Company Analysis and IPO Valuation

Company Analysis

and IPO valuation
Target Company: Aman Cotton
Fibrous Ltd.
Peer Company: Square Textiles
Limited
Report Company Analysis and IPO Valuation 26th August 2019

Course Title & Course Code:

Lease Financing and Investment Banking (F-610)
Submitted To-
Md. Sajib Hossain, CFA, ACCA
Assistant Professor
Department of Finance,
Faculty of Business Studies
University of Dhaka
Submitted By –
Name ID
1 Zakia Shamsi Zahan 35045
2 Nusrat Alam 36021
3 Farjana Yesmin 35030
4 Farzana Amin 31054
5 Nusrat Jahan Monmon 35032
6 Mohammed Nazmul Hasan 35059
7 Elius Chowdhury 35016
EMBA, Finance, University of Dhaka
Date of Submission – 26th August, 2019
Page i of 4


Letter of Transmittal
26th August, 2019.
Md. Sajib Hossain,

Assistant Professor
Department of Finance
University of Dhaka
Subject: Submission of Term Paper on Company analysis and IPO valuation of Square
Textiles Limited &
Sir,
With due respect, I would like to inform you that, it is a great pleasure for us to submit the report
on “Company Analysis and IPO Valuation of Aman Cotton Fibrous Ltd. (Target) & Square
Textiles Limited (Peer)” as a requirement of “Lease Financing and Investment Banking” course.
We have tried our best to gather all necessary information relevant to our study and presented as
cordially as possible. We have tried to make this report significant and communicative.
While working on this report, we have come to know depth knowledge about this course such as
valuation, company analysis, industry analysis of these companies. This information are so
important for this course as well as for a corporate person.
So, I therefore, request and hope that you would be kind enough to accept our report and oblige
thereby.
Sincerely Yours
On behalf of group
Zakia Shamsi Zahan (ID No. – 35045)
Page ii of 4


Acknowledgement
Our first acknowledge goes to the almighty Allah for bestowing us the patience and courage to
finish this task within its deadline.
Second, we humbly thank our course instructor Md. Sajib Hossain and greatly appreciate the time
and effort, he has given to us for the purpose of learning analysis and valuation of financial
statements and preparing a report on this.
Acknowledgments must go to the team members, whose unflagging patience and outstanding
capacity for creative work made the report both possible and successful under the pressure of
knocking deadline.
Page iii of 4


Executive Summary
This assignment is prepared by focusing on the Annual reports of Aman Cotton Fibrous Ltd. (Target) and
Square Textiles Limited (Peer). In this regard this paper not only demonstrates the ratios but also
demonstrates the valuation of these two companies.
This paper describes the Porter’s Five Forces analysis of Textile Industry of Bangladesh. Bargaining power
of supplier is high, bargaining power of supplier is high, threat of new entrants is high, threat of substitute
is high, and competitive rivalry among existing players is high too.
This paper describes the financial information of Aman Cotton Fibrous Ltd. (Target) and Square Textiles
Limited (Peer).
Moreover, this paper analyses activity, liquidity, solvency, profitability ratios, Common size financial
statements & valuation of Aman Cotton Fibrous Ltd. (Target) and Square Textiles Limited (Peer).
Lastly, this paper demonstrates Equity Valuation of Aman Cotton Fibrous Ltd. & Square Textiles Limited.
Dividend Discount Model (DDM), Multiples Valuation are used to determine their actual value of the stock.
Page iv of 4

TABLE OF CONTENTS
Particulars Page No.

Introduction 2
Company Overview of Aman Cotton Fibrous Ltd. 5
Company Overview of Square Textiles Limited 7
Macro-Economic Analysis 8
Macroeconomic performance in Bangladesh 9
Forecasting of Macroeconomic factors 11
Factors responsible for Forecasting 11
Industry Analysis 13
Porter’s five forces 14
Macroeconomic Performance of the Textile Industry 16
Company Analysis 18
Ratio Analysis of financial Statements: 19
Liquidity Ratio 19
Solvency Ratio 22
Profitability Ratio 26
Common Size Analysis: 31
Common Size Analysis of Balance Sheet 32
Common Size Analysis of Income statement 33
Sustainable Growth Rate 34
Alternative ROE 35
Alternative ROE of Aman Cotton Fibrous Ltd. 35
Alternative ROE of Square Textile Limited 36
Valuation 37
General Requirement for IPO checklist for Aman Cotton Fibrous Limited 38
Alternative requirements for book-building method 39
IPO Valuation 39
4 Methods for IPO Valuation 40
FCFF Method 43
DDM Method 46
Multiples Valuation Method 50
Conclusion 54
References and Bibliography 56
Chapter 1
Introduction
Page 2 of 56
Introduction
With the ever increasing size and sophisticated things of recent businesses it’s turning into
necessary for each business man to base choices of facts expressed in quantitative kind.
Quantitative measurement of a business is very significant for facilitating its operations towards
attaining optimal goal. We with our gathered knowledge have tried to analyze the macroeconomic
data, relative industrial data, financial statements and its valuation.
Origin of the report
For this report data have been collected from the following sources:
 Dhaka Stock Exchange
 Annual Report of AMAN COTTON FIBROUS LTD.
 Annual Report of Square Textiles Limited
Purpose of the report
As a business expectative of future, we should gather experiences beside our study. We should not
concern our lesson only in classroom but to implement it in practical life that will help us in our
future life. A clear objective helps in preparation of well decorated report in which other take the
right type of decision. So, identifying objectives is very much important. Our purpose of preparing
this report is:
 To identify how the economy of Bangladesh is performing.

 To analyze the relative manufacturing industry operating in the economy of
Bangladesh.
 To find out the company’s decision making process through ratio analysis.
 To learn how to make analysis of Financial Statements.
 To forecast intrinsic value of shares of the two companies.
Page 3 of 56
Company Overview of Aman Cotton Fibrous Ltd.
Aman Cotton Fibrous Ltd. was incorporated as a private Limited Company with the issuance of
certificate of incorporation bearing No-C-403 dated December 28, 2005 by the Registrar of Joint
Stock Companies & Firms and the Company commenced its commercial production on November
01, 2007. Subsequently the shareholders in their Extra-Ordinary General Meeting held on 22 April,
2012 approved conversion of status of the company from private limited to public limited
company.
The Principal activities and nature of the business of the company is to manufacture of high quality
yarn in Bangladesh and marketing and selling of product in the global and domestic Market.
Mission
To establish labor intensive industries blending the latest technologies upholding ownership by the
employees along with conservation of environment with precise commitment to the society and
contribute substantially to GDP through sustainable growth.
Vision
To be a leader in fulfilling country’s basic needs through industrialization with total Quality.
Major Achievement
1. Aman group Limited enlisted and obtained a license of economic zone namely Aman Economic
Zone Limited situated at the bank of River Meghna, Sonargaon, Narayangonj, Inagurated by
Honorable Prime Minister of Gov’t of the People’s Republic of Bangladesh Sheikh Hasina on 28th
of Feb 2016.
2. With a pronouncement of creating job opportunity for a fleet of 32000 work force by the year
of 2021, Aman group presently succeeded to be driven by 16000 (Sixteen thousand) direct
manpower towards its vision.
Page 4 of 56
Stock Market Information of Aman Cotton Firbous

Ltd.
Closing Price (25th August, 2019) BDT. 33.3

Market Capitalization (mn) BDT. 2664.000
Authorized Capital (mn) (30th June, 2018) BDT. 2000
Paid-up Capital (mn) (30th June, 2018) BDT. 800.000
Num. of Shares outstanding (30th June, 2018) 80,000,000
Market Category A
Face value BDT. 10
Table 1: Stock Market Information of Aman Cotton Fibrous Ltd.
Dividend History of Aman Cotton Fibrous Ltd.
Year Cash Dividend % Stock Dividend %

