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M O N N O
Monno Ceramic Industries Ltd.
AN ENQUIRY INTO THE SHARE PRICE MOVEMENT: A CASE OF MONNO CERAMIC INDUSTRIES LIMITED
MONNO
Term Paper FIN 637 Section 1
Monno Ceramic Industries Ltd.
1. INTRODUCTION
M O N N O
The capital market of Bangladesh has a significant contribution to economic growth, employment creation and poverty alleviation in our country. The success achieved so far by Bangladesh Stock Exchange Market is the result of active cooperation and support of many parties’ like- Government, Bangladesh Bank, issuers, investors and market intermediaries. Currently approximate 350 companies are enlisted in Bangladesh Stock Exchange Commission. The share prices of various companies usually fluctuate from time to time. Various internal and external factors are the reasons behind this fluctuation.
The most
important factors which influences the share prices are- goodwill and reputation of the company, financial condition of the company, future growth of the company, amount of dividends the company pays each year to its shareholders, industry growth, economic and political stability of the country etc. Among all these factors, financial condition of the company is the most important factor which influences the stock price of the company. In this report we will analyze the financial condition of Monno Ceramic Industries Ltd. which is the top most company in ceramic industry of Bangladesh.
1.1 A Brief History of Monno Ceramic Industries Limited Monno Ceramic Industries started its journey in Bangladesh on 1981 as a public limited company under the Companies Act 1913. The company went for public issues of share in 1985 and its shares are listed in Dhaka Stock Exchange Ltd. and Chittagong Stock Exchange Ltd. since 1983 and 1985 respectively. Till to date the company has 1,350,000 shares and 8071 shareholders.
is the largest ceramic company in Bangladesh and holds the top position in ceramic industry. It began its journey by producing porcelain dinnerware and Monno Ceramic Industries Ltd.
eventually expanded onto the manufacture of Bone China. The product quality has been immaculate from the very beginning which has been directly reflected by the continuous market demand from local and international consumers. Monno Ceramic’s state of the art technology and creative designs gives it a competitive edge and establishes it as a strong competitor in the porcelain manufacturing world. In order to create top of the range merchandise, Monno Ceramic possesses the most advanced machinery for porcelain production in the country. State of the art technology like isostatic press and Dip Glaze are there to increase efficiency and product quality. After meeting the need of local market successfully, Monno Ceramic is exporting to global market like- USA, Canada, Australia, France, UK, Sweden, New Zealand, Germany, Italy and many other countries. This is also a success indicator of the company. The sales turnover of Monno is Taka 968,613,719 and net income is Taka 5,556,571 for the year 2008. They have also declared 10% dividend for the shareholders. They always strive
Monno Ceramic Industries Ltd.
for protection of their capital as well as to ensure highest return and growth of their They also try to increase their wealth to maximize the benefit of their shareholder.
M O N N assets. O
According to Monno their vision, mission, objectives, corporate focus and Financial Management policy are-
Vision: The company sees business as a means to the well being of the shareholders and all other stakeholders, society as well as the national interest as a whole.
Mission: The mission of the company is to provide world class quality product to our valid customers, strictly maintain ethical standard, in business operation.
Objectives of the Company: The company’s objectives are to conduct transparent business operation within the legal and social framework with aims to attain the mission with a quantitative/qualities target in a business operation.
Corporate Focus: Monno Ceramic Industries Ltd’s vision, there mission and objectives are to emphasis on the continuous development in making value addition to there products for producing the higher end products, to keep well prepared for competitive world market.
Financial Management policy: All financial policies like investment policy, dividend policy and financing policy is to maximize the value of the organization.
Monno Ceramic Industries Ltd.
2. OBJECTIVE OF THE STUDY
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Monno is one of the strong companies enlisted in the stock market. To get an idea about the share price of the company it is needed to analyze the financial situation of the company. It is also needed to find out if there is any hidden discrepancy in the financial statements of the company to get a clear scenario regarding the market price of their share. So the major objectives of this report are•
To find out the difference between book value and market value of the share price and to identify the possible reasons behind this difference.
•
To find out if there is any specific hidden discrepancy in the existing financial statements of the company.
•
To eliminate the discrepancy by preparing a new financial statement for the company.
•
To get an idea about the financial condition of the company in last six years (20022008).
•
To get an idea about the cash dealings of the company over these years.
•
To compare the firm’s financial status with one of its rival firm through ratio analysis with the justification of balancing between the market price and book value of the shares.
•
To get an idea about the movement of stock price that can be related to capital structure decision, investment decision, and other rumors related to the firm, which has been done by regression analysis.
Monno Ceramic Industries Ltd.
3. METHODOLOGY
M O N N O
The research was initiated through the gathering of information. Secondary data was collected in the form of balance sheet and income statement from annual report of 20022008. This report evaluates each company’s financial performance and compares their position against each other. A subjective analysis was also undertaken in order to justify the stock market price.
3.1 Nature and Source of Data: Secondary data have been used to conduct this study. The main sources of information are annual reports of Monno Ceramic Industries Ltd. and Bengal Fine Ceramic Ltd., collected from Dhaka Stock Exchange Commission and websites of Monno Ceramic Industries Ltd and Bengal Fine Ceramic Ltd.
3.2 Period of Data: The period of this project is consecutive five years starting from July, 2002 to June 2008 as the financial year of Monno Ceramic Industries Ltd starts at the month of June. Analyzing the six years period’s data will help to get the positive/negative trend of the share price and to come up to a more justified conclusion.
3.3 Nature of Analysis: As industry data is not widely available for Bangladesh Ceramics Industry, we had to rely on mainly the two other financial analysis techniques. 1. Trend (Time Series) Analysis 2. Cross-Sectional Analysis
3.3.1 Trend Analysis In Trend Analysis or Time Series Analysis, company ratios are compared over time, typically years. Year-to-year comparisons can highlight trends and point up the need for action. Trend analysis works best with five years of ratios. For this report we have gathered the data on Monno Ceramic for last seven years.
Monno Ceramic Industries Ltd.
4. LIMITATION OF THE STUDY
M O N N O
During conducting this report, there were some constraints and limitations.
One of the major limitations is limited access to annual reports of the respective companies. Since the most recent report of 2009 was not available, the comparison was done upto year 2008.
