1.

Introduction

As business students, we will require the knowledge and skills to interpret financial and other numerical and
business data, communicate the underlying issues with decision makers. From Financial Management we get
the desired knowledge. We can get knowledge about the format of various financial statements, the elements
of FSs, the criteria for the recognition, measurement and disclosure of those elements. We can also know
about the capital structure of financial organization .But all those are theoretically. We must know how to
apply them practically. This report has been prepared by giving importance on the practical application of
those knowledge.

Objective of the report:

The main objective of the report is to know how the theoretical concepts of Financial Management are applied
practically in various organizations. Other objectives of the report-

To acquire the capability of analyzing Financial Statements of various companies using the theories
we have learnt in the course.

To turn our learning system from theoretical to practical

Methodology:
We have prepared this report using secondary data. We have collected the annual report of recent two years
(2012-13, 2011-12) of Olympic Industries Ltd from their website to analyze.

Limitations of the report:

Lack of experience:

As we do not have proper idea of the application of Financial Management we have faced some difficulties to
compete this report.

Lack of enough information:

The information about the various assumptions, used methods provided in the Financial Statements of the
organizations annual report is not enough.

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2. Basics of Financial Statements Analysis

Annual Report:
Annual report is report which is issued by all the companies to its stockholders annually. It consists
of relevant information related to corporations overall operating activities during the year. It
contains basic financial statements as well as managements opinion of the past years operations and
the firms prospect.

One of the basic or main parts of annual report is Financial Statement. Financial statements are the
accountants summary of the performance of the entity over a particular period and of its position at
the end of that period.

Financial Statement comprises five components and they are-

1) Balance sheet / Statement of position

2) Income statement / Statement of financial performance
3) Statement of retained earnings / Statement of changes in equity
4) Cash flow statement
5) Notes to the Financial Statement

Importance of Financial Statement:

Financial Statement analysis is used to determine the financial position of a firm and used to
compare the firm with other firms in the same industry. By analyzing financial statement, it is also
possible to find the strength and weakness of the firm.

Financial statement analysis is also important for the firms investors and creditors. Internally
financial managers use this information to invest in profitable sectors and maximize the firms
wealth. On the other hand, shareholders and creditors analyze the financial statement and decide
whether to invest in the particular firm or not.

Two types of information are found in annual report. At first it contains a letter from the chairman
describing the firms operating results during the past years and the firms future prospect.

Secondly, it contains the four basic statements. They are discussed below-

1) Income Statement:

The Income Statement presents the result of operating activities of a firm during a specific period of
time. It can be presented quarterly or yearly. It is also called profit and loss statement. With the help
of income statement, it is possible to know the amount of revenues generated and the amount of
expense incurred by the firm during the accounting period.

Net sales are shown t the top of each statement and various cost including income taxes are deducted
from the net sales to find the net income. A report on earnings and dividends per share is given at the
bottom of the statement.
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Accrual basis is followed in most corporations for preparing income statement. This means that,
revenues are recognized when they are earned, not when the cash is received and expenses are
realized when they are incurred, not when the cash is paid.

2) Balance Sheet:

The balance sheet shows the financial position of a firm at a specific point of time. With the help of
balance sheet, it is possible to know the amount of total assets, total liabilities and owners equity.
With the help of balance sheet, it is also possible to know how investment are made by the firm in
the form of assets and whether the assets are financed by borrowing (debt) or by selling ownership
shares(equity).

Here, the assets are listed in order of liquidity and claims or liabilities are listed according to the
order in which they must be paid.

3) Statement of retained earnings:

Retained earnings statement is a statement which reflects the change in the firms retained earnings
as a result of the income generated and retained during the years.

Retained earnings represent a claim against assets. Changes in retained earnings represent the
recognition that income generated by the firm during the accounting period has been reinvested in
assets rather than paid out.

4) Statement of Cash flows:

Cash flow statement reflects the firms operating, investing and financing activities on cash flows
over an accounting period. With the help of cash flow statement, it is possible to know the amount of
cash receipts and cash payment.

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Ratio Analysis
Ratio analysis is one of the important part of the financial statement analysis. By ratio analysis, we
can compare financial position of a firm with other firms in the same industry. It is possible to know
the actual position of the firm and it is also possible to know whether the firm is moving towards the
right path or not. With the help of ration analysis, firms can take necessary steps regarding assets,
liabilities and equity of the firm.

There are different kinds of ratios. They are described below-

1) Liquidity: The ratios that show the relationship of firms cash and other current assets to its
current liabilities is called liquidity ratio. With the help of liquidity ratio, firms can get idea about
the capability of the firm to repay its liabilities with the help of its current assets. Two commonly
used liquidity ratios are-

i. Current Ratio = Current Assets/ Current liabilities

ii. Quick or Acid test Ratio = (Current Assets Inventories)/ Current liabilities

In case of quick ratio, inventories are deducted from current assets because it is the least liquid asset
and face considerable price fluctuation.

