EXECUTIVE SUMMARY

 

My  selected company is Alltex Industries Limited which belongs to Textile  industry. In this report, the business analysis of Alltex Industries Limited has been accomplished using the four key steps: business strategy analysis, accounting analysis, financial analysis, and prospective analysis.

At the time of doing business strategy analysis, I found that the textile industry is currently profitable and there is no severe potential threat to destroy its profit and it can also be able to retain its profit in the future. The competition prevailing among the firms have been developed based on the non-price segment which is very much appreciated because it does not destroy the profit of the industry. And my selected firm for retained its profit mainly focusing on differentiation strategy.

The accounting analysis is another portion of business analysis. By doing accounting analysis of Alltex Industries Limited, I also found that it follows the rules Bangladesh Accounting Standard. The critical success factors and risks of Alltex Industries Limited  are not only research and development but also patent and trademark right. The quality of disclosure is very sound, the footnotes has provided adequate information.

By analyzing the financial statement, I located the liquidity position, operating efficiency, operating profitability and the debt to equity ratio is reasonable  and all the factors indicating financial risk are under control. The return on equity is more sensitive to its profit margin.

The prospective analysis of Alltex Industries Limited has been divided into two parts: valuation and pro forma statement analysis. To assess the equity value most of the case we have taken average growth of past years. The equity value of Alltex Industries Limited is Tk.133.26, which is higher than the market value. So we can say that the share of Alltex Industries Limited is undervalued and any time its price may raise.  And if the investor purchase share, there is a possibility to be a gainer.

 

ALLTEX INDUSTRIES LTD :  AT A GLANCE

 

Alltex Industries Limited was incorporated on 24 January 1985 as Private Limited Company and started commercial production in March 1986 only with Dyeing and finishing for local market. Subsequently a Primary unit has been setup to product home textile like quilt cover, Bed set, and Fitted Bed set dyed/ Printed fabrics and commenced production from March 1992.Since then the entire products are being exported and the company is being treated as 100% export oriented home textile industry in Bangladesh.  The company has converted its corporate status as public company limited on 24 October 1994.

Each of the company activities must benefit and add value to the common wealth of the society. Alltex Textile Mill Ltd firmly believes that in final analysis they are accountable to each of the constitutes with whom they interact; namely; the employees, the customers, the business associates, the citizens and the shareholders.

The objectives of this textile are to reward shareholders with continued growth and earnings with dividends, while maintaining a sound financial base for future expansion. It promises to provide a safe and healthy workplace and to minimize industry’s impact on the environment.

The industry vision to build a true marketing led enterprise with motivated workplace, innovative vision and strong revenue based product portfolio, customers’ satisfaction and understanding of global market

The company total has four units of the textile industries.

Dying & Finishing Unit

Printing Unit-1

Garments Unit

Printing Unit –2

Alltex Industries Ltd promised to deliver

• Top quality products at the least cost reaching the lowest rungs of the economic class of people in the country.
• Attaining success as a world-class global leader with each and every people contributing with passions and an unmatched sense of urgency.

 

• Striving for the best compensation to all the employees who constitute the backbone of the management and operational strength of the company through a pay-package composing salary, allowances, bonuses, profit participation and super-annuation & retirement benefits.
• Optimum profit through conduction of transparent business operations within the legal & social framework with malice to none and justice to all.

 

 

Accounting Analysis of Alltex Industries Ltd :

Accounting analysis helps to evaluate the degree to which a firm’s accounting captures its underlying business reality. This analysis is also useful to assess the degree of distortion in the firm’s accounting numbers by evaluating the appropriateness of the firm’s accounting policies and estimates and undo any  distortions to improve the reliability of accounting numbers. Accounting analysis consists of six steps, which are described bellow :

Step-1: Identify Key Accounting Policies

This step includes identifying and evaluating the policies and estimates the firms uses to measure its critical factors and risk. Every company has some policies to conduct the accounting treatment of the transactions. Alltex Industries Ltd follows the following rules and regulations. The basis for preparation of financial statements is in the “Historical Cost Conventions”. The basis of presentation and disclosures of information are based on the relevant and applicable requirements of the :

• Companies Act 1994;
• Securities and Exchange Rules 1987;
• Listing Regulations of DSE and CSE and Bangladesh Accounting Standards adopted by the ICAB based on International Financial Reporting Standards.
• The financial statements are presented in Bangladeshi currency (Taka), which has been rounded off to the nearest Taka except where indicated otherwise.

