FINANCIAL PERFORMANCE OF THE TURKISH TEXTILE & READY TO WEAR INDUSTRY FOR THE PERIOD BETWEEN by DiDEM GÜQBiLMEZ - PDF

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FINANCIAL PERFORMANCE OF THE TURKISH TEXTILE & READY TO WEAR INDUSTRY FOR THE PERIOD BETWEEN by DiDEM GÜQBiLMEZ A Thesis Submitted to the Department of Management And the Graduate School of Business

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FINANCIAL PERFORMANCE OF THE TURKISH TEXTILE & READY TO WEAR INDUSTRY FOR THE PERIOD BETWEEN by DiDEM GÜQBiLMEZ A Thesis Submitted to the Department of Management And the Graduate School of Business Administration in partial fulfillment of the requirements for the degree of Master of Business Administration Bilkent University January, 1996 H L.) a«6 {' V VJ O G 'â12.ö 9 O' I certify that I have read this thesis and in my opinion it is fully adequate, in scope and quality, as a thesis for the degree of Master of Business Administration. Assoc. Prof. Can imga Mugan \ I certify that I have read this thesis and in my opinion it is fully adequate, in scope and quality, as a thesis for the degree of Master of Business Administration. Assoc. Prof. Kür at Aydogan I certify that I have read this thesis and in my opinion it is fully adequate, in scope and quality, as a thesis for the degree of Master of Business Administration. Assoc. Prof. GCilnur Muradoglu, ' \ ^ /1 / / Approved for the Graduate School of Business Administration. Prof, SCibidey Togan ABSTRACT FINANCIAL PERFORMANCE OF THE TURKISH TEXTILE & READY TO WEAR INDUSTRY FOR THE PERIOD BETWEEN Didem Gu^bilmez MBA Supervisor: Assoc. Prof.Can imga Mugan February 1996, 65 PAGES The Textile & Ready to Wear Industry, with its share of 31.8% among all Turkish Consumption Goods Production and approximately 40% of share among all Turkish Exports clearly plays an important role in the overall Turkish Economy. Therefore the financial performance of such an important industry is worth investigation. Apart from the total industry, analyzing the financial performance of the sectors within the industry is as important in order to understand sector differences. The aim of this study is to analyze the financial performance of the Turkish Textile and Ready to Wear Industry and compare the financial performances of the Textile and Ready to Wear Sectors within the industry for the period between 1986 and The method that will be used is Ratio Analysis based on four criteria which are leverage, liquidity, profitability and market value. Key Words; Textile & Ready to Wear Industry, Textile Sector, Ready to Wear Sector, Ratio Analysis, Leverage, Liquidity, Profitability, Market Value.. ÖZET TÜRK TEKSTİL VE KONFEKSİYON ENDÜSTRİSİ NİN 1986 İLE 1994 YILLARI ARASINDAKİ MALİ PERFORMANSI Didem Güçbilmez Yüksek Lisans Tezi Tez Yöneticisi; Doç. Dr. Can Şımga Muğan Şubat 1996, 65 SAYFA Türk Tekstil ve Konfeksiyon Endüstrisi, toplam Türk Tüketim Malları Üretimi içindeki % 31.8 lik payı ve tüm Türkiye İhracatı içindeki % 40 a yakın payı ile Türkiye Ekonomisinde önemli bir rol oynamaktadır. Bundan dolayı, böyle büyük bir endüstri nin mali performasının incelenmesi önemlidir. Endüstrinin tümünden ayrı olarak, endüstri içindeki sektörlerin mali performanslarını da incelemek, sektör farklılıklarını anlamak açısından önem taşımaktadır. Bu çalışmanın amacı, Türk Tekstil ve Konfeksiyon Endüstrisinin mali performansını ve endüstri içerisinde yer alan tekstil ve konfeksiyon sektörlerinin karşılaştırmalı olarak mali performanslarını 1986 ile 1994 yılları arasındaki dönem için incelemektir. Kullanılacak metod rasyo analizi olup kaldıraç, likidite, karlılık ve piyasa değeri kriterleri baz alınacaktır. Anahtar Kelimeler; Tekstil ve Konfeksiyon Endüstrisi, Tekstil Sektörü, Konfeksiyon Sektörü, Rasyo Analizi, Kaldıraç, Likidite, Karlılık, Piyasa Değeri. ACKNOWLEDGEMENT This study is conducted under the supen/ision of Assoc. Prof. Can Şımga Mugan to whom I wish to express my deep gratitude for her invaluable guidance and productive criticisms throughout the completion of