FIN 7302: FINANCIAL MANAGEMENT

Financial Ratio Analysis of Shahjibazar Chemicals Limited & Baraka Cosmetics Limited

(For 2012-2013 to 2016-2017)

Submitted to:
Lt Col AHM Yeaseen Chowdhury
Associate Professor
Faculty of Business Studies (FBS), BUP

Submitted by:
Mir Tazbinur Sharif (17015053)
Md. Mehedi Hasan Riman (17015011)
Md. Sadman Ahsan (17015035)
Md. Shakwat Hossen (17015097)
Shafiul Islam Rasu (17015067)

Date of Submission: November 02, 2018

Introduction
Financial ratios are mathematical comparisons of financial statement accounts or
categories. These relationships between the financial statement accounts help investors,
creditors, and internal company management understand how well a business is
performing and of areas needing improvement.

Financial ratios are the most common and widespread tools used to analyze a business’
financial standing. Ratios are easy to understand and simple to compute. Since a ratio is
simply a mathematically comparison based on proportions, big and small companies can
be use ratios to compare their financial information. In a sense, financial ratios don’t take
into consideration the size of a company or the industry. Ratios are just a raw computation
of financial position and performance.

Ratios are usually only comparable across companies in the same sector, since an
acceptable ratio in one industry may be regarded as too high in another. For example,
companies in sectors such as utilities typically have a high debt-equity ratio, but a similar
ratio for a technology company may be regarded as unsustainably high.

Ratio analysis can provide an early warning of a potential improvement or deterioration in

a company’s financial situation or performance. Analysts engage in extensive number-
crunching of the financial data in a company’s quarterly financial reports for any such
hints.

Successful companies generally have solid ratios in all areas, and any hints of weakness in
one area may spark a significant sell-off in the stock.

Types of Ratio Analysis

We are going to discuss about 4 types of Financial Ratios:

 Profitability ratios
1. Profit margin.
2. Return on assets (investment).
3. Return on equity.

 Asset utilization ratios

1. Receivable turnover.
2. Average collection period.
3. Inventory turnover.
4. Fixed asset turnover.
5. Total asset turnover.

 Liquidity ratios
1. Current ratio.
2. Quick ratio.

 Debt utilization ratios

1. Debt to total assets.
2. Times interest earned.
3. Fixed charge coverage.

Profitability Ratios

Profitability ratio is used to evaluate the company’s ability to generate income as

compared to its expenses and other cost associated with the generation of income during a
particular period. It is the measurement of the firm’s ability to earn an adequate return on
sales, assets and invested capital.

Profit Margin:
Profit margin is one of the commonly used profitability ratios to gauge profitability of a
business activity. It represents how much percentage of sales has turned into profits.
Simply put, the percentage figure indicates how many cents of profit the business has
generated for each dollar of sale. For instance, if a business reports that it achieved 35
percent profit margin during the last quarter, it means that it had a net income of $0.35 for
each dollar of sales generated. The method of calculating profit margin can be represented
with the following formula:

𝑵𝒆𝒕 𝑰𝒏𝒄𝒐𝒎𝒆
𝑷𝒓𝒐𝒇𝒊𝒕 𝑴𝒂𝒓𝒈𝒊𝒏 = 𝑺𝒂𝒍𝒆𝒔

In the following table, we will find out the profit margin of Shahjibazar Chemicals
Limited & Baraka Cosmetics Limited for year 2012-2013 to 2016-2017

Year Company Net Income Sales Profit Margin

Shahjibazar 93,127,749 2,718,967,831 %
2013
Baraka 187510848 675390784 %
Shahjibazar 472292475 5055725129 %
2014
Baraka 249364982 1573361307 %
Shahjibazar 1031802484 9182109019 %
2015
Baraka 4241054777 3844108738 %
Shahjibazar 741,108,399 1,511,116,209 %
2016
Baraka 439055840 2960310153 %
Shahjibazar 949,894,782 1,314,173,261 %
2017
Baraka 457759550 3485450033 %

We can see that, except 2014-2015, in every other year, profit margin ratio of Baraka
Cosmetics Limited is better than Shahjibazar Chemicals Limited.