2009-10 0% 0%
2010-11 0% 9900%
2011-12 0% 700%
2012-13 0% 0%
2013-14 0% 0%
2014-15 0% 0%
2015-16 Unknown Unknown
2016-17 Unknown Unknown
2017-18 10% (Proposed)
Table 2: Dividend History of Aman Cotton Fibrous Ltd.
Page 5 of 56
Company Overview of Square Textiles Limited
Square Textiles Limited is a subsidiary company of Square Group. The Company was incorporated
as a public limited company in the year of 1994. The operation was started in 1997. It was enlisted
in Dhaka Stock Exchange & Chittagong Stock Exchange in 2002. Within a very short time of span
the company achieved some significance success. Square Textile receives Oeko-Tex standard 100
and ISO-9002 certificates in the year 2000. Authorized capital of the company is tk. 3000 million.
It’s paid- up capital is tk. 1789.133 million. 2,427 employees are working in this organization. The
business lines of Square Textiles Limited are manufacturing and marketing of yarn. The Net Profit
after Tax is 252.49 Million BDT of Square Textile in June 2017.
During the last few years they had to face hard competition in the national & international market.
To cope with the situation, they have adopted multiple product mix to attain high margin as
strategy of value addition through product differentiation.
Mission
Square realizes the need to stake out a competitive segment in the changing global market of today
through technological excellence and human expertise. Square is committed to transpose its local
success to the world scene.
Vision
To establish ourselves as a one stop source for the Global Knit Apparel market and assure complete
compliance with the international quality standards with employee’s internationally acceptable
working condition /standards. To attain highest level of competence through continuous
development of the professional management system and to ensure complete transparency in all
aspects of business.
Page 6 of 56
Stock Market Information of Square Textile
Closing Price (25th August, 2019) BDT. 42.9

Market Capitalization (mn) BDT. 8059.153
Authorized Capital (mn) (30th June, 2018) BDT. 3,000
Paid-up Capital (mn) (30th June, 2018) BDT. 1878.590
Num. of Shares outstanding (30th June, 2018) 187,859,048
Market Category A
Face value BDT. 10
Table 3: Stock Market Information of Square Textile
Dividend History of Square Textile
Year Cash Dividend % Stock Dividend %

2012-13 18% 15%
2013-14 20% 10%
2014-15 20% 10%
2015-16 25% 10%
2016-17 20% 5%
2017-18 20% 5%
Table 4: Dividend History of Square Textile Limited
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Chapter 2
Macro-Economic Analysis
Page 8 of 56
Macro-Economic Analysis
Macroeconomics is a branch of economics dealing with the performance, structure, behavior, and
decision-making of an economy as a whole.
Macroeconomists try to forecast economic conditions to help consumers, firms and governments
make better decisions.
Macroeconomic analysis broadly focuses on: national output (measured by gross domestic
product), unemployment, inflation and level of export and import.
 National Output: Gross Domestic Product

 Unemployment
 Inflation
 Export and Import.
Macroeconomic performance in Bangladesh

 The Gross Domestic Product (GDP) in Bangladesh expanded 7.3 percent in 2017 from the
previous year. This indicator has been discontinued and replaced by Bangladesh GDP Annual
Growth Rate. GDP Growth Rate in Bangladesh averaged 5.71 percent from 1994 until 2016,
reaching an all-time high of 7.3 percent in 2017 and a record low of 4.08 percent in 1994.
GDP Growth in Bangladesh

8
7 7.3 7.5
7.2
6 6.46 6.52 6.55
6.01 6.06
5 5.57
5.05
4
0
2008-2009 2009-2010 2010-2011 2011-2012 2012-2013 2013-2014 2014-2015 2015-2016 2016-2017 2017-2018
Page 9 of 56
 Unemployment Rate in Bangladesh remained unchanged at 4.20 percent in 2017 from 4.20
Percent in 2016. Unemployment Rate in Bangladesh averaged 3.85 percent from 1991 until
2017, reaching an all-time high of 5.10 percent in 1997 and a record low of 2.20 percent in
1991.
Unemployment rate in Bangladesh

4.35
4.3 4.3 4.3
4.25
4.2 4.2 4.2
4.15
2012 2014 2016 2018
 The annual inflation rate in Bangladesh edged up to 5.47 percent in February of 2019 from
5.42 percent in the prior month, averaged 6.53 percent from 1994 until 2019, reaching an
all-time high of 16 percent in September of 2011 and a record low of -0.03 percent in
December of 1996.
6 6.16 5.68 5.96

5.61
4 4.3
0
2014 2015 2016 2017 2018
 Bangladesh has been on the list of UN Least Developed Countries (LDC) since 1975.
Bangladesh met the requirements to be recognized as developing country in March,
2018.Here is a chart showing the gross export and import data (unit in billion) from year
2013-2017.
Fiscal Year Total Export(Billion) Total import(Billion)

2013-2014 $30.10 $29.37
2014-2015 $31.20 $40.69
2015-2016 $34.97 $40.08
2016-2017 $34.80 $44.83
Page 10 of 56
Forecasting of Macroeconomic factors

Macroeconomics performance showed different trend based on its variables.
 By analyzing previous data it is estimated that the growth rate of GDP will be increase in
future.
 Unemployment rate of Bangladesh is projected to trend around 4.20 percent by 2020, as
the recent years were showing a stable condition.
 In the long-term, there will be no major change in Bangladesh inflation rate as Bangladesh
has been at a comfortable level in terms of the inflationary pressure over the last few years.
 We expect export will increase but import will also grow according to the prior years.
A chart is showing the macroeconomic trend of Bangladesh for next five years.
Forecasted Macroeconomic Analysis

2018.5 2019 2019.5 2020 2020.5 2021 2021.5 2022 2022.5 2023 2023.5
10 6
8.76
9 8.48
8.01 5 5
8
7.3
7 4.4
7 4.3
4 4.05 4
6
5 3
4
2
3 6.15 6.06 5.81 5.58
5.02
2
1
1
0 0
2019 2020 2021 2022 2023
Factors responsible for forecasting