this master thesis. I would like to express my thanks to Assoc. Prof. Kürşat Aydogan and Assoc. Prof. GCilnur Muradoğlu for serving on my thesis commitee. I also would like to thank them for their suggestions and corrections. Finally, I am sincerely grateful to my family, my aunt Ferda Kıratlı, my friend Emrah Hadi Tercan and all my other friends who helped me in my thesis, the employees of the Capital Markets Board who helped me in my thesis and my managers and friends at Citibank for their help and encouragement for the completion of this thesis. Ill TABLE OF CONTENTS Page ABSTRACT ÖZET ACKNOWLEDGEMENT I. PURPOSE OF THE STUDY II. THE TEXTILE & READY TO WEAR INDUSTRY 2.1. Production and Cost of Production 2.2. Exports Imports III. FINANCIAL STATEMENT ANALYSIS 3.1. Financial Ratio Analysis 3.2. Credit Granting and Investment Decisions 3.3. Measures for Comparing Financial Ratios IV. METHODOLOGY 4.1. Data Collection Source of Data Method of Data Compilation 4.2. Analyzing the Data V. PRESENTATION, ANALYSIS AND RESULTS 5.1. Financial Performance of the industry as a Whole 5.2. The Textile and Ready to Wear Sectors Characteristics of Firms that Operate within the Sectors Financial Performance VI. CONCLUSION Financial Performance if the Industry and the Sectors within Leverage Liquidity Profitability Market Value Implications for Creditors and Investors REFERENCES APPENDICES Appendix A Imports and Exports of the Industry for the January - April Period of 1993, 1994 and 1995 Appendix B Ratios Used in the Study Appendix C Equal Weighted Mean Ratio Calculations for the Industry as a Whole Appendix D Equal Weighted Mean Ratio and Variability Measure Calculations for the Textile and Ready to Wear Sectors Appendix E Graphs of Equal Weighted Mean Ratios for the Industry a Whole LIST OF TABLES Page 1. Growth in Turkish Textile and Ready to Wear Production 4 2. Walsh s Categorization of Mostly Used Ratios 8 3. Gibson s Categorization of Mostly Cited Ratios 9 4. Equal Weighted Mean Ratios and Variance Measures 18 for the Industry as a Whole 5. The Price - Earnings and Dividend Yield Market Averages & the 23 Textile & Ready to Wear Industry Price - Earnings and Dividend Yield Ratios for the period between 1986 and Equal Weighted Mean Ratios and Variance Measures 28 for the Textile and the Ready to Wear Sectors 7. The Price - Earnings and Dividend Yield Market Averages & the 32 Textile & Ready to Wear Sectors' Price - Earnings and Dividend Yield Ratios for the period between 1990 and Imports & Exports of the Sectors 40 CHAPTER I. PURPOSE OF THE STUDY The Turkish Textile & Ready to Wear Industry has a share of 31.8% among the Total Turkish Consumption Goods production, and 8.4% among the Total Turkish production. The industry also has a large share among the Total Turkish Exports, which is approximately 40% (Ertug, 1994, p.152). Based on these numbers, it is clear that the Turkish Textile & Ready to Wear Industry has a very important place in the Turkish Economy which is worth investigating. The purpose of this study is to analyze and understand the financial performance of the Turkish Textile & Ready to Wear Industry and the sectors that operate within the industry, i.e. the Textile and Ready to Wear Sectors, during the period of 1986 to In the analysis four criteria will be used. These are( Brealey & Myers, 1991,pp ): 1. Leverage which shows how heavily the industry uses debt as its financing. 2. Liquidity which measures how easily the industry can lay its hands on cash. 3. Profitability which shows how efficiently the industry is using its assets. 