Financial ratio analysis provides information of the companys critical parameters. These parameters can be categorized into financial health, profitability, efficiency and growth rate ratios by properly establishing relationship between the items of the balance sheet and the profit and loss account. This analysis is prepared to meet external reporting obligations and also for decision making purposes. They play a dominant role in evaluating the framework of managerial decisions. But the information provided is not an end in itself as no meaningful conclusions can be drawn from these statements alone. However, the information provided in the analysis is of immense use in making decisions. Table 9 gives a snapshot of the financial ratios for Hai-O.
Table 9: Hai-O's Financial Ratio
Ratio
Financial Health Ratios
Current Ratio
2.57
2.66
2.50
2.25
2.13
Quick Ratio
1.97
1.95
1.63
1.34
1.32
Debt/Equity
0.44
0.40
0.34
0.34
0.37
Debt Ratio %
30
28
26
25
27
Profitability Ratios
Return on Sales %
12
13
12
7
4
Return on Equity %
36.1
46.0
23.8
13.0
7.5
Return on Asset %
21.07
23.78
14.36
8.10
4.66
Gross Profit Margin %
32
34
37
35
31
Efficiency Ratios
Receivable Turnover
11.76
13.85
14.54
8.65
10.85
Inventory Turnover
8. 2
6.0
3.5
3.3
3.8
Asset Turnover
1.75
1.83
1.27
1.17
1.19
Marketing Ratios
EPS
63.42
60.41
27.07
16.39
8.72
Financial Health Analysis
In 2009, the Group's long term debt was RM 15.73 million and total liabilities were RM 76.17 million. The Group's debt to equity ratio is relatively low, at only 0.44. Lower debt ratio signifies that the Group is at a lower level of risk as it does not rely on a lot of debt thus, lower interest does not carry a repayment burden for the Group.
A quick ratio of 1.97 would mean that cash and cash equivalents available are more than enough to cover expected year-ahead liabilities.
The Group is adhering to its dividend policy by paying not less than 50% of profit after tax as dividends to shareholders. This is equivalent to a total of gross of 42 cents per share. It was an increase of gross dividend paid in 2008 of 40 cents per share. The Group has been able to increase its dividend payout significantly high in the last 5 years.
Profitability Analysis
In terms of profitability, Hai-O is in favorable condition although 2009 saw a drop again in the gross margin. On the RM 435.22 million in sales reported by the Group in 2009, the cost of goods sold totaled RM 296.20 million, or 68% of sales, in which the gross profit was 32% of sales. This gross profit margin is lower than the Group achieved in 2008, when cost of goods sold totaled 66% of sales. The gross margin in 2009 was the lowest since 2005. In 2007, the gross margin had been as high as 37%.
The Group's profit before tax (PBT) was RM 75.89 million, or 17.5% of sales. This PBT to sales ratio is relatively lower with what the Group had achieved in 2008, when the PBT ratio was 18.1% of sales. And the Company's return on equity (ROE) in 2009 was 36.1%. This shows a significant loss as compared to high 46.0% return the Group achieved in 2008. Such drop in the profit margin suggests that the Group needs to reevaluate its pricing strategy.
Hai-O Enterprise Berhad reports profits by product line. During 2009, the itemized operating profits at all divisions were RM 53 million, which is equal to 12% of total sales. Of all the product lines, MLM had the highest operating profits in 2009, with operating profits equal to 17% of sales, followed by 16% operating profit contributed by Wholesale division out of its total sales. This shows that these two divisions are both important essence of the Group and it should leverage its strategy according to these segments.
Efficiency Analysis
In efficiency ratio, the most important comparisons are between company and the industry. Hai-O's ratios in this section are relatively in the same line with industry average. Although this suggests that Hai-O has implemented correct marketing strategies to market its products, more could still be done in order to make sure the turnover ratio rise steadily in years to come.
The Group's inventory turnover for 2009 is 8.2 times which indicates that it has 45 days of inventory on hand. It is a significant improvement over 61 days of inventory on hand in 2008 and highest in the past 5 years which suggest that the Group employs an efficient strategy in sales.
The accounts receivable for the Group is RM 37 million, which is equivalent to 30 days of sales. This is slightly higher than at the end of 2008, when the Group had 26 days of sales in accounts receivable. As mentioned above, there is still room to improve and in this case, the Group should consider revising the credit terms as it is shown that sales turnover was dropping in the past 3 years.
Marketing Analysis
Parallel to the Group's increasing profits over the last 5 years, Hai-O' was able to enjoy a good growth of its EPS. The improvement in the Group's profit performance was strongly supported by the Group's increased productivity. It was also the results of an enhanced marketing and recruitment programs. The growth of the Group's EPS saw a substantially growth in 2008 where it rose to 60 cents from only 27 cents in 2007.
Summary of Financial Ratio Analysis
Financial ratio analysis on Hai-O Group suggests an encouraging outlook of the Group's current situation. The Group has a lower debt ratio which translates to a low interest and less risks. The Group's quick ratio of 1.97 implies that the Group has enough cash and cash equivalents to cover its expected year-ahead liabilities.
Its positive increase in profit in the last 5 years has allowed the Group to increase its dividend payout. Despite the profit increase, the Group's profit margin suffers a significant loss. The gross margin of 32% in 2009 was the lowest since 2005. In consequent, the Group's return on equity also saw a loss. The ROE of 36.1% was a significant drop from 46.0% achieved in 2008. However, the Group's inventory turnover has increased. It was 8.2 times, in comparison to 6.0 times in 2008, and was the highest inventory turnover in the past 5 years.
On a different note, the Group's sales turnover also increased. From 26 days of sales in 2008, the Group sales turnover in 2009 climbed to 30 days. This shows a slight defeat in the Group's collection policy.
Over the last 5 years, the Group has been able to maintain an increase in profit which leads to a good EPS growth. As this can be concluded as encouraging, some deficiency annotations translated in the financial ratio analysis suggest more measures must be employed in the Group's business strategy.
