ACFM613 Accounting & Finance for managers
College of Graduate School
Project paper: Analysis of firm’s performance using accounting ratios
Name of companies: a) Muda Holdings Berhad b) Malaysian AE Models Holdings Behard
Prepared by
Hayder AbdUlhasan SadirID No.: SP20723
Lecturer: Dr Wong Pik Har
Analysis of firm’s performance using accounting ratios
ACFM 613 Accounting & Finance for Managers - project paper
This is an individual coursework that represent 40 percent of your total marks for ACFM 613 Accounting & Finance for managers. Your report should be font size 12 New Times Roman and would not be longer than 5000 words. Plagiarism declaration should be included in your report. Harvard referencing is used. Include the box below the cover of your report to unable marks to be given.
CriteriaName of
student & IDIntroduction
20%Content
60%Conclusion
20%Total100%
Choose two companies that are listed under the main board of the Bursa Malaysia.
Your report should include:1. History and background on each company2. Compare the financial performance using ratios for each company for 2007 and
2008.3. Evaluate the financial strategic used by each company based on the types of
financing that the company uses. Comment on the gearing levels of each company.
4. Conclusion
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Analysis of firm’s performance using accounting ratios
College of Graduate SchoolPlagiarism Statement
Read, complete and sign this statement to be submitted together with your written project paper.
I confirm that the submitted work is all my own work and is in my own words.
Signature: Name (BLOCK CAPITAL): HAYDER ABDULHASAN SADIRID no: SP 20723Date: 03 OCTOBER 09
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Analysis of firm’s performance using accounting ratios
TABLE OF CONTENTS
CHAPTER 1 INTRODUCTION 51.1 Background of the project paper 5
Separation of ownership and control 5Earnings management 7Evaluating the Earning’s of Corporation 9
1.2 Objectives of the Project Paper 101.3 Organizations of Project Paper 11
CHAPTER 2 LITERATURE REVIEW 122.1 Introduction 122.2 Conceptualisation of Accounting Profits 13
Weaknesses of accounting ratios is as follow 14Conservative accounting practices 14Accounting Based Performance Measurement 17
2.4 Summary 21
CHAPTER 3 RESULTS OF ANALYSES 223.1 Introduction 22
Why are ratios are useful? 233.2 Data Source and Profile 253.3. Arithmatic analysis 27
A. Financial Ratios: 27B. Calculations 36
3.4 Summary 37
CHAPTER 4 DISCUSSION AND CONCLUSION 384.1 Introduction 384.2 Discussion of the results 37
Limitation of This Project Paper 474.3 Conclusions 48
ACKNOLEDGMENTS 49REFERECES 49APPENDIX 52
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Analysis of firm’s performance using accounting ratios
TABLE OF FIGURES
Figure 1: Project Paper Outline 11 Fig (2) Accounting Ratios 28 Fig (3)comparision for cash in bank 39 Figure 4: Comparison for Cash flow relted to Current Assets
and Current Liabilities40
Figure 5: Comparison for Current Assets Ratios 41 Figure 6: Comparison for Current Assets with cash generated
from operations 41 Figure 7: Comparison for Profit's amounts 42 Figure 8: Comparison for Profitablity Ratios 43 Figure 9: Comparison of Effeciency Ratios 44 Figure 10: Comparison of Debt Ratios 45 Figure 11: Comparison of Investment Ratios 46 Figure 12: Comparison of Gearing Ratios 47
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Analysis of firm’s performance using accounting ratios
CHAPTER 1
Introduction
1.1 Background of Project Paper
Separation of ownership and control
The term separation of ownership and control as Stephen G. Mark (1999), "refers to
the phenomenon associated with publicly held business corporations in which the
shareholders (the residual claimants) possess little or no direct control over management
decisions". Reference to the separation of ownership and control, and concern over its
effect. Smith (1776), wrote about joint stock companies, stated: "The directors of such
companies ... , being the managers rather of other people’s money than of their own, it
cannot well be expected that they should watch over it with the same anxious vigilance
with which the partners in a private copartnery frequently watch over their own. Like the
stewards of a rich man, they are apt to consider attention to small matters as not for their
master’s honour, and very easily give themselves a dispensation from having it.
Negligence and profusion, therefore, must always prevail, more or less, in the
management of the affairs of such a company. It is upon this account that joint stock
companies for foreign trade have seldom been able to maintain the competition against
private adventurers".
We can define the separation of ownership and control with reference to the owner
managed firm. In such a firm, the owner/manager possesses two principal attributes. The
owner/manager makes management decisions of the firm and has a claim to the profits of
the firm. (These claims are sometimes called residual claims to reflect that they accrue
after all costs and fixed claims have been satisfied.) In a large publicly-held corporation,
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Analysis of firm’s performance using accounting ratios
the shareholders own residual claims but lack direct control over management decision
making. Correspondingly, managers have control but possess relatively small (if any)
residual claims.
The advantages and disadvantages of seperation ownership and control, Mark J. Roe
(2004), wrote that "decentralization has key advantages: regulatory specialization,
multiple channels of information flowing into the regulators, and the potential for
multiple regulatory players to loosely check one another, without an overarching,
potentially rigid regulatory monolith. One regulator might miss the problem, but—we
hope—another one catches it. But decentralization’s advantages come with two costs in
porosity. And they’re big ones. First off, a corporate crisis could arise in which no
specialized regulator is immediately equipped to head off the problem; and each may
think the task really belongs to another regulator, thought to be better equipped to handle
the current problem".
Eugene F. Fama and Michael C. Jensen (1983), They argue that "the separation of
decision and risk-bearing functions observed in large corporations is common to other
organizations such as large professional partnerships, financial mutuals, and nonprofits.
We contend that separation of decision and risk-bearing functions survives in these
organizations in part because of the benefits of specialization of management and risk
bearing but also because of an effective common approach to controlling the agency
problems caused by separation of decision and risk-bearing functions. In particular, our
hypothesis is that the contract structures of all of these organizations separate the
ratification and monitoring of decisions from initiation and implementation of the
decisions".
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Analysis of firm’s performance using accounting ratios
The benefits of separating ownership and control come from the interaction of three
factors. First, under certain conditions and for certain types of decisions, hierarchical
decision making may be more efficient than market allocation. Second, due to economies
of scale in both production and decision making, optimal firm size can be quite large.
Third, optimal investment strategy requires investors to be able to diversify and pool and
to be able to change their allocations in response to changing market conditions.
Under some conditions, hierarchical decision making may be more efficient than
market transactions. Both hierarchical structures and market structures impose transaction
costs. For some types of transactions, market costs may be particularly high. If so, then
hierarchical decision making may be more efficient.