Step-2 Assess Accounting Flexibility:

Identifying the key accounting policies is one of the most important factors for accounting analysis. Accounting flexibly varies from firm to firm and from industry to industry. Managers of  Alltex Industries Ltd has little flexibility in choosing accounting policies and estimates regarding their key success factor.  If mangers have little flexibility in choosing accounting policies and estimates regarding their key success factors, accounting data are likely to be less informative for understanding the firm’s economics. Most of the firm has flexibility in making estimates on depreciation, amortization and choosing inventory accounting method ( LIFO or FIFO). Like other firms, Alltex Industries Ltd has flexibility in making estimates about depreciation, amortization, and inventory accounting. All the policies has an important impacts in the financial reporting.

Step-3: Evaluate Accounting Strategy

• Alltex Industries Ltd accounting policies are as like as  to the norms in the industry.
• The company’s management doesn’t make earning management and the same time they have no strong incentive to do that.
•  The company has no changed any of its policies or estimates without justification.
• To the answer of the question about accounting policies, the company has not changed any important accounting policies.
• The company’s accounting policies were realistic in past and all the policies were stable.

Step-4: Evaluate the Quality of Disclosure

To an analyst it may be more or less complex to understand the business reality of a firm because of level of disclosure. At the same time, there is a minimum required level of accounting disclosure set by the regulatory authority. In this aspect manager has many things to consider. Disclosure quality is an important attribute for the quality of reporting. Our concerned company provides enough foot notes to understand the economic transactions and its consequences. The company’s foot notes gives us an over view of their key accounting policies. From the reporting of financial statements we can have a good understanding of their current performance. The concerned company has made a very good investors’ relationship program. It publishes annual report in due time and calls AGM regularly.

Step-5: Identify the Potential Red Flags

In addition to the above analysis, a common approach to accounting quality analysis is to look for “red flags” pointing to questionable accounting quality. After making meticulous observation about certain items, we have found the following results.

The company has not changed any accounting policies to manipulate the performance level as well as the company has not made any unexplained transactions to boost up profit such as sale of fixed assets or factoring of existing bad debts. From the reported papers, we have no confusion about the figure of sales and accounts receivables and level of inventories. For several of years, the company has no records of writing off large assets. The company also doesn’t maintain the time segment reporting.

 

Step-6: Undo Accounting Distortions

The elements of financial statements have been measured at historical cost convention, in a going concern concept and on accrual basis. It is normal to have some fluctuation regarding the decisions about the accruals. The accounting policy of Alltex Industries Ltd  is designed in such a way that  it is not possible to undo all distortions and footnotes that are given may provide significant condition.

 

Porter’s Five Factors Analysis

The nature of competitive conditions existing in an industry can provide useful information in assessing its future. Michel Porters five factors model excessively used to determine the competitive position in an industry. The intensity of competition in an industry determines the industry’s ability sustain above-average returns. The intensity is not a matter of luck, but a reflection of underlying factors that determine the strength of five basic competitive factors. The five factors analysis for Textile industry to determine Alltex Industries Ltd profit generating and profit retaining capacity are given bellow.

Threat of New Entrants in the Industry :

By analyzing the Industry we found that,

• Economies of scale are high, indicating larger amount of production to break even.
•  Product of this industry is undifferentiated. So the threat of new entrants are high for the industry as well as for the company in this sense.
• Capital requirements to enter in this business are high. So the threat of new entrants are low for the industry as well as for the company in this sense.
• Customers switching cost from one company’s product low. So the threat of new entrants are high for the industry as well as for the company in this sense.
• The incumbents of our Textile Industry don’t have proprietary knowledge or technology. Anyone can collect information about the industry and set up new firm for production.

So we can see that except economies of scale and capital requirements other factors are favorable for potential new entrants.

Bargaining Power of Buyers:

By analyzing the textile Industry we found that,

• Buyers are highly concentrated or buy in very high volume to have a very high bargaining power.
• Since general product is commodity so, buyers have the option to choose among various companies product.
• Buyers Know the production cost.
• Buyers do not have the capability to backward integrate.
• Products has little impact on quality of the Buyers final product.

