Comparative Ratio Analysis of Three Listed Companies

Of ICT Sector

August 08, 2012

TABLE OF CONTENT

Title Page

No

Letter of Transmittal 3

Acknowledgement 4

Introduction and Rationale of the study 6

Objectives 6

Sources of Data 6

Methodology 7

Findings of the Ratio Analysis 8

Liquidity Ratio 8

Debt Ratio 9

Profitability/Performance 10

Activity Ratio 13

Market Performance 18

Conclusion 19

Bibliography 19

Introduction and Rationale of the study

3

A widely held view is that the growth of the ICT industry may provide an

opportunity for developing countries to ‘leapfrog’ into the industrialized economy.

For example, low-income economies that have a strong human capital base can

take advantage of the rapid decline in the cost of computing power and

telecommunication over the last decade that has made it possible to deliver IT

service from a remote location. This has led to the emergence of

offshore/outsourcing industry, the market of which is expected to reach US$252

billion in 2010. (IGC, 2012)

There is considerable potential for the development of ICT industries in

Bangladesh because of the availability of trained personnel at relatively low wage

rates. The present government of Bangladesh envisions creating a “Digital

Bangladesh” by 2021, which critically depends on proper policies as well as

infrastructure development for this sector. However, in order to capture significant

gains from the growth of the ICT industry worldwide, policy makers and firms both

require a clear understanding of its dynamics. While a cheap and abundant human

capital base can explain the early stage of software industry development,

improved productivity is required to take advantage of emerging opportunities and

carve out a niche in the export of outsourced services. 

Objectives

This Study will examine the financial statement and analysis its financial prospects

in terms of liquidity, debt, company performance, efficiency and the market

performance of the market.

Sources of Data

The main data source ids the published annual reports of DAFODILCOM (Daffodil

Computers Ltd.), ISNLTD (Information Services Network Ltd.), and BDCOM

(BDCOM Online limited) for the year ended 2007, 2008, 2009, 2010 and 2012.

Methodology

The Financial Ratios:

I. Liquidity Ratio

i) Current Ratio

ii) Quick Ratio

II. Debt Ratio

i) Debt-to-equity

ii) Debt-to-Total Asset

III. Profitability/Performance

i) Gross Profit Margin

ii) Net Profit Margin

iii) Return on Asset (ROA)

iv) Return on Equity (ROE)

IV. Activity Ratio

i) Account Receivables Turnover

ii) Average Collection Period

iii) Inventory Turnover

iv) Inventory Turnover in days

v) Payable Turnover

vi) Payable Turnover in Days

vii) Operating Cycle

viii) Cash Conversion Cycle

V. Market Performance

i) EPS

ii) Payout Ratio

iii) PE Ratio

Findings of the Ratio Analysis

Liquidity Ratio

In a nutshell, a company's liquidity is its ability to meet its near-term obligations,

and it is a major measure of financial health. Liquidity can be measured through

several ratios.

5

I. Current ratio 

The current ratio is the most basic liquidity test. It signifies a company's ability to

meet its short-term liabilities with its short-term assets. A current ratio greater

than or equal to one indicates that current assets should be able to satisfy near-

term obligations. A current ratio of less than one may mean the firm has liquidity

issues.

Current Ratio = (Current Assets) / Current Liabilities

Current ratio

Company/Years200

7

200

8

200

9

201

0

201

1

Averag

e

DAFODILCOM 2.5

1

1.4

2

1.7

1

1.8

4

2.6

62.03

ISNLTD3.1

2

4.9

6

6.1

1

2.8

7

2.0

93.83

BDCOM7.1

8

7.0

1

1.6

2

1.5

6

4.6

54.40

Table 1: Current ratio

Among the three companies BDCOM online Ltd. is more liquid then ISNLTD and

then DAFODIL.

II. Quick Ratio

 The quick ratio is a tougher test of liquidity than the current ratio. It eliminates

certain current assets such as inventory and prepaid expenses that may be more

difficult to convert to cash. Like the current ratio, having a quick ratio above one

means a company should have little problem with liquidity. The higher the ratio,

the more liquid it is, and the better able the company will be to ride out any

downturn in its business.

