1.1 INTRODUCTION OF THE COMPANY
We have selected Renata Limited as the company to analyze the financial condition. Here is a
short overview of the company.
Type of Company: Listed Public Limited (Dhaka Stock Exchange)
Main Business: Manufacture and Marketing of Human Pharmaceuticals and Animal
Therapeutics. There are two production sites. The Mirpur Site is 12 Acres and Rajendrapur Site
is 17 Acres.
History: The Company started its operations as Pfizer (Bangladesh) Limited in 1972. For the
next two decades it continued as a highly successful subsidiary of Pfizer Corporation. However,
by the late 1990s the focus of Pfizer had shifted from formulations to research. In accordance
with this transformation, Pfizer divested its interests in many countries, including Bangladesh.
Specifically, in 1993 Pfizer transferred the ownership of its Bangladesh operations to local
shareholders, and the name of the company was changed to Renata Limited
No. of Employees: 2,213 employees.
Distributors and Affiliations: Alliance-Partners are Novartis Vaccines BASF(
Germany) InterVax, Evans Vanodine(UK)Zinpro(USA) Biomin Laboratories(Singapore)
International Presence: Guyana, Jordan, Kenya, Myanmar, Philippines, Hong Kong,
Afghanistan, Sri Lanka, Vietnam, and United Kingdom
Investment: 100% Shareholding in Renata Agro Industries Limited
Bankers: Agrani Bank, Standard Chartered Bank, Eastern Bank, HSBC, Sonali Bank, Citi Bank,
and Mutual Trust Bank
1.2 IDENTIFICATION OF PROBLEM
Book Value per Share is the accounting value of a share of common stock; equal to common
divided by the number of shares outstanding.
Market value is current price of the stock. If the profitability, liquidity, asset and debt
management is good market value will probably be as high as can be expected.
From the analysis of five years data we will try to find out the problems and reasons of changes
in the Market value of from the price of Tk. 1,216.00 per share at the beginning of 2003, to
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Rationalization Of Stock Price Through Financial Analysis A Case Of Renata Limited
Tk.7789 .25 at the end of 2008. Initially the book value of the share of the company is Tk. 100
per share and at the year 2008 it become 1437.00
So from the data it is evident that the Market value is substantially greater than the book value.
So we can say for our concern company that,
Market value > Book value
So, Company is enjoying a healthy financial status. In our report we shall diagnose all the data
and we shall established the reason behind the phenomenon.
We shall also look how Renata Limited is managing the Liquidity, Asset, Debt, and observe the
implications on Profitability and Market Value.
1.3 OBJECTIVE OF THE STUDY
The objective of this study is to identify the financial strength of Reneta Limited by analyzing
their accounting statements for a definite period and to compare their book value with the market
value of the share and finding out the reason of the discrepancy about this issue.
Have detail understanding about the instruments of finance.
o Make a thorough analysis of the company’s financial statements over the last 6 years
with the aid of ratio analysis, cash flow and analysis of major components of the
balance sheet .
o Find out Renata’s financial strength and level of competency.
o Find out where Renata stands.
o Find out the strength and weaknesses of Renata Limited.
1.4 METHODOLOGY
1.4.1 Statistical Technique
The statistical techniques applied in the study include primarily descriptive statistics and
inferential statistics. The descriptive statistics techniques applied are calculation of mean and
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Rationalization Of Stock Price Through Financial Analysis A Case Of Renata Limited
standard deviation and graphical analysis. The inferential techniques applied include correlation
analysis. We used bar chart and line chart to interpret the processed data.
1.4.2 Nature of Data
Two types of data had been used during the preparation of this report, primary data and
secondary data.
1.4.3 Sources of Data
Primary data had been collected from the Dhaka Stock Exchange and is of little importance to
the report. However these data have been helpful in providing us with some direction about how
to approach with the analysis.
This report was prepared mainly based on the secondary data available in the market. The
secondary data was collected from the internet, newspapers and the company’s annual reports.
The report prepared from the analysis of the raw data is of the formal type and the information
from the secondary data was used to support the findings of the financial analysis.
1.4.4 Period Under Consideration
Data for the last six financial years, starting from 2003 up to 2008, had been taken under
consideration while preparing this report.
We have considered last 6 years data for the company’s statistical and financial trend analysis.
1.4.5 Nature of Analysis
We mainly relied on “Cross Sectional Study” to compare between the two rival firms. To
monitor the performance of our company of focus over the years with respect to “Ratio
Analysis”, “Cash Flow Statement Analysis”, “Balance Sheet and Income Statement Analysis”
which helped us identify any specific trends or fluctuations occurred during the periods taken
into consideration for analysis.
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Rationalization Of Stock Price Through Financial Analysis A Case Of Renata Limited
The ratio had been analyzed with respect to three viewpoints, benchmarking, time series analysis
and cross section analysis.
In the ratio analysis five types of ratios had been considered, namely
o Liquidity Ratio
o Debt Management Ratio
o Asset Management Ratio
o Profitability Ratio
o Market Value Ratio
1.4.6 Standard of Comparison
We relied on “Cross Sectional Study” as standard for comparison of the performance of “Renata
Limited” with its rival “Square Pharmaceuticals Limited”. Due to unavailability of data and also
difficulty of calculation of the “Industry Averages”, we carried out ratio analysis of both the
companies for the last 6 years and compared their performances with respect to all the major
ratios. Finally, we came up with our comments regarding relative performances of each company
in due course of time.
We took Square as the rival of Renata because both are the among the leaders in the
pharmaceutical industry and enjoying healthy financial position with hot demand of their shares.
We also considered their high share price (much higher than their book value) in choosing rivals.
1.5 LIMITATION
Time was a very big constraint during the process of preparation of this report. As the report had been
prepared over a time period of only two months, time had to be budgeted and scheduled very calculatedly.
There was very little time that can be used as lagging in case something falls behind schedule.
Adding up to that, the unavailability of all the annual financial reports of the company had been a bottle
neck throughout the entire preparation of the report. Another matter of concern was that, the report
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Rationalization Of Stock Price Through Financial Analysis A Case Of Renata Limited
considers data only from the last six financial years. This may not be sufficient to clearly show the
reasons for the deviations in share prices along those years. A report with analysis of the last ten to fifteen
year may have been more precise and accurate.
Moreover many companies practice ambiguous accounting practices to get rid of tax that dilute
the actual scenario. Also sometimes, these companies try to make their performance much more
lucrative to the Shareholders by means of unethical practice which are completely unnoticeable
to general public. Such practice if had taken place might have diluted our findings which are
based on the information available in the “Annual Reports”.
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Rationalization Of Stock Price Through Financial Analysis A Case Of Renata Limited
2.0 ANALYSIS OF BALANCE SHEET
From the balance sheet analysis, following interpretation can be derived
2.1 ASSET
Current Assets
Current assets of Reneta limited have grown quite steadily over the years. In the years 2003 and
2004, currents assets of the company were Tk 479,972,832 and 611,522,586 respectively.
Although current assets fell in the year 2005 but rose substantially in the year 2006. This steady
growth may indicate quite a number of things. For instance, the steady rise in accounts
receivables indicate that the rate of sales have increased at quite a healthy rate over the years.
The cash and bank balances in the years 2003 and 2004 indicate a significant inflow of cash from
various sources, allowing the company to expand its overall assets in latter years. A healthy
amount of current assets are important for any company as it will eventually increase it’s
solvency and improve creditworthiness, and the current assets of Renata Limited have grown
significantly, especially in 2007 and 2008. The following table would clarify it further.
