Introduction & Methodology
Aftab Automobiles Limited has been our selected company, which is one of the largest automobile assembling plants in the private sector in Bangladesh. Aftab Automobiles Ltd. is in this business since 1967. In 1981 the Company registered itself as a Public Limited Company. The Company was listed with Dhaka Stock Exchange Limited and Chittagong Stock Exchange Limited in the year 1987 and 1996 respectively. The principal activities of the Company throughout the period were assembling of Toyota Land Cruiser soft top/ Pick-up, Land Cruiser Prado, Hino Bus, Hino Mini Bus / Truck Chassis with a production Capacity of 2400 units of vehicles in 3 shifts in Assembling Unit.
But since inception, the Plant is running single shift considering the market demand. The Company has added four units namely Body Building Unit, Paint Unit, Battery Unit & Furniture Unit and the commercial production of which started in May 5, 1997, November 01, 1999, January 03, 2002 and May 01, 2002 respectively.
Overall, it is a company with vision of maximizing shareholders’ wealth and its investors have already shown their confidence in the company.
Its share price has increased over the years compared to its book value. Furthermore, it enjoys a positive signaling effect from the market and there is good news for Aftab Auto. In this report, we will try to find out few reasons behind the good news and the positive signaling effect.
The main company that we are performing financial analysis is on Aftab Motors LTD.
Since our major focus is to compare two companies’ financial performances over time, so we have selected Atlas Bangladesh LTD as the rival company of Aftab Motors LTD. According to the project instruction, we aimed towards rationalizing stock price through financial statement analysis, and in doing so we have seriously dealt with the book value and market value of shares. By comparing the book value and the market value of
Aftab Motors LTD from the year 2005-2009, we found out following information:
• Making a thorough analysis of the company’s financial statements over the last 5 years through ratio analysis, cash flow analysis and analysis of major components of the balance sheet and trying to identify the actual state of the company since its enlistment in Dhaka Stock Exchange (DSE).
• Find out the difference between book value and market value of the share price and to identify the possible reasons behind this difference, and find if there is any specific hidden discrepancy in the existing financial statements of the company.
• Find out the growth to make the Pro Forma Statements (The Income Statement and the Balance Sheet) and thus forecast the growth potentials of Aftab Automobiles Ltd along with the stated out the results yielding out after the 5 year long term projection (long term cumulative process)., as well as projection of stock price through financial analysis.
• To compare the firm’s financial status with one of its rival firm (Atlas Auto) through ratio analysis with the justification of balancing between the market price and book value of the shares.
This study is based on the secondary financial data which is published in annual reports and monthly reviews of Dhaka Stock Exchange Ltd. by the respective companies. We have obtained the necessary information from the DSE (Dhaka Stock Exchange LTD), Motijjhil, Dhaka, and from the annual report of the company.
Data Processing and Analysis
We have calculated different ratio using sourced data from DSE, and showed the comparison between the two companies’ performances over the last five years. Here the positions of companies were compared to their previous year’s performance and then the analysis has been done between those companies current year’s situations.
Period of Data
We have used data of five consecutive years from 2005, 2006, 2007, 2008, 2009.
We basically used two different statistical techniques. First we used the Time Series method for ratio analysis and then Cross-Sectional method for showing the comparison between Aftab Motor’s LTD and Atlas Bangladesh LTD. There is also couple of tables and charts to specifically present the data with comments. We also did the regression analysis using the Microsoft Excel.
Standard of Comparison
As we know that there are few competitors for Aftab Motors LTD in Bangladesh. Among them, we figured that Atlas Bangladesh LTD is one of the most challenging one for Aftab Motors in terms of market share and fiscal performance over time.
4: Limitations of the Study
• Due to different month of year closing date comparison may not be accurate.
• We faced problem while breaking down the actual balance sheet and sorting out the adjustments.
• Due to time constraints we could not visit the premise of Aftab Auto to incorporate more recent information and views of the “Top Management” about the performance & position of the company.
• Another limitation was collecting the industry averages for the ratio analysis. No such data are readily available in context of Bangladesh. So, instead of the industry average data we have to take the best available rival data.
• Also we had some problem regarding what will be the future investment of the company. We had to depend on the secondary source for that.
• We did not find exact unit price of company’s products as it was not clearly mentioned in their annual report.
• Also the company’s official website is not very informative and organized through which we could collect the information about the company.
• Lack of technical knowledge-how in higher-level statistical techniques.
• Moreover, time constrains and other factors deterred us to anticipate highest concentration that we could have given to prepare this report.
Analysis & Interpretation
2.1: Revised Balance Sheet based on Market Value of Share
Market Value & Book Value of Aftab Auto Ltd:
From the Annual Report of the Aftab Automobiles ltd we calculated the Book Vale of their share from 2005 to 2009. Besides that we also collected the Market Value of the share from the library of the DSE (Dhaka Stock Exchange). The following Graph shows the Market Value and the Book Value per share of our proposed company.
Figure-1: Market & Book Value of Aftab Ltd. From 2005 to 2009
From the above graph we see that in year 2005, 2008 and 2009 the market price is higher then the book value, which is really good news for us. But in 2006 and 2007 the market price is below then the market price, which indicates that the investors underestimated the company’s wealth. But as our last year in 2009, so our analysis will be based on year 2009.
In year 2009, we found that the Market Value is far more then the Book value which is Taka 1,530 and taka 390.38248 respectably. This figure indicates that the investors are willing to pay more for per share for the company then the book value shows because the investors may think that the company may underestimated the company’s wealth. So we constructed a new Balance Sheet compared with the current year (2009) Balance Sheet based on the Market Value of the corporation.
