Accounting ratio is actually a financial statement analysis in order to measure the company's performance and its ratios expressed and counted by using the accounting figures that being provided in the company's financial statement. The accounting ratio is used to interpreting the business performance of a company as in the sense of its gaining profit or losing, to identify whether it is a potential investment company or not. There have actually 5 different categories of formula in order to measuring 5 different aspects of business performance which are,
Profitability of Company - Gross profit markup, Gross profit margin, Operating profit margin on sales, Profit margin on sales, Basic earning power(BEP), Return on total assets(ROA), Return on common equity(ROE)
Liquidity of Company - Current ratio, Liquid ratio
Asset management of company - Inventory turnover or Stock turnover, Fixed assets turnover, Total assets turnover, Debtor ratio, Debtor payment period, Days sales outstanding(DSO)
Debts Management and Capital Gearing of Company - Debts ratio, Capital gearing ratio, Debts equity ratio, Times interest earned, Creditor ratio, Creditor payment period
Market Value of Investment to Ordinary Shareholders - Earning per share, Earnings ratio, Dividend cover, Earning yield, Dividend yield, Cash flow ratio, Market price
There have a few ways to doing the comparison of the business performance measurement by using the accounting ratio. It can be the inter-temporal comparison between 2 periods which maybe the comparison of the current year and the previous year, inter-firms comparison between 2 companies, means the accounting ratio comparison with the other company and the last is the comparison with the industry averages, the company will used to compare with the overall averages of its industry to identify its business performance.
IJM Corporation Berhad and WCT Berhad are being chosen to identify its business performance measurement.
IJM was born in 1983 with an overarching purpose of competing more effectively against bigger foreign rivals. IJM is one of Malaysia's leading construction groups and is listed on the main board of bursa Malaysia. Its business activities encompass construction, property development, manufacturing and quarrying, infrastructure concessions and plantations. IJM headquartered in Selangor, Malaysia, IJM's regional aspirations have seen it establish a growing presence in neighboring developing markets with operations presently spanning 11 countries, with primary focus in Malaysia, India, United Arab Emirates, china and Indonesia.
WCT established on 14 January 1981 as WCT Earthworks & Building Contractors Sdn Bhd, the Company became a public company on 1 April 1994. WCT made its debut on the Malaysia Stock Exchange on 16 February 1995. The Company assumed its present name WCT Berhad since 5 June 2008 to reflect the diverse businesses within the WCT Group of Companies. WCT activities included project management, construction design, value engineering and assets management in F1 & international racing circuit, High-rise and special purpose building, International airport, Hydroelectric dam, Iconic infrastructure, Township planning & development, Racecourse, Commercial property development & management, Expressway & Highway and BOT Toll Concessions. Over a period of 30 years, WCT has completed more than 300 Construction Projects valued at RM16.5 billion with Global Presence in the Middle East, India, Vietnam and Malaysia and has delivered in excess of 12,000 units of residential and commercial properties amounting to sales value of RM3.0 billion.
Both income statements and balance sheets of the 2 companies must be provided as the main information for the business performance measurement. Both income statement and balance sheets are collected from the following internet link IJM, http://www.ijm.com/v2/, WCT, http://www.wct.com.my/CMS/Home/1/0.aspx
1.0Ratios Calculation
1.1 Profitability
Ratio with Formula
Calculation for IJM Berhad
Calculation for WCT Berhad
Gross Profit Markup
= 0.3115.. 100
= 31.16%
= 0.8225.. 100
= 8.23%
Gross Profit Margin
= 0.2375.. 100
= 23.76%
= 0.0759.. 100
= 7.6%
Operating Profit Margin on Sales
= 0.1865..100
= 18.65%
= 0.0523..100
= 5.23%
Profit Margin on Sales
= 0.0828...100
= 8.29%
= 0.0315..100
= 3.15%
Basic Earning Power (BEP)
= 0.0596..100
= 5.96%
= 0.0545..100
= 5.45%
Return on Total Asset (ROA)
= 0.2648..100
= 2.65%
= 0.0328..100
= 3.28%
Return on Common Equity
(ROE)
= 0. 6484..100
=6.48%
= 0.1176..100
= 11.77%
1.2 Liquidity
Ratio with Formula
Calculation for IJM Berhad
Calculation for WCT Berhad
Current Ratio
= 2.09 : 1
= 1.41 : 1
Acid-Test Ratio
= 2.09 : 1
= 1.41 : 1
1.3 Asset Management
Ratio with Formula
Calculation for IJM Berhad
Calculation for WCT Berhad