Current Asset
1,600,000,000
1,400,000,000
Value in BDT
1,200,000,000
1,000,000,000
800,000,000
600,000,000
400,000,000
200,000,000
-
2003
2004
2005
2006
2007
2008
Current Asset 455,136,2 573,416,4 672,355,2 979,254,8 988,092,8 1,506,070,
Year
Fig:1 Current Asset
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Rationalization Of Stock Price Through Financial Analysis A Case Of Renata Limited
Tangible Assets
Tangible assets are the part of fixed assets of the company. Over the years, Renata Limited has
invested quite intensely over the years. Among them, increase in property, plant and equipment
is very prominent and it also shows the company’s rise during these years and obvious necessity
signifies that demand for it’s product is quite high. The following graph would showcase the
pattern in this regard.
According to the data given in the annual report, depreciation has also increased over the years
further justifying the increasing property plant and equipment. The following graph would
clarify it further.
Tangible Assets
1,200,000,000
1,000,000,000
BDT
800,000,000
600,000,000
Tangible Assets
400,000,000
200,000,000
0
2008 2007 2006 2005 2004 2003
Years
Fig2: Tangible Assets
Capital Work in Progress
In the year 2003, there was no work in progress for Renata Limited, but in 2004, there was,
which was worth BDT 10,683,181. The next four years showed huge increases in this aspect. In
these six years , the company has expanded its business quiet aggressively and as a result, capital
working in process has been significantly on the higher side. This also explains to an extent, the
large amount of fixed assets in the latter years.
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Rationalization Of Stock Price Through Financial Analysis A Case Of Renata Limited
Capital Work in Process
600,000,000
500,000,000
BDT
400,000,000
300,000,000
200,000,000
100,000,000
0
2008
2007
2006
2005
2004
2003
Years
Fig3: Capital Work in Process
Intangible Assets
In the available reported, Renata Limited showed just one intangible asset and that is investment.
Over the years in question, the rise in investments has been massive. Especially after 2006, after
which investment have been recorded higher than TK 3 billion. Furthermore Renata has invested
in Central Depository Bangladesh Limited, BRAC Bank, Eastern Insurance, Social Investment
Bank, Exim Bank, Al-Arafah Bank and Square Textiles.
However, total intangible asset is subject to change with the change of market price of the share
of the company, which will be discussed later on, meanwhile, here is a graph to provide a
snapshot of the situation.
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Rationalization Of Stock Price Through Financial Analysis A Case Of Renata Limited
Investment
700,000,000
600,000,000
BDT
500,000,000
400,000,000
Investment
300,000,000
200,000,000
100,000,000
0
2008 2007 2006 2005 2004 2003
Years
Fig: 4: Investment
2.2 LIABILITY & EQUITY
Total Liability
There has been steady rise in overall liabilities over the years for Renata Limited. The reason for
this is the expansion of the company over the years and also the rise in operations. The major
players in the liability segment are current liabilities and the short term and long term debts,
which are certainly indicators of expansion via debt financing. loan, accounts payable etc.
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Rationalization Of Stock Price Through Financial Analysis A Case Of Renata Limited
Total Liabilities
5,000,000,000
4,000,000,000
3,000,000,000
BDT
2,000,000,000
1,000,000,000
0
2008
2007
2006
2005
2004
2003
Year
Fig: 5: Total Liability
Net Working Capital
Net working capital is positive by Tk 154 million and 253.38 million on the year 2003 and 2004
respectively. NWC for 2005 & 2006 is nominal and negative for 2007 & 2008. As a result
solvency position for the company is getting worse since current liability surpluses current asset.
That indicates a current asset of the firm is sufficient enough to pay back its supplier’s current
obligation through current assets during up to 2006. But after 2007, some of the current liability
has been deferred or financed through current asset.
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Rationalization Of Stock Price Through Financial Analysis A Case Of Renata Limited
Net Working Capitalt
350,000,000
300,000,000
Value in BDT
250,000,000
200,000,000
150,000,000
100,000,000
50,000,000
-
2003
2004
2005
2006
2007
2008
Net Working Capital 168,945,6 216,018,7 288,214,9 320,373,1 271,024,1 192,678,1
Year
Fig:6: Net Working Capital
Shareholder’s Equity
Over the years shareholders of Renata limited have experienced more than healthy growth in the
total equity. There are several reason for that and one being the high demand for the shares in the
market. Furthermore, as mention before Renata is considered to have high profitability which is
being proven through valid and sufficient ratio analysis data in following chapter.
.
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Rationalization Of Stock Price Through Financial Analysis A Case Of Renata Limited
Total Equity
1,800,000,000
1,600,000,000
Value in BDT
1,400,000,000
1,200,000,000
1,000,000,000
800,000,000
600,000,000
400,000,000
200,000,000
-
2003
2004
2005
2006
2007
2008
Total Equity 467,671,95 581,841,45 774,117,20 982,312,79 1,277,605,5 1,662,073,3
Year
Fig: 7: Total Equity
Change in Market Value
After taking closing price of Renata limited at the end of the year, market value is derived as
follows:
Change in Market Value
7,000
6,000
Value in BDT
5,000
4,000
3,000
2,000
1,000
(1,000)
Change in Market value
2003
2004
2005
2006
2007
2008
(42)
2,157
1,844
1,876
6,166
6,352
Year
Fig: 8: Change in Market Value
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Rationalization Of Stock Price Through Financial Analysis A Case Of Renata Limited
Initially in 2003, the market prices of Renata Shares were even lesser than the book value.
Eventually took the successful turn from 2004-2008. The change in market price went as high as
6,352 taka. The reason of this being very principle that despite of historical pricing book values
are eventually bound to rise with time.
2.3 RATIONALE BEHIND DIFFERENT BOOK VALUE & MARKET
VALUE
It is not very unusual for market value to differ with book value of a firm. The reason is, a
company is a going concern and when company issues shares to the public, depending on various
factors like demand and supply of the firm’s shares, the prices eventually fluctuate. In other
words, if a firm is profitable or at least deemed to be profitable, demand for that firm’s share is
higher and consequently the share price of that firm’s share is higher. Of course, this can also
occur the other way around. Therefore, it is safe to infer that market value of and book value of a
company can vary to quite some extent.
As a result market value and book value of the
company differs in a great extend. Due to this, this change in value can change the value of the
shareholder’s equity and not to mention the value of assets, fixed ones in particular. The same
principle is obviously also applicable for Renata limited and any other going concern.
There are lot of factors that indicates fundamental difference of market value and book value;
Following are the probable reasons why this happens:
o Undervaluation of Fixed Assets: Due to the historical price of land fixed assets are
undervalued in comparison with the current market value. Thus the accounting principle
of recording at historical price can cause this. It is only natural that an asset is bound to
rise in value 10 years from now.
o
Over Depreciation of Factory Building and Other Fixed Assets: The depreciation
rate for the factory building was calculated at 10% but in reality the actual depreciation
rate was lower than that. The depreciation rate for other fixed assets was also over
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Rationalization Of Stock Price Through Financial Analysis A Case Of Renata Limited
estimated than in reality. In other words, depreciation is often overestimated and applied
accordingly.
