FIN 201: Introduction to Finance

Jahangirnagar University
Department/Institute: Institute of Business Administration
(IBA)
Second Year First Semester/Honors/Masters Final Examination-2020
Assignment for Final Examination
Course No.# FIN 201
Course Title# Introduction to Finance
Name of the Student: MD. Obaidur Raman Dip
Class Roll No. #
Examination Roll No. #
Registration No. #
Academic Session #
Total number of written pages in the assignment #10 (Excluding
Top Sheet)
Date of Submission: July 18, 2021
Instructions:
1. Don’t copy from other’s assignment. Copying from others will be
punished severely.
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192470
2018-2019
20193550199
1939

2. The student must submit the assignment online (Google
classroom/email/google form etc.) as the course-teacher
prescribes.
3. You must use your name# your EXAM ID only for naming your
submitted file.
Financial Analysis on Fu-Wang
Foods Limited
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Table of Contents
Introduction......................................................................................................................................4
Company Overview.........................................................................................................................4
Financial Analysis...........................................................................................................................5
Analysis of Financial Performance..............................................................................................5
Comparative Ratios (Benchmarking)..........................................................................................8
Summary of Ratio Analysis (The DuPont Analysis)...................................................................9
Recommendations..........................................................................................................................10
Conclusion.....................................................................................................................................10
Index..............................................................................................................................................11
References......................................................................................................................................12
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Introduction
Financial statements provide information about the position of a firm or company at a point in
time and its operations over some past periods. Moreover, the essence of financial statements lies
in the fact that they can help predict a company’s financial position in the future. It also measures
the number of expected dividends and earnings (Besley and Brigham, 2016). Financial
statements are enriched with numbers, and it becomes difficult for the managers to determine
which number gets higher priority from another one. In order to understand whether a particular
number is of much importance, the general approach in financial statement analysis is to
calculate the ratios that demonstrate key underlying constructs. For example, liquidity,
efficiency, profitability, Etc. (Ak et al., 2013).
This formal assessment is aimed to collect financial statements for a specific year from a public
limited manufacturing company listed under DSE or CSE. The report also suggests calculating
the financial ratios for a given specific year. Finally, a comparison will be made between the
calculated ratios and the industry average.
Company Overview
In this formal assessment, Fu-Wang Foods Ltd. has been selected as the desired company to do
the analysis. Fu-Wang Foods Ltd. is a public limited company incorporated with joint-stock
companies. The company is also publicly listed in Dhaka Stock Exchange Ltd and Chittagong
Stock Exchange Ltd. (Fuwangfoodsltd.com, 2021). People of Bangladesh are well aware of Fu-
Wang. Most people from their early childhood were introduced to the “Instant Noodles” from
Fu-Wang. Other products include bread, biscuits, toast biscuits, wafer bar, chocolate, energy
drink, Etc. Fu-Wang has been incorporated in business since 1997 and has an authorized capital
of 1,500 Million (In Taka). There are approximately 1600 employees in the company
(Fuwangfoodsltd.com, 2021).
Limitations of the Study
While preparing the assignment, strict regulations have been maintained to make it flawless. Yet,
there were few limitations including:
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1. Lack of few data categories and for that the assignment has avoided few ratios.
2. There was no past data for commenting on the present situation of the company.
3. Lack of past experience.
Financial Analysis
Financial Analysis provides the information of a company’s current performance. The analysis
aimed to demonstrate the future development that can enhance the overall performance (Castro
and Chousa, 2006). Financial analysts emphasize ratio while analyzing financial statements
because cause-effect ratio analysis can be important (Miller and Miller, 1991). In this formal
assessment, the annual report of Fu-Wang (2019-2020) will be used to determine overall results,
and appropriate financial ratios will support the analysis.
Analysis of Financial Performance
A table is constructed below to demonstrate ratio title, formula, appropriate data, and results after
calculation. The industry average has also been included. The results will highlight the overall
performance of the financial year of 2019-2020 (As at 30th June, 2020)
Title of the Ratio Formula Appropriate Data (From
Balance Sheet and
Income Statement)
Result Industry
Average
Current Ratio Current Asset/
Current liabilities
212,381,740.00/
169,507,186.00
1.25 4.10
Quick Ratio (Current Assets-
Inventories)/Curre
nt liabilities
(212,381,740.00-
281,640,362.00)/
169,507,186.00
-0.41 2.10
Inventory
Turnover
Cost of Goods
Sold/Inventory
36,953,036.00/
281,640,362.00
0.13 7.40
Days Sales
Outstanding
Accounts
Receivable/
(Annual
Sales/360)
140,089,127.00/
(42,787,497.00/360)
1,178.66 32.10
Fixed Assets Sales/Net Fixed 42,787,497.00/ 1.03 4.00
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Turnover Assets 41,420,901.00
Total Assets
Turnover
Sales/Total Assets 42,787,497.00/
253,802,641.00
0.17 2.10
Debt to Total
Assets
Total Liabilities/
Total Assets
169,507,186.00/
253,802,641.00
0.67 0.42
Net Profit Margin Net Profit/Sales -5,653,365.00/
42,787,497.00
-0.13 0.05
Return on Total
Assets
Net income/Total
Assets
-5,653,365.00/
253,802,641.00
-0.02 0.10
Return on Equity Net Income/
Equity
-5,653,365.00/
1,330,811, 955.00
-0.20 0.18
Price/Earnings
Ratio
Share
price/Earnings per
share
18.50/ -56.53 -0.33 15.00
Market/Book
Ratio
Market Price Per
Share/Earnings Per
Share
18.50/ 12.01 1.54 2.50
Table 1: Financial Ratio Analysis of Fu-Wang Foods Limited (At the end of June 30th, 2020)
 Liquidity Ratio:
For the company FU-Wang, the financial report of 2019-2020 suggests that the current asset of
that period is 212,381,740.00, and current liabilities were 169,507,186.00 (Fu-Wang Foods
Limited, 2020). The current ratio for the company is 1.25x, where the industry average shows
that 4.1x is a standard value. This lower than industry average may indicate a higher risk of
distress or default for Fu-Wang Foods Limited compared to other businesses in the industry.