4. Market Value which shows how highly the industry is valued by investors and the chances of foreign investment The analysis will benefit Creditors in terms of understanding the credibility of the industry in credit granting decisions, and benefit Turkish and Foreign Investors in understanding the market value of the industry and in making investment decisions. In the second chapter information about the Turkish Text.le & Ready to Wear Industry and its developments are summarized. In the third chapter information about the techniques that are used for this study are provided. Chapter four presents the methodology followed in the study. In the fifth chapter the presentation, analysis and results of the study are provided. Finally, conclusion is provided in the last chapter. CHAPTER II. THE TURKISH TEXTILE & READY TO WEAR INDUSTRY The Turkish Textile & Ready to Wear Industry, which plays an important role in the Turk'Sh economy has gone through some major developments over the years. The Industry will be explained under the headings of; -Production & Cost of Production -Exports -Imports The data source for the information in this section is the Istanbul Hazır Giyim ve Konfeksiyon İhracatçıları Birliği (İTKİP), which has used the data of the Statistics Institute of Turkey. The numbers provided are based on 1988 constant prices (TL/$=1420) (Ertug, 1994, p.127) Production and Cost of Production The Turkish Textile & Ready to Wear Industry constitutes 31.8% of the Total Turkish Consumption Goods' production and 8.4% of the Total Turkish Production. It ranks as second among all Turkish production industries following the food industry, first (Ertug, 1994, p.152). The textile sector production includes the production of all cotton thread, cotton wool and cotton cloth. The production of the ready to wear sector includes all ready to wear clothing and knitted goods (Ertug, 1994, p.152). Table 1 below summarizes the growth in production over the years of 1984 to 1993 at 1988 constant prices (TL/$=1420) (Ertug, 1994, p.147): (Table 1) Growth in Turkish Textile and Ready to Wear Production YEAR TEXTILE READY TO WEAR TOTAL VALUE (MTL):i VALUE (MTL) VALUE (MTL) ,166,761 2,041,560 6,208, ,573,612 2,207,130 6,780, ,562,839 2,513,176 7,076, ,682,638 3,145,928 7,828, ,123,638 3,617,248 8,740, ,242,177 4,461,065 9,703, ,169,200 4,431,764 9,600, ,238,500 4,911,200 10,149, ,628,500 5,368,600 10,997, ,878,600 5,941,400 11,820, ,253,310 7,502,593 14,755,903 * The figures for 1994 are the planned amounts in the last 5 years development plan. From table 1 it is clear that although the production for both of the sectors has increased during the years, the production of the ready to wear sector has increased at a higher rate than the textile sector. Although the total ready to wear production has increased by 163% over the period of 1984 to 1993, the total textile production has only increased by 35.1% for the same period. The major reasons for the slower growth in the textile production can be summarized as high costs of production, decrease in productivity and inefficient use of capacity. On average the yearly growth in the Textile & Ready to Wear Production has been 8.7% for the period of 1984 to 1993. The cost of production for the textile sector is higher than that of the the ready to wear sector. Based on 1991 average figures the cost of production for the textile sector is 3.12 $ per hour, whereas it is 2.31$ per hour for the ready to wear sector in the same year. Turkey ranks 30th in textile cost of production, whereas it ranks 28th in ready to wear cost of production among all world countries (Ertug, 1994, pp ) Exports The export activities of the Turkish Textile & Ready to Wear Industry has started with the export of cotton wool during the 1970's. During the beginning of 1980's Turkey has become the number one cotton wool exporter country to the European Community (Ertug, 1994, p. 155). After 1984, the exports of the ready to wear sector have increased at a high rate whereas the exports of the textile sector have increased at a slower rate. The exports of the Textile & Ready to Wear Industry can be summarized by the table in Appendix A. It is clear from the numbers that the exports of the Textile & Ready to Wear Industry make up approximately 40% of the 1995 January - April Total Turkish exports and that the exports of the Ready to Wear sector make up nearly 75% of the total industry s exports for the same period. Also, the trend has been similar for the last three years. It is also clear that the European Community is the number one importer of our textile and ready to wear goods. 