Now based on the current book value of the firm, balance sheet can be summarized as follows:
2003
2004
2005
2006
2007
2008
455,136,227
573,416,439
672,355,277
979,254,859
988,092,820
1,506,070,972
Assets
Current Assets
Fixed Assets:
Net Tangible Assets
1,014,435,834
Intangible Assets
71,488,130
64,070,376
86,27,09,160
Current Liability
Equity
Total Asset
796,846,754
689,066,469
3 99,239,783
544,586,411
460,331,361
64,070,376
663,070,376
4,147,000
4,147,000
1,03,90,41,833
1,27,45,56,982
1,77,65,12,741
2,15,49,93,391
3,16,22,32,934
286,190,567
357,397,648
384,140,329
658,881,691
717,068,650
1,313,392,836
584,916,861
712,537,126
774,117,203
982,312,795
1,277,605,506
1,662,073,357
86,27,09,160
1,03,90,41,833
1,27,45,56,982
1,77,65,12,741
2,15,49,93,391
3,16,22,32,934
Liability & Equity
Total Liability
Equity
&
The new balance sheet will eliminate the difference between the market price and book value per
share. Because of the market price of the share, value of total equity will be increased and
therefore value of liability & owners equity will be increased. To apply matching principle, value
of the asset should get increased since source of fund is overvalued. Here we have added a
certain amount to intangible assets since it includes both goodwill and investment which is price
sensitive to the market price. Another way to retain matching principle is to subtract the
difference of book value and market value from liability portion so that adding portion is offset
by deduction of liability if any creditor forgives the payment of the amount. But in this case, this
is very unusual scenario and since not such kind of information is provided, we are not
subtracting any thing in liability portions. Thus we can come up with a new balance sheet.
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Rationalization Of Stock Price Through Financial Analysis A Case Of Renata Limited
The proposed balance sheet based on the market price and the balance sheet based on the book
value for the year of 2003 to 2008 are given below.
Particulars
Current Assets
2008
1,506,070,972
Fixed Assets:
Net
Tangible 515,340,517
Assets
Intangible
640,332,674
Assets
Goodwill
8,362,687,396
Total Asset
10,510,631,559
Liability
&
Equity
Total Liability
1,500,159,577
Equity
9,010,471,982
Total Liability 10,51,06,31,559
& Equity
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Rationalization Of Stock Price Through Financial Analysis A Case Of Renata Limited
3.0 CASH FLOW ANALYSIS:
3.1 CHANGES IN INVENTORY:
Changes in inventory can be both cash inflow and outflow for the company. The following graph will
help to get an idea about the changes in Inventory from the year 2003 to 2008.
Inventory
1,000,000,000
900,000,000
Value in BDT
800,000,000
700,000,000
600,000,000
500,000,000
400,000,000
300,000,000
200,000,000
100,000,000
-
2008
2007
2006
2005
2004
2003
Inventory 959,414,59 662,012,14 638,784,95 388,384,00 404,933,01 322,849,09
Year
Figure 9: Changes of Inventory of Renata Ltd. from 2003 to 2008
Comments
In 2003, inventory level was less. But in the all the subsequent financial years since 2004-2005, inventory
level had inventory level had gradually increased. This may give the impression that the company is
having very little sales and unnecessarily piling up inventory but in an economy of rising inflation like
that of Bangladesh, this is a good news as the company will have the low cost raw materials for the next
financial year and be able to enjoy the cheaper inventory which may not be available to the competitors.
Again the sales of the company are increasing and the management might be expecting a future increase
in sales in the following financial year. This might have triggered this sharp rise in the inventory levels.
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Rationalization Of Stock Price Through Financial Analysis A Case Of Renata Limited
3.2 CHANGES IN ACCOUNT RECEIVABLE:
This represents the total amount of cash the company is supposed to receive from the market in different
forms of revenue. The following graph will help to get an idea about the changes in Accounts Receivable
from the year 2003 to 2008.
Change in Account Receivables
350,000,000
Value in BDT
300,000,000
250,000,000
200,000,000
150,000,000
100,000,000
50,000,000
-
2008
2007
2006
2005
2004
2003
Account Receivables 344,226,9 194,727,8 198,626,0 162,224,0 103,542,0 95,395,30
Year
Figurer 10: Changes of Accounts receivables of Renata Ltd. from 2003 to 2008
Comments
Since 2003-2004, the amount of accounts receivable had gradually increased for Renata. It has drastically
increased in the year 2008.This reflects a bad credit policy. However the sales of the company had also
increased consequently and considering this it may be inferred that the increase in the sales had caused
this increase in the accounts receivable.
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Rationalization Of Stock Price Through Financial Analysis A Case Of Renata Limited
3.3 CHANGES IN ACCOUNT PAYABLE:
This represents supplier’s credit for inventory and other raw materials. The following graph will help to
get an idea about the changes in Accounts Payable from the year 2003 to 2008.
Accounts Payable
140,000,000
120,000,000
100,000,000
80,000,000
Value in BDT
60,000,000
40,000,000
20,000,000
-
2008
2007
2006
2005
2004
2003
Accounts Payable 127,107,6 37,929,10 51,607,32 16,645,26 14,371,92 34,553,75
Year
Figure 11: Changes of Accounts Payable of Renata Ltd. from 2003 to 2008
Comments
There was very little that the company owed to creditors in the market in the financial years of 2003 to
2007. But this had increased drastically in the financial year 2008. This might give a wrong message to
the investors regarding total current assets. This is a source of cash as these amounts are yet to be paid off
and is still in the accounts of the company. However immediate corrective actions should be taken and the
effects will be visible in the following financial years.
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Rationalization Of Stock Price Through Financial Analysis A Case Of Renata Limited
3.4 CHANGES IN PLANT & EQUIPMENTS:
This represents the changes in Plants and Equipments that took place in the last few financial years. The
following graph will help to get an idea about the changes in fixed assets from the year 2003 to 2008.
Change in Fixed Assets
1,200,000,000
Value in BDT
1,000,000,000
800,000,000
600,000,000
400,000,000
200,000,000
-
2008
2007
2006
2005
2004
2003
Fixed Assets 1,014,435, 796,846,7 689,066,4 399,239,7 555,269,5 460,331,3
Year
Figure 12: Changes in Plants & Equipment of Renata Ltd. from 2003 to 2008
Comments
In 2003 the plants and equipments increased and so there was a cash outflow. Since then there had been
gradual changes in the scenario up to the financial year 2008. There had been a huge increase in
investment on plants and equipments especially in year 2008. This indicates that this company is growing
and expanding in different areas.
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Rationalization Of Stock Price Through Financial Analysis A Case Of Renata Limited
3.5 NET CASH FLOW FROM OPERATION:
This shows the overall cash flow from the operating activities of the company in the last few financial
years.
Cash Flow from Operating Activities
500,000,000
Value in BDT
400,000,000
300,000,000
200,000,000
100,000,000
-
2008
2007
2006
2005
2004
Cash Flow from Operating 169,047,278 432,767,495 56,557,146 241,578,308 292,573,992
Activities
Year
Figure 13: Cash Flow From operating Activities of Renata Ltd. from 2003 to 2008
Comments
This shows that other than the financial year of 2006 there had been mentionable cash inflows into the
company. Since it was highest in the year 2007.
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Rationalization Of Stock Price Through Financial Analysis A Case Of Renata Limited
3.6 NET CASH PROVIDED BY INVESTMENT ACTIVITIES:
This section describes the amount of cash in flow and out flow because of various investing
activities.