While calculating the quick ratio, it was found that the value for Fu-Wang was -0.41, which is
very low compared to the industrial average. The quick ratio is an indicator of a company’s
short-term liquidity position. It also measures a company’s ability to meet its short-term
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obligations with most liquid assets. As the quick ratio turns out to be negative and less than 1,
Fu-Wang is highly in danger not to pay off its current liabilities in the short term.
 Asset Management Ratio:
The Inventory Turnover ratio of Fu-Wang shows that it is very low from the industrial average
given in the core textbook (Essentials of Managerial Finance, Besley and Brigham, 2016). The
inventory turnover ratio of only 0.13 suggests that either the sales were too low or the inventory
were too high. Fu-Wang, regardless of anything, could sell its average inventory in (360/0.13) or
2,700 days approximately. In contrast, other companies with an equal ratio to industrial average
can complete within (360/7.4) or around 49 days only.
The Days Sales Outstanding ratio of Fu-Wang shows a higher DSO than the industrial average of
32.1 days. The result came out around 1170 days. It indicates that Fu-Wang is taking more time
to collect its receivables than other competitors. The receivables might affect the cash-in-hand
for FU-Wang, which is very important for running the business in the industry.
In the financial year 2019-2020, Fu-Wang demonstrated a Fixed Asset Turnover ratio of 1.03x
that is lower than the average industrial ratio of 4.0x. Hence, the company is inefficient to
generate sales with the number of fixed assets they have. On the other hand, the Total Asset
Turnover ratio was 0.17x, whereas the industry average is 2.10x. As previously discussed, the
company is again failed to generate profit from the total assets. As both the Asset Turnover ratio
of Fu-Wang came out low, it indicates the possibility of low sales of Fu-Wang in the financial
year 2019-2020 was affected by the COVID-19 pandemic. The effect is still prevailing during
prolific lockdowns where markets are forced to be closed, and customers are not interested in
buying items other than a regular commodity. The COVID-19 pandemic has been a significant
reason for declining turnover (Fu-Wang Foods Limited, 2020).
 Debt Management Ratio:
The total debt to asset ratio of Fu-Wang was calculated, and it was found that the ratio was 0.67,
which is comparatively higher than the industrial average of 0.42. This higher ratio indicates that
the company is at greater risk associated with the firm’s operation. The high debt to asset ratio
also indicates that Fu-Wang has low borrowing capacity and lower financial flexibility.
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 Profitability Ratio:
The net profit margin after tax is calculated to be -0.13, where the industry average is 0.05. The
result suggests that the amount of selling products is not sufficient to meet up the cost of making
or selling the products of Fu-Wang Foods Limited.
After calculation, it was found that the Return on Total Assets was -0.02, which is still lower
than the usual industrial average of 0.10. This event indicates that the company is not effective in
generating income. On the other hand, the total shareholder’s equity of Fu-Wang amounted to
1,330,811, 955.00 BDT is the major portion of the other side of the balance sheet. The ROE
(Return on Equity) for Fu-Wang was found to be -0.20, which is very low compared to the
industrial average of 0.18. The event suggests that the company incurs a loss, and there is no net
income. Hence, it can be concluded that negative ROE is necessarily bad for a company.
 Market Value Ratio:
As the company is currently at a loss, the Price Earnings ratio also turned out to be less than the
industrial average. The ratio was found to be -0.33x, and the industrial average is 15x. Fu-Wang
is currently losing money, and there is a huge risk of bankruptcy if the company does not meet
up with current losses. It also indicates that the stock price is low compared to earnings (Estevez,
2020).
The book value per share of Fu-Wang is calculated to be 1.54x, and the industrial average shows
a ratio of 2.50. It is still less and indicates that investors are less likely to pay more for Fu-
Wang’s share for its book value than the industry.
