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Financial Analysis Financial Analysis

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SSquare quare TTextilesextiles

LLtd.td.

Prepared for:

Dr. Masud Rahman

Professor

Prepared by:

Shehreen Kamal, RQ 03Sumaya Mahmud, RQ18

Nusrat Sharmin Moutusi, RQ 38

BBA 17th Batch

Institute of Business Administration

University of Dhaka

Financial Analysis

Square Textiles Ltd.

Course: Corporate Finance

Letter of Transmittal

Dr. Masud RahmanProfessor BBA Program Institute of Business AdministrationUniversity of Dhaka

RE: Submission of term paper on “Financial Analysis of Square Textiles Ltd.”

Dear Sir

We do hereby feel privileged to submit our term paper on “Financial Analysis of Square Textiles Ltd.”, with an intention to have a better understanding of the course “Corporate Finance”.

We greatly value the opportunity you gave us.

With Regards,

Shehreen Kamal, RQ 03Sumaya Mahmud, RQ18Nusrat Sharmin Moutusi, RQ 38

Acknowledgement

We would like to convey sincere thanks to our teacher and mentor, Dr. Masud Rahman, for

assigning us with an independent term paper that allowed us to explore ‘Corporate Finance’

according to our own interests. This led us to research an important issue such as ‘Financial

Analysis of Square Textiles Ltd’.

Executive Summary

The objective of this case study is to find out the policy decisions made by Square Textiles Ltd. that influenced share price movement. We were also interested to analyze its investment decisions and the impact on share price. We also tried to forecast the share price by identifying growth opportunity of the firm.

Corporate Finance course is planned to comprehend the students with tools and concepts to have a sight of the financial functions and process highlighting the financial analysis.

The particular group conducted the study “Financial Analysis of Square Textiles Ltd” to evaluate and present the current issues regarding the topic. The members of the working group collected data on selected variable.

We got proper guidance and support from our instructor & mentor Dr. Masud Rahman during the course to prepare this term paper. Without your help, this term paper would have been impossible to complete. To prepare the term paper we collected what we believe to be most relevant information to make the term paper as analytical and reliable as possible. We have concentrated our best effort to achieve the objectives of the report and hope that our endeavor will serve the purpose. Throughout the duration of this course, the group members were conducting the study under topic and finally prepared the report.

The practical knowledge and experience gathered during report preparation will immeasurably help in our future professional life. I request you to excuse us for any mistake that may occur in the report despite of our best effort. I would really appreciate if you enlighten the whole group with your thoughts and views regarding the term paper.

The report helped us to understand some of the concepts and understandings that were critical for the successful completion of our course. We hope that the results of the study will be useful to the government, data analyst and other users of data.

Table of ContentsLetter of Transmittal...................................................................................................................................iii

Acknowledgement.........................................................................................................................................iv

Executive Summary........................................................................................................................................v

1.0 Introduction..............................................................................................................................................9

1.1 Square Textiles Ltd. at a glance........................................................................................................................ 9

1.2 Objective of the study............................................................................................................................................ 9

1.3 Limitations of the study........................................................................................................................................ 9

2.0 Methodology...........................................................................................................................................10

2.1 Financial Analysis techniques......................................................................................................................... 10

2.1.1 Bench mark Analysis.................................................................................................................................... 10

2.1.2 Time Series (Trend) Analysis..................................................................................................................... 10

2.1.3 Cross – Section Analysis.............................................................................................................................. 10

2.2 Statistical Techniques......................................................................................................................................... 10

2.3 Nature and Source of Data............................................................................................................................... 11

2.4 Time – Period under Consideration.............................................................................................................. 11

2.5 Standard of comparison.................................................................................................................................... 11

3.0 Analysis & Interpretation of Financial Data...............................................................................11

3.1 Balance Sheet Analysis....................................................................................................................................... 11

3.1.1 Sources of “Discrepancies” in the Balance Sheet............................................................................13

3.2 Cash Flow Analysis............................................................................................................................................... 15

3.2.1 Analysis of the Cash Flow:........................................................................................................................ 16

3.3 Ratio Analysis......................................................................................................................................................... 16

3.3.1 Liquidity Ratio............................................................................................................................................... 17

3.3.2 Asset Management Ratio.......................................................................................................................... 19

3.3.3 Debt Management Ratio........................................................................................................................... 23

3.3.4 Profitability Ratio........................................................................................................................................ 25

3.4 Market Value Ratio.............................................................................................................................................. 28

3.4.1 Market Value / Book Value Ratio.......................................................................................................... 29

4.0 Stock Price Movement.........................................................................................................................31

4.1 Account Closing..................................................................................................................................................... 31

4.2 Dividend Declaration.......................................................................................................................................... 31

4.3 Record Date............................................................................................................................................................. 32

4.4 Annual General Meeting.................................................................................................................................... 32

4.5 M&A Activities........................................................................................................................................................ 32

5.0 Prospective Analysis............................................................................................................................33

5.1 Different Growth Rates...................................................................................................................................... 33

5.1.1 Scenario 1: Growth at Sustainable Growth Rate............................................................................33

5.1.2 Scenario 2: Growth as per Gordon Model..........................................................................................34

5.1.3 Scenario 3: Growth at GDP growth rate.............................................................................................34

5.1.4 Scenario 4: Optimistic................................................................................................................................ 35

5.1.5 Scenario 5: Pessimistic............................................................................................................................... 35

5.2 Choice of Growth Rate........................................................................................................................................ 35

5.3 The Plug Variable................................................................................................................................................. 36

5.4 Weighted Average Cost of Capital................................................................................................................. 36

5.6 Share Price according to Gordon Model.....................................................................................................36

6.0 Findings and Conclusions..................................................................................................................37

6.1 Financial Performance....................................................................................................................................... 37

6.2 Stock Price Movement........................................................................................................................................ 37

6.3 Growth Prospect and Future Share Price.................................................................................................. 37

7.0 Appendix..................................................................................................................................................38

7.1 Regression results................................................................................................................................................. 38

7.1.1 Account closing............................................................................................................................................. 38

7.1.2 Dividend Declaration.................................................................................................................................. 39

7.1.3 Record Date.................................................................................................................................................... 41

7.1.4 AGM.................................................................................................................................................................... 42

7.1.5 M&A Activities................................................................................................................................................ 44

7.2 Weighted Average Cost of Capital................................................................................................................. 45

7.2.1 Calculationβ .................................................................................................................................................. 45

7.2.2 Average Market Return............................................................................................................................. 45

7.3 Financial Statements & Performance Data...............................................................................................46

7.4 References.................................................................................................................................................................... 47

Content of Tables & Figures

Figure 1 Comparison between Market Value & Book Value of Square Textiles Shares.....................13Figure 2 Acid Test Ratio Trend................................................................................................................................... 18Figure 3 Inventory Turnover Trend......................................................................................................................... 20Figure 4 Days Sales Outstanding Trend.................................................................................................................. 21Figure 5 Fixed Asset Turnover Trend....................................................................................................................... 22Figure 6 Total Asset Turnover Trend....................................................................................................................... 23Figure 7 Debt Ratio trend............................................................................................................................................. 24Figure 8 Times Interest Earned Trend.................................................................................................................... 25Figure 9 Profit Margin on Sales Trend.................................................................................................................... 26Figure 10 Return on Assets Trend............................................................................................................................ 27Figure 11 Return on Equity trend............................................................................................................................. 28Figure 12 Price / Earning Ratio Trend................................................................................................................... 29Figure 13 Market Value Book Value Trend........................................................................................................... 30