Another limitation was to collect the industry averages data as this type of information is not readily available in our stock market. Therefore, the analysis has compared the data of Monno Ceramic Industries Ltd with only one of the four rival firms of the ceramic industry - Bengal Fine Ceramic Ltd.
The value estimation of tangible fixed assets like land, building, machinery etc as well as intangible fixed asset like- goodwill, reputation etc of the company was also a constraint for this report. It was difficult to get the accurate market price of all the fixed assets especially goodwill, reputation etc. which is subjective and can’t be measured in monetary value.
Time constraint was also a limitation. Due to time constraint it wasn’t possible for us to calculate the actual price of all fixed assets.
Monno Ceramic Industries Ltd.
5. TRENDS IN MARKET VALUE & BOOK VALUE INDUSTRIES
OF
MONNO CERAMIC
If we look at the trend analysis of book value and market value of the Monno shares, it shows that the market value is always fluctuating with its book value. So, there must be some reason why this discrepancy happens between book value and market value. Table 1: The Market price and Book Value per Share for the years 2002-2008 Years Market Price per Share Book Value per Share 2008 2007 2006 2005 2004 2003 2002
346.75 212.00 175.75 254.00 271.00 301.25 249.00
224.95 230.84 250.51 259.26 270.27 269.74 271.18
Book Value Vs. Market Value 370 350 346.75 330 310
301.25 271.18
269.74
290
271.00 270.27
249.00
259.26 254.00
270
250.51
250
230.84
230
224.95
212.00
210 190
175.75
170 150
2002
2003
2004
2005
Market Price per Share
2006
2007
2008
Book Value per Share
Figure 1: Comparison between Book Value and Market Value of Monno Ceramic Indutries Ltd.
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M O N N O
Monno Ceramic Industries Ltd.
6. BALANCE SHEET ANALYSIS Balance Sheet is an itemized statement that lists the total assets and the total liabilities of a given business to portray its net worth at a given moment of time. The amounts shown on a balance sheet are generally the historic cost of items and not their current values. Balance sheet can be defined as, Assets = Liabilities + Equity The assets side of the balance sheet is always equal to the total liabilities and equities. It indicates the investment made by the firm in the form of assets and the means by which the assets were financed – that is, whether the funds were raised by the borrowing (liability) or by selling ownership shares (equity). Table 2: Balance sheet for Monno Ceramic (2008) based on Book Value Balance Sheet Asset
Liabilities and Equity Taka '000
Current Asset Inventories Trade & Other recievable Advance, Deposits & pre payments Cash & Cash Equivalents
Non Current Asset Property,Plant & Equipment Investment
296,501.81 79,753.78 112,639.34 17,240.44 506,135
368,719.87 84,500.00 453,220
Taka '000
Current Liabilities Cash Credits Long Term Loans Trade & Others Payable Accrued Expenses Unclaimed Dividends Provision For Income Tax Liabilities for other finance
Non-Current Liabilities Long Term Borrowings Deffered Liabilities
Share Holders Equity Issued & Paid-up share Capital Revenue, Reserve & Surplus Proposed Dividends
Total Assets
959,355
Total Liabilities & Share Holders Equity
267,512.07 33,545.68 164,165.03 14,595.34 5,834.79 10,241.25 45,385.89 541,280
103,085.85 11,302.01 114,388
135,000.00 155,187.34 13,500.00 303,687 959,355
* Source: Annual Report 2008 of Monno Ceramic Indutries Ltd.
The above table shows the balance sheet as it was presented in the annual report 2008 of Monno Ceramic Industries Ltd. According to this balance sheet the book value of MCI shares for the day June 30, 2008 should be 224.95 Taka. But in reality we can see that the actual market price on that day was much higher than that, 346.75 Taka.
Monno Ceramic Industries Ltd.
We are going to try and identify the reasons of this discrepancy. For this analysis we are going to concentrate on the Balance Sheet from the last year (2008). After a thorough analysis of the of the annual report of the year 2008 we were able to identify the following factors which might have caused the discrepancy between the book value and the market value. •
The financial statements have been prepared under the historical cost concept and fixed assets are stated at cost or revaluation less accumulated depreciation. According to time value of money concept, price changes all the time. Though there are some assets which were revalued at the middle of their life cycle but they didn’t consider market price or even depreciation was charged on a straight line basis. From this analysis we can come to a conclusion that fixed assets were under priced.
•
The balance sheet does not incorporate any intangible assets, like goodwill.
is the largest ceramic company in Bangladesh and holds the top position in ceramic industry. It is a testament of their Monno Ceramic Industries Ltd.
goodwill that the company is having constant grow in its sales. •
The equity of the company has been severely understated. The company calculates its equity from 1981 when Monno was first listed with the Dhaka Stock Exchange. But according to the time value of money theory the value of money has increased a lot over this last 28 years.
M O N N O
M O N N O
Monno Ceramic Industries Ltd. Table 3: Balance sheet for Monno Ceramic (2008) based on Book Value Balance Sheet Asset
Liabilities and Equity Taka '000
Current Asset Inventories Trade & Other recievable Advance, Deposits & pre payments Cash & Cash Equivalents
Non Current Asset Property,Plant & Equipment Property,Plant & Equipment Goodwill Investment
296,501.81 79,753.78 112,639.34 17,240.44 506,135
368,719.87 523,145.03 10,000.00 84,500.00 617,645
Taka '000
Current Liabilities Cash Credits Long Term Loans Trade & Others Payable Accrued Expenses Unclaimed Dividends Provision For Income Tax Liabilities for other finance
Non-Current Liabilities Long Term Borrowings Deffered Liabilities
Share Holders Equity Issued & Paid-up share Capital Revenue, Reserve & Surplus Revenue, Reserve & Surplus Proposed Dividends
Total Assets
1,123,780
Total Liabilities & Share Holders Equity
267,512.07 33,545.68 164,165.03 14,595.34 5,834.79 10,241.25 45,385.89 541,280
103,085.85 11,302.01 114,388
135,000.00 155,187.34 319,612.50 13,500.00 468,113
1,123,780
After identifying these above listed discrepancies we have tried to adjust the balance sheet to match the market value of stocks. In doing so we have changed three figures in the original balance sheet: •
Property, plant and equipment have been changed from 303,720,000 Taka to 523,145,000 Taka.
•
We added an intangible asset as Goodwill, 10,000,000 Taka.
