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Introduction

Objective
The objective of this report is to analyze the scenario of Bata Shoe Company (Bangladesh) Ltd. as well as gathering practical knowledge from the financial context and establish a relation with our knowledge of the course. A key objective is to conduct a ratio analysis, developing common size income statement of the company and evaluate their performances by generating industry averages or industry standard values. To evaluate their performances against the industry standard values we have used the Do Pont System to analyze the ratios. The project includes application of various ratio formulas to find out the ratios required to understand the financial situation of the company in comparison to the industry average.

Methodology
Before gathering all the information, we generated a clear and precise strategy to work. First we collected the Annual report of the company for the year 2005 & 2004. Then the ratios and industry standard values are generated using Microsoft Excel. Afterwards, the original reports are common sized using the format of our book (Principles of Managerial Finance, Lawrence J.Gitman.) Finally, implementing our learning in the course did the analysis part.

Scope
This report focuses on the various ratios under the criterion of liquidity, profitability, asset management, debt management, market value which are generated on the financial performances of the shoe manufacturing company naming Bata Bangladesh from Dhaka Stock Exchange of the year 2005.

Limitation
T analysis part reflects our limited knowledge about the vast financial world. Furthermore, the assumptions made about various situations can be different from what it is in the real world. So, the content of the report may vary slightly from reality and the analysis in the report may not fully reflect the actual situation of the company.

Source of data
The information provided in this report was collected in several ways. We collected the annual report from people in parental level and other essential information was collected from the internet. Finally, they were manipulated with the help of the contents of our book.

Background of the Company


Bata Bangladesh is affiliated to the Bata Shoe Organization, the world's largest footwear manufacturing and marketing organization. It started operation in Bangladesh in 1962. In 1972 it incorporated in Bangladesh. Currently, Bata Bangladesh operates 2 manufacturing plant Tongi and Dhamrai, Bata Bangladesh is producing around 110,000 pairs of shoes daily. It has a modern tannery with the latest technological facilities to process 5 million square feet of leather yearly. The Tannery is equipped with a high-tech effluent treatment plant ensuring a pollution free environment for both workers and locality where we operate. Bata Bangladesh sells all kinds of footwear which are classified in alignment with market sectors as follows: Domestic market under the trademarks of Bata, Power, Weinbrenner Bubblegummers, Marie Claire, B-First and Sandak through a countywide distribution network comprising retail stores, DSPs and independent dealers. Overseas market under the trademarks of its customers, and also markets its own brands to sister companies and the Middle East.

Why we have chosen the company


Bata Shoe Company (Bangladesh) Ltd. is the leading footwear manufacturing and marketing organization in Bangladesh. For the last 22 years they are operating here. From their annual report we have seen that it has a high turnover and profit rate and these are increasing every year. Last year it achieved 18% growth in turnover. It has also achieved the VIP taxpayer status in the year 2005. All these points have helped us to choose the company for our project.

RATIO CALCULATIONS

Workings:
All the calculations are done for the ratio shown in below:
Liquidity Ratios

1. Liquidity Ratio = Current Asset/Current Liabilities (Current Asset and Current Liabilities are taken from balance sheet) 2. Quick or Acid Ratio = Current Asset-Inventories/Current Liabilities (Current Asset, Inventories, Current Liabilities are taken from balance sheet)

Activity or Asset Management Ratios

3. Inventory Turnover = Cost of Good Sold/Inventory(COGS is taken from income statement, and Inventory from balance sheet) 4. Fixed Asset Turnover = Cost of Good Sold/Fixed Asset(COGS is taken from income statement and Fixed Asset from balance sheet) 5. Total Asset Turnover = Total Operating Income/Total Asset(Total Operating Income Total Asset is taken from income statement and Total Asset from balance sheet) 6. Average collection period (period average) = Accounts receivable/Average sales per day . [Average sales per day = Annual sales/ 360] 7. Average payment period (period end) = Accounts payable/ Average purchases per day. [Average purchases per day = Annual purchases/ 360]

