Financial analysis is one of the most common ways of analyzing financial data is to calculate ratios from the data to compare against those of other companies or against the company's own historical performance. For example, return on assets is a common ratio used to determine how efficient a company is at using its assets and as a measure of profitability. This ratio could be calculated for several similar companies and compared as part of a larger analysis.
4.2 Analysis of Balance Sheet
4.2.1 Asset Structure
Figure 4.2.1 Asset Structure of Kuala Lumpur Kepong Berhad
The graph above shows the assets structure for Kuala Lumpur Kepong Berhad (KLK Berhad) for the last five years, 2006 to 2010. Non-current asset for KLK Berhad grew constantly every year with over RM 3 billion in the year 2006 and rose to RM 4 billion the next year of 2007. The assets grew constantly for the last three years of 2008, 2009 and finally in the 2010 with over estimated value of RM 5 billion in its non-current assets. It is as expected out of KLK Berhad as the company hold vast numbers asset such as property, plant and equipment, biological assets and many more.
The current assets for KLK Berhad also show constant increase in its assets for the last five years. In the year 2006, the current assets value at over RM1 billion and rose over RM 2 billion in 2007. In the year 2008, the current assets rose to a further RM 3 billion before decline slightly in 2009 and later increases in the year 2010.
4.2.2 Financial Structure
Figure 4.2.2. Financial Structure of Kuala Lumpur Kepong Berhad
Based in the graph above, the financial structure consists of long term lialibilities, current liabilities and shareholder equity. Based on the chart given, the long term liabilities for Kuala Lumpur Kepong Berhad increase from year 2006 to 2010. It is because the company has to borrow from the other institution or bank for a long period.
In current liabilities,Kuala Lumpur Berhad the same pattern of movement from 2006 to 2008 when the company keep on increasing and declining from 2008 to 2009,and back to increase until 2010. The fluctuated pattern in term of current lialibilities are happen due to the different level of tax in each year.
The shareholder equity also shows the same pattern between Kuala Lumpur Berhad as it increases from year 2006 to 2010. These may happen because the company are getting stronger in the industry and getting more shareholder from year to year.
4.3 Analysis of Profit and Loss Statement
4.3.1 Interest Obligation
Figure 4.3.1 Interest Obligation of Kuala Lumpur Kepong Berhad
Refer to the graph above, Kuala Lumpur Kepong Berhad (KLK) show that interest on that company gradually increasing from year 2006 until year 2009. It also indicates the company had increase in the amount of borrowing from financial institutions. However, in the year 2010 the company interest is much lower as to compare with the previous year due to the fact that the company may have lower the amount of borrowing or pay its debt.
4.3.2 Dividend Distribution
Figure 4.3.2 Dividend Distribution of Kuala Lumpur Kepong Berhad
The graph above depicts the dividend distribution of Kuala Lumpur Kepong Berhadfrom period of 2006 to 2010. As can be seen above, the dividend distributed in the year 2006 and 2007 is RM0.36 and RM0.37 respectively. In the year 2008, the dividend distributed rose to RM0.55 before declining to RM0.40 in 2009. The dividend distribution is affected by the profit or revenue the company generate for the year. In the 2007, the dividend distributed increases as the profit generated by the company increases as well and further increases as the profit for the company further increases. The dividend decline later in 2009 and increases yet again in the year 2010 as the company performance are well for the year.
4.4 Financial Ratio Analysis
4.4.1 Horizontal Analysis
In this horizontal analysis, ratio are analyzed form selected company which is Kuala Lumpur Kepong Berhad (KLK Berhad) for the last five years of 2006 to 2010.
Liquidity Ratios
Current ratio for KLK Berhad is average of 2.00 times per year during the last five years. In 2006, KLK current ratio is 2.61 times, it's second highest next to 2.67 times in the year 2010. KLK Berhad recorded low current ratio on the year 2008 with 2.07 times.
Current ratio measures of the adequacy of working capital and short-term liquidity, since it indicates the extent to which short-term obligations are covered by assets that are capable of being converted to cash in a period roughly corresponding to the maturity of the obligations. Well above 1.0 times of current ratio, indicates that good probability the company can retire current debts. With ratios all above 2.0, KLK Berhad is in a comfortable financial position.
Quick ratio for KLK Berhad is all above 1.0 indicator which means that a higher ratio indicates the amount of liquid assets available are able to offset debt nearly the same as current ratio. KLK Berhad recorded is 1.28 times in 2006 and the highest is 1.54 times in 2009 and decline to 1.38 times in 2010.