•
We have also changed the Capital and reserves attributable to the Company’s equity holders from 155,187,000 Taka to 319,613,000 Taka.
•
The total balance after all these adjustment became 1,123,780,000 Taka in place of the original balance of 959,355,000 Taka.
6. CASH FLOW ANALYSIS Cash flows are the cash receipts and the cash disbursements of the company that is the inflows and outflows of cash. It is an analysis over a period of time revealing the availability, or lack, of cash. More simply put the difference between cash in (income) vs. cash out (expenses). Since money does not flow in and out at an equal rate, in most businesses, an analysis of cash flow is important, especially of businesses that are cyclical in nature, or subject to external forces. Cash and Cash Equivalent at end of year
60,000,000 50,000,000 40,000,000 30,000,000 20,000,000 10,000,000 2002
2003
2004
2005
Cash and Cash Equivalent at end of year
2006
2007
2008
Figure 2: Cash & Cash Equivalent at the end of the year 2002-2008
By doing the Cash flow we have found that MONNO is going through sufficient cash problem. The problem caused because of low volume of sales both in international market and in domestic market. Another reason is the interest payment of long term debt used for development and expanding of factory. To overcome the problem Monno has to take rigorous selling campaign. Otherwise it may lead to bank rapt. But as MONNO is a very old and established company who is still now coping up with new technology and equipment has managed the situation and has turned back to positive growth.
Inventories: Inventories 400,000,000 350,000,000 300,000,000 250,000,000 200,000,000 150,000,000
Inventories
100,000,000 50,000,000 2001
2002
2003
2004
2005
2006
2007
2008
Figure 3: Inventory at the end of the year 2002-2008
The inventory of MONNO is gradually increasing from 2001. Non-stop growing of inventories reflects the fact that sales of MONNO are not satisfactory. As a result inventory is piling up which will increase cost associated with maintenance of inventory.
Long Term Debt Non-Current Liabilities 250,000,000 200,000,000 150,000,000 100,000,000 50,000,000 2001 2002 2003 2004 2005 2006 2007 2008 Non-Current Liabilities Figure 4: Long-term Debt at the end of the year 2002-2008
Long term debt of Monno shows irregular tendency. This is showing the long term investment that MONNO has taken for its development through the years for whicht they have to pay interest.
Net working Capital
Thousands
Net Working Capital 100,000 80,000 60,000 40,000 20,000 (20,000)
2001
2002
2003
2004
2005
2006
2007
2008
(40,000) (60,000)
Net Working Capital Figure 5: Net Working Capital at the end of the year 2002-2008
Monno is going through cash problems through years and this is very much clear from the graph. The reason behind cash flow is primarily low volume of sales for aftershock of 9/11. The export of goods started falling. Additionally MONNO also have taken long term development project to improve its product quality and efficiency. So a large amount of cash had to be paid as interest expenses. Moreover in middle of all these MONNO also suffered from loss of equipment and plant as there were incident of fire in the factory. As a result the production process was stopped for few months and also some inventory and raw material were lost for fire.
Net Cash Provided by Operating Activities This section shows how much cash came into the company and how much went out during the normal course of business. MONNO is facing problem in generating cash from operating activities. This is for the down fall in sales. But in recent years Monno is gaining again from bad times.
Thousands
120,000 100,000 80,000 60,000 40,000 20,000 (20,000) (40,000) (60,000) (80,000)
Cash Flows from Operating Activities
2002
2003
2004
2005
2006
2007
2008
Cash Flows from Operating Activities
Figure 6: Trend of Cash Flow from Operating Activities
Net fixed investment This section shows how much cash came into the company and how much went out during the normal course of business. Cash Flows from Investing Activities
180000000 160000000 140000000 120000000 100000000 80000000 60000000 40000000 20000000 0 2002
2003
2004
2005
2006
2007
2008
Cash Flows from Investing Activities Figure 7: Trend of Cash Flow from Investment Activities
Net investment in the years of MONNO in the analysis shows that in 2003 and 2007 was of most amounts. And the investment was for the development of the product and quality.
7. RATIO ANALYSIS To evaluate a firm’s financial condition and performance, the financial analyst usually performs various analyses among which ratio analysis is one of the most important and commonly used methods. In this study various ratio analyses will be done to understand the financial condition of the company and to compare this condition with its rival firm to get a clear picture. The analysis of financial ratios involves two types of comparison, •
First, the analyst can compare a present ratio with past and expected future ratios for the same company. The current ratio (the ratio of current assets to current liabilities) for the present year could be compared with the current ratio for the previous year-end. When financial ratios are arrayed over a period of years, the analyst can study the composition of change and determine whether there has been an improvement or deterioration in the firm’s financial condition and performance over time.
•
The second method of comparison involves comparing the ratios of one with those of similar firms or with industry averages at the same point in time. Such a comparison gives insight into the relative financial condition and performance of the firm. It also helps us identify any significant deviations from any applicable industry average (or standard).
7.1. Liquidity Ratios •
Short term solvency or liquidity measures the firm’s ability to pay its bills and current liabilities on time.
•
It indicates the ease with which non-cash assets can be converted to cash, and also the ratio of non-cash assets to current liabilities.
7.1.1 Current Ratio : Current ratio=Current Asset/ Liability Current ratio refers the extent to which current liabilities is covered by the current assets. It shows the short term solvency position of the firm.
Liquidity Ratio
1.6 1.4
Monno Ceramic Industries Ltd. Bengal Fine Ceramics Limited
1.2 1 0.8 0.6 0.4 0.2 0 2001
2002 2003
2004 2005
2006 2007
2008
year Figure 8: Trend of Current Liquidity Ratio from 2001-2008
The ratio analysis of the liquidity ratio shows fluctuation through years, it is gradually decreasing. For last two years the ratio is below 1.00. Which means that Monno is having hard time managing short term cost that is current liability is higher than current assets. So, meeting operating expenses will be tough for Monno. The condition would be better understood by calculating other current ratio. In Cross-section analysis with Bengal Fine Ceramics Limited it is visible that they are also facing same problem. Compared to them Monno is in better position.
7.1.2 Quick Ratio: Quick Ratio=(Current Asset-Inventory)/ Current Liability Quick ratio expresses a company’s ability to repay its current liabilities out of its most liquid assets. Quick ratio for Monno shows that ratio is below 1.00 for years. So, current liabilities are greater from Current Asset without inventory from 2001 through 2008. And ratio shows fluctuation and also decreasing. So Monno is facing liquidity problem. The reason behind the problem is inventory. Inventories are not converting quickly that
is the reason for cash or liquidity problem is arising. If the situation continues for long Monno will face difficulty paying short term debt and long term debt.
