Financial Performance of CMC-Kamal Textile Mills Limited

Abstract

Textiles Industry plays a vital role in the socio-economic development of Bangladesh. CMC-

Kamal Textile Mills Limited as a Textile Industry plays an important role in this regard. But the net

profit of this textile has decreased for the last few years. This study was designed to review the

financial performance of this textile to test its strengths and weaknesses. The financial performance

of this textile is measured in terms of Ratios (Profitability, Liquidity, Solvency and Activity Ratios)

Analysis and in terms of Testing Financial Soundness by using Multivariate Discriminate Model

(MDM) as developed by Prof. Altman. For the source of data I mainly relied on Annual Reports

and Official Records. It was observed from the study of the financial statement of the CMC-Kamal

Textile Mills Limited that the profit earning capacity, liquidity position, financial position and

performance of the CMC-Kamal Textile were not in sound position and it was also observed that

the CMC-Kamal Textile Mills Limited had a lower level position of bankruptcy. The reasons

behind this position of the CMC-Kamal Textile Mills Limited were inefficiency of financial

management, absence of realistic goal, strict government regulation and increased cost of raw-

materials, labor and overhead. Its financial performance should be improved immediately.

Key Words: Financial Performance, Ratio Analysis, Textiles Industry, Multivariate Discriminate

Analysis (MDA), CMC-Kamal Industries Limited.

Introduction

Publicly traded companies are the economic pulse of a nation. Their birth, prosperity and

demise generally reflect the financial condition of the country. A fairly reliable index of an

economy in its process of growth and development is the rate of growth and decline of publicly

traded companies. With the rapid growth of trades, commerce and industries, the number of

publicly traded companies are considerably increasing in Bangladesh. These companies play a

vital role on the economy of the country. Textile is an important adjunct of industrialization in

the country. There are 27 listed Textile Companies in Dhaka Stock Exchange

(http:www.dsebd.org/by_industrylisting/) and 22 listed in Chittagong Stock Exchange

(http:www.csebd.org/by_industrylisting/). Analyzing the Industrial Life Cycle, it is found that

all of the listed companies just reached to the middle stage. No company could reach to the

maturity stage. In a word, textile industries of the country are just improving. Garments

1

industry mostly depends on textile product. It is well known that Garments Industry is the main

key of earning foreign currency. So textile plays an important role on the export of the country.

On the other hand, most of the internal demand of clothes are fulfilled by own textile industry

of the country.

Performance measurement of Public Enterprises has been the subject matter of discussion for

planners, administrators, managers, economists and academics since long. But some lack of

clarity about performance and the existence of defensive attitude on the part of those who have

to take responsibility for inefficient operations, have the effect of inhibiting both frame

discussion and decisive action in this regard (Bunnett, 1987). Financial analysis is the process

of identifying the financial strengths and weaknesses of the firm by properly establishing

relationship between the items of the balance sheet and the profit and loss account (Pandey,

1991). Financial Statements (income statement, cash flow statement, owners’ equity statement

and balance sheet) contain a wealth of information which, if properly analyzed and interpreted,

can provide valuable insights into a firm’s performance and position.

Analysis of financial statements is of interest to lenders, security analysts, managers and others

(Prasanna, 1995). Trade creditors are interested in the firm’s ability to meet their claims. Their

analysis will therefore, confine to the evaluation of the firm’s liquidity position. The suppliers

are concerned with the firm’s solvency and survival. They analyze the firm’s profitability over

time. Long term creditors place more emphasis on the firm’s solvency and profitability. The

investors are most concerned about the firm’s earnings. So, they concentrate on the analysis of

the firm’s present and future profitability as well as its earning ability and risk (Abu Sina,

1998).

But there is a problem that textile industry of Bangladesh depends on foreign country for raw-

material and technology. Now it’s the time to make this textile self sufficient for the betterment

of the country. At this time, performance of manufacturing enterprise, like textile, needs to be

measured and analyzed. But evaluation of performance is not a regular practice in the country.

CMC-Kamal Industries Limited as a Textile Industry plays an important role in this regard. But

the net profit of this textile has decreased for the last few years. Against this backdrop this study

is an attempt to evaluate performance of selected textile for the period under study. To evaluate

the financial performance of the textiles the technique of financial analysis has been applied.