Debt Management Ratios

7. Debt Ratio = Total Liabilities/ Total Asset (Total Liabilities, Total Asset are taken from balance sheet) 8. Times Interest Earned = EBIT/Interest paid on borrowing (EBIT, and Interest are taken from Income sheet) 9. Fixed payment coverage = EBIT + Lease payment/ Interest + Lease payments + {(principal payments + Preferred stock dividends) * [1/(1-T)]}
Profitability Ratios

10. Gross Profit Margin = Sales Cost of goods sold/ Sales ( Sales or Turn over and Cost of goods sold are taken from Income statement) 11. Operating Profit Margin = Operating Profits / Sales ( Sales and Operating Profits are taken from Income statement) 12. Net Profit Margin = Earnings Available for Common stockholders/ Sales ( Sales and Earnings available for common stockholders are taken from Income Statement ) 13. Earnings per Share = Earnings Available for common stockholders/ Numbers of Shares of common stock outstanding. ( EACSH is from income statement and No. of common stock is from Balance sheet) 14. Return On Total Assets = Earnings Available for common stockholders /Total Assets (EACSH is taken from Income sheet and Total Asset is taken from balance sheet) 15. Return On Equity = Earnings Available for common stockholders /Common Stock Equity (EACSH is taken from Income sheet and Common stock Equity is taken from balance sheet)
Market Value Ratios

16. Price/Earnings = Market Price Per Share of common stock / Earnings Per Share (Price Per Share taken from News paper and EPS from Income statement)

LIQUIDITY RATIO

i)

Current Ratio
= = Tk. 1507240857 Tk. 979377824 1.54

ii)

Quick(Acid-test) Ratio
= = Tk. (1507240857 900592601) Tk. 979377824 0.62

ACTIVITY RATIOS

i)

Inventory Turnover Ratio


= = Tk. 1921820859 Tk. 900592601 2.13

Average age of inventory = (360/2.13) = 160.01 days ii) Average Collections Period
= = Tk. 189892488 Tk. 3064425608/360 22.3 days

iii)

Average Payment Period


= Tk. 217771865+249040789+88211625 Tk. 1126412581/360

105.75 days

iv)

Total Asset Turnover


= = Tk. 3064425608 Tk. 746888105 1.65

v)

Fixed Asset Turnover


= = Tk. 1921820859 Tk. 341664110 5.41

DEBT RATIOS

i)

Debt Ratio
= Tk. 1107552416 Tk. 1854440521 0.60 * 100 60 %

= =

ii) Times Interest Earned Ratio


= = Tk. 321355315 Tk. 3547076 90.58

iii)
=

Fixed Payment Coverage Ratio


Tk. 21355315+2013384 Tk. 3547076+2013384+ {(0+164160000)*[1/ (1114717000)]}

4.20

PROFITABILITY RATIOS

i)

Gross Profit Margin


= = Tk. 1142604749 Tk. 3064425608 37.2 %

ii)

Operating Profit Margin


= = Tk. 321355315 Tk. 3064425608 10.48 %

iii)

Net Profit Margin


= = Tk. 206638315 Tk. 3064425608 6.74 %

iv)

Earnings Per Share (EPS)


= = Tk. 206638315 Tk. 13680000 Tk. 15.11

v)

Return on Total Assets (ROA)


= = Tk. 206638315 Tk. 1854440521 11.14 %

vi)

Return on Common Equity (ROE)


= = Tk.206638315 Tk.746888105 27.67 %

MARKET RATIOS

i)

Price/Earnings (P/E) Ratio:


= = Tk.125 Tk.15.11 8.27

AT A GLANCE
Ratio Formula Year 2005 Industry Average CrossSectional Evaluation
Good Poor

Liquidity Ratios
Current Ratio Quick (AcidTest) ratio Inventory Turnover Current Assets Current Liabilities Current Assets- Inventory Current Liabilities Cost of Goods Sold Inventory 1.57 0.62 1.3 1.2

Activity Ratios
2.13 2.8 Good

Average Collections Period Average Payment Period Total Asset Turnover Fixed Asset Turnover

Accounts Receivables Average Sales per day Accounts Payable Average purchases per day Sales Total Assets Sales Total Fixed Asset

22.3 days 105.75 days 1.65 5.41

75.1 days 77.9 days 1.1 8.7

Good Poor Good Poor

Continued..