0.7
QUICK rATIO
0.6 Monno Ceramic Industries Ltd. Bengal Fine Ceramics Limited
0.5 0.4 0.3 0.2 0.1 0 2001 2002 2003 2004 2005 2006 2007 2008
YEARS
Figure 9: Trend of Quick Ratio from 2001-2008
Cross section analysis with Bengal shows for few years their ratio was increasing when Monno’s were decreasing. But for recent years both company’s ratio is falling. In most recent years ratio shows sign of improve. That means recently Monno is recovering from the situation but slowly.
7.2 Asset Management Ratios Asset Management ratios measure how efficiently the firm utilizes its assets and inventory.
7.2.1 Inventory Turnover Ratio: Inventory Turnover Ratio= Cost of Gold Sold/Inventory It shows how many times a company’s inventory is sold and repaid over a period.
Inventory Turn over Ratio
3.5 3
Monno Ceramic Industries Ltd.
2.5 2
Bengal Fine Ceramics Limited
1.5 1 0.5 0 2001 2002 2003 2004 2005 2006 2007 2008
Figure 10: Trend of Inventory turnover from 2001-2008
The inventory turnover ratio shows a rough approximation each item of inventory is sold out and restocked or turned over. In our case of Monno the highest 3.1 times a year. This is very poor ratio for any firm. And this is the reason for the liquidity problem that Monno is facing. The reason may be for less demand of goods in abroad that is the decrease in sales. Monno must take quick steps to work out this. Then pressure for liquidity will be lower and short tem loan and long term loan payment will be trouble-free. Inventory turnover ratio of Monno is not satisfactory at all, more over it has fluctuating trend, and this is going to hamper performance of monno.
7.2.2 Days Sales Outstanding : Days Sales Outstanding =Account receivables/ (Sales/360)
120
Days Sales Outstanding(DSO)
100
Monno Ceramic Industries Ltd.
80
Monno Ceramic Industries Ltd.
60 40 20 0 2001 2002 2003 2004 2005 2006 2007 2008
Years
Figure 11: Days Sales Outstanding (DSO) from 2001-2008
On an Average Monno takes 43 days to collect credit sales. Though the trends is irregular but in recent years in 2007 and 2008 the days are falling, which is a good sign. As a result cash collection is improving in recent years. Compared to Bengal, Monno is in a far better position. On average DSO for Bengal is more than 80 days. Both inventory turnover ratio and DSO together shows that Monno’s sales collection period is well enough from other firms but sell of inventory is slow. They have that stated reason for this situation is shock of 9/11. After 9/11 volume of export to world market slowed down and so in domestic market. That’s why they faced such problem but now they are overcoming the problem.
7.2.3 Fixed Asset Turnover: Fixed Asset Turnover=Sales /Total Fixed Asset The Fixed Asset Turnover Ratio measures how effectively the firm uses its plant and equipment to help generate sales.
3
Fixed Assets Turnover Monno
2.5
Ceramic
Industries Ltd.
2
Bengal Fine Ceramics Limited
1.5 1 0.5 0 2001 2002 2003 2004 2005 2006 2007 2008 Figure 12: Fixed Asset Turnover from 2001-2008
The trend of ratio shows that till 2006 it was fluctuating but from 2007 it is gradually rising. When using fixed asset turnover ratio to compare the performance with other firm historical cost and inflation should be in mind as most balance sheet accounts are stated in terms of historical cost and inflation might cause the value of money assets that were purchased in past may be seriously understated. From 2001 to 2008 total fixed asset of Monno was around 4 billion taka to 5.5 billion taka. So, at that point of time inflation has reached to double digit in Bangladesh and prices of land building material, equipment and machineries have reached to a higher pick. So, total fixed asset of Monno has been understated in the balance sheet that is why fixed asset turnover ratio of monno should be less than what we have now. On an average Monno is in better position.
7.2.4 Total Asset Turnover: Total Asset Turnover= Sales/ Total Asset It measures how effectively a business is using its assets to generate sales. It is most useful for capital intensive industry like manufacturing companies like MONNO and Bengal.
Total Asset Turnover
2008 Bengal Fine Ceramics Limited
2007 2006
Monno Ceramic Industries Ltd.
2005 2004 2003 2002 Year
2001 0
0.5
1 value of ratio
1.5
2
Figure 13: Total Asset Turnover from 2001-2008
This Ratio shows turnover of all of the firm assets. The trend is changing over years but at recent years it is gaining, meaning generating higher volume of business given its investment in total asset. The trend shows that Monno is getting out of bad times gradually. But to become more efficient Monno should increase its sales. Rigorous selling policy should be taken to improve sales and to improve the turnover.
7.3 Debt Management Ratio:
7.3.1 Debt Ratio: Debt Ratio= Total Asset/ Total Debt In debt financing, money has been collected through notes, bonds, borrowing directly from financial institutions. Some advantages of higher debt are. (a) It helps to start or expand a business (b) Tax advantages can be gained. One of the major disadvantages is sufficient cash flow is needed to repay the debt. So the borrowers are on pressure.
Debt Ratio
0.8 0.7 Value of Ratio
Monno Ceramic Industrie s Ltd.
0.6 0.5
Bengal Fine Ceramic s Limited
0.4 0.3 0.2 0.1 0 2001
2003
2005 Year
2007
Figure 14: Debt Ratio from 2001-2008
The Debt ratio measures the percentage of firm’s assets financed by the creditors. From 2001 to 2004 the debt ratio was smaller compared to the following years. And debt ratio was around 20%. But after 2004 the ratio increased to over 60%, which means that Monno has taken Long term debt and so 60% of total asset of Monno are financed by debt from other institutions. The debt was taken to improve the
technology and efficiency of the company. And the development project is being implemented through years. And for that an amount interest expense will have to be beard by the company.
7.3.2 Times Interest Earning Ratio (TIE): TIE (Times Interest Earned Ratio)= EBIT/Interest
3
Times Interest Earned Ratio Monno Ceramic Industrie s Ltd.