Financial analysis is the analysis of financial statements of an enterprise. Among the various

2

tools of financial analysis the most important one seems to be the ratio analysis. It is very

helpful to gain valuable insight into the financial position, operation and financial problems of a

particulars enterprise. Moreover, the researchers used Multivariate Discriminate Analysis

developed by Professor Altman to examine the overall financial soundness. Some statistical

tools like mean, standard deviation and co-efficient of variance are used to evaluate the

performance.

Objective of the study

The primary objective of the study is to assess the performance of the CMC-Kamal Industries

Limited. This will also bring into light the state of difference variance faced by the CMC-

Kamal Industries Limited during the courses of its working period. Following are the main

objective of the study-

i. To examine the financial state of affairs of the CMC-Kamal Industries Limited.

ii. To test the financial strengths and weaknesses of CMC-Kamal Textiles Industries

Limited.

iii. To asses the operational efficiency of the CMC-Kamal Industries Limited.

iv. To asses the financial stability of the CMC-Kamal Industries Limited.

v. To pinpoint the causes of poor financial performance and suggest some measures to

overcome the problems.

Methodology of the study

Sample was taken from Textiles enlisted in DSE and CSE in Bangladesh. For the study only

CMC-Kamal Industries Limited was considered. Because, the objectives of the study are to find

out the reasons for the declining trend in profit of the CMC-Kamal Industries Limited and to

help the Textile to overcome its problems. The study covers seven years period from 2005 to

2009. The study was based on both primary and secondary data. The primary data was collected

through questionnaire, personal interview and discussions with the concerned executives of the

selected Textile Limited.

Secondary data are the annual reports of the selected Textile Limited and various studies made

available through library work. The collected data were analyzed and interpreted with the help

of different financial ratios, Multivariate Discriminate Analysis (MDA) and statistical tools like

mean, standard deviation and coefficient of variation by using excel and SPSS etc.

Literature Review

3

Sina (1998) used financial ratios to test the financial strengths and weaknesses of Khulna

Newsprint Mills Ltd. He found that due to lack of planning and control of working capital,

operational inefficiency, obsolete store, ineffective credit policy, increased cost of raw

materials, labor and overhead, the position of the company was not good. Jahur (1995) used

financial ratios to measure operational performance of limited company. He used profitability,

liquidity, activity and capital structure to measure operational performance.

Jahur (1996) used Altman’s MDA model to conclude the bankruptcy position of Chittagong

Steel Mills Ltd. He found that absences of realistic goals, strict govt. regulation are the main

reasons for lowest level of bankruptcy. Ohlson (1980) employed financial ratios to predict a

firm’s crisis. He found that there were four factors affecting a firm’s vulnerability. These

factors were firm’s scale, financial structure, performance and liquidity. In the article “The

Assessment of Financial and Operating Performance of the Cement Industry: A Case Study of

Confidence Cement Limited”, Dipak & Milan (2001) found that the investment in cement was

fairly profitable.

Salauddin (2001) examined the profitability of the Pharmaceutical Companies of Bangladesh.

By using ratio analysis, mean, standard deviation and co-efficient of variation he found that the

profitability of Pharmaceuticals sector was very much satisfactory in terms of the standard

norms of return on investment. Hye & Rahman (1997) conducted a research to assess the

performance of the selected private sector general insurance companies in Bangladesh. The

study revealed that the private sector insurance companies had made substantial progress. The

study found that the insurance companies were keeping their surplus funds in the form of fixed

deposits with different commercial banks due to absence of suitable avenues for investment.

Salim & Kabir (1996) examined the financial performance of Bangladesh Shipping

Corporation. They found that conversion of long-term debt to equity may improve the financial

performance of Bangladesh Shipping Corporation to a greater extent.

These studies attest that the ratio analysis and MDA are the good method to evaluate firm

performance. Therefore, financial ratio and MDA model were used to measure the financial

performance of CMC-Kamal Industries Limited in this paper.