Revised Balance Sheet Based on the Market Value in 2009:
|Aftab Automobiles Ltd | |Balance Sheet | |2009 | | |Based on Book Value | Based on Market | Increase / Decrease | | | |Value | | |Assets | |Current Assets | | |Stock And Stores (Inventory) | | | | | | | | | | | |Total Stock & Stores
| 737,517,274 | 1,281,969,612 | 544,452,338 | | |Total Accounts Receivable | 993,547,199 | 993,547,199 | – | | |Income Tax Deducted at Source | 93,002,081 | 93,002,081 | – | | | | | | | | |Advance, Deposits & Prepayments | 149,320,158 | 149,320,158 | – | | |Cash & Bank Balances | 27,881,100 | 27,881,100 | – | |Total Current Assets | 2,001,267,812 | 2,545,720,150 | 544,452,338 | |Non-Current Assets | | |Property, Plant & Equipment | | | | | | |Land | 58,959,642.00 | 58,959,642 | 648,556,062 | 589,596,420 | | |Building | 169,846,130.00 | 142,270,645 | 213,405,968 | 71,135,323 | | |Shades | 2,682,800.00 | | | | | |Less: |Accumulated | 1,529,591.00 | | | | | |Depreciation till 2008 | | | | | |Tools & Equipment | 45,965,960.00 | | | | | |Less: |Accumulated | 17,743,259.00 | | | | |Depreciation till | | | | |
|2008 | | | | |Office Equipment | 31,021,242.00 | | | | | |Less: |Accumulated | 7,323,987.00 | | | | |Depreciation till | | | | | |2008 | | | | |Furniture & Fixture | 16,953,271.00 | | | | | |Less: |Accumulated | 2,973,873.00 | | | | | |Depreciation till 2008 | | | | | |Less: |Accumulated | 26,595,111.00 | | | | |Depreciation till | | | | | |2008 | | | | |Investment (4109300 Share Of Navana CNG) | 33,961,309 | 796,793,270 | 762,831,961 | | |Intangible Assets | – | 1,263,853,978 | 1,263,853,978 | |Total Assets | 2,438,883,896 | 5,744,380,219 | 3,305,496,323 | |Liabilities & Owners Equity | – | – | |Current Liabilities | | | – | – | | |Short Term Loan | | 229,914,219 | 229,914,219 | – | | |Total Accrued & Other Current Liabilities
| | 1,275,342,755 | 1,263,853,978 | (11,488,777) | | |Dividend Payable for Preference Share | | 1,179,500 | 1,179,500 | – | |Total Current Liabilities | 1,506,436,474 | 1,494,947,697 | (11,488,777) | |Non-Current Liabilities | | | | – | | |Loan & Deferred Liabilities | | 17,100,000 | 17,100,000 | – | | |Preference Share Capital including Premium | | 9,827,929 | 9,827,929 | – | |Total Liabilities | 1,533,364,403 | 1,521,875,626 | (11,488,777) | |Equity Attributable to Equity Holders | | |Paid up Share Capital (Ordinary Shares – 2319570 Shares) | | 231,957,000 | 3,548,942,100 | 3,316,985,100 | | |Share Premium | | 250,191,730 | 250,191,730 | – | | |Reserve | | 107,100,735 | 107,100,735 | – | | |Retained Earnings | | 316,270,028 | 316,270,028 | – | |Total Assets & Liabilities | 2,438,883,896 | 5,744,380,219 | 3,305,496,323 |
1. Stock & Stores: The investors may think that the company underestimates
the price of the finished goods. As the company use to measure the finished goods based on the Cost of Production basis. But the original market price is higher then the value written in the Annual Report. Also the market price of the Raw Materials, Store & Spares, Goods in Transit, L/C Margin, Work-In-Process is underestimated. So in Revised Balance Sheet we increase the value of the Stock & Stores.
2. Land: The Land value is underestimated as we know that the land value is calculated as per the purchase price, not as per the market value. We know that the value of the land always increases. So we increase the value of the land.
3. Buildings: The value of the Building is calculated as per the establishment cost and the current value is calculated by deducting depreciation. So in this case the investors may find the Market value of the Building is more then the value used in the annual report. The investors may find the Building in better condition and able to offer the higher price than the value calculated in the balance sheet. So we also increase the value.
4. Plant & Machinery, Tools & Equipment, and Transport Vehicle: As all of these items value is written on the basis of the purchase price and also by deducting the accumulated depreciation. So the investors may find these items in better condition and also think that the market price is higher than the written in Balance sheet.
5. Investment: This Company purchased 4,109,300 pcs of share from Navana CNG Ltd. The value written on the Balance Sheet is from the purchased price. But the Current market price of this share is taka 193.90. So we also increased the value of the investment by using the market value of the stock.
6. Intangible Assets: The market price of the share is increased. This value increased may be the reason is the value increasing of the company’s intangible assets like Patent, Trademark etc.
7. Goods Supplied Account: We are decreasing this account on the basis is that, the company may get some purchase discount from the vendors. So the value of the accounts receivable is decreasing.
In year 2009, we see that the Market price is much higher then the Book Value of each share. Investors are willing to pay more than the book value of each share. The major reasons of the higher market value are the underestimation of the assets, as the assets are calculated based on the purchase price; not on the basis of the market price. Besides that investment to the other shares are also calculated on the purchase price. But the market price is also higher. Moreover, Aftab Automobiles ltd enjoys a better reputation on the market. So the Intangible assets like, Patent, Trade mark should be considered. So we can say that the company’s financial position is good.
2.1: Cash Flow Analysis:
Cash flows are the cash receipts and the cash disbursement of the company. Since money does not flow in and out at an equal rate, so in most of the businesses, an analysis of cash flow is important. In our case we are working with the Cash Flow Statement of Aftab Automobiles Ltd from the year 2005 to 2009. After analyzing the statements we can have an idea of the cash dealing of the company of the years under our study.
|Sources |2005 |2006 |2007 |2008 |2009 | | | | | | | | |EBIT |55,369,060 |61,681,543 |43,530,063 |79,204,842 |125,312,761 | | | | | | | | |Depreciation | 26,964,852 | 26,964,852|26,964,852 |26,964,852 |26,964,852 | |Tax
|-7,179,527 |-14,602,650 |-13,059,019 |-21,781,331 |-51,261,009 | |Operating cash Flow |75,154,385 |74,043,745 |57,435,896 |84,388,363 |101,016,604 | | | | | | | | |Capital Spending: | | | | | | |Ending Net Fixed Investment |30,149,974 |26,582,937 |23,015,900 | |Less Beginning Fixed Investment | |-30,531,889 |-30,531,889 |-23,666,305 |-23,666,305 | |Deprecation | |26,964,852 |26,964,852 |26,964,852 |26,964,852 | |Net Fixed Investment | |26,582,937 |23,015,900 |26,314,447 |29,612,994 | | | | | | | | |Changes In Net Working Capital: | | | | | | |Ending Net Working Capital | |425,800,770 |260,925,322 |298,947,675 |905,519,493 | |Less: Beginning Net Working Capital | |171,666,619 |425,800,770 |260,925,322 |620,450,571 | |Changes In Net Working Capital: | |254,134,151 |-164,875,448 |38,022,353 |285,068,922 | | | | | | | | |Free Cash Flow from Assets | | | | | | |Operating Cash Flow |75,154,385 |74,043,745 |57,435,896 |84,388,363 |101,016,604 | |Net Fixed Investment | |-26,582,937 |-23,015,900 |-26,314,447 |-29,612,994 | |Changes In Net Working Capital | |-54,134,151
|-164,875,448 |-38,022,353 |-285,068,922 | |Free Cash Flow | |-6,673,343 |-130,455,452 |20,051,563 |-213,665,312 | |Cash Flow from/to Creditors | | | | | | |Interest Paid |34,992,217 |44,619,538 |48,012,628 |54,362,263 |90,846,346 | |Less New Long Term Borrowing |17,100,000 |17,100,000 |17,100,000 |117,100,000 |26,927,929 | |Cash Flow From Creditors |17,892,217 |27,519,538 |30,912,628 |-62,737,737 |63,918,417 | | | | | | | | |Cash Flow From Investors | | | | | | |Dividend Paid |24,000,000 |12,000,000 |12,000,000 |12,000,000 |1,179,500 | |New Equity |439,792,483 |701,016,976 |685,748,820 |621,050,571 |905,519,493 | |Cash Flow To Investors |463,792,483 |713,016,976 |697,748,820 |633,050,571 |906,698,993 |
• As we can see from the cash flow statement that, in 2006, 2007 & 2009 the free cash flow figures are negative. This might happen because of high investment in inventory and R&D departments, means the company used more cash than they had sourced of.
• Also the cash flows to Investors were sufficient for the company over the years. The company had sufficient fund to pay out dividends and that would eventually maximize the value of the firm.
• Fixed investments were consistent and consumed huge cash over the years.
Overall we see that the Sales of the company are increasing which is a good sign. Besides that the company is investing heavily on the fixed assets,
which may used to generate more revenue for the company. They are also offering cash dividend each year and also the company paid its short term load and also taking short term loans, which indicates that the company is enjoying a favorable environment in terms of the short term credit situation. So, we can conclude that the Aftab Automobiles Ltd is financially sound based on the Cash Flow analysis.
