1.0 Introduction
Financial statement of a company means a written report which is quantitatively describes the financial health of the company. It is also includes an income statement and a balance sheet, and often there is also includes a cash flow statement. Financial statements are normally compiled on the quarterly and also annual basis statement. Accounting ratio analysis is where single most of the important technique of financial analysis in which of the quantities are been converted into the ratios for meaningful comparisons, with the past ratios and also ratios of other firms in the same or even different industries. Ratio analysis determines trends and also exposes the strengths or weaknesses of a firm. Bursa Malaysia which is formerly known as Kuala Lumpur Stock Exchange is an exchange holding company which is approved under the Section 15 of Capital Markets and also Services Act 2007. It operates the fully-integrated exchange, and also offering the complete range of exchange and services including the trading, clearing, settlement and also depository services.
From the Kuala Lumpur Stock Exchange I Choose two companies which is Apollo Food Holdings Berhad and then Oriental Food Industries Holdings Berhad. I choose the annual report of year 2010 from both companies to proceed with the accounting ratio. In both of the company the balance sheet divided for company and also group. I choose group for both of the companies.
2.0 Body
All over there are five ratios which have been used for both companies. There is Liquidity ratio, Asset Utilization (Activity) Ratio, leverage Ratio, Profitability ratio, and lastly is Marketing Value Ratio.
3.0 Liquidity Ratio
There are three parts in liquidity ratio which is Net Working Capital, Current Ratio and lastly Acid-Test (Quick) Ratio.
3.1.1 Net Working Capital
Net Working Capital is where more a measure of the cash flows than a ratio. The result of the calculation must be in a positive number. According to the above table the net working capital of Apollo Company is stronger then Oriental Company which is 94336008 while Oriental Company has only 37780986. The differences between both companies are 56555022. This is may be because of Oriental Company do not have more enough current assets.
3.1.2 Current Ratio
According to the current ratio, Apollo Company has a stronger balance then Oriental Company in the differences of 8.99x. This situation happens because Oriental Company does not have enough current assets to meet the payment schedule of its current debts with the margin of a safety for possible losses in current assets, which is like inventory shrinkage or even collectable accounts. Because of the Oriental Company's current ratio is too low, then they should have to raise it by paying some of the debts, increasing their current assets from the loans or other borrowings with the maturity of more than one year, converting their non-current assets from the new equity contribution and then lastly putting profits back into their business.
3.1.3 Acid - Test (Quick) Ratio
According to the Acid-test (Quick) Ratio, Apollo Company is stronger then Oriental Company in the differences of 8.22 x. This Quick Ratio is the much more exacting measure than the Current Ratio. This ratio will be more useful when the question is " If all the sales revenues should disappear, and how the company meet with its current obligations with the readily convertible which is 'quick' funds on hand" and the answer will be by excluding the inventories, it concentrates on the really liquid assets, with the value which is fairly certain.
4.0 Asset Utilization (Activity) Ratio
There are five parts in Asset Utilization (Activity) Ratio which is Accounts Receivable Turnover, Accounts Receivable Turnover, Inventory Turnover Ratio, Fixed Asset Turnover and lastly Total Asset Turnover.
4.1.1 Accounts Receivable Turnover
Average Receivable Turnover is also been known as the days sales outstanding. It links accounts receivable with the daily sales and it is expresses in number of days where the lower number will be the better performance. According to the table Apollo Company has the lower amount than Orient Company. In this situation may be Orient Company do have some sales outstanding or even don't have enough performances. So then they should try to clear out the sales outstanding up to date and also should improve their performances.
4.1.2 Inventory Turnover Ratio
Inventory turnover Ratio is used to compares the cost of goods sold (cogs) with the inventory. For this ratio it is expressed in "turns", where the higher the number then the better it will be. Compared to Apollo and Orient Company Apollo Company has higher amount and it is better than the Orient Company.
4.1.3 Fixed Asset Turnover
According to the table Apollo Company has a stronger amount then Orient Company. Orient Company should increase their net sales to improve their fixed Assets Turnover.
4.1.4 Total Asset Turnover
According to the table Orient Company has high amount the Apollo but Apollo is stronger then Orient Company because it has less assets turnover.
5.0 Leverage Ratio
There are three parts in Leverage Ratio which is Debt Ratio, Debt/Equity Ratio and lastly Times Interest Earned Ratio.
5.1.1 Debt Ratio
Debt Ratio is indicates the extent to where the business is been reliant on the debt financing. It is can be identify as creditor versus the owner's equity. According to the table Apollo Company have the stronger amount then the Orient Company. It is good to a company to have fewer amounts at Debt Ratio.
5.1.2 Debt/Equity Ratio
In generally, the higher in this ratio then the more risky a creditor will be perceive its exposure in their business. It is also making it correspondingly harder to obtain the credit. According to the table Orient Company has higher number than Apollo Company. Because Orient Company has higher number will be make them face a lot of risks in their businesses. To avoid that situation Orient Company should improve their stockholder equity and then should clear their pending liabilities due to the date.