Earning’s Management
Before diving into what earnings management is, it is important to have a solid
understanding of what we mean when we refer to earnings. Earnings are the profits of a
company. Investors and analysts look to earnings to determine the attractiveness of a
particular stock. Companies with poor earnings prospects will typically have lower share
prices than those with good prospects. Remember that a company's ability to generate
profit in the future plays a very important role in determining a stock's price.
That said, Earnings management is a strategy used by the management of a company to
deliberately manipulate the company's earnings so that the figures match a pre-
determined target. This practice is carried out for the purpose of income smoothing. Thus,
rather than having years of exceptionally good or bad earnings, companies will try to
keep the figures relatively stable by adding and removing cash from reserve accounts.
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Analysis of firm’s performance using accounting ratios
According to Healy and Wahlen (1999), "Earnings Management" occurs
when managers use judgement in financial reportingand in structuring transactions to
alter financial reports to either mislead some stakeholders about the underlying economic
performance of a company or influence contractual outcomes that depend on reported
accounting numbers.
Earnings management usually involves the artificial increase (or decrease)
of revenues, profits, or earnings per share figures through aggressive accounting tactics.
Aggressive earnings management is a form of fraud and differs from reporting error.
Management wishing to show earnings at a certain level or following a certain
pattern seek loopholes in financial reporting standards that allow them to adjust the
numbers as far as is practicable to achieve their desired aim or to satisfy projections by
financial analysts. These adjustments amount to fraudulent financial reporting when they
fall 'outside the bounds of acceptable accounting practice'. Drivers for such behaviour
include market expectations, personal realisation of a bonus, and maintenance of position
within a market sector. In most cases conformance to acceptable accounting practices is a
matter of personal integrity. Aggressive earnings management becomes more probable
when a company is affected by a downturn in business.
Earnings management is seen as a pressing issue in current accounting practice. Part
of the difficulty lies in the accepted recognition that there is no such thing as a single
'right' earnings figure and that it is possible for legitimate business practices to develop
into unacceptable financial reporting.
It is relatively easy for an auditor to detect error, but earnings management can
involve sophisticated fraud that is covert. The requirement for management to assert that
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Analysis of firm’s performance using accounting ratios
the accounts have been prepared properly offers no protection where those managers
have already entered into conscious deceit and fraud. Auditors need to distinguish fraud
from error by identifying the presence of intention.
The main forms of earnings management are (Unsuitable revenue recognition,
Inappropriate accruals and estimates of liabilities, Excessive provisions and generous
reserve accounting and Intentional minor breaches of financial reporting requirements
that aggregate to a material breach).
Evaluating the Earning’s of Corporation
David M. Blitzer, Robert E. Friedman,Howard J. Silverblatt (2001), identified
that there are three general measures of earnings: as reported earnings, operating
earnings, and pro forma earnings. All three measures have uses in the appropriate
settings. These measures, their use, and meaning are summarized here:
• As reported earnings: This is the broadest measure of corporate
performance of the three considered here. As reported earnings are
earnings including all charges except those related to discontinued
operations, the impact of cumulative accounting changes, and
extraordinary items, as defined by GAAP. This is the traditional earnings
measure and has a long history, having been used for the S&P 500 and
company analyses for decades.
• Operating earnings: This measure focuses on the earnings from a
company’s principal operations, with the goal of making the numbers
comparable across different time periods. Operating earnings are usually
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Analysis of firm’s performance using accounting ratios
considered to be as reported earnings with some charges reversed to
exclude corporate or one-time expenses. Despite the lack of any generally
accepted definition, operating earnings are increasingly popular in
corporate reports. The use of this measure seems to come from internal
management controls used when a business unit manager is not
responsible for managing corporatelevel costs.
• Pro forma earnings: Originally, the use of the term pro forma meant a
special analysis of a major change, such as a merger, where adjustments
were made for an “as if” review. In such cases, pro forma measures are
very useful. However, the specific items being considered in an “as if”
review must be clear. In some recent cases, “as if” has come to mean “as if
the company didn’t have to cover proper expenses.” In the most extreme
cases, pro forma is nicknamed EBBS, or “earnings before bad stuff.”
Such abuses not withstanding, pro forma earnings do have a place and
should be used for special analyses of potential changes in a corporation.
In such cases, pro forma earnings are defined for the particular analysis.
1.2 Objectives of the Project Paper
In this project we will estimate the finicial performance for two companies for each
one for 2007 and 2008 after that we will compare the finincial performance between
each other… all that will be by using accounting ratios.
The evaluation of Financial Statements will help us to Internal uses include
Performance evaluation – compensation and comparison between divisions, and
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Analysis of firm’s performance using accounting ratios
Planning for the future – guide in estimating future cash flows. External uses include
Creditors, Suppliers, Customers and Stockholders.
1.3 Organizations of Project Paper
This project paper include five chapters: Chapter one an Introduction, chapter two is
a Literature Review, chapter three is the arithmatic Analysia and its results, chpter
four is Discussion and Conclusions for the results of the calculations and then finally
we have Appendix.
The following figure explaining the organzations of the project paper.
Figure 1: Project Paper Outline
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IntroductionLiterature
ReviewAnalysis
Discussion &Conclusion
Appendix
Analysis of firm’s performance using accounting ratios
CHAPTER 2
LITERATURE REVIEW
2.1 Introduction
Over the past decade, financial institutions have placed a significant amount of
time and resources into developing ways of measuring and improving risk and
return.
Traditional performance indicators however, such as Return on Assets, Return on
Equity etc., focus on an accounting vision of profitability. As a result of this:
measures of risk and performance were often developed independently, involving
little co-ordination between risk and finance also capital management initiatives
negatively impacted business relationships whilst businesses expanded without
due recognition of changing risk profiles on capital requirements. And a financial,
regulatory view was created rather than one aligned to business imperatives.
True shareholder value is realized when earnings on capital invested is greater
than the minimum required by investors to compensate for taking on underlying
risk. Banks therefore strive tomaximize returns within the boundaries of defined
risk limits. Risk adjusted performance measurement offers more advanced
performance indicators using risk measures derived from regulatory & economic
capital which answer questions such as how much capital is needed to support the
bank’s total risk and target credit rating? how much capital is needed to support a
given level of profitability/business mix?
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Analysis of firm’s performance using accounting ratios
2.2 Conceptualisation of Accounting Profits
Accounting profit is the difference between price and the costs of bringing to
market whatever it is that is accounted as an enterprise (whether by harvest,
extraction, manufacture, or purchase) in terms of the component costs of delivered
goods and/or services and any operating or other expenses.
A key difficulty in measuring profit is in defining costs. Pure economic monetary
profits can be zero or negative even incompetitive equilibrium when accounted
monetized costs exceed monetized price.