2) Asset management Ratio: The asset management ratio measures how efficiently the firm is
managing its assets. Firms invest in assets to generate revenue. Firms have to invest in assets in
such a portion that will maximize their profit and will not increase its interest expenses. It
includes-

i. Inventory turnover = Cost of goods Sold/ Inventories

ii. Day sale outstanding: Days sale outstanding is used to evaluate its credit sales in a timely
manner.

Days sale outstanding = Receivables/ Average sale per day

= Receivables/ (Annual sale/360)

iii. Fixed Assets Turnover: The fixed asset turnover ratio measures how efficiently the firm
uses its plants and equipment to help generate sales,

Fixed Assets Turnover = Sales/ Net fixed assets

iv. Total Asset Turnover: The fixed asset turnover ratio measures the turnover of all the
firms assets.

Total Assets Turnover = Sales/ Total assets

3) Debt management ratio: Date management ratio includes-

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 i. Debt ratio: The debt ratio measures the percentage of the firms assets financed by
creditors (borrowings)

Debt Ratio = Total Debt/ Total Asset

Here, the total debt includes both current liabilities and long term debt. Creditors prefer low debt
ratios, because when the ratio is low, the creditors are in lees risky position in the event of
liquidation. On the other hand, owners can get benefit from leverage because it magnifies earnings.
But too much debt is not good for the firm.

ii. Times interest earned Ratio: Times interest earned ratio measure the extent to which
earnings before interest and taxes can decline before the firm is unable to meet its annual
interest costs.

Times interest earned Ratio = EBIT/(Interest Charges)

EBIT= Earnings before interest and taxes

4) Profitability Ratio: Probability Ratios show the combined effects of liquidity, asset management
and debt management on operating results. It includes-

i. Net Profit Margin on Sales: Net profit margin on sales measures net income per dollar of
sales. It gives the profit per dollar of sales.

Net Profit Margin on Sales = Net Income / Sales

ii. Return on Total Asset: Return on Total Asset is the ratio of net income to total assets. It
provides an idea of the overall return on investment earned by the firm.

Return on Total Asset = Net Income/Total Assets

iii. Return on Common Equity: Return on Common Equity is the ratio of net income to
common equity. It measures the rate of return on common stockholders investment.

Return on Common Equity = Net Income Available to common Stockholders/ Common

Equity

5) Market Value Ratio: The market value ratios represent a group of ratios that relates the firms
stock price to it earnings and book value per share. It includes-

i. Price Earnings Ratio: The price/earnings ratio shows investors are ready to pay how
much per dollar of reported profits.

Price Earnings Ratio = Market price per share/ Earnings per share

Here, Earning per share = Net Income Available to common Stockholders/Number of common
shares outstanding

P/E ratios are higher for firms with high growth prospects but they are lower for riskier firm.

ii. Market/Book Ratio: Market/Book Ratio is the ratio of a sock market price to its book
value which gives another indication of how investors regard the company. It is
calculated as follows-
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Market/Book Ratio = Market Price per share/ Book value per share

Book Value Per Share = Common Equity/ Number of common shares outstanding

3. Ratio Analysis of Olympic Industries

Ratio Analysis (2012)

1. Current Ratio = Current Assets / Current liabilities
= 1389386956 / 1037540875
= 1.29

2. Quick or Acid test Ratio = (Current Assets Inventories)/ Current liabilities

= (1389386956 - 416634463) / 1037540875
= 0.94

3. Inventory turnover = Cost of goods Sold/ Inventories

= 4542709785/ 416634463
= 10.90

4. Days sale outstanding = Receivables/ Average sale per day

= Receivables/ (Annual sale/360)
= 25539737 / (6003342018 / 360)
= 1.53 days

5. Fixed Assets Turnover = Sales/ Net fixed assets

= 6003342018 / 1201849350
= 5 times

6. Total Assets Turnover = Sales/ Total assets

= 6003342018 / 2591236306
= 2.32 times

7. Debt Ratio = Total Debt/ Total Asset

= 1422629846 / 2591236306
= 54.90%

8. Times interest earned Ratio = EBIT/(Interest Charges)

= 697507228 / 73726223
= 9.46

EBIT= Earnings before interest and taxes

9. Net Profit Margin on Sales = Net Income / Sales

= 465219732 /6003342018
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 = 7.75%

10. Return on Total Asset = Net Income/Total Assets

= 465219732 / 2591236306
= 17.95%

11. Return on Common Equity = Net Income Available to common Stockholders/ Common
Equity
= 465219732 / 1168606460
= 39.81%
12. Price Earnings Ratio = Market price per share/ Earnings per share
= 10 / 8.91
= 1.12 times