Analysis and Findings

4

This section has five parts. The first part of the section showed the profitability position of the

selected Textile. In the second part the position of liquidity was analyzed. The third part

focused on activity ratios. The fourth part showed solvency position and the last part showed

the financial soundness of selected textile.

Profitability Ratios

The following table-1 depicts various profitability ratios of the selected textile CMC-Kamal

Industries Limited for the period under study. Profitability ratio includes gross profit margin,

return on investment, net profit margin, operating profit ratio, return on capital employed and

return on total assets.

Table-1: Profitability Ratios of CMC-Kamal Industries Limited

Profitability

Ratios

2005 2006 2007 2008 2009 Minim

um

Maxim

um

Mean Std.

Deviation

C.

Variance

Gross Profit

margin (%)

14.10 13.90 10.53 10.53 14.24 10.53 14.24 12.6600 1.94817 3.795

Return on

investment

(%)

8.77 -2.27 -5.33 -20.30 6.40 -20.30 8.77 -2.5460 11.52296 132.779

Net profit

margin (%)

135.94 -173.33 -343.25 -

1136.66

33.52 -1136.66 135.94 -

296.7562

504.76277 254785.451

Operating

profit ratio

(%)

1.03 9.08 -5.25 -92.55 7.10 -92.55 9.08 -16.1182 43.09004 1856.752

Return on

Capital

employed (%)

0.61 -1.45 -3.11 -10.75 6.10 -10.75 6.10 -1.7182 6.12569 37.524

Return on

total asset (%)

0.61 -1.45 -3.11 -10.75 6.10 -10.75 6.10 -1.7182 6.12569 37.524

Source: Annual Report and Official Records of the CMC-Kamal Industries Ltd.

Gross Profit Margin

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The earnings in terms of sales can be assessed through the profit margin. The gross margin

reflects the effectiveness of pricing policy and of production efficiency. Some authors consider

that a profit margin ratio ranging from 20% to 30% has been considered as the standard norm

for any industrial enterprise. The table-1 shows that the average Gross Profit Margin of CMC-

Kamal Industries Ltd during the period was 12.6600% which was lower than standard norm and

shown an increasing trend up to 2008. The gross profit ratio ranges from maximum 10.53% in

2008 and 2007to minimum 14.24% in 2005. The higher ratio indicate favorable purchasing and

markup policies and the ability of management to develop sales volume .This ratio also

indicates that the selected enterprise seems to be in an advantage position to service in the face

of falling sales prices, rising cost of production or decline demand for the product. The

coefficient of variation reveals that the variation of Gross Profit Margin over the study period is

negligible which speaks about the stability of net profit earning of this textile.

Net Profit Margin

The ratio shows the overall profitability of the concern, that’s why it is very useful to the

shareholders and prospective investors. It also indicates management efficiency in

manufacturing, administrating and selling of the products. The calculated ratio in table-1 shows

that the Net Profit Margin ranges from maximum 135.94% in year 2005 to minimum -

1136.66% in 2009. The average net profit margin was -296.7562% which was very lower than

standard norm. The calculated Net Profit Margin ratios in table-1 were all very lower position

in the study period. Lower position refers to the company’s failure to achieve satisfactory return

on owner equity .It also indicates that the efficiency of the concern is very low in position. The

coefficient of variation of Net Profit Margin of the selected textile shows that the variation of

net profit over the study period was negligible which speaks the stability of net profit earning of

the selected textile.

Return on Investment (ROI)

This ratio measures the profitability of enterprise on total investment. The Planning

Commission, Government of Bangladesh has declared that the entire existing project in the

public sector would have to guarantee a fixed return to 7.5% of the investment. This may be

considered as the standard norm for the industrial enterprise. The table-1 shows that the return

on investment on an average for the period under study was -2.5460% which was far away from

the standard norm. The table-1 also shows that the Return on Investment for the period under

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study varies from maximum 8.77% in the year 2005 to minimum -20.30% in the year 2009. The

ratio shows a declining trend which indicated the inefficiency of the business as a whole. The

coefficient of variance of the selected textile was 132.779% which reveals that the variation of

Return on Investment over the years under study was negligible i.e. the Return on Investment

for the textile under the study period was stable.