Cash Flow From Investment
50,000,000
Value in BDT
(50,000,000)
(100,000,000)
(150,000,000)
(200,000,000)
2008
2007
2006
2005
2004
Cash Flow From Investment 21,891,526 (164,135,13 (177,750,27 (11,834,818) (80,917,925)
Year
Figure 14: Cash Flow From Investment Activities of Renata Ltd. from 2003 to 2008
Comments
As per the graph, there had been cash outflows in all the years other than 2008. Under consideration
accept the financial year of 2006 and 2007 the cash outflow was huge due to investment and this is indeed
good for the company as they are expanding into new projects.
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Rationalization Of Stock Price Through Financial Analysis A Case Of Renata Limited
3.7 NET CASH PROVIDED BY FINANCING ACTIVITIES:
This section represents the net cash flow from the financial activity.
Cash Flow From Financing Activities
500,000,000
Value in BDT
400,000,000
300,000,000
200,000,000
100,000,000
(100,000,000)
2008
2007
2006
2005
2004
Cash Flow From Financing 414,177,169 (49,846,619) (27,398,386) (33,160,404) (33,081,044)
Activities
Year
Figure 16: Cash Flow From Financing Activities of Renata Ltd. from 2003 to 2008
Comments
Little change can be noticed in the past four financial years from 2004-2007. The significant inflow of
cash in the financial year of 2008 reflects that the company received huge amount of medium term loan
for further expansion in the financial year 2008.
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Rationalization Of Stock Price Through Financial Analysis A Case Of Renata Limited
3.8 OVERALL COMMENT ON CASH FLOW:
o The net change of cash flow is positive which indicates that during the years the firm has
more cash inflow than outflow. So, it can be said that the company has grown strongly
over the years.
o Huge inventory pilled up that consumed cash as well the accounting profit
o Increase in fixed asset also consumed a mentionable amount of cash. It also contributed
to the increasing accounts payable which consequently create pressure on cash.
o Due to heavy investment long term debt was taken and for that the company always has
to keep a room to pay the interest against those loans.
o Due to purchase of Fixed assets investment increased as a result capital work in progress
also increased.
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Rationalization Of Stock Price Through Financial Analysis A Case Of Renata Limited
4.0 RATIO ANALYSIS:
Ratio analysis is the calculation and comparison of ratios which are derived from the information in a
company's financial statements. The level and historical trends of these ratios can be used to make
inferences about a company's financial condition, its operations and attractiveness as an investment. To
evaluate a firm’s financial condition and performance, the financial analyst usually performs analysis on
various aspects to find out the financial health of the firm; among which ratio analysis is one of the most
important and commonly used methods. In this study various ratio analyses will be done to understand
the financial condition of the company and to compare this condition with its rival firm to get a clear
picture. The financial ratios can be analyzed based on three criteria:
o
Benchmark Analysis: A benchmark is a point of reference with which the financial ratios of the
specific company can be compared. For example, the current ratio of 2:1 is considered to be ideal
for a company and it is assumed to be the benchmark.
o
Time Series Analysis: It involves comparing a present ratio with past and expected future ratios
for the company. For instance, the current ratio (the ratio of current assets to current liabilities)
for the present year could be compared with the current ratio for the previous years. When
financial ratios are arranged over a period of years, the analyst can study the composition of
change and determine whether there has been an improvement or deterioration in the firm’s
financial condition and performance over time.
o
Cross Section Analysis: The third method of comparison involves comparing the ratios of one
with those of similar firms or with industry averages at the same point in time. Such a comparison
gives insight into the relative financial condition and performance of the firm. It also helps us to
identify any significant deviation from any applicable industry average.
In this paper, ratios of Renata Ltd and Square Pharmaceuticals Ltd are calculated and analyzed based on
bench mark, time series and cross sectional analysis.
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Rationalization Of Stock Price Through Financial Analysis A Case Of Renata Limited
4.1 LIQUIDITY OR SHORT TERM SOLVENCY:
Liquidity or Short Term Solvency ratios are used to determine a company's ability to pay off its shortterms debts obligations. The higher the value of the ratios, the larger will be the margin of safety that the
company possesses to cover short-term debts. It shows the relationship of a firm’s cash and other current
assets to its current liabilities. Different types of liquidity ratios are discussed below.
4.1.1 Current Ratio:
Current Ratio is the ratio of current assets to current liabilities. The current ratio indicates the ability of a
company to pay its current liabilities from current assets and shows the strength of the company’s
working capital position. Current ratio of 2:1 is considered to be a healthy condition for most businesses.
The ratio is calculated as follows:
Current Ratio = Current Assets / Current Liabilities
The following table shows the current ratio data of the 2 companiesCompany
2003
2004
2005
2006
2007
2008
Renata
1.59
1.60
1.75
1.49
1.38
1.15
Square
1.16
1.62
1.66
1.78
1.44
1.26
From the above table, we can see that the current ratio of Renata is lower compared to the standard or
benchmark ratio of 2:1. The current ratio of Renata has gradually gone down from 2005 to 2008 from
1.75 to 1.15. In 2008, the current ratio has decreased to 1.15 due to a significant rise in current liabilities,
i.e. around 83.16% from TK 71,70,68,650 to TK 1,31,33,92,836. Although the current assets has also
increased during 2007 to 2008 from TK 98,80,92,820 to TK 1,50,60,70,972, which is around
52.42%.This is evident in the balance sheet as we can see that the total liabilities figures have gone up
gradually. The declining ratio of 2005 to 2006 may be attributed to the increased liabilities during these
years. This is not necessarily bad news as Renata has invested heavily in the expansion of their company.
Where, the current ratio of Square has increased from 1.66 to 1.78. But from 2006 to 2008 the current
ratio started to decline from 1.78 to 1.26 as current liabilities have increased to a greater extent.
25
Rationalization Of Stock Price Through Financial Analysis A Case Of Renata Limited
Current Ratio
Current Ratio
2.00
1.50
Renata
1.00
Square
0.50
0.00
2003
2004
2005
2006
2007
2008
Renata
1.59
1.60
1.75
1.49
1.38
1.15
Square
1.62
1.66
1.78
1.44
1.26
1.46
Year
Fig 17: Current Ratios of Renata & Square for the years 2003-2008
Where Renata shows a declining pattern, Square has a wavy pattern in case of current ratio. If we take it
as an industry average then Renata’s performance is satisfactory.
4.1.2 Quick Ratio:
The Acid-test or quick ratio measures a company's ability to meet its short-term obligations with its most
liquid assets. Inventories typically are the least liquid of a firm’s current assets – they are the assets on
which require more time to be sold and losses are most likely to occur in the event of liquidation.
Therefore, it is important to measure the firm’s ability to pay off short term obligations without having to
rely on the sale of inventories. Quick ratio of 1:1 is considered to be a healthy condition for most
businesses. It is calculated as follows.
Quick Ratio= (Current Assets- Inventories)/ Current Liabilities
26
Rationalization Of Stock Price Through Financial Analysis A Case Of Renata Limited
The following table shows the quick ratio data of the two companiesCompany
2003
2004
2005
2006
2007
2008
Renata
0.46
0.59
0.74
0.52
0.45
0.42
Square
0.56
0.98
1.08
1.19
0.84
0.68
The above table shows that the quick ratio of Renata is lower compared to the standard or benchmark
ratio of 1:1. The trend of quick ratio of Renata shows that the ratio had been increasing from 2003 to
2005 and afterwards it declined over the years. It is optically a bad indication that Renata has limited
ability to pay off short term obligations without having to rely on the sale of inventories. During 2006 and
2008, there was significant addition in the level of inventory (i.e.64.47 percent in 2006 over 2005) from
TK 38,83,84,007 to TK 63,87,84,952 and there was further addition of inventory to TK 29,74,02,445 in
2008 (i.e. 44.97% over 2007) which led to an deterioration in the quick ratio. But from 2006 to 2008, a
huge amount of inventory was piled up, causing the current assets also increased at a higher proportion
(i.e. 52.42%), as a result the quick ratio dropped over the years. In case of Square we see that their quick
ratio is healthier than benchmark (1:1) as well as Renata. Because their inventories as well as current
assets increased gradually but not drastically.