Return on Assets (Investment):

Return on assets (ROA) is an indicator of how profitable a company is relative to its total
assets. ROA gives an idea as to how efficient management is at using its assets to generate
earnings. Calculated by dividing a company's annual earnings by its total assets, ROA is
displayed as a percentage. Sometimes this is referred to as "return on investment". The
formula for return on assets is:

𝑵𝒆𝒕 𝑰𝒏𝒄𝒐𝒎𝒆
𝑹𝒆𝒕𝒖𝒓𝒏 𝒐𝒏 𝑨𝒔𝒔𝒆𝒕𝒔 =
𝑻𝒐𝒕𝒂𝒍 𝑨𝒔𝒔𝒆𝒕𝒔

The ROA figure gives investors an idea of how effectively the company is converting the
money it has to invest into net income. The higher the ROA number, the better, because
the company is earning more money on less investment. For example, if one company has
a net income of $1 million and total assets of $5 million, its ROA is 20%; however, if
another company earns the same amount but has total assets of $10 million, it has an ROA
of 10%. Based on this example, the first company is better at converting its investment
into profit.

In the following table, we will find out the return on assets of Shahjibazar Chemicals
Limited & Baraka Cosmetics Limited for year 2012-2013 to 2016-2017

Year Company Net Income Total Assets ROA

Shahjibazar 93,127,749 2,718,967,831 %
2013
Baraka 187510848 675390784 %
Shahjibazar 472292475 5055725129 %
2014
Baraka 249364982 1573361307 %
Shahjibazar 1031802484 9182109019 %
2015
Baraka 4241054777 3844108738 %
Shahjibazar 741,108,399 1,511,116,209 %
2016
Baraka 439055840 2960310153 %
Shahjibazar 949,894,782 1,314,173,261 %
2017
Baraka 457759550 3485450033

We can see that, except 2012-2013, in every other year, return on assets of
Shahjibazar Chemicals Limited is better than Baraka Cosmetics Limited.

Return on Equity:
Return on equity (ROE) is the amount of net income returned as a percentage of
shareholders equity. Return on equity measures a corporation's profitability by revealing
how much profit a company generates with the money shareholders have invested.

ROE is expressed as a percentage and calculated as:

𝑵𝒆𝒕 𝑰𝒏𝒄𝒐𝒎𝒆
𝑹𝒆𝒕𝒖𝒓𝒏 𝒐𝒏 𝑬𝒒𝒖𝒊𝒕𝒚 =
𝑺𝒕𝒐𝒄𝒌𝒉𝒐𝒍𝒅𝒆𝒓𝒔′ 𝑬𝒒𝒖𝒊𝒕𝒚

We can also calculate Return on Equity using the following formula:

𝑹𝒆𝒕𝒖𝒓𝒏 𝒐𝒏 𝑨𝒔𝒔𝒆𝒕𝒔 (𝑹𝑶𝑨)

𝑹𝒆𝒕𝒖𝒓𝒏 𝒐𝒏 𝑬𝒒𝒖𝒊𝒕𝒚 =
𝑫𝒆𝒃𝒕
𝟏 − (𝑨𝒔𝒔𝒆𝒕𝒔)
In the following table, we will find out the return on equity of Shahjibazar Chemicals
Limited & Baraka Cosmetics Limited for year 2012-2013 to 2016-2017

Year Company Net Income Stockholders’ ROE

Equity
Shahjibazar 93,127,749 %
2013
Baraka 187510848 2980974619 %
Shahjibazar 472292475 384409703 %
2014
Baraka 249364982 6130749857 %
Shahjibazar 1031802484 1913338274 %
2015
Baraka 4241054777 6836442056 %
Shahjibazar 741,108,399 2,270,988,679 %
2016
Baraka 439055840 7126856118 %
Shahjibazar 949,894,782 2,756,143,746 %
2017
Baraka 457759550 7005765068 %

We can see that, in every year, return on equity of Shahjibazar Chemicals Limited is
better than Baraka Cosmetics Limited.

Asset Utilization Ratios

Asset utilization ratio is the ratio of the value of a company’s sales or revenues generated
relative to the value of its assets. The Asset Utilization ratio can often be used as an
indicator of the efficiency with which a company is deploying its assets in generating
revenue.

