You are required to compute and compare the accounting ratios between these two companies, and conclude the results of your finding. The limitations or problems of using accounting ratios for performance analysis should be included in your conclusion.
1.0 Introduction
The companies of same industries that I have chosen are London Biscuits Berhad and Apollo Food Holdings Berhad. I would like to compare both of these companies' performance and financial position by using accounting ratio analysis. Accounting ratio consists of five types of ratio, which are profitability ratio, liquidity ratio, asset utilization (activity) ratio, leverage ratio, and market value ratio. An accounting ratio analysis can provide meaningful comparisons between two companies in the same industry.
2.0 Body
2.1 Profitability Ratio
Ratio
Formula
Gross Profit Margin
Net Profit Margin
Return on Total Assets
Return on Common Equity (ROCE/ROE)
Ratio
London Biscuits Berhad
Apollo Food Holdings Berhad
Gross Profit Margin
= 24.2%
= 28.5%
Net Profit Margin
= 8.1%
= 15.5%
Return on Total Assets
= 0.038 = 3.8%
0.113 = 11.3%
Return on Common Equity (ROCE/ROE)
= O.O98 = 9.8%
= 0.126 = 12.6%
Profitability ratio shows the overall efficiency and performance or a company. It determines the ability of a firm to earn profit and return on investment. Gross profit margin, net profit margin, return on total assets, and return on common equity (ROCE/ROE) are the elements that are included in profitability ratio.
From the table above, the gross profit margin of Apollo Food Holdings Berhad, 28.5% is higher compare to London Biscuits Berhad, 24.2%. Net profit margin of London Biscuits Berhad, 8.1%, is lower than Apollo Food Holdings Berhad, 15.5%. This is because the net profit of London Biscuits Berhad is lesser than Apollo Food Holdings Berhad. Apollo Food Holdings Berhad has a higher return on total assets of 11.3% compare to London Biscuits Berhad that only has 3.8% of return on total assets. Besides that, the return on common equity of Apollo Food Holdings Berhad is also higher than London Biscuits Berhad where Apollo Food Holdings Berhad is 12.6% while London Biscuits is 9.8%.
2.2 Liquidity Ratio
Ratio
Formula
Net Working Capital
Current Assets - Current Liabilities
Current Ratio
Acid-Test (Quick) Ratio
Ratio
London Biscuits Berhad
Apollo Food Holdings Berhad
Net Working Capital
RM109,188,926 - RM152,378,455
= -RM43,189,529
RM102,345,475 - RM8,009,467
= RM94,336,008
Current Ratio
= 0.717x
= 12.778x
Acid-Test (Quick) Ratio
= 0.313x
= 10.729x
Liquidity ratios state the ability of a firm to pay off its short-term debts obligations. There are some ratios that are contained in liquidity ratio, which are net working capital, current ratio, and acid-test (quick) ratio.
The net working capital of London Biscuits Berhad is presented in negative amounts, -RM43, 189,529. This is because the current liabilities of this company are more than current assets. Hence, the net working capital of London Biscuits Berhad is lower than Apollo Food Holdings Berhad, who has RM94, 336,008 of net working capital. Due to the big amount of total liabilities, London Biscuits Berhad experience a lower current ratio, 0.717x, compare to Apollo Food Holdings Berhad who experience 12.778x of current ratio. Same goes to acid-test (quick) ratio; Apollo Food Holdings Berhad has a higher acid-test ratio, 10.729x than London Biscuits Berhad, 0.313x.
2.3 Asset Utilization (Activity) Ratio
Ratio
Formula
Accounts Receivable Turnover
Average Collection Period
Inventory Turnover Ratio
Fixed Asset Turnover
Total Asset Turnover
Ratio
London Biscuits Berhad
Apollo Food Holdings Berhad
Accounts Receivable Turnover
= 9.105x
= 7.639x
Average Collection Period
= 42.973 ï‚» 43days
= 46.841 ï‚» 47 days
Inventory Turnover Ratio
= 5.240x
= 8.517x
Fixed Asset Turnover
= 0.56x
= 1.278x
Total Asset Turnover
= 0.446x
= 0.702x
Asset utilization (activity) ratio is used to determine the efficiently of a firm in managing its assets. Ratios which are accounts receivable turnover, average collection period, inventory turnover ratio, fixed asset turnover, and total asset turnover are considered as asset utilization (activity) ratio.