Table 1 Balance sheet of Square Textiles Ltd. based on book value of share (Figures in Taka)....12

Table 2 Balance sheet of Square Textiles Ltd. based on Market value of share....................................15Table 3 Cash Flow Statement for Square Textiles Ltd. for the year 2009................................................16Table 4 Current Ratio for Square Textiles Ltd. & Apex Spinning & Knitting Mills Ltd.......................17Table 5 Current Ratio Trend........................................................................................................................................ 17Table 6 Acid Test (Quick) Ratio for Square Textiles Ltd. & Apex Spinning & Knitting Mills Ltd....18Table 7 Inventory Turnover for Square Textiles Ltd. & Apex Spinning & Knitting Mills Ltd...........19Table 8 Days Sales Outstanding for Square Textiles Ltd. & Apex Spinning & Knitting Mills Ltd.. .20Table 9 Fixed Asset Turnover of Square Textiles Ltd. & Apex Spinning & Knitting Mills Ltd..........21Table 10 Total Asset Turnover of Square Textiles Ltd. & Apex Spinning & Knitting Mills Ltd........22Table 11 Debt Ratio for Square Textiles Ltd. & Apex Spinning & Knitting Mills Ltd...........................24Table 12 Times Interest Earned for Square Textiles Ltd. & Apex Spinning & Knitting Mills Ltd.. .24Table 13 Profit Margin on Sales for Square Textiles Ltd. & Apex Spinning & Knitting Mills Ltd.. .26Table 14 Return on Assets for Square Textiles Ltd. & Apex Spinning & Knitting Mills Ltd...............26Table 15 Return on Equity for Square Textiles Ltd. & Apex Spinning & Knitting Mills Ltd..............27Table 16 Return on Equity for Square Textiles Ltd. & Apex Spinning & Knitting Mills Ltd..............28Table 17 Market / Book Value for Square Textiles Ltd. & Apex Spinning & Knitting Mills Ltd......29

1.0 Introduction

This case study is prepared with an intention to meet partial requirement of the course ‘Corporate Finance’ and to have a better insight of the subject matter. We have chosen Square textiles Ltd., one of the leading yarn manufacturers of the country for this purpose. We performed an analysis of the company and tried to evaluate its justification with the acquired knowledge from this course.

1.1 Square Textiles Ltd. at a glanceSquare Textiles Ltd. was established as a public company in 1994. As a group company Square Group with a business line of manufacturing and marketing of yarn. The company started its operation on 1997 and was listed at both Dhaka Stock Exchange and Chittagong Stock Exchange in 2004. At the end of 2009 paid-up capital of the company was Tk. 705.84 million with 70,584,053 shares outstanding. The company is very profitable and doing very good in terms of share price also. Dividend payout in both cash and bonus share form has also been very consistent through the last few years.

Square Textiles got Oeko-Tex Standard 100 and ISO-9002 certification in 2000.

At end of 2009, the production capacity of the company stands at 11,582,899 Kg Ring Yarn and 12,329,688 Kg of O/E yarn.

1.2 Objective of the study

The objective of this Case Study is to: Identify policy decisions that has an impact on share price movement Relate consequences of financial activities with the valuation of the firm

1.3 Limitations of the study

Like all other term papers, this too has got its limitations. Following are the areas where we had our limitations

Unable to conduct direct interview with Square Textiles employees to get a better insight of our findings.

Unavailability of information in a “Soft Copy” which consumed lot of time. No information was available on the overall market share in the yarn industry in

Bangladesh. Moreover, the industry averages were not also available which would have been a better option to compare with.

Financial year of Square Textiles and ASKML ends in different months which can create inaccuracies in cross-section analysis

Due to time constraint, cross section analysis was done only for last year. It would be better if it was compared for last 7 years.

Due to unavailability of project data, we could not perform an analysis of investment decisions made by Square Textiles

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2.0 Methodology

There are a number of methods and techniques which were used towards reaching a conclusion.-

2.1 Financial Analysis techniques

A balance sheet analysis was performed to identify the sources of discrepancies in balance sheet that

causes book value and market value of share to be different.

A cash flow analysis was performed to study the cash dealings of the firm and to identify its financial

position.

We also performed a ratio analysis to evaluate the firm’s financial strengths or weaknesses. The most

prominent Financial Analysis techniques include the following 3 methods: -

2.1.1 Bench mark Analysis

This method is literally unusable in Bangladesh as no industry data is widely available regardless of any

sector. This led to high dependency on the remaining two methods.

2.1.2 Time Series (Trend) Analysis

The time series analysis is predominantly known as “Trend Analysis”, where we try to find a trend of a

specific performance of the company. Different ratios are computed over time and comment is made

whether any increasing / decreasing trend is found.

2.1.3 Cross – Section Analysis

In this type of analysis, Company’s financial ratios are compared with other industry ratio averages. This

can also be performed by issuing comparison between two companies of similar business.

For the sake of the case study, we will perform Time Series analysis on the seven year data that we have

and a Cross Section analysis between our company of interest Square Textiles Ltd. and Apex Spinning &

Knitting Mills Ltd (ASKML).

2.2 Statistical Techniques

To relate share price movement with different events or policy decisions e.g. account closing, record date,

dividend declaration, AGM etc. we relied on simple regression by populating dummy variable against the

event.

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2.3 Nature and Source of Data

The data used in this study is secondary data collected from annual reports and Dhaka Stock Exchange web

site and data archive

2.4 Time – Period under Consideration

We collected seven (08) years of data of Square Textiles Ltd., and considered data from 2003 to 2010. For

enquiry into share price movement we’ve used only the data from 2008 – 2010 since news about different

events were only available for this period. For trend analysis, we used data of 2003 – 2009 since annual

report of 2010 is yet to be published. We accept that only seven year data is not good enough to comment

on the financial performance of the company, but it can at least give us a glimpse of the recent trend that

the company is going through.

2.5 Standard of comparison

As the industry benchmark was not available to us, we decided to compare the ratios of our company with

that of another one. We chose Apex Spinning & Knitting Mills Ltd. for the comparison as this company’s

performance was the best among the companies whose data were available.

3.0 Analysis & Interpretation of Financial Data

3.1 Balance Sheet Analysis

The Balance Sheet shows the financial position of a firm at a specific point in time. The financial statement

indicates the investments 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 borrowing (which is actually the Liabilities part of a

Balance Sheet) or by selling ownership shares or common shares or common stocks (which is basically the

Equity part of a Balance Sheet). 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.

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Balance SheetAssets Liabilities and EquitiesCurrent Assets Current LiabilitiesStocks 942,568,134 Short Term Bank Loan 573,802,358

Trade Debtors 1,683,329,048 Short Term Loan 552,993,073

Short Term Loan 431,848,649 Sundry Creditors 870,756,515

Advance, Deposits and Prepayments

120,651,506 Other Current Liabilities 170,321,074

Cash & Bank Balances 46,332,373 Provision for income tax 108,728,783Total Current Assets 3,224,729,710 Total Current Liabilities 2,276,601,803

Fixed Assets Non-current LiabilitiesAssets at Cost Less Depreciation 1,378,552,606 Deferred Tax Liability 112,276,486Investment-Long Term (At Cost) 105,000,000 Total Liabilities 2,388,878,289Share Money Deposit 800,000,000 EquitiesTotal Fixed Assets 2,283,552,606 Share capital 705,804,530

General Reserve and Surplus 2,413,563,497

Tax Holiday -Total Equities 3,119,404,027

Total Assets 5,508,282,316 Total Liabilities & Equities 5,508,282,316Table 1 Balance sheet of Square Textiles Ltd. based on book value of share (Figures in Taka)

The above table shows the Balance Sheet of Square Textiles Ltd. as presented in their annual report.