Generally speaking, the higher the asset utilization ratio, the better the company is
performing, since higher ratios imply that the company is generating more revenue per
dollar of assets. Yet, this ratio can vary widely from one industry to the next. As such,
considering the asset utilization ratios of an energy company and a telecommunications
company will not make for an accurate comparison. Comparisons are only meaningful
when they are made for different companies within the same sector.
Receivable Turnover:
An accounting measure used to quantify a firm's effectiveness in extending credit and in
collecting debts on that credit. The receivables turnover ratio is an activity ratio measuring
how efficiently a firm uses its assets.

Receivables turnover ratio can be calculated by dividing the net value of credit sales
during a given period by the accounts receivable during the same period.

The method for calculating receivables turnover ratio can be represented with the
following formula:

𝑺𝒂𝒍𝒆𝒔 (𝒄𝒓𝒆𝒅𝒊𝒕)
𝑹𝒆𝒄𝒆𝒊𝒗𝒂𝒃𝒍𝒆𝒔 𝑻𝒖𝒓𝒏𝒐𝒗𝒆𝒓 𝑹𝒂𝒕𝒊𝒐 = 𝑨𝒄𝒄𝒐𝒖𝒏𝒕𝒔 𝑹𝒆𝒄𝒆𝒊𝒗𝒂𝒃𝒍𝒆𝒔

The receivables turnover ratio is most often calculated on an annual basis, though this can
be broken down to find quarterly or monthly accounts receivable turnover as well.
A high receivables turnover ratio can imply a variety of things about a company. It may
suggest that a company operates on a cash basis, for example. It may also indicate that the
company’s collection of accounts receivable is efficient, and that the company has a high
proportion of quality customers that pay off their debts quickly. A high ratio can also
suggest that the company has a conservative policy regarding its extension of credit. On
the other hand, a company’s policy may be too conservative if it is too tight in extending
credit, which can drive away potential customers and give business to competitors.

A low ratio, in a similar way, can also suggest a few things about a company, such as that
the company may have poor collecting processes, a bad credit policy or none at all, or bad
customers or customers with financial difficulty.

Receivables
Year Company Sales (credit) Receivables
Turnover
Shahjibazar 333.7
2013
Baraka 2.82
Shahjibazar 354.1
2014
Baraka 2.72
Shahjibazar 322.46
2015
Baraka 0.79
Shahjibazar 409.98
2016
Baraka 1.22
Shahjibazar 1565.83
2017
Baraka 1.04

We can see that, in every year, receivable turnover of Shahjibazar Chemicals

Limited is better than Baraka Cosmetics Limited.
Average Collection Period:

The average collection period is the approximate amount of time that it takes for a
business to receive payments owed in terms of accounts receivable. The average collection
period is calculated by dividing the average balance of accounts receivable by total net
credit sales for the period and multiplying the quotient by the number of days in the
period.

𝑨𝒄𝒄𝒐𝒖𝒏𝒕𝒔 𝑹𝒆𝒄𝒆𝒊𝒗𝒂𝒃𝒍𝒆𝒔
𝑨𝒗𝒆𝒓𝒂𝒈𝒆 𝑪𝒐𝒍𝒍𝒆𝒄𝒕𝒊𝒐𝒏 𝑷𝒆𝒓𝒊𝒐𝒅 = 𝑨𝒗𝒆𝒓𝒂𝒈𝒆 𝒅𝒂𝒊𝒍𝒚 𝒄𝒓𝒆𝒅𝒊𝒕 𝒔𝒂𝒍𝒆𝒔

The average collection period represents the average number of days between the date a
credit sale is made and the date payment is received from the credit sale. When calculating
the average collection period for an entire year, 360 may be used as the number of days in
one year for simplicity. In general, a lower average collection period is more favorable
than a higher average collection period. A low average collection period indicates that the
organization is collecting payment faster. However, this may be an indication that its
credit terms are too strict, and customers may seek suppliers or service providers with
more lenient payment terms.