13. Market/Book Ratio = Market Price per share/ Book value per share
= 10/ 22.37
= 0.48 times

Book Value per Share = Common Equity/ Number of common shares outstanding
= 1168606460 / 52240875
= 22.37

Ratio Analysis (2013)

1. Current Ratio = Current Assets / Current liabilities

= 2260856080 / 1517602918
= 1.49

2. Quick or Acid test Ratio = (Current Assets Inventories)/ Current liabilities

= (2260856080- 517702890) / 1517602918
= 1.15

3. Inventory turnover = Cost of goods Sold/ Inventories

= 5271458122 / 517702890
= 10.18

4. Days sale outstanding = Receivables/ Average sale per day

= Receivables/ (Annual sale/360)
= 22881927 / (7093179369 / 360)
= 1.16 days

5. Fixed Assets Turnover = Sales/ Net fixed assets

= 7093179369 / 1432816473
= 4.95 times

6. Total Assets Turnover = Sales/ Total assets

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 = 7093179369 / 8693672553
= 1.92 times

7. Debt Ratio = Total Debt/ Total Asset

= 1961949908 / 8693672553
= 22.57%

8. Times interest earned Ratio = EBIT/(Interest Charges)

= 931270071 / 92624403
= 10.05 times

EBIT= Earnings before interest and taxes

9. Net Profit Margin on Sales = Net Income / Sales

= 615357060 / 7093179369
= 8.68%

10. Return on Total Asset = Net Income/Total Assets

= 615357060 / 8693672553
= 7.08%

11. Return on Common Equity = Net Income Available to common Stockholders/ Common
Equity
= 615357060 / 1731722645
= 35.53%%
12. Price Earnings Ratio = Market price per share/ Earnings per share
= 10 / 7.85
= 1.27 times

13. Market/Book Ratio = Market Price per share/ Book value per share
= 10/ 22.10
= 0.45 times

Book Value Per Share = Common Equity/ Number of common shares outstanding
= 1731722645 / 78361312
= 22.10

Total Overview of the ratios:

SL. Name of the Ratios 2012 2013

No.
01. Current Ratio 1.29 1.49

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02. Quick or Acid test Ratio .94 1.15

03. Inventory turnover 10.90 10.18

04. Days sale outstanding 1.53 days 1.16 days

05. Fixed Assets Turnover 5 times 4.95 times

06. Total Assets Turnover 2.32 times 1.92 times

07. Debt Ratio 40% 22.57%

08. Times interest earned Ratio 9.46 10.05

09. Net Profit Margin on Sales 7.75% 8.68%

10. Return on Total Asset 17.95% 7.08%

11. Return on Common Equity 39.81% 35.53%

12. Price Earnings Ratio 1.12 times 1.27 times

13. Market/Book Ratio 0.48 times 0.45 times

4. Graphical Presentation of Ratio Analysis and

Interpretation

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Current ratio: current ratio shows the current assets against current liabilities. Current ratio of Olympic in
2013 goes to 1.49 from 1.29.
Quick or Acid test ratio: Inventory is deducted from current assets. The ratio of 2013 is more than that of
2012. So it is a positive signal for the company.

Inventory turnover ratio: In 2013 inventory turnover ratio has decreased to 10.18 from 10.90. This means that
Olympic is holding excessive stocks of inventory compared to 2012.
Days Sales Outstanding (DSO): DSO ratio has decreased in 2013 compared to 2012. This means that average
collection period has decreased.
Fixed asset turnover ratio: The ratio has slightly decreased in 2013 compared to 2012. In spite of that the firm
is using its fixed asset efficiently to generate sales.

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Total asset turnover ratio: Slightly low from the previous year; which means that the company has
generate a less volume from its investment on assets.

Debt Ratio: Has decreased significantly because the company has purchased a big amount of asset by
the fund raised from equity.

TIE ratio : This ratio has also decreased but not much it can be said the ability of firm to meet its
annual interest payments has decreased somewhat.

Net profit margin on sales:

According to the found ratio we can say that net income per dollar of sales has increased. It is
normal, because debt proportion of Olympic Industries is very low in comparison to total assets.Its
interest payments ability also supports this.

Return on total assets:

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 The percentage has become less than half of the previous year . It is a result of Olympics huge
investment in assets which has not been successfully converted into profits.

Return on common equity: It is decreased from 39.81% to 35.53%.Each tk of equity has generated
less profit than previous year. It is clear from the findings that the company management is using the
investors money less effectively to fund operations, generate income and grow the company than
previous year.

5. Basics of Cost of Capital and capital Structure

The cost of capital is he rate of return that a firm must earn on a project in which it invests to
maintain the market value of its stocks. It can also be thought of as the rate of return required by the
market suppliers of capital to attract their funds to the firm.