2.5 2
ratio
1.5
Bengal Fine Ceramic s Limited
1 0.5 0 -0.5 2001 2002 2003 2004 2005 2006 2007 2008 -1 -1.5
Year
Figure 15: Times Interest Earned Ratio from 2001-2008
The TIE ratio measures the extent to which a firm’s earnings before interest and taxes (EBIT), also called net operating income, can decline before these earnings are unable to cover annual interest costs. As interest is paid with pretax dollars, the firm’s ability to pay current interest is not affected by taxes. Monno’s interest is covered on average 1.2 times which is very poor and again refers to the fact that Monno is suffering from sales and cash management. For low sales earning is going down. The other firm also shows very poor performance in the TIE ratio. In 2007 TIE became negative, which indicates Bengal suffered from huge loss in 2007.
7.4 Profitability Ratios: Profitability ratio shows the combined effects of liquidity management, asset management and debt management on operating result.
7.4.1 Net Profit Margin On Sales: Net Profit Margin on Sales= Net Income/ Sales Profitability ratios show the effect of liquidity, debt management, and asset management on operating results. It measures how much the firm is earning compared to its sales and how the assets and equity are being utilized to generate sales.
Net Profit Margin On Sales
0.06 0.04
Monno Ceramic Industries Ltd. Bengal Fine Ceramics Limited
08 20
07 20
06 20
05 20
04 20
02
03 20
-0.04
20
-0.02
01
0 20
Ratio
0.02
-0.06 -0.08 -0.1
Year
Figure 16: Net Profit Margin on Sales from 2001-2008
This ratio gives profit per dollar sale or profit per taka sale in our case. In case of Monno, profit per taka is very poor through years and in last year (2007) they did not profit at all. The ratio is negative, since Monno incurred a loss in 2007. Bengal Ceramic’s position is even worse than Monno, which is a very unsatisfactory performance by the industry. But the recent year ratio shows positive value. So, Monno is turning back from loss and gaining profit.
7.4.2 Return on Assets(ROA): Return on Asset=Net Income/Asset It gives idea about the overall return on investment earned by the firm, it is the after tax earnings generated by total asset.
08 20
07 20
06 20
05 20
04
Monno Ceramic Industries Ltd.
20
20
02 20
01
20
values of Ratio
0.02 0 -0.02 -0.04
03
ROA
0.06 0.04
-0.06 -0.08 -0.1 -0.12 -0.14
Bengal Fine Ceramics Limited
Year
Figure 17: Return on Asset from 2001-2008
The trend shows that MONNO’s ratio was stable initially but from 2003 it is gradually decreasing and in 2007 it turned in to negative. But it increased to positive amount at 2008. But still is need to be increased to sustain in long run.
7.4.3 Return on Equity (ROE): It measures the rate of return earned on common stockholders’ equity. Higher the ROE, better the profitability and financial position of the firm. The ratio was decreasing from 2002 to 2004. But then eventually became negative in 2007. But again in 2008 it gained positive value. As net income went down ROE also went down. In 2007 Net Income was negative, so the ratio also became negative. Compared to Bengal ceramics Monno is in a superior position. In 2006 ROE became almost -0.2 because of negative income.
ROE
0.15 0.1
Monno Ceramic Industries Ltd.
0.05
8
Bengal Fine Ceramics Limited
2
0
0
7 2
0
0
6 0
0
5 2
0
0
4 2
0
0
3 2
2
0
0
2 0 0 2
2
-0.05
0
0
1
Ratio
0
-0.1 -0.15 -0.2 Years
-0.25
Figure 18: Return on Equity from 2001-2008
7.4.4 P/E Ratio: P/E = Market Price/ Earnings Per Share P/E ratio shows the taka amount investors will pay for 1 taka of current earnings. The most significant indicator of ratio analysis shows how the investors in the stock market perceive the company.
Ratio
100 80 60 40 20 0 -20 -40 -60 -80 -100 -120
P/E Ratio
2001 2002 2003 2004 2005 2006 2007 2008
Monno Ceramic Industries Ltd. Bengal Fine Ceramics Limited
Year
Figure 19: P/E Ratio from 2001-2008
Monno’s PIE gradually increased from 2002 to 2004 and the fall to negative in 2007. Again in 2008 it increased to a higher value of all time. The negative value in 2007 appeared in ratio because of negative income of 2007. Others thing held constant, P/E ratios are higher for firms with high growth prospects and lower for riskier firms. As Monno’s ratio is higher than Bengal, so Monno is less risky than Bengal.
7.4.5 M/B value: M/B Value = Market Price/(Equity/Share) This gives another indication of how investors regard company. M/B value shows feature of Monno Ceramic, this proves the goodwill of Monno Ceramic. In spite of the continuing down fall of income and loss in 2007 M/B shows the fluctuating but increasing trend. There were fluctuations in the trend from 2002 to 2007. But from 2006 it increased to a very high level in 2008.
M/BValue
1800 1600
Monno Ceramic Industries Ltd.
1400 1200 Ratio
1000
Bengal Fine Ceramics Limited
800 600 400 200 8 2
0 0
7 2
0 0
6 2 0
Year
0
5 0 2 0
0 4 2 0
0 3 2 0
0 2 2 0
0 0
2
-200
1
0
Figure 20: M/B Ratio from 2001-2008
8. SUMMERY FROM RATIO ANALYSIS: •
Liquidity Ratios shows that Monno is facing harsh liquidity problem after 9/11. Current ratio is on average 1.1 and quick ratio is 0.4 which is to poor for any company. For this situation Monno must have taken some short term loan to solve short run liquidity problem. In turns this could be dangerous leading the risk of being bankrupt.
•
Asset Management Ratios demonstrate the low turn of inventory problem which has arisen for the low volume of sale. It is showing that cash collection period is good but as sale has gone down inventory is increasing. According to Monno they have taken various steps to increase sale. They are selling goods with discounted price to increase sale. Total asset turn over and current asset turnover is also supporting that huge amount of current asset of Monno is making situation worse.
•
Debt Management Ratio illustrate that Monno is just in the limit line of paying debt. The debt ratio shows huge amount of debt compared to asset and TIE shows that the payment ability is not in good condition. Monno has taken development project to improve technology and quality of product for few years. And simultaneously the sale has gone down. To overcome the situation Monno must increase volume of sale or have to let go some of its assets.