Avg. Daily Credit Avg. Collection

Year Company Receivables
Sales Period
Shahjibazar 8,146,823 7,552,688 1.07
2012-2013
Baraka 991,834,353 7,778,094 127.51
Shahjibazar 8,361,487 8,224,608 1.01
2013-2014
Baraka 970,051,637 7,341,475 132.13
Shahjibazar 8,239,430 7,380,279 1.11
2014-2015
Baraka 7,020,519,791 15,524,026 452.2
Shahjibazar 7,308,265 8,322,905 0.87
2015-2016
Baraka 7,586,676,525 25,744,442 294.69
Shahjibazar 2,167,018 9,425,515 0.22
2016-2017
Baraka 9,968,454,576 28,907,237 344.84

We can see that, in every year, average collection period of Shahjibazar Chemicals
Limited is way better than Baraka Cosmetics Limited.
Inventory Turnover:
Inventory turnover is a ratio showing how many times a company's inventory is sold and
replaced over a period of time. It is calculated as sales divided by average inventory.

𝑺𝒂𝒍𝒆𝒔
Inventory Turnover = 𝑰𝒏𝒗𝒆𝒏𝒕𝒐𝒓𝒚

Inventory turnover measures how fast a company is selling inventory and is generally
compared against industry averages. A low turnover implies weak sales and, therefore,
excess inventory. A high ratio implies either strong sales and/or large discounts. The speed
with which a company can sell inventory is a critical measure of business performance.

Inventory
Year Company Sales Inventory
Turnover
Shahjibazar 2,718,967,831 916,667,980 2.97
2012-2013
Baraka 2,800,114,153 1,049,868,444 2.67
Shahjibazar 2,960,859,038 963,396,630 3.07
2013-2014
Baraka 2,642,931,175 968,604,433 2.73
Shahjibazar 2,656,900,567 731,105,851 3.63
2014-2015
Baraka 5,588,649,526 8,119,844,723 0.69
Shahjibazar 2,996,245,717 767,238,337 3.91
2015-2016
Baraka 9,267,999,144 8,274,569,142 1.12
Shahjibazar 3,393,185,456 478,086,812 7.10
2016-2017
Baraka 10,406,605,367 9,959,332,466 1.04

We can see that, in every year, inventory turnover of Shahjibazar Chemicals Limited
is better than Baraka Cosmetics Limited.

Fixed Asset Turnover:

The fixed-asset turnover ratio is, in general, used by analysts to measure operating
performance. It is a ratio of net sales to fixed assets. This ratio specifically measures how
able a company is to generate net sales from fixed-asset investments. In a general sense, a
higher fixed-asset turnover ratio indicates that a company has more effectively utilized
investment in fixed assets to generate revenue. The fixed-asset turnover ratio is calculated
as:

𝑺𝒂𝒍𝒆𝒔
Fixed Asset Turnover = 𝑭𝒊𝒙𝒆𝒅 𝑨𝒔𝒔𝒆𝒕

While a higher ratio is indicative of greater efficiency in managing fixed-asset

investments, there is not an exact number or range that dictates whether a company has
been efficient at generating revenue from such investments. For this reason, it is important
for analysts and investors to compare a company’s most recent ratio to both the historic
ratios of the company and to ratio values from peer companies and/or industry averages.

Fixed Asset
Year Company Sales Fixed Asset
Turnover
Shahjibazar 2,718,967,831 324,326,938 8.38
2012-2013
Baraka 2,800,114,153 794,646,537 3.52
Shahjibazar 2,960,859,038 305,415,286 9.69
2013-2014
Baraka 2,642,931,175 1,246,283,435 2.12
Shahjibazar 2,656,900,567 310,229,902 8.56
2014-2015
Baraka 5,588,649,526 4,409,012,785 1.27
Shahjibazar 2,996,245,717 332,484,961 9.01
2015-2016
Baraka 9,267,999,144 4,176,538,958 2.22
Shahjibazar 3,393,185,456 319,993,892 10.60
2016-2017
Baraka 10,406,605,367 3,890,915,180 2.67

We can see that, in every year, fixed asset turnover of Shahjibazar Chemicals
Limited is better than Baraka Cosmetics Limited.

Total Asset Turnover:

Asset turnover ratio is the ratio of the value of a company’s sales or revenues generated
relative to the value of its assets. The Asset Turnover ratio can often be used as an
indicator of the efficiency with which a company is deploying its assets in generating
revenue.
 𝑺𝒂𝒍𝒆𝒔
Total Asset Turnover = 𝑻𝒐𝒕𝒂𝒍 𝑨𝒔𝒔𝒆𝒕

Generally speaking, the higher the asset turnover ratio, the better the company is
performing, since higher ratios imply that the company is generating more revenue per
dollar of assets. Yet, this ratio can vary widely from one industry to the next. As such,
considering the asset turnover ratios of an energy company and a telecommunications
company will not make for an accurate comparison. Comparisons are only meaningful
when they are made for different companies within the same sector.