Ratio Analysis and Interpretations
To evaluate a firm’s financial condition and performance, the financial analyst usually performs analyses 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. Ratio analysis is a tool frequently used during the analysis to relate two pieces of financial data by dividing one quality by the other. 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 analysis of financial ratios involves two types of comparison:
← Time–Series Analysis: First, the analyst compares a present ratio with past and expected future ratios for the same company. 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 year-end. 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. Here we will conduct time series only on the Aftab Auto Ltd.
← Cross-Section Analysis: The second 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 identify any significant deviation from any applicable industry average (or standard).
Here we will discuss and calculate different types of ratios. Then we will compare the ratios between Aftab Auto Ltd. and Atlas Auto Ltd. The reason for doing this is that the industry average is not available in perspective of Bangladesh.
▪ Liquidity Condition Analysis:
Ratios that show the relationship of a firm’s cash and other current assets to its current liabilities are known as liquidity ratios. Different types of liquidity ratios are discussed below.
The ratio that relates current assets to current liabilities is the current ratio. 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.
Figure-1: The Current Ratios of Aftab and Atlas for the years 2005-2009
Time Series Analysis: Current ratio for Aftab is higher than 1 and it is consistent for all five years. In 2006 it has increased a lot from the previous year but in 2007 it dropped for two consecutive years but again in 2009 it has increased again and is in a good satisfactory condition.
Cross-Section Analysis: However, comparing to the ratios of Atlas, we see significant difference the two companies’ ratios. Aftab’s ratios seem to be much weaker than Atlas’s. None of the years it has made the benchmark of 2. However, the last 3 years results are not satisfactory at all because none of them is showing benchmark of 2 or the increasing manner. So, we can conclude that Aftab is showing poor trend in its quick ratio.
Inventories typically are the least liquid of a firm’s current assets – they are the assets on which 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. This is why quick ratio is used.
Figure-2: The Quick Ratios of Aftab and Atlas for the years 2005-2009
Time Series Analysis: Quick ratio of Aftab is less than 1 which means it has piled up inventories as its current assets. The trend of quick ratio of Aftab shows that the ratio had been increasing from 2005 to 2006 but then suddenly fell significantly in year 2007 and 2008. Then it has increased in 2009. So, we can conclude that Aftab is showing low quick ration but increasing trend in its quick ratio.
Cross-Section Analysis: Comparing with Atlas, Aftab has a very poor quick ratio even though it has increased but its running with risky conditions in terms its quick ratio.
It is another measure of liquidity of the firm. It shows cash solvency of the firm.
Figur-3: The Cash Ratios of Aftab and Atlas for the years 2005-2009
Time Series Analysis: Aftab’s cash ratio has seen a fluctuating matter. The ratio is very low. Even though the ratio improved in 2008 than previous year, the ratio is significantly lower. Too much inventory pile up and poor credit collection policy may led to such deteriorating trend in cash ratios.
Cross-Section Analysis: Comparing with Aftab, Atlas has a very high cash ratio which indicates Atals has a better credit collection policy and lower
piled up inventories.
Asset-Management Efficiency Analysis:
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
Total Asset Turnover:
The total asset turnover ratio is calculated by dividing sale by total assets. The total assets turnover ratio measures the turnover of all the firm’s assets.
Figure-4: The Total Asset Turnover Ratios of Aftab and Atlas for the years 2005-2009
Time Series Analysis: Total turnover of Aftab is not very satisfactory which means its not generating enough revenue by using its total assets which indicates it may some inefficient assets in its stock which deteriorating the total revenue. It’s in decreasing trend till 2007 but after that it as an increasing trend which is a very good sign in fact.
Cross-Section Analysis: Atlas has a very high asset turnover ratios which indicates its assets efficient enough to generate more revenues and its in increasing trend for both the firm.
Fixed Asset Turnover:
The fixed asset turnover ratio is calculated by dividing sale by total fixed
assets. The total fixed assets turnover ratio measures the turnover of all the firm’s fixed assets.
Figure-5: Fixed Asset Turnover Ratios of Aftab and Atlas for the years 2005-2009
Time Series Analysis: Fixed Asset Turnover of Aftab is very low and it’s in decreasing trend which indicates that it has very inefficient fixed assets in its stock to generate enough sales. . It means it is becoming more efficient to utilize its short term assets to generate sales and even though it’s fixed asset is generating more sales than does the short term assets
Cross-Section Analysis: in terms of Fixed Assets Turnover Atlas has a very high fixed asset turnover ratio compare to Aftab which indicates Atlas is doing well in terms of using its fixed assets and generating revenue.
This ratio indicates how active the company has been. It talks about the efficiency as well as the management of the company. This ratio indicates the number of times in a trading year a firm sells the value of its stocks.
Figure-6: Inventory Turnover Ratios of Aftab and Atlas for the years 2005-2009
Time Series Analysis: Inventory Turnover of Aftab is very low but it’s in increasing trend till 2006 then there was a drop in 2007 after that it increased in 20008 then again it increased in 2009. So tells us that its inventory turnover is fluctuating and it doesn’t have efficient inventory to generate sales properly. This means Aftab was suffering from poor inventory management which is also evident from the balance sheet. But, recently it improving and overcoming the situation which is a good indication.
Cross-Section Analysis: comparing with Atlas Aftab has a very low inventory turnover ratio whereas Atlas’s inventory turnover is very high which indicates that Atlas is efficient in managing its inventory. But Atlas’s inventory turnover has a decreasing trend whereas as Aftab’s is in increasing trend
Days Sales Outstanding (DSO):
DSO 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.
Figure-7: DSO of Aftab and Atlas for the years 2005-2009
Time Series Analysis: From the graph it’s been seen that initially low but then there were increasing trend in DSO but after 2007 it’s again starts to decrease which us a good sign that indicates that’s they are being more efficient in collecting its receivables.
Cross-Section Analysis: Comparing with Aftab, Atlas has a very low collection period which means Atlas take less time to collect its receivable.
▪ Debt-Management Efficiency Analysis:
This ratio measures how effectively a firm is managing its debts. Debt Management ratios include analysis of two types of ratio: debt ratio and times interest earned ratio.
Debt to Asset Ratio:
It measures the percentage of the firm’s assets financed by creditors.
Figure-8: Debt Ratios of Aftab and Atlas for the years 2005-2009
Time Series Analysis: Debt ratio of Aftab is fluctuating trend. It has high debt ratios which indicate that they a high leveraged firm and since interest on debt enjoy tax advantage, this is evident in the gradual increment in EPS figures. This is good news for the investors.
Cross-Section Analysis: Comparing with Aftab, Atlas has a very low debt ratio which indicates they have a long-term solvency and low risk but at the same time they don’t have much leverage power to generate more profit and enjoy the tax benefits.
Times 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. It measures the ability of the firm to meet its annual interest payments
Figure-09: TIE Ratios of Aftab and Atlas for the years 2005-2009
Time Series Analysis: TIE ratio of Aftab is very low which means it has low ability to meet its annual interest payments. Aftab is covering its interest charges by a low margin of safety. This affects the potentiality of raising further debt in future.
Cross-Section Analysis: Compare to Atlas, Aftab has a very low TIE ratio which means Atlas has very high safety of margin to cover its interest payment.
▪ Profitability Condition Analysis:
A group of ratios showing the effect of liquidity, asset management, and debt management on operating results. Profitability is the net result of a number of policies and decisions. Profitability ration are of three types- Net profit margin on sales, Return on Asset (ROA) and Return on Equity (ROE).