Debt Ratios
Debt Ratio Times Earned Interest Ratio Fixed-payment coverage ratio Total Liabilities 0.6 Total Assets Earnings before interest and tax 90.58 Interest Earnings before interest and 4.20 tax+ Lease payments Interest+ Lease Pay. + {Prin. +Pref div.)*[1/(1-T)]} 0.7 59.4 0.4 Good Good Good

Profitability Ratios
Gross Profit Margin Operating Profit Margin Net Profit Margin Earnings per share (EPS) Return of total assets (ROA) Return of common equity (ROE) Price/Earnings (P/E) ratio Gross Profits Sales Operating Profits Sales Earnings available to Common Stockholders Sales Earnings available to Common stockholders Number of shares of common stock outstanding Earnings available for common stockholders Total Assets Earnings available for common stockholders Common Stock Equity Market price per share of common stock Earnings per share 37.2% 10.48% 6.74% 27.60% 14.80% 5.50% Good Good Good Good

Tk.15.11 9.6

11.14% 27.67%

6.10% 19.20%

Good Good

Market Ratios
8.27 15.7 Poor

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BATA SHOE COMPANY LTD RATIO ANALYSIS

The recent trends of BATA and comparison with the industrys average in terms of its financial performance according to the several criteria are illustrated below: Analysis on Current Ratio: Industry Comparison: Batas current ratio (1.57) was above the industry average (1.3), so its liquidity position was good. In the year 2005 it increased along with the industry average but the difference was low. Comment: So we can say that Batas current ratio is higher than the industry average which means that the company has substantial ability to meet its short term obligations as they come due. Analysis on Acid Ratio: Industry Comparison: Comparing with the industry standards we can say that it is doing quiet well. Batas quick ratio is half of the industry average. Though its quick (acid) ratio (0.62) is less than the industry average (1.2) but it is acceptable in comparison with current ratio. Comment: So we can say that the company has to improve its performance regarding inventory because it has less liquid current asset than the industry average. Analysis on Inventory Turnover Ratio:

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Industry Comparison: Batas inventory turnover (2.13) is less than the industry standard (2.8). But it is acceptable. Comment: So we can say that Bata is using its inventory properly. It is not holding up too much inventory. But they have to improve its performance regarding this matter as the industry average is higher than the companys ratio. Its trend is good and if it continues like this it will improve and the ratio may go up than the industry standard. Analysis on Average Collections Period Industry Comparison: The average collections period for the company is about 22.3 days which is substantially lower than the industry average of 75.1 days. Comment: The Company must have very strict collections policies which are implemented thus showing that the company has a very efficient receivables management. So it can be said that Bata is very efficient in collecting their credits.

Analysis on Average Payment Period: Industry comparison: The average payment period, however is about 105.75 days which is higher than the industry average 77.9 days for almost 1 month. Comment: So the company has to take the initial steps to turn their Average payment rate faster than the industry average.

Analysis on Fixed Asset Turnover: Industry Comparison: The industry average for fixed asset turnover is 8.7 where the companys ratio of fixed asset turnover is 5.41. The fixed asset turnover indicates the efficiency with which

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the firm uses its fixed asset to generate sales. The industry average is almost 1.6 times of companys ratio. Comment: Bata is not utilizing its fixed asset effectively to generate revenue. As a result the industry average goes up than the company ratio. However, the company has acquired new fixed assets during the year due to which the fixed asset turnover is lower Analysis on Total Asset Turnover: Industry Comparison: In the recent year the industry average is 1.1 where the company ratio is 1.65. Comment: The firm is generating sufficient volume of business given its total asset as the other firms of the industry. This would mean that the company is utilizing its assets efficiently to generate sales as the company ratio is higher (1.65).