 

We can conclude that buyers of this industry contain bargaining power to provide a significant influence on the industries profitability.

 

Bargaining Power of Supplier:

By analyzing the Textile Industry we found that,

• Raw materials suppliers of this industry are concentrated.
• There is no reliable substitute for this industries raw material.
• Suppliers of this industry do not have the intention to forward integrate.
• Suppliers’ products are not differentiated.
• Since suppliers are from abroad switching cost is high for the companies to change suppliers’ frequently.

So from the above analysis we can find that, suppliers got significant bargaining power to maintain a significant impact on the industries profitability.

Threat of Substitutes :

By analyzing the Textile Industry we found that,

• There are substitute of this industry such as China, Pakistan & India which could affect the industries profitability.
  • Ø The average level of profitability is primarily influenced by the nature of rivalry among existing firms in the industry.
  • Ø In the textile sector there is large number of competitors in industry in our country though these industries are growing slowly in their performance.
  • Ø For continuing operations it needs several costly equipment and machineries i.e., the large portions of costs are fixed.
  • Ø The qualities of products produced by every textile industry are more or less similar and also undifferentiated.
  • The switching cost of buyer is very low because they can easily go to different producers if they find some of the supplier provides materials at a lower cost by getting assurance of similar quality products.
  • Moreover, exit barriers are very high in this industry because large portion of selling occurred at credit in our country and government takes initiatives to promote industrialization in this sector.

Intra-Industry Rivalry :

Finally, we can conclude from the five factors analysis that, except the bargaining power of the supplier & Buyer, the other three factors are favorable for the industries profitability.

 

 

Industry & Strategy analysis:

My selected company is Alltex Industries  Limited which belongs to the textile Industry. The Company is currently profitable. Porter’s five models  has been developed based on the following factors:

• Degree of actual and potential competition:Three potential sources of competition in an Industry:
  • Rivalry among existing firms: Textile Industry is still in growing stage and the rate of growth is higher than any other Industry in our country. Few years ago there was a tendency in the industry to maximize short-term sale. For this reason the profitability of the industry was gone down, but the present situation is satisfactory.
  • Threat of new entrants: As large amount of investment is needed  to established a new company so we can safely say that there is a little risk of new entrants.
  • Threat of substitute products: In the textile industry, threats of substitute products are high.

 

• Relative Bargaining power in input and output markets:Two factors are included in this stage :
  • Bargaining power of buyers: The bargaining power of buyer is higher in this sector because buyers are highly concentrated as well as substitute products are available.
  • Bargaining power of suppliers : The bargaining power of suppliers is high because of small number of suppliers as well as un availability of substitute products. Bargaining power of supplier is the most critical factor for the profitability of this industry.

Capability of profit retention by an industry depends on two factors, which are, bargaining power of the customer and bargaining power of the supplier.

In the textile industry bargaining power is high for the suppliers but low for the Buyer. Here the bargaining powers of the suppliers are high because, huge amount of the raw materials are imported from abroad and it is difficult importers to change suppliers to get cost advantage. On the other hand, bargaining power of the customer in this industry is high because products are not differentiated and switching costs are low. After that I think the industry is capable of retaining the profit it makes because company has a great strength on cost leadership strategy.

The company follow the differentiation strategy seeks to be unique in its industry along some dimension that is highly valued by customers. For differentiation the firm has to accomplish three things: i)Firm identify one or more attributes of a product or service that customer value ii) It has to position to meet the chosen customer need in a unique manner iii) The firm has to achieve differentiation at a cost that is lower than the price the customer is willing to pay for differentiated product or service.

 

Ratio Analysis:

The value of the firm is determined by its profitability and growth. The firm’s growth and profitability are influenced by its product market and financial market strategies. The product market strategy is implemented through the firm’s competitive strategy, operating policies and investment decision. Financial market strategies are implemented through financing and dividend policies. Thus, the four levers managers can use to achieve their growth and profit targets are i) Operating management ii) Investment management iii) Financing strategy  & iv)  Dividend policies.

The objective of ratio analysis is to evaluate the effectiveness of the firms policies in each of these area. Effective ratio analysis involves relating the financial numbers to the underlying business factors in as much detail as possible. While ratio analysis may not give all the answers to an analyst regarding the firms performance, it will help the analyst frame questions for further probing.