Net Profit Margin:
This ratio measures how much the sales is contributing to the net profit of the company, which belongs to the shareholders.
Figure-10: Net Profit Margin of Aftab and Atlas for the years 2005-2009
Time Series Analysis: Net Profit Margin of Aftab gradually decreased in the first three year then it started rising and continue to rise. This is a very good indication for the company and as well as the investors. This increasing trend in Aftab’s profit margin ratio will help to attract the investors.
Cross-Section Analysis: from the figure we can see that initially Atlas net profit was higher than the Aftab but later on Aftab’s net profit gradually increased and Atlas’s started to decrease. This indicates that Aftab earning more than Atlas does. The decreasing trend in Atlas’s profit margin ratio will not help to attract the investors.
Operating Profit Margin:
Figure-11: Operating Profit Margin of Aftab and Atlas for the years 2005-2009
Time Series Analysis: From the graph we can see that Aftab’s operating profit
is in increasing trend which is a good indication of the fact that Aftab is becoming more efficient is its operation thus it has been able to reduce the operating cost which enable for higher and increasing operating profits.
Cross-Section Analysis: Comparing with Atlas, Aftab is doing well in terms of making operating profit and Afatb has an increasing trend in its operating profit margin whereas Atlas has a decreasing operating profit margin.
Earnings Per Share (EPS):
Figure-12: EPS of Aftab and Atlas for the years 2005-2009
Time Series Analysis: EPS of Aftab has a decreasing trend for the first three years and then it followed and increasing trend and a big jump in EPS in 2009. So Aftab is earning more per share of its then it was previously earned.
Cross-Section Analysis: From the graph we can see that Aftab has higher EPS then Atlas. Thus Aftab will be able to attract more investors then Atlas as its earning more than Atlas for its per share.
Return On Asset:
Figure-13: ROA of Aftab and Atlas for the years 2005-2009
Time Series Analysis: From the table we can see that return on total asset of Aftab is decreasing from the very start period. But from 2007 it starts increasing and it’s a positive factor for the company and the investors’ as well
Cross-Section Analysis: ROA ratio of Aftab is lower than Atlas all through the five years. Aftab has faced a severe downfall at 2007 which may be
triggered by the high interest charges on its huge amount of debt. So, it is very poor compare to Atlas but its improving for the last three years.
Return on Equity:
ROE measures the rate of return on stockholder’s investment.
Figure-14: ROE of Aftab and Atlas for the years 2005-2009
Time Series Analysis: From the table we can see that return on total equity of Aftab is decreasing from the very start period. But from 2007 it starts increasing and it’s a positive factor for the company and the investors’ as well. This improvement indicates firm’s improving liquidity position, efficient asset management and efficient use of high debt amount.
Cross-Section Analysis: ROE ratio of Aftab is lower than Atlas all through the five years. Aftab has faced a severe downfall at 2007 which may be triggered by the high interest charges on its huge amount of debt. So, it is very poor compare to Atlas but its improving for the last three years.
▪ Market Condition Analysis:
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. Market value ratio is of two types- Price/Earnings Ratio and Market/Book value Ratio.
Market to Book 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.
[pic]Figure-15: M-B Ratio of Aftab and Atlas for the years 2005-2009
Time Series Analysis: It is noticeable that Aftab has an increasing trend in its M/B ratio after 2005 which is good indicator. This indicates investors are gaining confidence on Aftab’s share and are now ready to pay more for Aftab’s book value of its share.
Cross-Section Analysis: Even though there are increasing trend in the M/B ratio of Aftab it is much lower than the Atlas’s. It indicates that Atlas is gaining more investor’s trust over the years then Aftab. This justifies the high riskiness of Aftab’s securities due to its huge debts. But its M/B is increasing which means investors are gaining the confidence which is a good indicator to compete with Atlas
This is the ratio of the price per share to earnings per share. It shows the dollar amount investors will pay for $1 of current earnings. It is computed by market price per share and earnings per share (EPS).
Figure-16: P/E Ratio of Aftab and Atlas for the years 2005-2009
Time Series Analysis: P/E ratio of Aftab was decreasing trend for the first two years then it experienced a rise in 2007 which indicates the firm’s high growth potential. After that it starts to decrease. This shows firm’s huge riskiness which we have already seen by its increasing debt financing and overall poor management and other ratios. This indicates that investors are now willing to pay less for 1taka of current earnings.
Cross-Section Analysis: Aftab has a lower P/E ratio then Atlas but both the company has the same decreasing trend in its P/E ratio. So both the company is losing investors’ confidence and investors are now willing to pay less for 1taka of current earnings.
Summary of all the Ratio Calculation:
The calculation of the following ratios has been done following the particular formulas. In the Appendix section we have attached the calculation procedures in details.
Aftab Automobiles Limited
|Type of Ratios |2005 |2006 |2007 |2008 |2009 | |Liquidity Ratio | |Current Ratio |1.19 |1.39 |1.20 |1.20 |1.33 | |Quick Ratio |0.39 |0.83 |0.79 |0.78 |0.84 | |Cash Ratio |0.027 |0.014 |0.019 |0.020 |0.019 | |Asset-Management Efficiency Ratio | |Total Asset Turnover |1.03 |0.86 |0.65 |0.83 |0.87 | |Fixed Asset Turnover |5.00 |5.31 |2.95 |4.22 |4.86 | |Inventory Turnover |1.7 |2.0 |1.9 |2.7 |2.5 | |DSO |38.3 |135 |210 |178.2 |128 | |Debt Management Ratio | |Debt-Asset Ratio |68.13 |61.22 |66.09 |72.23 |62.87 | |Time Interest Earned |2.5 |2.7 |2.0 |2.6 |2.4 | |Profitability
Ratio | |Net Profit Margin |3.38 |3.03 |2.33 |3.10 |14.90 | |Operating Profit |6.19 |6.17 |6.37 |6.95 |10.30 | |Earnings per Share |28.58 |27.91 |18.06 |24.76 |136.50 | |Return on Assets |3.5 |2.6 |1.5 |2.6 |13.0 | |Return on Equity |11.0 |6.7 |4.4 |9.2 |35.0 | |Market Ratio | |Price Earning Ratio |14.8 |10.9 |20.3 |15.8 |11.6 | |Market/Book Ratio |1.62 |0.73 |0.90 |1.46 |4.07 |
Atlas Bangladesh Limited
|Type of Ratios |2005 |2006 |2007 |2008 |2009 | |Liquidity Ratio | |Current Ratio |2.46 |2.45 |2.55 |2.12 |1.86 | |Quick Ratio |2.07 |1.82 |1.86 |1.33 |1.11 | |Cash Ratio |1.08 |0.77 |0.94 |0.55 |0.40 | |Asset-Management Efficiency Ratio | |Total Asset Turnover |2.22 |2.53 |2.73 |3.34 |3.31 | |Fixed Asset Turnover |114.72 |121.53 |111.04 |170.57 |237.08 | |Inventory Turnover |11.0 |12.1 |10.0 |10.6 |9.4 | |DSO |4.08 |6.20 |2.87
|2.16 |3.32 | |Debt Management Ratio | |Debt-Asset Ratio |46.50 |46.59 |44.46 |51.69 |56.85 | |Time Interest Earned |1510.2 |539.6 |3477.4 |363.4 |827.3 | |Profitability Ratio | |Net Profit Margin |4.60 |3.84 |4.69 |3.21 |5.22 | |Operating Profit |4.73 |5.93 |3.95 |6.94 |4.73 | |Earnings per Share |17.33 |11.97 |12.63 |9.69 |22.39 | |Return on Assets |10.2 |9.7 |12.8 |10.7 |17.3 | |Return on Equity |19.1 |18.2 |23.0 |22.2 |40.0 | |Market Ratio | |Price Earning Ratio |19.5 |16.8 |24.4 |37.7 |21.3 | |Market/Book Ratio |3.72 |3.06 |5.62 |8.37 |8.54 |
Enquiry into Stock Price Movement
In this chapter we will consider only the stock price movement of the year 2005-2009. Daily stock price is affected due to various factors that can be a macroeconomic variable as well as company specific variable. But in this section we will consider only the corporate decision factors.