Total Asset
Year Company Sales Total Asset
Turnover
Shahjibazar 2,718,967,831 1,668,177,438 1.63
2012-2013
Baraka 2,800,114,153 4,206,767,477 0.67
Shahjibazar 2,960,859,038 1,745,368,557 1.70
2013-2014
Baraka 2,642,931,175 4,440,437,986 0.60
Shahjibazar 2,656,900,567 1,656,468,333 1.60
2014-2015
Baraka 5,588,649,526 22,824,375,404 0.24
Shahjibazar 2,996,245,717 1,708,212,364 1.75
2015-2016
Baraka 9,267,999,144 24,498,078,737 0.38
Shahjibazar 3,393,185,456 1,530,809,740 2.22
2016-2017
Baraka 10,406,605,367 28,638,650,875 0.36

We can see that, in every year, total asset turnover of Shahjibazar Chemicals Limited
is better than Baraka Cosmetics Limited.
Liquidity Ratios

Liquidity Ratios emphasizes the firm’s ability to pay off short-term obligations as and
when due. It is an indicator of whether a company's current assets will be sufficient to
meet the company's obligations when they become due. The liquidity ratios include the
current ratio and the acid test or quick ratio. The current ratio and quick ratio are also
referred to as solvency ratios.

Current Ratio:
The current ratio is a liquidity ratio that measures a company's ability to pay short-term
and long term obligations. To gauge this ability, the current ratio considers the current
total assets of a company (both liquid and illiquid) relative to that company’s current total
liabilities.

The formula for calculating a company’s current ratio, then, is:

𝑪𝒖𝒓𝒓𝒆𝒏𝒕 𝑨𝒔𝒔𝒆𝒕
Current Ratio = 𝑪𝒖𝒓𝒓𝒆𝒏𝒕 𝑳𝒊𝒂𝒃𝒊𝒍𝒊𝒕𝒊𝒆𝒔

The current ratio is called “current” because, unlike some other liquidity ratios, it
incorporates all current assets and liabilities. The current ratio is also known as the
working capital ratio.

The current ratio is mainly used to give an idea of the company's ability to pay back its
liabilities (debt and accounts payable) with its assets (cash, marketable securities,
inventory, and accounts receivable). As such, current ratio can be used to take a rough
measurement of a company’s financial health. The higher the current ratio, the more
capable the company is of paying its obligations, as it has a larger proportion of asset
value relative to the value of its liabilities.

In the following table, we will find out the Current Ratio of Shahjibazar Chemicals
Limited & Baraka Cosmetics Limited for year 2012-2013 to 2016-2017:
 Current Current
Year Company Current Asset
Liabilities Ratio

Shahjibazar 1,343,850,500 1,161,067,940 1.157

2012-2013
Baraka 3,412,120,940 682,076,795 5.002

Shahjibazar 1,439,953,271 1,129,435,545 1.274

2013-2014
Baraka 3,194,154,551 632,994,434 5.005

Shahjibazar 1,346,238,431 952,818,215 1.412

2014-2015
Baraka 18,415,362,619 5,283,396,036 3.485

Shahjibazar 1,375,727,403 917,496,241 1.499

2015-2016
Baraka 20,321,539,779 4,794,396,502 4.328

Shahjibazar 1,210,815,848 604,848,142 2.001

2016-2017
Baraka 24,747,735,695 7,018,627,141 3.526

We can see that, current ratio of Baraka Cosmetics Limited is higher than
Shahjibazar Chemicals Limited in every year meaning Baraka Cosmetics Limited is
more capable of paying its obligations.