 Bangladesh’s GDP transformation is driven in large part by social changes, starting with
the women empowerment. Accommodative monetary policy and expansionary fiscal
policy are also playing vital role behind that growth. Public investment in transport and
energy infrastructure has risen notably in recent years and this should help attract more
FDI.
 Bangladesh’s economic growth has been performing satisfactorily with 7-8 percent GDP
growth. However, employment opportunities have not been on per with this growth.
Volatile unemployment rate forecasted based on report of Bangladesh bank is that the
Page 11 of 56
youth unemployment has increased significantly over the year whereas the overall
unemployment remained stable. We expect that, Investment in the private sector,
upgrading the education sector with science and technology, vocational training will help
to deal with unemployment in near future.
 In 2019-2020 growing inflation rate is forecasted because it is believed that depreciation
of the exchange rate is the primary culprit underlying inflation in Bangladesh. Beside that
growth of remittance, syndicates, fuel price, relative strength of Bangladesh currency,
growth of money supply, trade-off between growth and inflation and international
commodity prices are seen as the reason behind growing inflation. But in these debate
inflation is temporary and the government has little control over inflation except to make
efforts to insulate domestic food and fuel prices from rising through price controls and
subsidies.
 Strong support to the entrepreneurs, huge private sector investment, getting closer to grow
market, growing safety reputation of RMG sector, huge capacity ;easier control on the
supply chain, technology adoption, qualitative transformation, power and gas supply is
getting better, human capital transformation and green branding will boost up the export of
Bangladesh. On the other hand to fulfill the demand of raising population, Bangladesh
needs more product to import. India and Bangladesh already have a free trade agreement
in place while China allows some preferential trade access which will accelerate the import
of Bangladesh.
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Chapter 3
Industry Analysis
Page 13 of 56
Industry Analysis
Both of the companies analyzed in this report are known for manufacturing high quality yarn in
Bangladesh and marketing and selling of product in the global and domestic Market. By definition,
Yarn is a long continuous length of interlocked fibres, suitable for use in the production
of textiles, sewing, crocheting, knitting, weaving, embroidery, or ropemaking. During the last few
decades, it has become an important industrial sector in Bangladesh.
Given the importance of this industry in the economy of Bangladesh, here is a figure given
analyzing the Porter’s Five Forces Model to get an insight about the plastic industry of Bangladesh-
Threats of New Entrants
• About 80% of total export income comes from the textile sector in Bangladesh leading
the government of Bangladesh lightening the restrictive requirements in entering into
the market.
• For local market, the threat is not so high because there are a lot of unutilized
resources in Bangladesh. Internationally, there is high threat of new entrants because
it is a labor-intensive industry. And many countries of the world like China and India
are trying to capture the international market by their huge labor and technological
advantage.
Threats of Substitute Product
• Bangladesh is lagging behind to some extent because of poor country barding and less
power to influence custome, other's products get preferenced.
• To ensure growth and profitability, Bangladesh should try to substitute the Indian and
Chinese products by providing cheap and quality products.
Bargaining Power of Buyers
• Being the second largest manufacturer of textile product in the world, Bangladesh
serve a lot of markets in world.
• It maintains both quality and price at a time. Because, input cost as labor is very low
in Bangladesh. Buyers can switch to the products of China and India easily if
Bangladesh fails to provide quality and cheap products at a time.
• Also the best for outsourcing in textile product. Leading the international brands
come to Bangladesh to get their work done by Bangladesh. That’s why there are many
franchises and subsidiaries in this country. Finally, quota system, GSP and low labor
cost are making some balances in the market for Bangladeshi textile product in the
world
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Barganing Power of Suppliers
• Bangladesh is collecting the raw materials at world price form the abroad. They have
a good reputation to the suppliers for timely payment.
• Besides, B2B LC1 is permitted in Bangladesh, which is giving extra facilities to the
industry.
• the powers of local suppliers are increasing day by day. But in case of labor supply,
industry is in advantageous position.
• The suppliers of labor are not so strong as compared to the suppliers of raw
materials because labors are adequate in this country.
Rivalry among existing Competitors
• Bangladesh ranks 6th in case of supplying garment products in US and EU market.

China and India Are big Players in the market.
• Bangladesh imports raw materials and uses other factors of production like cheap
labor to make it final goods at cheaper rate
• the industry is maintaining an average of 15% growth annually. And there are no
notable barriers to exit from the market.
• This indicates a quite high degree of competitions among existing companies.
After considering the model, it can be said that the plastic industry encompasses a monopolistic
competition market.
Bargaining Power
of Suppliers: High
Competitive
Rivalry Between Bargaining Power
Existing Players:
High
Porter’s of Customers: High
Five Forces
Threat of New
Threat of
Entrants: High
Substitutes: High
Figure 1: Porter’s Five Forces Model of Textile Industry of Bangladesh
Page 15 of 56
Macro-Economic Performance of the Textile Industry

The macroeconomic performance had been stable for Bangladesh, despite structural constraints
and global volatility.
 Bangladesh’s RMG sector has been playing a pivotal in facilitating the country’s export
earnings, contributing 83.4% of total export (source: EPB), apart for
 generating employment to the tune of 4.4 million, 80% of which are women. (Source: WB).
 Considering the sector’s importance to the country’s economic stability, ensuring steady
growth for RMG export in the short to medium term, is a key policy imperative.
 The ready-made garment (RMG) sector contributed $20.21 billion to Bangladesh’s total
export earnings—up by 14.51% from $17.65 billion during the same period of the previous
fiscal year.
 Of the total export earnings by the apparel sector, knitwear products earned $10.14 billion,
which is 13.86% higher than the $8.90 billion earned during the same period of FY2017-
18.
 Woven products earned $10.07 billion, up by 15.18% from $8.75 billion during the same
period of the previous fiscal year.
 The specialized textile sector saw a 41.11% growth to $84.03 million from $59.55, while
home textile products saw a negative growth of 0.79% to $490 million from $494.09.
 In the recent past, the sector’s growth has been marginal, with exports growing by 0.2%
and 8.7% for 2016-17 and 2017-18 respectively.
 Future growth would be contingent on the outcomes of multitude of internal and external
factors, which could potentially determine the sector’s competitiveness and performance
vis-à-vis its closest competitors.
Growth in Exports of the Textile Industry

The sector got back on its growth trajectory in 2018, mainly due to a depreciating currency and
growing export trend to the US market, which is the single largest importer of Bangladeshi
apparels. The US government’s cancellation of Trans-Pacific Partnership (TPP) agreement with
11 partner countries- Australia, Japan, New Zealand, Canada, Mexico, Singapore, Malaysia,
Vietnam, Brunei, Chile and Peru- have resulted in fresh imposition of tariff on Vietnamese apparel,
which is directly benefiting its closest competitor, Bangladesh. Recovering US economy will also
increase overall consumer spending and import, apparel included. The sector got back on its
growth trajectory in 2018, mainly due to a depreciating currency and growing export trend to the
US market, which is the single largest importer of Bangladeshi apparels. The US government’s
cancellation of Trans-Pacific Partnership (TPP) agreement with 11 partner countries- Australia,
Japan, New Zealand, Canada, Mexico, Singapore, Malaysia, Vietnam, Brunei, Chile and Peru-
have resulted in fresh imposition of tariff on Vietnamese apparel, which is directly benefiting its
closest competitor, Bangladesh. Recovering US economy will also increase overall consumer
spending and import, apparel included.
Page 16 of 56
Page 17 of 56
Chapter 4
Company Analysis
Page 18 of 56
Company Analysis
Ratio analysis of financial statements:
A) Liquidity Ratio:
Current Ratio: The current ratio is a widely used measure for evaluating company’s liquidities&
short-term debt- paying ability:
Current ratio = Current assets ÷ Current liabilities
Quick Ratio: The quick ratio is an indicator of a company's short-term liquidity. The quick ratio
measures a company's ability to meet its short-term obligations with its most liquid assets.
Cash Ratio: The cash ratio or cash coverage ratio is a liquidity ratio that measures a firm’s ability
to pay off its current liabilities with only cash and cash equivalents. The cash ratio is much more
restrictive than the current ratio or quick ratio because no other current assets can be used to pay
off current debt--only cash.
Cash Ratio= Cash and cash equivalent /current liability
Defensive Interval Ratio: The defensive interval ratio (DIR), also called the defensive interval
period (DIP) or basic defense interval (BDI), is a financial metric that indicates the number of days
that a company can operate without needing to access noncurrent assets, long-term assets whose
full value cannot be obtained within the current accounting year, or additional outside financial
resources.
DIR= Current Asset/Daily Operational expense
Liquidity ratio:
Page 19 of 56
Table 6: Liquidity Ratios for Square Textiels Limited (Peer)
Square textile:
Liquidity ratio:
2016 2017 2018
Current ratio 2.961 2.045 1.476
Quick ratio 1.977 1.293 0.928
Cash ratio 0.724 0.33 0.154
Aman textile:
2016 2017 2018
Current ratio 2.205 2.407 2.596
Quick ratio 1.321 1.478 1.701
Cash ratio 0.107 0.037 0.038
Table 7: Liquidity Ratios for Aman Cotton Fibrous Ltd. (Target)
The current ratio is a financial ratio that measures a company’s ability to pay off its current obligations with
current assets. Management and external users analyze this ratio to judge the liquidity of the company as
well as its efficiency. The current ratio measures the current assets as a percentage of the current liabilities
to show the amount of current debt that can be paid off with current assets like cash, inventory, and
receivables. Here the current ratio for square textile has been decreasing from 2016 to 2018, from 2.961 to
1. 476.Whereas for Aman textile the current ratio has increased from 2.205 to 2.596.
Current ratio:
2500
2000
1500
1000
500
0
Column3 Column4
year
current ratio: 2016 square 2.961 aman 2.205
Page 20 of 56
Quick ratio
2.5
1.5
0.5
0
2016 2017 2018
square aman
The quick ratio is a financial liquidity ratio that compares quick assets to current liabilities. Quick assets
generally include cash, cash equivalents, and accounts receivable. The quick ratio is designed to show
investors and creditors how quickly a company can pay off its short-term debt. Here we can observe that
the quick ratio of square textile has decreased from 2016 to 2018.however for Aman textile the ratios has
rose from 2016 to 2018, from 1.32 to 1.70.
cash ratio
0.8
0.7
0.6
0.5
0.4
0.3
0.2
0.1
0
2016 2017 2018
square aman
The cash ratio is a measurement of a company's liquidity, specifically the ratio of a company's total cash
and cash equivalents to its current liabilities. The metric calculates a company's ability to repay its short-
term debt with cash or near-cash resources, such as easily marketable securities. This information is useful
to creditors when they decide how much money, if any, they would be willing to loan a company. Here we
observe that the cash ratio of Aman textile is very low in compared to square textile.
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B) Solvency Ratios:
Debt to Asset: Debt to total assets ratio measures the percentage of total assets provided by the
creditors.
Debt to total assets ratio = Total debt ÷ Average total assets.
Debt to Equity: Debt to equity ratio shows how much of total capital is raised from debt.
Debt to Equity ratio = Total debt ÷ Total Equity
Debt to Capital: The debt-to-capital ratio is a measurement of a company's financial leverage.