KLK Berhad recorded at least RM1 billion of healthy net working capital per year with constant increase each year from 2006 to 2010. High net working capital indicates the amount of assets available to pay off the short term expenses such as salaries, equipment rental, inventory, and so on. In 2006, RM 1,134,928,000, increase in 2007 to RM1,232,541,000. The amount constantly increase RM100,000,000 per year until 2010 with value of RM 2,125,335,000 in 2010. Working capital also demonstrates the amount of liquid assets that are available to sustain and build a business by measuring the company's efficiency and short-term financial health. Since, KLK Berhad have healthy, the company are efficiently are able to sustain its business.
Leverage Ratio
KLK Berhad debt ratio for the year 2006 is 18.08%, 27.25% in 2007, increases to 32.55% in 2008 and slightly decrease in 2009 with 30.93%. It rose to 37% in the year 2010. Debt ratio are used to gain a general idea the amount of leverage being used by a company. A low percentage means that the company is less dependent on leverage, for instance money borrowed from or owed to others. The lower the percentage, the less leverage a company is using and the stronger its equity position. In general, the higher the ratio, the more risk that company is considered to have taken on. KLK Berhad debt ratio amount are aligned with the size of its business and as a large, well-established company, KLK Berhad can push the liability component of their balance sheet structure to higher percentages without getting into trouble.
Debt equity ratio another leverage ratio that compares a company's total liabilities to its total shareholders' equity. This is a measurement of how much suppliers, lenders, creditors and obligors have committed to the company versus what the shareholders have committed. Similar to the debt ratio, a lower the percentage means that a company is using less leverage and has a stronger equity position. For KLK Berhad debt equity ratio is 0.22 times in 2006, 0.37 times in 2007, 0.48 times in 2008, 0.45 times in 2009 and finally decrease in 2010 to 0.20 times. Since the ratio is lower than 1.0 indicates that the company does not use more debt than equity in financing its activities.
Times interest earned determines how easily a company can pay interest expenses on outstanding debt. KLK Berhad recorded times interest earned of 41.12 times in 2006 which is the highest during the last five years and lowest of 13.40 times in the year 2009. When a company's interest coverage ratio is only 1.5 or lower, its ability to meet interest expenses may be questionable. Thus, KLK Berhad is at a comfortable position since higher is desirable as it indicates higher margin of safety.
Activity Ratios
Activity ratios measure the effectiveness in managing the company's assets and efficiency in handling the company's operations.
Average collection period for KLK Berhad is 28 days in the year 2006 and 2008. In 2007, 38 days, 48 days in 2009 and 39 days in 2010. With low ratio of average collection period, KLK Berhad have higher cash cycle and low cost capital the investments in account receivable.
Account receivable turnover for KLK Berhad is the highest in the year 2006 with 12.86 times and lowest in the year 2009 with 7.5 times. Higher account receivable turnover indicates the efficient receivable management with low average collection period and funds reserves in receivable are released for other productive investment.
Inventory turnover for KLK Berhad is 3.65 times in 2006, 3.49 times in 2007, 4.48 times in 2008, 5.34 times and 4.12 times in 2010. A higher inventory turnover is indicates higher risk of inability to meet production and sales demand but it is still preferred due to efficient inventory management and lower cost of investment inventories and contributions to company's profitability.
Fixed asset turnover reflect a company's efficiency in managing these significant assets. Simply put, the higher the yearly turnover rate, the better. KLK Berhad fixed asset turnover in 2006 is 1.02 times which is the lowest and highest is 2.92 times in 2010. KLK Berhad turnover is constantly increasing during the last five years.
The total asset turnover for KLK Berhad during the last five years, from 2006 to 2010 are 0.69 times, 0.72 times, 0.92 times, 0.77 times and 0.82 times respectively. This ratio measures the company ability to use all of its assets to generate sales efficiently, thus higher ratio is desirable and most preferred as it refers to better efficiency in managing the resources or the management control over its investment in assets. Since KLK Berhas total asset turnover is relatively low, it indicates that the company in not utilizing its resources as efficiently as the company can.
Profitability Ratios
KLK Berhad gross profit margin from 2006 to 2010 decrease each year from 32.76% in 2006 to 29.14% in 2010. The gross profit margin is used to analyze how efficiently a company is using its raw materials, labor and manufacturing-related fixed assets to generate profits. A higher margin percentage is a favorable profit indicator.This indicates that the company's performance in using its resources to generate profit have decrease in number this last five years.