•
Profitability Ratios gives the idea about the income condition of Monno. The trend is showing gradually decreasing income level. At some time it becomes negative. And this can be seen in ratios too. But still the market value of shares has not gone down at the rate if income. P/E ratio shows that in spite of low earning price was high but it became negative in 2007 as income was negative but M/B shows the image of the company has not been that much affected for the low trend if income generation.
9. SECURITY (MONNO CERAMIC IND. LTD.) GENERAL INDEX) RETURN-RISK
AND
MARKET (DSE
The return on any stock traded in a financial market is composed of two parts. First, the normal, or expected, return from the stock is the part of the return that investors predict or expected. This return depends on the information investors have about the stock, and it is based on the market’s understanding today of the important factors that will influence the stock in the coming year. The second part of the return on the stock is the uncertain, or risky, part. This is the portion that comes from unexpected information revealed during the year. To determine the risk and return of Monno Ceramic Industries Ltd. and market (DSEGEN) the time data series were gathered and calculated the historical monthly returns of 72 months (6years) using data from July, 2002 till June, 2008. Firstly, daily stock price of Monno Ceramics Ind. Ltd. and DSE General Index (DGEN) were obtained. Along with that the risk free rate is considered as 5% as of the approximate rate of Bangladesh Treasury Bill for 364 days. Monthly returns were calculated using the closing price of the first trading day of the month using the following formula. Stock Price of 1st day of Current Month – Stock Price of 1st day of Previous Month Stock Price of 1st day of Previous Month
Market Return Statistics Mean Median Standard Deviation Sample Variance Kurtosis Skew ness Minimum Maximum Sum Count Largest(1) Smallest(1) Confidence Level (95.0%)
0.020711645 0.010610738 0.064720518 0.004188745 1.248709366 (0.129903229) (0.198714344) 0.173874329 1.491238452 72 0.173874329 -0.198714344 0.000478289
Monno Ceramics Return Statistics Mean Median Standard Deviation Sample Variance Kurtosis Skew ness Minimum Maximum Sum Count Largest(1) Smallest(1) Confidence Level(95.0%)
0.009525677 (0.004489636) 0.104313497 0.010881306 5.981580775 1.614106406 (0.224770642) 0.475490196 0.685848747 72 0.475490196 -0.224770642 0.000770883
Table 4: Return-Risk of Monno Ceramic and DSE General Market Index
The expected monthly return of Monno Ceramic Ltd. is 0.95% (11.43% of yearly expected return) and standard deviation is 10.43%, while the market (DSEGEN) expected monthly return (estimated through time series analysis) is 2.07% (24.85% of yearly expected return) and standard deviation is 6.47%. According to the principle of risk-return trade-off, potential return rises with an increase in risk. Low levels of uncertainty (low risk) are associated with low potential returns, whereas high levels of uncertainty (high risk) are associated with high potential returns. But here we can see that Monno Ceramic Ind. Ltd. has a higher level of risk as measured by standard deviation, compare to its level of return. Hence, it can be said that Monno Ceramic Ind. Ltd. has higher risk compared to the average risk or market risk. However, the covariance of the security and market is 0.00233, which is positive, so the security tends to move in the same direction as the market. If we divide the covariance with the product of two standard deviations we find the correlation, which in this case is 0.2146. This tells us that the security of Monno Ceramic has a fairly strong tendency to move with the overall market, but the tendency is not perfect. By multiplying Correlation, of Monno Security and Market, with ratio of standard deviation of Monno ceramic and market the systematic risk, beta (β) is calculated, here beta is 0.5576.
Capital market line CML is a line used in the capital asset pricing model to illustrate the rates of return for efficient portfolios depending on the risk-free rate of return and the level of risk (standard deviation) for a particular portfolio. The CML is derived by drawing a tangent line from the intercept point on the efficient frontier to the point where the expected return equals the risk-free rate of return. When the market portfolio is combined with the risk-free asset, the result is the Capital Market Line. All points along the CML have superior risk-return profiles to any portfolio on the efficient frontier. Just the special case of the market portfolio with zero cash weighting is on the efficient frontier. Additions of cash or leverage with the risk-free asset in combination with the market portfolio are on the Capital Market Line. All of these portfolios represent the highest possible Sharpe ratio. One can prove that the CML is the optimal CAL and that its equation is
Securities market line The relationship between systematic risk and expected return in financial market, is usually called the security market line (SML). The SML essentially graphs the results from the capital asset pricing model (CAPM) formula. The x-axis represents the systematic risk (beta), and the y-axis represents the expected return. The market risk premium is determined from the slope of the SML. The relationship between β and required return is plotted on the securities market line (SML) which shows expected return as a function of β. The intercept is the nominal risk-free rate available for the market, while the slope is E(Rm − Rf). The securities market line can be regarded as representing a single-factor model of the asset price, where beta is exposure to changes in value of the Market. The equation of the SML is thus:
Here, we already calculated market return of DSEGEN is 24.85%, beta (β) 0.5576, risk free return 5%, therefore the security expected return is 16.07%. Expected Return
24.85%,
5%
0.557
1.0
Beta
Figure 21: Security Market Line (SML)
The reward to return ratio for Monno Ceramic is (16.07%-5%)/ 0.5576 = 19.85%, in other words Monno has a risk premium of 19.85% per unit of systematic risk.
10. REGRESSION ANALYSIS Market Excess Return was estimated by deducting risk-free rate from the estimated monthly expected return of DSE general index and company excess return was obtained by subtracting the risk-free rate from the monthly expected returns of Monno Ceramic Ind. Ltd. for 6 years. Risk-free rate of 5% is assumed to be constant for whole period for keeping the analysis simple. Then, a regression analysis was performed using market excess return as independent (explanatory) variable and company excess return as dependent variable that is to be explained by regression.