In ratio analysis , the analyst can

• Compare ratios for a firm over several years (a time series comparison)
• Compare ratios for the firm and other firms in the Industry (cross-sectional comparison)
• Compare ratios to some absolute benchmark.

 

The following section deal with financial ratios time series  analysis of Alltex Industries Ltd. In particular , the analysis covers the following five categories of financial ratios discussion.

• Internal liquidity  (solvency)
• Operating performance
  • Operating efficiency
  • Operating profitability
• Risk analysisGrowth analysis
  • Business risk
  • Financial risk.
• External liquidity (marketability

Time Series Analysis of Alltex Industries Ltd.

Here our purpose is to analyze the subject company through ratios in a particular period of time. We took financial data from 2001 to 2005 to evaluate the firm’s performance.

• Current Ratio. Current ratio is calculated by dividing current assets by current liabilities:

Current assets

Current Ratio = Current liabilities

 

Figure 1: Current Ratio of Alltex

Current assets are those assets, which can be converted into cash within a year, such as cash, marketable securities, account receivable, debtors and inventories. The Above Figure-1 shows the five years trend of current ratio of Alltex Industries Ltd.  Here in case of Alltex Industries Ltd. between 2001-2004, current ratio of the firm gradually declined & but in 2005, current ratio has increased to 1.26 because of decreasing notes payable. It means that the liquidity position of the firm is much better than 2004. However, whether the ratio is within realm of appropriateness, can’t be said unless compared against that of peer company and industry benchmark.

 

• Quick Ratio. It is a refinement of the current ratio and is a more conservative measure of liquidity.  The ratio shows the degree to which a company’s current liabilities are covered by most liquid current assets. Cash is the most liquid asset.  Other assets, which are considered to be relatively liquid and included in quick assets, are book debts (debtors and bills receivables) and marketable securities (temporary quoted investments).  The quick ratio is found by dividing quick assets by current liabilities.

Current assets – Inventories

Quick Ratio =    Current liabilities

 

Figure 2: Quick Ratio of Alltex

In figure -2, Quick ratio acts same as Current ratio. The ratio improved in 2002 than 2001 and decreased in 2003 to 2004 and again improved in 2005.

 

• Average Collection Period. This ratio determines how rapidly the firm’s credit accounts are being collected. The Average collection period ratio is found by dividing Account Receivable by annual sales multiplied by 360 days.

Accounts Receivable x 360 days

Average Collection Period  =   Annual Sales

 

         Figure 3: Average Collection Period

The average collection period of accounts receivable is the average number of days required to convert receivables into cash. Alltex indicate that during 2005 the firm collected its accounts in 11 days on average, which is an improvement over the year from 2001-2004. It indicates that the credit policies is restricted, as reflected in an average collection period. If the average collection period is shorter than Industry competitors then the firm may be losing qualified customers.

 

• Accounts Receivable Turnover Ratio. This ratio is the inverse of the average collection period.

Net Annual Sales on credit

Accounts Receivable Turnover   =   Accounts Receivable

 

Figure 4: Accounts Receivable Turnover of Alltex

 

This ratio is exactly the inverse of the previous ratio average collection period. So as we said earlier the turnover increase in final year 2005.

 

• Inventory Turnover. This ratio is an indicator of the liquidity of inventory.

Cost of Goods Sold

Inventory Turnover   =   Inventory

 

Figure 5: Inventory Turnover of Alltex

Inventory turnover measures the efficiency of the firm in managing and selling inventory. It is a gauge of the liquidity of a firm’s inventory. The inventory turn over for Alltex was 5.68 times in 2005, an improvement over 2001 to 2004.

Generally, a high turnover is a sign of efficient inventory management and profit for the firm; the faster inventory sells, the fewer fund are tide up in inventory. But a high turnover can also mean under stocking and lost orders.

 

• Total Asset Turnover. This ratio indicates how many dollars in sales the firm makes out of each dollar invested in assets.

Annual Sales

Total Asset Turnover   =  Total Asset

 

Figure 6: Total Asset Turnover of Alltex

Total assets exhibit an upward trend over the analysis period, indicating increase in the efficiency of utilization of company assets. Generally the higher these ratios, the smaller is the investment required to generate sales and thus the more profitable is the firm.

 

• Fixed Asset Turnover. This ratio shows how many dollars in sales the firm secures out of each dollar invested in fixed assets.