Operating Profit Ratio

The Operating Profit Ratio establishes the relationship between operating profit and sales. This

ratio indicates the portion remaining out of every taka worth of sales after all operating cost and

expenses have been met. Higher the ratio the better it is. Operating Profit Ratio ranging 4% to

6% is considered standard norm for the purpose of comparison and control by some authors.

The table-1 shows that the average Operating Profit Ratio of the CMC-Kamal Industries Ltd.

for the period was 4.64%. The Operating Profit Ratio ranges from maximum 9.08% in the year

2005to minimum -92.55% in the year 2009. The calculated ratio showed a decreasing trend and

lower rate for some of the years which indicate inefficiency of the concern. The coefficient of

variance of 1856.752% indicates extremely desirable stability position.

Return on Capital Employed

The most independent ratio for assessment of profitability is the return on capital employed. It

reflects the overall efficiency with which capital is used. Here, Capital Employed=Equity share

capital + Preference share capital+ Undistributed profit+ Reserve and Surplus+ Long term

Liabilities- Fictitious Assets A rate of return ranging from 11% to 12% on Capital employed

may be considered as reasonable for a selected enterprise. The table-1 represents the return on

capital employed ratio of the sample textile for the period under study. The table-1 shows that

the average Return on Capital Employed was -1.7182% and the ratio range from maximum

6.10% in the year 2005 to a minimum -10.75% in the year 2009. It is seen from the table that

CMC-Kamal Industries Limited had lower Return on Capital Employed as compared with

standard norm. The calculated ratios showed a decreasing trend over the years under study. The

lower position of the calculated ratio is an indicative of poor earnings in terms of capital

employed. It speaks that the management should be more efficient in using the long term fund

of owners and creditors. It appears from the table that the coefficient of variance was 37.524%

which speaks that the Return on Capital Employed was stable for the study period.

Return on Total Assets

7

This ratio is calculated to measure the profit after the tax against the amount invested in total

assets to ascertain whether assets are being utilized properly or not. Some authors consider 10%

to 12% rate of Return on Total Assets as reasonable norm for a profitable firm and this may be

considered as reasonable norm for the selected enterprise. The calculated ratios show that the

average Return on Total assets was -1.7182% and the ratio ranges from maximum 6.10% in

2005 to -10.75% in 2009. The calculated ratios were far lower than standard norm and showed

a decreasing trend during the period of study and lower ratios indicate the assets were not being

utilized properly during the period. The coefficient of variance of 37.524% indicates that the

variation was extremely stable.

Liquidity Ratios

The Current Ratio, Quick Ratio, Current Assets to Fixed Assets and Net Working Capital to

Total Assets are used to assess liquidity position of an enterprise. The table-2 depicts various

liquidity ratios of the selected textile for the period under study.

Table: 2 Liquidity Ratios of CMC-Kamal Industries Limited

Ratios 2005 2006 2007 2008 2009 Mini

mum

Maxim

um

Mean Std.

Deviation

C.

Variance

Current Ratio (in

time)

1.22 1.07 0.88 0.53 0.41 .41 1.22 .8218 .34681 .120

Quick Ratio (in

time)

0.69 0.54 -0.42 0.06 0.08 -.42 .69 .1890 .43987 .193

Current Assets to

Fixed Assets (in

time)

0.21 0.20 0.19 0.19 0.27 .19 .27 .2102 .03474 .001

Net Working

Capital to Total

Assets (in time)

0.09 0.10 0.11 0.21 0.29 .09 .29 .1570 .08665 .008

Source: Annual Report and Official Records of the CMC-Kamal Industries Limited.

Current Ratio

This ratio is a measure of the firm’s short term solvency of the firm’s liquidity. It indicates the

ability of the company to meet its current obligations. If the current ratio is too low, the firm

8

may have difficulty in meeting short run commitment as they measure. If the ratio is too high

the firm may have an excessive investment in current assets or be under utilizing short term

credit. Some authors consider 2:1 as standard norm for current ratio. Table-2 shows that the

average current ratio was .8218:1. The current ratio ranges from maximum 1.22:1 in the year

2006to a minimum .41:1 in the year 2009. The calculated ratios are very lower than the

standard ratios and show a declining trend. It indicates the company has least ability to pay

current liabilities and no margin of safety. The financial position is very unsatisfactory. The

company’s short term solvency is threatened.