According to this balance sheet the book value of Square Textiles shares for the day December 31, 2009

should be 44.19 Taka. But in reality we can see that the actual market price on that day was much higher

than that, 111.54 Taka.

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Figure 1 Comparison between Market Value & Book Value of Square Textiles Shares

Having a look at the trend analysis of the market value and book value of Square Textiles Ltd., it was found

that the Market value has been much higher than the book value by a huge margin. These values indicate

that there exists some sort of discrepancy between these two types of values. Our intention is to identify

these discrepancies and thus propose a Balance Sheet based on the Market Value.

3.1.1 Sources of “Discrepancies” in the Balance Sheet

In order to identify the sources of discrepancies we now concentrate on the Balance Sheet for the year

2009, of Square Textiles Ltd. After a thorough analysis of balance sheet items, the following items were

identified as factors contributing towards raising discrepancies between the book value and market value: -

Fixed Assets are “Undermined”: The financial statements have been prepared under the historical cost

convention and fixed assets are stated at cost less accumulated depreciation. But, as suggested by the Time

Value of Money concept, price changes as time passes. Moreover, the depreciation was charged using the

Straight – Line method. From this analysis above we reach to a conclusion that the values of fixed assets are

undermined. The asset composition shows that a significant 30% of fixed assets are land and building which

have been recorded at historical cost. But over the years these assets’ market price has significantly

increased which has not been reflected in the balance sheet.

No Intangible Assets section: It was found that the company did not incorporate any Intangible assets in

the balance sheet. One of the most important intangible assets is “Trademark” which was not considered in

preparing the balance sheet. Square Textiles Ltd. is in operation in Bangladesh for the last 11 years, since

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1997, and has been holding a healthy position for last several years. They have been profitable with a fair

performance in share market also. So, this is certainly an evidence of their goodwill which should be valued.

The firm recently acquired Mithapur Textiles and also merged with Square Spinning Ltd. These M&A

activities have been recorded as cost/share price. But the brand value acquired from these activities has not

been recorded.

Equity “Understated”: As we can find from the balance sheet here that equity of Square Textiles Ltd. has

been severely understated. The company calculates its equity from the period of 2004 when it was first

listed with Dhaka Stock Exchange, but with reference to the Time Value of Money concept the equity has

increased a lot over this period of time. Gain from price increase in land and building has not been

recognized.

Upon identifying the above mentioned discrepancies, we adjusted the balance sheet in terms of the market

value of stocks. In order to standardized in terms of market value the following three values were changed

in the original balance sheet.

The Value of Assets Less Depreciation was changed from taka 1,378,552,606 to Taka 4,132,057,851

Goodwill was added valued as taka 2,000,000,000.

General Reserve and Surplus has been changed from 2,413,563,497 taka to 7,167,104,742 taka.

As a result the Total Assets and Total Liabilities & Equities sides balanced at taka 10,261,787,561.

Balance SheetAssets Liabilities and EquitiesCurrent Assets Current LiabilitiesStocks 942,568,134 Short Term Bank Loan 573,802,358Trade Debtors 1,683,329,048 Short Term Loan 552,993,073Short Term Loan 431,848,649 Sundry Creditors 870,756,515Advance, Deposits and Prepayments 120,651,506 Other Current Liabilities 170,321,074Cash & Bank Balances 46,332,373 Provision for income tax 108,728,783Total Current Assets 3,224,729,710 Total Current Liabilities 2,276,601,803

Fixed Assets Non-current LiabilitiesAssets Less Depreciation 4,132,057,851 Deferred Tax Liability 112,276,486Investment-Long Term (At Cost) 105,000,000 Total Liabilities 2,388,878,289Share Money Deposit 800,000,000Intangible Assets 2,000,000,000 EquitiesTotal Fixed Assets 7,037,057,851 Share capital 705,804,530

General Reserve and Surplus 7,167,104,742

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Tax Holiday -Total Equities 7,872,909,272

Total Assets 10,261,787,561 Total Liabilities & Equities 10,261,787,561Table 2 Balance sheet of Square Textiles Ltd. based on Market value of share

3.2 Cash Flow Analysis

The statement of cash flows is designed to show how the firm’s operations have affected its cash position

by examining the investment and financing decisions of the firm. Often time, the information contained in

the statement of cash flows answer questions like: Is the firm generative the cash needed to purchase

additional fixed assets for growth? Does it have excess cash flows that can be used to repay debt or to

invest in new products? Information contained in the Cash Flow Statement is useful both for financial

managers and investors. Following is the cash flow analysis of Square Textiles Ltd.:-

2009 2008Cash flow from operating activitiesReceipts:Cash from sales revenue 3,888,585,244 2,763,272,886Cash from other income 259,007 23,676

Total cash receipts 3,888,844,251 2,763,296,562

Payments:Purchase for raw & packing materials (2,840,712,628) (1,951,063,214)Manufacturing & operating expense (517,209,344) (482,296,269)Finance Cost (112,410,317) (114,091,254)Income tax (41,934,432) (77,675,961)Workers profit participation fund (16,355,199) (13,369,264)

Total payment (3,528,621,920) (2,638,495,962)

Net Cash Flow From Operating Activities 360,222,331 124,800,600

Cash flow from investing activitiesCash flow from investing activitiesPurchase of fixed assets (97,332,491) (130,606,406)Profit from disposal of Fixed Assets 295,000 1,047,111Cash Receiver from Merger of SSL (10,000,000) 13,198,790Net Cash Flow From Investing Activities (107,037,491) (116,360,505)

Cash flow from financing activitiesShort term Bank loan (203,726,227) (27,451,291)Short term loan from/(to) sister Concern 58,058,364 129,959,939Payment of Dividend (105,876,079) (98,583,425)Net Cash Flow From Financing Activities (251,543,942) 3,925,223

Net cash position 1,640,898 12,365,318Opening cash & cash equivalents 44,691,475 32,326,157

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Closing Cash & Cash Equivalent 46,332,373 44,691,475Table 3 Cash Flow Statement for Square Textiles Ltd. for the year 2009

3.2.1 Analysis of the Cash Flow:

Net Cash Flow from Operating Activities: The net cash flow from operating activities was much higher than

previous year mainly due to increase in sales which shows a good sign for the company.

Net Cash Flow from Investment Activities: There is no significant change in net cash flow from investment

activities compared to the previous year.

Net Cash Flow from Financing Activities: The company has paid off a large amount of short term loan

which caused a large amount of cash outflow..

Net cash after 2009 position is weaker than 2008 even after a significant rise in sales. This happened mainly

due to paying off a large amount of short term loan.

3.3 Ratio Analysis

The real value of financially statements lies in the fact that they can be used to help predict a firm’s

financial position in the future and to determine expected earnings and dividends. An analysis of the firm’s

ratios generally is the first step in a financial analysis. The ratios are designed to show relationships

between financial statement accounts within firms and between firms.