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.
For this reason, the ratio excludes inventories from current assets, and is calculated as
follows:

𝑪𝒖𝒓𝒓𝒆𝒏𝒕 𝑨𝒔𝒔𝒆𝒕−𝑰𝒏𝒗𝒆𝒏𝒕𝒐𝒓𝒚
Quick Ratio = 𝑪𝒖𝒓𝒓𝒆𝒏𝒕 𝑳𝒊𝒂𝒃𝒊𝒍𝒊𝒕𝒊𝒆𝒔

The quick ratio measures the dollar amount of liquid assets available for each dollar of
current liabilities. Thus, a quick ratio of 1.5 means that a company has $1.50 of liquid
assets available to cover each $1 of current liabilities. The higher the quick ratio, the better
the company's liquidity position. It is also known as the “acid-test ratio" or "quick assets
ratio."
The quick ratio is more conservative than the current ratio because it excludes inventories
from current assets. The ratio derives its name presumably from the fact that assets such as
cash and marketable securities are quick sources of cash. Inventories generally take time
to be converted into cash, and if they have to be sold quickly, the company may have to
accept a lower price than book value of these inventories. As a result, they are justifiably
excluded from assets that are ready sources of immediate cash.

Current Quick
Year Company Current Asset Inventories
Liabilities Ratio
2012- Shahjibazar 1,343,850,500 1,161,067,940 916,667,980 0.367
2013 Baraka 3,412,120,940 682,076,795 1,049,868,444 3.463
2013- Shahjibazar 1,439,953,271 1,129,435,545 963,396,630 0.412
2014 Baraka 3,194,154,551 632,994,434 968,604,433 3.515
2014- Shahjibazar 1,346,238,431 952,818,215 731,105,851 0.645
2015 Baraka 18,415,362,619 5,283,396,036 8,119,844,723 1.948
2015- Shahjibazar 1,375,727,403 917,496,241 767,238,337 0.663
2016 Baraka 20,321,539,779 4,794,396,502 8,274,569,142 2.015
2016- Shahjibazar 1,210,815,848 604,848,142 478,086,812 1.211
2017 Baraka 24,747,735,695 7,018,627,141 9,959,332,466 2.107

We can see that, quick ratio of Baraka Cosmetics Limited is higher than Shahjibazar
Chemicals Limited in every year.
Debt Utilization Ratios

The debt utilization ratio compares an individual's total debt balances to total available
credit. It helps determine part of a person's credit score. It estimates the overall debt
position of the firm.
Your utilization ratio tells potential lenders how much debt you owe and how much of
your available credit you are using. The lower your utilization ratio, the better it looks to
lenders (and the higher your credit score will be) because it's more likely that you'll be
able to make your payments.

Someone with a high utilization ratio often carries a lot of debt or is nearing their
maximum credit limit. This looks risky to lenders because that person may be less able to
repay them as the debt builds.

Debt to Total Assets:

The corporations borrow money to do their business because debt capital is cheaper than
the equity capital. On the other hand, excessive amount of debt can create problems for the
company. To see the debt level of a company, we define its debt ratio, or leverage ratio as
follows:

𝑻𝒐𝒕𝒂𝒍 𝑫𝒆𝒃𝒕
Debt Ratio = 𝑻𝒐𝒕𝒂𝒍 𝑨𝒔𝒔𝒆𝒕𝒔

The higher the ratio, the higher the degree of leverage and consequently a greater
possibility of financial risk.

In the following table, we will find out the Debt Ratio of Shahjibazar Chemicals Limited
& Baraka Cosmetics Limited for year 2012-2013 to 2016-2017:
 Debt
Year Company Total Debt Total Assets
Ratio
Shahjibazar 1,538,246,865 1,668,177,438 92.21%
2012-2013
Baraka 700,841,079 4,206,767,477 16.66%
Shahjibazar 1,508,221,307 1,745,368,557 86.41%
2013-2014
Baraka 664,415,096 4,440,437,986 14.96%
Shahjibazar 1,327,863,638 1,656,468,333 80.16%
2014-2015
Baraka 12,991,534,000 22,824,375,404 56.92%
Shahjibazar 1,290,778,117 1,708,212,364 75.56%
2015-2016
Baraka 13,339,558,165 24,498,078,737 54.45%
Shahjibazar 976,736,138 1,530,809,740 63.81%
2016-2017
Baraka 15,805,091,237 28,638,650,875 55.19%

We can see that, debt ratio of Baraka Cosmetics Limited is lower than Shahjibazar
Chemicals Limited in every year which means Shahjibazar Chemicals Limited is in
greater financial risk than Baraka Cosmetics Limited.