Liquid (Quick or Acid Test) Ratio

It measures the firm’s ability to meet short term obligations from its most liquid assets. Table-2

shows that the average liquid ratio was .8218:1 which was very lower than standard norm 1:1.

The states that the liquid ratio ranges from maximum .69:1 in the year 2006 to a minimum

-.42:1 in the year 2009 which are far away from the standard norm. The calculated ratios

showed a declining trend over the year under study. It indicates that the company was

financially very weak and had no ability to pay its most immediate liabilities. It is also observed

that this position was declining and it is the dangerous signal for the company. In the context of

variation of this ratio over the years, it was found that the variation was negligible.

Current Assets to Fixed Assets

Another criterion for liquidity assessment is the ratio between current assets to fixed assets.

This ratio will differ from industry to industry and, therefore, no standard can be laid down. A

decrease in ratio may mean that trading is slack or more mechanization has been put through.

The calculated ratios show a decreasing trend which mean that trading is slack or more

mechanization has been put through. From the table-2 it is seen that the average current assets

to fixed assets ratio was .2102:1 for the textile under study. The table shows that the ratio

ranges from maximum .27:1 in the year 2005 to a minimum .19:1 in the year 2006. The table

reveals that the ratio increased in the year 2004but decreased in the subsequent years and again

increased in the year 2008. This is concluded from the calculated ratios that the trading was

slack or mechanization had been put through in the selected textile. From the coefficient of

variation it is clear that the variation of current ratio to fixed assets over the period under study

was negligible.

Net Working Capital to Total Assets

9

From the calculated ratios in table-2 it is clearly seen that the average not working capital to

total assets ratio was .1570:1 and the ratio ranges from maximum .29:1 in the year 2009 to a

minimum .091 in the year 2008. The calculated ratios were negative for the year 2005 2007and

2008 and showed a declining trend. Such state of affairs indicates the inability and inadequacy

of net working capital to cover the total assets of the selected enterprise for the period under

review. From the coefficient of variation .008it is seen that the variation in net working capital

to total assets was negligible.

Activity Ratios

Activity ratios show the intensity with which the firm uses its assets in generation sales. These

ratios indicate whether the firm’s investments in current and long-term assets are too small or

too large. The objective is to have “enough” assets but not “too many”. Table-3 shows the

various activity ratios of the CMC-Kamal Industries Limited for the periods under study.

Table: 3 Activity Ratios of CMC-Kamal Industries Limited

Ratios 200

5

200

6

2007 2008 2009 Mini

mum

Maxi

mum

Mean Std.

Deviation

C.

Variance

Inventory

Turnover (in time)

6.96 5.69 4.74 2.32 2.19 2.19 6.96 4.3776 2.09513 4.390

Fixed Assets

Turnover (in time)

0.73 6.45 0.57 0.17 0.73 .17 6.45 1.7290 2.64892 7.017

Total Assets

Turnover (in time)

0.67 6.36 0.58 0.21 0.95 .21 6.36 1.7546 2.58834 6.700

Source: Annual report and official records of the CMC-Kamal Industries Ltd.

Inventory Turnover Ratio

This ratio is also known as stock turnover ratio, establishes relationship between sales (or cost

of goods sold) and the total inventory (or average inventory). A low inventory turnover may

indicate an excessive investment in inventories, a high ratio often means that the firm is running

10

out of stock, resulting in poor service to customers. It assists the financial manager in

evaluating inventory policy to avoid any danger of over stocking as a prelude to the effective

utilization of the resources of the firm. Higher the ratio the better it is because it shows that

stock is rapidly turned over. Table-3 shows that the average Inventory Turnover Ratio was

4.3776 times which was lower than standard norm. The table reveals that the Inventory

Turnover Ratio ranges from maximum 6.96 times in the year 2009 to 2.74 times in the year

2005. The calculated ratios showed increasing trend over the year except in the year 2004and

2007. It implies excessive inventory levels or a slow moving or obsolete inventories. If it is the

obsolete inventories then it has to be written. This will adversely affect the working capital and

liquidity position of the firm. The calculated ratios indicate that the sale management of the

company couldn’t be said to be efficient to sell its product. The coefficient of variation speaks

that the variation in Inventory Turnover was negligible.

