An Over View of Confidence Cement Ltd

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1. Industry Overview

Cement sector is the largest increase sector in Bangladesh. There are 70+
cement factories in Bangladesh and daily production capacity is 16.687 Million
MT.
The
cement market in Bangladesh consists of 100% supply in bagged cement. The
dominant type of cement used in Bangladesh is Ordinary Portland Cement (OPC).
The clinker, a raw material used in the production of cement, is imported from
other countries like India, Thailand, Malaysia and China. The country lacks
limestone—a major raw material required to make cement. The only production
stage performed in Bangladesh, to make cement, is importing the clinker and
grinding it with gypsum to give pure cement.

The first cement factory in the country
was Chattak Cement Factory, which was established in the early 1940 when
Bangladesh was a part of India. This was the only integrated cement plant in
the whole country because of the lack of raw materials. The first cement
factory by the private sector was the Aynepur Cement Factory, which was
established in 1992, had a capacity of 30,000 TPA. This was also an integrated
cement plant, but it did not play any significant role in the cement industry
because of irregular production and Other than these two factories, there are
no other plants in the country. All other cement production facilities that are
in operation today are clinker grinding units, facilities where imported
clinkers are ground to produce cement. By 2002, there were as many as 56 cement
grinding factories in the country with a total production capacity of 11.8
million tons.

Till the first half of 90’s, Bangladesh
cement market was typically an import market. Hyundai was the first
multinational company to start up a local factory primarily to fulfill the
demand of Jamuna Bridge. After the year 1990, Bangladesh government changed its
rules as it withdrew the price control, and had a favorable tax control for the
imported clinker. As a result, the cement industry in the country began to develop
after 1990. In 2001, Bangladesh became self sufficient in cement production.
Many multinational companies and entrepreneurs also started setting up their
plants in the country because of the favorable duty structure imposed by the
government for local production. This included world leaders like Lafarge,
Holcim, Heidelberg (Scancem) or Cemex – each now having their own plants. Now
Bangladesh is producing surplus cement to its requirements and there are more
companies than what the country needed.

Figure 1: Demand & Supply of Cement in Bangladesh 1997-2005

Bangladesh is having a Free Trade
Agreement talk with Sri Lanka which means that Bangladesh may have good chance
of exporting its surplus cement to Sri Lanka, and once it does that, the doors
of other countries who lack cement industry, may also open up for Bangladeshi
cement.

The cement industry in Bangladesh is
riddled with lots of problems, which are hindering its growth. Most of the companies
hardly utilize 50 percent of their production capacities as the supply vastly
exceeds the demand. Moreover, obtaining raw materials, environmental issues,
political instability, natural disasters, inconsistent supply of electricity
and unavailability of foreign machinery severely affect the local cement
industries.

Currently there are 8 public listed
companies in the cement industry. They are,

*
Aramit Cement
Ltd. – A

*
Confidence Cement
Ltd. – A

*
Heidelberg Cement
Ltd. – A

*
Lafarge Surma Cement
Ltd. – G (Greenfield)

*
Meghna Cement
–  A

*
Modern Cement – Z

*
Niloy Cement – Z

*
Padma Cement – Z

Among these 8 companies, we
chose 5 for industry analysis. Those 5 companies are Confidence Cement, Meghna
Cement, Aramit Cement, Heidelberg Cement & Niloy Cement.

2. Company Overview

Confidence Cement Ltd. was incorporated as a public
limited company on May 2, 1991 with an authorized capital of Tk. 200,000,000
equally divided into 2,000,000 ordinary shares with par value of Tk. 100 each.
This capital was increased on March 31, 1998 to Tk. 500,000,000. Confidence
Cement Ltd. is the first privately held cement manufacturing company in
Bangladesh. The company’s production facility was established in 1990 with
480,000 Metric Ton annual production capacity in Chittagong. Currently,
Confidence Cement Ltd’s annual turnover ranges from US$ 10 million to US$ 50
million, the main markets being Eastern Asia and the subsidiary ones being
Bangladesh and India.

Confidence Cement manufactures ordinary Portland
cement. The company aims to be the best cement manufacturing company of
Bangladesh through continuous development and by producing high and consistent
quality cement to meet all customers’ needs. To achieve these objectives, it
uses modern state-of-art machinery, calibrated testing equipments and
computerized packing and raw materials mixing devices in its controlled
production process. Confidence Cement Ltd’s Research and Development team
consists of 20 personnel out of the total workforce of 500.

Confidence Cement Ltd. is the first ISO-9002 certified
cement manufacturer in Bangladesh. To generate customer satisfaction and
confidence it adopted the ISO-9002 standards which ensure standard operating
procedures for half-yearly marketing sales, procurements and manufacturing
processes of ordinary Portland cement. These standards are recognized worldwide
as the highest for developing a company’s production process and external
customer services. ISO-9002 regulations have been brought into t Confidence
Cement Ltd. administration as well. All staff at all levels of Confidence
Cement has been trained in the highly demanding quality control system. The
receipt of ISO-9002 delineates the determination on part o the management and
staff of the company to maintain a quality system that efficiently meets all
customer and government requirements.

3. Analysis
of Financial Statements

The
analysis of the financial statements of the Confidence Cement Ltd. has been
done by applying a few analytical tools and techniques to financial statements
and the other relevant data to obtain useful information. The analyses rely on
comparisons or relationships of data as they enhance the utility o practical
value of accounting information. They help to assess the company’s past
performance and current financial position. The information shows the
consequences of prior management decisions. It is also used to make predictions
that may have direct effect on decisions made by users of financial
statements.  A company’s financial statements
are analyzed internally my management and externally by investors and
creditors.

Present
investors and potential investors are both interested in its profitability- the future ability of a company to generate
income or earn profits.
These investors wish to predict future dividends
and changes in the market price of the company’s common stock. Since both
dividends and price changes are likely to be influenced by earnings, investors
may seek to predict earnings.

Creditors
are interested to in predicting a company’s solvency- the ability of a company to pay debts as they come due. The
liquidity of a company affects its shorter solvency. The company’s liquidity is
its state of possessing liquid assets like cash and other assets which will
soon be converted to cash. Since companies must pay short-term debts soon,
liquid assets must be available for their payment. Long-term creditors are
interested in a company’s long-term solvency. A company is considered solvent
when its assets exceed its liabilities so that the company has positive stockholder’s
equity.

To
analyze the financial position of the company Confidence Cement Ltd. and to
decide whether we should invest in this industry, particularly in this company
by buying its shares, several techniques have been applied. These include,

*
Analysis of the
Comparative Balance Sheets 2002-2006

Horizontal
Analysis

Vertical Analysis

*
Analysis of the
Comparative Profit & Loss Account 2002-2006

Horizontal
Analysis

Vertical Analysis

*
Trend Percentages
of the Income Statement

*
Ratio Analysis of
the company along with the overall industry

This sequential analysis
process will gradually bring out the whole financial scenario of the company
and help us decide whether it will be profitable to invest in this company or
not.