KLK Berhad operating profit margin had fluctuates during this last five years. In 2006, operating profit margin of 14.93% is recorded and later increase to 17.58% in 2007. It increases to 18.68% in 2008 before decline to 13.84% in 2009 and rose in 2010 to 18.74%. Higher margin is preferred as it represent lower cost structure and will result in higher profits.
Operating ratio in 2006 is 12.47%, 10.92% in 2007, 13.87% in 2008, 10.87% in 2009 and 6.74% in 2010. KLK Berhad operating ratio is relatively low thus is it desirable because it indicates better efficiency and higher profits can be expected.
Net profit margin measures the after-tax-profit per Ringgit of sales. It is the ability of the company to generate the net income from its sales after deducting all expenses. The net profit margin for KLK Berhad is quite high with 11.23% in 2006 and its lowest 9.56% in 2009 before rose to 14.25% in 2010. This indicates the company ability to make profits for distribution to the equity holders and internal source of financing to support growth of the company.
KLK Berhad return on asset is also acceptably high with it highest of 31.44% in 2010 and lowest of 7.47% in 2009. Higher return on asset makes attractive to obtain outside capital and maintain its growth during the business period.
Market Ratios
Earning per share of the company measure the amount of earnings available to common stockholders per share common stock held. KLK Berhad had paid attractive for the last five years due to the high generated income. Earning per share of the company increases every year from 2006 to 2010 with 41.00 sen in 2006, 65.20 sen in 2007, 97.70 sen in 2008, 57.50 sen in 2009 and lastlty in 2010 with 95.10 sen of earning per share.
The dividend per share of KLK Berhad is also as attractive as its earning per share. In 2006, KLK Berhad paid 36.40 sen, 36.90 sen in 2007 and lastly 54.90 sen in 2008. KLK Berhad however did not paid any dividend in the last two years which is in 2009 and 2010.
4.4.2 Vertical Analysis
Liquidity Ratios
Kuala Lumpur Kepong Berhad (KLK Berhad) performance for 2010 referring to its current ratio was acceptable as to compare with its competitor Batu Kawan Berhad. On average, KLK Berhad manage to record current ratio 2.67x from the in the year 2010. However, Batu Kawan Berhad current ratio is higher with 8.04x in the same year. Higher current ratio indicates that the company has enough resourcers to pay their debt and lot more efficient. It is also gives signal of safe liquidity in which also indicates that KLK Berhad has enough resources as to compare with Batu Kawan Berhad in term of paying their debt
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KLK berhad quick ratio is much lower as to compare with Batu Kawan Berhadin in 2010 with 1.38x for KLK Berhad and 7.34x for Batu Kawan Berhad. If quick ratio is higher, company may keep too much cash on hand or have a problem collecting its accounts receivable. Higher quick ratio is needed when the company has difficulty borrowing on short-term notes. A quick ratio higher than 1:1 indicates that the business can meet its current financial obligations with the available quick funds on hand. A quick ratio lower than 1:1 may indicate that the company relies too much on inventory or other assets to pay its short-term liabilities
KLK Berhad's net working capital exceed over RM1 billion worth wich is much higher whereas Batu Kawan Berhad highest is over RM 200 million. Positive working capital means that the business is able to pay off its short-term liabilities. Also, a high working capital can be a signal that the company might be able to expand its operations. Negative working capital means that the business currently is unable to meet its short-term liabilities with its current assets. Therefore, an immediate increase in sales or additional capital into the company is necessary in order to continue its operations. Working capital also gives an idea of company's efficiency. Money tied up in inventory or accounts receivable cannot pay off any of the company's short term financial obligations.
Leverage Ratios
As quick summarization, leverage ratios for KLK Berhad is higher in comparison to Batu Kawan Berhad. High leverage will result in high risk.
Activity Ratios
KLK Berhad activity ratio is more promising compare to Batu Kawan Berhad. A higher activity ratio equal to higher profitability. KLK Berhad also record a higher turnover overall which mean better use of capital or resources and later result in better profitability ratio.
Profitability Ratio
In terms of profitability, both KLK Berhad and Batu Kawan record high ratio for the last five years. Both company are able to manage their resources efficient and pays off their debt quite efficiently as well.
In conclusion, Kuala Lumpur Kepong Berhad does performed better in overall situation as to compare with Batu Kawan Berhad. However there is still weakness in the debt part of the company, KLK Berhad. Batu Kawan Berhad manage to avoid borrowing from other financial institutions in some years of operating its business thus perform better lowering their debt. In addition, KLK Berhad manage to perform and managing their resources and assets much better in comparison with Batu Kawan Berhad.