27
Rationalization Of Stock Price Through Financial Analysis A Case Of Renata Limited
Quick Ratio
Renata,
Square
1.40
1.20
Quick Ratio
1.00
0.80
0.60
0.40
0.20
0.00
2003
2004
2005
2006
2007
2008
Renata,
0.46
0.59
0.74
0.52
0.45
0.42
Square
0.56
0.98
1.08
1.19
0.84
0.68
Time
Fig 21: Quick Ratios of Renata and Square for the years 2003-2008
Whereas, the quick ratio of Square has increased from 2003 to 2005, but there is a decreasing pattern
from 2006 to 2008 as the level of current liabilities has started to increase compared to the proportionate
rise in current assets. In addition, around 31.25% of the inventories were piled up (from TK
1,54,41,91,798 to TK 2,02,67,36,322) during 2007 over 2006 leading to deterioration in the quick ratio.
4.1.3 Cash Ratio:
Cash Ratio is the ratio of a company's total cash and cash equivalents to its current liabilities. The cash
ratio is most commonly used as a measure of company liquidity. It can determine how quickly the
company can repay its short-term debt. It shows cash solvency of the firm. We can find cash ratio in the
following way.
Cash Ratio = Cash/Current Liabilities
28
Rationalization Of Stock Price Through Financial Analysis A Case Of Renata Limited
The following table shows the cash ratio data of the two companiesCompany
2003
2004
2005
2006
2007
2008
Renata
0.10
0.20
0.23
0.12
0.07
0.09
Square
0.02
0.04
0.20
0.14
0.05
0.06
From the above table, we can see that normally the cash ratio of Renata is higher compared to Square,
which reflects that Renata has higher cash to meet its current liabilities. In addition, the cash ratio of
Renata started to rise till 2005, but there was a sharp decline in 2006 and 2007 from TK 82,035,371 to TK
48,256,978. However, an improvement in cash ratio can be noticed in 2008 from 0.07 to 0.09.
Cash ratio of Square is decreasing from 2005 to 2008, because the amount of cash declined over the years
due to investment.. In addition, the cash ratio of Renata started to rise till 2005, but there was a sharp
decline in 2006 and 2007 from TK 82,035,371 to TK 48,256,978. However, an improvement in cash ratio
can be noticed in 2008 from 0.07 to 0.09.
Cash Ratio
Renata,
Square
0.25
Cash Ratio
0.20
0.15
0.10
0.05
0.00
2003
2004
2005
2006
2007
2008
Renata,
0.10
0.20
0.23
0.12
0.07
0.09
Square
0.02
0.04
0.20
0.14
0.05
0.06
Time
Fig 22: Cash Ratio of Renata and Square for the years 2003-2008
29
Rationalization Of Stock Price Through Financial Analysis A Case Of Renata Limited
4.2 LONG TERM OR DEBT MANAGEMENT RATIOS:
Debt Management ratios help to evaluate a company's long-term solvency measuring the extent to which
the company is using long-term debt. This ratio reflects how effectively a firm is managing its debts. It
helps the analyst to determine the extent to which borrowed funds have been used to finance assets and
review how well operating profits can cover fixed charges such as interest.
4.2.1 Debt Ratio:
The debt ratio indicates how much of a company's assets are provided through debt or the percentage of
the firm’s assets financed by creditors. Total debt includes both current liabilities and long term liabilities.
Creditors prefer low debt ratios, because the lower the ratio, the greater the cushion against creditor’s
losses in the event of liquidation. The owners on the other hand can benefit from leverage because it
magnifies earnings, and thus the return to stockholder. But, too much debt often leads to financial
difficulty, which eventually might cause bankruptcy. It is calculated as follows:
Debt Ratio= Total Debt/ Total Assets
The following table shows the debt ratio data of the 2 companiesCompany
2003
2004
2005
2006
2007
2008
Renata
32.20%
31.42%
39.26%
44.71%
40.71%
47.44%
Square
25.53%
34.22%
29.58%
31.15%
30.07%
33.74%
The above table reflects that the long term solvency of Renata is weaker than Square. But this debt is
taken for further expansion of the company. So we can say that in long run it is good for the company as
well as shareholders. Further more this is also a sign that the demand for the product is on the rise both in
local and international market which justify the expansion project. They are giving handsome dividend to
their shareholders over the years. So share holders are also satisfy with the company. However, Renata
can enjoy tax advantage due to interest on debt and it will be rationalized by an increased EPS. From
2003 to 2008, the debt ratio of Renata started to rise at a steady rate from 32.20% to 47.44%. During 2006
and 2007, the proportionate rise in debt was higher compared to rise in total assets. Renata is a highly
levered firm and since interest charges are compulsory obligation the Renata must take initiatives to
decrease the debt ratio as much as possible. Creditors might be reluctant to lend Renata more money, and
30
Rationalization Of Stock Price Through Financial Analysis A Case Of Renata Limited
management would be subjecting the firm greater chance of bankruptcy if it decides to increase the debt
ratio much further by borrowing additional funds. However, since interest on debt enjoys tax advantage,
this is evident in the gradual increment in EPS figures. Whereas, the debt ratio of Renata is higher
compared to Square and it shows that Renata has higher debt burden.
Debt Ratio
Renata,
50.00%
Debt Ratio
30.00%
47.44%
44.71%
45.00%
40.00%
35.00%
Square
40.71%
39.26%
34.22%
31.42%
25.43%
32.20%
29.58%
33.74%
31.15%
30.07%
25.00%
20.00%
15.00%
10.00%
5.00%
0.00%
2003
2004
2005
2006
2007
2008
Time
Fig 23: Total Debt Ratio of Renata and Square for the years 2003-2008
4.2.2
Time Interest Earned (TIE) Ratio:
The TIE ratio measures the extent to which earnings before interest and taxes (EBIT), also called
operating income, can decline before the firm is unable to meet its annual interest cost. Failure to meet
this obligation can bring legal action by the firm’s creditor, possibly resulting in bankruptcy. The TIE
ratio is computed by dividing earning before interest and taxes (EBIT) by interest charges. It measures the
ability of the firm to meet its annual interest payments. The TIE ratio is calculated as follows:
Time interest earned ratio = EBIT/ Interest charges
31
Rationalization Of Stock Price Through Financial Analysis A Case Of Renata Limited
The following table shows the times interest ratio data of the 2 companiesCompany
2003
2004
2005
2006
2007
2008
Renata
9.54
9.96
13.78
10.17
9.57
8.40
Square
9.60
15.92
12.51
8.64
6.58
7.64
The Above table reflects that the TIE ratio of Renata is increasing from 2003 to 2005, but after 2006 the
TIE ratio started to decline from 10.17 times to 8.4 times. In 2006, there was rise in EBIT of around 27%
from TK 316,958,675 to TK 404,424,412, whereas the rise in interest was around 72.87 % from TK
23,002,949 to TK 39,765,188. In 2007 and 2008, the interest charges have increased, but the
proportionate increase in EBIT is lower than increase in interest charges. In addition, the TIE ratio of
Renata is much lower compared to Square over the years.