Due to the higher operating revenue of London Biscuits Berhad, they experience a higher accounts receivable turnover, 9.105x compare to Apollo Food Holding Berhad who has 7.639x of accounts receivable turnover. Besides that, the average collection period of London Biscuits Berhad that is 43 days is faster than Apollo Food Holdings Berhad that is 47 days. However, London Biscuits Berhad has a lower inventory turnover ratio, 5.24x than Apollo Food Holdings Berhad, 8.517x. This is because the average inventory of London Biscuits Berhad is more than Apollo Food Holdings Berhad.
The ratio of Apollo Food Holdings Berhad, 1.278x is higher than London Biscuits Berhad, 0.56x when comparing the fixed asset turnover. Furthermore, total asset turnover of London Biscuits Berhad is slightly lower than the total asset turnover of Apollo Food Holdings Berhad, where London Biscuits Berhad experience 0.446x and Apollo Food Holdings Berhad experiencing 0.702x.
2.4 Leverage Ratios
Ratio
Formula
Debt Ratio
Debt/Equity Ratio
Times Interest Earned (Interest Coverage) Ratio
Ratio
London Biscuits Berhad
Apollo Food Holdings Berhad
Debt Ratio
= 0.504 = 50.4%
= 0.106 = 10.6%
Debt/Equity Ratio
= 1.267x
= 0.118x
Times Interest Earned (Interest Coverage) Ratio
= 2.887x
Leverage ratio is a type of ratio that is used to evaluate the ability of a firm in using its asset efficiently in order to generate revenue. Leverage ratio consists of debt ratio, debt/equity ratio, and times interest earned (interest coverage) ratio.
From the computation above, we clearly seen than the debt ratio of London Biscuits Berhad is much higher than the debt ratio of Apollo Food Holdings Berhad, where the debt ratio of London Biscuits Berhad is 50.4%, and the debt ratio of Apollo Food Holdings Berhad is 10.6%. This is because the total liabilities of London Biscuits Berhad are very high amounts. Besides, London Biscuits Berhad's debt/equity ratio, 1.267x, is higher than Apollo Food Holdings Berhad, 0.188x. Furthermore, the times interest earned of London Biscuits Berhad are 2.877x, while Apollo Food Holdings Berhad is 0. This is because Apollo Food Holdings Berhad did not have to pay any interest due to they are not borrowing.
2.5 Market Value Ratio
Ratio
Formula
Earnings per Share
Price/Earnings Ratio
Book Value per Share
Dividend Ratios
Dividend Yield
Dividend Payout
Ratio
London Biscuits Berhad
Apollo Food Holdings Berhad
Earnings per Share
= 0.188x
= 0.308x
Price/Earnings Ratio
= 6.064x
= 3.422x
Book Value per Share
= 2.290x
= 2.540x
Dividend Ratios
Dividend Yield
Dividend Payout
= 18.98
= 106.38
The last ratio is market value ratio. These ratios are the ratios that relate the market price of the firm's common stock to selected financial statement items. This ratio contains earnings per share, price/earnings ratio, book value per share, and dividend ratios where dividend ratios divided into dividend yield and dividend payout.
Earnings per share of Apollo Food Holdings Berhad are slightly higher than earnings per share of London Biscuits Berhad, where the earnings per share of Apollo Food Holdings Berhad are 0.308x, and the earnings per share of London Biscuits Berhad are 0.188x. The preferred dividend of both companies is 0. However, the price/earnings ratio of London Biscuits Berhad, 6.064x, is higher than Apollo Food Holdings Berhad, 3.422x.
On the other hand, the book value per share of London Biscuits is slightly lower than Apollo Food Holdings Berhad, where the ratio of London Biscuits Berhad is 2.290x, while the ratio of Apollo Food Holdings Berhad is 2.540x. Due to the lack of dividends per share of London Biscuits Berhad, I could not calculate the dividend yield and dividend payout of London Biscuits Berhad. The dividend yield and dividend payout of Apollo Food Holdings Berhad is 18.98 and 106.38 respectively.
Limitations or Problems of Accounting Ratio Analysis
There are some limitations or problems when using accounting ratios for performance analysis. One of the main limitations is the information problem. Some of the information such as interest expenses of Apollo Food Holdings Berhad, and dividend per share of London Biscuit Berhad are not provided in their annual report. Apollo Food Holdings Berhad never list out their interest expenses. This is because they have no debt; they does not borrow loan from the others. They do not experience in paying interest. Therefore, they never provide their interest expenses. In addition, there is a limitation when is some ratios are not measured definitively, and also out of date information that is listed in the financial statements. It is difficult for us to make an accurate judgement from that information which is out-dated.