Variables can be some the following ones:
1. Dividend declaration
Share Price Movement for the year of 2009:
Figure-17: Stock Price fluctuation of Aftab for the year 2009
We can see that the price of Aftab Auto rose continuously throughout the year till the middle of May. DSE inquiry tells us that there was no sensitive price information that was undisclosed for the price hike that we see. Then there were drop in the stock price but after that we can see a significant rise from around beginning of the September. We can only conclude that dividend declaration on 31st August may contribute to this price hike. Again after the AGM took place in 6th December, the stock price started to fall. But at the end of the year, the company experienced a slight increase in the share price.
Calculation of Beta:
Average Market return (RM) = 1.884658331
Covariance (Ri,RM) = 0.00543901
Variance = 0.01175511849
βi = 0.462692922
Beta measures the volatility, or systematic risk, of a security or a portfolio in comparison to the market as a whole. As beta of Aftab Auto is less than 1 that is 0.463 which means that the security will be less volatile than the market.
Dividend declaration & Stock Price Movement:
We will now take a functional approach to the matter of dividend declaration for the year. We have taken the dividend declaration on 31/08/2009 an important factor which affected the stock price during that period. A regression analysis is done using dummy variable. The regression output summary follows:
SUMMARY OUTPUT OF REGRESSION
|R Square |0.549260989 | | | |Cost of Capital |15% | | | |Year |10 | | | |Investment | |1,500,000,000.00 | | |Quantity |200 | |200.00 | |Price |10,000,000.00 | |10,000,000.00 | |Revenue | | |2,000,000,000.00 | |VC |70% | |1,400,000,000.00 | |FC |3.50% | |70,000,000.00 | |Depreciation | | |150,000,000.00 | |EBIT | | |380,000,000.00 | |Tax |27.50% | |104,500,000.00 | |Net Income | | |275,500,000.00 | |Cash flow | | |425,500,000.00 |
So, project NPV at 2010 is, NPV2010 = -1,500,000,000 + (425,500,000.00 X PVIFAn=10, i=15%)
NPV2010 = -1,500,000,000 + 425,500,000.00 * 5.018768626
= 635,486,050.36 Taka
So the NPV of the Project is 635,486,050.36 Taka which is positive. So the company may go for this project based on the assumptions we took to calculate the NPV.
Now we would like to test the sensitivity of NPV to various inputs of the project. Because we need to know what happens to NPV if some inputs change. This helps give us better understanding of the projects situation to sustain the NPV.
|Particulars |Amount in Taka |Amount in Taka |Change | |Revenue |2,000,000,000.00 |1,600,000,000.00 |(0.20) | |VC |1,400,000,000.00 |1,120,000,000.00 |(0.20) | |FC |70,000,000.00 |70,000,000.00 |- | |Depreciation |150,000,000.00 |150,000,000.00 |- | |EBIT |380,000,000.00 |260,000,000.00 |(0.32) | |Tax |104,500,000.00 |71,500,000.00 |(0.32) | |Net Income |275,500,000.00 |188,500,000.00 |(0.32) | |Cash flow |425,500,000.00 |338,500,000.00 |(0.20) | |NPV |635,486,050.36 |198,853,179.90 |(0.69) | |Relative Change | | |3.44 |
Here we see that,
%∆in Revenue= -20%
%∆in NPV = -69%
And Relative Change = 3.44
So from the above analysis we can see that NPV is very sensitive to change in revenue. For 20% decrease of Revenue, NPV is decreased by 69%. Besides that, 1% change of revenue; NPV is changed for 3.44%.
New Share Price with the project:
New share price= (current capitalization + NPV of the project) / shares outstanding
= (market price per share on the last day of 2009 * shares outstanding +NPV) / shares outstanding
= (2,048.75 * 2,319,570+ 635,486,050.36) / 2,319,570
= 2,322.72 Taka/ share
For scenario analysis we took three cases
3. Optimistic situation
We will assume that only sales are taken for the scenario analysis. The whole income statement is vertical size statement. Then after calculating the NPV for three scenarios of sales we will find the share price.
We took that in pessimistic scenario sales will drop by 20% and in optimistic scenario sales will increase by 20%.
|Particulars |Pessimistic |Normal |Optimistic | |Quantity |160.00 |200.00 |240.00 | |Price |10,000,000.00 |10,000,000.00 |10,000,000.00 | |Revenue |1,600,000,000.00 |2,000,000,000.00 |2,400,000,000.00 | |VC |1,120,000,000.00 |1,400,000,000.00 |1,680,000,000.00 | |FC |70,000,000.00 |70,000,000.00 |70,000,000.00 | |Depreciation |150,000,000.00 |150,000,000.00 |150,000,000.00 | |EBIT |260,000,000.00 |380,000,000.00 |500,000,000.00 | |Tax |71,500,000.00 |104,500,000.00 |137,500,000.00 | |Net Income |188,500,000.00 |275,500,000.00 |362,500,000.00 | |Cash flow |338,500,000.00 |425,500,000.00 |512,500,000.00 | |NPV |198,853,179.90 |635,486,050.36 |1,072,118,920.83 |
Now we can calculate the future stock price for these three scenarios using the new share price finding process shown earlier in this chapter.
|Description |Pessimistic |Normal |Optimistic | |MKT Price |2,048.75 |2,048.75 |2,048.75 | |No. Of Share Outstanding |2,319,570.00 |2,319,570.00 |2,319,570.00 | |Current Capitalization (A) |4,752,219,037.50 |4,752,219,037.50 |4,752,219,037.50 | |NPV (B) |198,853,179.90 |635,486,050.36
|1,072,118,920.83 | |(A + B) |4,951,072,217.40 |5,387,705,087.86 |5,824,337,958.33 | |New Share Price With Project |2,134.48 |2,322.72 |2,510.96 |
We can see that according to NPV the future market price of the company changes.
Breakeven Quantity Based on NPV:
|PVIFAn=10, i=15% |5.019 | |Initial Investment |1,500,000,000.000 | |EAC |298,878,093.768 | |Fixed Cost |70,000,000.000 | |VC |7,000,000.000 | |Price |10,000,000.000 | |Tax |0.275 | |1-Tc |0.725 | |Depreciation |150,000,000.000 | |After Tax Fixed Charge |308,378,093.768 | |After Tax Contribution |2,175,000.000 | |BEP Quantity |141.783 |
|Particulars |Year (2011-2021) | |Investment |1,500,000,000.000 | |Quantity |141.78 | |Price |10,000,000.00 | |Revenue |1,417,830,316.17 | |VC |992,481,221.32 | |FC |70,000,000.00 | |Depreciation |150,000,000.00 | |EBIT |205,349,094.85 | |Tax
|56,471,001.08 | |Net Income |148,878,093.77 | |Cash flow |298,878,093.77 |
So, project NPV at 2010 is, NPV2010 = -1,500,000,000 +(298,878,093.77 X PVIFAn=10, i=15%)
NPV = -1,500,000,000 + 298,878,093.77 * 5.018768626
= 0.00 Taka.