In the accounting sense of the term, net profit (before tax) is the sales of the firm
less costs such as wages, rent, fuel, raw materials, interest on loans
and depreciation. Costs such as depreciation, amortization, and overhead are
ambiguous. Revenue may also be ambiguous when different products are sold as a
package, or "bundled." Within US business, the preferred term for profit tends to
be the more ambiguous income.
Gross profit is profit before Selling, General and Administrative costs (SG&A),
like depreciation and interest; it is the Sales less direct Cost of Goods (or services)
Sold (COGS), Net profit after tax is after the deduction of either corporate tax (for
a company) or income tax (for an individual).
Operating profit is a measure of a company's earning power from ongoing
operations, equal to earnings before the deduction of interest payments and
income taxes.
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Analysis of firm’s performance using accounting ratios
Weaknesses of accounting ratios is as follow:
Although financial statement analysis is a highly useful tool, it has two
limitations. These two limitations involve the comparability of financial data
between companies and the need to look beyond ratios. Comparison of one
company with another can provide valuable clues about the financial health of an
organization. Unfortunately, differences in accounting methods between
companies sometime makes it difficult to compare the companies' financial data.
For example if one company values its inventories by the LIFO method and
another firm by average cost method, then direct comparisons of financial data
such as inventory valuations are and cost of goods sold between the two firms
may be misleading.
Conservative accounting practices
What is "conservative accounting"? It is the practice of recording and presenting
financial statements based on cautious principles such as "acquisition cost or
market value whichever is lower" (instead of the presently favored "fair value",
frequently based on the subjective overvaluation of assets or undervaluation of
debts) and "recognizing profits only after realizing sales", etc. If "philosophy" is
meant in the professional sense (i.e., not merely as an "attitude"), one comes to the
following conclusion:
A "conservative accounting philosophy" is an ontology and epistemology that
tries to justify conservative accounting by taking into consideration: The volatility
of values (in general, but particularly, of assets, equities, etc.), and from othe hand
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Analysis of firm’s performance using accounting ratios
that these values should be represented in a "prudent" and objective rather than an
"optimistic" and subjective way..
A financial value is not a property of something but a three-way relation
between some (i) person(s), (ii) an object, and (iii) changeable circumstances.
This implies a potential for sudden or unexpected fluctuations in value such that
its representation at one moment of time may no longer correspond to the reality
at another moment. This creates a dilemma. On one side, accounting and financial
statements are supposed to represent "reality", on the other side, this reality is in
constant flux. Hence, neither a "conservative" value nor a "fair" value satisfies the
ontological quest posed by a realist ontology. One solution to this problem would
be to supplement accounting values of the financial statements with some kind of
error estimates (e.g., its standard deviation), or to use a "multiple value approach."
Proposals of this kind have been made in the literature (e.g., in
Mattessich's Accounting and Analytical Methods, 1964: 220-231) but have not
been seriously considered by practitioners. However, as far as share values are
concerned, financial practice often attributes a risk factor to each share price. The
traditional solution to this dilemma is to accept for accounting the
generalprinciple of conservativism (according to which it is preferable to err on
the cautious than optimistic side). This principle has been the pivot of accounting
practice (even of most of its theories) until the last decade of the twentieth century
when empirical and positive accounting theories were instrumental in promoting
"fair values". But some experts may argue that this resulted in occasional
overvaluations in the stock market with billions of dollars in losses to the public.
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Analysis of firm’s performance using accounting ratios
Typical overvaluations as occurred in a series of financial scandals, such as
ENRON, WorldCom, Parmalat, etc. -- and more recently in the "sup-prime
mortgage scandal". However, a conservative accounting philosophy has its own
disadvantages. For example, it can lead to enormous discrepancies between
(unrealistically low) accounting book values and (much higher) share prices in the
market. Thus, neither a philosophy of conservative nor one of aggressive
accounting seems to be desirable. What is needed is a philosophy that, on one
side, emphasizes the fundamental dilemma of accounting representation and, on
the other side, tries to sail safely through the Skylla of conservative and the
Caryptis of aggressive accounting practice by indicating when to use one and
when to use the other.
2.3 Accounting Based Performance Measurement
Tom Farin (1995), In his article the author reviewed two levels of
financial ratios that contribute to the most important measure of an institution’s
profitability, its ROE. By setting standards for the ratios in the tree diagram and
comparing the institution’s performance to these ratios, management teams and
boards can diagnose major reasons for negative changes in their institution’s
profitability. If the reasons for changes in performance are identified early in the
process, corrective action can be initiated and the damage, minimized.
"In a case like Fort Knox Savings and Keep (FKS&K), as performance
improves, management and boards can begin to identify reasons for the
improvement, and begin to determine whether the changes are temporary or
permanent. The analysis showed that improvements in core profitability
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Analysis of firm’s performance using accounting ratios
represented far more than the improvement to FKS&K’s ROA that occurred over
three years. Core profitability improvements were offset somewhat by a reduction
in non-reoccuning income and an increase in taxes.
Its three years increase in core profitability would seem to position FKS&K
for continued ROEs in the 1.4% range. But before drawing this conclusion one
needs to determine if the factors comprising core profitability will remain steady.
It must also be determined whether credit risk or interest rate risk is likely to
interfere with FKS&K’s ability to continue to deliver ROA at the 1.4% level".
Kathleen A. Kaminski, T. Sterling Wetzel, Liming Guan (2004), their study
were about Fraudulent financial reporting which is a matter of grave social and
economic concern. Recent news abounds with corporate fraud scandals (e.g.
Enron, WorldCom, Qwest). The purpose of this study was to explore the fraud
detection capabilities of ratio analysis. It compared a multitude of financial ratios
for matched fraudulent and nonfraudulent firms to see if differences existed. It
examined an extended time period both pre- and post-fraud years. Statistically,
there was not much difference in the ratios of fraud versus nonfraud firms. Those
ratios found significant were not consistent across the time periods. A
discriminant prediction model misclassified fraud firms from 58 percent to 98
percent of the time.
They Found that "The results of this study provide empirical evidence of the
limited ability of ratio analysis to detect fraudulent financial reporting. Such
findings should be useful to both standard setters and auditors in their prescription
and application of ratio analysis for the detection of financial statement fraud".
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Analysis of firm’s performance using accounting ratios
There were several limitations to this study. First, the identified fraud firms
were limited to public firms with discovered fraud that were subject to SEC
enforcement actions. Second, a nonfraud firm might have been misclassified.
Financial statement fraud might have occurred but had not been detected or
subject to SEC investigation. Owing to the low incidence of financial statement
fraud and the need for an adequate sample size, the sample extends over a long
period. Such maturation often results in changing conditions within the sample
period which can also impact the model data and the prediction period. Owing to
sample size limitations, the use of a “hold out” sample to validate the discriminant
model was not feasible. Finally, there does not exist an acceptable theoretical
foundation for the selection of financial ratios for decision making. The ratios
selected for inclusion in this study were based on scattered heterogeneous
empirical evidence and logical inferences of accounts most likely involved in
fraudulent financial reporting. Different results might ensue if different ratios
were selected.