Times Interest Earned
Renata
18.00
15.92
Times Interst Earned
16.00
13.78
14.00
12.00
10.00
Square
12.51
9.54
9.60
10.17
9.96
8.64
8.00
9.57
8.40
6.58
7.64
6.00
4.00
2.00
0.00
2003
2004
2005
2006
2007
2008
Year
Fig 24: Times Interest Earned (TIE Ratio) of Renata & Square for the years 2003-2008
This graph reflects that over the time Renata grew stronger in financial position to pay its interest with the
aid of increasing EBIT. So it is a good sign for the company because though it has more loan but it have
the capacity to pay them off.
32
Rationalization Of Stock Price Through Financial Analysis A Case Of Renata Limited
4.3 ASSET MANAGEMENT RATIO:
A set of ratios that measure how effectively a firm manages its assets compared to its sales. These ratios
are designed to find out whether the total amount of each type of asset as reported on the balance sheet
appear reasonable, too high, or too low considering current and projected sales levels. Asset Management
Ratio is done based on inventory turnover ratio, day’s sales outstanding and fixed asset and total asset
turnover ratio.
4.3.1 Inventory Turnover Ratio:
Inventory Turnover Ratio tells how often a business' inventory turns over during the course of the year.
Inventories are the least liquid form of asset and a high inventory turnover ratio is generally positive. On
the other hand, an unusually high ratio compared to the average for the industry could mean that the
business is losing sales because of inadequate stock on hand. The ratio is calculated as follows:
Inventory turnover ratio= Cost of goods sold /Inventories
The following table shows the inventory turnover ratio data of the 2 companiesCompany
2003
2004
2005
2006
2007
2008
Renata
1.83
1.93
2.13
1.53
1.96
1.59
Square
3.54
2.76
2.63
2.76
2.40
2.70
The above table reflects that although Renata have a fluctuation and lower than industry standard
inventory turnover ratio, it is still should not be viewed negatively. Because it is also a sign of rising
demand of the products and strong sales drive both locally and internationally. Therefore they some times
have to hold inventories longer than other company to meet the market’s instant demand. Then again
33
Rationalization Of Stock Price Through Financial Analysis A Case Of Renata Limited
steps
may
be
taken
to
improve
the
inventory
management
system.
Inventory Turnover Ratio
Renata
Inventory Turnover Ratio
4.00
Square
3.54
3.50
2.76
3.00
2.50
2.00
2.70
2.40
2.13
1.93
1.83
2.76
2.63
1.96
1.59
1.53
1.50
1.00
0.50
0.00
2003
2004
2005
2006
2007
2008
Year
Fig 25: Inventory Turnover Ratio of Renata and Square for the years 2003-2008
4.3.2 Days Sales Outstanding (DSO):
The DSO ratio is calculated by dividing accounts receivable by average sales per day which indicates the
average length of time it takes the firm to collect its credit sales. It is also called the average collection
period, is used to evaluate the firm’s ability to collect its credit sales in a timely manner. DSO is
calculated as follows:
Daily Sales Outstanding (DSO) =Receivables/Average sales per day
= Receivables/ [Annual sales/360]
The following table shows the current ratio data of the 2 companiesCompany
2003
2004
2005
2006
2007
2008
Renata
33.93
30.07
36.31
37.09
27.66
40.11
Square
14.78
15.54
14.67
13.34
13.56
17.97
34
Rationalization Of Stock Price Through Financial Analysis A Case Of Renata Limited
From the table, we can see that the days sales outstanding (DSO) is increasing at an alarming rate over the
years. It suggests that Renata collects sales too slowly compared to Square. The collection performance is
getting worse day-by-day as the DSO in increasing from 33.93 days to 40.11 days over 6 years. It has a
poor credit policy. On the other hand, the sales collection of Square is much faster and it is quite steady
over the years, which reflects that Square has a better credit policy in comparison to Renata. Therefore,
Renata should take steps to improve the time it takes to collect the account receivables. Considering that
DSO is already poor, the firm can not relax the credit terms any more, so to reduce the sales price and/or
aggressive market campaign may be a good option to promote sales by proper monitoring. To improve
the DSO, the firm should be more punctual in its collection of credit sales. In addition, cash discount can
be increased.
Days Sales Outstanding
Renata
Square
45.00
40.00
35.00
40.11
37.09
36.31
33.93
30.07
27.66
DSO
30.00
25.00
20.00
15.00
14.78
15.54
17.97
14.67
13.56
13.34
10.00
5.00
0.00
2003
2004
2005
2006
2007
2008
Year
Fig 26: Days Sales Outstanding (DSO) of Renata and Square for the years 2003-2008
4.3.3 Total Asset Turnover Ratio:
Total Asset Turnover ratio measures the amount of sales generated for every dollar's worth of assets. The
total asset turnover ratio is calculated by dividing sale by total assets. It is calculated as follows:
Total Assets Turnover Ratio = Sales/ Total Assets
35
Rationalization Of Stock Price Through Financial Analysis A Case Of Renata Limited
The following table shows the current ratio data of the 2 companiesCompany
2003
2004
2005
2006
2007
2008
Renata
1.29
1.30
1.26
1.09
1.18
0.98
Square
0.91
0.78
0.76
0.83
0.75
0.86
From the above table, we can see that from 2003 to 2008 mostly the total asset turnover ratio of Renata is
declining. In 2008 there was a sharp fall in the total asset turnover ratio. But this is not reflecting the
original picture as their sales also increased significantly (i.e. 31 % in 2007, 21% in 2008 over previous
year) but not enough in proportionate increase in total asset.
Total Asset Turnover
Renata
Total Asset Turnover
1.40
1.29
1.30
Square
1.26
1.18
1.20
1.00
1.09
0.98
0.91
0.78
0.80
0.76
0.83
0.86
0.75
0.60
0.40
0.20
0.00
2003
2004
2005
2006
2007
2008
Year
Fig 27: Total Asset Turnover Ratio of Renata and Square for the years 2003-2008
When compare to industry average the performance of Renata is good because it is always better than that
of Square over the years.
36
Rationalization Of Stock Price Through Financial Analysis A Case Of Renata Limited
4.4 PROFITABILITY RATIO:
Profitability ratios show the combined effect of liquidity, asset management, and debt management on
operating results. It is the net result of a number of policies and decisions.
4.4.1 Net Profit Margin on Sales:
Profit Margin is the ratio of profitability calculated as net income divided by revenues, or net profits
divided by sales. It measures how much out of every dollar of sales a company actually keeps in earnings.
Profit margin is very useful when comparing companies in similar industries. A higher profit margin
indicates a more profitable company that has better control over its costs compared to its competitors.
Profit margin is displayed as a percentage; a 20% profit margin, for example, means the company has a
net income of $0.20 for each dollar of sales. It is calculated as follows:
Profit margin on sales = Net Income/ Sales
The following table shows the current ratio data of the two companiesCompany
2003
2004
2005
2006
2007
2008
Renata
9.51%
10.76%
11.97%
12.56%
13.26%
14.02%
Square
17.67%
20.26%
16.45%
14.96%
14.45%
16.63%
37
Rationalization Of Stock Price Through Financial Analysis A Case Of Renata Limited
Profit Margin
Renata
Square
25.00%
20.26%
Profit Margin
20.00%
17.69%
16.45%
15.00%
10.00%
11.97%
10.76%
9.51%
16.63%
14.96%
14.45%
13.26%
14.02%
12.56%
5.00%
0.00%
2003
2004
2005
2006
2007
2008
Year
.