Breakeven Price Based on NPV:
|Particulars |Amount in Taka | |Revenue | 1,825,349,094.85 | | VC | 1,400,000,000.00 | | FC | 70,000,000.00 | | Depreciation | 150,000,000.00 | | EBIT | 205,349,094.85 | | Tax | 56,471,001.08 | | Net Income | 148,878,093.77 | | Cash flow | 298,878,093.77 |
Revenue = Price X Quantity
Price = Revenue / Quantity
Price = 1,825,349,094.85 / 200
Break-Even Price = 9,126,745.47
With the different factors positively contribute to the growth of the stock price of Aftab Automobiles, we have analyzed the trend of different variables from the five year financial statement and detected the growth or reduction of every item. After that we have selected few components which show a growing trend and positively contribute to the growth of Stock Price.
As we found that for Aftab Automobiles ltd, Market price movement is mostly similar with company’s financial performance as like sales growth & profit growth.
|Growth Rates (%) |2009-2008 |2008-2007 |2007-2006 |2006-2005 |GEOMEAN | |Sales |14.74% |41.81% |-15.92% |8.95% |17.67% | |Net Profit/Loss |28.96% |88.45% |-35.28% |-2.36% |50.61% | |Operating Profit/Loss |69.27% |26.14% |47.34% |7.64% |28.45% | |EBIT |58.21% |81.95% |-29.43% |11.35% |37.83% |
From the income statement we can concentrate on growth rates of sales revenue, operating profit, EBT and Net income. We are concentrating on average of last 4 years growth performance. From here we will use average sales growth of 17.67% for forecasting future market price. As growth rate of operating profit, EBT and Net income is close in figure, we are going to use average net income growth of 50.61% for forecast the market price trend.
As the world economy is experiencing the recession and the impact of recession is also started affecting our economy, so it will be a highly optimistic choice if we expect that the company will grow at the rate of 17.67% or 50.61%. On the other hand, the other growth rates that have been calculated also give us the indication that we cannot consider them as
company growth rate given GDP growth of Bangladesh is 5.5% and world economy is in recession. We can assume that average growth rate for forecasting the share price & value of the company.
Growth Rate: Scenario -1
Assuming growth rate of 17.67% as average of last 4 years growth of Sales
| |Current |5 Year Projection | |Year |2009 |2010 |2011 |2012 |2013 |2014 | |Growth Rate | |17.67% |17.67% |17.67% |17.67% |17.67% | |Sales |2,124,637,706 |2,500,061,189 |2,941,822,001 |3,461,641,948 |4,073,314,080 |4,793,068,678 | |Net Income |316,616,692 |372,562,861 |438,394,719 |515,859,066 |607,011,363 |714,270,271 | |Dividend |47,570,900 |55,976,678 |65,867,757 |77,506,590 |91,202,004 |107,317,398 | |Addition to Retain Earnings|269,045,792 |316,586,183 |372,526,962 |438,352,476 |515,809,359 |606,952,873 | |Total Asset |2,438,883,896 |2,869,834,680 |3,376,934,468 |3,973,638,789 |4,675,780,763 |5,501,991,224 | |Total Debt |1,533,364,403 |1,804,309,893 |2,123,131,451 |2,498,288,779 |2,939,736,406 |3,459,187,829 | |Common Stock |589,249,465 |589,249,465 |589,249,465 |589,249,465 |589,249,465 |589,249,465 | |Retained Earnings |316,270,028 |632,856,211 |1,005,383,174 |1,443,735,650 |1,959,545,009 |2,566,497,881 | |Total Financing |2,438,883,896 |3,026,415,569 |3,717,764,090 |4,531,273,893 |5,488,530,879 |6,614,935,175 | |Funds Needed |- |(156,580,889) |(340,829,621) |(557,635,104) |(812,750,116) |(1,112,943,951) | |Debt: Equity Ratio |1.69
|1.48 |1.33 |1.23 |1.15 |1.10 | |Sustainable Growth Rate |42.27% |34.96% |30.48% |27.49% |25.37% |23.81% | |EPS |136.50 |160.62 |189.00 |222.39 |261.69 |307.93 | |Price |2,048.75 |2,410.76 |2,836.75 |3,338.00 |3,927.82 |4,621.87 |
Assuming 17.67% growth rate, it has been found that the company has excess fund, which can be financed distributed to payoff long term debt and reduce the obligations of interest expenses. The projection says that assuming 17.67% growth rate, after 5 years in 2014 EPS of the company would be 307.93 as well as considering current P/E ratio as constant factor, in year 2014 share price would be Taka 4,621.87.
Growth Rate: Scenario -2
Assuming growth rate of 50.61% as average of last 4 years growth of Net income
| |Current |5 Year Projection | |Year |2009 |2010 |2011 |2012 |2013 |2014 | |Growth Rate | |50.61% |50.61% |50.61% |50.61% |50.61% | |Sales |2,124,637,706 |3,199,916,849 |4,819,394,766 |7,258,490,458 |10,932,012,478 |16,464,703,993 | |Net Income |316,616,692 |476,856,400 |718,193,424 |1,081,671,116 |1,629,104,867 |2,453,594,840 | |Dividend |47,570,900 |71,646,532 |107,906,843 |162,518,496 |244,769,106 |368,646,751 | |Addition to Retain Earnings |269,045,792 |405,209,867 |610,286,581 |919,152,620 |1,384,335,761 |2,084,948,089 | |Total Asset |2,438,883,896 |3,673,203,036
|5,532,211,092 |8,332,063,126 |12,548,920,274 |18,899,928,825 | |Total Debt |1,533,364,403 |2,309,400,127 |3,478,187,532 |5,238,498,242 |7,889,702,202 |11,882,680,486 | |Common Stock |589,249,465 |589,249,465 |589,249,465 |589,249,465 |589,249,465 |589,249,465 | |Retained Earnings |316,270,028 |721,479,895 |1,331,766,477 |2,250,919,096 |3,635,254,857 |5,720,202,947 | |Total Financing |2,438,883,896 |3,620,129,488 |5,399,203,473 |8,078,666,803 |12,114,206,524 |18,192,132,898 | |Funds Needed |- |53,073,548 |133,007,619 |253,396,323 |434,713,750 |707,795,927 | |Debt: Equity Ratio |1.69 |1.76 |1.81 |1.84 |1.87 |1.88 | |Sustainable Growth Rate |42.27% |44.75% |46.56% |47.85% |48.74% |49.35% | |Price |2,048.75 |3,085.62 |4,647.26 |6,999.23 |10,541.54 |15,876.62 |
Assuming 50.61% growth rate, it has been found that the company required additional fund to run to sustain the business in this growth rate. The projection says that assuming 50.61% growth rate, after 5 years in 2014 EPS of the company would be 1057.78 as well as considering current P/E ratio as constant factor, in year 2014 share price would be Taka 15,876.62.