Sources for these ratios are the company Financial Statements within the industry that contains figures on

assets, liabilities, profits, and losses. Industry ratios are only meaningful when compared with other

information. Since individual companies are most often compared with industry data, ratios help an

individual understand a company's performance relative to that of competitors and are often used to trace

performance over time.

There are 5 major categories when ratio analysis is considered. These categories are:

Liquidity Ratio which gives a picture of a company’s short term financial situation or solvency.

Asset Management Ratio uses turnover measures to show how efficient a company is in its operations and

use of assets.

Debt Management Ratio shows the extent that debt is used in a company's capital structure.

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Profitability Ratio uses margin analysis and show return on sales and capital employed.

Market Value Ratio shows company’s standing in the capital market.

3.3.1 Liquidity Ratio

Liquid asset is an asset that can be converted to cash without significant loss of its original value. This

basically indicates the strength of a company in terms of meeting the current obligations or liabilities, e.g.

employee salary. Sometimes low liquidity even leads to bankruptcy. Two commonly used Liquidity Ratios

are (1) Current Ratio and (2) Acid Test Ratio.

Current RatioCurrent Ratio is the ratio of current assets to current liabilities, which refers to the short term solvency of

the company and calculated as: -

Company Square Textiles Ltd. ASKMLYear 2009 2008 2007 2006 2005 2004 2003 2009Current Ratio 1.35 1.21 1.38 1.12 1.41 1.14 1.01 1.10

Table 4 Current Ratio for Square Textiles Ltd. & Apex Spinning & Knitting Mills Ltd.

We can see from the above data that the current ratio for Square Textiles is 1.35, which is below the

benchmark standard for any company. But comparing with Apex Spinning & Knitting Mills Ltd., it is higher

as Apex Spinning & Knitting Mills Ltd. has a Current Ratio of 0.89.

Table 5 Current Ratio Trend

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The trend line of current ratio for Square textiles shows that the company has maintained a somewhat

steady current ratio for the last 7 years and also there has been improvement in current ratio from last

year.

Acid Test Ratio (Quick) Ratio

Acid Test Ratio is a better measure than Current Ratio as it deducts inventories from Current assets and thus

provides a better idea about the liquidity of the firm. It is calculated as follows:

Company Square Textiles Ltd. ASKMLYear 2009 2008 2007 2006 2005 2004 2003 2009Acid Test Ratio 0.96 0.76 0.96 0.73 0.91 0.80 0.75 0.76

Table 6 Acid Test (Quick) Ratio for Square Textiles Ltd. & Apex Spinning & Knitting Mills Ltd.

Currently Square Textiles is maintaining a quick ratio of 0.96, which is lower than the Benchmark ratio of 1.

But comparing with Apex Spinning & Knitting Mills Ltd., it is much higher as Apex Spinning & Knitting Mills

Ltd. has a Quick Ratio of 0.075.

Figure 2 Acid Test Ratio Trend

As we can see from the graph above, the quick ratio trend is not steady. It may indicate that the company

has gone for multiple projects/investments in last few years. The company’s quick ratio is pretty much close

to the benchmark of 1.

Overall Comment on Liquidity

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The overall liquidity position of the company is not very good but it is getting better. Both the ratios have

increased in 2009. Considering the length of operation of Square Textiles the performance is quite good

especially in terms of quick ratio as it is pretty close to benchmark. The kind of ups and downs found in the

trend analysis is mainly due to the fact that the company has gone for multiple projects/investments in last

few years. This eventually is good news for a firm like Square Textiles who has very strong financial support

from the group. Also the company’s position is much better compared to Apex Spinning & Knitting Mills.

3.3.2 Asset Management Ratio

Whether the assets of the company are being used effectively or in other words is able to generate sales, is

suggested by the asset management ratio.

Inventory Turnover

It shows that how many times the inventory of a firm is sold and replaced in a specific period.

Company Square Textiles Ltd. ASKMLYear 2009 2008 2007 2006 2005 2004 2003 2009Inventory Turnover 3.55 2.04 3.39 4.18 3.79 5.14 5.28 9.56

Table 7 Inventory Turnover for Square Textiles Ltd. & Apex Spinning & Knitting Mills Ltd.

The inventory turnover for Square Textiles is 3.55 whereas, Apex Spinning & Knitting Mills Ltd. has inventory

turnover of 9.56. So, in this regard, Square Textiles is in a much worse position.

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Figure 3 Inventory Turnover Trend

The trend line does not look very impressive. Inventory turnover is getting lower. This might be due to

increasing price of raw materials and also due to price reduction to cope up with the competitive market.

However, there is a very sharp rise from 2008 to 2009. This can primarily be attributed to the handsome

increase in export sales.

Days Sales OutstandingDays Sales Outstanding refers to the average time a company takes to turn the receivables into cash.

Company Square Textiles Ltd. ASKMLYear 2009 2008 2007 2006 2005 2004 2003 2009DSO 158.26 202.06 117.67 114.36 115.52 123.93 145.83 54.16

Table 8 Days Sales Outstanding for Square Textiles Ltd. & Apex Spinning & Knitting Mills Ltd.

During the last year Square Textiles had a DSO of 158.26 days whereas, Apex Spinning & Knitting Mills Ltd.

has DSO of 54.16 days. So, in this regard, Square Textiles is in a much worse position.

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Figure 4 Days Sales Outstanding Trend

The trend analysis shows that during the period 2008 Square Textiles had the worst DSO of 202.06. in 2009,

it improved a bit. But DSO is still too high. This may be due to the fact that most of Square Textiles’ dales

are export sales which naturally take longer to be collected.

Fixed Asset TurnoverThis ratio refers to how much sales or revenue is generated by employing the fixed assets of the company.

Company Square Textiles Ltd. ASKMLYear 2009 2008 2007 2006 2005 2004 2003 2009Fixed Asset Turnover 1.70 1.29 1.62 1.54 2.00 2.08 1.73 4.63

Table 9 Fixed Asset Turnover of Square Textiles Ltd. & Apex Spinning & Knitting Mills Ltd.

Square Textiles had Fixed Asset Turnover Ratio of 1. 70, which means their Taka 1 of fixed asset can

generate taka 1.70 of sales whereas, Apex Spinning & Knitting Mills Ltd. has Fixed Asset turnover of 4.63.

So, in this regard, Square Textiles is in a much worse position. But a further inquiry shows that ASKML is

very low on fixed assets, which is an indication of off-balance sheet financing. On the other hand, Square

Textiles did not go for leasing option.

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Figure 5 Fixed Asset Turnover Trend

The trend analysis shows that Square Textiles’ Fixed Asset Turnover deteriorated for during 2007 and 2008.

But in 2009 it got a little better.

Total Asset TurnoverLike the fixed asset, this ratio refers to how much sales or revenue is generated by employing the fixed

assets of the company.

Company Square Textiles Ltd. ASKMLYear 2009 2008 2007 2006 2005 2004 2003 2009Total Asset Turnover 0.70 0.53 0.73 0.84 0.92 0.97 0.84 1.93

Table 10 Total Asset Turnover of Square Textiles Ltd. & Apex Spinning & Knitting Mills Ltd.

Square Textiles had Total Asset Turnover Ratio of 0.70, which means their Taka 1 of total asset can

generate taka 0.70 of sales whereas, Apex Spinning & Knitting Mills Ltd. has Total Asset turnover of 1.93.