Fig 28: Profit Margin of Renata and Square for the years 2003-2008
The above table and the figure below illustrates that from 2003 to 2008 the profit margin of Renata is
improving at increasing rate from 9.51% to 14.02%. Whereas, from 2003 to 2008 the profit margin of
Square is almost steady. Although the profit margin of Renata is below than Square from 2003 to 2008,
But hopefully it will reach industry standard in few years. This are all good sign for the company
4.4.2
Return on Asset (ROA):
Return on Asset (ROA) an indicator of how profitable a company is relative to its total assets. It gives an
idea as to how efficient management is at using its assets to generate earnings. It is calculated by dividing
a company's annual earnings by its total assets, ROA is displayed as a percentage. Sometimes this is
referred to as "return on investment". The ROA after interest and taxes are computed as follows:
Return on Asset (ROA) = Net Income / Total Assets
The following table shows the current ratio data of the 2 companiesCompany
2003
2004
2005
2006
2007
2008
Renata
12.24%
14.00%
15.11%
13.63%
15.59%
13.70%
Square
16.52%
15.88%
12.54%
12.43%
10.88%
14.26%
38
Rationalization Of Stock Price Through Financial Analysis A Case Of Renata Limited
The above table illustrates that the return on asset of Renata is increasing from 12.24% to 15.59% during
2003 to 2007 afterward it drop in 2008. But it is also noticeable that the return on asset of in line with
industry average
Return on Asset
Renata
18.00%
16.52%
16.00%
15.88%
15.59%
15.11%
14.00%
14.26%
13.70%
13.63%
12.54%
12.43%
14.00% 12.24%
12.00%
ROA
Square
10.88%
10.00%
8.00%
6.00%
4.00%
2.00%
0.00%
2003
2004
2005
2006
2007
2008
Year
Fig: 29 Return on Asset (ROA) of Renata and Square for the years 2003-2008
4.4.3 Return on Equity (ROE):
Return on Equity (ROE) is the amount of net income returned as a percentage of shareholders equity. It
measures a company's profitability by revealing how much profit a company generates with the money
shareholders have invested. The return on equity (ROE) is measured as follows:
Return on Equity (ROE) = Net income / Total Shareholders’ Equity
The following table shows the current ratio data of the 2 companies2003
2004
2005
2006
2007
2008
Renata
18.05%
25.00%
24.88%
24.65%
26.29%
26.06%
Square
21.13%
22.55%
18.21%
17.77%
16.42%
19.00%
39
Rationalization Of Stock Price Through Financial Analysis A Case Of Renata Limited
The above table indicates that the rate of return on equity of Renata shows an increasing pattern from
18.05% to 26.06% during 2003 and 2008. It indicates that the rate of return on the common stockholders’
investment is rising over the years, which is a good indicator for the company. Whereas, the return on
equity of Square is declining over the years at a steady rate. In addition, the return on equity of ACI has
increased in 2008, which will help Renata to gain shareholders’ trust.
Return on Equity
Renata
Square
30.00%
24.88%
25.00%
ROE
20.00% 18.05%
22.55%
21.13%
20.42%
24.65%
18.21%
17.77%
26.29%
26.06%
19.00%
16.42%
15.00%
10.00%
5.00%
0.00%
2003
2004
2005
2006
2007
2008
Year
Fig 30: Return on Equity (ROE) of Renata and Square for the years 2003-2008
4.5 MARKET VALUE RATIO:
The market value ratios represent a group of ratios that relates the firm’s stock price to its earnings and
book value per share. These ratios give management an indication of what investors think of the
company’s past performance and future prospect. If the firm’s liquidity, asset management, debt
management, and profitability ratios are all good then market value ratios will be high which will lead to
an increase in the stock price of the company.
40
Rationalization Of Stock Price Through Financial Analysis A Case Of Renata Limited
4.5.1
Earnings Per Share (EPS):
Earnings per Share (EPS) are the portion of a company's profit allocated to each outstanding share of
common stock. It serves as an indicator of a company's profitability. It is generally considered to be the
single most important variable in determining a share's price. It is also a major component used to
calculate the price-to-earnings valuation ratio. It is calculated as follows:
EPS = Net Income/ Number of Shares Outstanding
The following table shows the current ratio data of the 2 companiesCompany
2003
2004
2005
2006
2007
2008
Renata
227.07
260.79
287.66
301.41
348.47
374.44
Square
269.46
269.46
290.71
234.67
218.61
157
Earnings Per Share
Renata
Square
400.00
348.47
350.00
300.00
269.46
EPS
250.00 227.07
269.46
260.79
374.44
287.66 290.71 301.41
234.67
218.61
200.00
156.56
150.00
100.00
50.00
0.00
2003
2004
2005
2006
2007
2008
Year
Fig 31:Earnings per Share (EPS) of Renata and Square for the years 2003-2008
The above table illustrates the EPS of Renata has been increasing at healthy rate over the years. This is
good news because this will help attract the investors and thus the company can collect more money from
stock market. The EPS of Renata is increasing from TK 227.07 to TK 374.44 during 2003 to 2008 which
helped to increase the share price. It is good that the EPS of Renata is much higher than the industry
41
Rationalization Of Stock Price Through Financial Analysis A Case Of Renata Limited
4.5.2.
Price/Earning (P/E) Ratio:
This is the ratio of the price per share to earnings per share. It shows how much investors are willing to
pay per dollar of reported profit. It is calculated as follows:
P/E Ratio = Market Price per Share/ Earnings per Share
The following table shows the current ratio data of the 2 companiesCompany
2003
2004
2005
2006
2007
2008
Renata
5.35
12.27
10.43
10.28
21.50
20.80
Square
6.75
14.10
8.41
9.65
16.84
20.13
From the above table, we can see that the price/earning ratio of Renata is significantly increased over the
years. This indicates the demand and trust of this share to the investors. The investors willing to pay 20.80
taka for earning 1 taka profit from the company. The company has a proven track record in stock market
so it’s share may be considered as blue chip.
This High P/E Ratio means that Renata has a very high growth potential. If we compare the P/E ratio of
Renata with Square we can see it has over taken Square from the year 2005 & maintaining it till date.
Price Earning Ratio
Renata
Square
25.00
21.50
20.80
20.00
P/E Ratio
20.13
15.00
10.00
12.27
16.84
10.28
10.43
14.10
6.75
9.65
8.41
5.00
5.35
0.00
2003
2004
2005
2006
2007
Year
Fig : 32 P/E Ratio of Renata and Square for the years 2003-2008
42
Rationalization Of Stock Price Through Financial Analysis A Case Of Renata Limited
2008
4.5.3 Book Value Per Share:
Common stockholders' equity is determined on a per-share basis. Book value per share is calculated by
subtracting liabilities and the par value of any outstanding preferred stock from assets and dividing the
remainder by the number of outstanding shares of stock. It is calculated as follows:
Book Value per Share=Equity/Number of Shares Outstanding
The following table shows the current ratio data of the 2 companiesCompany
2003
2004
2005
2006
2007
2008
Renata
1258.20
1042.96
1156.38
1222.80
1325.32
1436.81
Square
1275.04
1289.07
1288.65
1230.08
941.25
824.16
The above table shows the book value per share of Renata and Square from 2003 to 2008. The book value
per share of Renata is increasing from TK 1258.20 to TK 11436.81 from 2003 to 2008. In addition,
Renata has higher market value than the book value over the years, which is a good indicator for the
company. The level of equity is rising over the years, but during 2007 and 2008 the equity rose by from
TK 1,277605506 to TK 1662073357, which led to a rise in the book value per share. Whereas, the book
value per share of Square is decreasing from TK 1275.04 to TK 824.16 during 2003 to 2008. However,
the book value per share of Square is much lower than Renata.