2.3. Imports While the exports of textile & ready to wear goods have increased during the 1980 s and 1990 s, the imports of the industry have also increased. Most of the imports consist of textile goods, i.e. cotton goods, the major reason being the high cost of producing textile goods (Ertug, 1994, p.178). The imports of Textile & Ready to Wear Industry can be summarized by the table in Appendix A. It is clear from the table that the Turkish Textile & Ready to Wear Industry makes up 9% of the 1995 January - April Total Turkish Imports and that the Textile Industry makes up nearly 100% of the industry s imports for the same period. It is also clear again that most of our trade is performed with the European Community. CHAPTER til. FINANCIAL STATEMENT ANALYSIS 3.1. Financial Ratio Analysis The major tool in Financial Statement Analysis is Ratio Analysis. In Financial Ratio Analysis on aims to evaluate the financial performance of the firm over time (time series analysis) or across firms (cross sectional analysis) (Martikainen, 1992). Financial ratios are usually classified as leverage, liquidity, profitability and market value ( See Appendix B). As stated before leverage shows how heavily the industry uses debt as its financing, liquidity measures how easily the industry can lay its hands on cash, profitability shows how efficiently the industry is using its assets and market value shows how highly the industry is valued by investors. Several questionnaire based studies have examined the relative importance managerial respondents give to individual financial ratios and / or variables. A representative study is Walsh (1984), where the primary purpose was to learn the preferences of a representative group of Chief Executive Officers and other S ^ io r Executives concerning the ratios and other financial indicators that they use regularly for various types of decision making . Questionnaires were sent to the CEO's of 500 of the Fortune 1000 industrial companies and 50 firms in service industries. A total of 101 usable survey responses was received. Respondents were asked to note the decision making activities in which individual ratios were used. These activities were grouped into the following categories: - Planning, Budgeting and Goal Setting(PBGS) - Evaluating Investment Proposal(EIPO) - Appraising Performance of Managers and Units (APMU) - Awarding Incentive Compensation(AIC) - Other Table 2 below summarizes a subset of the responses. Ratios relating to return on investment were the most frequently mentioned by the respondents. Walsh also concluded that based on the number of times that each indicator was ranked first in importance, return on investment and absolute net earnings receive the most such mentions . TABLE 2) Walsh^s Categorization of Mostly Used Ratios Cateaorv of ratio/variable PBGS EIP APMU i AlC OTHER TOTAL Return on Investment(6 Ratios Absolute Net Earnings(1) Debt Ratios(2) Inventory Turnover(1) Net Profit Margin(1) Accounts R eceivable Turnove Earnings Per Share(1) Liquidity Ratios i Gibson (1982a) surveyed the opinions of the controllers of companies listed in Fortune s 500 firms. The conclusion was that controllers rated profitability ratios as the most significant: Gibson (1982b) also made a study of the annual reports of 100 U.S. companies in the Fortune 500 listing of industrial firms. Using the financial ratio categories of liquidity, debt, and profitability, he reported that the ratios in Table 3 were most frequently cited: (Table 3) Gibson s Categorization of Mostly Cited Ratios Frecuency of Appearance jliquidity Current Ratio 47 :Debt Ratios Debt to capital 23 Debt to Equity 19 i Profitability 1 Return on equity 62 Profit Margin 58 ; Return on Capital 21 Gibson reported consistency in the way companies computed the current ratio but inconsistency in the other ratios cited. Foster is also concerned about similar issues and believes that