This is once again due to the fact that ASKML has opted for off-balance sheet financing

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Figure 6 Total Asset Turnover Trend

The total asset turnover of Square Textiles was increasing during the period 2003-2004 but then it started

to drop and reached a lowest in 2008. It stands at 0.70 in 2009, which shows a turning point in turnover

trend.

Overall Comment on Asset ManagementSquare Textiles is in a worse position than Apex Spinning & Knitting Mills Ltd. in all the Asset Management

Ratio, except for DSO. Though high DSO is explainable, but the other ratios are not impressive at all.

It seems that the company is not managing its assets very well though there is an indication that the

company is getting better in asset management.

3.3.3 Debt Management Ratio

Debt Management Ratios judge the debt management performance of a company. If a company goes for

too much debt for financing its operations, it might end up in a very hard financial situation.

Debt RatioThe Debt Ratio measures the percent of total funds provided by creditors. Debt includes both current

liabilities and long-term debt.

Company Square Textiles Ltd. ASKMLYear 2009 2008 2007 2006 2005 2004 2003 2009Debt 43.37 48.95 39.70 40.69 38.26 46.82 50.67 53.07

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Ratio % % % % % % % %Table 11 Debt Ratio for Square Textiles Ltd. & Apex Spinning & Knitting Mills Ltd.

Square Textiles Ltd. has a much lower debt ratio than Apex Spinning & Knitting Mills Ltd. Last year the debt

ratio of Square Textiles Ltd. was 43.37% which is lower than the industry recommended average of 50%. It

looks like the company prefers capital financing to debt financing.

Figure 7 Debt Ratio trend

The trend analysis shows that Square Textiles Bangladesh had a high debt ratio at the end of the year 2003.

But after that the debt ratio has started to go down dramatically. This is actually a very good sign for the

company. The company is managing debt in very efficient way.

Times Interest Earned

Company Square Textiles Ltd. ASKMLYear 2009 2008 2007 2006 2005 2004 2003 2009TIE 3.56 3.53 4.88 6.22 6.85 4.26 2.46 2.06

Table 12 Times Interest Earned for Square Textiles Ltd. & Apex Spinning & Knitting Mills Ltd.

Last year Square Textiles Ltd. had Times Interest Earning of 3.56. It means that Square Textiles Ltd. has got

Taka 3.56 to pay interest of Taka 1 whereas Apex Spinning & Knitting Mills Ltd. had TIE of 2.06. In this

respect Square Textiles Ltd. was in a better position.

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Figure 8 Times Interest Earned Trend

Square Textiles have maintained a pretty good TIE for the last 7 years. From the trend, it is seen that TIE

declined between 2005 and 2008. But last year it improved a bit.

Overall comment on Debt ManagementDebt Ratio of Square Textiles Ltd. is much lower than Apex Spinning & Knitting Mills Ltd. It is less than the

benchmark of 50%. This indicates that Square Textiles Ltd. is not a highly levered firm.

Square Textiles Ltd. had much lower debt ratio last year. Higher profitability might be the reason for what

Square Textiles Ltd. did not take more loans.

Last year Square Textiles Ltd. had much high TIE, which can also be justified by high profit of the last year.

Square Textiles’ overall debt management performance is very impressive which is very good news for the

company.

3.3.4 Profitability Ratio

Profitability is the company's ability to generate revenues in excess of the costs incurred in producing those

revenues. Profitability Ration is the measure of performance showing how much the firm is earning

compared to its sales, assets or equity.

Profit Margin on Sales

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Company Square Textiles Ltd. ASKMLYear 2009 2008 2007 2006 2005 2004 2003 2009Profit Margin 6.71% 7.75% 13.87% 13.31% 10.69% 8.08% 7.98% 0.87%

Table 13 Profit Margin on Sales for Square Textiles Ltd. & Apex Spinning & Knitting Mills Ltd.

Last year, Square Textiles had profit margin of 6.71%. It means by utilizing Taka 100 of sales, it can have net

income of Taka 6.71. The profit margin of Square Textiles is much better compared to Apex Spinning &

Knitting Mills.

Figure 9 Profit Margin on Sales Trend

The trend analysis shows that Square Textiles profit margin had been increasing till 2007. But for the last 2

years, we see a declining trend. Though sales has increased in last few years, the profit margin has gone

down due to decline in price of finished goods and also due to increase in raw material price

Return on Asset

Company Square Textiles Ltd. ASKMLYear 2009 2008 2007 2006 2005 2004 2003 2009ROA 4.73% 4.07% 10.12% 11.18% 9.88% 7.83% 6.71% 1.68%

Table 14 Return on Assets for Square Textiles Ltd. & Apex Spinning & Knitting Mills Ltd.

Last year, it had Return on Asset of 4.73%. It means by utilizing Taka 100 of asset, it can have net income of

Taka 4.73. ROA of Square Textiles also was much better than Apex Spinning & Knitting Mills.

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Figure 10 Return on Assets Trend

ROA dropped drastically during 2008. In 2009, it regained a little. This is also due to decreased profitability

caused by price increase of raw materials and price cut for finished goods

Return on Equity

Company Square Textiles Ltd. ASKMLYear 2009 2008 2007 2006 2005 2004 2003 2009

ROE 8.36% 7.98%17.44

%19.70

%16.88

%14.72

%13.61

% 3.49%Table 15 Return on Equity for Square Textiles Ltd. & Apex Spinning & Knitting Mills Ltd.

Last year, it had Return on Equity of 8.36%. It means by utilizing Taka 100 of total equity available to

common shareholders, it can have net income of Taka 8.36. ROE of Square Textiles was better than Apex

Spinning & Knitting Mills’ ROE of 3.49%.

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Figure 11 Return on Equity trend

The ROE trend is quite similar to ROA.

Overall comment on profitabilitySquare Textiles has been a profitable company almost since its establishment and during the past few years

the Profit Margin ratio has improved a lot. But in last couple of years, profitability has gone down to

changing economy. But still the firm has considerable offset compared to its competitor.

3.4 Market Value Ratio

Market value is the most critical ratio while making any kind of investment decision about the company.

Price / Earning Ratio

Company Square Textiles Ltd. ASKMLYear 2009 2008 2007 2006 2005 2004 2003 2009P/E Ratio 30.23 24.90 14.25 8.54 12.61 27.44 10.12 48.02

Table 16 Return on Equity for Square Textiles Ltd. & Apex Spinning & Knitting Mills Ltd.

P/E Ratio of Square Textiles Ltd. in the last year was higher than that of Apex Spinning & Knitting Mills Ltd.

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Figure 12 Price / Earning Ratio Trend

P/E Ratio of Square Textiles Ltd. climbed up in the last year from 2008. The company has maintained a

healthy P/E ratio for the last 7 years.

3.4.1 Market Value / Book Value Ratio

Company Square Textiles Ltd. ASKMLYear 2009 2008 2007 2006 2005 2004 2003 2009M/B Ratio 2.52 2.34 2.49 1.46 1.65 2.84 0.97 1.67

Table 17 Market / Book Value for Square Textiles Ltd. & Apex Spinning & Knitting Mills Ltd.

M/B Ratio of Square Textiles Ltd. is higher than that of Apex Spinning & Knitting Mills Ltd.

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Figure 13 Market Value Book Value Trend

M/B trend shows that for Square Textiles Ltd. it was steady for last 3 years after some ups and downs in the

earlier years.