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Rationalization Of Stock Price Through Financial Analysis A Case Of Renata Limited
Book Value per Share
Renata
Square
Book Value Per Share
1600.00
1325.33
1289.07
1288.651222.80
1230.08
1156.38
1400.00 1258.20 1275.04
1200.00
1436.81
1042.96
941.25
1000.00
824.16
800.00
600.00
400.00
200.00
0.00
2003
2004
2005
2006
2007
2008
Year
Fig 33: Book Value per Share of Renata and Square for the years 2003-2008
4.5.4
Market/Book (M/B) Ratio:
The ratio of a stock’s market price to its book value gives another suggestion of how investors regard the
company. Companies with relatively high rates of return on equity generally sell at higher multiples of
book value than those with low returns. The formula for Market/Book Value is given below:
Market /Book Ratio = Market Price per Share / Book Value per Share
The following table shows the current ratio data of the two companiesCompany
2003
2004
2005
2006
2007
2008
Renata
0.97
2.97
2.60
2.53
4.71
5.66
Square
1.43
2.95
1.90
1.84
3.91
3.82
The above table shows the market to book value per share of Square and Renata from 2003 to 2008. The
market/book ratio of Renata shows an increasing pattern from 0.97 times to 5.66 times during 2003 to
2008. However the market/book ratio of Square is also increasing from 1.43 times to 3.82 times during
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Rationalization Of Stock Price Through Financial Analysis A Case Of Renata Limited
2003 to 2008. The cross section analysis indicates that the market/book ratio of Renata is much higher
than Square, which means that market value of Square is not increasing at a faster compared to book
value per share. Investors are willing to pay more for the book value of Renata than for that of an average
pharmaceutical company. This should not be surprising, because as it is discovered previously Renata has
generated above average returns with respect to both total asset and common equity.
Market/Book Value
Renata
Square
6.00
4.71
M/B Value
5.00
5.66
4.00
2.97
3.00
2.00
1.00
3.82
3.91
2.53
2.60
2.95
1.43
1.84
1.90
0.97
0.00
2003
2004
2005
2006
2007
2008
Year
Fig: 34 Market /Book Ratio of Renata and Square for the years 2003-2008
The overall market value ratios of Renata are high, which indicates that the firm retains its good position
in the industry. Investors are very confident about Renata’s future prospects. Due to this, Renata’s market
value ratios are getting better in recent years.
4.5.5
Dividend Payout Ratio:
The dividend payout ratio indicates how much of the dividend is being paid to the shareholders.
Dividend Payout Ratio= Dividend Paid/Number of Shares Outstanding
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Rationalization Of Stock Price Through Financial Analysis A Case Of Renata Limited
The following table shows the current ratio data of the 2 companiesCompany
2003
2004
2005
2006
2007
2008
Renata
49.60
41.37
40.93
41.28
40.95
41.07
Square
58.33
92.00
66.96
62.50
33.33
29.63
The above table shows that the dividend payout ratio of Renata is steady from 2003 to 2008, which has
lead to the rise in the market value of the shares. In addition, the dividend payout ratio of Renata is higher
than Square in recent years. Therefore, it is good news for Renata and its stakeholders since the market
value per share is increasing due to the rise in the level of dividend payout ratio.
Dividend Payout Ratio
Renata
Square
100.00
Dividend Payout Ratio
90.00
80.00
70.00
92.00
58.33
60.00
41.37
50.00
40.00
66.96
40.93
41.28
62.50
40.95
41.07
49.60
30.00
20.00
33.33
29.63
10.00
0.00
2003
2004
2005
2006
2007
Year
Fig; 35 Dividend Payout Ratio of Renata and Square for the years 2003-2008
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Rationalization Of Stock Price Through Financial Analysis A Case Of Renata Limited
2008
4.6 OVERALL COMMENT ON RENATA & SQUARE
Analyzing the liquidity ratios we can see that Renata does not have adequate short term solvency. Both
the current ratio and the cash ratio are lower than the industry benchmark. It is identified that during 2007
and 2008, Renata was holding excessive stock of inventory. In 2008, there was a huge rise in the level of
inventory around 52.42%. However, the pile up of huge amount of inventory that may become its
competitive advantage in an inflationary economy as it may enjoy in the future. This is good news for the
investors and this fact is reflected in the higher market price of Renata than its book value per share from
2003 to 2008.
It is observed that there is an industry trend to invest for expansion during the period of 2005 to 2006.
Because as there is a facility for Bangladesh pharmaceutical company to manufacture any patented drug
of any company of the world till 2016. All the pharmaceuticals companies have invested heavily to
capitalize on this opportunity. Renata was also not out of this trend. So we saw in that years its asset
increased significantly which has portrayed certain ratios weaker.
According to the asset management ratios conducted it is fair to say that Renata has room for
improvement when it comes to inventory management, credit policy management. But when we look at
the asset turnover ratio, it is higher than the market. This indicates improving sales of Renata.
Consequently this has contributed theoretically poor DSO and inventory turnover ratio.
In case of debt management ratio it is obvious that Renata is highly levered company but than again as we
mentioned before during 2005 and 2006 the company invested heavily for expansion purpose via debt
financing. Given the scope of market both locally and internationally this was necessary to cope up with
the increasing demand but good news is that the company is utilizing this loan efficiently and effectively.
When it comes to profitability the company is in very encouraging position. Profit margin wise Renata
has been increasing at steady mode despite being lower than the market. As per ROA and ROE investors
would be extremely happy because it at par with the competitor and above respectively. Furthermore
Renata has very good EPS and steady dividend pay out ratio which will be eventually helped the
company to increase the stock price.
Overall the market ratio also show healthy sign as Book value par share and market value ratio show
greater competence than the market which cause the company share price to higher.
All this justifies why the market value is a lot higher than the book value of the company.
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Rationalization Of Stock Price Through Financial Analysis A Case Of Renata Limited
CONCLUSION
The whole point of the thorough analysis conducted on Renata Limited was to asses this entity in
terms of liquidity, profitability, solvency, cash health, comparison with rival and so on.
Accordingly, it would safe to say that Renata Limted is a company with great potential for the
future. As it is since the beginning, this entity has come a long way. During 2005-2006, it has
taken made big investments for expansion of it’s operations and as of today, the company has
been running quite successfully both in Bangladesh and abroad, particularly in Sri Lanka.
Furthermore, to vouch for it’s success, the company has been able to hold a very good price in
the stock market. Although not yet as a large a business entity as Square Pharmaceuticals, but it
is competing well at par with the local pharmaceutical giant. In fact, in various aspects
mentioned in the report, Renata has proved to be in rather more suitable condition compared to
it’s competitor in question.
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Rationalization Of Stock Price Through Financial Analysis A Case Of Renata Limited