Quick Ratio = (Cash + Accounts Receivable + Short-Term or Marketable

Securities) / (Current Liabilities)

Acid test ratio

Company/Years200

7

200

8

200

9

201

0

201

1

Averag

e

DAFODILCOM 1.9

7

1.3

7

0.8

1

1.2

2

2.2

01.51

ISNLTD3.1

2

4.9

6

6.1

1

2.8

7

2.0

93.83

BDCOM6.0

6

5.7

6

1.3

7

1.3

0

4.2

23.74

Table 2: Acid test ratio

The quick ratio also behalf like the current ratio. Among the three companies

BDCOM online Ltd. is more liquid then ISNLTD and then DAFODIL. One

interesting observation is the Current and Quick ratios of all selected year are

same, because of null inventories in their operations.

Ranking in terms of Liquidity

Rank Current ratio Acid test ratio

1 BDCOM ISNLTD

2 ISNLTD BDCOM

3 DAFODILCOM DAFODILCOM

Table 3: Ranking in terms of Liquidity

Debt Ratio

The debt ratio compares a company's total debt to its total assets, which is used to

gain a general idea as to the amount of leverage being used by a company. A low

percentage means that the company is less dependent on leverage, i.e., money

borrowed from and/or owed to others. The lower the percentage, the less leverage

a company is using and the stronger its equity position. In general, the higher the

ratio, the more risk that company is considered to have taken on.

Total debt to equity ratio

Company/Years 2007 2008 2009 2010 2011

Avera

ge

DAFODILCOM

39.00

%

39.00

%

23.00

%

22.00

%

24.00

%

29.00

%

ISNLTD

24.00

%

14.00

%

7.00

%

20.00

%

31.00

%

19.00

%

7

BDCOM

7.00

%

8.00

%

33.00

%

33.00

%

11.00

%

18.00

%

Table 4: Total debt to equity ratio

DAFODILCOM have comparatively higher debt portion relative to the equity than

other two companies. It might not be normal compared to the industry and which

might put the firm under risk but indicate high leverage.

Debt-to-Total Asset

Company/Years 2007 2008 2009 2010 2011Avera

ge

DAFODILCOM 39.91

%

70.47

%

58.42

%

54.42

%

37.59

%

52.16

%

ISNLTD32.10

%

20.17

%

16.38

%

34.84

%

47.94

%

30.29

%

BDCOM13.94

%

14.26

%

61.86

%

64.15

%

21.49

%

35.14

%

Table 5: Debt-to-Total Asset

DAFODILCOM also have comparatively higher debt portion relative to the Assets

than other two companies. It seems using more debt compared to the industry and

which might put the firm under risk pressure but indicate high leverage.

Ranking in terms of high leverage

RankTotal debt to

equity ratio

Debt-to-Total

Asset

1 DAFODILCOM DAFODILCOM

2 ISNLTD BDCOM

3 BDCOM ISNLTD

Table 6: Ranking in terms of high leverage

Profitability/Performance

Every firm is most concerned with its profitability. One of the most frequently used

tools of financial ratio analysis is profitability ratios which are used to determine

the company's bottom line. Profitability measures are important to company

managers and owners alike. If a small business has outside investors who have put

their own money into the company, the primary owner certainly has to show

profitability to those equity investors. (Bernstein & Wild, 2004)

I. Gross Profit Margin

The gross profit margin looks at cost of goods sold as a percentage of sales. This

ratio looks at how well a company controls the cost of its inventory and the

manufacturing of its products and subsequently passes on the costs to its

customers. The larger the gross profit margin, the better for the company. The

calculation is: Gross Profit/Net Sales = ____%. Both terms of the equation come

from the company's income statement. (Ed., 2012)

Gross Profit Margin

Company/Years 2007 2008 2009 2010 2011Avera

ge

DAFODILCOM 19.16

%

19.16

%

19.93

%

18.71

%

21.72

%

19.74

%

ISNLTD45.93

%

51.38

%

44.47

%

49.62

%

47.85

%

47.85

%

BDCOM65.35

%

67.03

%

73.94

%

68.38

%

63.16

%

67.57

%

Table 7: Gross Profit Margin

Higher GPM indicates higher profitability of the firm.