Yu-Jie Wang (2008), he assessed the financial performance of the domestic
airline in Tiwan. Many previous researches concerning the performance of
airlines usually focus on operation. Financial performance, which would influence
the survival of an airline, is often ignored. To evaluate financial performance,
financial ratios obtained form balance sheet, income statement and cash flow must
be partitioned into several clusters and found the representative indicators from
these clusters to be criteria. In his paper, he utilized grey relation analysis to
cluster financial ratios and found representative indicators. Then he applied a
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Analysis of firm’s performance using accounting ratios
fuzzy multi-criteria decision-making (FMCDM) method to evaluate financial
performance of airlines. Finally, an empirical study of financial performance of
three domestic airlines in Taiwan is illustrated.
He concluded that the financial performance of these airlines can easily be
evaluated with the FMCDM method, whether the number of alternatives is large
or not. Besides, comparing one airline with others can identify the competitive
strength and weakness of itself. It is useful for that the airline can realize the
finance competition location on airline market and ready to improve its
competitive advantage for enhancing the finance ability in the future.
Edwin R. Etter, Barbara Lippincott and Jacqueline Reck (2006), Financial
accounting ratios of non-U.S. companies are subject to misinterpretation by U.S.
investors due to differences in accounting principles, institutional practices, and
economic environments. The purpose of this study is to compare selected
financial accounting ratios of companies from seven Latin American countries
with those of a matched sample of U.S. companies, and explain any observed
differences in the ratios based on the above three factors. In general, the results
indicated that the liquidity, activity, and coverage ratios of the Latin American
companies were lower than those of the U.S. companies. The profitability ratios
varied, however, with the profit margin on sales generally higher for the Latin
American companies, the return on assets mixed, and the return on equity ratios
not significantly different between the Latin American and U.S. companies.
Finally they concluded that with the growth of financial markets and businesses in
Latin America there are tremendous investment opportunities for U.S. investors.
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Analysis of firm’s performance using accounting ratios
The results and subsequent discussion in this study suggest that a successful and
comprehensive analysis of Latin American financial accounting ratios can only be
conducted with an understanding of the underlying accounting principles,
institutional practices, and economic environments which influence them.
Issham Ismail (2006), The main purpose of his study was to identify the
relationship between Economic Value Added and the company performance in
Malaysia. It also sought to explain the ability of EVA, compared to traditional
tool, in measuring performance under various economic conditions; pre-economic
crisis, during economic crisis and post-economic crisis period. Single and
multiple panel pool regression, using pooled time-series, cross-sectional, with
common and period specific coefficients with White’s heteroscedasticity-
corrected variances and standard errors were used for data analysis. This study
found that traditional tools particularly EPS is able to correlate and had a
relationship with stock return and this study revealed that EVA also able to
correlate with stock return and it is superior in explaining the variations of the
stock return as compared to the traditional tools under varying economic
conditions.The finding disclosed that a component of EVA was not had a better
relationship with stock return than EVA. While, this study indicates that EVA had
a better relationship with stock return over a longer period of the study. The
finding revealed that neither positive EVA (value creators) nor negative EVA
(value destroyers) had a relationship with stock return. However, the positive
EVA (value creators) had a better relationship with earnings than negative EVA
(value destroyers) and this study indicates that value creators have better earnings
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Analysis of firm’s performance using accounting ratios
multiplier than value destroyers. While the combination of traditional tool and
EVA will not lead to increase the ability in developing relationship with stock
return.
The study concluded that combination of traditional tool and EVA will not
lead to increase ability in developing the relationship with the stock return,
however in some cases the combination had a better relationship with the stock
return but the percentage increase is very nominal. These findings are in line with
finding by Isa and Lo (2004).
2.4 Summary
In this chapter the conceptualization of accounting profits was discussed
which will be as an enterance to the next chapter in which we will
calculate finacial rations of company Muda Holdings BHD. and
Malaysian AE Models Holding BHD. for both years for 2007 and 2008
separetaly.
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Analysis of firm’s performance using accounting ratios
CHAPTER 3
RESULTS OF ANALYSES
3.1 Introduction
This chapter describes the steps taken to analysis the financial performance for
companies Muda Holdings Berhad and Malaysian AE Models Holding Behard
based on accounting ratios.
Ratio-analysis is a concept or technique which is as old as accounting concept.
Financial analysis is a scientific tool. It has assumed important role as a tool for
appraising the real worth of an enterprise, its performance during a period of time
and its pit falls. Financial analysis is a vital apparatus for the interpretation of
financial statements. It also helps to find out any cross-sectional and time series
linkages between various ratios. Unlike in the past when security was considered
to be sufficient consideration for banks and financial institutions to grant loans
and advances, nowadays the entire lending is need-based and the emphasis is on
the financial viability of a proposal and not only on security alone. Further all
business decision contains an element of risk. The risk is more in the case of
decisions relating to credits. Ratio analysis and other quantitative techniques
facilitate assessment of this risk.
Ratio-analysis means the process of computing, determining and presenting the
relationship of related items and groups of items of the financial statements. They
provide in a summarized and concise form of fairly good idea about the financial
position of a unit. They are important tools for financial analysis.
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Analysis of firm’s performance using accounting ratios
Why are ratios are useful?
The primary objective of financial record keeping and analysis is to make
better business decisions. Identifying emerging problems and initiating timely
corrective action, as well as identifying potential opportunities for increased
profit, are some of the obvious benefits of financial analysis. Hopefully, ongoing
analysis will help the farm manager identify past mistakes and learn from them by
not repeating those same mistakes again.
A word of caution: the need for accurate record keeping is critical because
decisions are no better than the information they are based on. Financial measures
derived from incomplete or inaccurate information are typically misleading and
can lead to bad business decisions.
Several types of analysis are appropriate. At a minimum, farmers should
evaluate their performance over time. Comparing financial documents from past
years is useful because they reveal trends or patterns. Comparing current
statements to past statements reveal what has been happening to the farm
business' financial situation. The balance sheets show changes in owner's equity
and risk exposure (whether they have been increasing, decreasing or remaining
the same); the income statements reveal trends in profit; and, the cash flow
statements can help the farmer understand the timing of cash availability and
needs.
The information from these three financial statements also can be used to
prepare additional financial measures that reveal the strengths and weaknesses of
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Analysis of firm’s performance using accounting ratios
the farm. These additional financial measures can be used to make several
comparisons.
