company, either by determining the ratio of debt levels to asset levels or by analysing the ratio of various indicators of profitability to debt service. Like liquidity ratios, they are of great interest to creditors in analysing the financial health of the company. Debt management ratios include:

1. total debt to total assets;
2. times interest earned; and
3.  debt to equity ratio (leverage)

Total debt to total assets

This ratio is a measure of the relative importance of total debt in the capital structure and is used as a general measure of the creditworthiness and financial risk of the company. The ratio is sometimes referred to as the gearing ratio.

Calculation of this ratio is: (total debt/total assets)

Times interest earned (TIE)

This ratio is an indicator of how many times earnings before interest and tax (EBIT) could decline before the company is unable to meet or cover its interest obligations. A TIE figure of 4.0 means that the company’s EBIT could decline by as much as four times before the company would be unable to cover its interest charges.The ratio is similar to some of the coverage ratios discussed later because it uses a measure of income (or earnings) to determine the ability of the company to meet some fixed obligations.

Calculation of this ratio is: (EBIT/ interest charges)

Debt to equity ratio

The relative importance of debt to the capital structure is shown by this ratio and it is compared over time for the same company and for similar companies. The ratio can be defined in two ways. Some analysts calculate it as total debt (current liabilities plus long term debt) divided by equity, while

others feel that only long term debt should be compared to equity. Deciding what ratio to use depends on the company and the industry convention for ratios. Companies that use a significant amount of short-term debt on a regular basis (for permanent finance) should usually use total debt in the ratio. Companies that use a small amount of short-term debt, or use it only on a seasonal basis, should generally use long-term debt.

Calculation of this ratio is: (Debt (total debt or long-term debt)/Total equity)

Profitability ratios

Profitability ratios show the combined effect of liquidity and asset and debt management on operating ratios .Liquidity does not just happen. Liquidity management is the essence of working capital

management, and it is obvious that high levels of liquidity are not necessarily the desired goal of financial managers, though some desired level of liquidity is important.

This addresses the viability/solvency issue.

Profit margin on sales

This ratio determines the ratio of net profit after tax (NPAT) divided by sales, and is a measure of the general profitability of the company. There are several profit margin ratios, the most popular being gross profit margin, which is calculated, as sales minus variable costs of goods sold divided by sales. This ratio provides a measure of the general operating profitability of the company.

Calculation of this ratio is: (NPAT /Sales)

Basic earning power

This ratio shows the earning power on total assets and is sometimes calculated on total tangible assets to show the operating profit rate of return. Another way to look at this ratio is as a measure of pre-tax

profitability of the company’s assets, or as a measure of the ability of assets to generate profits. This is a useful measure of comparison between different companies because it does not include the impact of taxes or debt structure (leverage), which may vary greatly from company to company.

Calculation of this ratio is: (EBIT total assets)

Return on total assets (ROA):

The return on assets after tax shows the net operating rate of return. Both the ROA and basic earnings power calculations provide an indication of the company’s efficiency of operations, as well as the ability of the company’s asset base to generate profits. In the case of ROA, the ability of the assets to generate after tax profits are measured, thus reflecting the impact of both taxes and the use of debt (leverage).

The term net income could refer to net profit after taxes (NPAT) or could be a more restrictive measure, such as earnings available to shareholders. The ratio analyst must have a clear definition of all components of the formulae in determining them.

Calculation of this ratio is: (net income/total assets)

Return on equity (ROE):

This widely used ratio indicates the earning power on shareholder investment and is frequently used in comparing two or more companies in an industry. The ratio focuses on the returns available to ordinary shareholders.

Calculation of this ratio is: (net income available to ordinary shareholders/common equity

Market value ratios

Market value ratios provide an indication of how investors feel about the company’s

history and future prospects. They differ from the previous ratios in that they are based primarily on the current market value (share price) of the company being analyzed

Earnings per share (EPS) is the amount of earnings per each outstanding share of a company’s stock The EPS formula does not include preferred dividends for categories outside of continued operations and net income. Earnings per share for continuing operations and net income are more complicated in that any preferred dividends are removed from net income before calculating EPS. This is because preferred stock rights have precedence over common stock[4]Dividend payout ratio is the fraction of net income a firm pays to its stockholders in dividends: The part of the earnings not paid to investors is left for investment to provide for future earnings growth. Investors seeking high current income and limited capital growth prefer companies with high Dividend payout ratio. However investors seeking capital growth may prefer lower payout ratio because capital gains are taxed at a lower rate. High growth firms in early life generally have low or zero payout ratios. As they mature, they tend to return more of the earnings back to investors. Note that dividend payout ratio is the reciprocal of dividend cover, which is calculated as EPS/DPS.[5]Uses and limitations of ratio analysis

The three main users of financial ratios are as follows.

1. Corporate managers, who use ratios to manage, control and improve their company.

2. Credit analysts who use ratios to determine the creditworthiness of a company.

3. Share analysts or investors who use ratio analysis to determine which shares to

recommend or purchase, or what the company’s securities ratings should be.

There are four primary problems in using ratio analysis in corporate finance.

1. Ratios look primarily at past performance and may not be an accurate indicator of future performance. They represent a position at one point in time; conditions could change the next day.

2. Ratios only point to potential problem areas and do not always identify the specific problem.

3. It is not always easy to distinguish between good and bad values for ratios. Also, what is good for one company may be bad for another.

Some are parts:

Financial Statement Analysis of Rahimafrooz Batteries Limited (Part 1)

Financial Statement Analysis of Rahimafrooz Batteries Limited (Part 2)

Financial Statement Analysis of Rahimafrooz Batteries Limited (Part 3)