The debt-to-capital ratio is calculated by taking the company's interest-bearing debt, both short-
and long-term liabilities and dividing it by the total capital. Total capital is all interest-bearing debt
plus shareholders' equity, which may include items such as common stock, preferred stock and
minority interest.
Debt-to-Capital Ratio = Interest-bearing Debt / (Interest-bearing Debt + Equity)
Financial leverage: Financial leverage is the degree to which a company uses fixed-income
securities such as debt and preferred equity. The more debt financing a company uses, the higher
its financial leverage. A high degree of financial leverage means high interest payments, which
negatively affect the company's bottom-line EPS.
Interest Coverage Ratio: The interest coverage ratio is a debt ratio and profitability ratio used to
determine how easily a company can pay interest on its outstanding debt. The interest coverage
ratio measures how many times a company can cover its current interest payment with its available
earnings. In other words, it measures the margin of safety a company has for paying interest on its
debt during a given period.
Companies need to have more than enough earnings to cover interest payments in order to survive
future (and perhaps unforeseeable) financial hardships that may arise. A company’s ability to meet
its interest obligations is an aspect of its solvency and is thus a very important factor in the return
for shareholders.
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Interest Coverage Ratio = EBIT/Interest Expense
Debt to asset ratio:

SQUARE TEXTILE
Debt to asset ratio 0.212872401 0.276509555 0.353883809

Debt to equity ratio 0.270442049 0.382188261 0.547709242
Debt to capital ratio 0.213309516 0.277094866 0.354617805
Financial leverage ratio 1.27 1.382 1.54
Interest coverage ratio 43.89 10.286 10.28
Table 8: Solvency Ratios for Square Textiles Limited (Peer)
AMAN TEXTILE
Debt to asset ratio 0.302321698 0.278606831 0.268331314

Debt to equity ratio 0.433325355 0.38620664 0.366738825
Debt to capital ratio 0.302321698 0.278606831 0.268331314
Financial leverage ratio 1.433 1.386 1.367
Interest coverage ratio 5.279 5.201 5.871
Table 9: Solvency Ratios for Aman Cotton Fibrous Ltd. (Target)
Debt to asset ratio

0.4
0.35
0.3
0.25
0.2
0.15
0.1
0.05
0
2016 2017 2018
square aman
The debt to asset ratio is a leverage ratio that measures the amount of total assets that are financed by
creditors instead of investors. In other words, it shows what percentage of assets is funded by borrowing
compared with the percentage of resources that are funded by the investors. From the above data we can
Page 23 of 56
observe that the debt to asset ratio for square textile has risen since 2016 to 2018. However for Aman textile
the ratio has been falling.
Debt to equity
0.6
0.5
0.4
0.3
0.2
0.1
0
2016 2017 2018
square aman
The debt to equity ratio is a financial, liquidity ratio that compares a company’s total debt to total equity.
The debt to equity ratio shows the percentage of company financing that comes from creditors and investors.
A higher debt to equity ratio indicates that more creditor financing (bank loans) is used than investor
financing (shareholders). Here debt to equity ratio is higher for square textile in compared to Aman textile.
Debt to capital
0.4
0.35
0.3
0.25
0.2
0.15
0.1
0.05
0
2016 2017 2018
square aman
The debt to capital ratio is a liquidity ration that calculates a company’s use of financial leverage by
comparing its total obligations to total capital. In other words, this metric measures the proportion of debt
a company uses to finance its operations as compared with its capital. Here also we can observe that the
debt to capital ratio for square is higher than Aman textile.
Page 24 of 56
Financial leverage
1.8
1.6
1.4
1.2
1
0.8
0.6
0.4
0.2
0
2016 2017 2018
square aman
Leverage ratios measure the overall debt load of a company and compare it with the assets or equity. This
shows how much of the company assets belong to the shareholders rather than creditors. When shareholders
own a majority of the assets, the company is said to be less leveraged. When creditors own a majority of
the assets, the company is considered highly leveraged. All of these measurements are important for
investors to understand how risky the capital structure of a company and if it is worth investing in. Square
textile has slightly higher financial leverage than aman textile.
Interest coverage
50
40
30
20
10
0
2016 2017 2018
square aman
The interest coverage ratio is a financial ratio that measures a company’s ability to make interest payments
on its debt in a timely manner. Unlike the debt service coverage ratio, this liquidity ratio really has nothing
Page 25 of 56
to do with being able to make principle payments on the debt itself. Instead, it calculates the firm’s ability
to afford the interest on the debt. square textile has relatively higher interest coverage ratio in 2018
compared to the previous year and Aman textile has a constant interest coverage ratio is all throughout 2016
to 2018.
C) Profitability Ratios:
Gross Margin: The gross margin represents the percent of total sales revenue that the company
retains after incurring the direct costs associated with producing the goods and services it sells.
In other words, it measures how efficiently a company uses its materials and labor to produce
and sell products profitably. The higher the percentage, the more the company retains on each
dollar of sales, to service its other costs and debt obligations.
Gross Margin (%) = (Revenue-COGS) ÷ Revenue
Operating Profit Margin: Operating margin is a measurement of what proportion of

company's revenue is left over after paying for variable costs of production such as wages, raw
material, etc. is a profitability ratio that measures what percentage of total revenues is made up by
operating income. In other words, the operating margin ratio demonstrates how much revenues are
left over after all the variable or operating costs have been paid. Conversely, this ratio shows what
proportion of revenues is available to cover non-operating costs like interest expense.
Operating profit margin= Operating Income ÷ Net Sales
Pretax Profit Margin

