Presentation on Cross Sectional Analysis Between Metro Spinning and Saiham Textile www.AssignmentPoint.com

Company Profile Vision: We see Business as a means to the well being of the shareholders and all other stakeholders, society at large keeping in line with the Nation’s interest. Mission Statement: Our Mission is to provide world-class products to our valued Customers, Maintaining high Ethical Standard business.

Company Profile Objective Our primary objective is to conduct transparent business operation within legal and social framework with aims to attain the mission with qualitative quantitative target in business operation. Financial Management policy: All Financial Policies like Investments, Dividend disbursement and other related financial policies are aimed to maximize the value of the organization.

Cross sectional analysis Between Metro Spinning & Saiham Textile

Liquidity Ratio Current ratio: A measure of liquidity which is calculated by dividing the firm’s current assets by its current liabilities. Current ratio = For Metro Spinning 0.68:1 For Saiham Textile 1.19:1 Comments The current ratio of metro spinning is 0.68:1. It means metro spinning has current assets of Tk.0.68 for meeting current liability of Tk.1. That means the current liability of the company is more than the current assets, so the company is technically insolvent, therefore it is unable to meet its short-term obligation. Whereas, the current ratio of Saiham textile Ltd. is 1.19:1. So we can say that Saiham textile Ltd is more capable to meet its current liability than that of Metro spinning Ltd.

Liquidity Ratio Quick Ratio A measure of liquidity calculated by dividing the firm’s current assets minus inventory by its current liabilities. Quick Ratio = For Metro Spinning 0.2:1 For Saiham Textile 0.32:1 Comments The quick ratio for Metro spinning is 0.2:1. It means the company is maintain current assets excluding inventory of Tk.0.2 for current liability of Tk.1 which mean it has insufficient current assets for meeting current liabilities. Whereas the quick ratio of Saiham textile Ltd is 0.32:1. It indicates that Saiham textile Ltd is in the better position than the Metro spinning, but actually both the company is technically insolvent because of insufficient current assets.

Activity Ratio Inventory turnover Inventory turnover commonly measures the activity or liquidity of a firm’s inventory. Inventory turnover = For Metro Spinning 0.69 times For Saiham Textile 1.61 times Comments The inventory turnover of Metro spinning Ltd is 0.69 times. It means the firm is able to turn inventory into sales 0.69 times a year. Whereas the inventory turnover of Saiham textile Ltd is 1.61 times. So it can say that Saiham textile is more capable to turn inventory into sales than that of Metro spinning Ltd.

Activity Ratio Average payment period The average payment period is the average amount of time needed to pay accounts payable. It is calculated in the same manner as the average collection period. Average payment period = For Metro Spinning 10.75 days For Saiham Textile 25.84 days Comments The average payment period of Metro spinning is 10.75 days. It indicates that the company is more concentrate to pay their due payment. Whereas the average payment of Saiham textile Ltd is 25.84 days. In this regard we can say that the Metro spinning Ltd is more concentrate to pay their accounts payable.

Activity Ratio Average collection period The average collection period is the average amount of time needed to collect account receivable. Average collection period = For Metro Spinning 81.57 days For Saiham Textile 21.95 days Comments The average collection period of Metro spinning Ltd is 81.57 days. It means the firm is capable to collect its account receivable on an average of 81.57 days. Where as the average collection period of Saiham textile Ltd is 21.57 days. So we can say that The Saiham textile Ltd is more efficient to collect its account reciavable.

Activity Ratio Total asset turnover The total asset turnover indicates the efficiency with which the firm uses its assets to generate sales. Total asset turnover is calculated as follows Total asset turnover = For Metro Spinning 0.32 times For Saiham Textile 0.66 times Comments The total assets turnover of Metro Spinning Ltd is 0.32 times. It indicates that the company can generate sales 0.32 times a year by utilizing its total assets. The more total assets turnover the more efficient the company. Whereas the total assets turnover of Saiham textile Ltd is 0.66 times. So we can say that Saiham Textile Ltd is more efficient to generate sales by utilizing its total assets.

Debt ratio Debt ratio The debt ratio measures the proportion of total assets financed by be firm’s creditors. The ratio is calculated as follows Debt ratio = For Metro Spinning 65.03% For Saiham Textile 38.26% Comments The debt ratio of the Metro spinning Ltd is 65.03%. It means that the company’s 65.03% of total assets are collected from the creditors. So it is more levered firm. The greater the financial leverage the greater its risk. Whereas the debt ratio of Saiham textile is 38.26%. So it can say that the Saiham textile is in the better position than that of Metro spinning Ltd.

Debt ratio Time interest earned ratio The time interest earned ratio measures the firm’s ability to make contractual interest payments. Time interest earned is calculated as follow Time interest earned ratio = For Metro Spinning 1.02 times For Saiham Textile 1.63 times Comments The time interest earned ratio of the Metro Spinning Ltd is 1.2 times. It indicates that the company is able to meet its interests 1.2 times. The greater the time interest earned ratio the greater the creditors confidence to invest. Whereas the time interest earned ratio of Saiham textile Ltd is 1.63 times. So we can say that the Saiham textile Ltd is in the better position than that of Metro Spinning Ltd.

Profitability ratio Operating profit margin The operating profit margin measures the percentage of each sales dollar remaining after all costs and expenses other than interest, taxes and preferred stock dividend are deducted. Operating profit margin = For Metro Spinning 28.31% For Saiham Textile 14.48% Comments The operating profit margin of Metro Spinning Ltd is 28.31%. It indicates that the company is generated Tk. 28.31 of operating profit from each Tk. 100 of sales. Whereas the Saiham textile Ltd is 14.48%. So we can say that the Metro Spinning is more capable to produce more operating profit than the Sahiham textile Ltd.