This upward-sloping regression line on the diagram above is drawn to minimize the sum of all the squared deviations around it and this line called security characteristic line best fits the data in the scatter diagram. SCL of Monno Ceramic has very high positive intercept. The slope coefficient of Monno Ceramic security has positive beta, i.e. it moves on average in the same direction as the market (DSEGEN). The small beta suggests that this security carries less systematic risk. R square (R²) represents the strength of the regression equation, i.e. how much of the total deviation in the dependent variable (Monno Ceramics Ind. Ltd. excess return) can be explained by the independent variable (market excess return). The
regression output displays that R² is about 10%, which indicates that about 10% of the total variation in Monno Ceramics excess return can be explained by the regression line. Since Significance of F=0.006728555 which is less than the cut-off value of 0.05, then it can be concluded that the F value of 7.80 is significant which indicates a good fit of the regression equation and we are confident about the regression equation. The intercept value of the regression equation is -0.00714 which is negative. However, the p-value of the t-statistic is 0.52 which is greater than the cut-off value of 0.05 which suggests that the low value of t-stat (-0.64) is not significant. Thus this negative intercept is not statistically significant. According to theory, the intercept is expected to be of zero value, but the negative value of intercept from this regression output being insignificant does not contradict theory, i.e. there is no evidence to reject theory. SUMMARY OUTPUT Regression Statistics Multiple R
0.316653839
R Square
0.100269654
Adjusted R Square
0.087416363
Standard Error
0.091808953
Observations
72
ANOVA df
SS
Regression
MS
1
0.065754467
0.065754467
Residual
70
0.590021873
0.008428884
Total
71
0.65577634
Coefficients Intercept X Variable 1
Standard Error
F 7.801088173
t Stat
P-value
Significance F 0.006728555
Lower 95%
-0.007140565
0.011114585
-0.642450024
0.522679685
-0.029307905
0.475034802
0.17007788
2.793042816
0.006728555
0.13582517
Upper 95% 0.01502677 5 0.81424443 3
Lower 95.0%
Upper 95.0%
-0.029307905
0.015026775
0.13582517
0.814244433
Table - Regression between Market Excess Return and Security Excess Return Slope (coefficient of independent variable) of the regression equation is 0.475 which also represents the beta coefficient or beta risk. The p-value of the t-statistic
is 0.006 which is less than 0.05 which suggests that the t-statistic (2.793) is significant and thus the slope of 0.475 is valid. This positive value of beta falls within the range of beta 0. 3 – 2.5 as expected and it can be concluded that the beta of 0.475 is significant. Beta is a measure of a stock's volatility in relation to the market. By definition, the market has a beta of 1.0, and individual stocks are ranked according to how much they deviate from the market. A stock that swings more than the market over time has a beta above 1.0. If a stock moves less than the market, the stock's beta is less than 1.0. High-beta stocks are supposed to be riskier but provide a potential for higher returns; low-beta stocks pose less risk but also lower returns. Thus, Monno Ceramics is a lower risk stock as ß=0.475 which is less than the average risk or market ß of 1. Therefore, Monno Ceramics is only about a little more than half as volatile as the DSE general index. Hence, it can be stated that if market risk premium (DSEGEN excess return) increases by 1%, Monno Ceramics Ind. excess return will increase by 0.475%.
Ltd.
Stock price movement can be related to various company specific decisions and issues such as dividend decision, investment decision, capital structure decision; stock price may also change due to change in macroeconomic variables or factors affecting all the firms operating in a nation’s economy such as change in political government, inflation, GDP growth, natural calamities, etc. Regression analysis is performed in this section to explain stock price movement with the use of dummy variables. Firstly, one factor or issue is selected such as issuance of large amount of long-term debt on a specific date of a year. Then the daily stock price of one month before that date is taken and one month after that date is taken which is the dependent variable. Then the independent variable is created with “0” for all the days before the selected date and “1” for all the days after the specific date. Then after running the simple regression, the slope coefficient of the independent variable investigated.
is examined and the significance of the t-statistic
is
11. CHANGE IN GOVERNMENT (CARE TAKER GOVERNMENT) SUMMARY OUTPUT Regression Statistics Multiple R 0.366236 R Square 0.134129 Adjusted R Square Standard
0.107070 11.81488
Error Observations
6 34
ANOVA df
SS
MS
F
Significan
691.9535
691.9535
4.95698
ce F 0.033149
1
3 4466.928
3 139.5915
81
8
Residual
32
82 5158.882
3
Total
33
35
Coefficien
Standard
ts
Error
Regression
Intercept X Variable 1
t Stat
P-value
Lower
Upper
Lower
Upper
1.053E-
95% 174.3897
95% 186.42
95.0% 174.389
95.0% 186.42
180.4063
2.95372
61.07761
34 0.03314
2
278 17.307
72
278 17.307
9.0382
4.05950
2.22643
98
0.76926
13
0.76926
13
The effect of 1/11 and change in government, stock price of Monno Ceramics Ind. Ltd. is examined through simple dummy regression analysis. The new caretaker government came into power on 11th January 2007 and the uncertainty in the nation’s political situation was a common macroeconomic factor affecting all companies in the stock exchanges of Bangladesh. The regression output displays the t-statistic is 2.23 which has p-value less than 0.05, thus it implies that t-stat is statistically significant. In other words, the results provide statistical evidence that that the factor ‘change in government’ is relevant and has substantial effect on stock price of Monno Ceramic’s security. The slope coefficient of 9.03 is positive which provides empirical evidence that investors reacted positively to the change in government. Investors believed in the advantages of change in government after a long period of political unrest, strikes and violence in the country.
12. EFFECT OF NATURAL CALAMITIES (CYCLONE SIDR) SUMMARY OUTPUT Regression Statistics 0.76575 Multiple R R Square Adjusted
5 0.58638 R
1 0.57577
Square Standard Error Observation
6 10.7268
s
41
ANOVA df
SS
MS
6361.894
6361.89
1
22 4487.508
42 115.064
Residual
39
22 10849.40
3
Total
40
244
Regression
Intercept
Coeffici
Standard
ents 237.605
Error
3
F
t Stat
24.9803
eF 5.44545E55.2899
P-value
09
Lower 95%
4.88824E2.4609
96.5523
X Variable 1
Significanc
48
232.6276
5.44545E3.3595
-7.4357
09
-31.7755
Upper
Lower
Upper
95% 242.58
95.0% 232.627
95.0% 242.58
29 -
6
29 -
18.185
-
18.185
0
31.7755
0
The unprecedented flood and cyclone Sidr incurred on 17th November 2007, which caused massive loss of lives, ruined properties and left a great deal of economic reconstruction for both the private and public sectors. This macroeconomic factor effect on all companies was examined to find any relation to stock price movement. The regression output displays the t-statistic is -7.43 which has p-value is not less than 0.05, thus it implies that t-stat is statistically insignificant. In other words, the results provide no statistical evidence that that the cyclone factor is irrelevant to movement in stock price of Monno Ceramic. The slope coefficient of -24.98 is
negative which provides no empirical evidence that investors reacted positively to the natural calamities.