The pretax profit margin is the ratio of a company's pre-tax earnings to its total sales. The higher
the pretax profit margin, the more profitable the company.
Return on Asset: Percentage of profit a company earns in relation to its overall resources. It
is commonly defined as net income divided by total assets. The return on assets ratio, often
called the return on total assets, is a profitability ratio that measures the net income produced by
total assets during a period by comparing net income to the average total assets. In other words,
the return on assets ratio or ROA measures how efficiently a company can manage its assets to
produce profits during a period.Net income is derived from the income statement of the company
and is the profit after taxes.
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Return on Asset =Net Income (Profit after Tax) ÷ Total Asset
Return on Equity: Measure of the profitability of a business in relation to the book value of
shareholder equity, also known as net assets or assets minus liabilities. ROE is a measure of how
well a company uses investments to generate earnings growth.
Return on Equity =Net Income (Profit after Tax) ÷ Total Equity
Square textile:
Gross profit margin 0.142 0.102 0.102

Operating Profit 0.114 0.071 0.071
Margin
Net profit margin 0.09 0.053 0.053
ROE 0.101 0.056 0.055
ROA 0.08 0.041 0.036
Table 10: Profitability Ratios for Square Textiles Limited
Aman textile:
Gross profit margin 0.256 0.25 0.248

Operating Profit 0.231 0.232 0.228
Margin
Net profit margin 0.16 0.16 0.16
ROE 0.095 0.089 0.076
ROA 0.066 0.064 0.056
Table 11: Profitability Ratios for Aman Cotton Fibrous Ltd. (Target)
Page 27 of 56
Gross profit margin

0.3
0.25
0.2
0.15
0.1
0.05
0
2016 2017 2018
square aman
Gross margin ratio is a profitability ratio that compares the gross margin of a business to the net sales. This
ratio measures how profitable a company sells its inventory or merchandise. In other words, the gross profit
ratio is essentially the percentage markup on merchandise from its cost. This is the pure profit from the sale
of inventory that can go to paying operating expenses. Here the gross margin ratio of Aman textile is higher
than square textile.
Operating Profit Margin

0.25
0.2
0.15
0.1
0.05
0
2016 2017 2018
square aman
Page 28 of 56
The operating margin ratio, also known as the operating profit margin, is a profitability ratio that measures
what percentage of total revenues is made up by operating income. In other words, the operating margin
ratio demonstrates how much revenues are left over after all the variable or operating costs have been paid.
Conversely, this ratio shows what proportion of revenues is available to cover non-operating costs like
interest expense. Here also we observe that the operating profit margin is higher for aman textile in
compared to square textile.
Net profit margin

0.25
0.2
0.15
0.1
0.05
0
2016 2017 2018
square aman Series3
The net profit margin ratio, also called net margin, is a profitability metric that measures what percentage
of each dollar earned by a business ends up as profit at the end of the year. In other words, it shows how
much net income a business makes from each dollar of sales. Net profit margin of Aman textile is higher
in compared to square textile.
Page 29 of 56
ROE
0.12
0.1
0.08
0.06
0.04
0.02
0
2016 2017 2018
square aman
The return on equity ratio or ROE is a profitability ratio that measures the ability of a firm to generate
profits from its shareholders investments in the company. In other words, the return on equity ratio shows
how much profit each dollar of common stockholders’ equity generates. ROE of aman textile is higher than
square textile.
ROA
0.09
0.08
0.07
0.06
0.05
0.04
0.03
0.02
0.01
0
2016 2017 2018
square aman
The return on assets ratio, often called the return on total assets, is a profitability ratio that measures the net
income produced by total assets during a period by comparing net income to the average total assets. In
other words, the return on assets ratio or ROA measures how efficiently a company can manage its assets
to produce profits during a period. Initially the ROA was higher for square textile than Aman textile but in
2018 there was a fall in ROA of Square, below Aman textile.
Page 30 of 56
Common Size Analysis
Common size analysis, also referred as vertical analysis, is a tool that financial managers use to
analyze financial statements. It evaluates financial statements by expressing each line item as a
percentage of the base amount for that period. The analysis helps to understand the impact of each
item in the financial statement and its contribution to the resulting figure.
Common Size Analysis of Balance Sheet
The balance sheet common size analysis mostly uses the total assets value as the base value. On
the balance sheet, the total assets value equals the value of total liabilities and shareholders’ equity.
A financial manager or investor uses the common size analysis to see how a firm’s capital structure
compares to rivals. They can make important observations by analyzing specific line items in
relation to the total assets.
For example, if the value of long-term debts in relation to the total assets value is too high, it shows
that the company’s debt levels are too high. Similarly, looking at the retained earnings in relation
to the total assets as the base value can reveal how much of the annual profits are retained on the
balance sheet.
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Table 11: Common size Balance Sheet for Square textiles Limited (Peer) and Aman Fibrous Ltd. (Target)
Income Statement Common Size Analysis
The base item in the income statement is usually the total sales or total revenues. Common size
analysis is used to calculate net profit margin, as well as gross and operating margins. The ratios
tell investors and finance managers how the company is doing in terms of revenues, and they can
make predictions of the future revenues. Companies can also use this tool to analyze competitors
to know the proportion of revenues that goes to advertising, research and development and other
essential expenses.
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Table 12: Common size Income Statement for Square textiles Limited (Peer) and Aman Fibrous Ltd. (Target)
Page 33 of 56
Sustainable Growth Rate (Dividend Growth Rate)
Sustainable growth rate is the rate at which a company can grow without having to borrow money to fund
its growth. In other words, it's the maximum rate at which a company can grow while limited to using its
own internally generated revenue to fund that growth.
Sustainable Growth Rate = Retention Rate * Return on Equity (ROE)

For that we had to calculate,
Dividend Payout Ratio = Dividend Declared / Net Income Available to Common Stockholders
Retention Rate = 1 – Dividend Payout Ratio
2016-2017 2017-2018
Particulars
Square Aman Square Aman
Return on Equity 0.0559 0.0850 0.0621 0.0790
Dividend Payout Ratio 0.9884 0.0000 0.7829 0.0000
Retention Ratios 1.0000 0.2171 1.0000
0.0116
Growth Rate (Dividend Growth Rate) 0.0006 0.0850 0.0135 0.0790
Table 13: ROE, Dividend Payoout Ratio, Retention Ratio & Sustainable Growth rate for Square Textiles Limited &
Aman Cotton Firbous.
SUSTAINABLE GROWTH RATE

0.1000
0.0800
0.0600
0.0400
0.0200
0.0000
2016-2017 2017-2018
Square Textiles Limited 0.0006 0.0135
Aman Cotton Fibrous Ltd. 0.0850 0.0790
Figure: Sustainable Growth Rate of Square Textile Ltd and Aman Cotton Fibrous Ltd.
Aman Cotton Fibrous Ltd. is experiencing declining sustainable growth rate over the years Whereas Square
Textiles Limited is increasing. Both of companies need to borrow money for their growth.
Page 34 of 56
Alternative ROE
The Textile sector experienced a fall in their sales which results in declining net profit. Both Square Textile
Limited and Aman Cotton Fibrous Ltd. has decreasing net profit, and this is the reason of their declining
ROE.
Alternative ROE of AMAN COTTON FIBROUS LTD. (Target):
AMAN COTTON FIBROUS LTD.