4. Analysis
of the Balance Sheets

4.1  
Comparative Balance Sheets – 2006
& 2005 :

December 31

Increase or
(Decrease)

2006 over 2005

Percent of Total
Assets 

2006

2005

Taka

Percent

2006

2005

ASSETS

Current Assets

Stores and spares

  64,283,578

64,109,994

  173,584

0.3

6.4

6.1

Stock of raw and packing materials

104,771,563

  153,257,431

  (48,485,868)

-31.6

10.4

14.5

Book debts

  140,737,743

  144,598,910

(3,861,167)

-2.7

14.0

13.7

Advances, deposits and pre-payments

   69,277,082

78,480,587

(9,203,505)

-11.7

6.9

7.4

Other receivables

  4,238,262

3,003,777

1,234,485

41.1

0.4

0.3

Cash and cash equivalents

41,629,728

39,376,003

2,253,725

5.7

4.1

3.7

Total Current Assets

  424,937,956

  482,826,702

  (57,888,746)

-12.0

42.3

45.8

Fixed & Long-Term Assets

Operating Fixed Assets -at cost

  845,234,939

  801,804,143

  43,430,796

5.4

84.1

76.1

Less:
Depreciation

  (298,273,434)

  (265,617,733)

  (32,655,701)

12.3

-29.7

-25.2

Capital work-in-progress

  673,659

(673,659)

-100.0

0.0

0.1

Investment-at cost

31,325,000

31,325,000

0.0

3.1

3.0

Pre-production expenses

2,047,826

2,632,919

(585,093)

-22.2

0.2

0.2

Total Fixed & Long-Term
Assets

  580,334,331

  570,817,988

  9,516,343

1.7

57.7

54.2

Total Assets

  1,005,272,287

  1,053,644,690

  (48,372,403)

-4.6

100.0

100.0

LIABILITIES & STOCKHOLDERS’ EQUITY

Current Liabilities & Provisions

Creditors and accruals

61,807,398

52,985,936

8,821,462

16.6

6.1

5.0

Short term loans-secured

  238,698,077

  361,626,333

(122,928,256)

-34.0

23.7

34.3

Current portion of long term loans

12,000,000

5,178,000

6,822,000

131.7

1.2

0.5

Proposed dividend

28,500,000

9,500,000

  19,000,000

200.0

2.8

0.9

Provision for taxation

21,200,000

  21,200,000

2.1

0.0

Total Current Liabilities

362,205,475

429,290,269

  (67,084,794)

-15.6

36.0

40.7

Long-term Liabilities

Long-term loan-secured

10,501,799

4,421,453

6,080,346

137.5

1.0

0.4

Total Liabilities

372,707,274

  433,711,722

  (61,004,448)

-14.1

37.1

41.2

Stockholders’ Equity

Share Capital

  190,000,000

  190,000,000

  –

0.0

18.9

18.0

Share Premium

220,192,749

  220,192,749

0.0

21.9

20.9

Reserves

220,862,754

208,362,754

  12,500,000

6.0

22.0

19.8

Profit & Loss Account

1,509,510

1,377,465

132,045

9.6

0.2

0.1

Total stockholders’ equity

632,565,013

619,932,968

  12,632,045

2.0

62.9

58.8

Total
liabilities & stockholders’ equity

 1,005,272,287

 1,053,644,690

  (48,372,403)

-4.6

100.0

100.0

Table 1: Comparative Balance Sheets – 2006 & 2005

5.1.1 Horizontal Analysis:

*
In 2006, the
total current assets have decreased Tk. 57,888,746, consisting largely of Tk.
48,485,868 decrease in cash, while total current liabilities have decreased Tk.
67,084,794.

*

Total assets have
decreased Tk. 57,888,746, while total liabilities have decreased Tk.
61,004,448.

*
The current
assets decreased by 12%, while the current liabilities decreased by 15.6%.
Though current liabilities are decreasing, the high decrease rate of current
assets can be a major threat to the company.

*
The long-term
liabilities increased by an astonishing 137.5% as the company took a loan of
Tk. 10,501,799 from Prime Bank Ltd.

*
Overall, the
decrease in total assets is 4.6%, whereas, the decrease in total liabilities is
14.1%.

*
The change in
total fixed & long-term assets & total stockholders’ equity was not
much.

5.1.2 Vertical Analysis:

*
The vertical
analysis of the company’s balance sheet discloses each account’s significance
relative to total assets or equities.

*
The stock of raw
and packing materials decreased from being 14.5% to 10.4% of the total assets.

*
The
pre-production expense did decrease by 22.2% but it is only 0.2% of the total
assets.

*
The current
liabilities decreased by 4.7% from 40.7% to 36% of the total equities
(liabilities & stockholders’ equity)

*
The total
liabilities decreased from being 41.2% to 37.1% of the total equities.

*
Finally, the
vertical analysis shows, the percentage of stockholder financing to total
assets of the company increased from 58.8% to 62.9% 

By
analyzing the comparative balance sheets of 2006 & 2005, we can conclude
that the sudden decrease in the company’s assets is not a good sign.

5.1.3  
Comparative Balance Sheets – 2005
& 2004 :

December 31

Increase or
(Decrease)

2005 over 2004

Percent of Total
Assets 

2005

2004

Taka

Percent

2005

2004

ASSETS

Current Assets

Stores and spares

64,109,994

67,110,497

(3,000,503)

-4.5

6.1

7.2

Stock of raw and packing materials

  153,257,431

100,108,278

53,149,153

53.1

14.5

10.7

Book debts

  144,598,910

119,980,667

24,618,243

20.5

13.7

12.8

Advances, deposits and pre-payments

78,480,587

40,166,325

38,314,262

95.4

7.4

4.3

Other receivables

   3,003,777

894,284

2,109,493

235.9

0.3

0.1

Cash and cash equivalents

39,376,003

29,055174

10,320,829

35.5

3.7

3.1

Total Current Assets

  482,826,702

357,315,225

125,511,477

35.1

45.8

38.1

Fixed & Long-Term Assets

Operating Fixed Assets -at cost

  801,804,143

778,917,673

22,886,470

2.9

76.1

83.1

Less:
Depreciation

  (265,617,733)

(234,041,557)

(31,576,176)

13.5

-25.2

-25.0

Capital work-in-progress

  673,659

107,007

566,652

529.5

0.1

0.0

Investment-at cost

31,325,000

31,325,000

0.0

3.0

3.3

Pre-production expenses

2,632,919

3,218,012

(585,093)

-18.2

0.2

0.3

Total Fixed & Long-Term
Assets

  570,817,988

579,526,135

(8,708,147)

-1.5

54.2

61.9

Total Assets

  1,053,644,690

936,841,360

116,803,330

12.5

100.0

100.0

LIABILITIES & STOCKHOLDERS’ EQUITY

Current Liabilities & Provisions

Creditors and accruals

52,985,936

41,688,822

11,297,114

27.1

5.0

4.4

Short term loans-secured

  361,626,333

250,184,131

111,442,202

44.5

34.3

26.7

Current portion of long term loans

5,178,000

27,715,744

(22,537,744)

-81.3

0.5

3.0

Proposed dividend

9,500,000

9,500,000

0.0

0.9

1.0

Provision for taxation

Total Current Liabilities

429,290,269

329,088,697

100,201,572

30.4

40.7

35.1

Long-term Liabilities

Long-term loan-secured

4,421,453

83,293

4,338,160

5208.3

0.4

0.0

Total Liabilities

  433,711,722

329,171,990

104,539,732

31.8

41.2

35.1

Stockholders’ Equity

Share Capital

  190,000,000

190,000,000

0.0

18.0

20.3

Share Premium

  220,192,749

220,192,749

0.0

20.9

23.5

Reserves

208,362,754

207,412,754

950,000

0.5

19.8

22.1

Profit & Loss Account

1,377,465

(9,936,133)

11,313,598

-113.9

0.1

-1.1

Total stockholders’ equity

619,932,968

607,669,370

12,263,598

2

58.8

64.9

Total liabilities & stockholders’ equity

 1,053,644,690

936,841,360

116,803,330

12.5

100.0

100.0

Table 2: Comparative
Balance Sheets – 2005 & 2004

5.2.1 Horizontal Analysis:

*
In 2005, the
total current assets increased Tk. 125,511477, while total current liabilities
increased Tk. 100,201,572.

*

Total assets have
increased Tk. 116,803,330, while total liabilities have increased Tk.
104,539,732.

*
The current
assets increased by 35.1%, while the current liabilities increased by 30.4%.
Though current liabilities are increasing, the increase in the company’s
current assets is definitely a good sign.

*
The long-term
liabilities increased by an astonishing 5208.3%.

*
Overall, the
increase in total assets is 12.5%, whereas, the increase in total liabilities
is 31.8%.

*
The change in
total fixed & long-term assets & total stockholders’ equity was not
much.

5.2.2 Vertical Analysis:

*
The stock of raw
and packing materials decreased from being 14.5% to 10.4% of the total assets.

*
The
pre-production expense did increase by 18.2% but it is only 0.2% of the total
assets.