13. NEWS OF INVESTMENT DECISION SUMMARY OUTPUT Regression Statistics Multiple R 0.7820 R Square 0.6115 Adjusted R Square 0.6034 Standard Error 26.57872 Observations
50
ANOVA Df
SS
Regression Residual
1 48
53389.630 33908.557
Total
49
87298.188
Coefficie nts
Standard Error
MS 53389.6306 706.4283
t Stat
F 75.57686
P-value
Significance F 2.01267E-11
Lower 95%
Upper 95%
Lower 95.0%
Upper 95.0%
Intercept
235.18
5.42536
43.34829
3.77173E-40
224.2715864
246.088
224.271
246.088
X Variable 1
65.406
7.52362
8.69350
2.01267E-11
50.27929053
80.533
50.279
80.5338
Monno Ceramic Industries Ltd. informed to public and investors about finalizing the development project of BMRE programme for Unit-2 on 30th June 2002 and this internal company related factor was investigated through dummy regression. BMRE project comprised of establishing new world class machinery from Germany and Japan. The total cost of the proposed BMRE has been estimated at Tk. 161.713 million. The regression output disclose a t-statistic of 8.69 with positive which indicates that t-stat is statistically significant. P- value of t stat is less than 0.05, so co-efficient of the slope is statistically significant at 5% level. This provides evidence that huge investment in different projects is relevant for stock price movement of Monno Ceramic.
14 CAPITAL STRUCTURE DECISION (DEBT FINANCING) SUMMARY OUTPUT Regression Statistics 0.3177237 Multiple R
41 0.1009483
R Square Adjusted
R
Square
76 0.0795423 85 12.972384
Standard Error
58
Observations
44
ANOVA df
SS
MS
F
Significa
793.603594
793.6035
4.7158935
nce F 0.035582
1
1 7067.87599
941 168.2827
7
392
Residual
42
5 7861.47958
618
Total
43
9
Regression
Coefficient
Standard
s 274.98315
Error 2.97606912
t Stat
79 -
P-value
92.39810
3.75298E-
9
836 -
50
8.5739578
3.94820186
2.171610
0.0355823
95
1
824
92
Intercept
X Variable 1
Lower
Upper
Lower
Upper
95%
95% 280.98
95.0% 268.97
95.0% 280.989
268.9772
91
72 -
1
-
16.541
-16.5418
0.6062
8
-0.6062
Monno Ceramic Industries Ltd. took a long-term bank loan of BDT 134.42 million from Sonali Bank for 10 years with 34 quarterly installments on 1st March 2003. The term loan was taken for implementation of the BMRE program for development of Unit-2 of the company. This internal company related factor was studied and the regression output disclose a t-statistic of -2.17 with negative which indicates that tstat is statistically insignificant which provides no statistical evidence that capital structure decision is relevant and affects stock price movement. The negative slope coefficient
-8.57 provides no empirical evidence that investors believe in the
advantages of debt financing.
15. NEWS OF FINALIZATION OF BMRE PROGRAMME
SUMMARY OUTPUT Regression Statistics Multiple R 0.792429 R Square 0.6279437 Adjusted R Square 0.6184038 Standard Error 29.691678 Observations 41 ANOVA df Regression Residual Total
Intercept X Variable 1
SS
MS
F
1 39 40
58029.1474 34382.2337 92411.3811
58029.15 881.5957
65.822854
Coefficient s 296.90789 75.444378
Standard Error 6.81173 9.29904
t Stat
P-value
43.58769 8.113128
1.0624E-34 6.6905E-10
Significance F 6.6905E-10
Lower 95% 283.13 56.64
Upper 95% 310.69 94.25
Lower 95.0% 283.13 56.64
Upper 95.0% 310.69 94.25
Monno Ceramic Industries Ltd. has launched the BMRE project in 2003 to reduce the production cost and will keep competitive in the international market. However, in March 2008, they have successfully completed the project. The regression output disclose a t-statistic of 8.11 with less than 0.05 p value, which indicates that t-stat is statistically significant. This provides evidence that the successful launch of BMRE project is relevant for stock price movement of Monno Ceramic.
16. FINDINGS FROM REGRESSION All these positive indicators represent sources of good news for the company which provides justification for the increasing trend in stock price of Monno Ceramic Industries Ltd. in Dhaka Stock Exchange.
Monno Ceramic has a moderate expected return and abit high standard deviation compared to that of the market (DSE general index). the covariance of the security and market is 0.00233, which is positive, so the security tends to move in the same direction as the market.
The security of Monno Ceramic has a fairly strong tendency to move with the overall market, but the tendency is not perfect, it has a positive correlation with market. Monno Ceramics has a lower risk stock as ß=0.475, which is less than the average risk or market ß of 1. Therefore, Monno’s stock is less than half as volatile as the DSE general index. Hence, it can be stated that if market risk premium (DSE excess return) increases by 1%, Monno Ceramic’s excess return will increase by 0.475%.
Simple regression of dummy variables reveals that the stock price of Monno Ceramic
Industries
Ltd.
changes
with
different
variables.
Change
in
government and takeover of care taker government in 2007 is relevant to stock price movement and investors reacted positively to this factor. Similarly, findings prove that investors react positively in new investment and that the capital structure decision is irrelevant to stock price.
17. FINDINGS AND CONCLUSION We undertook this study to review the movement of share price depending on the company internal as well as the macro-economic factors. In doing so these are the things we were able to identify. •
The balance sheet of the company understates fixed asset value and equity value, as they do not incorporate time value of money theory.
•
The company financial statement does not take into consideration their goodwill in the financial market.
•
Unfortunately the company, Monno Ceramic Industries Ltd. suffered a loss during the last year which greatly affected its cash flow.
•
We chose Bengal Fine Ceramic Ltd. as out standard of comparison while performing cross-sectional analysis of financial ratios. We found that Monno Ceramic is doing mostly better than Bengal Fine Ceramics..
•
The security of Monno Ceramic has a fairly strong tendency to move with the overall market, but the tendency is not perfect, it has a positive correlation with market.
•
Monno Ceramics has a lower risk stock as ß=0.475, which is less than the average risk or market ß of 1. Though, the company has a high company specific or unsystematic risk.
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