First, the current performance of the farm can be compared to its historical
and projected or budgeted performance. This comparison helps farmers
understand how and why the actual outcome of the business differs from what
they had expected.
Second, the farm's performance can be compared to that of its peers, or
similar farm businesses, to determine the relative status. A farm’s performance
that is below the average indicates that additional profits are possible because
others (peers) are proving it is possible to be more productive. The key is to
identify why and take appropriate management action. These comparisons are
very useful but sometimes difficult to do because of the personal nature of the
information. However, farm financial information that can be used to compare
farm businesses is available through Extension reports and farm record-keeping
organizations.
A third comparison can be made between the performance of the
farm business and non-farm alternatives. This last comparison
identifies opportunities, if any, that are lost or relinquished because
one has invested their time and capital in owning and operating a
farm.
However most users of financial statements are concerned about what will
happen in the future. Stockholders are concerned with future earnings and
dividends. Creditors are concerned with the company's future ability to repay its
debts. Managers are concerned with the company's ability to finance future
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Analysis of firm’s performance using accounting ratios
expansion. Managers must pay attention to the financial ratios used by external
inventories to evaluate the company's investment potential and creditworthiness.
3.2 Data Source and Profile
Data were obtained from the annual reports in the websites for each company
(Muda Holdings Berhad and Malaysian AE Models Holdings Behard) after being
chosen through the main market in the official web site for Bursa Malaysia
(http://www.bursamalaysia.com/website/bm/). we chose the annual report for each
company for (2007&2008) as a secondary data source.
Muda Holdings Berhad
Company background
It's considered pioneered the paper milling and packaging in Malaysia with it's
first paper mill in Tasek, Penang in 1964 and it's first corrugator plant in Petaling
Jaya in 1971. Today, it's own one of the largest integrated paper mill and
corrugated plants in Malaysia.
Except for one corrugated box plant in Qingyuan, China, it's manufacturing
activities are mostly centred in Peninsular Malaysia where it has two factories for
paper milling, four factories for making corrugated boxes, a factory for multi-wall
paper bags and a factory for PE laminated paper, paper bags and paper-based
stationery. It's plants have been awarded the ISO 9001, OHSAS 18001, and ISO
14001 accreditation.
Core Business
It's manufacture high grade industrial brown paper, paper boards, corrugated
boxes, multi-wall paper bags, PE laminated paper for industrial and food
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Analysis of firm’s performance using accounting ratios
application, flat, satchel and self-opening-style paper bags for food and non-food
retail outlets, paper pallets and honeycomb for packaging and furniture industries,
paper-based stationery, trading in imported paper and paper related products for
the domestic and export market.
Malaysian AE Models Holding Behard
Company background
Founded by the CEO/Group MD Datuk Dr. Jimmy KS Lim and his business
mates, Malaysian AE Models Holdings Berhad (MAE) is an established
Malaysian conglomerate listed on the Main Board of Bursa Malaysia (Stockcode:
MAEMODE 7075).
Back to 1979, MAE was established in Singapore to produce high quality
engineering design scale models such as architecture, infrastructure and ship
models to local clients. In mid 1980s, the company started the trading business in
engineering and power transmission products in Malaysia such as motors,
automation parts, sensors, semiconductors and components. Subsequently MAE
ventured into material handling business and formed a strategic partnership with
Maruyasu Kikai - a material handling specialist from Japan. From there on, the
company further developed the technology and started penetrating into overseas
market via setup of subsidiary companies. Today, MAE is well equipped with the
technology and resources to provide turnkey material handling solution and has
established a global network to serve its clients’ needs in both domestic and
overseas markets, including Europe, USA, Middle East and Asia regions, with
total over 700 employees.
45
Analysis of firm’s performance using accounting ratios
Core Business
It's specialize in system design, manufacture and system integration of
automated material handling solution to a large spectrum of industries including
coal and mineral, food and beverage processing, automotive, airport, electrical
and electronic, pulp and paper, postal and courier services, wholesales and
distribution, retail and general merchandise.
MAE’s principal businesses consist of: Unit Material Handling Solution
(UHS), Logistic Sortation Warehousing Solution (LSW), Bulk Material
Handling Solution (BHS), Contract Manufacturing Service (CMS) and other
SBUs: Packaging Machines, Pipe and Joint System, Engineering Design
Scale Models, and Trading
Business Philosophy
It's philosophy is to enhance living standard and working knowledge of the
employees, fulfill social responsibility to the society, create continuous learning
culture and to minimize cost and maximize efficiency
3.3. Arithmatic analysis
A. Financial Ratios:
We will use the accounting Ratios in fig (2) to analyse the fiancial performance of
the companies.
45
Analysis of firm’s performance using accounting ratios
Fig (2) Accounting Ratios
Profitability ratios:
Return on capital employed ratio
The best way of assessing profitability is to calculate a ratio known as the return on
capital employed (ROCE) ratio. It can be expressed quite simply as:
Profit–––––––100Capital
Gross profit ratio
The gross profit ratio enables us to judge how successful the entity has been at trading. It
is calculated as follows:
The gross profit ratio measures how much profit the entity has earned in relation to
the amount of sales that it has made. The definition of gross profit does not usually cause
45
Analysis of firm’s performance using accounting ratios
any problems. Most entities adopt the definition which we have used in this book, namely
sales less the cost of goods sold, and so meaningful comparisons can usually be made
between different entities.
Mark-up ratio
The gross profit ratio complements another main trading ratio: for convenience, we will
refer to it as the mark-up ratio. The mark-up ratio is calculated as follows:
Mark-up ratios measure the amount of profit added to the cost of goods sold. The
cost of goods sold plus profit equals the sales revenue. The mark-up may be reduced to
stimulate extra sales activity, but this will have the effect of reducing the gross profit.
However, if extra goods are sold, there may be a greater volume of sales and this will
help to compensate for the reduction in the mark up on each unit.
Net profit ratio
Owners sometimes like to compare their net profit with the sales revenue. This can be
expressed in the form of the net profit ratio, which is calculated as follows:
It is difficult to compare fairly the net profit ratio for different entities. Individual
operating and financing arrangements vary so much that entities are bound to have
different levels of expenditure, no matter how efficient one entity is compared with
another. Thus it may only be realistic to use the net profit ratio in making internal
45
Analysis of firm’s performance using accounting ratios
comparisons. Over a period of time, a pattern may emerge, and it might then be possible
to establish a trend.
Liquidity ratios
Liquidity ratios measure the extent to which assets can be quickly turned into cash.
In other words, they try to assess how much cash the entity has available in the short term
(this usually means within the next twelve months). For example, it is easy to extract the
total amount of trade debtors and trade creditors from the balance sheet, but are they too
high? We cannot really tell until we put them into context.We can do this by calculating
two liquidity ratios known as the current assets ratio and the acid test ratio. Current assets
ratio. The current assets ratio is calculated as follows:
It is usually expressed as a factor, e.g. 3 to 1, or 3 : 1, although sometimes it
expressed as a percentage (300% in our example, i.e. 3–1 × 100).