*
The current
liabilities decreased by 4.7% from 40.7% to 36% of the total equities
(liabilities & stockholders’ equity)

*
The total
liabilities increased from being 35.1% to 41.2% of the total equities.

*
Finally, the
vertical analysis shows, the percentage of stockholder financing to total
assets of the company decreased from 64.9% to 58.8% 

By
analyzing the comparative balance sheet of the year 2004 & 2003, we can
conclude that, the rate of increase in the company’s liabilities is greater
than that of the company’s assets.

5.2  
Comparative Balance Sheets – 2004
& 2003 :

December 31

Increase or
(Decrease)

2004 over 2003

Percent of Total
Assets 

2004

2003

Taka

Percent

2004

2003

ASSETS

Current Assets

Stores and spares

67,110,497

69,533,018

(2,422,521)

-3.5

7.2

7.4

Stock of raw and packing materials

100,108,278

109,473,965

(9,365,687)

-8.6

10.7

11.6

Book debts

119,980,667

92,724,917

27,255,750

29.4

12.8

9.8

Advances, deposits and pre-payments

40,166,325

35,148,538

5,017,787

14.3

4.3

3.7

Other receivables

894,284

894,284

0.1

0.0

Cash and cash equivalents

29,055174

28,884,680

170,494

0.6

3.1

3.1

Total Current Assets

357,315,225

335,765,118

21,550,107

6.4

38.1

35.6

Fixed & Long-Term Assets

Operating Fixed Assets -at cost

778,917,673

776,446,70

2,470,973

0.3

83.1

82.3

Less:
Depreciation

(234,041,557)

(204,286,681)

(29,754,876)

14.6

-25.0

-21.7

Capital work-in-progress

107,007

107,007

0.0

0.0

Investment-at cost

31,325,000

31,325,000

0.0

3.3

3.3

Pre-production expenses

3,218,012

3,803,105

(585,093)

-15.4

0.3

0.4

Total Fixed & Long-Term
Assets

579,526,135

607,288,124

(27,761,989)

-4.6

61.9

64.4

Total Assets

936,841,360

943,053,242

(6,211,882)

-0.7

100.0

100.0

LIABILITIES & STOCKHOLDERS’ EQUITY

Current Liabilities & Provisions

Creditors and accruals

41,688,822

36,706,946

4,981,876

13.6

4.4

3.9

Short term loans-secured

250,184,131

202,269,119

47,915,012

23.7

26.7

21.4

Current portion of long term loans

27,715,744

29,290,392

(2,189,648)

-7.3

3.0

3.20

Proposed dividend

   9,500,000

9,500,000

0.0

1.0

1.0

Provision for taxation

Total Current Liabilities

329,088,697

278,38,457

50,707,240

18.2

35.1

29.5

Long-term Liabilities

Long-term loan-secured

83,293

22,513,604

(22,430,311)

-99.6

0.0

2.4

Total Liabilities

329,171,990

300,895,061

28,276,929

9.4

35.1

31.9

Stockholders’ Equity

Share Capital

190,000,000

190,000,000

0.0

20.3

20.1

Share Premium

220,192,749

220,192,749

0.0

23.5

23.3

Reserves

207,412,754

217,862,754

(10,450,000)

-4.8

22.1

23.1

Profit & Loss Account

(9,936,133)

14,102,678

(24,038,811)

-170.5

-1.1

1.5

Total stockholders’ equity

607,669,370

642,158,181

(34,488,811)

-5.4

64.9

68.1

Total liabilities & stockholders’ equity

936,841,360

943,053,242

(6,211,882)

-0.7

100.0

100.0

5.3.1 Horizontal Analysis:

*
In 2004, the
total current assets have increased Tk. 21,550,107, while total current
liabilities have increased Tk. 50,707,240.

*

Total assets have
decreased Tk. 6,211,882, while total liabilities have increased Tk. 28,276,929.

*
The current
assets increased by 6.4%, while the current liabilities increased by 18.2%.
This can be a threat to the company as it started losing its solvency.

*
The long-term
liabilities decreased by 99.6%.

*
Overall, the
decrease in total assets is 0.7%, whereas, the increase in total liabilities is
9.4%.

*
Both the total
fixed & long-term assets & total stockholders’ equity decreased in this
period.

5.3.2 Vertical Analysis:

*
The book debts
increased from being 9.8% to 12.8% of the net sales.

*
The current
assets increased from being 35.6% to the 38.1% of the net sales.

*

The current
liabilities increased from being 29.5% to 35.1% of the total equities
(liabilities & stockholders’ equity)

*
The total
liabilities increased from being 31.9% to 35.1% of the total equities.

*
Finally, the vertical
analysis shows, the percentage of stockholder financing to total assets of the
company decreased from 68.1% to 64.9% 

By
analyzing the comparative balance sheets of 2006 & 2005, we can conclude
that the decrease in the company’s asset along with the increase of its
liabilities is a very bad sign for the company. It means, the company is losing
its ability to pay its debts and has a very high chance of being bankrupt.

5.3  
Comparative Balance Sheets – 2003
& 2002 :

December 31

Increase or
(Decrease)

2003 over 2002

Percent of Total
Assets 

2003

2002

Taka

Percent

2003

2002

ASSETS

Current Assets

Stores and spares

69,533,018

86,609,695

(17,076,677)

-19.7

7.4

8.1

Stock of raw and packing materials

109,473,965

153,902,053

(44,428,088)

-28.9

11.6

14.3

Book debts

92,724,917

80,819,765

11,905,152

14.7

9.8

7.5

Advances, deposits and pre-payments

35,148,538

65,663,718

(30,515,180)

-46.5

3.7

6.1

Other receivables

Cash and cash equivalents

28,884,680

57,916,886

(29,032,206)

-50.1

3.1

5.4

Total Current Assets

335,765,118

444,912,117

(109,146,999)

-24.5

35.6

41.5

Fixed & Long-Term Assets

Operating Fixed Assets -at cost

776,446,70

739,487,743

36,958,957

5.0

82.3

68.9

Less:
Depreciation

(204,286,681)

(174,329,556)

(29,957,125)

17.2

-21.7

-16.2

Capital work-in-progress

27,378,577

(27,378,577)

-100.0

0.0

2.6

Investment-at cost

31,325,000

31,325,000

0.0

3.3

2.9

Pre-production expenses

3,803,105

4,388,198

(585,093)

-13.3

0.4

0.4

Total Fixed & Long-Term
Assets

607,288,124

628,249,962

(20,961,838)

-3.3

64.4

58.5

Total Assets

943,053,242

1,073,162,079

(130,108,837)

-12.1

100.0

100.0

LIABILITIES & STOCKHOLDERS’ EQUITY

Current Liabilities & Provisions

Creditors and accruals

36,706,946

73,168,190

(36,461,244)

-49.8

3.9

6.8

Short term loans-secured

202,269,119

276,754,204

(74,485,085)

-26.9

21.4

25.8

Current portion of long term loans

29,290,392

43,817,392

(13,912,000)

-31.7

3.20

4.1

Proposed dividend

9,500,000

9,500,000

1.0

0.0

Provision for taxation

Total Current Liabilities

278,38,457

393,739,786

(115,358,329)

-29.3

29.5

36.7

Long-term Liabilities

Long-term loan-secured

22,513,604

43,987,929

(21,474,325)

-48.8

2.4

4.1

Total Liabilities

300,895,061

437,727,715

(136,832,654)

-31.3

31.9

40.8

Stockholders’ Equity

Share Capital

190,000,000

190,000,000

0.0

20.1

17.7

Share Premium

220,192,749

220,192,749

0.0

23.3

20.5

Reserves

217,862,754

217,862,754

0.0

23.1

20.3

Profit & Loss Account

14,102,678

7.378,861

6,723,817

91.1

1.5

0.7

Total stockholders’
equity

642,158,181

635,434,364

6,723,817

1.1

68.1

59.2

Total liabilities & stockholders’ equity

943,053,242

1,073,162,079

(130,108,837)

-12.1

100.0

100.0

Table 4: Comparative
Balance Sheets – 2003 & 2002

5.4.1 Horizontal Analysis:

*
In 2003, the
total current assets decreased Tk. 109,146,999, while total current liabilities
decreased Tk. 115,358,329.