Analysis on Debt Ratio: Industry Comparison: The industrys capital structure contains high debt (0.7), and is above that of City Banks (0.6). Comment: The debt ratios indicate the debt position of the company. Low debt is going to give the Bata Company comparative advantage over other companies, as it will provide cushion against creditors losses in the event of liquidation. It has a debt ratio of 60% which means that 60% of the companys assets are financed externally. Although a higher degree of indebtedness means the company has greater financial leverage, the companys debt ratio as compared to the industry average of 70% is good as it shows that more portions of the companys assets has been financed internally compared to the industry average.

Analysis on Times-Interest-Earned Ratio:.

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Industry Comparison: The ratio of Bata Company (90.58) is well above the industry average (59.4). Comment: interest coverage ratio measures the firms ability to make contractual interest payments. The higher the ratio the better able the firm is to fulfill its interest obligation. This shows that Bata is covering its interest charges effectively.

Analysis on Fixed-payment coverage ratio: Industry average: The comparison shows that the company ratio (4.2) is 10.5 times more than the industry average (0.4). Comment: The fixed payment coverage ratio measures the firms ability to meet all fixed payment obligations. The ratio shows that the company is in a good position to meet the fixed debts. The higher the ratio the lower the risk to both lenders and owners. This ratio gives the interested parties a clear picture to assess the firms ability to meet additional fixed obligations without being bankrupt.

Analysis on Gross Profit Margin: Industry Comparison: City Banks gross profit margin ratio (37.2%) is higher than that of the industrys (27.60%). Comment: Batas increasing profit margin will provide it with cushion to take more risks. The higher the gross profit margin the better is the position. Comparatively they have less gross profit than the pervious year.

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Analysis on Operating Profit Margin: Industry average: The company ratio is 10.48 where the industry standard is 14.80. Comment: Operating profit margin represents the pure profit earned on each dollar sales. Though the ratio is less than the industry average the company is in a good position. But a higher operating profit margin is preferred

Analysis on Net Profit Margin Industry comparison: The net profit margin, 6.74% is almost 1.23 times greater than the industry average of 5.5%. Comment: This reflects that the company is performing well in comparison to other companies. Analysis on Earnings per share (EPS): Industry average: The EPS is about Tk 15.11. It is Tk. 5.51 more than the industry average (9.6). Comment: Basic earning power of Bata is higher than the industry. This indicates that City Banks is doing well. Analysis on Return On Assets: Industry Comparison: The Return on Asset for Bata (11.14%) is higher than that of industrys (6.10%) up to 2005 but in recent years it is much higher than that of the industries.

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Comment: The Companys ratio is almost 2 times higher than the industry average. This indicates that the firm is generating higher profit from each dollar investment on its assets than the industry. Analysis on Return on Equity: Industry Comparison The Return on Equity for Bata (27.67%) is much higher than that of industrys (19.20%) Comment: This indicates that City Banks profit on each dollar investment is getting higher than that of other firms of the industry. The ratio is significantly higher than the industry averages thus depicting that the company is affectively earning substantially on the investments made in the company.

Analysis on Price/Earnings (P/E) Ratio: Industry Comparison: The Price/Earnings Ratio (8.27) for Bata is lower than the industry average (15.7). Comment: This ratio is commonly used to assess the owners appraisal of share value. This gives a picture of how much the investors are willing to pay for each Tk. of a firms earning. This indicates that Bata is somewhat riskier than most. Because the higher the P/E ratio the greater is investors confidence.