The cost of capital is an important financial concept that links the firms long-term
investment decisions with the wealth of the owners.
It is a magic number that is used to decide whether a proposed corporate investment will
increase or decrease the firms stock price.
If risk is held constant, projects with a rate of return above the cost of capital will increase the firm
value. If the rate of return is below the cost of capital, firm value will decrease.
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 Project Cost of capital Rate of return Firm value
ACI Ltd. 8% 10% Increase
Lindebd 12% 11% Decrease
Monno Ceramics 9% 13% Increase
BDLamps 11% 7% Decrease

Some Basic Assumptions:

Business riskthe risk to the firm of being unable to cover operating costsis assumed to be
unchanged. This means that the acceptance of a given project does not affect the firms ability to
meet operating costs.
Financial riskthe risk to the firm of being unable to cover required financial obligationsis
assumed to be unchanged. This means that the projects are financed in such a way that the firms
ability to meet financing costs is unchanged.
After-tax costs are considered relevantthe cost of capital is measured on an after-tax basis.

The Cost of Specific Sources:

Cost of debt before tax:

The pre-tax cost of debt is equal to the yield-to-maturity on the firms debt adjusted for flotation
costs.

A bonds yield-to-maturity depends upon a number of factors including the bonds coupon rate,
maturity date, par value, current market conditions, and selling price.

After obtaining the bonds yield, a simple adjustment must be made to account for the fact that
interest is a tax-deductible expense to the issuing firm.

Example:

Suppose a company could issue 9% coupon, 20 year debt with a face value of $1,000 for $980.
Suppose further that flotation costs will amount to 2% of par value.

So the pre-tax cost of debt=

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 =9.39%

Cost of debt after tax:

After tax cost of debt is the relevant cost of new debt, taking into consideration of the tax
deductibility of interest.

After tax cost of debt= before tax cost of debt (1-tax rate)

Example:

If before-tax cost of debt is 9.38% and marginal tax rate is 40%, then after-tax cost of debt will be-

=5.63%

Cost of Preferred Stock:

Cost of preferred stock is the rate of return that the investors require on the firms preferred stock.

Example: ABC Ltd. has issued 11 percent preference shares of the face value of Tk 1000 each to be
redeemed after 10 years. Flotation cost is expected to be 5 percent. Determine the cost of
preference shares.

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 =11.58%

No tax adjustments are made with calculating Kps, because preferred dividends are not tax
deductible.

Cost of Common Equity:

Example:

Suppose ABC Co paid in 2013 10% dividend of common shares with a face value of tk1000 par
share, the expected growth rate is 5%.Each of the share is sold in the market at 980.So-

Cost of newly issued common stock:

Example: Suppose ABC Company issues new common stocks with 10% dividend, face value of the
share is 1000.The cost of issuing the stock is 3%.The expected growth rate is 6%.

Weighted Average Cost of Capital:

Weighted average cost of capital is a weighted average of the component costs of the debt, preferred
stock and common equity.

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Specifically, these weights are the target percentages of debt and equity that will minimize the firms
overall cost of raising funds.

Using the costs previously calculated along with the market value weights, we may calculate the
weighted average cost of capital as follows:

Capital structure of ABC com. Is given below:

Sources Amount Weight

Debt 50,00,000 .50
Preferred stock 30,00,000 .30
Common stock 20,00,000 .20

6. Cost of Capital and Capital Structure of

Olympic industries ltd:

Olympic Industries Ltd did not issued any new ordinary shares and bonds. So we cant calculate any
cost of them.

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The capital structure of Olympic industries Ltd is a mixture of debt and equity.75.83% of its capital
comes from common stock and 24.17% comes from long term loan and lease financing.

6. Findings:

With this report, we have tried to find the financial condition of Olympic Industries
Ltd.Olympics financial condition is very good compared to other industries. Its ratios indicate
that the firm is doing well and there is slight variability in the ratios of 2011-12 to 2012-13.Its
liquidity position is good and asset management condition is not bad.

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7. Conclusion

From this report we have come to know about different things regarding financial statements analysis
of a financial organization. We have been able to have a clear idea about the ratio analysis of a
company and taking decision from the analysis about the future perspectives of the company. With
the help of this report we have been able to know different things about the Square Pharmaceuticals
Limited regarding our analysis. We have analyzed the Financial Statements of Olympic Industries
Limited and with the help of this we have been able to find out the different financial decisions taken
by Olympic Industries Limited. We have also analyzed the capital structure of Olympic Industries
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Limited. Finally, we have compared the ratios of corresponding two years. Thus we have come to an
effective decision about the financial perspectives of Olympic Industries Limited.

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.8.Bibliography:

1. Essentials of Managerial Finance by Scott Besley and Eugene F.

Brigham.
2. Principles of Managerial Finance by Gitman
3. Annual Report of Olympic Industries Limited.

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