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Ethical and Unethical Business Practices Of Wal-Mart & Grameen Phone Ltd.
Introduction
Outright Fashion Limited, a private limited company, incorporated in 1991 with having its business in 100% export oriented RMG (both Knit and Woven) situated in 965, Shawrapara , Mirpur, Dhaka in its own six storied building within the industrial park of the groups own. Since its inception in 1991, it gradually expanded to present status having more than 2200 sewing machine with more than 55 production line. Annual Turnover of the company is more than 142 crore taka in 2007.
| COMPARATIVE STATEMENT ON EXPORT OF RMG AND TOTAL EXPORT | ||||
| YEAR | EXPORT OF RMG (IN MILLION US$) | TOTAL EXPORT OF BANGLADESH (IN MILLION US$) | % OF RMG’S TO TOTAL EXPORT | |
| 1983-84 | 31.57 | 811.00 | 3.89 | |
| 1984-85 | 116.2 | 934.43 | 12.44 | |
| 2003-2004 | 4912.09 | 6548.44 | 75.01 | |
| 2004-2005 | 5686.09 | 7602.99 | 74.79 | |
| 2005-2006 | 6417.67 | 8654.52 | 74.15 | |
| 2006-2007 | 7900.80 | 10526.16 | 75.06 | |
| 2007-2008(Dec) | 4730.36 | 6220.61 | 76.04 | |
From the above table we can assume the importance of RMG sector in our total export earning. RMG sector become the most important sector in Bangladesh even in Quota free world Market. Competitive Wages, Quality products and Compliances make Bangladeshi Garment Industries viable though there are number of difficulties. Bank finance plays an important role to expand this sector to its present condition. However, there are still many miles to go and this industry needs more and more investment from Financial Institutions as well as from own sources of the sponsors.
This is why we have chosen a firm in RMG sector to be analyzed with concentration on Common Size analysis, Ratio & Trend Analysis for healthiness of the firm to meet its financial obligations with its assets.
Financial analysis is a process which involves reclassification and summarization of information through the establishment of ratios and trends.
Analysis of financial statement refers to the examination of the statements for the purpose of acquiring additional information regarding the activities of the business.
For our purpose we have used the following financial statements of Outright Fashion Limited. These financial statements are audited ones.
Income Statement of OFL:
| INCOME STATEMENT | |||
| FYE | 31.12.2005 | 31.12.2006 | 31.12.2007 |
| Income Statement | Actual | Actual | Actual |
| Amount | in (000) Taka | in (000) Taka | in (000) Taka |
| Gross sales | 1,317,271 | 1,392,230 | 1,424,119 |
| Less:VAT | 0 | 0 | 0 |
| Net Sales | 1,317,271 | 1,392,230 | 1,424,119 |
| Total Sales Revenue | 1,317,271 | 1,392,230 | 1,424,119 |
| Less :Cost of Goods Sold | 1,184,724 | 1,291,664 | 1,283,879 |
| GROSS PROFIT/REVENUE | 132,547 | 100,566 | 140,240 |
| Less: Selling. Gen. & Admin. Expenses | 30,151 | 29,810 | 42,392 |
| TOTAL OPERATING PROFIT (EBITD) | 102,396 | 70,756 | 97,848 |
| Less: Depreciation | 30,388 | 31,285 | 43,525 |
| Less: Interest Expense | 25,656 | 24,642 | 47,489 |
| PROFIT BEFORE TAXES & EXTR ITEM | 46,352 | 14,829 | 6,834 |
| Add: Other Income | 353 | 0 | 0 |
| Income Taxes | 1,144 | 2,448 | 3,560 |
| NET PROFIT | 45,561 | 12,381 | 3,274 |
Balance Sheet of OFL:
| FYE | 31.12.2005 | 31.12.2006 | 31.12.2007 |
| B/S | Actual | Actual | Actual |
| Amount | in (000) Taka | in (000) Taka | in (000) Taka |
| CURRENT ASSETS | |||
| Cash/Bank Balances | 1,025 | -89 | 2,353 |