Inventory Turnover
= 5.78 times
= 37.93 times
Total Assets Turnover
=0.32 times
= 1.04 times
Debtor Ratio
= 0.54 : 1
= 0.32 : 1
Day Sales Outstanding
= 0.54 365 Days
= 197.1 Days
= 0.32 365 Days
= 116.8 Days
1.4 Debts Management
Ratio with Formula
Calculation for IJM Berhad
Calculation for WCT Berhadi
Debt Ratio
= 0.49 : 1
= 0.67 : 1
Debts Equity Ratio
= 1.19 : 1
= 2.39 : 1
Time Interest Earned
or Interest Cover
= 3.73 times
= 4.85 times
1.5 Market Value of Investment to Stockholders
Ratio with Formula
Calculation for IJM Berhad
Calculation for WCT Berhad
Earnings Per Share
= RM 0.25
= RM 0.19
Price Earnings Ratio
= 19.2 times
= 13.68 times
Earnings Yield
= 0.6944….100
= 6.94%
= 0.974358… 100
= 9.74%
Market Price Per Book Value
=1.24 : 1
= 1.61 : 1
1.1Comparison on IJM & WCT
1.1.1 Profitability
IJM has the higher percentage in both Gross profit markup and Gross profit margin, it's actually showing that IJM has the better performance in the sense of more effective and efficient in controlling the purchasing cost and effective of using the resources such as the materials and labour in terms of reducing the production cost and increase the gross profit earning.
On the measurement of Operating profit margin on sales and Profit margin on sales, IJM also provided a better performance which is 18.65% and 8.29% respectively. It is showing that IJM has a better net profit earning after deduction of all the expenditure included tax as well. On the other word, IJM had effective controlled its expenditure and interest costs such as lower the operating costs and interest costs in order to increase its profit.
IJM has the higher profit percentage on the basic earning power measurement, this is the profit generating without deduction of any tax and interest whereas after the tax and interest deduction in the Return on total assets and Return on common equity measurement, it turns to become WCT has the higher net income profit generating, it's actually WCT is more effective used of assets and capital employed on its business activities in terms of minimise the production costs in a big production volume in the sense of increase the profit earning as well.
1.1.2 Liquidity
Based on the calculation of Current ratio and Acid-test ratio, IJM also has the higher ratio of liquidity which higher than the average of its industry, 2.09:1 for both ratio measurement. It's showing IJM has the more stable financial and high liquidity in order to handle or finance its short-term liabilities because it has the larger amount on both current and liquid assets whereas WCT has the lower ratio (1.41:1) than IJM but it still higher than its industry ratio, it still able to finance its short-term liabilities but that is less liquidity than IJM by the result of ratio calculation.
1.1.3 Asset Management
WCT has the higher inventory turnover ratio with 37.93 times compare with IJM has only 5.78 times with the calculation on its inventory turnover. With the higher inventory turnover ratio, WCT has more liquidity on its stocks turnover; it means WCT's capital won't be tying up by its kept stocks and it's an effectiveness of its money flowing.
WCT also has the higher turnover ratio (1.04 times) on its total assets by the calculation of Total assets turnover. It's showing that WCT had effectively using on its assets in order to indicate its higher sales generated in the sense of higher production and sales volume on the return of its assets.
Based on the calculation of the Debtor ratio and Day sales outstanding, WCT also has the better performance due to its lower debtor ratio and day sales outstanding which is 0.32:1 and 116.8 days with the comparison with IJM which is 0.54:1 and 197.1 days respectively. WCT has the shorter period for allowing the debtor owing in order to prevent the tying up of money, so WCT is able to finance its short-term financial problem and won't have the happen of money shortage.
1.1.4 Debt Management and Capital Gearing
In the calculation of Debt ratio, WCT has the higher debts burden (0.67:1) compare with IJM (0.49:1). IJM will less burden on its debts in the sense of bearing the lower amount of debts and also the lower interest cost. IJM also showing its lower risky and the abilities to finance and pay back the debts compare with WCT who has the higher debt ratio.
WCT also has the higher ratio on the Debt equity ratio (2.39:1), it's actually showing that WCT has bearing higher debts and showing its unstable financial since it bearing with a higher interest cost compare with IJM which is (1.19:1) lower than WCT.
On the measurement of Interest cover, IJM bearing the higher interest charges (3.73 times) in relation to its available profit compare with WCT (4.85 times) which indicate that the company is bearing the low interest charges.