Overall comment on Market ValueSquare Textiles’ P/E ratio of last 7 years suggest that shareholders are willing to spend a much higher price for the company’s shares compared to the earnings. This indicates trust on the company. All the previous ratios also suggest that the company is doing quite well for last several years. The company’s performance has gained trust among the share market investors and as a result the share price is quite high compared to book value which is also reflected in M/B ratio.

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4.0 Stock Price Movement

In this section of the report, we try to relate stock price movement with different events/corporate decisions like AGM, account closing, dividend declaration, M&A etc. by doing a simple regression of share price against a dummy variable populated indicating the event. The value of the dummy variable is taken as 0 for all dates before the event and 1 for all dates after the event. Regression was done with a 95% confidence interval.

4.1 Account Closing

Year R2 FSignificance

FCo-efficient

P-Value of Co-

efficient2008 0.78464 134.805 6.73182E-14 13.3031746 6.73182E-

142009 0.207308 10.46094 0.002447 -4.07143 0.0024472010 0.006267 0.239632 0.627286 0.3 0.627286

There is significant statistical evidence that the share price was positively correlated with account closing in 2008. And we also see a significant negative correlation in 2009. But there is no statistical evidence that the share price was correlated to account closing in 2010.

4.2 Dividend Declaration

YearDividend

PaidR2 F

Significance F

Co-efficient

P-Value of Co-

efficient

200825% Cash

20% Bonus

0.1537 5.993255 0.019845 4.672222 0.019845

200918% Cash

20% Bonus

0.300204 17.58851 0.000143 -3.59545 0.000143

201016% Cash

15% Bonus

0.565958 53.46095 6E-09 -10.7548 6E-09

We see significant positive correlation between dividend declaration and share price in 2008. In later years the correlation is more significant and there is an increase in R2 which indicates the correlation becoming higher. If we observe the dividend payout for these years, we find that the company has declared lesser and lesser dividends in the later years and the relation is

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significantly negative. This suggests that the stockholders definitely did not like the decrease in dividend payout.

4.3 Record Date


FCo-efficient

P-Value of Co-

efficient2008 0.298928 16.62913 0.000217 -8.16857 0.0002172009 0.965318 1196.835 5.04E-33 -15.7315 5.04E-332010 0.886335 304.1134 5.17E-20 -13.826 5.17E-20

The regression results indicate significant negative relation between record date and share price. Decrease in share price after record date is mainly due to that fact that shareholders who likes to get dividends holds the share until record date and sells them afterwards.

4.4 Annual General Meeting


FCo-efficient

P-Value of Co-

efficient2008 0.158764 7.549105 0.00896 -5.84909 0.008962009 0.131547 6.36187 0.015537 -3.83354 0.0155372010 0.581957 55.68386 4.3E-09 9.795 4.3E-09

The regression results indicate significant relation between AGM and share price. However the relation was negative in 2008 and 2009 while we find a significant positive correlation in year 2010. The change in sign of correlation cannot be explained with available data.

4.5 M&A ActivitiesApart from the regular annual events, we were interested to observe the effect on share price caused by 2 very big decisions made by Square Textiles in recent years: merger with Square Spinning Ltd. and acquisition of Mithapur Textiles Ltd.

Decision R2 FSignificance

FCo-

efficient

P-Value of Co-

efficientMerger with

Square Spinning Ltd.

0.392191 23.22916 2.6E-05 -3.91818 2.6E-05

Acquisition of Mithapur Textiles

Ltd.0.000123 0.004814 0.945042 -0.0599 0.945042

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The Regression analysis shows that the stockholders did not like the merger between Square Textiles and Square Spinning Ltd. On the other hand, they were indifferent about the takeover of Mithapur Textiles.

5.0 Prospective Analysis

5.1 Different Growth RatesIt is important to identify a practicable growth rate of a firm to be able to forecast its share price in future. Different growth scenarios create different effect on share price. In this study we first consider the following growth scenarios to observe the effect:

Scenario 1: Growth at Sustainable Growth Rate

Scenario 2: Growth as per Gordon Model

Scenario 3: Growth at GDP Growth Rate

Scenario 4: Optimistic Growth Rate

Scenario 5: Pessimistic Growth Rate

5.1.1 Scenario 1: Growth at Sustainable Growth Rate

Sustainable Growth Rate, gs =

Where, p = Profit Margin on Salesd = Dividend Payout RatioD/E = Debt Equity RatioT =Ratio of total assets to salesIn our case, gs = 1.36%Table: 3 yrs Forecast at g = gs 2009 2010 2011 2012Sales 3,882,244,01

03,935,002,59

33,988,478,15

04,042,680,42

4Net Income 260,634,002 264,175,943 267,766,019 271,404,882Dividend 218,810,564 221,784,137 224,798,120 227,853,062Addition to Retained Earnings 41,823,438 42,391,806 42,967,899 43,551,820Total Assets 5,508,282,31

65,583,138,29

35,659,011,54

25,735,915,88

6Total Debt 2,388,878,28

92,421,342,46

02,454,247,81

02,487,600,33

4Common Stock 705,840,530 705,840,530 705,840,530 705,840,530Retained Earnings 2,413,563,49

72,455,955,30

32,498,923,20

22,542,475,02

2Total Financing 5,508,282,31 5,583,138,29 5,659,011,54 5,735,915,88

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6 3 2 6External Funds Needed 0 0 0 0Debt: Equity Ratio 0.77 0.77 0.77 0.77Sustainable Growth Rate 1.36% 1.36% 1.36% 1.36%EPS 3.69 3.74 3.79 3.85Price (P/E = 30.227) 111.61 113.13 114.67 116.23

5.1.2 Scenario 2: Growth as per Gordon Model

According to Gordon Model, g=Retention Rate × ROEIn our case, Retention Rate = 16%

ROE = 8.36%

So, Growth Rate, g = 1.34%

Table: 3 yrs Forecast at g = 1.34% 2009 2010 2011 2012Sales 3,882,244,01

03,934,149,61

23,986,749,19

34,040,052,02


65,581,928,05

15,656,558,42

95,732,186,61

5Total Debt 2,388,878,28

92,420,817,59

22,453,183,92

32,485,982,99


72,455,946,11

42,498,895,38

72,542,418,89

1Total Financing 5,508,282,31

65,582,604,23

65,657,919,84

05,734,242,41

3External Funds Needed 0 -583,858 -1,175,539 -1,775,149Debt: Equity Ratio 0.77 0.77 0.77 0.76Sustainable Growth Rate 1.36% 1.36% 1.36% 1.36%EPS 3.69 3.74 3.79 3.84Price (P/E = 30.227) 111.61 113.11 114.63 116.16

5.1.3 Scenario 3: Growth at GDP growth rate

GDP growth rate = 5.8%

Table: 3 yrs Forecast at g = 5.8% 2009 2010 2011 2012Sales 3,882,244,01

04,107,414,16

34,345,644,18

44,597,691,54

7

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Net Income 260,634,002 275,750,774 291,744,319 308,665,490Dividend 218,810,564 231,501,577 244,928,668 259,134,531Addition to Retained Earnings 41,823,438 44,249,197 46,815,651 49,530,958Total Assets 5,508,282,31