Comparative Ratios (Benchmarking)
Comparative ratios for many industries are available from several sources, including Dun and
Bradstreet, Robert Morris Associates, and the U.S department of commerce. Hence, the
comparative ratio analysis is described as the ratio calculated for a particular company compared
to those of other companies in the same industries (Besley and Brigham, 2016).
Below table is constructed in the context of Fu-Wang’s financial ratio analysis of the year 2019-
2020.
Ratio Ratio Value Industry Average Comment
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Liquidity Ratio
Current Ratio 1.25x 4.1x Low
Acid Test -0.41x 2.1x Poor
Asset Management Ratio
Inventory Turnover Ratio 0.13x 7.4x Poor
Days Sales Outstanding 1,178 days 32.1 days Poor
Fixed Asset Turnover Ratio 1.03x 4.0x Low
Total Asset Turnover Ratio 0.17x 2.1x Low
Debt Management Ratio
Debt to Assets Ratio 0.67x 0.42x High
Profitability Ratios
Net Profit Margin -0.13x 0.05x Poor
Return on Total Assets -0.02x 0.10x Poor
Return on Common Equity -0.20x 0.18x Poor
Market Value Ratios
Price/Earnings Ratio -0.33x 15.0x Poor
Market/Book Ratio 1.54x 2.5x Low
Table 2: Comparative Ratios (Benchmarking) of Fu-Wang for 2019-2020
Summary of Ratio Analysis (The DuPont Analysis)
DuPont Analysis
ROA (Fu-Wang) Net Profit Margin × Total Assets Turnover -2.21%
ROE (Fu-Wang) ROA × Equity Multiplier -0.419%
ROA (Industry) Net Profit Margin × Total Assets Turnover (Industry
Average)
10.3%
ROE (Industry) ROA × Equity Multiplier (Industry Average) 17.7%
Table 3: DuPont Analysis of Fu-Wang Foods Limited for the financial year 2019-2020
Here, we found ROA as -2.21% in DuPont method. The DuPont equation is as follows:
ROA= Net profit margin x Total asset turnover= Net income/sales x sales/Total Assets
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Fu-Wang Foods Limited has its equity multiplier calculated as 0.190x, which is less than 1. This
ratio indicates that Fu-Wang Foods Limited has fewer debt-financed assets. This incident is also
seen as a positive sign as the debt servicing cost is lower. On the other hand, Fu-Wang may also
be unable to entice lenders to loan it money on favourable terms. The inability to entice loans can
be problematic sometimes.
By using Equity multiplier, ROE is found to be -0.419%. The extended DuPont equation for
ROE is given below:
ROE = Net Profit Margin X Total Assets Turnover X Equity Multiplier
Here, ROE is very low than the industry average for Fu-Wang Foods Limited. The net profit
margin is also lower in this case. The negative ROE is necessarily bad for the company. Here the
costs are the result of improving the business. It can be described as improving business through
reconstruction.
Recommendations
After all the financial analysis, it has been found that despite all the losses that Fu-Wang Foods
limited incurred during the period is fixable. For this, some of the recommendations will be:
1. To overcome the prominent credit risk, Fu-Wang should hold more cash among total
current assets.
2. The company should focus on increasing its utilization of production capacity.
3. Varieties of products should be introduced.
Conclusion
The formal assessment aimed to make the students capable of analyzing the ratios of a certain
company. Hence, a business student can easily make financial analyses that will be beneficial for
future endeavors. In this assignment, a financial ratio analysis of Fu-Wang foods ltd. of
Bangladesh has been conducted. The industry average was taken from the core textbook to
compare the calculated ratios. Finally, a recommendation part has been included for Fu-Wang
Foods ltd. of Bangladesh.
Index
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Table 1: Financial Ratio Analysis of Fu-Wang Foods Limited (At the end of June 30th, 2020)....6
Table 2: Comparative Ratios (Benchmarking) of Fu-Wang for 2019-2020....................................9
Table 3: DuPont Analysis of Fu-Wang Foods Limited for the financial year 2019-2020..............9
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References
Ak, B., Dechow, P., Sun, Y. and Wang, A., 2013. The use of financial ratio models to help
investors predict and interpret significant corporate events. Australian Journal of Management,
38(3), pp.553-598.
Besley, S. and Brigham, E., 2016. Essentials of Managerial Finance. 14th ed. Mason, OH:
Thomson/South-western, pp.51-52.
Castro, N. and Chousa, J., 2006. An integrated framework for the financial analysis of
sustainability. Business Strategy and the Environment, 15(5), pp.322-333.
Fuwangfoodsltd.com. 2021. About. [online] Available at:
https://www.fuwangfoodsltd.com/about [Accessed 10 July 2021].
Fu-Wang Foods Limited, 2020. Annual Report. Dhaka: Fu-Wang Foods Ltd.
Estevez, E., 2020. Can Stocks have a negative price-to-earnings ratio? [online] Investopedia.
Available at: https://www.investopedia.com/ask/answers/05/negativeeps.asp [Accessed 12 July
2021].
Miller, B. and Miller, D., 1991. How to Interpret Financial Statements for Better Business
Decisions. New York, NY: AMACOM.
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