In most circumstances we can expect that current assets will be in excess of current
liabilities. The current assets ratio will then be at least 1 : 1. If this is not the case, the
entity may not have sufficient liquid resources (i.e. current assets that can be quickly
turned into cash) available to meet its immediate financial commitments. Some textbooks
argue that the current assets ratio must be at least 2 : 1, but there is no evidence to suggest
that this is a necessary relationship. Use it, therefore, only as a guide.
Acid test ratio
It may not be easy to dispose of stocks in the short term as they cannot always be quickly
turned into cash. In any case, the entity would then be depriving itself of those very
45
Analysis of firm’s performance using accounting ratios
assets that enable it to make a trading profit. It seems sensible, therefore, to see what
would happen to the current ratio if stocks were not included in the definition of current
assets. This ratio is called the acid test (or quick) ratio. It is calculated as follows:
Like the current ratio, the acid test ratio is usually expressed as a factor (or occasionally
as a percentage). It is probably a better measure of the entity’s immediate liquidity
position than the current assets ratio because it may be difficult to dispose of the stocks in
the short term. Do not assume, however, that if current assets less stocks are less than
current liabilities, the entity’s cash position is vulnerable. As we explained above, some
of the current liabilities may not be due for payment for some months. Some textbooks
suggest that the acid test ratio must be at least 1 : 1, but again there is no evidence to
support this assertion, so once more use it only as a guide.
Efficiency ratios:
Traditional accounting statements do not tell us how efficiently an entity has been
managed, that is, how well its resources have been looked after. Profit may, to some
extent, be used as a measure of efficiency but, as we have explained in earlier chapters,
accounting profit is subject to a great many arbitrary adjustments, and it is not entirely
reliable. What we need to do is to put whatever evidence we have into context, compare it
with earlier accounting periods and, if possible, with other similar entities.
There are very many different types of ratios that we can use to measure the efficiency
of an entity, but in this book we will cover only the more common ones.
Stock turnover ratio The stock turnover ratio may be calculated as follows:
45
Analysis of firm’s performance using accounting ratios
A simple average is usually used to calculate the average stock, i.e. (Opening stock +
closing stock).
The stock turnover ratio is normally expressed as a number (e.g. 5 or 10 times) and not as
apercentage.
Fixed assets turnover ratio
Another important area to examine, from the point of view of efficiency, relates to fixed
assets. Fixed assets (such as plant and machinery) enable the business to function more
efficiently, and so a high level of fixed assets ought to generate more sales.We can check
this by calculating a ratio known as the fixed asset turnover ratio. This may be done as
follows:
The fixed assets turnover ratio may also be expressed as a percentage. The more times
that the fixed assets are covered by the sales revenue, the greater the recovery of the
investment in fixed assets.
Trade debtor collection period ratio
Investing in fixed assets is all very well, but there is not much point in generating extra
sales if the customers do not pay for them. Customers might be encouraged to buy more
by a combination of lower selling prices and generous credit terms. If the debtors are
slow at paying, the entity might find that it has run into cash flow problems. Thus it is
important for it to watch the trade debtor position very carefully.We can check how
45
Analysis of firm’s performance using accounting ratios
successful it has been by calculating the trade debtor collection period. The ratio may be
calculated as follows:
The average trade debtors are usually calculated by using a simple average [i.e g
(opening trade debtors + closing trade debtors)]. The closing trade debtors figure is
sometimes substituted for average trade debtors. This is acceptable, provided that the
figure is representative of the overall period.
Trade creditor payment period
A similar ratio can be calculated for the trade creditor payment period. The formula is
as follows:
The average trade creditors amount would again be a simple average of the opening and
closing balances, although it is quite common to use the closing trade creditors. The
trade creditors must be related to credit purchases.
Investment ratios:
The various ratios examined in the previous sections are probably of interest to all users
of accounts, such as creditors, employees and managers, as well as to shareholders. There
are some other ratios that are primarily (although not exclusively) of interest to
prospective investors. These ratios are known as investment ratios.
The first investment ratio that we might find useful is the dividend yield. It usually
applies to ordinary shareholders, and it may be calculated as follows:
45
Analysis of firm’s performance using accounting ratios
The dividend yield measures the rate of return than an investor gets by comparing the
cost of his shares with the dividend receivable (or paid).
Dividend cover
Another useful investment ratio is called dividend cover. It is calculated as follows:
This ratio shows the number of times that the ordinary dividend could be paid out of
current earnings. The dividend is usually described as being x times covered by the
earnings. Thus, if the dividend is covered twice, the company would be paying out half of
its earnings as an ordinary dividend.
Earnings per share
Another important investment ratio is that known as earnings per share (EPS). This ratio
enables us to put the profit into context, and to avoid looking at it in simple absolute
terms. It is usually looked at from the ordinary shareholder’s point of view. we may use
the following formula to calculate what is called the basic earnings per share.
The above definition uses the term ‘non-equity shares’. Preference shares are an example
of such shares.
Capital gearing ratio
45
Analysis of firm’s performance using accounting ratios
The last ratio that we are going to consider is the capital gearing ratio. Companies are
financed out of a mixture of share capital, retained profits and loans. Loans may be long-
term (such as debentures), or short-term (such as credit given by trade creditors). In
addition, the company may have set aside all sorts of provisions (e.g. for taxation) which
it expects to meet sometime in the future. These may also be regarded as a type of loan.
From an ordinary shareholder’s point of view, even preference share capital can be
classed as a loan, because the preference shareholders may have priority over ordinary
shareholders both in respect of dividends and upon liquidation. Therefore, if a company
finances itself from a high level of loans, there is obviously a higher risk in investing in
it. This arises for two main reasons:
1. The higher the loans, the more interest that the company will have to pay, and that
may affect the company’s ability to pay an ordinary dividend.
2. If the company cannot find the cash to repay its loans, the ordinary shareholders may
not get any money back if the company goes into liquidation.
As far as item 1 is concerned, there will be no particular problem arising if profits are
increasing, because the interest on its loans will become a smaller and smaller proportion
of the total profit. But it could become a problem if profits are falling and the interest is
having to be paid out of a continuing decline in profit. It might then be difficult
to pay out any ordinary dividend. There are many different ways of calculating capital
gearing. The most common methods is as follows:
45
Analysis of firm’s performance using accounting ratios
B. Calculations
Below the calculations for the Ratios analysis for the companies (Muda Holdings
BHD. and Malaysian AE Models Holding BHD.) Performance based on accounting
ratios. Depending on the explained formuals in this Chapter.