Normally, people will say that ratios are useless if they are not comparing with the ratios from comparable unit. Hence, we must compare both organizations that are in the same industry in order to have realistic information. But, it is impossible to find two organizations that are the same in every sense. What's more, it is really hard to compare two organizations even both of them are in the same sector. This is because different organization has different depreciation methods, different dividend policies, and different inventory valuation methods. Furthermore, the size and accounting procedure of the organizations might different although the organizations that we choose are in the same industry. This problem shows trickier to compare both organizations. This is one of the tricky ways to compare both London Biscuits Berhad and Apollo Food Holdings Berhad due to their difference.
Besides that, ratios alone are not enough. The ratios cannot be taken as final regarding in justifying whether the financial position of the business is good or bad. This is because the ratios are just the indicators. Although ratios are helpful in evaluating the effectiveness of the business, but it is just useful when comparing with previous results of the business. These comparisons only provide the sight to the past performance of the organization instead of the future. Thus, the prediction for the organization's future might not be proved correctly due to some of the factors that might affect the future operations.
Moreover, the directors make their own estimations based on their past experience as well as some assumptions that are believed to be logical under the situations. The estimations and assumptions might affect the reported amounts of assets and liabilities. The actual results might be different from those judgements and estimations. What's more, ratios that we used are only reflects the results from the financial statements. However, it does not explain the reasons that influence the business scenes.
3.0 Conclusion
In conclusion, accounting ratio analysis is a useful tool in order to determine the performance of the company. It can tell us which company is stronger and which company is weaker if we compare both companies by using accounting ratio analysis. Although accounting ratio analysis is useful, but it still have some limitations or problems. From the computation that I've done, we clearly seen that the performance of Apollo Food Holdings Berhad in the year 2010 is better compare to the performance of London Biscuits Berhad.
4.0 References
Unknown author, unknown year, accounting ratio/financial ratio, unknown sponsor of resources, viewed 8 March 2011, http://www.accountingformanagement.com/financial_statement_analysis_accounting_ratios.htm
Dennis, Michael C. 1995, The Limitations of Financial Statement Analysis, unknown sponsor of source, viewed 8 March 2011, http://www.allbusiness.com/accounting-reporting/reports-statements/490273-1.html
5.0 Bibliography
Lucy Rudnicka. 2009, Limitations of Financial Ratio Analysis, unknown sponsor of source, viewed 9 March 2011, http://ezinearticles.com/?Limitations-of-Financial-Ratio-Analysis&id=3481750
Question 2
Identify and discuss three different ways for transferring capital or fund from savers to borrowers in the financial market.
1.0 Introduction
From this website, http://finance.mapsofworld.com/financial-institutions/, we can know that financial institutions are those institutions that are involved in providing different types of financial services and advices to their clients or customers. Most financial institutions are normally highly regulated by the rules and regulations of government authorities.
There are various types of financial institutions, such as commercial banks, credit unions, mutual savings banks or building societies that are considered as deposit-taking institutions. The main functions of this institution are such as accepting deposits, providing loans, and issuing share certificates. Besides that, pension funds and investment funds are also the types of financial institutions.
Normally, most of the financial institutions are function as the intermediaries between the capital markets and debt markets. One of the functions of financial institutions is to transfer funds from investors to the companies that need it. It also deals with a variety of financial activities that are related to loans, insurance, bonds, investment and many other types of associated functions.
Different institutions have different functions. Here are some of the examples. For investment banks, financial institutions are function as underwriting securities, providing brokerage services, and selling securities to investors. For stock exchanges and commodity markets, financial institutions are responsible in creating and giving ownership for financial claims, maintaining liquidity in the market and managing price change risks.
There are three different ways to transfer capital or fund from savers to borrowers in the financial market. The three ways are direct transfers of money and securities, investment banking house, and financial intermediaries.
2.0 Body
2.1 Direct Transfers
In business area, direct transfers take place when a firm sells its stocks or bond directly to savers without going through any kind of financial institution. Figure 1 shows the direct transfer between business and savers. The firms are delivering its securities to savers. In return, firms will receive the money or capitals that they need which are given by savers.
Figure 1
Besides business, direct transfers can occur in our daily life too. It is take place when an individual wants to borrow money from another individual. For example, if I want to borrow money from you, you will lend me the money that you have saved. In short, this is the easiest way to transfer the money and securities from one to another.