Net Fixed Assets Turnover

The ratio indicates the extent of generating sales volume in terms of net fixed assets. One

author considers that an ideal fixed assets turnover for an enterprise should be 5 times of net

fixed assets and hence this may also be considered so far over selected case. The table-3 shows

that the average Net Fixed Assets Turnover ratio was 2.40 times which 50% of the standard

norm was. The calculated ratio shows that the ratio ranges from maximum 6.45 times in the

year 2008 to a minimum .17 times in the year 2005 which was far away from the standard

norm. From the calculated ratios it is seen that the ratios showed a declining trend up to

2007and it increased solidly in 2008 and 2009. This low level of ratio indicates poor sales

volume in terms of fixed assets. This indicates an inefficient use of fixed capital. From the

Coefficient of variation it is seen that the variation was stable.

Total Assets Turnover

Another activity ratio is total assets turnover. This is a measure of the extent of generating sales

in terms of the total assets. A standard norm of 200% (i.e. 2 times) of this ratio is considered

standard norm by some authors for an industrial enterprise. This may also be taken as such for

our selected concern. The table-3 shows that the average total assets turnover ratio was 1.7546

times for the selected textile which was lower than the standard norm. The table reveals that the

ratio ranges from maximum 6.36 times in the year 2008 to 1.04 times in the year 2007. Such a

low level of total assets turnover ratio indicates that the selected industry generated lower taka

of sales per taka of tangible assets which may be an indication of poor use of fixed and

11

circulating capital. In terms of variation in Total Assets Turnover it is revealed that the variation

is negligible.

Solvency Ratios

Debt-Equity ratio, Debt to Total Assets ratio and Time Interest Earned ratio are commonly used

solvency ratios. Table-04 shows various solvency ratios for the CMC-Kamal Industries Limited

for the study period.

Debt-Equity Ratio

Equity represents a “cushion” for share-holders. This is a ratio calculated to measure the

relative proportions of outsiders’ funds and shareholder’ funds invested in the company. This

ratio is also known as external-internal equity ratio. The standard ratio is .30032:1. The table-04

shows that the debt-equity ratio ranges from maximum 1.24:1 in the year 2009 to minimum

.44:1 in the year 2005 and the average debt-equity ratio was .9136:1. It is observed from the

table that the debt-equity ratio for all the years were very lower than the standard norm. These

low ratios mean that the claims of creditors are lower than those of owners and the company

has not liberally used debt to finance its assets. It indicates an inefficient financial management.

From the coefficient of variation it is clear that the variation is negligible.

Table: 4 Solvency Ratios of CMC-Kamal Industries Limited

Profitability

Ratios

2005 2006 2007 2008 2009 Minimu

m

Maximu

m

Mean Std.

Deviation

C.

Variance

Debt-Equity

Ratio (in time)

1.24 0.90 0.91 1.09 0.44.44 1.24 .9136 .30032 .090

Debt to Total

Assets Ratio (in

time)

0.52 0.39 0.41 0.48 0.28.28 .52 .4166 .09166 .008

Source: Annual Report and Official Records of the CMC-Kamal Industries Ltd.

Debt to Total Assets Ratio

The objective of this ratio is to assign what portion of total assets (debt + equity) is collected

from debt. Some authors consider that debt to total assets ratio should be 50% for an industrial

enterprise. The table-04 shows the debt to total assets ratio for the CMC-Kamal Industries

Limited for the study period. It is observed the table that the average debt to total assets ratio

12

was 9.166% only which was far away from the standard norm. The table also shows that the

debt to total assets ratio ranges from maximum 52% in the year 2004to minimum 28% in the

year 2005. The calculated ratios indicate the claim of creditors was about to very small in

percentage to the shareholders. Such a lower ratio of debts to total assets of the selected

enterprise reveals the fact that it is less dependent on debt rather than on its own capital for

financing its projects. The coefficient of variation shows that the variation was absolutely

stable.