Growth Rate: Scenario -3
Assuming growth rate of 42.27% as sustainable growth rate
Sustainable Growth Rate = [pic]
| |Current |5 Year Projection | |Year |2009 |2010 |2011 |2012 |2013 |2014 | |Growth Rate | |42.27% |42.27% |42.27% |42.27% |42.27% | |Sales |2,124,637,706 |3,022,749,966 |4,300,506,074 |6,118,386,469 |8,704,708,779 |12,384,303,496 | |Net Income |316,616,692 |450,454,726 |640,867,854 |911,771,112 |1,297,188,735 |1,845,527,449 | |Dividend |47,570,900 |67,679,744 |96,288,861 |136,991,427 |194,899,502 |277,286,081 | |Addition to Retain Earnings |269,045,792 |382,774,982 |544,578,993 |774,779,685 |1,102,289,233 |1,568,241,368 | |Total Asset |2,438,883,896 |3,469,832,148 |4,936,575,765 |7,023,331,171 |9,992,185,492 |14,216,013,523 | |Total Debt |1,533,364,403 |2,181,537,673 |3,103,702,297 |4,415,678,018 |6,282,243,106 |8,937,829,769 | |Common Stock |589,249,465 |589,249,465 |589,249,465 |589,249,465 |589,249,465 |589,249,465 | |Retained Earnings |316,270,028 |699,045,010 |1,243,624,003 |2,018,403,688 |3,120,692,921 |4,688,934,289 | |Total Financing |2,438,883,896 |3,469,832,148 |4,936,575,765 |7,023,331,171 |9,992,185,492 |14,216,013,523 | |Funds Needed |- |- |- |- |- |- | |Debt: Equity Ratio |1.69 |1.69 |1.69 |1.69 |1.69 |1.69 | |Sustainable Growth Rate |42.27% |42.27% |42.27% |42.27% |42.27% |42.27% | |EPS |136.50 |194.20 |276.29 |393.08 |559.24 |795.63 | |Price |2,048.75 |2,914.78 |4,146.90 |5,899.85 |8,393.79 |11,941.96 |
Assuming 42.27% growth rate, it has been found that the company has no excess fund or no deficit. The projection says that assuming 42.27% growth rate, after 5 years in 2014 EPS of the company would be 795.63 as well as considering current P/E ratio as constant factor, in year 2013 share price would be Taka 11,941.96.
Growth Rate: Scenario -4
Assuming growth rate of 5.5% as GDP growth rate
| |Current |5 Year Projection | |Year |2009 |2010 |2011 |2012 |2013 |2014 | |Growth Rate | |5.50% |5.50% |5.50% |5.50% |5.50% | |Sales |2,124,637,706 |2,241,492,780 |2,364,774,883 |2,494,837,501 |2,632,053,564 |2,776,816,510 | |Net Income |316,616,692 |334,030,610 |352,402,294 |371,784,420 |392,232,563 |413,805,354 | |Dividend |47,570,900 |50,187,300 |52,947,601 |55,859,719 |58,932,004 |62,173,264 | |Addition to Retain |269,045,792 |283,843,311 |299,454,693 |315,924,701 |333,300,559 |351,632,090 | |Earnings | | | | | | | |Total Asset |2,438,883,896 |2,573,022,510 |2,714,538,748 |2,863,838,380 |3,021,349,490 |3,187,523,712 | |Total Debt |1,533,364,403 |1,617,699,445 |1,706,672,915 |1,800,539,925 |1,899,569,621 |2,004,045,950 | |Common Stock |589,249,465 |589,249,465 |589,249,465 |589,249,465 |589,249,465 |589,249,465 | |Retained Earnings |316,270,028 |600,113,339 |899,568,031 |1,215,492,732 |1,548,793,291 |1,900,425,381
| |Total Financing |2,438,883,896 |2,807,062,249 |3,195,490,411 |3,605,282,122 |4,037,612,377 |4,493,720,796 | |Funds Needed |- |(234,039,738) |(480,951,663) |(741,443,742) |(1,016,262,887) |(1,306,197,084) | |Debt: Equity Ratio |1.69 |1.36 |1.15 |1.00 |0.89 |0.80 | |Sustainable Growth Rate |42% |31% |25% |21% |18% |16% | |EPS |136.50 |144.01 |151.93 |160.28 |169.10 |178.40 | |Price |2,048.75 |2,161.43 |2,280.31 |2,405.73 |2,538.04 |2,677.63 |
Assuming realistic one 5.5% growth rate, it has been found that the company has excess fund, which can be financed distributed to payoff long term debt and reduce the obligations of interest expenses. The projection says that assuming 5.5% growth rate, after 5 years in 2014 EPS of the company would be 178.40 as well as considering current P/E ratio as constant factor, in year 2014 share price would be taka 2,677.63.
Calculating Expected Return of Aftab Auto using CAPM:
The general idea behind CAPM is that investors need to be compensated in two ways: time value of money and risk. The time value of money is represented by the risk-free (Rf) rate in the formula and compensates the investors for placing money in any investment over a period of time. The other half of the formula represents risk and calculates the amount of compensation the investor needs for taking on additional risk or risk premium. This is calculated by taking a risk measure (beta) that compares the returns of the asset to the market over a period of time and to the market premium (Rm-Rf). [pic]
[pic] = 7.25% + 0.463 (1.88% – 7.25%) [pic] = 4.915%
We have determined market return Rm for year 2009 taking the monthly change
in DSE Index. The average market return in 2009 has been found to be 1.88% and beta for the company is 0.46. If we post all the values in the above equation (considering Rf=7.5) we get the expected return [pic] to be 4.915%. This is lower than the risk free rate. This is the outcome of low market return. As such the expected return derived from CAPM can not be used for stock valuation.
Future Stock Price Valuation under Gordon Model :
In this section we shall make a projection of market stock price of Aftab Auto. It has a security specific beta risk of 0.46 and the expected return for the company is 4.915%. But the expected return 4.915% is based on market return 1.88%. This phenomenon may be due to the fact that in 2009 due to the political situation & anti corruption activity of the government, a lot of money has been invested in DSE. As a result the price of stocks increased. It is vivid from the below graph.
[pic]Figure-20: DSE General Index for the 2009
As the Expected Return derived from CAPM is too low (4.915%), we shall use another formula for expected rate of return.
Growth rate, g=Retention Rate*ROE
Retention Rate = 0.85g= (0.85*0.35) =29.71%
ROE = 35%
D1= D0 (1+g) =20.51*1.2975=26.50
ks = (26.61/ 2048.75)+0.2975 = 31.01%
From this formula we get the Expected Return (ks) 31.01%.
Using the above information we can forecast expected stock value for Aftab Auto using the Gordon Model (Dividend Valuation Model). We assume that dividends will grow at a constant rate, g, forever. Since future cash flows grow at a constant rate forever, the value of a constant growth stock is the present value of a growing perpetuity:
We assume g=29.71% & k=37.12%. From all the above information we can forecast the future stock price for 2009. So the stock price for 1st January, 2010 would be BDT 459.64 But the real average stock price for first three months in 2010 was BDT 298.43. The average stock price is 54% lower than our forecasted price. This indicates the price of Aftab share is undervalued in the market. The explanation for lower market price may be due to decreasing trend in the General Index in 2010.