*

Total assets have
decreased Tk. 130,108,837, while total liabilities have decreased Tk.
136,832,654.

*
The current
assets decreased by 24.5%, while the current liabilities decreased by 29.3%.
Though current liabilities are decreasing, the high decrease rate of current
assets can be a major threat to the company.

*
The cash and cash
equivalents decreased by 50.1%. This could be very harmful for the company

*
The long-term
liabilities decreased by 48.8%.

*
Overall, the
decrease in total assets is 12.1%, whereas, the decrease in total liabilities
is 31.3%.

*
The change in
total fixed & long-term assets & total stockholders’ equity was not
much.

5.4.2 Vertical Analysis:

*
The stock of raw
and packing materials decreased from being 14.3% to 11.6% of the total assets.

*
The cash and cash
equivalent did decrease from being 5.2% to 3.1% of the total assets.

*
The current
liabilities decreased from 36.7% to 29.5% of the total equities (liabilities
& stockholders’ equity)

*
The total
liabilities decreased from being 40.8% to 31.9% of the total equities.

*
Finally, the
vertical analysis shows, the percentage of stockholder financing to total
assets of the company increased from 59.2% to 68.1%. 

We can finally conclude that,
though the decrease in the company’s liabilities is good but the simultaneous
decrease rate of the assets is very harmful.

6. Analysis
of the Profit & Loss Account

 

December 31

Increase or (Decrease)

2006 over 2005

Percent of Net Sales

2006

2005

Taka

Percent

2006

2005

Sales (net of VAT)

950,502,498

  685,713,532

264,788,966

38.6

100.0

100.0

Less: Cost of goods sold

  (620,643,737)

  (223,800,333)

36.1

-88.8

-90.5

Gross Profit/(Loss)

  106,058,428

65,069,795

40,988,633

63.0

11.2

9.5

Less: Expenses:

Administrative

  (21,341,906)

  (18,614,660)

(2,727,246)

14.7

-2.7

Selling and distribution

(7,723,865)

(7,774,899)

51,034

-0.7

-0.8

-1.1

Total expenses

  (29,065,771)

  (26,389,559)

(2,676,212)

10.1

-3.1

-3.9

Trading Profit/(Loss)

76,992,657

38,680,236

38,312,421

99.1

8.1

5.6

Less: Financial charges

  (17,559,894)

  (21,573,826)

4,013,932

-18.6

-1.9

-3.2

Operating profit/(loss) before other income

59,432,763

17,106,410

42,326,353

247.4

6.3

2.5

Add: Other income

6,179,916

4,802,640

1,377,276

28.7

0.7

0.7

Operating profit/(loss) before income tax &

workers’ profit participation fund

65,612,679

21,909,050

43,703,629

199.5

6.9

3.2

Less: Contribution to workers’ profit participation fund (@5%)

(3,280,634)

(1,095,452)

(2,185,182)

199.5

-0.4

-0.2

Net profit/(loss) before tax

62,332,045

20,813,598

41,518,447

199.5

6.6

3.0

Less: Provision for income tax

  Current year

  (18,700,000)

(18,700,000)

-2.0

0.0

  Deferred tax

(2,500,000)

(2,500,000)

-0.3

0.0

Total tax

  (21,200,000)

(21,200,000)

-0.3

0.0

Net profit after tax

41,132,045

20,813,598

20,318,447

97.6

4.3

3.0

Unappropriated profit brought forward

1,377,465

(9,936,133)

11,313,598

-113.9

Profit/(loss) available for appropriation

42,509,510

10,877,465

31,632,045

290.8

Appropriation:

Transferred from dividend equalization fund

Less: Proposed dividend

  (28,500,000)

(9,500,000)

(19,000,000)

200.0

Transferred to dividend equalization
fund

  (12,500,000)

(12,500,000)

Dividend distribution tax

  (41,000,000)

(9,500,000)

(31,500,000)

331.6

Unappropriated
profit for the year transferred to statement changes in shareholder’s equity

1,509,510

1,377,465

132,045

9.6

6.1.1 Horizontal Analysis:

*
Net sales
increased by 38.6% in 2006.

*
Gross profit
increased by 63%.

*
Expenses
increased by 10.1%.

*
Trading profit
increased by 99.1%.

*
Financial charges
decreased by 18.6%.

*
Operating profit
before other income increased by 247.4%.

*
Other income
increased by 28.7%.

*
Operating profit
before income tax & worker’s profit participation fund, contribution to
worker’s profit participation fund & net profit before tax increased by
199.5%.

*
The company paid
income tax of total Tk. 21,200,000.

*
Net profit after
tax increased by 97.6%

*
Proposed dividend
increased by 200%.

*
Finally, the
unappropriated profit for the year increased by 9.6%

6.1.2 Vertical Analysis:

*
The gross profit
increased from being 9.5% to 11.2% of the net sales.

*
The expenses
decreased from being 3.9% to 3.1% of the net sales. 

*
The trading
profit increased from being 5.6% to 8.1% of the net sales.

*
The operating
profit before other income increased from being 2.5% to 6.3% of the net sales.

*
Other income
remained the same portion of the net sales.

*
Operating profit before
income tax & worker’s profit participation fund increased from being 3.2%
to 6.9%.

*
Contribution to
worker’s profit participation fund increased from being 0.2% to 0.4% of the net
sales.

*
Net profit before
tax increased from being 3% to 6.6% of the net sales.

*
Net profit after
tax increased from being 3% to 4.3% of the net sales.

So,
we can conclude that, financially 2006 was a much better year than 2005 as the
net income had increased significantly.

 

December 31

Increase or (Decrease)

2005 over 2004

Percent of Net Sales

2005

2004

Taka

Percent

2005

2004

Sales (net of VAT)

685,713,532

466,480,439

 
219,233,093

47.0

100.0

100.0

Less: Cost of goods sold

 
(435,232,440)

 
(185,411,297)

42.6

-90.5

-93.3

Gross Profit/(Loss)


65,069,795

31,247,999

33,821,796

108.2

9.5

6.7

31,247,999

Less: Expenses:

Administrative


(18,614,660)

 
(18,279,503)

(335,157)

1.8

-2.7

-3.9

Selling and distribution


(7,774,899)

  (14,792,401)

7,017,502

-47.4

-1.1

-3.2

Total expenses


(26,389,559)

(33,071,904)

6,682,345

-20.2

-3.8

-7.1

Trading Profit/(Loss)


38,680,236

(1,823,905)

  40,504,141

-2220.7

5.6

-0.4

Less: Financial charges


(21,573,826)

 
(25,264,715)

3,690,889

-14.6

-3.1

-5.4

Operating profit/(loss) before other income


17,106,410

  (27,088,620)

44,195,030

-163.1

2.5

-5.8

Add: Other income


4,802,640

3,049,809

1,752,831

57.5

0.7

0.7

Operating profit/(loss) before income tax &

workers’ profit participation fund


21,909,050

  (24,038,811)

45,947,861

-191.1

3.2

-5.2

Less: Contribution to workers’ profit participation fund (@5%)


(1,095,452)

(1,095,452)

-0.2

0.0


Net profit/(loss) before tax

(24,038,811)

44,852,409

-186.6

3.0

-5.2

Less: Provision for income tax

Current year

  Deferred tax

Total tax

Net profit after tax

(24,038,811)

44,852,409

-186.6

3.0

-5.2

Unappropriated profit brought forward


(9,936,133)

 
14,102,678

 
(24,038,811)

-170.5

Profit/(loss) available for appropriation


10,877,465

(9,936,133)

20,813,598

-209.5

Appropriation:

Transferred from dividend equalization fund

 
10,450,000

 
(10,450,000)

-100.0

Less: Proposed dividend


(9,500,000)

(9,500,000)

0.0

Transferred to dividend equalization
fund

Dividend distribution tax

(950,000)

950,000


(9,500,000)

(9,500,000)

Unappropriated profit for the year transferred to statement changes in
shareholder’s equity

1,377,465

(9,936,133)

11,313,598

-113.9

6.2.1 Horizontal Analysis:

*
Net sales
increased by 47% in 2006.