65,827,762,69

06,165,772,92

66,523,387,75

6Total Debt 2,388,878,28

92,527,433,23

02,674,024,35

72,829,117,77


72,457,812,69

42,504,628,34

52,554,159,30


65,691,086,45

45,884,493,23

26,089,117,60

3External Funds Needed 0 136,676,236 281,279,695 434,270,153Debt: Equity Ratio 0.77 0.84 0.92 1.00Sustainable Growth Rate 1.36% 1.42% 1.48% 1.54%EPS 3.69 3.91 4.13 4.37Price (P/E = 30.227) 111.61 118.09 124.94 132.18

5.1.4 Scenario 4: Optimistic

We assume an optimistic growth rate of 20%

Table: 3 yrs Forecast at g = 20% 2009 2010 2011 2012Sales 3,882,244,01

04,658,692,81

25,590,431,37

46,708,517,64


66,609,938,77

97,931,926,53

59,518,311,84

2Total Debt 2,388,878,28

92,866,653,94

73,439,984,73

64,127,981,68


72,463,751,62

22,523,977,37

32,596,248,27


66,036,246,09

96,669,802,63

97,430,070,48

6External Funds Needed

0 573,692,6801,262,123,89

62,088,241,35

6Debt: Equity Ratio 0.77 1.09 1.46 1.88Sustainable Growth Rate 1.36% 1.61% 1.89% 2.23%EPS 3.69 4.43 5.32 6.38Price (P/E = 30.227) 111.61 133.94 160.72 192.87

5.1.5 Scenario 5: Pessimistic

We assume a pessimistic growth rate of -10%

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Table: 3 yrs Forecast at g = -10% 2009 2010 2011 2012Sales 3,882,244,01

03,494,019,60

93,144,617,64

82,830,155,88


64,957,454,08

44,461,708,67

64,015,537,80

8Total Debt 2,388,878,28

92,149,990,46

01,934,991,41

41,741,492,27


72,451,204,59

12,485,081,57

52,515,570,86


65,307,035,58

15,125,913,52

04,962,903,66

4External Funds Needed 0 -349,581,497 -664,204,844 -947,365,856Debt: Equity Ratio 0.77 0.57 0.40 0.25Sustainable Growth Rate 1.36% 1.21% 1.07% 0.96%EPS 3.69 3.32 2.99 2.69Price (P/E = 30.227) 111.61 100.45 90.41 81.37

5.2 Choice of Growth RateIn the earlier scenarios, we see that high growth rate is not sustainable and it requires a very high D/E ratio which is not desired. In the trend analysis section, we found that the firm maintains a Debt Ratio below 50%. Considering this capital structure policy, it is very less likely that the company will go for debt financing to achieve high growth rates.

We also found out that the sustainable growth rate is also quite similar to the growth rate found from Gordon Model. So, it seems that the firm is actually looking to grow at sustainable growth rate. So, we take the sustainable growth rate to predict future stock price of the company.

5.3 The Plug VariableAs the company policy is to keep the debt ratio below a certain level, the company has been changing the dividend payout ratio every year. So, dividend payout is the plug variable here.

5.4 Weighted Average Cost of CapitalFrom the financial reports, we find that the cost of debt is 15.8%

To find out the cost of equity, we take help of CAPM which says that

Cost of equity, Rj = Rf + (Rβ m – Rf)

Where,

Rf = Risk free return

=β company risk

Rm = Average market return

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We consider risk free rate as 8% which is the average rate of return of bonds.

To calculate Rm and , we took monthly closing DSE index and share price of Square Textiles.β From regression, β = 0.76

Rm = 50.43%

From these values, cost of equity Rj = 40.25%

The firm has a debt ratio = 43.37%

Weighted Average Cost of Capital = 29.65%

5.6 Share Price according to Gordon Model

According to Gordon Model, share price

P = D1/(k-g) = D0(1+g)/(k-g)

D0 = 3.1 k = 29.65% g = 1.36%

So, P = 12.42

We see that the stock of Square Textiles is highly overpriced. So, it is highly likely that the share price will go down in future.

6.0 Findings and Conclusions

Square Textiles share price at the end of 2009 BDT 111.54 while its net asset value per share is only BDT 44.19. So, we were interested to find out the reasons behind this difference and also to predict future price movement. Following are the key findings in the study:

6.1 Financial Performance Square Textiles is a profitable company

It is not utilizing its assets efficiently. ROA is very low.

The company is not highly levered

The company may have some hidden profit in terms of market value of their fixed assets

especially land and buildings

6.2 Stock Price Movement Stock price of the company is highly affected by dividend declaration, record date, AGM

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The stockholders did not like the decrease in dividend in recent years

There was a merger with Square Spinning which also did not please the shareholders

which resulted in a negative correlation with share price

6.3 Growth Prospect and Future Share Price The company seems to maintain a debt equity ratio of below 1

If the firm continues with this policy, it has a very low growth opportunity

With current growth opportunity, the shares of this company is highly overpriced and

expected to fall in future

With the above observations, we come to a conclusion that the prevailing share price of the firm is expected to be decreasing in future. However, we still need to explain why the share price is so high with a high M/B ratio. This can be attributed to the brand value of ‘Square’ which has created a lot of trust among the investors. As a result, investors are ready to invest in the share even with a low return and growth opportunity.

7.0 Appendix

7.1 Regression results

7.1.1 Account closing

Year 2008

SUMMARY OUTPUT

Regression StatisticsMultiple R 0.885798821R Square 0.784639552Adjusted R Square 0.778818999Standard Error 3.567105062Observations 39

ANOVAdf SS MS F Significance F

Regression 1 1715.290867 1715.290867 134.8049916 6.73182E-14Residual 37 470.7968254 12.72423852Total 38 2186.087692

Coefficients Standard Error t Stat P-value Lower 95% Upper 95% Lower 95.0% Upper 95.0%Intercept 123.452381 0.778406141 158.5963605 5.06152E-54 121.8751803 125.0295816 121.8751803 125.0295816X Variable 1 13.3031746 1.145782816 11.61055518 6.73182E-14 10.98159812 15.62475109 10.98159812 15.62475109

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Year 2009

SUMMARY OUTPUT



Regression 1 174.0535714 174.0535714 10.4609381 0.002447242Residual 40 665.5371429 16.63842857Total 41 839.5907143

Coefficients Standard Error t Stat P-value Lower 95% Upper 95% Lower 95.0% Upper 95.0%Intercept 115.8571429 0.890115792 130.1596309 3.47014E-54 114.0581518 117.656134 114.0581518 117.656134X Variable 1 -4.071428571 1.258813825 -3.234337352 0.002447242 -6.615586187 -1.527270955 -6.615586187 -1.527270955

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Year 2010

SUMMARY OUTPUT

Regression StatisticsMultiple R 0.079161735R Square 0.00626658Adjusted R Square -0.019884299Standard Error 1.937979143Observations 40



Coefficients Standard Error t Stat P-value Lower 95% Upper 95% Lower 95.0% Upper 95.0%Intercept 119.195 0.43334531 275.0577823 2.64807E-64 118.3177383 120.0722617 118.3177383 120.0722617X Variable 1 0.3 0.612842815 0.489521934 0.627286287 -0.940635407 1.540635407 -0.940635407 1.540635407

7.1.2 Dividend Declaration

Year 2008

SUMMARY OUTPUT




Coefficients Standard Error t Stat P-value Lower 95% Upper 95% Lower 95.0% Upper 95.0%Intercept 130.2277778 1.330094622 97.90865678 2.97752E-42 127.5216799 132.9338756 127.5216799 132.9338756X Variable 1 4.672222222 1.908499712 2.448112616 0.019845461 0.789350382 8.555094062 0.789350382 8.555094062