Fig-21: DSE General Index in 2010
|Year |Dividend |Projected Price of Stock(using Gordon Model) | |2009 (Actual) |Do |20.51 |2,048.75 | |2010 (projected) |D1 |26.60388 |2048.75 | |2011 (projected) |D2 |34.50836 |2657.469714 | |2012 (projected) |D3 |44.76141 |3447.050776 | |2013 (projected) |D4 |58.06081 |4471.230282 | |2014 (projected) |D5 |75.3117 |5799.711558 | |2015 (Projected) |D6 |97.68813 | |
Future Market Price projection in different growth Rate:
|Growth Rate |2006 |2007 | |Sales |2,124,637,706 |2,500,061,189 | |Cost |1,808,021,014 |2,127,498,327 | |Net Income |316,616,692 |372,562,861.48 | |Asset |2,438,883,896 |2,869,834,680.42 | |Debt |1,533,364,403 |1,804,309,893.01 | |Equity |905,519,493.00 |1,065,524,787.41 | |Total |2,438,883,896.00 |2,869,834,680.42 | |Debt : Equity Ratio |1.69 |1.69 |
Here the plug variable is Dividend distribution of taka 212,557,567 and thus the Debt : Equity ratio becomes unchanged.
|Particulars |2,009.00 |17.67% Growth Rate | |Sales |2,124,637,706 |2,500,061,189 | |Cost |1,808,021,014 |2,127,498,327 | |Net Income |316,616,692 |372,562,861.48 | |Asset |2,438,883,896 |2,869,834,680.42 | |Debt |1,533,364,403 |1,591,752,325.95 | |Equity |905,519,493.00 |1,278,082,354.48 | |Total |2,438,883,896.00 |2,869,834,680.42 | |Debt:Equity Ratio |1.69 |1.25 |
In this case, no Dividend is paid. So Equity increases for the Net income and thus Debt goes down. So in this case, plug variable is the Debt: Equity ratio.
In this case study, the growth rate of 5.5% has been selected as the constant growth rate and the pro forma statement has been generated based on this growth rate. For scenario analysis, both optimistic and pessimistic scenarios are being considered.
| |Current |Scenario Analysis of 2009 Pro-forma | |Year |2009 |Pessimistic |Normal |Optimistic | |Growth Rate | |2.50% |5.50% |8.50% | |Sales |2,124,637,706 |2,177,753,649 |2,241,492,780 |2,305,231,911 | |Net Income |316,616,692 |324,532,109 |334,030,610 |343,529,111 | |Dividend |47,570,900 |48,760,173 |50,187,300 |51,614,427 | |Addition to Retain Earnings |269,045,792 |275,771,937 |283,843,311 |291,914,684 | |Total Asset |2,438,883,896 |2,499,855,993 |2,573,022,510 |2,646,189,027 | |Total Debt |1,533,364,403 |1,571,698,513 |1,617,699,445 |1,663,700,377 | |Common Stock |589,249,465 |589,249,465 |589,249,465 |589,249,465 | |Retained Earnings |316,270,028 |592,041,965 |600,113,339 |608,184,712 | |Total Financing |2,438,883,896 |2,752,989,943 |2,807,062,249 |2,861,134,555 | |Funds Needed |- |(253,133,949) |(234,039,738) |(214,945,527) | |Debt: Equity Ratio |1.69 |1.33 |1.36 |1.39 | |Sustainable Growth Rate |42.27% |30.45% |31.35% |32.24% | |EPS |136.50 |139.91 |144.01 |148.10 |
|Price |2,048.75 |2,099.97 |2,161.43 |2,222.89 |
In the above scenario analysis, we have taken the 5.5% growth rate in normal situation. If we want to be optimistic enough to predict that the economy will have a high growth and the company will also able to grow at 8.50%. On the other hand, the situation can also be worse enough to have a growth lower than the normal and the company may face a growth of 2.50%. After analyzing the scenario of different situation we can say that the projected growth rate is appropriate for the company which will help the company to operate in the market even if the situation is worse. It gives a positive indication towards the company and increases the shareholders confidence to invest in the company’s share.
Findings & Conclusion:
At the end we can say that, in year 2009, we see that the Market price is much higher then the Book Value of each share. Investors are willing to pay more than the book value of each share. The major reasons of the higher market value are the underestimation of the assets, as the assets are calculated based on the purchase price; not on the basis of the market price. Besides that investment to the other shares are also calculated on the purchase price. But the market price is also higher. Moreover, Aftab Automobiles ltd enjoys a better reputation on the market. So the Intangible assets like, Patent, Trade mark should be considered. So we can say that the company’s financial position is good. Based on market price if we re-construct the balance sheet, we have to introduce ‘Goodwill’ as intangible asset for Aftab Auto. This goodwill basically shows the confidence of the shareholders & investors on Aftab Auto backed by some positive news.
Overall we see that the Sales of the company are increasing which is a good sign. Besides that the company is investing heavily on the fixed assets, which may used to generate more revenue for the company. They are also offering cash dividend each year and also the company paid its short term load and also taking short term loans, which indicates that the company is enjoying a favorable environment in terms of the short term credit situation. So, we can conclude that the Aftab Automobiles Ltd is financially sound based on the Cash Flow analysis.
Profit margin, operating profit, EPS, market-book value of the Aftab is increasing which indicates that the company is becoming more efficient in terms of its operations and also gaining investors confidence. So we can say that after experiencing some downfall Aftab Auto is now experiencing efficiency in its performance and also investors’ confidence.
From the cash flow statement we can see that, in 2006, 2007 & 2009 the free cash flow figures are negative. This might happen because of high investment in inventory and R&D departments, means the company used more cash than they had sourced of. . Also the cash flows to Investors were sufficient for the company over the years. The company had sufficient fund to pay out dividends and that would eventually maximize the value of the firm. Fixed investments were consistent and consumed huge cash over the years.
Using dummy variable to find effects of Dividend declaration was a success in 2009. We have seen that dividend declaration had a significant effect on the share price of Aftab Auto in the year 2009. Price fluctuated after the dividend was declared. Price increased significantly after the dividend was declared.
Using dummy variable to find effects of AGM on Stock Price was a success in 2009. We have seen that AGM declaration also had a significant effect on the share price of Aftab Auto in the year 2009. Price fluctuated after the AGM took place. Price fell enormously after the AGM.
We assumed a hypothetical situation of capital investment for Aftab Auto. The project turned out to have a positive NPV of 635,486,050.36 Taka. So it’s a project that adds value to the company.
Incorporating the value of the project in the share price result is a share price of 2322.72 taka. This is higher than the market price of 2048.75 taka in the last trading day of 2009. This shows that the project adds value to the wealth of the shareholders.
From the sensitivity analysis, we can see that NPV is very sensitive to change in revenue. For 20% decrease of Revenue, NPV is decreased by 69%. Besides that, 1% change of revenue; NPV is changed for 3.44%.
The scenario analysis shows that under pessimistic scenario of sales variable NPV becomes 198,853,179.90 taka and the future share price becomes 2134.48 taka. And optimistic scenario of sales variable results in a NPV of 1,072,118,920.83 taka and future price of share becomes 2510.96 taka. This shows how changes in sales in different situation can affect the project, its NPV and the future market price per share. But in this case it is satisfactory that sales change doesn’t affect the share price of the company to a great extent. This can mean that the company has a diversified way to do their business that a single project is not that much strong to affect the company’s price per share.
Break-Even Quantity for the new investment is 142 units if the selling price is 10,000,000 per unit. On the other hand, Break-Even Price is 9,126,745.47 if the selling quantity is 200 units.
In projecting future market price, assuming realistic one 5.5% growth rate, it has been found that the company has excess fund, which can be financed distributed to payoff long term debt and reduce the obligations of interest expenses. The projection says that assuming 5.5% growth rate, after 5 years in 2014 EPS of the company would be 144.01 as well as considering current P/E ratio as constant factor, in year 2013 share price would be 2,677.63
Initially we assumed many growth variables, but considering current world wide economic condition, Bangladesh GDP growth rate of 5.5% as an assumption would be most appropriate, as due to recession period it would be very
optimistic to assume higher growth rate