| Acc. Receivables-Trade | 229,052 | 271,629 | 202,230 |
| Accounts Receivable – Others | 353 | 0 | 0 |
| Advance deposit & prepayments | 6,078 | 10,422 | 28,995 |
| Inventory | 174,660 | 181,669 | 225,977 |
| TOTAL CURRENT ASSETS | 411,168 | 463,631 | 459,555 |
| FIXED ASSETS | |||
| Gross Fixed Assets | 522,446 | 672,444 | 847,233 |
| Less: Depreciation | 165,145 | 196,430 | 239,932 |
| NET FIXED ASSETS | 357,301 | 476,014 | 607,301 |
| NON-CURRENT ASSETS | |||
| Machinery under installation | 1,416 | 99,066 | 29,784 |
| Building under construction | 0 | 52,751 | 15,290 |
| Long term security deposits | 3,083 | 4,757 | 7,732 |
| others | 2,352 | 2,352 | 2,352 |
| TOTAL NON-CURRENT ASSETS | 364,152 | 634,940 | 662,459 |
| TOTAL ASSETS | 775,320 | 1,098,571 | 1,122,014 |
| Short Term Bank Borrowings | 74,643 | 139,052 | 170,115 |
| Current Funded Portion of Term Debt (CMLTD) | 25,478 | 16,954 | 41,746 |
| Accounts Payable | 244,856 | 263,519 | 247,644 |
| Other Payables | 30,648 | 69,134 | 50,311 |
| Proposed Dividend | 28,268 | 0 | 0 |
| Others | 10,216 | 9,709 | 12,993 |
| TOTAL CURRENT LIABILITIES | 414,109 | 498,368 | 522,809 |
| LONG TERM LIABILITIES | |||
| Term Loan | 13,809 | 142,188 | 105,323 |
| Defered L/C Liability | 0 | 45,622 | 28,996 |
| TOTAL LIABILITIES | 427,918 | 686,178 | 657,128 |
| NET WORTH | |||
| Paid up Capital | 282,680 | 282,680 | 282,680 |
| Directors Loan(subordinated) | 0 | 49,782 | 110,729 |
| Retained Earnings | 20,949 | 36,158 | 27,704 |
| Tax Holiday Reserve | 43,773 | 43,773 | 43,773 |
| NET WORTH | 347,402 | 412,393 | 464,886 |
| TOTAL LIABILITIES & NET WORTH | 775,320 | 1,098,571 | 1,122,014 |
Ratio Analysis
A tool used by individuals to conduct a quantitative analysis of information in a company’s financial statements. Ratios are calculated from current year numbers and are then compared to previous years, other companies, the industry, or even the economy to judge the performance of the company. Ratio analysis is predominately used by proponents of fundamental analysis.
Financial ratio analysis is a fascinating topic to study because it can teach us so much about accounts and businesses. When we use ratio analysis we can work out how profitable a business is, we can tell if it has enough money to pay its bills and we can even tell whether its shareholders should be happy!
Ratio analysis can also help us to check whether a business is doing better this year than it was last year; and it can tell us if our business is doing better or worse than other businesses doing and selling the same things.
In addition to ratio analysis being part of an accounting and business studies syllabus, it is a very useful thing to know anyway!
One of the ways in which financial statements can be put to work is through ratio analysis. Ratios are simply one number divided by another; as such they may or not be meaningful. In finance, ratios are usually two financial statement items that may be related to one another and may provide the prudent user a good deal of information. Of the myriad of ratios that could be generated, some will be more meaningful than others. Generally ratios are divided into the following gross categories:
1. Growth Ratios: Gross Sales/Revenues Growth, Net Sales/Revenue Growth, Net Income Growth, Net Asset Growth, Net Liability Growth, Net Worth Growth etc.
2. Profitability Ratios: includes various profit margin, expenditure percentage regarding to sales, ROA, ROE etc. Profitability indicates the efficiency with which manages resources.