Times Interest Earned:

The times interest earned ratio, sometimes called the interest coverage ratio, is a coverage
ratio that measures the proportionate amount of income that can be used to cover interest
expenses in the future.

The times interest earned ratio is calculated by dividing income before interest and income
taxes by the interest expense.

𝑰𝒏𝒄𝒐𝒎𝒆 𝒃𝒆𝒇𝒐𝒓𝒆 𝒊𝒏𝒕𝒆𝒓𝒆𝒔𝒕 𝒂𝒏𝒅 𝒕𝒂𝒙𝒆𝒔 (𝑬𝑩𝑰𝑻)

𝑻𝒊𝒎𝒆𝒔 𝒊𝒏𝒕𝒆𝒓𝒆𝒔𝒕 𝒆𝒂𝒓𝒏𝒆𝒅 =
𝑰𝒏𝒕𝒆𝒓𝒆𝒔𝒕 𝑬𝒙𝒑𝒆𝒏𝒔𝒆𝒔

In some respects the times interest ratio is considered a solvency ratio because it measures
a firm’s ability to make interest and debt service payments. Since these interest payments
are usually made on a long-term basis, they are often treated as an ongoing, fixed expense.
As with most fixed expenses, if the company can’t make the payments, it could go
bankrupt and cease to exist. Thus, this ratio could be considered a solvency ratio.
In the following table, we will find out the Times interest earned of Shahjibazar Chemicals
Limited & Baraka Cosmetics Limited for year 2012-2013 to 2016-2017. There were no
mention of explicit Interest Expense in the financial statements of these company. Hence
we took Financial Expenses as Interest Expense in the calculation.

Interest
Year Company EBIT TIE
Expense
Shahjibazar 184,678,027 52,947,364 3.5
2012-2013
Baraka 458,748,867 67,333,441 6.8
Shahjibazar 388,447,913 64,843,857 6.0
2013-2014
Baraka 457,390,391 50,831,484 9.0
Shahjibazar 328,730,236 38,207,325 8.6
2014-2015
Baraka 769,381,386 583,581,078 1.3
Shahjibazar 196,268,476 25,081,141 7.8
2015-2016
Baraka 2,593,888,998 1,022,683,668 2.5
Shahjibazar 216,398,964 7,759,766 27.9
2016-2017
Baraka 2,795,693,177 884,832,907 3.2

We can see that, except 2012-2013 and 2013-2014, in every other year, TIE of
Shahjibazar Chemicals Limited is better than Baraka Cosmetics Limited.

Fixed Charges Coverage:

The fixed charge coverage ratio is a financial ratio that measures a firm’s ability to pay all
of its fixed charges or expenses with its income before interest and income taxes. The
fixed charge coverage ratio is basically an expanded version of the times interest earned
ratio or the times interest coverage ratio.

Fixed charges coverage is expressed as:

 𝑰𝒏𝒄𝒐𝒎𝒆 𝒃𝒆𝒇𝒐𝒓𝒆 𝒇𝒊𝒙𝒆𝒅 𝒄𝒉𝒂𝒓𝒈𝒆𝒔 𝒂𝒏𝒅 𝒕𝒂𝒙𝒆𝒔
𝑭𝒊𝒙𝒆𝒅 𝑪𝒉𝒂𝒓𝒈𝒆 𝑪𝒐𝒗𝒆𝒓𝒂𝒈𝒆 =
𝑭𝒊𝒙𝒆𝒅 𝑪𝒉𝒂𝒓𝒈𝒆𝒔

We could not find any explicit fixed charges in the financial statements of Shahjibazar
Chemicals Limited and Baraka Cosmetics Limited. As a result we also could not evaluate
income before fixed charges and taxes. Hence we could not find out this ratio.

References

1. http://lankabd.com/dse/stock-market/SHAHJIBAZAR/Shahjibazar-chemicals-
limited/financial-
statements?companyId=142&goToHomePageParam=true&stockId=142
2. http://lankabd.com/dse/stock-market/BARAKACOSMET/Baraka-cosmetics-
limited/financial-
statements?companyId=141&goToHomePageParam=true&stockId=141