Ratio analysis is an analytical technique of financial analysis (Chang, 2000) and is used to measure measuring complex financial relationship (Altman, 1983) such as prediction of corporate bankruptcy (Huang et al., 2008), financial distress (Altman, 1983), analysis of profitablity, liquidity and competitor, and profit estimation (Thomas et al., 1996), bond rating, commercial credit scoring, auditing,security analysis (Martekainen et al., 1994; Martekainen et al., 1995) and fraud detection (Zabihollah Rezaee, 2005).
Statament of Intermediate Balances (SIB) is the new tool that introduced by Baker et al (2005) that share the function of conventional ratio analysis. It measures the performance of company in term of profit from core and non-core business activity, operation cost, etc. (Baker et al., 2005; Liedtka,2002).
However, the research on SIB is only applied on airline industry in Europe and China(Baker et al., 2005).
As such, my research will apply the new SIB tools in Malaysia and compare the result with conventional ratio analysis to determine the effectiveness of the tools.
Research Question
1. What is the impact of SIB on financial performance ralatives to conventional ratio analysis?
Research Objective
1. To compare the result of analysis between SIB and conventional financial ratio analysis.
2. To learn the application of SIB in fiancial evaluation.
Literature Review (Gap Filled)
Financial statement represents the main part of an annual report. It is included major parts whih are Consolidated Income Statement , Consolidated Balance Sheet, Consolidated Statement of Cash Flows and Consolidated Statements of Stockholders' Equity (Matan Feldman and Arkady Libman, 2007).
Financial statement reports on the managerial performance and provides information on managerial success or failure and most important is it is able to provide the necessary information for foreseen difficulties (Chang, 2000) and in other words, it allows analysis on company's financial performance and (Matan Feldman and Arkady Libman, 2007). Users will perform financial statement analysis to identifiy aspect of financial statement to judge the firm value and provide relevant information for investment decisions (Jane et.al, 1989). In additions, Jane et.al (1989) explains that intrinsic value of one company is able to discoverd from financial statement and it serve as benchmark for evaluting stock price, either overpriced or underpriced. Furthermore, analysis on financial statement able to detect values that not usually reflect in stock price. For example, Erkki (2005) using financial statment method to access the potential of Nokia by evaluting thier expenditure growth rate, future earning and thier strategic phase.
Ratio analysis is an analytical technique of financial analysis (Chang, 2000). It is being used as simple summary in measuring complex financial relationship (Altman, 1983) such as prediction of corporate bankruptcy (Huang, 2008), financial distress (Altman, 1983), analysis of profitablity, liquidity analysis and competitor evaluation, and profit estimation (Thomas, 1996). On top of that, ratio analysis also can be used for bond rating, commercial credit scoring, auditing, security analysis (Martekainen, 1994; Martekainen, 1995) and fraud detection (Zabihollah Rezaee, 2005). External users like financial analysts, investors, creditors or even the business owners are depending on the financial analysis result to make on-going decisions that bring benefits to them (Gallizo etal., 2003).
The ratios selected and the use of the resulting information depends on the needs of the users. Users may have different objectives and thus they need diverse information (Mishekary et al., 2005). For instance, the bank efficiency is measured by return on equity (ROE), return on total assets (ROA), the difference of interest bearing elements of assets and liabilities, profit/loss per employee, the efficiency ratio and the net interest margin ratio (George et al., 2004).
Besides the conventional financial ratio analysis, there has been 1 analysis tool named Statement of Intermediate Balances (SIB) that able to perform a comparative financial statement analysis (Baker et al., 2005). SIB shared the same function as ratio analysis where it evaluate company financial strength (Feng et al., 2000).According to Baker et al. (2005) and Feng et al.(2000), SIB analyzing one's company in terms of Commercial Margin, Total 'production' for the fiscal period, Value Added, EBITDA (Gross Operating income), Operating income, Operating net income/loss before taxes, Unusual Income/loss and Net Income/loss after tax available to common shareholders.
Benefits of using SIB are it allowed users to compare the company financial position over the period and eliminated the problem of unequal length. It is due to the intermediate balances can be shown as monetary term or percentage of variation (useful for trend analysis). Besides that, SIB analyses enable the analyst to identify the sub-elements in income statement. SIB is able to 'cut' the income statement into meaningful blocks of data for users to interpret firm performance. In spite of that, it also eliminates the problem of comparing financial statement that differs in currency used. (Baker et al., 2005; Liedtka,2002).
SIB tool has been adopted by Baker et al. (2005) in evaluating airline industry of Europe and China and suggested that this tools should also be applied in others industry to test the effectiveness.
As such, my research will be applying the SIB tools among public listed company in industrial product industry Malaysia and compare the results with the conventional ratio analysis. Industrial products industry is chosen based on suggestion by Baker et al. (2005).
Sample Frame
Sample frames are the public listed company in Malaysia.
Data Collection Method
Consolidated financial statement are obtained from Bursa Malaysia or corporate website.
Sampling Strategy
From the pool of public listed company in Malaysia, only companies that fall into Industrial Product Industry choosen. There total of 255 companies in that category. Next, only company that have at least 5years complete annual report listed out. Total of 144 companies being filtered out. Simple random sampling technique is applied to choose 100 companies as samples. When performing simple random sampling technique, the name of 144 company is written on paper and put into busket ans shake well. Only 100 papers will be pull out and it represents the 100 samples.
Analysis Method
Result of SIB and conventional ratio analysis is compared and interpreted to determine the effectivness.
Role of Theory
For this research, the role of theory will be theory generating. Theory being generated when we know the result of SIB after compared to convention ratio analysis. The result from SIB tools on financial performance of one's company may or may not be the same with the result obtain from conventional ratio analysis.
Limitation
SIB tools only can be applied on financial statement that prepared by 'nature'. SIB is not applicable for those financial statement that prepared by 'function'. According to Baker et al. (2005), it is very difficult to convert financial statement that prepared by 'function' to by 'nature'. Furthermore, non-financial information are not considered in this tools and it may affect the results as well.
Suggestion for future study
For future study, the annual report should cover for a longer period, said 10years . Next, the research should perform on others industry such as constructHYPERLINK "http://biz.thestar.com.my/marketwatch/main.asp?clp=2"ion, consumer, finance, hotels, , mining, plantation, properties ,REITS and technology industry.
Contribution Expected
The main contribution expected is SIB is able to provide an alternatives financial statement analysis tools to all the internal and external users and increase the accuracy of financial evaluation. Internal users will have a additional way to evaluate their company financial position and the external users will adopt the new tools to make a wiser investment decision.