3. Coverage Ratios: Interest Coverage Ratio, Debt-Service Coverage Ratio. These ratios indicates the firms ability to pay interest/financial costs
4. Activity Ratios: Receivables, Payables, Inventory & Asset Turnover Ratios along with in days. These Ratios indicate how effectively the firm manages resources at its disposal to generate sales.
5. Liquidity Ratios: Current and Quick Ratio. Liquidity ratios indicate the firm’s ability to meet it maturing short-term obligations.
6. Leverage Ratios: Debt to equity, Debt to Total Asset, Total Capitalization etc.
This indicates the extent to which the firm is financed by debt.
Remember, ratios are just one number divided by another and as such really don’t mean much. The trick is in the way ratios are analyzed and used by the decision maker. A good strategy is to compare the ratios to some sort of benchmark, such as industry averages or to what a company has done in the past, or both.
Analysis of Ratios:
Once ratios are calculated, an analyst needs some benchmarks to find out where the company stands at that particular point. Useful benchmarks are industry comparisons and company trends.
It may be useful to compare a company to certain industry averages to get a feel for how the company is performing. In that case it is necessary to obtain industry performance measures. There are a number of sources for industry figures.
- Commercial Sources – A number of companies publish information on industry comparisons. Among these sources are private credit reporting agencies such as Dun & Bradstreet and Robert Morris & Associates. Rating agencies such as Moody’s and Standard & Poor’s also provide industry information.
- Government Sources – There are a number of government sources of helpful industry information, such as the U.S. Industrial Outlook and Quarterly Financial Reports.
- Trade Associations – Many industries have trade associations or industry groups that regularly publish information for and about members.
The industry averages is difficult to collect in Bangladesh. However we have used another company’s (in the same line of business) ratios as industry average.
Financial Ratios of OFL:
| FINANCIAL RATIOS | 31.12.2005 | 31.12.2006 | 31.12.2007 |
| % | % | % | |
| GROWTH RATIOS: | |||
| Sales Growth, Sales% | N/A | 5.69 | 2.29 |
| Net Sales Growth, Composite % | N/A | 5.69 | 2.29 |
| Net Income Growth, % | N/A | -72.83 | -73.56 |
| Total Assets Growth, % | N/A | 41.69 | 2.13 |
| Total Liabilities Growth, % | N/A | 60.35 | -4.23 |
| Net Worth Growth, % | N/A | 18.71 | 12.73 |
| PROFITABILITY RATIOS: | |||
| Gross Margin, Composite % | 10.06 | 7.22 | 9.85 |
| SG & A, % | 2.29 | 2.14 | 2.14 |
| Cushion (Gross Margin – SG&A), % | 7.77 | 5.08 | 6.87 |
| Depreciation, Amortization, % | 2.31 | 2.25 | 3.06 |
| Operating Profit Margin, % | 7.77 | 5.08 | 6.87 |
| Interest Expense, % | 1.95 | 1.77 | 3.33 |
| Operating Margin, % | 3.52 | 1.07 | 0.48 |
| Net Margin, % | 3.46 | 0.89 | 0.23 |
| Return on Assets, % | 5.88 | 1.13 | 0.29 |
| Return on Equity, % | 13.11 | 3.00 | 0.70 |
| COVERAGE RATIOS: | |||
| Interest Coverage (EBIT/Total Interest) | 2.81 | 1.6 | 1.14 |
| Debt Ser. Coverage(EBITDA/Total Interest +CMLTD) | 1.49 | 1.7 | 1.1 |
| ACTIVITY RATIOS: | |||
| Receivables in Days | 63 | 71 | 52 |
| Payables in Days | 75 | 74 | 70 |
| Inventory in Days | 54 | 51 | 64 |
| Sales/Total Assets (X) | 1.7 | 1.3 | 1.3 |
| LIQUIDITY RATIOS: | |||
| Working Capital | -2,941 | -34,737 | -63,254 |
| Quick Ratio (X) | 0.56 | 0.54 | 0.39 |
| Current Ratio (X) | 0.99 | 0.93 | 0.88 |
| Sales/ Net Working Capital (X) | -447.9 | -40.08 | -22.51 |
| LEVERAGE RATIOS: | |||
| Total Liabilities/ Net Worth (X) | 1.23 | 1.66 | 1.41 |
| Affiliate Exposure/Net Worth (%) | 0.4 | 24 | 6.4 |
| Total Liabilities/(Net Worth-Affiliates) (X) | 1.24 | 2.19 | 1.51 |
Trend Analysis
The Term Trend Analysis can be deifined as a comparative analysis of a company’s financial ratios over time. The term “trend analysis” refers to the concept of collecting information and attempting to spot a pattern, or trend, in the information. In some fields of study, the term “trend analysis” has more formally-defined meanings.