Type of Ratios
FunctionMuda Holdings
Berhad
MALAYSIAN AE MODELS
HOLDINGS BERHAD
2007 2008 2007 2008
Ratio AnalysisCurrent Asset ratio 0.92 0.93 1.38 1.32
Acid test Ratio 0.58 0.53 1.3 1.26
Profitability ratios
ROCEProfit before taxation 5.4% 13.1% 13.4% 14.3%
Net profit 4 % 11% 10.1% 9.8%
Gross Profit ratio (GP) 16.9% 19.9% 23.3% 21.5%
Mark-up Ratio 20.34% 24.8% 30.4% 27.3%
Net profit Ratio 3.3% 7.8% 6.06% 6.48%
Effeciency Ratios
Stock Turnover Ratio 5.2 4.7 16.4 23.1
Fixed Asset Turnover ratio 1.6 1.8 4.1 3.5
Trade Debtor Collection Period
78 65 241 226
Trade Creditor payment Period 15 10 41 27
Investment Trend Ratios
Dividend Yield (return) 4.29% 4.03% 2.18% 2.56%
Dividend Cover Ratio 2.98 7.19 16.4 12.66
Earnings Per Share 0.158 0.506 0.171 0.19
Price Earning (PE ) Ratio 3.7 12.3 5.3 5.14
Capital Gearing Ratio 0.1 0.05 0.14 0.15
3.4 Summary
45
Analysis of firm’s performance using accounting ratios
After being familier with how to standardize financial statements for comparison
purposes and how to compute important financial ratios, and after we got this results
from the calculations based on the mentioned formulas, they are ready now to interpretate
in the next chapter to get idea about the health and performance for those companies.
45
Analysis of firm’s performance using accounting ratios
CHAPTER 4
DISCUSSION AND CONCLUSION
4.1 Introduction
In this chapter we will interpretate the accounting results in Ch.3. The term
‘interpretation of accounts’ is a detailed explanation of the financial performance of an
entity incorporating the information contained within a set of financial accounts.
The amount of information contained in a set of internal accounts is considerable and,
as we have discovered, even published accounts can be extremely detailed. Nevertheless,
such information is not adequate or sufficient to be able to get a realistic assessment of an
entity’s past or future performance. There are three main reasons why this is so. We
summarize them below.
First reason is Absolute. The information contained in financial accounts is limited to
quantitative matters that can be easily translated into financial terms. The data are
presented in absolute amounts such as thousands or millions of Ringit. The numbers are
difficult to comprehend if they are very large.
Second reason is Contextual. The absolute amounts presented in financial accounts do
not mean very much in isolation. Although comparative figures for the preceding year
may be of some help, greater and wider comparisons need to be made before the figures
begin to mean anything.
Third reason is Structural. Financial accounts are prepared on the basis of a series of
accounting rules. They contain a restricted amount of information and some arbitrary
assessments have to be made about the treatment of certain matters, e.g. bad debts,
depreciation and stock valuation. They are usually prepared for a past period of time,
45
Analysis of firm’s performance using accounting ratios
limited to two accounting periods (at best), and they do not take into account the impact
of inflation (in some countries this can be significant, even over a one-year period).
4.2 Discussion of the results
Liquidity:
The most Critical Ratios are Liquidity ratios , if a company (or an entity) is not
likely to have sufficient cash to finance day-to-day needs it cannot continue in a
business for very long no matter how profitable it could turn out to be in the long
run.
Figfigure 3: Comparison for Cash amounts in bank
Fig (3)comparision for cash in bank
From Fig (3) we see how Muda had increased it's cash at the bank (63.5%), In
absolute amount it’s a large increase in the cash flow. In other hand we see MEA
had a decrease of (20.3%) from its cash on 2007, but still less than twofold the
cash for MUDA because of it's core business which need high liquidity.
45
Muda Malaysian AE Muda Malaysian AE
Bank
RM000
40,405 20.3% 32,212
17,200
63.5% 10,520
Financial year
Val
ue
Analysis of firm’s performance using accounting ratios
With relating the cash amouts to the total current assets and total current
liabilities, we will get as shown in fig (4).
MAE still doing better in spite of the decreasing in cash amounts on 2008.
Figure 4: Comparison for Cash flow relted to Current Assets
and Current Liabilities
From fig(5) we can see how Current Assets Ratios relates without and with
Inventories.
Normaly the limits is (0.5 - 2), We see that MAE has more stable performance in
spite of getting decrease on 2008.
45
Cash flow relted to Current Assets and Current Liabilities
Muda Malaysian AECash flow relted to Current Assets and Current Liabilities
Muda Malaysian AE
5.5% 5.1%
3.5% 3.3%
17%
12.7% 12.3%
9.6%
Financial year
Per
cen
tage
(%
)
Analysis of firm’s performance using accounting ratios
Figure 5: Comparison for Current Assets Ratios
Figure 6: Comparison for Current Assets with cash generated from operations
45
Comparison of Liquidity Ratios Muda Malaysian AE
Comparison of Liquidity Ratios Muda Malaysian AE
1.38 1.32 1.3 1.26
0.93 0.92
0.58 0.53
Financial year
Val
ue
Comparision of FixedAssets and Cash generated from Operations
Muda Malaysian AE
Comparision of FixedAssets and Cash generated from Operations
Muda Malaysian AERM000
445,879 444,175
127,467
93,035
36,575
91
103,280 93,654
Financial year
Val
ue
Analysis of firm’s performance using accounting ratios
For the fig(6) we summerized a comparision between fixed assets (Property,
plant and equipments) with the cash generated from operations.
We can see that both have already ingaged in a major capital investment project
which is effecting on its low liquidity. We can see also that Muda has a small
investment comparing to that one for MAE. Same time it has more than three fold
from MAE for the current assets which mean more stable on the long term.
The overall verdict is that the companies appear not to have any immediate
liquidity problems.
Profitability:
According to the available data in the annual report, we can see from
consolidated income statement that both companies have increased in (The
Figure 7: Comparison for Profit's amounts
45
Comparison on Profits' amounts Muda Malaysian AE
Comparison on Profits' amounts Muda Malaysian AE
43,623
36,388
28,972
22,882 19,364 16,421
RM000
78,434
61,298
41,670
22,898
5,699 2,586
Financial Year
Val
ue
Analysis of firm’s performance using accounting ratios
profit attributable to equity shareholders, The profit from the operations and
The profit on ordinary activities) as shown in the fig (7).
They are all increase and in absolute terms they are very large amounts.
By examining the profitability ratios we calculated (as shown in fig(8) below),
ROCE (in terms of net profit befors tax and interest, Net profit after tax) are taken
into account as a proportion of what the shareholders had invested in the business
and the results for Muda on 2007 being not good
Figure 8: Comparison for Profitablity Ratios
as a reutrn, but the results of 2008 is being better as a return comparing with
that return from investing in a bank or a building society.