Profitability ratio Net profit margin The net profit margin measures the percentage of each sales dollar remaining after all costs and expenses, including interest, taxes and preferred stock dividend have been deducted. Net profit margin is calculated as follows. Net profit margin = For Metro Spinning 5.10% For Saiham Textile 4.80% Comments The net profit margin of the Metro Spinning Ltd is 5.10%. It indicates that the company is capable to generate net profit of Tk. 5.10 from each sales of Tk. 100. The greater the net profit margins the better for the company. Whereas the net profit margin of the Saiham textile Ltd is 4.80%. So in this regard we can say that Metro Spinning is in the better position than that of Saiham textile Ltd.

Profitability ratio Earnings per Share (EPS) EPS represent the dollar amount earned on behalf of each outstanding share of common stock- not the amount of earnings actually distributed to shareholders. EPS = For Metro Spinning Tk. 3.77 For Saiham Textile Tk. 11.52 Comments The EPS of the Metro Spinning Ltd is Tk. 3.77. Which indicates the company is able to earn Tk. 3.77 against each share of common stock outstanding. The higher the EPS the higher the corporate success. Whereas the EPS of Saiham textile Ltd is Tk. 11.52. So it can say that the Saiham textile Ltd is in the better position than that of Metro Spinning Ltd.

Profitability ratio Return on Total Assets (ROA) The Return on Total Assets Measures the overall effectiveness of management in generating profits with its available assets. ROA = For Metro Spinning 1.65% For Saiham Textile 3.16% Comments The ROA of the Metro Spinning Ltd is 1.65%. Which indicates that the company is able to generate net profit of Tk. 1.65 by utilizing each total assets of Tk. 100. The higher the ROA the more efficient of the management. Whereas the ROA of the Saiham textile Ltd is 3.16. So we can say that Saiham textile is more efficient than that of Metro spinning Ltd.

Profitability ratio Return on Equity (ROE) The return of Equity measures the return earned on the common stockholders’ investment. ROE = For Metro Spinning 4.74% For Saiham Textile 5.12% Comments The ROE of the Metro Spinning Ltd is 4.74%. Which indicate that the company earns Tk. 4.74 against of each Tk. 100 of Common stock equity. The higher this return the better for the owners. Whereas the ROE of Saiham Textile Ltd is 5,12%. So we can say that the Saiham textile Ltd is in the better position.

Market ratio Price/Earning (P/E) Ratio P/E measures the amount that investors are willing to pay for each dolar of a firm’s earnings; the higher the P/E ratio, the greater the investor confidence. It is calculated as follows Price/Earning (P/E) Ratio = For Metro Spinning 16.18 times For Saiham Textile 26.54 times Comments The price earning ration of the Metro Spinning Ltd is 16.18 times. That indicates the investors of the company are currently paying 16.18 times in related to EPS to buy a share. The greater the P/E ratio the greater the investors’ confidence towards the company. Whereas the P/E ratio of the Saiham textile Ltd is 26.54 times. So we can say that the investors of the Saiham textile Ltd have more confidence than that of the Metro spinning Ltd.

Market ratio Market/Book (M/B) Ratio Market/Book ratio provides an assessment of how investors view the firm’s performance. M/B ratio = For Metro Spinning 0.77 times For Saiham Textile 1.36 times Comments The M/B ratio of the Metro Spinning Ltd is 0.77. It indicates that the investors of the company are currently paying Tk. 0.77 for each Tk. 1.00 of book value of Metro Spinning Ltd. Whereas the M/B ratio of the Saiham textile Ltd is 1.36.

Major Findings The equity capital of Saiham textile is greater than 50% (62%) the problem is that the firm can be acquired by any other company. The debt capital of metro spinning is higher that posses higher risk. Net profit margin of Metro Spinning is sharply decline because of higher interest on higher debt capital used in capital structure. Earnings per share of Metro spinning (3.77) is less than the Saiham Textile (11.52) because their net profit hugely decline from operating profit because of higher interest payment. The higher interest payment also affects the return on total assets of Metro Spinning. Both the companies have effective cost management system that result operating income is slightly decline to operating profit margin Both the company is less capable to turn inventory into sales. Saiham textile is more efficient to collect due money than metro spinning.

Recommendation The Saiham Textile should increase their debt capital slightly more than 50% in order to reduce the chance of hostile takeover from another company. The debt capital of Metro Spinning should slightly decline to reduce the financial distress cost. The debt capital should decline to reduce the interest payment that adversely affect in profitability ratio of Metro Spinning Ltd. The existing Management body should be continued for both the company. Both the company can increase inventory turnover by increasing sales by any means and reducing the inventory into storage. Metro spinning can reduce collection period by offering some strategy such discount to debtors. Metro Spinning can increase total assets turnover increasing sale by lowering sales price, increasing advertisements.

Conclusion After analyzing capital structure and impact of that in profitability of the two industry we find that the high volume of debt capital in capital structure affect negatively in company’s profit. Though, use of debt in capital structure reduces the cost of capital of the company. But if the debt amount is used high volume it adversely affect on profit of the company, and also increase the financial distress cost. So finally it is recommended that debt use in capital structure is obvious and high volume is not, so the company should use optimum capital structure that will generate maximum profit.