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Bata Company Limited Common Size Income Statement For the Year Ended December 31 2005 Sales Revenue (Turnover) Less: cost of goods sold Gross profit margin Less: Administration, selling and Distribution expenses Add: Other income Less: Workers participation fund poor Profit for the year before tax Provision for tax: Current Deferred poor Profit for the year after tax Inappropriate profit brought forward Adjustment in respect of earlier years Profit available for appropriation Appropriations: DividendInterim Proposed final Divided distribution tax 100.00% (62.71%) 37.29% (26.55%) 10.74% 0.31% 11.05% (0.55%) 10.50% 3.92% (0.17%) 3.75% 6.75% 14.01% 0.02% 14.03% 20.78% 2004 100.00% (59.91%) 40.09% (29.10%) 10.99% 0.24% 11.23% (0.56%) 10.67% 3.96% (0.13%) 3.83% 6.84% 16.92% _ 16.92% 23.76% Evaluation (2004-2005) same poor poor good good good good poor good good poor poor good poor poor

4.46% 0.89% _ 5.35%

6.71% 1.05% 0.11% 7.87%

good good good good 17

Inappropriate profit, carried forward

15.43%

15.89%

poor

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DU PONT SYSTEM
Relate ROA and ROE-----

ROA = = =

Earnings available to common stockholder/ Total Asset (Earnings available to common stockholder/ sales) * (Sales / Total Asset) Net Profit Margin * Total Asset Turnover

ROE = = =

Earnings Available to common stockholder/ Common stock Equity (Earnings available to common stockholder/ Total Asset) * (Total Asset/ Common stock Equity) ROA * FLM (Financial Leverage multiplier)

CALCULATION: ROA = = FLM = = = ROE = = = 6.74% * 1.65 11.12 % Total Asset / Common stock Equity (341664110+5535554+1507240857)/ 746888105 2.48 ROA *FLM 11.12% * 2.48 27.58 %

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DUPONT System Analysis


The DuPont Equation is designed to show that how the profit margin on sales, the total asset turnover ratio, and the use of debt interact to determine the rate of return on equity. The DuPont formula enables the firm to break down its return into profit on sales and efficiency of asset use components. In our findings we have found the following ratios: Return on Total Assets (ROA) = = Tk.206638315 Tk.1854440521 11.14 %

Return on Common Equity (ROE) = = Tk.206638315 Tk.746888105 27.67 %

From the above ratio we can trace that Batas high ROE is primarily the consequences of fast collections of accounts receivable, which resulted in low levels of receivable and therefore low levels of total assets. The low total assets slowed Batas total asset turnover driving up its ROA, which then drove up its ROE. By using the DuPont system of analysis to combined Batas overall returns as measured by its ROE. The advantage of DuPont system is that it allows the firm to break its return on equity into a profit on sales component (net profit margin), an efficiency of asset use component (total asset turnover), and a use of financial leverage component (financial leverage multiplier). The total return to owners therefore can be analyzed in these important dimensions.

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Suggestions
After completing the analysis part we have recommended some suggestions which they may follow: 1. Though the current ratio of Bata is in a better position than the industry average but their quick ratio is very poor compared to the industry average. Inventory is the least liquid current asset. Analyzing the quick ratio we can say that the companys inventory management is not so good. If they keep on carrying their inventory for a long time then there is a possibility of their inventory becoming obsolete. So they have to focus on their inventory management system. 2. Although their inventory turn over ratio sounds good but it is less than the industry average ratio. We know from the quick ratio that their inventory management is not good enough. If they run their company with the same inventory ratio they wont be able to cope with the industry standard to be in the market. 3. They need to improve their average payment period otherwise the lenders and the suppliers would not be interested to invest or supply goods on credit to the company. 4. They must improve their price per earnings as this will attract investors as it indicates the degree of confidence of the investor in the firms future performance.

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What we have learned from this project


As BBA graduates, in the near future when we will be a part of the corporate activities, it will be important for us to understand the financial situation of the company we will be working for or will be running. This project gave us an opportunity to learn several important aspects about the finance of a company. We learned to prepare common size income statement and calculate ratios from the figures of the companys balance sheet and income statement. We have also learned how to interpret financial ratios to analyze and monitor a firms performance. It helped us to gather practical knowledge from the financial context and establish a relation with our knowledge of the course.

CONCLUSION
Bata Shoe Company Ltd. is one of the leading companies in the footwear manufacturing industry in Bangladesh. Analyzing the overall ratios we have found that although their overall performance is good but they need to focus on some areas where they need to improve their performance which will in turn boost up their profit and will help them to battle with their competitors.

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