5.1.3 Times Interest Earned Ratio
According to table only Orient Company has its number on Time Interest Earned Ratio. Because Apollo Company didn't take any loans so they don't have finance cost to calculate the number of this ratio.
6.0 Profitability
There are four ratios in Profitability which is Gross Profit Margin, Net Profit Margin, Return on Total Sales and lastly Return on Common Equity (ROCE).
6.1.1 Gross Profit Margin
Gross Profit Margin Ratio is where comes with the percentage of sales cost left after subtracting the cost of goods sold which is sold from the net sales. This ratio measures the percentage of the sales money remaining (after obtaining or even manufacturing the goods sold) which is available to pay the overhead expenses of the company. Comparisons of the companies ratios to those with the similar businesses will be reveal the relative strengths or weaknesses in their business. According to the table Oriental and Apollo Company has almost the same number of debt ratio.
6.1.2 Net Profit Margin
Net profit Margin Ratio is the percentage of sales dollars which is left after subtracting the cost of goods sold and also all expenses, except the income taxes. This ratio also provides a good opportunity to compare a company' "return on sales" with the performance of another company in an industry. This ratio will be calculated before the income tax because tax rates and also tax liabilities vary from a company to another company for a wide variety of reasons, taking comparisons after the taxes much more difficult. According to the table Apollo Company has higher number and stronger then Oriental Company.
6.1.3 Returns on Total Shares
According to the table Apollo Company has high return than the Oriental company. It is because Apollo Company has high net Income and also the average total sales. When the income divides with the net income it gives high return at the last compared with Oriental Company.
6.1.4 Return on Common Equity (ROCE)
According to the table Apollo Company has les number then Oriental Company. Its shows Oriental Company is weaker then Apollo Company. Oriental company has high return in their equity which is means they still have outstanding in their Stockholders Equity.
7.0 Market Value Ratios
In Market Value Ratios there are all together five ratios which is Earnings Per Share, Price/ Earnings Ratio, Book Value Per Share, and then the Dividends Ratio divided into two which is Dividend Yield and Dividend Payout.
7.1.1 Earnings Per Share
According to the table when we compare both companies Orient Company has high earnings per share and Apollo Company has less then Orient Company. In Orient Company the amount the get will make them face some difficulties o their share. But Apollo Company will easily sell or even trade in easily with their earnings for per share.
7.1.2 Price / Earnings Ratio
According to the table both companies don't have their Price / Earnings Ratio. It is happens because both companies to not have report about the Market Price per share at their balance sheet and even at their financial highlights or director report.
7.1.3 Book Value Per Share
According to the table Apollo Company has a very good and stronger amount then Orient Company. Orient company should increase all their total stockholders Equity in order to divide by shares outstanding. Here both companies do not have their preferred Dividends.
7.1.4 Dividend Yield
According to the table both companies do not have Market Share. So this cause with the ratio becomes N/A for both of the companies. It happens because market price is important to this ratio to be divided with dividend per share.
7.1.5 Dividend Payout
According to the table Apollo Company has 0.65 and Orient Company has 0.48 for their dividend payout. Orient company is the lesser and stronger compared with Apollo Company because they have less amount of dividend to payout.
8.0 Conclusion
Actually ratio analysis uses the parts of a financial statement to compute with various ratios, and then, use a system which is known as benchmarking, compares the ratios of one company to those with another company or even to the ratios for only one industry. Ratio analysis is widely had been used concept, but it also does have several limitations which must be considered before using the analysis.
8.1 Accounting Methods
Firstly not all the companies are using the same accounting methods. For example, one firm will be using straight line depreciation while another will be using double declining balance depreciation. Other than that some there will be different ways which have to calculate to get some amounts, while in another company will be straight forward. If everything between the two companies is equal, except for the one asset firm A uses the straight line depreciation and then Firm B uses double declining balance depreciation, then Firm A will be having a better return on the asset ratio because of the higher net income at the beginning in the depreciation cycle. Other than that nothing is different between the firms, except on how they depreciate assets, yet their ratios are not the same.
8.2 Inflation
When we comparing one period of time with another period of tie on a financial statement, then the accountants do not the typically factor in inflation. When using the financial ratio analysis, then, it needs more in depth analysis as the company's balance sheet will be having numbers from the different periods in the inflation. In an addition, the earnings will be increasing due to inflation and to the performance.
8.3 Seasonal Factors
The public companies release quarterly results, as per of the Securities and Exchange Commission regulation. Looking at the two firm's quarterly results with ratios could be more affected by the seasonality. Seasonality is where a company shows how it performs in specific seasons. For an example, Apollo Company is more to cakes and biscuits, and Oriental company is more to snacks and biscuits. So its make Apollo Company have their sales continuously especially more during school days because Apollo cake is one of the most attracted cake among young children.