*
Gross profit
increased by 108.2%.

*
Expenses
decreased by 20.2%.

*
Trading profit
increased by 2220.7%.

*
Financial charges
decreased by 14.6%.

*
Operating profit
before other income increased by 163.1%.

*
Other income
increased by 57.5%.

*
Operating profit
before income tax & worker’s profit participation fund, increased by
191.1%.

*
Net profit before
tax increased by 186.6%.

*
Net profit after
tax increased by 186.6%

*
Proposed dividend
remained unchanged.

*
Finally, the
unappropriated profit for the year increased by 113.9%

6.2.2 Vertical Analysis:

*
The gross profit
increased from being 6.7% to 9.5% of the net sales.

*
The expenses
decreased from being 7.1% to 3.8% of the net sales. 

*
The trading
profit became 5.6% of the net sales

*
Operating profit
before income became 2.5% of the net sales.

*
Other income
remained the same portion of the net sales.

*
Operating profit
before income tax & worker’s profit participation fund became 3.2% of net
sales

*
Contribution to
worker’s profit participation fund became 0.2% of net sales.

*
Net profit before
tax became 3% of the net sales.

*
Net profit after
tax became 3% of the net sales.

So,
we can conclude that, as there was a loss in the year 2004, 2005 was a good
financial year for the company as they started earning profit again.

December 31

Increase or (Decrease)

2004 over 2003

Percent of Net Sales

2004

2003

Taka

Percent

2004

2003

Sales (net of VAT)

466,480,439

 
637,874,790

 (171,394,351)

-26.9

100.0

100.0

Less: Cost of goods sold

 
(435,232,440)

 
(564,693,010)

129,460,570

-22.9

-93.3

-88.5

Gross Profit/(Loss)

31,247,999

73,181,780

(41,933,781)

-57.3

6.7

11.5

Less: Expenses:

Administrative

(18,279,503)

 
(21,620,158)

 
3,340,655

-15.5

-3.9

-3.4

  Selling and
distribution

(14,792,401)

 
(18,153,928)

 
3,361,527

-18.5

-3.2

-2.8

Total expenses

(33,071,904)

 
(39,774,086)

 
6,702,182

-16.9

-7.1

-6.2

Trading Profit/(Loss)

(1,823,905)

33,407,694

(35,231,599)

-105.5

-0.4

5.2

Less: Financial charges

(25,264,715)

 
(18,824,654)

(6,440,061)

34.2

-5.4

-3.0

Operating profit/(loss) before other income

(27,088,620)

14,583,040

(41,671,660)

-285.8

-5.8

2.3

Add: Other income

3,049,809

3,494,662

(444,853)

-12.7

0.7

0.5

Operating profit/(loss) before income tax & workers’ profit
participation fund

(24,038,811)

18,077,702

(42,116,513)

-233.0

-5.2

2.8

Less: Contribution to workers’ profit participation fund (@5%)

(903,885)

903,885

-100.0

0.0

-0.1

Net profit/(loss) before tax

(24,038,811)

17,173,817

(41,212,628)

-240.0

-5.2

2.7

Less: Provision for income tax

Current year

Deferred tax

Net profit after tax

(24,038,811)

17,173,817

(41,212,628)

-240.0

-5.2

2.7

Unappropriated profit brought forward

14,102,678

7,378,861

 
6,723,817

91.1

Profit/(loss) available for appropriation

(9,936,133)

24,552,678

(34,488,811)

-140.5

Appropriation

Transferred from dividend equalization fund

10,450,000

10,450,000

Less: Proposed dividend

(9,500,000)

(9,500,000)

0.0

Transferred to dividend equalization
fund

(950,000)

–  

0.0

Dividend distribution
tax

(950,000)

 –

 
(10,450,000)

10,450,000

-100.0

Unappropriated
profit for the year transferred to statement changes in shareholder’s equity

(9,936,133)

14,102,678

(24,038,811)

-170.5

6.3.1 Horizontal Analysis:

*
Net sales
decreased by 26.9% in 2004.

*
Gross profit
decreased by 57.3%.

*
Expenses
decreased by 16.9%.

*
Trading profit
decreased by 105.5%.

*
Financial charges
increased by 34.2%.

*
Operating profit
before other income decreased by 285.8%.

*
Other income
decreased by 12.7%.

*
Operating profit
before income tax & worker’s profit participation fund decreased by 233%.

*
There was no
contribution to the workers; profit participation fund in 2004.

*
The net profit
before tax and after tax decreased by 240%.

*
The company paid
no income tax in the years 2004 & 2003.

*
Dividend
distribution tax of Tk. 950,000 was paid in 2004.

*
Finally, the
unappropriated profit for the year decreased by 170.5%

6.3.2 Vertical Analysis:

*
The gross profit
decreased from being 11.5% to 6.7% of the net sales.

*
The expenses
increased from being 6.2% to 7.1% of the net sales. 

*
The trading
profit gained a negative value in 2004 as there was a loss.

*
The operating
profit before other income gained a negative value in 2004 because of loss.

*
Other income
increased from being 0.5% to 0.7% of the net sales.

*
Operating profit
before income tax & worker’s profit participation fund gained a negative
value in 2004.

*
Net profit before
tax and after tax both gained a negative value in 2004 as there was a loss.

*

The
economic year of 2004 was depressing for the company. They suffered a loss due
to unprecedented flood affecting the whole nation for over three months. Due to
prolonged stagnation of water, all major roads were damaged which disrupted
total surface communication network. They lost three months of effective
selling time. Frequent devaluation of currency also affected the import of
clinkers.


December 31

Increase or (Decrease)

2003 over 2002

Percent of Net Sales

2003

2002

Taka

Percent

2004

2003

Sales (net of VAT)

 
637,874,790

 
402,836,313

 
235,038,477

58.3

100.0

100.0

Less: Cost of goods sold

 
(564,693,010)

 
(401,078,555)

(163,614,455)

40.8

-88.5

-99.6

Gross Profit/(Loss)

73,181,780

1,757,758

71,424,022

4063.4

11.5

0.4

Less: Expenses:

Administrative

 
(21,620,158)

 
(11,748,158)

(9,872,000)

84.0

-3.4

-2.9

Selling and
distribution

 
(18,153,928)

 
(20,432,531)

2,278,603

-11.2

-2.8

-5.1

Total Profit

 
(39,774,086)

 
(32,180,689)

(7,593,397)

23.6

-6.2

-8.0

Trading Profit/(Loss)

33,407,694

  (30,422,931)

63,830,625

-209.8

5.2

-7.6

Less: Financial charges

 
(18,824,654)

 
(11,040,297)

(7,784,357)

70.5

-3.0

-2.7

Operating profit/(loss) before other income

14,583,040

  (41,463,228)

56,046,268

-135.2

2.3

-10.3

Add: Other income

3,494,662

1,916,098

1,578,564

82.4

0.5

0.5

Operating profit/(loss) before income tax & workers’ profit
participation fund

18,077,702

  (39,547,130)

57,624,832

-145.7

2.8

-9.8

Less: Contribution to workers’ profit participation fund (@5%)

(903,885)

(903,885)

-0.1

0.0

Net profit/(loss) before tax

17,173,817

  (39,547,130)

56,720,947

-143.4

2.7

-9.8

Less: Provision for income tax

Current year

Deferred tax

Net profit after tax

17,173,817

  (39,547,130)

56,720,947

-143.4

2.7

-9.8

Uappropriated profit brought forward

7,378,861

46,925,991

 
(39,547,130)

-84.3

Profit/(loss) available for appropriation

24,552,678

7,378,861

17,173,817

232.7

Appropriation

Transferred from dividend equalization fund

Less: Proposed dividend

(9,500,000)

(9,500,000)

  Transferred to dividend equalization fund

(950,000)

(950,000)

Dividend distribution
tax

 
(10,450,000)

 
(10,450,000)

Unappropriated
profit for the year transferred to statement changes in shareholder’s equity

14,102,678

7,378,861

6,723,817

91.1

6.4.1 Horizontal Analysis:

*
Net sales
increased by 58.3% in 2003.

