By waheed Ali MBA-1 SIBA
Note: All figures used below from financial statements are in thousands (000)
Q:1 Interpretation of the ratios
(a) Profitability ratios
1. Net profit margin ratio
If I asses the profit margin ratio of BNL stores, one thing becomes clear that profitability trend
of BNL was stable from 2002-2005 had highest point of 3.46% in 2004, later on it started
decreasing dramatically and reached to 0.59% in 2009 and gone even worse in 2010 had net
profit ratio about -11.83% in negative digits, although all the time sales increased by significant
amount(in billions) 6.2, 6.6, 7.4, 8.2, 8.5, 9.3, 11.17, 12.56 for 2002-2009 respectively.
The negative trend might be explained by increased in general and administrative expenses
and interest rate expenses for some years, because all other operating expenses increased in
sound manners.
The SG&A expenses had increased just 6.41% for year 2003 ($1403094 in 2002 and $1493159
in 2003) and 8.18% for 2004. But what happened for year ending 2005 that SG&A had
increased by 25% more than tripled compared to previous year and it accelerated so on. The
highest increased in SG&A was recorded for year 2010 by 41% increased compare to previous
year despite that sales decreased by 4.7% and counting net operating income in loss about 2.2
billion for same year, this can be explained as ineffective used of SG&A expenses to produce
sales.
The continues increase in SG&A can be explained by increase in incentives and bonuses for
managers who were advised to increase sales by offering credits.
The other factor that reduced profit for BNL was interest expense, which increased normally
for starting years but was not normal for 2010, interest expense was 163 million in 2009 and
was 256 million for 2010. This could be explained as increased in credit sale, now company
needed to borrow huge money to support their day to day operations.
Making conclusion profitability ratio had been declining from 3.4% in 2002 to negative -11.82%
in 2010).
2. Return on equity:
Return on equity measures the ratio of earning to its shareholder’s equity, As it can see
ratio of return of equity was declining from 2002-2008 except in 2005 where company
had put some efforts to increase ROE and maintained at 14.38%. And what happened
for last two-year (2009-10) ROE dropped from 11.30% in 2008 to 3.34% in 2009 and
gone negative -183.42% for next year 2010.
The huge decreasing trend in ROE can supported by increased in total liabilities from
2008-2010, where company borrowed long term debt. Moreover, it can be seen in
balance sheet that account for long term-debt had increased tremendously (around 4
time) $219001 to $870769 from 2006-2007. This was just happening because of the
adopted strategy by management to provide credit facility attract more and more
customer, as resulted company’s accounts receivable increased 138% for year 2005
compare to just increased 16% in 2004. This not stopped there it was continually
increasing at large portion for each following year.
As result of massive increase in A/c receivable (which is equal to cash and cash