2016-2017 2017-2018
EBIT 339,048,243 314,996,290
Tax 25% 25%
Total Debt 1,034,173,582 995,224,661
Cash & Cash Equivalents 38,987,811 118,158,157
Equity 3,129,326,452 3,386,614,445
Net Interest Expense 63,023,368 51,599,240
Net Operating Profit After Tax (NOPAT) 254,286,182 236,247,218

Net Debt 995,185,771 877,066,504
Net Asset 4,124,512,223 4,263,680,949
Net Interest Expense After Tex (NIEAT) 47,267,526 38,699,430
Equity 3,129,326,452 3,386,614,445
Operating ROA (OPROA) 0.06165 0.05541

Net Financial Leverage (NFL) 0.31802 0.25898
Effective Interest Rate After Tax (EIRAT) 0.04750 0.04412
SPREAD 0.00293 0.00244
NFL*SPREAD 0.00093 0.00063
ROE 6.26% 5.60%
Table 14: Alternative ROE of AMAN COTTON FIBROUS LTD. (Target)
Aman Cotton’s operating return on asset (OPROA) & Net Financial Leverage (NFL) is declining over the
years. Financial gain to shareholders for Aman Cotton has increased and it has better ratio than Square
Textile Limited
Page 35 of 56
Alternative ROE of Square Textile Ltd. (Peer):
Square Textile Limited

2016-2017 2017-2018
EBIT 551,426,058 672,258,953
Tax 25% 25%
Total Debt 1,960,934,053 3,418,073,502
Cash & Cash Equivalents 862,921,763 596,108,722
Equity 7,345,185,658 7,444,414,383
Net Interest Expense 12,222,672 30,854,279
Net Operating Profit After Tax (NOPAT) 413,569,544 504,194,215

Net Debt 1,098,012,290 2,821,964,780
Net Asset 8,443,197,948 10,266,379,163
Net Interest Expense After Tex (NIEAT) 9,167,004 23,140,709
Equity 7,345,185,658 7,444,414,383
Operating ROA (OPROA) 0.04898 0.04911

Net Financial Leverage (NFL) 0.14949 0.37907
Effective Interest Rate After Tax (EIRAT) 0.00835 0.00820
SPREAD 0.00041 0.00040
NFL*SPREAD 0.00006 0.00015
ROE 4.90% 4.93%
Table 15: Alternative ROE of Square Textiles Limtied (Peer)
In case of Square Textile, their operating return on asset (OPROA) is increasing a bit over the years. Their
net financial leverage (NFL) is increasing because of their short-term loans. NFL×SPREAD denotes the
financial gain to shareholders which is also decreasing.
Page 36 of 56
Chapter 5
Valuation
Page 37 of 56
Valuation
General Requirements for IPO checklist for Aman Cotton

Fibrous Limited:
Paticulars Complied Not Complied
(a) it offers an amount of at least equivalent to 10% of its paid-up √
capital (including intended offer) or Tk. 15 crore at par value,
whichever is higher
(b) it has minimum existing paid up capital of Tk. 15 crore √
(c) it has not made any material change including raising of paid- √
up capital after the date of audited financial statements as included
in the prospectus
(d) the issue manager is in no way connected with the issuer not √
does hold any of its securities
(e) it has prepared its financial statements in accordance with the √
requirements of the Securities and Exchange Rules, 1987, the
provisions of IFRS /IAS as adopted in Bangladesh and audited the
same as per Bangladesh Standards on Auditing (BSA) as well as
the Companies Act, 1994 and other applicable legal requirements;
155
(f) it has got cost audit by professional accountants as per the √
Companies Act, 1994, if applicable
(g) it has got its latest financial statements audited by the panel √
auditors as declared by the Commission from time to time
(h) it has been regular in holding annual general meeting (AGM); √
(i) it has complied with the provisions of Corporate Governance √
Guidelines as published by the Commission from time to time
(j) it has complied with all the requirements of these Rules in √
preparing prospectus
(k) it has no accumulated retained loss at the time of application √
(l) it has complied with the provisions of guidelines regarding √
valuation of assets, if any, as published by the Commission from
time to time; and
(m) The issuer or any of its directors is not a bank defaulter. √
Table 16: Checklist of General Requirements for IPO Processing
Page 38 of 56
Additional requirements for book-building method:

As Aman Cotton Fibrous Ltd. Came into IPO through Book-building Method, they needed to comply with
the following checklist as per Bangladesh Securities and exchange Commission (Public Issue) Rules, 2015
Paticulars Complied Not Complied

(a) it has been in commercial operation at least for immediate last √
3 (three) years
(b) it has made net profit after tax at least for immediate preceding √
2 (two) financial years;
(c) it has positive net operating cash flow at least for immediate √
preceding 2 (two) financial years;
(d) the issue manager is in no way connected with the issuer not √
does hold any of its securities
(d) it has appointed separate persons as issue manager and √
registrar to the issue for managing the issue;
(e) the issuer/issue has been rated by a credit rating company √
registered with the Commission
(f) at least 35% of the issue has been underwritten on a firm √
commitment basis by the underwriter(s).
Table 17: Checklist of Additional Requirements for Book Building Method for IPO Processing
IPO Valuation:
As an issue manager(s) shall, among others, we tried to consider the following methods for valuation of
the securities according to the Sub-section (d) of section 14 of Bangladesh Securities and exchange
Commission (Public Issue) Rules, 2015,
(i) net asset value at historical or current costs;
(ii) earning-based-value calculated on the basis of weighted average of net profit after tax for immediate
preceding five years or such shorter period during which the issuer was in commercial operation;
(iii) projected earnings for the next three accounting year with rationales of the projection, if not in
commercial operation;
(iv) average market price per share of similar stocks for the last one year immediately prior to the offer
for common stocks with reference and explanation of the similarities or in case of repeat public offering,
market price per share of common stock of the issuer for the aforesaid period.
Page 39 of 56
i) Net assets value per share
Fair Value Fair Value

Sl no. Valuation Method
(2016-17) (2017-18)
a. Net Asset Value

(NAV) at historical or Current costs (With 39.12 42.33
Revaluation Reserve) :
Method- 01
b. Net Asset Value
(NAV) at historical or Current costs (Without
35.80 39.02
Revaluation Reserve):
Method- 02 Earning Based Value: 24.53
Method- 03 Yearly Average market price per share of 51.92

similar stocks:
Method- 04 P/BV Multiple of Similar Stocks Based 39.56

Valuation:
Table 18: Methods for IPO Processing
Method-1 :
Page 40 of 56
 NAV Calculation with Revaluation :-
Particulars Taka (2016-17) Taka (2017-18)

Share Capital (A) 800000000 800000000
Revaluation Reserve (B) 26538238 26538238
Retained Earnings (C) 2063982851 2321261057
TOTAL Shareholders’ Equity 3147799295 3147799295
(A+B+C=D)
No. of Share (E) 80000000 80000000
NAV per Share (D/E) 39.12 42.33
 NAV Calculation without Revaluation :-
Particulars Taka (2016-17) Taka (2017-18)

Share Capital (A) 800000000 800000000
Retained Earnings (C) 2063982851 2321261057
TOTAL Shareholders’ Equity 3147799295 3147799295
(A+B+C=D)
No. of Share (E) 80000000 80000000
NAV per Share (D/E) 35.80 39.02
We can see that NAVPS has increased in both the years comparing to the year 2016 of Aman Cotton
Fibrous Ltd.
ii) Earning-based-value calculated on the basis of weighted average of net profit after tax for immediate
preceding five years or such shorter period during which the issuer was in commercial operation
Valuation of AMAN COTTON FIBROUS LTD. (Target):
Weighted Average Net

Year No. of Shares Net Profit After tax Weight
Profit After tax
2013 80000000 289,156,006 0.20 57,831,201

2014 80000000 296,365,313 0.20 59,273,063
2015 80000000 256,713,297 0.20 51,342,659
2016 80000000 270,759,277 0.20 54,151,855
2017 80000000 277,033,076 0.20 55,406,615
Total 400000000 547,792,353 0.4 278,005,394
Weighted Average Net Profit After Tax 278,005,394
Number of Shares 400,000,000
Weighted Average Earnings per Share (EPS) 0.70
Page 41 of 56
Market P /E 35.30
Earning Based Value Per Share using Market P/E 24.53
Table 19: Earning Based valuation for IPO Processing
(iii) projected earnings for the next three accounting year with rationales of the projection, if not in
commercial operation; as Aman Cotton Fibrous was in operation this option is not required. Still we
have calculated this while calculating the FCFF of the related company.
(iv) Yearly Average market price per share of similar stocks (Method-03):
We have taken twelve months stock prices for the year 2018 of Square Textile as Peer Company for this
valuation. Here are the twelve months prices of Square Text:
Months End Date Square Text Prices