Testing Financial Soundness

After examining liquidity, profitability, solvency and activity of sample textile, now it is

necessary to examine the overall financial soundness of the textile during the study period. In

this context Multivariate Discriminate Analysis (MDA) model as developed by Prof. Altman

may be considered worth while. The said model can give some rough idea about the financial

soundness of the selected textile. He developed the following equation for judging the financial

soundness of an enterprise.

Z = 8.81x1 + 1.85x2 + 1.76x3 + 1.17x4 + 3.62x5

Where;

X1 : Working Capital / Total Assets

X2 : Retained earnings / Total Assets

X3 : Earning before interest & taxes / Total Assets

X4 : Market value of equity / Total debt

X5 : Sales / Total Assets

Z : Overall index

In order to test the overall financial soundness of the CMC-Kamal Industries Ltd. it needs to

calculate the ratios of working capital to total assets, retained earnings to total assets, earning

before interest & taxes to total assets, market value of equity to book value of total debt and

sales to total assets. The following table-05 depicts the year wise as well as average position of

the ratios of working capital to total assets, retained earnings to total assets, earning before

interest and taxes to total assets, market value of equity to total debt and sales to total assets.

The year wise position of all these ratios excepting market value of equity to total debt had been

either negative or to low positive. These resulted in poor financial performance of the sample

textile.

13

Table: 5 Ratios for Testing Financial Soundness of CMC-Kamal Industries Limited

Profitability

Ratios

2005 2006 2007 2008 2009 Minimu

m

Maximu

m

Mean Std.

Deviation

C.

Variance

Working Capital

to Total Assets

(in time)

0.09 0.10 0.11 0.21 0.29.09 .29 .1570 .08665 .008

Retained

Earnings to Total

Assets (in time)

0.03 0.02 -0.01 -0.01 0.03-.01 .03 .0115 .02154 .000

Earnings before

interest and taxes

to Total Assets

(in time)

7.22 -0.01 -0.03 -0.05 0.07-.05 7.22 1.4394 3.23119 10.441

Market value of

equity to Total

Debt (in time)

0.81 1.11 1.10 0.92 2.28.81 2.28 1.2454 .59304 .352

Sales to Total

Asset (in time)

0.67 0.64 0.58 0.21 0.95.21 .95 .6098 .26774 .072

Source: Annual Report and Official Records of the CMC-Kamal Industries Ltd.

Such lower positions of these ratios indicate very unsatisfactory position. On the other hand the

market value of equity to total debt and sales to total assets were 2.66 and 1.255 times

respectively which indicate unsatisfactory position of financial performance of the sample

industry.

The following table shows the year-wise as well as average position of Z’s score of the sample

industry during the study period.

Table: 6 Analysis of Z score of CMC-Kamal Industries Limited

Profitability

Ratios

2005 2006 2007 2008 2009 Minimu

m

Maximu

m

Mean Std.

Deviation

C.

Variance

Z’ score 8.81 1.85 1.76 1.17 3.621.17 8.81 3.4420 3.13941 9.856

14

After putting the respective average values of x1, x2, x3, x4 and x5, in the aforesaid equations as

developed by Prof. Altman, Z score was estimated 8.81, 1.85, 1.76, 1.17 and 3.62respectively

for the year 2009, 2008, 2007, 2006, and 2005. The average Z score stood at 1.27 comparing

with Prof. Altman’s conclusion that firms with Z score above 2.99 were solvent while those

below Z score of 1.81 were bankrupt. Average Z score of sample industry equivalent to only

1.27 showed the position of bankruptcy at a lower level during the period 2005 to 2009. From

the coefficient of variation it is seen that the variation was stable.

Therefore, it can be concluded that the overall financial soundness of the sample Industry

during the study period had been worst leading to total bankruptcy of the industry.