2.2 Investment Banking House
The second way to transfer the capital or fund from savers to borrowers is through investment banking house. It is a financial institution that helps individuals, firms and governments in raising capital and funds. They act as the clients' agent in the issuance of securities in order to raise the capital.
Investment bank is different from commercial bank and retail bank as it does not take deposit. Besides that, investment bank might involve in some other business such as global transaction banking, investment management, merchant banking, and commercial banking. Investment bankers act as a significant role in issuing new security offering. The investment banks provide services to both firms and investors or savers, where firms issuing securities and investors or savers buying securities. In this situation, money is transfer from the savers to the borrowers.
From the figure above, we can clearly seen that the transferring of funds and capital between borrowers and saver. From here, we understand that the firm selling its securities to the investment banking houses in order to get funds or capital. Then, the particular investment banking houses will sell these same securities to the savers. Therefore, the funds or capitals that the savers used to purchase the securities will goes to the investment banking houses because they buy the stocks or bonds from the investment banking house. Overall, we can know that the firms' securities and the savers' money are just passing through the investment banking house.
But, the investment bank is taking risk if there do purchase and hold the firms' securities for a period of time. This is because they might unable to resell the securities to the savers for as much as they paid. This is due to the new securities are involved and the firms receives the earnings of the sale. In this situation, it is called a primary market transaction.
Besides that, investment bank are also occupied in some other businesses, such as global transaction banking, investment management, merchant banking, and commercial bank. Transferring of funds occur in global transaction banking. This is because it is the sector that offers cash management, lending, custody services, and securities brokerage services to institutions. The transaction between funds take place when investment bank lending to institutions.
2.3 Financial Intermediaries
Financial intermediaries are one another way to transfer fund or capital from savers to borrowers. It is a financial institution that plays the role as a "middleman" between savers and borrowers. There are some types of financial intermediaries, which are depository institutions, contractual saving institutions, and investment companies. Depository institutions contain commercial bank, saving and loan associations, mutual saving banks, and credit unions. Contractual saving institutions consist of life insurance companies, fire and casualty insurance companies, and pension funds; while investment companies include finance companies and mutual funds.
For example, a bank accepts funds from the people who have extra money and channel it to those with a lack of funds who need it. In simple word, financial intermediaries transfer the funds from savers to borrowers. This transferring might be in the form of loans or mortgages. For instance, if there is a sale of a house, a bank often act as a financial intermediary by providing a mortgage to you if you want to buy that particular house. Besides that, loans can be made directly through financial intermediaries. The ways that they provide in making loans and moving funds from a place to another place is much safer.
Due to the cooperation with numerous of people and institutions, financial intermediaries are able to diversify their risks that a single person couldn't. In addition, this increases the safety. For example, I'm facing to significant risks if I make a loan to you and you cannot pay back to me. Conversely, if bank use money that investors invested in it to makes loans, the effect on investors is insignificant if these loans go bad. This is because the risks have been diversified. In brief, financial risks can be diminished greatly by using financial intermediaries.
Furthermore, financial institutions make the financial markets work. In our daily life, many people and firms want to borrow money for their own purpose. Besides offering access to funds that can be borrowed, these institutions will also providing loan servicing. Financial intermediaries will offer a secure place for investment when people with additional money want to invest it.
There are some laws and regulations are designed in order to protect their members. Thus, financial institutions are needed to comply with these designed regulations. In lots of country, institutions are needed to carry insurance in order to protect their people. In case of there is anything happen, people with deposit funds will not lose them since the insurance will pay out on their claims. With the existence of financial intermediaries, the efficiency of money and capital market is greatly increases.
3.0 Conclusion
In conclusion, it is easy to transfer funds or capitals from savers or investors to the borrowers by these three ways, which are direct transfer, investment banking house, and financial intermediaries. Besides having this kind of service, investment banking house and financial intermediaries also provide lots of other services to customers, such as the services that related to insurance or investments. From here we can know that it's really easy and convenient for people.
4.0 References
Unknown author, unknown year, Financial Institutions, unknown sponsor of source, viewed 3 March 2011, http://finance.mapsofworld.com/financial-institutions/
Bill Freehling. 2010, Commercial Bank vs. Investment House, Investor Word: Commercial Bank Definition, viewed 4 March 2011, http://www.ehow.com/about_6328681_commercial-bank-vs_-investment-house.html