January 61.4
February 55.2
March 51.6
April 54
May 50.9
June 50.7
July 50.7
August 52
September 50.4
October 51.2
November 48.4
December 46.5
Average Price: 51.92
Source: DSE Monthly Review and www.dsebd.org
Average Market Price of Similar Stocks is BDT 51.92
Method-04: P/BV Multiple of Similar Stocks Based Valuation:
Company Average Price of last year NAV P/BV

Square Textile 65.34 28.67 1.28
Average P/BV of Paper Sector 1.28
P/BV multiple of similar stock based

valuation
a. NAV of Square Text. 28.67
b. Average P/BV 1.38
Fair Price (a*b) 39.56
Page 42 of 56
Free Cash Flow to Firm (FCFF) Method:
Free cash flow valuation is a method of business valuation in which the business value equals the present
value of its free cash flow. It involves projecting free cash flows into future and then discounting them at
the appropriate cost of capital.
FCFF Forecasting of AMAN COTTON FIBROUS Ltd. (Target):
Table 20: FCFF calculation for Aman Cotton Fibrous Ltd. (Target)
AMAN COTTON FIBROUS Ltd. has a calculated value per share of BDT 44.68, which is more than the
market valuation. According to FCFF, the company is under-valued.
Page 43 of 56
FCFF of Square Textile Ltd. (Peer):
Table 21: FCFF calculation for Square Textiles Limtied (Peer)
Square Textile Ltd. has a calculated value per share of BDT 11.71, which is far under the market
valuation. According to FCFF, the company is far over-valued.
Page 44 of 56
Equity Value Per Share

50
45
40
35
30
25
44.68
20
15
10
5 11.71
0
Aman Cotton Fibrous Ltd. Square Textile Limited
Equity Value Per Share
Figure: Equity value per share for Aman Cotton Fibrous and Square textiles Limited
Page 45 of 56
Dividend Discount Model (DDM) Method:

The dividend discount model is a way of applying net present value analysis to estimate the future dividends
a stock will pay. Those dividends are then discounted back to their present value. If the present value of
the future dividends is more than the current market value of the stock, the stock is said to be undervalued.
If the present value is more, then the stock is overvalued. Present Value of Future Dividends = Dividends
Per Share / (Discount Rate – Dividend Growth Rate) The discount rate equals the rate investors require for
their investment. The dividend discount model has its limitations. For one, since a company's dividends
are discretionary, they are very difficult to predict. In addition, it’s difficult to predict their growth rate.
Finally, the model is not suitable for a company that doesn’t pay dividends.
DDM Valuation of AMAN COTTON FIBROUS LTD. (Target):

AMAN COTTON FIBROUS LIMITED
Key informations:
Intial Sales 1,609,935,925.00
SGR for next 5 years .0790
COGS (% sales) 75.21%
Incremental Capen/Fin ( % of increased sales) 2.2%
Incremental WC (% of increased sales) 9%
Tax Rate 25%
Operating Expenses (% sales) 2.02%
Debt Ratio 21.50%
WACC 10.98%
Value of Debt 995,224,661
Value of Equity 3,386,614,445
Cash 118,158,157
No. of share 80000000
Dividend Payout Ratio 0 (as no dividend was paid)
Growth Rate .70
Table 23: Dividend Discount Model Valuation for Aman Cotton Fibrous Ltd.
2017- 2018
To Calculate COGS on Sales:
Sales 1,609,935,925
COGS 1,210,797,259
COGS (% Sales) 75.207
To calculate operating expenses on sales:

Operating expenses 32,543,135.31
Operating expenses (%sales) 2.02
To calculate incremental Capex rate

Current Period PPE 1,384,228,123
Prior Period PPE 1,442,587,677
Current Period Depreciation 61,896,629
Page 46 of 56
Incremental Capex (% of Sales) 2.20
To calculate incremental WC:

Working capital 1,754,178,708
Incremental WC (% of Sales) 9
Table 24: Calculation of COGS, Operating expenses, Incremental Capex & Incremental WC of Sales for Aman
Cotton Fibrous Ltd (target)
Table 25: DDM Calculation for Aman Cotton Fibrous Limited (Target)
Page 47 of 56
DDM Valuation of Square Textile Limited (Peer):

Square Textiles Limited
Key informations:
Intial Sales 9,411,869,563.00
SGR for next 5 years .0135
COGS (% sales) 89.70%
Incremental Capen/Fin ( % of increased sales) 10.06%
Incremental WC (% of increased sales) 9%
Tax Rate 25%
Operating Expenses (% sales) 3.14%
Debt Ratio 29.57%
WACC 13.89142%
Value of Debt 3,418,073,502
Value of Equity 7,444,414,383
Cash 596,108,722
No. of share 187,859,048
Dividend Payout Ratio 0.7829
Growth Rate 10%
Table 26: Assumptions for DDM Valuation for Square Textiles Limited (Peer)
2017- 2018
To Calculate COGS on Sales:
Sales 9,411,869,563
COGS 8,443,275,210
COGS (% Sales) 89.708
To calculate operating expenses on sales:

Operating expenses 296,335,400
Operating expenses (%sales) 3.148
To calculate incremental Capex rate

Current Period PPE 4,369,283,667
Prior Period PPE 4,514,651,120
Current Period Depreciation 240,069,108
Incremental Capex (% of Sales) 10.06
To calculate incremental WC:

Working capital 1,754,178,708
Incremental WC (% of Sales) 9
Table 27: Calculation of COGS, operating expenses, Incremental Capex & Incremental WC of Sales for Square
Textiles Limited (Peer)
Page 48 of 56
Table 28: DDM Calculation for Square Textiles Limited (Peer)
Assumptions:
1. It is assumed that the company will mature within 5 years.
2. Required rate of return is 12.90%
3. Calculated WACC has been used as discount rate
4. Tax benefit facility will not be available in future.
Page 49 of 56
Multiples Valuation Method:

The multiples approach is a valuation theory based on the idea that similar assets sell at similar
prices. This assumes that a ratio comparing value to some firm-specific variable (operating
margins, cash flow, etc.) is the same across similar firms. Generally, “multiples” is a generic term
for a class of many different indicators that can be used to value a stock. A multiple is simply a
ratio that is calculated by dividing the market or estimated value of an asset by a specific item on
the financial statements or other measure. The multiples approach is a comparable analysis method
that seeks to value similar companies using the same financial metrics.
Earning Based Value Per Share of Aman Cotton Fibrous Ltd.(Target):
Table 29: Valuation of Aman Cotton Fibrous Ltd. using Maket P/E
Earning Based Value per Share of our target company “AMAN COTTON FIBROUS LTD.”. is BDT
118.25
Page 50 of 56
Earning Based Value Per Share of Square Textile Limited. (Peer):
Table 30: Valuation of Square Textiles Limited (Peer) using Market P/E
Value using P/E and P/B ratio of Square Textiles Ltd. (Peer):
Table 31: Valuation by using P/E and P/B ratio of Square Textiles Limited (Peer)
AMAN Cotton Fibrous Ltd. has a calculated value of BDT 71.14 using P/E of peer company and 131.02
using P/B ratio of our peer company “Square textile Ltd.”.
Page 51 of 56
Value using Justified P/E Ratio:

Value using Justified P/E ratio
Leading Justified P/E

(1-b)/(r-g) 1-b 0.3
0.329
r-g 0.029
Weighted Average EPS 3.35 b=0.70
Value 1.102 (assumed
as no
dividend
Trailing Justified P/E was paid)
(1-b)(1+g)/(r-g) 1-b 0.3 r=0.129
1+g 1.1 1.429 g=0.10
r-g 0.029
Weighted Average EPS 3.35
Value 4.78
Table 32: Valuation by using Justified P/E ratio for Aman Cotton Fibrous Limited (Target)
AMAN COTTON FIBROUS LTD. has a calculated value of BDT 1.102 using Leading Justified
P/E ratio and BDT 4.779 using Trailing Justified P/E ratio.
Multiples Valuation at a glance:

Earning Based Value using Value using Value using Leading Value using Trailing
Value P/E of Peer P/B of Peer Justified P/E Justified P/E
BDT ৳ 118.25 BDT ৳ 7.14 BDT ৳ 131.02 BDT ৳ 1.102 BDT ৳ 4.78
Table 33: Multiples Valuation at a glance for Aman Cotton Fibrous Ltd. (Target)
Multiple is a performance measure, which is used in the valuation of a firm’s financial health and
performance. Financial analysts use multiple analysis to determine the financial performance and
solvency of a firm. In stock valuation, using the ‘multiple method’ allows an analyst to compare
the company’s metrics relative to its sales or earnings; hence, the multiple valuation is also known
as relative valuation.
In addition, in the relative valuation model, financial analysts are converting the market values into
standardized values to perform the comparison and identify potential differences between firms that
operate in the same industry. At the end of the day, relative valuation is used to determine whether a
stock is under- or overvalued.
Page 52 of 56
Aman Cotton Firbous Ltd.
2016 2017 2018

Price 22.17 22.9 17.1
Earnings 3.38 3.46 3.22
book value 15.72 16.16 17.49
Operating cash flow 4.9 5.02 4.58
cash flow 0.981 0.03 0.364
number of shares 80000000 80000000 80000000
P/E 6.5592 6.6185 5.3106

P/BV 1.4103 1.4171 0.9777
P/OCF 4.5244 4.5572 3.7336
P/CF 22.5993 763.3333 46.9780
Table 34: Multiples valuation model for Aman Cotton Fibrous Ltd. (Target)
Square textiles Limited

2016 2017 2018
price 75.5 67.7 50.7
earnings 4.55 2.3 2.43
book value 45.15 41.05 39.62
Operating cash flow 5.79 3.08 3.57
cash flow 4.58 2.31 2.44
number of shares 162648527 178913379 187859048
MULTIPLES:
P/E 16.5934 29.4348 20.8642
P/BV 1.6722 1.6492 1.2797
P/OCF 13.0397 21.9805 14.2017
P/CF 16.4847 29.3074 20.7787
Table 35: Multiples valuation model for Square Textiles Limited (Peer)
Page 53 of 56
Chapter 6
Conclusion
Page 54 of 56
Conclusion
Different ratios tell us different results regarding the liquidity, solvency, profitability, performance
and coverage of these both companies. In case of Liquidity, Profitability ratio Aman Cotton Fibrous
Ltd. Is in the lead. Which means it has more liquidity than Square Textiles Limited.
But the solvency is less in the Square Textiles Limited than Aman Cotton Fibrous which can tell us
at a first look risk inverse investors should choose the Aman Cotton Fibrous Limited for making
their investment. Which means Aman Cotton Fibrous is in better position in maintaining debt
obligations and maintaining its own expense on its own.
But more prudently based on our stock valuation analysis we can tell a better way to make
investment. The better way is, since the stock of Aman Cotton Fibrous Ltd. is undervalued an
investor should buy this stock. As the stock of Square Textiles Limited is overvalued an investor
should think before buying the stock. Because on that way an investor will be hopefully able to
make superior return on his or her investment. And thereby management must focus on that area
as well.
Overall, we can say that Aman Cotton Fibrous Ltd. Is in a leading position than Square Textiles
Limited.
Page 55 of 56
References and Bibliography
 Annual Report of 2017-2018 of AMAN COTTON FIBROUS LTD.

 Annual Reports of 2017-2018, 2016-2017 & 2015-2017 of Square Textile Limited
 CFA-2017-level-1-schweser-notes-book-3
 https://www.dsebd.org
 https://www.lankabd.com
 https://www.dsebd.org/data_archive.php
 https://www.amancotton.com/wp-content/uploads/2018/05/Aman-Cotton-Abridged-Version-
of-Prospectus-Final-01.pdf
 https://www.lightcastlebd.com/insights/2018/10/04/rmg-and-textile-sector-emerging-trends-
and-challenges-for-2018
 https://www.lankabd.com/Company/OverviewV2?symbol=SQUARETEXT
 https://www.lankabd.com/Company/OverviewV2?symbol=ACFL
 https://www.myaccountingcourse.com/financial-ratios
Page 56 of 56

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Course Title & Course Code:

Date of Submission – 26th August, 2019

Md. Sajib Hossain,

Zakia Shamsi Zahan (ID No. – 35045)

Particulars Page No.

Origin of the report

Purpose of the report

 To identify how the economy of Bangladesh is performing.

Company Overview of Aman Cotton Fibrous Ltd.

Stock Market Information of Aman Cotton Firbous

Closing Price (25th August, 2019) BDT. 33.3

Table 1: Stock Market Information of Aman Cotton Fibrous Ltd.

Dividend History of Aman Cotton Fibrous Ltd.

Year Cash Dividend % Stock Dividend %

Table 2: Dividend History of Aman Cotton Fibrous Ltd.

Company Overview of Square Textiles Limited

Stock Market Information of Square Textile

Closing Price (25th August, 2019) BDT. 42.9

Table 3: Stock Market Information of Square Textile

Dividend History of Square Textile

Year Cash Dividend % Stock Dividend %

Table 4: Dividend History of Square Textile Limited

 National Output: Gross Domestic Product

Macroeconomic performance in Bangladesh

GDP Growth in Bangladesh

Unemployment rate in Bangladesh

6 6.16 5.68 5.96

Fiscal Year Total Export(Billion) Total import(Billion)

Forecasting of Macroeconomic factors

Forecasted Macroeconomic Analysis

Factors responsible for forecasting

Threats of New Entrants

Threats of Substitute Product

Bargaining Power of Buyers

Barganing Power of Suppliers

Rivalry among existing Competitors

• Bangladesh ranks 6th in case of supplying garment products in US and EU market.

Figure 1: Porter’s Five Forces Model of Textile Industry of Bangladesh

Macro-Economic Performance of the Textile Industry

Growth in Exports of the Textile Industry

Ratio analysis of financial statements:

Current ratio = Current assets ÷ Current liabilities

Cash Ratio= Cash and cash equivalent /current liability

DIR= Current Asset/Daily Operational expense

Table 6: Liquidity Ratios for Square Textiels Limited (Peer)

current ratio: 2016 square 2.961 aman 2.205

Debt to total assets ratio = Total debt ÷ Average total assets.

Debt to Equity ratio = Total debt ÷ Total Equity

Debt to Capital: The debt-to-capital ratio is a measurement of a company's financial leverage.

Debt-to-Capital Ratio = Interest-bearing Debt / (Interest-bearing Debt + Equity)

Interest Coverage Ratio = EBIT/Interest Expense

Debt to asset ratio:

Debt to asset ratio 0.212872401 0.276509555 0.353883809

Debt to asset ratio 0.302321698 0.278606831 0.268331314

Debt to asset ratio

Gross Margin (%) = (Revenue-COGS) ÷ Revenue

Operating Profit Margin: Operating margin is a measurement of what proportion of