*
Gross profit
increased by 11.5%.

*
Expenses
increased by 23.6%.

*
Trading profit
acquired a positive value by as there was a loss in 2002.

*
Financial charges
increased by 70.5%.

*
Operating profit
before other income acquired a positive value also.

*
Other income
increased by 82.4%.

*
Operating profit
before income tax & worker’s profit participation fund & net profit
before tax also acquired positive values.

*
Tk. 903,885 was
paid as the contribution to worker’s profit participation fund.

*
The company paid
no income tax in both of the years.

*
Net profit after
tax acquired a positive value.

*
Tk. 9,500,000 was
appropriated for proposed dividend.

*
Finally, the
unappropriated profit for the year increased by an astonishing 232.7%.

6.4.2 Vertical Analysis:

*
The gross profit
increased from being 0.4% to 11.5% of the net sales.

*
The expenses
decreased from being 8% to 6.2% of the net sales. 

*
The trading
profit was 5.2% of the net sales in 2003.

*
The operating
profit before other income was 2.3% of the net sales in 2003.

*
Other income
remained the same portion of the net sales.

*
Operating profit
before income tax & worker’s profit participation fund was 2.8% of the net
sales in 2003

*
Contribution to
worker’s profit participation fund was only 0.1% of the net sales in 2003
though none was paid in 2002.

*
Net profit before
and after tax was 2.7% of the net sales in 2003.

As,
there was loss in the year 2002, the financial position of the company in the
year 2003 can be considered good as the company started profiting again.

Trend
Percentages

2002

2003

2004

2005

2006

Sales (net of VAT)

100%

73%

107%

149%

Cost of goods sold

100%

77%

110%

150%

Gross Profit/(Loss)

100%

43%

89%

145%

Operating Expenses

100%

83%

66%

73%

Trading Profit/(Loss)

100%

-5%

116%

230%

Financial charges

100%

134%

115%

93%

Operating profit/(loss) before other income

100%

-186%

117%

408%

Other income

100%

87%

137%

177%

Operating profit/(loss) before income tax & workers’ profit
participation fund

100%

-133%

121%

363%

Contribution to workers’ profit participation fund (@5%)

100%

0%

121%

363%

Net profit/(loss) before tax

100%

-140%

121%

363%

Provision for income tax

Net profit/(loss) after tax

100%

-140%

121%

240%

Table 9: Trend Percentages of the Income
Statement 2003-2006

* As there was a loss in the year 2002, it
could not be used as a base year.

**
Due to loss in the year 2004, the trend percentage does not show a consistent
upward trend.

*
As we can see,
excluding 2004, as the company suffered a loss that year, the sales of the
Confidence Cement Ltd. is increasing every year.

*
Cost of goods sold
also shows an upward trend except in the year 2004.

*
The gross profit
in 2005 was however less than 2003. However, it increased in the year 2006.

*
The trading
profit also shows a very good upward trend.

*
The trend of the
financial charges is not consistent.

*
Operating profit
before income in the year 2006 is a very good sign telling us that the company
is indeed moving forward.

*
Both the net
profit before tax and after tax shows upward trend.

If
we exclude the year 2004 from our consideration, as there was a flood which
caused the company to suffer a loss, we can conclude that the company’s trend
percentages show a definite growth.

7.Ratio
Analysis

Ratios
are expressions of logical relationships between certain items in the financial
statements. This part of the report will analyze four kinds of ratios of the
Confidence Cement Ltd. These are,

*
Liquidity Ratios

*
Equity or
Long-Term Solvency Ratios

*
Profitability
Ratios

*
Markets Tests

 
Liquidity Ratios:

Liquidity
ratios are used to indicate a company’s short-term debt paying ability. These
ratios show interested parties the company’s capacity to meet maturing current
liabilities.

8.1.1 Current or Working Capital Ratio:

The current ratio indicates
the ability of a company to pay its current liabilities from current assets and
thus shows the strength of a company’s working capital position. Short-term
creditors are particularly interested in the current ratio since the conversion
of inventories and accounts receivable into cash is the primary source from
which the company obtains the cash to pay short-term creditors. Long-term
creditors are also interested in the current ratio because a company that is
unable to pay short-term debts maybe forced into bankruptcy.

Year

2002

2003

2004

2005

2006

Current
assets (a)

444,912,117

335,765,118

357,315,225

482,826,702

424,937,956

Current
liabilities (b)

393,739,786

278,381,457

329,088,697

429,290,269

362,205,475

Working
capital (a-b)

51,172,331

57,383,661

28,226,528

53,536,433

62,732,481

Current ratio (a÷b)

1.13:1

1.21:1

1.09:1

1.12:1

1.17:1

Industry Average

0.98:1

0.76:1

0.67:1

0.75:1

0.77:1

Figure 2: Current Ratio of Confidence
Cement Ltd. & the Industry Average 2002-2006

As
we can see, the current ratio of the company has been quite consistent during
the past five years. It does not show any fixed upward or downward trend. The
same can be said about the overall industry. But the company has a slightly
good current ratio ha the industry, meaning it has the ability to pay its
current debts easily.

 
Acid-Test (Quick) Ratio:

The acid-test ratio is the
ratio of quick assets (cash, marketable securities and net receivables) to
current liabilities. Inventories and prepaid expenses are excluded from the
current assets to compute quick assets because they might not be readily
convertible into cash. Short-term creditors are particularly interested in this
ratio, since it relates the “pool” of cash and immediate cash inflows to
immediate cash outflows.

Year

2002

2003

2004

2005

2006

Quick
assets (a)

204,400,369

156,758,135

190,096,450

265,459,277

255,582,815

Current
liabilities (b)

393,739,786

278,381,457

329,088,697

429,290,269

362,205,475

Net
quick assets (a-b)

(189,339,417)

(121,623,322)

(138,992,247)

(163,830,992)

(106,622,660)

Acid-test ratio (a÷b)

0.52:1

0.56:1

0.58:1

0.62:1

0.71:1

Industry Average

0.48:1

0.29:1

0.29:1

0.33:1

0.65:1

Figure 3: Acid-Test Ratio of Confidence
Cement Ltd. & the Industry Average 2002-2006

The
acid-test ratios of the past five years tell us that, the company cannot pay
its current debts with the help of its quick assets or assets which can be
readily converted into cash. The ratio of the overall industry is even worse.
But the company’s quick ratio is getting better every year.

 
Accounts Receivable Turnover:

Year

2002

2003

2004

2005

2006

Net
sales (a)

402,836,313

637,874,790

466,480,439

685,713,532

950,502,498

Average
net accounts receivable (b)

57,776,170

86,772,341

106,799,934

134,238,819

146,289,346

Accounts receivable
turnover (a÷b)

6.97

7.35

4.36

5.11

6.50

Industry Average

13.15

8.97

6.89

8.51

9.82



Figure 4: Accounts Receivable Turnover
of Confidence Cement Ltd. & the Industry Average 2002-2006

The
turnover ratio provides an indication of how quickly the receivables are being
collected. For example, in 2006, Confidence Cement Ltd. collected its accounts
receivables slightly more than 6 times per year. The turnover ratio of the
Confidence Cement Ltd. does not show any specific upward or downward trend. The
same can be said about the industry. But the industry’s turnover ratio is
better than Confidence Cement Ltd.

 
Number of Day’s Sales in Accounts Receivable:

Year

2002

2003

2004

2005

2006

Accounts receivable
turnover

6.97

7.35

4.36

5.11

6.50

Number of Days’ Sales in
Account Receivable

52.37

49.66

83.72

71.43

56.15

Industry Average

41.5

59.68

100.55

57.78

40.03

Figure 5: Number of Day’s Sales in Accounts Receivable of
Confidence Cement Ltd.