Although trend analysis is often used to predict future events, it could be used to estimate uncertain events in the past.
Specifically this ananlysis is done to take future investment decisions , to take a overveiew on the firms financial strength. Practically Trend Analysis and Ratio Analysis is closely related and often analyzed together. For Trend analysis, Ratio analysis is a prerequisite.
Liquidity Ratios: Trend Analysis
| 2005 | 2006 | 2007 | |
| Current Ratio | 0.99 | 0.93 | 0.88 |
| Quick Ratio | 0.56 | 0.54 | 0.39 |
Comparison with industry average: Current Ratio
| 2005 | 2006 | 2007 | |
| OFL | 0.99 | 0.93 | 0.88 |
| Industry Average | 1.70 | 1.75 | 1.80 |
Comparison with industry average: Quick Ratio
| 2005 | 2006 | 2007 | |
| OFL | 0.56 | 0.54 | 0.39 |
| Industry | 0.85 | 0.90 | 0.90 |
Comment on the trend analysis of Liquidity Ratios:
The Current ratio of Outright Fashion Limited has been reduced slightly over the years whereas the industry average shows a upward trend. At the same time the Quick Ratio/Acid Test Ratio of OFL decreased sharply whereas that of industry average shows a stable condition.
Hence we can conclude that inventory management is a significant problem for OFL.
Profitability Ratios: Trend Analysis
| 2005 | 2006 | 2007 | |
| Gross Margin, Composite % | 10.06 | 7.22 | 9.85 |
| Operating Profit Margin, % | 7.77 | 5.08 | 6.87 |
| Net Margin, % | 3.46 | 0.89 | 0.23 |
| Return on Assets, % | 5.88 | 1.13 | 0.29 |
| Return on Equity, % | 13.11 | 3.00 | 0.70 |
Comparison with industry average: Operating Profit Margin
| 2005 | 2006 | 2007 | |
| OFL | 7.77 | 5.08 | 6.87 |
| Industry | 15.00 | 12.00 | 11.00 |
Comparison with industry average: Net Margin
| 2005 | 2006 | 2007 | |
| OFL | 3.46 | 0.89 | 0.23 |
| Industry | 12.00 | 9.00 | 8.00 |
Comment on Profitability Analysis:
The profitability ratios for OFL have all been falling since 2005. Each of the ratios is bellow the industry average for the past three years. This indicates that COGS, Administrative costs and financial cost may be too high and potential problem for OFL.
Hence we can conclude that to increase profitability the management should taken special care of COGS and other costs.
Trend Analysis: Coverage Ratio
| 2005 | 2006 | 2007 | |
| Interest Coverage (EBIT/Total Interest) | 2.81 | 1.60 | 1.14 |
| Debt Ser.Coverage(EBITDA/Total Interest+CMLTD) | 1.49 | 1.70 | 1.10 |
Comparison with Industry: Interest Coverage Ratio
| 2005 | 2006 | 2007 | |
| OFL | 2.81 | 1.60 | 1.14 |
| Industry | 5.40 | 4.50 | 3.75 |
Comparison with Industry: Debt Service Coverage Ratio
| 2005 | 2006 | 2007 | |
| OFL | 1.49 | 1.70 | 1.10 |
| Industry | 3.20 | 2.80 | 2.70 |
Comment on Coverage Ratio Analysis:
The interest coverage ratio and debt service coverage ratio both for OFL has been falling since 2005. It has been below industry average for the past three years. This indicates too low earnings may be a potential problem for OFL.