9

II. Net Profit Margin

When doing a simple profitability ratio analysis, net profit margin is the most

often margin ratio used. The net profit margin shows how much of each sales

dollar shows up as net income after all expenses are paid. For example, if the

net profit margin is 5% that means that 5 cents of every dollar is profit. The net

profit margin measures profitability after consideration of all expenses

including taxes, interest, and depreciation. The calculation is: Net Income/Net

Sales = _____%. Both terms of the equation come from the income statement.

(Ed., 2012)

Net Profit Margin

Company/Years 2007 2008 2009 2010 2011Avera

ge

DAFODILCOM 4.72

%

4.04

%

6.05

%

6.29

%

12.39

%6.70%

ISNLTD22.56

%

24.35

%

20.56

%

19.43

%

10.53

%

19.49

%

BDCOM6.87

%

7.84

%

7.76

%

9.46

%

16.29

%9.65%

Table 8: Net Profit Margin

Here also higher NPM indicates higher profitability of the firm.

III. Return on Asset (ROA)

The Return on Assets ratio is an important profitability ratio because it measures

the efficiency with which the company is managing its investment in assets and

using them to generate profit. It measures the amount of profit earned relative to

the firm's level of investment in total assets. The return on assets ratio is related to

the asset management category of financial ratios. The calculation for the return

on assets ratio is: Net Income/Total Assets = _____%. Net Income is taken from

the income statement and total assets are taken from the balance sheet. (Ed.,

2012)

Return on Asset

Company/Years 2007 2008 2009 2010 2011 Averag

e

DAFODILCOM 3.67

%

3.06

%

5.32

%

4.45

%

5.21

%4.34%

ISNLTD9.33

%

9.50

%

5.81

%

4.97

%

2.62

%6.45%

BDCOM2.96

%

3.42

%

2.81

%

5.04

%

6.02

%4.05%

Table 9: Return on Asset

The higher the percentage, the better the firm’s asset utilization to earn, because

that means the company is doing a good job using its assets to generate sales.

IV. Return on Equity (ROE)

The Return on Equity ratio is perhaps the most important of all the financial ratios

to investors in the company. It measures the return on the money the investors

have put into the company. This is the ratio potential investors look at when

deciding whether or not to invest in the company. The calculation is: Net

Income/Stockholder's Equity = _____%. Net income comes from the income

statement and stockholder's equity comes from the balance sheet. (Ed., 2012)

Return on Equity

Company/Years 2007 2008 2009 2010 2011Averag

e

DAFODILCOM 5.11% 3.70%5.65

%

5.44

%

6.45

%5.27%

ISNLTD11.56

%

10.84

%

6.23

%

5.96

%

3.42

%7.60%

BDCOM 3.17% 3.71%3.74

%

6.69

%

6.68

%4.80%

Table 10: Return on Equity

In general, the higher the percentage, the better earning capability against its

equity, with some exceptions, as it shows that the company is doing a good job

using the investors' money.

Ranking in terms of Profitability & Performance

11

RankGross Profit

Margin

Net Profit

MarginReturn on Asset Return on Equity

1 BDCOM ISNLTD ISNLTD ISNLTD

2 ISNLTD DAFODILCOM BDCOM BDCOM

3 DAFODILCOM BDCOM DAFODILCOM DAFODILCOM

Table 11: Ranking in terms of Profitability & Performance

Activity Ratio

Activity ratios measure company sales per another asset account—the most

common asset accounts used are accounts receivable, inventory, and total assets.

Activity ratios measure the efficiency of the company in using its resources. Since

most companies invest heavily in accounts receivable or inventory, these accounts

are used in the denominator of the most popular activity ratios. (Editor, 2012)

I. Account Receivables Turnover

Accounts receivable is the total amount of money due to a company for products

or services sold on an open credit account. The accounts receivable

turnover shows how quickly a company collects what is owed to it. (Ed., 2012)

Accounts Receivable

Turnover =

Total Credit Sales

Accounts

Receivable

Receivable Turnover

Company/Years200

7

200

8

200

92010 2011 Average

DAFODILCOM 5.3

2

3.8

4

5.8

2

22.6

6

11.2

69.78

ISNLTD1.0

0

0.9

0

0.9

20.73 0.63 0.84

BDCOM2.1

1

2.1

8

2.4

03.33 3.21 2.65

Table 12: Receivable Turnover

The higher the receivable turnover indicates quicker chance of receivable

collection.

II. Average Collection Period

This indicates the collection period in days of the receivables of credit sales.