different accounting policies may lead to the noncomparison of financial ratios and that these differences should be taken into account while performing cross sectional or time series analysis (Foster, 1986, p. 184) Credit Granting and Investment Decisions Credit Granting Brealey and Myers (1991, p. 679) state that it is safer to lend to a company that has relatively little leverage and a predominance of liquid assets. They state that if you are extending credit or lending to a company, you are not interested only in the total asset coverage of debt. You want to know whether the company will be able to lay its hands on cash to repay you. That is why credit analysts and bankers look at several measures of leverage and liquidity. Investment Decisions Bareley and Myers (1991, p. 683) state that investors look at price-earnings ( P/E ) and dividend yield ratios in making investment decisions. The price-earnings ratio is a common measure of the esteem in which the company is held by investors. It is the stock price divided by the earnings per share. They state that if a company's dividends are expected to grow at a steady rate, then a high P/E ratio might indicate that (1) investors expect high dividend grov/th; or (2) the stock has low risk and therefore the investors are content with a low prospective return; or (3) the company is expected to achieve average grovv^h while paying out a high proportion of earnings. The stock's dividend yield is simply the expected dividend as a proportion of the stock price. In a company with a steady expected growth in dividends, a high yield may indicate that investors expect low dividend growth or that investors require high return Measures for Comparing Financial Ratios Foster describes several measures for comparing financial ratios. Two of these measures a re ; 1) Central Tendency(Foster, 1986, p.178); A most widely used measure of central tendency is the Equal Weighted Mean (EWM), which is computed by adding the ratio of each firm and then dividing the total by the number of firms in the analysis. 2) Variability Measure ( Foster, 1986, p.72): An approach that is gaining popularity in the literature is to compute variability measures for financial ratios over time. This is a ratio of standard deviation. It 10 shows the dispersion of a certain measure. It is computed by subtracting the minimum value in the data series from the maximum value and then dividing the result by the average of the data series. 11 CHAPTER IV. METHODOLOGY 4.1. Data Collection Source of Data The data for the analysis are obtained from all the Textile & Ready to Wear firms trading in the Istanbul Stock Exchange (ISEX) as of 31/12/1994. There are 17 firms in total. All the audited balance sheets and income statements of the firms for the years ending 1986 through 1994 are obtained from the Turkish Capital Markets Board and the Istanbul Stock Exchange (1995). Only the audited financial Statements are taken into consideration to maximize reliability and comparibility. The beginning year for the study is taken as 1986 because firms were first quoted to the Istanbul Stock Exchange in this year. The major limitation to this approach is that the number of data points for each year are not equal, as the firms in the analysis have been quoted on the ISEX at different years. Therefore their audits have started at different years. The firms, the year they have entered the analysis and the year they have been quoted to ISEX is given on the next page: 12 FIRM YEAR OF ENTERING ANALYSIS QUOTATION AT ISEX Akal Tekstil Sanayii A.Ş. Aksu Dokuma ve Boya Apre Fabrikaları A.Ş. Altınyıldız Mensucat ve Konfeksiyon Fab. A.Ş. Derimod Konfeksiyon Sanayii A.Ş. Edip İplik Sanayii A.Ş. Karsu Tekstil San. ve Tic. A.Ş. Koniteks Konfeksiyon Endüstri ve Tic. A.Ş. Kordsa Kord Bezi San. ve Tic. A.Ş. Köytaş Tekstil San. ve Tic. A.Ş. Lüks Kadife Tic. ve San. A.Ş. Okan Tekstil San. ve Tic. A.Ş. Polylen Sentetik iplik Sanayi A.Ş. Sifaş Sentetik İplik Fabrikaları A.Ş. Söks
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