The Industry Average 2002-2006

The number of days’ sales in
accounts receivable ratio measures the average liquidity of accounts receivable
and gives an indication of their quality. Generally, the shorter the collection
period, the higher the quality of receivables. In 2004, both the company and
the industry had long collection period, because of a nationwide flood. After
that both the company and the industry has managed to shorten their collection
period.

 
Inventory Turnover:

Year

2002

2003

2004

2005

2006

Cost of goods sold (a)

401,078,555

564,693,010

435,232,440

620,643,737

844,444,070

Average inventory (b)

213,434,765

209,759,366

173,112,879

192,293,100

193,211,283

Inventory turnover (a÷b)

1.88:1

2.69:1

2.51:1

3.23:1

4.37:1

Industry Average

6.59:1

8.4:1

4.44:1

5.64:1

6.75:1

Figure 6: Inventory Turnover of
Confidence Cement Ltd. & the Industry Average 2002-2006

A
company’s inventory turnover shows the number of times its average inventory is
sold during a period. A manager who is able to maintain the highest inventory
turnover ratio is considered the most efficient. But then again, if a company
that achieves  high inventory turnover
ratio by keeping extremely small inventories on hand may incur larger ordering
costs, lose quantity discounts and lose sales due to lack of adequate
inventory. So, in order to earn satisfactory income, management must balance
the costs of inventory storage and obsolescence and the cost of tying up funds
in inventory against possible losses of sales and other costs associated with
keeping too little inventory in hand. Confidence Cement Ltd. has managed to
increase its inventory turnover every year. But the inventory turnover of the
industry has been much better than the company during the last 5 years.

 
Total Assets Turnover:

Year

2002

2003

2004

2005

2006

Net
sales (a)

402,836,313

637,874,790

466,480,439

685,713,532

950,502,498

Average
total assets (b)

1,033,959,321

1,008,107,661

939,947,301

995,243,025

1,029,458,489

Total assets turnover
(a÷b)

0.39:1

0.63:1

0.50:1

0.69:1

0.92:1

Industry Average

0.83:1

0.74:1

0.43:1

0.88:1

1.03:1

Figure 7: Total Assets Turnover of
Confidence Cement Ltd. & the Industry Average 2002-2006

This ratio measures the
efficiency with which a company uses its assets to generate sales. For example,
in 2006, each taka of assets in Confidence Cement Ltd produced Tk. 0.92 sales.
The larger the total assets turnover, the larger will be the income on each
dollar invested in the assets of the business. The assets turnover ratio has
increased over the years except for 2004. But a ratio less than 1 is not good
enough for any company. On other hand, since 2002 to 2004 the assets turnover
ratio of the industry showed a downward trend but it started to increase from
2005. Except for the year 2004, the ratio of the industry was better than the
company.


Equity or Long-Term Solvency Ratios:

Equity
or long-term solvency ratios show the relationship between debt and equity
financing in a company.

 
Equity (Stockholders’ Equity) Ratio:

Year

2002

2003

2004

2005

2006

Stockholder’s
equity (a)

  635,434,364

642,158,181

607,669,370

619,932,968

632,565,013

Total
assets (b)

1,073,162,079

943,053,242

936,841,360

1,053,644,690

1,005,272,287

Equity ratio (a÷b)

0.59

0.68

0.65

0.58

0.63

Industry Average

0.53

0.50

0.46

0.29

0.60

Figure 8: Equity Ratio of Confidence
Cement Ltd. & the Industry Average 2002-2006

The
equity ratio indicates the proportion of total assets (or total equities)
provided by stockholders (owners) on any given date. From a creditor’s point of
view, a high proportion of stockholders’ equity is desirable as it indicates
the existence of a large protective buffer for creditors in the event a company
suffers loss. But from an owner’s point of view, a high proportion of
stockholders’ equity may or may not be desirable. If borrowed funds can be used
by the business generate income in excess of the net after-tax cost of the
interest on such borrowed funds, a lower percentage of stockholders’ equity may
be desirable. The equity ratios of both the company and the industry are low
which is good for the owners as they can use the borrowed funds to generate
income.

 
Stockholders’ Equity to Debt Ratio:

Year

2002

2003

2004

2005

2006

Stockholder’s equity (a)

635,434,364

642,158,181

607,669,370

619,932,968

632,565,013

Total debt (b)

437,727,715

300,895,061

329,171,990

433,711,722

372,707,274

Equity ratio (a÷b)

1.45:1

2.13:1

1.85:1

1.43:1

1.70:1

Industry Average

1.05:1

0.77:1

0.70:1

0.65:1

0.87:1

Figure 9: Stockholders’ Equity to Debt
Ratio of Confidence Cement Ltd. & the Industry Average 2002-2006

The
relative equities of owners and creditors can be expressed by this ratio. As we
can see, the ratios of both the company and the industry do not follow a
specific trend. But the company’s ratios are higher than the overall industry.


Profitability Tests:

Profitability
is an important measure of a company’s operating success. Two areas are given
focus while judging profitability: (1) relationship on the income statement
that indicate a company’s ability to recover costs and expenses and, (2)
relationships of income to various balance sheet measures that indicate the
company’s relative ability to earn income on assets employed. 

 
Rate of Return on Operating Assets:

Year

2002

2003

2004

2005

2006

Net operating income (a)

(41,463,228)

14,583,040

(27,088,620)

17,106,410

59,432,763

Operating assets (b)

944,406,586

872,776,599

861,130,732

937,528,748

898,384,117

Rate of return on

operating assets (a÷b)

-4.4%

1.67%

-3.14%

1.82%

6.62%

Industry Average

-6.2%

-9.66%

-7.67%

-4.29%

-4.0%

Figure 10: Rate of Return on Operating Assets of Confidence Cement Ltd.
& the Industry Average 2002-2006

This
ratio is designed to show the earning power of the company as a bundle of
assets. By disregarding both non-operating assets and non-operating income
elements, the rate of return on operating assets measures the profitability of
the company in carrying out business functions.

As
we can see, Confidence Cement Ltd. had a negative ratio in 2002 and 2004. But
right now it is going upward. On the other hand, the cement industry has had a
negative ratio for the past 5 years.

The
ratio can be broken down into two elements- the operating margin & the
turnover of operating assets.

 
Operating Margin:

Year

2002

2003

2004

2005

2006

Net operating income (a)

(41,463,228)

14,583,040

(27,088,620)

17,106,410

59,432,763

Net sales (b)

402,836,313

637,874,790

466,480,439

685,713,532

950,502,498

Operating margin  (a÷b)

-10.29%

2.29%

-5.81%

2.49%

6.25%

Industry Average

-5.56%

-4.76%

-11.23%

-0.44%

4.02%

Figure 11: Operating Margin of
Confidence Cement Ltd. & the Industry Average 2002-2006

Operating
margin reflects the percentage of each taka of net sales that becomes net
operating income. As we can see, except for in 2004, the operating margin of
Confidence Cement Ltd. is increasing every year. That means more and more net
sales are turning into net operating income. The same can be said for the
overall industry. But the ratio of the overall industry only got positive in
the year 2006.

 
Turnover of Operating Assets:

Year

2002

2003

2004

2005

2006

Net sales (a)

402,836,313

637,874,790

466,480,439

685,713,532

950,502,498

Operating assets (b)

944,406,586

872,776,599

861,130,732

937,528,748

898,384,117

Turnover of operating assets (a÷b)

0.43:1

0.73:1

0.54:1

0.73:1

1.06:1

Industry Average

0.76:1

0.74:1

0.63:1

1.01:1

1.26:1


Figure 12: Turnover of Operating Assets of Confidence Cement Ltd. &
the Industry Average 2002-2006

Turnover
of the operating assets shows the amount of sales taka generated for each taka
invested in operating assets. Except for the year 2004, the ratio of the
company has increased every year, meaning more income is being generated by the
money invested. The same thing can be said about the overall industry. But the
ratio of the industry is better than Confidence Cement Ltd.