Conclusion

From the discussion it can be concluded that the financial position and operational performance

of the CMC-Kamal Industries Ltd. were not satisfactory. The inefficiency of financial

management may be a major cause for such a position of the state of affairs. This view was also

substantiated by using Prof. Altman’s MDA model. By applying this model it was seen that the

overall financial position of the sample industry was at the lower level of bankruptcy. The main

reasons attributed to such situation reported to be poor market demands, scarcity of raw

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materials and lack of their timely procurement, high competition, vanished quota system,

management in attention, lack of realistic goals, strict government regulations, political

instability, increased price of raw materials and others, adverse environmental factors etc. In

order to save the industry from total bankruptcy the financial performance of the industry

should be improved as early as possible.

The followings are the recommendation from the researchers:

i. The government may give subsidy to import quality raw materials for textiles in the

country. By this way the cost of production will be reduced. As a result profitability will

be high.

ii. The formalities required for taking loan from various commercial banks and other

financial institution may be minimized.

iii. In view of growing importance of textiles in the economy of the Bangladesh,

arrangement may be made to provide working capital to this sector. There may be

provision for short loan from the government.

iv. The financial management specially purchase, sales and inventory management have to

be motivated, so that they act all the tasks cordially, efficiently and honestly. As a result

sale will be increased and cost related with inventory will be reduced as well as level of

inventory will be optimum. By this way the profitability of the textile will be increased.

v. The industry should regularly make use of ratio analysis and measure should be taken to

improve undesirable ratios at least as to the point of standard.

vi. Adequate facilities for training of the staffs and workers may be ensured through

cooperation of the corporation, Government and existing training institutions.

vii. In Bangladesh, industrial policy was found very unsuitable. In such a case, a long term

plan relevant to industrial policy and also for textile industry need to be formulated. A

committee comprising academicians, economist, industrialists and professional

managers can work out long term textile industry policy of the country.

viii. The authority of the CMC-Kamal Industries Limited should appoint qualified,

trained and experienced management personnel. Due to lack of specified management

personnel the performance of the textile is not good.

ix. A multiple criteria need to be set up to evaluate the financial performance of the

selected textile. A comparison between actual and standard may be made at the year

end. Reward and punishment for the concerned managerial personnel may go hand in

hand with such evaluation.

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x. Productivity must be increased for reducing cost of goods sold.

xi. Sales management must be efficient for increasing sales volume and a rationale short

term credit sales system should be introduced for increasing sales volume which will

reduce the obsolete inventory.

xii. Government regulations regarding textiles industry should be flexible.

xiii. Operational efficiency should be increased by reducing cost and wastage and

improving operating and management performance.

xiv. Liquidity position of the selected industry should be improved by reducing

current liabilities and by reducing investment in inventory.

xv. Realistic goal should be set out by the textile.

xvi. A reasonable credit policy should be implemented, so that the main portion of profit

does not spend in payment of fixed charges.

xvii.Capital structure should be modified by increasing the share of owner’s capital and

decreasing the portion of debt capital.

xviii. Management found not to enjoy adequate autonomy. In order to make the textile

management duly responsible and accountable, it is the most necessary that they may be

given adequate autonomy with the definite targets.

Reference

Altman, E.I. (1968), Financial Ratios, Discriminant Analysis and the Prediction of Corporate

Bankruptcy, The Journal of Finance, Vol.4, pp. 589-609

Bunnet, A.H.M. (1987), Performance Evaluation of Public Enterprises in Bangladesh, Journal

of Business Administration, Vol.13, No.1,p. 1

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Chandra, P. (1995), The Investment Game, New Delhi, Mc Graw Hill Publishing Co. Ltd.

p.172

Dutta, D.D.Kanti & Bhattacharjee, Dr. Milan Kumar, 2001, “The assessment of financial and

operating performance of the cement industry: A case study of confidence cement ltd.” The

Chittagong University Journal of Commerce, volume 16, pp. 1-16

Hye,Dr.M.A. & Rahman, M.A. (1997) Performance of Selected Private Sector General

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Jahur, Mohammad Saleh & Uddin, Mohammad Mohi (1995) Measurement of operational

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Chittagong, CU studies (Commerce), Vol XI, pp. 245-255

Jahur, Mohammad Saleh & Parveen, Jannat Ara, 1996, “An analysis of financial performance

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Jain, S.P. & Narang, K.L. Financial Accounting, Kalyani Publishers, Ludhiana, New Delhi, pp

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