Annual Sales

Fixed Asset Turnover   =    Fixed Asset

 

Figure 7: Fixed Asset Turnover of Alltex

Paralleling total asset turnover, fixed asset turnover of Alltex increased during all of the years. Generally, the fixed asset turnover considers only the firm’s investment in property, plant and equipment and is extremely important for the capital-intensive firm, such as a manufacturer with heavy investments in long-lived assets.

 

• Debt Ratio. This ratio indicates how much of the firm’s assets have been financed by borrowed funds.

Total Liabilities

Debt Ratio   = Total Asset

 

Figure 8: Debt Ratio of Alltex

Figure 8 illustrates the debt ratio of the company, which increased during 2002 & 2004 only to decrease in 2001. The explanation to this includes taking a short term loan in 2004 pushing the ratio up to 0.61 from 0.58.  It is a bad sign for the company in the sense that when the leverage goes up then the risk is higher. Using more leverage also a good sigh for the tax purposes.

 

• Time Interest Earned Ratio. This ratio shows the firm’s ability to meet its interest obligations out of its annual operating earnings, e.g., earnings before interest and taxes (EBIT), calculated in a manner described below.

EBIT

Time interest Earned Ratio   =  Interest Payment

 

Figure 9: Times Interest Earned Ratio of Alltex

 

This ratio showed improvement during 2001 but it decreased gradually during 2002 to 2003 and again increase in 2004 to 2005.

• Gross Profit Margin Ratio. Gross profit margin indicates the gross margin that a firm makes. It compares gross profit of a firm, defined as the excess of sales over its cost of goods sold, to its sales.

Gross Profit

Gross Profit Margin Ratio =      Sales

 

Figure 10: Gross Margin Ratio of Alltex

 

As shown in figure above, Gross profit margin of Alltex decreased in 2002 but increased gradually during 2003 to 2005 due to increase in sales volume. It is good sign for Alltex Industries Ltd.

 

• Operating Profit Margin Ratio. Operating profit margin indicates the operating profit margin that a firm makes. Operating profit margin measures the rate of profit on sales after operating expense.

Operating Profit

Operating Profit Margin Ratio  =         Net Sales

 

 

        Figure 11: Operating Profit  Margin Ratio of Alltex

The operating margin of the Alltex Industries ltd has decreased from year 2001 to 2004 but slight increase in 2005. It indicates that the operating expense is higher than previous year. It should be increased by increasing the efficiency of the firm.

 

• Net Profit Margin Ratio. Net profit margin means net income to sales

Net Profit

Net Profit Margin Ratio  =         Net Sales

 

Figure 12: Net Profit  Margin Ratio of Alltex

 

The net profit margin measures profitability after consideration of all revenue and expense including interest, taxes and operating items. The net profit  margin of Alltex decreased during the year 2001 to 2004 but it significant increase in 2005.It indicates that the operating expense is higher than previous year. It should be increased operating efficiency of the firm.

 

• Return on Total Asset Ratio. This ratio reflects the rate of return on firm’s total investment after interest and taxes.

Net Income

Return on Total Assets Ratio =       Total Asset

 

Figure 13: Return on Total Asset Ratio of Alltex

The return on total asset is declining from 2001 to 2004 & also increase in 2005. The return of total asset in 2005 is 1.00, which is comparatively low. Net income decreasing year to year due to increasing operating expense.

 

• Return on Equity Ratio. Return on equity (ROE) reflects the net return obtained by the shareholders on their investment.

Net income

Return on Equity Ratio =     Common equity

 

Figure 14: Return on Equity Ratio of Alltex

            The return on equity ratio declining during the year 2001 to 2004 but it significantly increase in 2005 due to increase in sates revenue.

 

Valuation Summery

 

Findings:

Beta                 :           1.7986

R_f                     :           7.5%

R_{m                          :}               23.08%

Risk Premium:             Considered at 0.50% as the company is not rated by CRISL or CRAB. However, Alltex is the leading Textile Company in Bangladesh. Considering their size of business and considering their present portfolio and liquidity ratios, adequate ROE, I have assumed Risk Premium at 0.50%.

K_d                    :           8.00%

K_e                    :           35.53%

Average WACC:          20.08%

 

Equity Value   :           Tk. 1624.64 million.

Shares Outstanding:    4.80 million

Equity value per share: Tk.133.26.