For MAE was almost steady state. In broad terms the company still in
approximate stable level. It's being acceptable as a return comparing with that
return from investing in a bank or a building society.
45
Comparison of Profitability Ratios Muda Malaysian AE
Comparison of Profitability Ratios Muda Malaysian AE
Financial year
Per
cen
tage
(%
)
24.8%
19.9% 20.34%
16.9%
11%
7.8%
4% 3.3%
30.4%
27.3%
23.3% 21.5%
9.8% 10.1%
6.5% 6.06%
Analysis of firm’s performance using accounting ratios
The gross profit also Mark up, Muda company sells the product with a price (17-
20%) more than it takes. The Net profit is being between (3.3%) on 2007 and
(7.8%) on 2008. In other side we see MAE sells the product with a price (17-20%)
more than it takes. The Net profit is being between (6%) on 2007 and (6.5%) on
2008, which is almost stable.
The overall verdict both companies appears to be in stable and good profitability
performance on 2008.
Effeciency:
We must treat the stock turnover ratios that we have calculated with some
caution because we think that the cost of sales includes production costs and so
Figure 9: Comparison of Effeciency Ratios
45
Comparison of effeciency Ratios
Muda Malaysian AE
Comparison of effeciency Ratios
Muda Malaysian AE
Financial year
Val
ue
4.7 5.2
1.8 1.6
23.1
16.4
3.5 4.1
Analysis of firm’s performance using accounting ratios
we do not have a separate figure of the purchases. The stock turnover appears to
have gone[down for both companies as shown in fig(9).
The performance for the trade debtor collection period, and tade creditor
payment goes down for both companies on 2008. For tade creditor going down less
the normal limits that put from both companies, and in Muda case it's far form the
lowest limit, which means that the suppliers are more serious with this company
and has less trust so they shorted the payment period to (10)days, This is a very
short period. However, the purchases probably include production costs. If these
costs were taken out of purchases we would have a more realistic result for the
trade creditor payment period. In other side we see MAE has problem with it's
debtors, which represent risk on the company. The overall verdict seems to do
better effeciency on 2008 but still need to be more efficient.
Figure 5: Comparison of Debt Ratios
Figure 10: Comparison of Debt Ratios
45
Financial year
Val
ue
Financial year
Val
ue
Comparison of Debt Ratios
Muda Malaysian AE Normal margins for trade credit terms granted for customers. Normal margins for trade credit terms granted by suppliers.
Comparison of Debt Ratios
Muda Malaysian AE Normal margins for trade credit terms granted for customers. Normal margins for trade credit terms granted by suppliers.
90
60
30
180
78
65 41 27 10 15
241 226
Analysis of firm’s performance using accounting ratios
Investment:
The Investment Ratios analysis are summerized in Fig(11) & (12) to show the
performance for both companies.
From the fig (11) we can see how the shareholders for Muda Co. will be sad to
get paid a small rate of their dividends, same time we see that earning per share
goes up sharply on 2008, which is very good indicatir, Clearly, the company has
had a policy for some time of retaining most of its earnings and of only paying a
small proportion of them in dividends. There could, therefore, be pressure from the
shareholders to increase the level of dividends paid out but obviously the impact on
cash flow would have to be considered very seriously.
Figure 11: Comparison of Investment Ratios
45
Comparison of Investment Ratios
Muda Malaysian AE
Comparison of Investment Ratios
Muda Malaysian AE
Financial year
Val
ue
50.6
15.8
12.3
7.19
2.98 3.7
19 16.4 19
12.66
5.14 5.3
Dividend Yield (return)4.03
4.29
2.18
2.56
5
4
3
2
1
Analysis of firm’s performance using accounting ratios
In other side we see the share holders for MAE got less paid than 2007 and that
related for the need for money for the investment of the company (as expalined in
cash to fixed asset reatio).
For Gearing, as it's being clear from the chart that Muda company more safe, in
other Side MAE has increased on 2008 which mean the financial risk will
increase, and therefore the cost of capital of the firm will also increase.
The investment indicators reflect a good performance during the year
Figure 12: Comparison of Gearing Ratios
Limitations of This Project Paper
Although this study considered two years of data (2007&2008), the time period of
analysis is still relatively short and only involeves years during the economic
boom in the region.
45
5.3 5.14
0.1
0.05
Muda Malaysian AE Muda Malaysian AE
Financial year
Val
ue
0.14 0.15
0.1
0.05
Analysis of firm’s performance using accounting ratios
Year-end values may not be representative. Certain account balances that are used
to calculate ratios may increase or decrease at the end of the accounting period
because of seasonal factors. Such changes may distort the value of the ratio.
Average values should be used when they are available.
4.3 Conculusions:
The study examined the financial performance for two Malaysian companies
from the main market list in Bursa Malaysia website which are Muda Holdings
Bhd and Malaysian AE Models Holding Bhd.
The evaluating was done by using the Financial Accounting Ratios (Liquidity
Ratios, Profitabbility Ratios, Effeciency Ratios and Investment ratios).
In general it was found that Malaysian AE Models Holding Bhd had more
liquidity inspite of it's ingaged in a major capital investment more than RM 34
Milion which effected on it's liquidity to be less than in 2007, also it has
relatively higher effeciency (in spite of some long debtors) reach five times that
for Muda in time they had an appoximate stable level performance for the
Profitability and finally Muda had better performance for the Investment.
As a result the MAE has more apportinties for going concern.
45
Analysis of firm’s performance using accounting ratios
Acknowledgments
The researcher gratefully acknowledge and would like to thank Dr. Wong for her big
support and help to do this simple project. Also the researcher gratefully acknowledge
for the logistic support from his family in Iraq.
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Analysis of firm’s performance using accounting ratios
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Analysis of firm’s performance using accounting ratios
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Analysis of firm’s performance using accounting ratios
Appendix
The reference data for Muda Holdings Berhad which already got from the annual report
1. Balance sheet:
45
Analysis of firm’s performance using accounting ratios
45
Analysis of firm’s performance using accounting ratios
2. Income Statements
45
Analysis of firm’s performance using accounting ratios
3. Cash Flow statements:
45
Analysis of firm’s performance using accounting ratios
45
Analysis of firm’s performance using accounting ratios
The reference data for Malaysian AE Holding Bhd. which already got from the annual
report
1. Income Statements
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Analysis of firm’s performance using accounting ratios
2. Balance Sheets
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Analysis of firm’s performance using accounting ratios
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Analysis of firm’s performance using accounting ratios
3. Cash flow Statements:
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Analysis of firm’s performance using accounting ratios
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