Analysis & Interpretation of Financial Statements Confidence Cement Limited

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Analysis & Interpretation of Financial Statements Confidence Cement Limited

1. Introduction

1.1 Origin of the Report:

This report was prepared for Mr. Abdul Momen as a course requirement for Financial Accounting II.

1.2 Problem & Purpose:

The purpose of this report is to analyze the current financial condition of the cement manufacturing company Confidence cement Ltd and also get a closer ok at the cement industry of Bangladesh. Based on that analysis, finally it provides recommendations whether it’s profitable to buy the company’s shares or not.

1.3 Scope:

This report analyzes the financial statements of 2002-2006 of Confidence Cement Ltd. To calculate the industry average and compare it with the company’s ratios, it analyzes the available data of 4 other contemporary cement companies. These companies are, Meghna Cement Ltd., Aramit Cement Ltd., Heidelberg Cement Ltd. and Niloy Cement Ltd.

1.4 Limitations:

Different companies have different methods to present their data. This poses to be a problem when we compare their financial conditions. Moreover, to calculate the industry average, the ratios of only 5 companies have been used. As there are more companies in the cement industry, it does not give us a full view of the overall industry.

1.5 Sources & Methods of Collecting Information:

Various sources have been used to prepare this report. These sources are mainly secondary ones. The list of the sources is mentioned in the bibliography.

1.6 Report Preview:

At first, the report analyzes the comparative balance sheets and profit and loss account from 2002-2006. Then it analyzes the company’s trend percentage. Moving on, it calculates different ratios and finally compares them with the industry average. Based on the information from the analysis, it suggests whether it would be profitable to invest in this industry or not.

2. 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

Source: The Daily Star

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, and 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, and Heidelberg Cement & Niloy Cement.

3. 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.

4. 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.

5. Analysis of the Balance Sheets

5.1 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.

· The fixed & long-term assets increased Tk. 9,516,343 while the long-term liabilities increased 6,080,346

· 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.

5.2 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.

· The fixed & long-term assets decreased Tk. 8,708,147 while the long-term liabilities increased 4,38,160

· 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.

5.3 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

Table 3: Comparative Balance Sheets – 2004 & 2003

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.

· The fixed & long-term assets decreased Tk. 27,761,989 while the long-term liabilities decreased Tk. 22,430,311.

· 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 fixed & long-term assets went from being 64.4% to the 61.9% 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.

5.4 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