Average Collection Period

Company/Years 2007 2008 2009 2010 2011Averag

e

DAFODILCOM 67.6

9

93.6

7

61.8

1

15.8

9

31.9

854.21

ISNLTD358.

39

398.

53

389.

84

492.

87

569.

13441.75

BDCOM170.

42

165.

31

149.

81

108.

10

112.

18141.16

Table 13: Average Collection Period

The lower the collection period indicates quicker receivable collection.

III. Inventory Turnover

For a company to be profitable, it must be able to manage its inventory, because

it is money invested that does not earn a return. The best measure of inventory

utilization is the inventory turnover ratio (aka inventory utilization ratio), which

is the total annual sales or the cost of goods sold divided by the cost of inventory.

(Bernstein & Wild, 2004)

Inventory

Turnover =

Total Annual Sales or Cost of

Goods Sold

Inventory Cost

Using the cost of goods sold in the numerator is a more accurate indicator of

inventory turnover, and allows a more direct comparison with other companies,

13

since different companies would have different markups to the sale price, which

would overstate the actual inventory turnover. (IGC, 2012)

Inventory Turnover

Company/

Years2007 2008 2009 2010 2011

Avera

ge

DAFODILCOM 5.14 44.62 4.49 6.28 4.74 13.06

ISNLTD - - - - - -

BDCOM 5.91 4.51 5.90 8.39 8.73 6.69

Table 14: Inventory Turnover

The higher turnover indicates the maximum utilization of inventory efficiently.

(ISNLTD do not have any inventory for operation)

IV. Inventory Turnover in days

The lower turnover in days indicates the maximum utilization of inventory

efficiently.

Inventory Turnover (Days)

Company/

Years2007 2008 2009 2010 2011

Avera

ge

DAFODILCOM 70.08 8.07 80.17 57.28 75.95 58.31

ISNLTD - - - - - -

BDCOM 60.87 79.87 61.01 42.88 41.23 57.17

Table 15: Inventory Turnover (Days)

(ISNLTD do not have any inventory for operation)

V. Payable Turnover

A short-term liquidity measure used to quantify the rate at which a company pays

off its suppliers. Accounts payable turnover ratio is calculated by taking the total

purchases made from suppliers and dividing it by the average accounts payable

amount during the same period.

(Ed., 2012)

Payable Turnover

Company/

Years2007 2008 2009 2010 2011

Avera

ge

DAFODILCOM 36.95 32.62 41.98 27.69 33.40 34.53

ISNLTD - - - - - -

BDCOM 8.27 6.14 1.54 4.01 4.76 4.94

Table 16: Payable Turnover

The lower payable turnover allows the firm to get the maximum advantage of

credit purchase.

(ISNLTD do not have any credit purchase/ payables)

VI. Payable Turnover in Days

Payable Turnover (Days)

Company/

Years2007 2008 2009 2010 2011

Avera

ge

DAFODILCOM 9.74 11.03 8.57 13.00 10.78 10.63

ISNLTD - - - - - -

BDCOM 43.55 58.67233.2

589.70 75.65

100.1

6

Table 17: Payable Turnover (Days)

The higher payable turnover days allow the firm to get the maximum advantage of

credit purchase.

VII. Operating Cycle

The time between the purchases of an asset and its sale, or the sale of a product

made from the asset. Most companies desire short operating cycles because it

creates cash flow to cover the company's liabilities.

Operating Cycle

Company/

Years2007 2008 2009 2010 2011

Avera

ge

DAFODILCOM 138.7

5

101.8

5

143.1

073.97

108.9

8

113.3

3

ISNLTD - - - - - -

15

BDCOM232.1

3

246.2

8

211.6

6

151.5

8

153.9

8

199.1

3

Table 18: Operating Cycle

A long operating cycle often necessitates borrowing and thereby reduces

profitability.

VIII. Cash Conversion Cycle

A metric that expresses the length of time, in days, that it takes for a company to

convert resource inputs into cash flows. The cash conversion cycle attempts to

measure the amount of time each net input dollar is tied up in the production and

sales process before it is converted into cash through sales to customers. This

metric looks at the amount of time needed to sell inventory, the amount of time

needed to collect receivables and the length of time the company is afforded to pay

its bills without incurring penalties, also known as "cash cycle." (Bernstein & Wild,

2004)

Calculated as:

Where:

DIO represents days inventory outstanding

DSO represents day’s sales outstanding

DPO represents day’s payable outstanding

Cash Conversion Cycle

Company/Years 2007 2008 2009 2010 2011Averag

e

DAFODILCOM 127.