Hence we can conclude that further investment in OFL in way of Bank financing needs special care.
Trend Analysis: Leverage Ratios
| 2005 | 2006 | 2007 | |
| Total Liabilities/ Net Worth (X) | 1.23 | 1.66 | 1.41 |
| Affiliate Exposure/Net Worth (%) | 0.40 | 24.00 | 6.40 |
| Total Liabilities/(Net Worth-Affiliates) (X) | 1.24 | 2.19 | 1.51 |
Comparison with industry: Debt to equity Ratio
| 2005 | 2006 | 2007 | |
| OFL | 1.23 | 1.66 | 1.41 |
| Industry | 0.98 | 1.01 | 1.25 |
Comment on Leverage Analysis:
The leverage ratios indicates that though liability increases in 2006 than 2005, again it decreases in 2007. Debt is decreasing to match almost in the line with the industry.
Hence we can conclude that leverage or debt status of OFL is in the line with industry average.
Trend Analysis: Activity Ratios
| 2005 | 2006 | 2007 | |
| Receivables T/O in Days | 63 | 71 | 52 |
| Payables T/O in Days | 75 | 74 | 70 |
| Inventory T/O in Days | 54 | 51 | 64 |
| Asset T/O (X) | 1.7 | 1.3 | 1.3 |
Comparison with Industry: Receivables T/O in days
| 2005 | 2006 | 2007 | |
| OFL | 63 | 71 | 52 |
| Industry | 70 | 68 | 65 |
Comparison with Industry: Payables T/O in days
| 2005 | 2006 | 2007 | |
| OFL | 75 | 74 | 70 |
| Industry | 70 | 71 | 70 |
Comparison with Industry: Inventory T/O in days
| 2005 | 2006 | 2007 | |
| OFL | 54 | 51 | 64 |
| Industry | 55 | 52 | 51 |
Comparison with industry: Asset T/O Ratio
| 2005 | 2006 | 2007 | |
| OFL | 1.70 | 1.30 | 1.30 |
| Industry | 2.50 | 2.60 | 2.70 |
Comment on Activity Ratio Analysis:
Activity ratios shows that OFL’s inventory T/O ratio is too high than the industry and still it is paying it’s creditors almost as in the industry. At the same time it is recovering its receivables earlier than the industry, paying the trade creditors as in the industry. Asset T/O ratio is too low.
From Activity ratios, it is clear that OFL is yet to be reaching its 100% capacity utilization level.
Common Size Analysis
A financial statement displaying all items as a percentage of a common base figure, i,e the items of income statement in the percentage of revenue and that of Balance sheet is in the percentage of total assets. Such a statement may be useful for noting changes in the relative size of the various elements.
Presentation showing Balance Sheet and Profit and Loss Statement as percentages of total Assets and sales, respectively, rather than (or in addition to) currency. Common size analysis, which is also called vertical analysis, facilitates the comparison of one period to another and helps identify trends. Also called one hundred percent statement.
Illustration-1: Common Size Income statement of Outright Fashion Ltd.