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Year 2009

SUMMARY OUTPUT





Year 2010

SUMMARY OUTPUT




Coefficients Standard Error t Stat P-value Lower 95% Upper 95% Lower 95.0% Upper 95.0%Intercept 119.55 1.027916609 116.3032088 2.75037E-53 117.4740803 121.6259197 117.4740803 121.6259197X Variable 1 -10.7547619 1.470897682 -7.311699539 6.0043E-09 -13.7253 -7.784223805 -13.7253 -7.784223805

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7.1.3 Record Date

Year 2008

SUMMARY OUTPUT





Year 2009

SUMMARY OUTPUT





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Year 2010

SUMMARY OUTPUT





7.1.4 AGM

Year 2008

SUMMARY OUTPUT





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Year 2009

SUMMARY OUTPUT





Year 2010

SUMMARY OUTPUT




Coefficients Standard Error t Stat P-value Lower 95% Upper 95% Lower 95.0% Upper 95.0%Intercept 102 0.905795419 112.6082092 1.12173E-51 100.1693192 103.8306808 100.1693192 103.8306808X Variable 1 9.795 1.312622267 7.462161999 4.29564E-09 7.142091466 12.44790853 7.142091466 12.44790853

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7.1.5 M&A Activities

Merger with Square Spinning

SUMMARY OUTPUT





Acquisition of Mithapur Textiles

SUMMARY OUTPUT

Regression StatisticsMultiple R 0.011108975R Square 0.000123409Adjusted R Square -0.025514452Standard Error 2.743636038Observations 41



Coefficients Standard Error t Stat P-value Lower 95% Upper 95% Lower 95.0% Upper 95.0%Intercept 108.8043478 0.572087661 190.1882443 1.70733E-59 107.6471913 109.9615043 107.6471913 109.9615043X Variable 1 -0.059903382 0.86341235 -0.069379806 0.945041827 -1.806319687 1.686512923 -1.806319687 1.686512923

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7.2 Weighted Average Cost of Capital

7.2.1 Calculationβ

SUMMARY OUTPUT




Coefficients Standard Error t Stat P-value Lower 95% Upper 95% Lower 95.0% Upper 95.0%Intercept -0.00112883 0.005051618 -0.223459041 0.823625186 -0.01114869 0.008891031 -0.01114869 0.008891031Rm-Rf 0.75919073 0.112550898 6.745310255 9.40568E-10 0.535946562 0.982434897 0.535946562 0.982434897

7.2.2 Average Market Return

Average weekly return = 0.97%

So, average annual return = 0.97*52 = 50.43%

A.2.2 Cost of Equity

Ri = .08 + 0.76 (.5043 - .08) = 40.25%

A.2.2 WACC

Cost of Debt = 15.8%

Debt Ratio = 43.37%

WACC = 0.4337 X 15.8 + (1-0.4337) X 40.25 = 29.65%

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7.3 Financial Statements & Performance DataSquare Textiles Ltd.

ASKML2009 2008 2007 2006 2005 2004 2003

Current Assets 3,224,729,710 3,437,049,714 1,909,672,000 1,417,780,000 1,391,410,000 1,357,092,000 1,284,065,000 481,192,792Current Liabilities 2,388,878,289 2,843,250,860 1,382,789,000 1,269,821,000 989,212,000 1,187,839,000 1,267,503,000 436,833,644Inventory 942,568,134 1,267,785,890 577,163,363 487,871,798 487,753,824 405,449,809 329,015,503 150,077,244COGS 3,348,870,289 2,589,019,736 1,958,696,404 2,041,065,393 1,847,818,461 2,083,702,523 1,737,055,759 1,434,176,589Accounts Receivable

1,683,329,048 1,689,670,282 819,360,445 821,199,524 756,736,173 834,989,837 840,066,283 235,362,912

Sales 3,882,244,010 3,052,235,640 2,541,543,000 2,620,966,000 2,390,979,000 2,459,201,000 2,102,670,000 1,586,094,474Fixed Assets 2,283,552,606 2,370,847,250 1,573,559,000 1,702,906,000 1,193,767,000 1,180,203,000 1,217,332,000 342,491,610Total Assets 5,508,282,316 5,807,896,964 3,483,231,000 3,120,686,000 2,585,177,000 2,537,295,000 2,501,397,000 823,684,402Total Debt 2,388,878,289 2,843,250,860 1,382,789,000 1,269,821,000 989,212,000 1,187,839,000 1,267,503,000 437,134,519EBIT 433,507,033 387,282,778 517,149,366 481,315,121 465,778,608 300,290,342 305,414,202 35,344,028Interest Expenses 121,730,159 109,701,045 106,026,180 77,350,086 67,966,406 70,530,935 124,160,747 17,176,247Net Income 260,634,002 236,529,908 352,447,136 348,833,453 255,494,330 198,689,678 167,893,727 13,814,819Common Equity 3,119,404,027 2,964,646,104 2,020,482,000 1,770,905,000 1,513,511,000 1,349,457,000 1,233,894,000 396,170,995Market Price 111.54 117.3 127.4 75.6 81.7 138.3 43.1 790EPS 3.69 4.71 8.94 8.85 6.48 5.04 4.26 16Book Value 44.19 50.04 51.23 51.65 49.66 48.7 44.53 472No. of shares 70,584,053 58,820,044 39,433,370 34,289,887 30,479,900 27,709,000 25,190,000 840,000Dividend payout 218,810,564 223,516,167 177,450,165 154,304,492 129,539,575 110,836,000 100,760,000Dividend per share 3.10 3.80 4.50 4.50 4.25 4.00 4.00

Source: Annual Reports

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7.4 References

1. Dewaelheyns and Hulle (2009),Capital Structure, Journal Of Economic Perspectives, Vol. 11, No. 2, Pp 8-10.

2. Harris, M and Raviv A, (1991), The Theory Of Capital Structure, Journal Of Finance, Vol. 46, Pp. 297- 355.

3. Shah ,Hijazi T (2004), The Theory Of Capital Structure, Journal Of Finance, Vol. 46, Pp. 297-355

4. Lima, (2009), The Determinants Of Capital Structure, Journal Of Finance, Vol. Pp 1- 19.

5. Modigliani F and Miller H, (1958), The Cost Of Capital, Corporation Finance And The Theory Of Investment, American Economic Review Pp. 261-297.

6. Modigliani F And Miller H, (1963), Corporation Income, Taxes And The Cost Of Capital: A Correction, American Economic Review

7. Myers S (1984), The Capital Structure Puzzle, Journal Of Finance, 39, Pp 572-92

8. http://textile.squaregroup.com/sqtextile.html

9. http://textile.squaregroup.com/tex_financialStat.html

10. http://textile.squaregroup.com/downloads/square_textiles_3rdquarter_ended12.pdf

11. http://textile.squaregroup.com/downloads/stxl_half_yearly_report_2012.pdf

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http://textile.squaregroup.com/downloads/stxl_half_yearly_report_2012.pdf

http://textile.squaregroup.com/downloads/square_textiles_3rdquarter_ended12.pdf

http://textile.squaregroup.com/tex_financialStat.html

http://textile.squaregroup.com/sqtextile.html

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