 
Net Income to Net Sales (Return on Sales) Ratio:

Year

2002

2003

2004

2005

2006

Net income (a)

(39,547,130)

17,173,817

(24,038,811)

20,813,598

41,132,045

Net sales (b)

402,836,313

637,874,790

466,480,439

685,713,532

950,502,498

Net income to net sales  (a÷b)

-9.82%

2.69%

-5.15%

3.04%

4.33%

Industry Average

-8.80%

-9.20%

-14.43%

-4.90%

-13.64%

Figure 13: Net Income to Net Sales Ratio
of Confidence Cement Ltd. & the Industry Average 2002-2006

This
ratio measures the proportion of the sales taka that remains after the
deduction of all expenses. The industry has had a negative ratio for past 5
years, which means there was no profit generated by the net sales. But except
in 2004, the ratio of the Confidence Cement Ltd. has increased every year.

 
Net Income to Average Common Stockholders’ Equity:

Year

2002

2003

2004

2005

2006

Net income (a)

(39,547,130)

17,173,817

(24,038,811)

20,813,598

41,132,045

Average common

stockholders’ equity (b)

663,153,609

638,795,273

624,913,776

613,801,169

626,248,991

Net income to average common
stockholders’ equity (a÷b)

-5.96%

2.69%

-3.85%

3.39%

6.57%

Industry Average

-7.11%

-12%

-19.57%

-26.49%

22.87%

Figure 14: Net Income to Average Common Stockholders’ Equity
of Confidence Cement Ltd. & the Industry
Average 2002-2006

From
the stockholders’ point of view, an important measure of the income-producing
ability of a company is the relationship of net income to average common stockholders’
equity. Again, except in 2004, the ratio of the company is increasing day by
day which means the company is earning more in return of the stockholders’
equity. This is good news for the stockholders. But unfortunately, that is not
the case for the overall industry. The ratio for the industry became positive
only in 2006. Until then it had kept on decreasing.

 
Earnings per Share of Common Stock:

Year

2002

2003

2004

2005

2006

Earnings available to
common stockholders (a)

(39,547,130)

17,173,817

(24,038,811)

20,813,598

41,132,045

Weighted-average number

of shares (b)

1,900,000

1,900,000

1,900,000

1,900,000

1,900,000

EPS of common stock (a÷b)

-20.81

9.51

-12.65

10.95

21.65

Industry Average

7.23

-4.09

-14.16

-3.24

31.95

Figure 15: Earnings per Share of
Confidence Cement Ltd. & the Industry Average 2002-2006

His
measure is most widely used to appraise a company’s operations. The more the
EPS, people are more likely to buy the company’s shares. As we can see in the
graph, due to nation-wide flood, the EPS in 2004 had a negative value. But
apart from that the EPS of Confidence Cement LTD. is increasing day by day. The
same can be said about the overall industry.


Market Tests:

Market
test ratios are computed using the information from the financial statements
and information about market price of the company’s stock. These tests help
investors and potential investors assess the relative merits of the various
stocks in the marketplace.

 
Earnings Yield on Common stock:

Year

2002

2003

2004

2005

2006

Earnings
per share (EPS)

(11.64)

9.51

(12.65)

10.95

21.65

Current market price per
share of common stock

239.75

141.75

161.75

114.75

137.75

Earnings yield on common
stock

-4.86%

6.71%

-7.82%

9.54%

15.72%

Figure 16: Earnings Yield on Common
Stock of Confidence Cement Ltd. & the Industry Average 2002-2006

The
increase of the earnings yield on common stock every year is a good sign for
the investors. It means buying its share would prove to be profitable.

 
Price-Earnings Ratio:

Year

2002

2003

2004

2005

2006

Current market price per share of
common stock

239.75

141.75

161.75

114.75

137.75

Earnings per
share (EPS)

(11.64)

9.51

(12.65)

10.95

21.65

Price-earnings ratio

-20.6:1

14.91:1

-12.79:1

10.48:1

6.36:1

Figure 17: Price-Earnings Ratio of
Confidence Cement Ltd. & the Industry Average 2002-2006

According to the recent data, in 2006, the stock of
the Confidence Cement Ltd. was selling at 6.36 times the earning. But this
comparison of the ratios since 2002-2006 does not show any specific trend.

 
Dividend Yield on Common Stock :

Year

2002

2003

2004

2005

2006

Dividend per share of
common stock

20

5

5

5

15

Current market price per
share of common stock

239.75

141.75

161.75

114.75

137.75

Dividend yield on common
stock

8.34%

3.53%

3.09%

4.35%

10.89%

Figure 18: Dividend Yield on Common Stock of
Confidence Cement Ltd. & the Industry Average 2002-2006

The
dividend paid per share of common stock is also of much interest to common
stockholders. In 2006, the shareholders got the highest dividend yield on
common stock.

 
Payout Ratio on Common Stock :

Year

2002

2003

2004

2005

2006

Dividend per share of
common stock

20

5

5

5

15

Earnings
per share (EPS)

(11.64)

9.51

(12.65)

10.95

21.65

Payout ratio on common
stock

-171.82%

52.58%

39.53%

45.66%

69.28%

Industry Average

-40.38%

83.13%

57.37%$

24.99%

32.56%

In
2006, the payout ratio of Confidence Cement Ltd. was 69.28%. This means 69.28%
of the company’s earnings were paid as dividends. And we can also that the
ratio is increasing every year. But overall, the industry does not have a
steady growth in payout ratio on common stock.

9.
Conclusion

The future of the cement industry is
very bright as Bangladesh is developing, and is in need of variety of
construction materials, chiefly cement, for its overall development. The
country is also facing rapid urbanization, which in turn means lack of space in
the developed cities. Therefore, the multistoried apartment buildings are
indispensable. As the country is regularly visited by floods, cement will play
a vital role as it is unaffected by water. On the contrary, it hardens when it
comes in contact with water.  So we can
conclude that, the cement industry in Bangladesh is indeed a prospective
industry.

Should we buy its shares?

Now
the question is, should we invest in this industry or more specifically in
Confidence Cement Ltd.? The analysis of the balance sheets and the profit and
loss account shows, the assets have sometimes increased and sometimes
decreased. The same can be said about liabilities. A steady trend is indeed
hard to find. But the profit and loss account shows us a steady increase in
profit except 2004. In 2004, due to a nationwide flood, the company suffered
loss. The trend percentage also shows the increasing trend of the sales and profit.

Now
moving on to the ratios, the liquidity ratios of the company is not at all
satisfactory. It means the company does not have sufficient current assets to
pay its liabilities. So, if a situation like that occurs, there is a
possibility that the company might be bankrupt. The long-term solvency ratios
are slightly better. Though in the recent past, many of profitability ratios
had negative values, the scenario is changing now. The profitability of the
company is increasing day by day.

The
current EPS along with the market test ratios is pretty satisfactory. The
investors are getting regular dividends and making a profit. The current market
price for each share with 100 taka face value is Tk. 338.75. So, considering
the fact that the cement industry is a prospective industry, the increase in
the amount of exports in the near future and most importantly the current
financial position helps us to conclude that, to invest in this company would
be profitable in the long-run.

Among
the other companies investing in Heidelberg Cement, Lafarge Surma Cement and
Meghna Cement would be profitable. 

Bibliography

*
Annual Reports:

*
Annual Reports of
Confidence Cement Ltd 2002, 2003, 2004, 2005 & 2006

*
Annual Reports of
Meghna Cement Ltd 2002, 2003, 2004, 2005 & 2006

*
Annual Reports of
Heidelberg Cement Ltd 2002, 2003, 2004, 2005 & 2006

*
Annual Reports of
Aramit Cement Ltd 2002, 2003, 2004, 2005 & 2006

*
Annual Reports of
Niloy Cement Ltd 2002, 2003, 2004, 2005 & 2006

*
Text Book:

*
Accounting
Principles – Fifth Edition – Hermanson, Edwards, Maher

*
Organizational Assistance:

*
Dhaka Stock
Exchange

*
Internet:

*
www.yahoo.com

*
www.google.com

*
www.dsebd.org

*
www.wikipedia.com