| INCOME STATEMENT | ||||||
| FYE | 31.12.2005 | 31.12.2006 | 31.12.2007 | 31.12.2005 | 31.12.2006 | 31.12.2007 |
| Income Statement | Actual | Actual | Actual | Common Size | Common Size | Common Size |
| Amount | in (000) Taka | in (000) Taka | in (000) Taka | % | % | % |
| Gross sales | 1,317,271 | 1,392,230 | 1,424,119 | 100.00 | 100.00 | 100.00 |
| Less:VAT | 0 | 0 | 0 | 0.00 | 0.00 | 0.00 |
| Net Sales | 1,317,271 | 1,392,230 | 1,424,119 | 100.00 | 100.00 | 100.00 |
| Less :Cost of Goods Sold | 1,184,724 | 1,291,664 | 1,283,879 | 89.94 | 92.78 | 90.15 |
| GROSS PROFIT/REVENUE | 132,547 | 100,566 | 140,240 | 10.06 | 7.22 | 9.85 |
| Less: Selling. Gen. & Admin. Expenses | 30,151 | 29,810 | 42,392 | 2.29 | 2.14 | 2.98 |
| TOTAL OPERATING PROFIT (EBITD) | 102,396 | 70,756 | 97,848 | 7.77 | 5.08 | 6.87 |
| Less: Depreciation | 30,388 | 31,285 | 43,525 | 2.31 | 2.25 | 3.06 |
| Less: Interest Expense | 25,656 | 24,642 | 47,489 | 1.95 | 1.77 | 3.33 |
| PROFIT BEFORE TAXES & EXTR ITEM | 46,352 | 14,829 | 6,834 | 3.52 | 1.07 | 0.48 |
| Add: Other Income | 353 | 0 | 0 | 0.03 | 0.00 | 0.00 |
| Income Taxes | 1,144 | 2,448 | 3,560 | 0.09 | 0.18 | 0.25 |
| NET PROFIT | 45,561 | 12,381 | 3,274 | 3.46 | 0.89 | 0.23 |
Illustration-2: Common Size Balance Sheet of Outright Fashion Ltd.
| FYE | 31.12.2005 | 31.12.2006 | 31.12.2007 | 31.12.2005 | 31.12.2006 | 31.12.2007 |
| B/S | Actual | Actual | Actual | Common Size | Common Size | Common Size |
| Amount | in (000) Taka | in (000) Taka | in (000) Taka | % | % | |
| CURRENT ASSETS | ||||||
| Cash/Bank Balances | 1,025 | -89 | 2,353 | 0.13 | -0.01 | 0.21 |
| Acc. Receivables-Trade | 229,052 | 271,629 | 202,230 | 29.54 | 24.73 | 18.02 |
| Accounts Receivable – Others | 353 | 0 | 0 | 0.05 | 0.00 | 0.00 |
| Advance deposit & prepayments | 6,078 | 10,422 | 28,995 | 0.78 | 0.95 | 2.58 |
| Inventory | 174,660 | 181,669 | 225,977 | 22.53 | 16.54 | 20.14 |
| TOTAL CURRENT ASSETS | 411,168 | 463,631 | 459,555 | 53.03 | 42.20 | 40.96 |
| FIXED ASSETS | 0.00 | 0.00 | 0.00 | |||
| Gross Fixed Assets | 522,446 | 672,444 | 847,233 | 67.38 | 61.21 | 75.51 |
| Less: Depreciation | 165,145 | 196,430 | 239,932 | 21.30 | 17.88 | 21.38 |
| NET FIXED ASSETS | 357,301 | 476,014 | 607,301 | 46.08 | 43.33 | 54.13 |
| NON-CURRENT ASSETS | 0.00 | 0.00 | 0.00 | |||
| Machinery under installation | 1,416 | 99,066 | 29,784 | 0.18 | 9.02 | 2.65 |
| Building under construction | 0 | 52,751 | 15,290 | 0.00 | 4.80 | 1.36 |
| Long term security deposits | 3,083 | 4,757 | 7,732 | 0.40 | 0.43 | 0.69 |
| others | 2,352 | 2,352 | 2,352 | 0.30 | 0.21 | 0.21 |
| TOTAL NON-CURRENT ASSETS | 364,152 | 634,940 | 662,459 | 46.97 | 57.80 | 59.04 |
| TOTAL ASSETS | 775,320 | 1,098,571 | 1,122,014 | 100.00 | 100.00 | 100.00 |
| Short Term Bank Borrowings | 74,643 | 139,052 | 170,115 | 9.63 | 12.66 | 15.16 |
| Current Funded Portion of Term Debt (CMLTD) | 25,478 |