1.1.5 Market Value of Investment to Ordinary Shareholders
IJM has the higher ratio in Earnings per share with RM0.25 a more attractiveness towards the common stockholders whereas WCT has the ratio of RM0.19, a less attractiveness to the common stockholders based on the comparison on both companies. The earnings per share ratio showing IJM a higher rate of business growth on its businesses activities and it will bring to a higher profit earnings stage as well, so it will be more attractiveness on the common stockholders' view.
Even though IJM has the higher ratio on the earnings per share but based on the calculation of Price earnings ratio, WCT is better than IJM because WCT take shorter times (13.68 times) for common stockholders to earning profit to cover up their capital on the share investment rather than IJM (19.2 times) used. With the advantage of profit earnings within a shorter period, it will be more attractiveness to the common stockholders as well.
WCT also has a better performance on the Earnings yield, based on the calculation; WCT has the higher ratio of net income return for the common stockholder which is 9.74% whereas IJM only provided 6.94% of net income ratio. With the higher net income return, WCT's result was easier to attract the common stockholders for their investment.
On the Market price per book value calculation, WCT was getting a higher ratio which is higher than the average of its industry (1.61:1) whereas IJM also getting a higher ratio than the industry's average but lower than WCT which is only 1.24:1. The higher ratio that WCT got is actually being not attractiveness towards the common stockholders because it shares' value was rises too high even above its real assets value. So, it will be unworthy for a common stockholder to purchase the share at a higher rate or higher value.
Conclusion
Based on the comparison on both IJM and WCT cooperation by using the financial accounting ratio, IJM is actually having the majority of the better business performance except the Return on total asset, Return on common equity, Inventory turnover, Total assets turnover and the Interest cover. It's showing that IJM is having the problem on the utilising of its assets because it having a worst result compare with WCT on the sectors of return of the assets and assets turnover ratio, it's the main elements that brought down the business performance of IJM in the comparison. Generally, IJM had the better business performance no matter is in the sense of profit making, shares performance and attraction on the common stockholders, debts collection and even liquidity of the company. All these can be proving by the calculation has been prepared as above. It's actually having some limitations of the ratio analysis for example,
Information Problems
By using the information that directly got from the cooperation website, it's actually always happened that the outdated information being provided and it will miss led the direction or the accuracy of the financial analysis. Some of the analysis may not using the current year financial statement of the company but is the previous year being used, this kind of historical cost or statement may not be able to provide the most appropriate decision for the cooperation after the analysis being made. The information that can be directly collected from the cooperation's website may not appropriate but only summarised information. Thus, detailed information is a must to have in order to have an appropriate and accurate financial analysis. The finalized result of the financial analysis is only a general view or symptoms of the company's financial problem not the actual causes, so there will be a limited use of the financial analysis information.
Inter-firm Comparison
As it practices the inter-firm comparison in this assignment, in fact it also has some limitations on practising this method for doing the financial analysis. The 2 companies that selected might not be having the exactly same norms on it businesses, so it's not able to provide the best accuracy of analysis result. Every company will have its own financial and businesses risk and normally it won't be able to presume if it does not exist. So, as logically doing the financial analysis by using its previous financial record, it may not useful enough. Different cooperation are using the different accounting policies, in order to analyse the accurate and efficient financial report, both cooperation must provide a similar accounting policies otherwise it will got the wrong financial analysis. Both cooperation that selected must have the similar geographical as well because it will have different impacts on the financial analysis based on its different environment or home based company. If the cooperation is in different countries, it will have the different external impacts as well, so it will also affect the accuracy of the financial analysis.
2.0 Financial Market
Financial market is a fund transferring market within the organization and people in the situation which a party who lack of fund and wanted to borrow money and the opposite view, a party who having surplus fund for lending out in the financial market. Different financial market will operate differently and serve for different type of customer as well, financial market can be differ into physical assets market and it also known as the tangible asset market because physical market is dealing with all the tangible asset such as machinery, properties, computer and so on whereas financial market is dealing with all those financial asset such as stock, share, bonds and all the invisible assets. Both physical asset market and financial market also can be operating as the spot market and future market. Spot market is the market which can be deal within a few days or direct on the spot whereas the future market is referring to the transaction which will be deal on the future expected date such as 6 months or 1 year in the future and it do have some major financial market as per following mentioned.
2.1 Types of Financial Market
2.1.1 Money Market
Money market is a short term financial market which is a borrowed or loaned for short period of less than 1 year. Any borrowing from bank can be categories in money market as long as its period is less than 1 year.
2.1.2 Capital Market
A long term financial markets that dealing with all the stocks and shares for a long period of minimum 1 year or more than that. Capital market also included the primary market and secondary market which is the market that used to be the transaction of stocks and shares.