22

85.5

2

153.3

8

72.9

8

118.

15111.45

ISNLTD358.

39

398.

53

389.8

4

492.

87

569.

13441.75

BDCOM 261.

60

260.

15

-

644.9

-

34.3

36.8

6

-24.13

4 2

Table 19: Cash Conversion Cycle

The lower the cash conversion cycles the more the firm efficient in liquating its

asset.

Ranking in terms of activity ratios

Ran

k

Account

Receivable

s Turnover

Average

Collection

Period

Inventory

Turnover

Inventory

Turnover

in days

Payable

Turnover

Payable

Turnover

in Days

Operating

Cycle

Cash

Conversion

Cycle

1 DAFODILCOM DAFODILCOMDAFODILCO

MBDCOM BDCOM BDCOM

DAFODILCO

MBDCOM

2 BDCOM BDCOM BDCOMDAFODILCO

M

DAFODILCO

M

DAFODILCO

MBDCOM

DAFODILCO

M

3 ISNLTD ISNLTD - - - - - ISNLTD

Table 20: Ranking in terms of activity ratios

Market Performance

I. EPS

The portion of a company's profit allocated to each outstanding share of common stock. Earnings per share serve as an indicator of a company's profitability.Calculated as:

EPSCompany/Years

2007

2008

2009

2010

2011

Average

DAFODILCOM 0.69 0.47 0.70 0.63 0.94 0.69ISNLTD 1.08 1.22 1.18 1.05 0.55 1.02BDCOM 0.67 0.92 0.86 0.61 0.51 0.71

Table 21: EPS

II. Payout RatioThe amount of earnings paid out in dividends to shareholders. Investors can use the payout ratio to determine what companies are doing with their earnings.

17

Calculated as:

Payout RatioCompany/Years

2007

2008

2009

2010

2011

Average

DAFODILCOM 1.84 0.03 0.53 0.01 0.00 0.48ISNLTD 0.90 0.32 0.42 0.00 0.00 0.33BDCOM 0.00 0.00 0.00 0.00 0.53 0.11

Table 22: Payout Ratio

Mostly depend in the company policy

III. PE RatioThe P/E looks at the relationship between the stock price and the company’s

earnings. The P/E is the most popular metric of stock analysis, although it is far

from the only one you should consider. P/E = Stock Price / EPS

PE RatioCompany/Years

2007

2008

2009

2010

2011

Average

DAFODILCOM 26.1

325.5

018.6

522.2

214.8

921.48

ISNLTD15.2

814.7

520.3

420.9

549.0

924.08

BDCOM32.8

420.6

520.9

328.6

934.8

027.58

Table 23: PE Ratio

Ranking in terms of Market performance

Rank EPS Payout P/E

1 ISNLTD BDCOM BDCOM

2 BDCOM ISNLTD ISNLTD

3 DAFODILCOM DAFODILCOM DAFODILCOM

Table 24: Ranking in terms of Market performance

Conclusion

It is to be concluded for this study that, this is a very difficult to make decision about any of the firms performance and the measurement tools, because all the formulas and functions are applied to attain an specific requirement of the firm as

the part of the firm’s financial strategy. So, the qualitative information will also need to understand the purpose of the firm to use any of the tools to measure their performance. Finally it could be recommended that, the importance of the ratio analysis depends on the stakeholder’s specific need and the situational requirements.

BibliographyBernstein, J. A., & Wild, J. J. (2004). Analysis of Financial Statements (5th ed.). New Delhi: Tata McGraw-Hill.

Ed., F. (2012). Financial Ratios. Retrieved 8 2012, 01, from about.com: http://stocks.about.com/od/evaluatingstocks/a/pe.htm

Editor. (2012). Free Dictionary. Retrieved 8 2012, 01, from The Free Dictionary: http://financial-dictionary.thefreedictionary.com/

IGC. (2012). The ICT Sector in Bangladesh. Retrieved 08 2012, 01, from International Growth Center: http://www.theigc.org/article/ict-sector-bangladesh-analysis-firm-capabilities