2.1.3 Mortgage Market
The financial market that a loan dealing on the residential, industrial real estate, commercial and farmland. A loan that is secure to the lender by the asset mortgage from the borrower. For example the hire purchase of property, the contract or the property will be kept by the bank as the mortgage item until the loan being settle then only the contract will be return back to the borrower and only this will show that the property is wholly owned by the loan borrower.
2.1.4 Consumer Credit Market
A loan financial markets that dealing on the autos and appliances as the consumers' goods. A purchasing purpose loan from the borrower such as car, properties, education and so on.
2.1.5 Primary Market
A financial market that an existing company issuing new securities or new share to the public in order to raising the company capital.
2.1.6 Secondary Market
Stocks or shares transaction market, it also called aftermarket. A previous issued securities that being bought and sold in the secondary market among the dealer and the investor.
2.1.7 Initial Public Offering (IPO) Market
A market where a company first ever issue or offer the company shares to the public. There are often issues by the smaller or younger companies in order to seeking capital for the business expanding purpose.
2.1.8 Private Market
Private market is the market where the financial transaction that being worked out privately between the 2 parties which most probably will be the lender and borrower and without going to public such as 3rd party. For example the loan settlement that being done directly by the borrower with the bank but not going through by the finance company.
There have total of 3 ways for the capital or fund transferring from the savers to the borrowers in the financial market as per below showing,
2.2 Capital Transferring Method
2.2.1 Direct Transfer from Savers to Borrowers
A capital or fund can be direct transfer between the company and the investors (savers) without going through any financial institution. Capital transferring begins when a company issues and selling directly the share to the savers, in return savers pay back the money to the company as per shares' value the other way round, savers writing a request letter to the company to purchase its shares, thus the company will use the money as the capital for the business expansion purpose.
2.2.2 Indirect Transfer from Savers to Borrowers through Investment Banking House
A capital transferring by the middleman (Investment Bank) from the borrowers to the savers. An example of the investment bank like Maybank Investment Bank, it does purchase the shares that issued by the companies (borrowers) and resell the companies' share to the investor (savers) in order to transferring the capital from the savers to the borrowers by using the of shares' transaction.
2.2.3 Indirect Transfer from Savers to Borrowers through a Financial Intermediary
A financial intermediary playing a main role in this capital transferring method, financial intermediary like Public Mutual Fund will receive the capital from the savers by issued its own securities and use it as the capital to purchase or invest into the public listed company in the sense of buying the companies' shares but it don't have any direct relationship from the savers to the company as a capital borrower because all the transaction will go through by the 3rd party which is the financial intermediary. So, actually financial intermediary is playing 2 roles in this transaction, it's the money lender for the company which being invested and it's the borrower for those savers who bought the intermediary's own securities.
2.3 Financial Intermediaries
There is actually some cooperation that is a financial intermediary in order to transferring the capital from the beginning saver to the end borrower. Financial intermediaries do issued its own securities for the beginning savers in order to collect the capital and reinvest into those potential business cooperation. Those existing financial intermediaries are,
2.3.1 Commercial Banks
Commercial bank is the common place that people will go for their own saving whereas commercial bank will actually use those saving money to lend out to the borrowers as it investment or direct doing investment into other potential business cooperation and bank will pay back interest for the savers in return.
2.3.2 Savings and Loan Associations
Is a specialize savings and loan cooperation in order to create liquidity in the capital market by using the method of collect funds from many small savers and then lend out those saving funds to the house buyers or other types of borrowers.
2.3.3 Mutual Savings Fund
It's similar with the savings and loan association to create liquidity on the capital market but the mutual savings fund is more towards on those long-term basis borrowers for example properties loan.
2.3.4 Credit Unions
It's a cooperative association among those members who has a common bond so that the union will collect the funds or savings from the members and loan it to those member who need funds to finance the purchases and normally credit unions is the cheapest source of funds that available for the individuals borrowers.
2.3.5 Pension Funds
This is dedicated for the government retirement plan and normally pension funds will be invested primarily in bonds, stocks, mortgages and real estate.
2.3.6 Life Insurance Companies
Life insurance companies are doing the investment by collecting the annual premiums from those insurance savers and paying the interest to the insured parties in return.
2.3.7 Mutual Funds
It is a funds collect directly from the savers and reinvest these funds to buy stocks, long-term bonds and short-term debt that issued by the business cooperation or government. Normally mutual funds can be consider the most save investment because mutual funds will normally pool together the funds from all the savers and doing the investment, thus it will reduce the risk of the saver.
