Introduction
Accounting ratio is the ratios expressed and will be counted based on the figures derived mostly in the financial statements of a company. The accounting ratios are mostly used to describe the financial statements in order to measure the business performances of a company. Using the accounting ratio , analyst can analyse the company and compare the business performances. There are five different aspect of business performances that can be measured using the accounting ratios, profitability of company, liquidity of company, asset management of company, debts managements and capital gearing of company and market value of investment to ordinary shareholders .
Profitability of company
Gross profit markup= Gross profit______ x 100%
Cost of good sold
= Gross profit________________________ x 100%
Opening stock+ Purchases- Closing stock
Gross profit margin= Gross profit____ x 100%
Net sales value
= Gross profit_________ x 100%
Sales- Return inwards
This formulas is use to measure the amount of company earned from sales. The higher gross profit margin and markup from the business or corporation indicate that there is higher gross profit earned by the company with its efficiency and effectiveness in the activities or production and purchasing. Whereas the lower gross profit margin and markup indicate the lower gross profit earned by the company with its efficiency.
Operating profit margin= Operating profit before interest and before taxation x 100%
Net sales value
Profit margin on sales= Net income available to common stockholder x 100%
Net sales value
Profit margin is used to measure the extent of profit earned by the company.Therefore, if company has higher profit margin, then it shows that the company had earned higher profit from the business with successful control on expenditure.
Basic earning power= Operating profit before interest and before taxation x 100%
Total assets
= Operating profit before interest and before taxation x 100%
Fixed assets+ Current assets
Return on total assets= Net income available to common stockholder x 100%
Total assets
Return on common equity= Net income available to common stockholder x 100%
Common equity
BEP, ROA and ROE are use to measure how much profit is being generated from the total assets and capital employed in business due to efficiency and effectiveness spending. When the BEP,ROA and ROE increases, it means higher profits is generated from assets and capital employed which have effectively spend, or in another word, the company had control well on assets and capital used to do its business.
Liquidity of Company
Current ratio= Current assets____ x 100%
Current liabilities
Current ratio is used to measure the financial status and liquidity of a firm.. Therefore if company has higher current ratio than the average in industry, it indicate the company's is financially stable and able to finance its short term liabilities.
Liquid ratio= Liquid assets___ x 100%
Current liabilities
The liquid ratio to calculate the liquidity of company whether the company have sufficient liquid assets to cover current liabilities.Therefore, if a company had higher liquid ratio, then it shows that company able to finance its current liabilities as well as to finance the short term liabilities. This also indicate the firm is financially stable.
Asset Management of Company
Inventory turnover= Cost of sales
Average stock value Or Closing stock value
The inventory turnover also known as stock turnover. The inventory turnover is also used to measure how fast a company stock turned over in the business and also resale the goods from the stock. The higher the inventory stock, the faster the goods resale. This also indicates that the goods purchased kept in store are quick to be sold so that the stocks are not accumulated and the money is not tied up with the stocks
Total assets turnover= Net sales__
Total assets
Total assets turnover is to measure the efficiency and effectiveness on utilizing assets of a company . How much of the sales can be made from the assets due to efficiency. Thus, the higher the assets turnover represents the higher of business sales.
Debts Management of Company
Debts ratio= Total debts_
Total assets
The debtor ratio formula are to measure how the amount of the debtor from credit sales will affect the company collect money's period. The higher debt ratios indicate the company has heavey debts burden, then the company has to take more time to collect all the money. The company cannot finance and is at risky condition. Company may have to sell its assets or dispose them to pay back the debts.
Debts equity ratio= Total debts____
Common equity
Debts equity is measure the relationship between the amounts of the debts and common equity of company.
Time interest earned= Profit before interest and before taxation
Interest charges
Time interest earned also called interest cover. It is measure the profit can earned and used to cover the interest cost.
Market Value of Investment to Ordinary Shareholders
Earning per share= Net income available to common stockholder
Number of ordinary shares in issue
Earning per share is use to calculate the business growth in a company. If the company has higher rate of growth, it means it earned higher profits, then it can attract more common shareholders.
Price/ Earning ratio= Market price per ordinary share
Earnings per share
This is to measure the time w spent by common shareholders in using their profit earnings to recover their share investment with the profit earned. The higher the price/ earning ratio, the longer time to recover the investment money.
Earning Yield= Gross earnings profit_________ x 100
Market price per ordinary share
= [100/(100-Income tax basic rate)]x Earnings per share x 100
Market price per ordinary share
Earning yield use to calculate the net income which earned by ordinary shareholders. Thus the earning yield must higher and then only can attract more shareholders.
Market price per book ratio= Market price per ordinary share__
Net book value per ordinary share
=Market price per ordinary share_______
Common equity/Ordinary shares in issue
It is used to measure whether the share market price is attractive. If the market price per book ratio is high, then it means the market price already rise which is more than real asset value, thus it will not attract ordinary shareholders.
To compare the a business performance in this assignment is the IJM Corporations Berhad and WCT Berhad is used to measure and compare the business performance . In order to measure the performances of these two company the financial statements from the annual report of company has to be obtain . The figures collected have to be calculated using the ratio comparison from the five category in order to make the comparison of business performance.
Profitability
Liquidity
Asset management
Debts management
Market Value of investments to stockholders.
1.1 Background of company
IJM Corporation Berhad
IJM is one of the largest Malaysian construction group. This company has been listed in the main board of the Bursa Malaysia. The company activities involves of major construction, property development, manufacturing and quarrying, infrastructure concessions and plantations.
The headquater of the company is in Selangor, Malaysia. The IJM regional aspirations have seen it establish a growing presence in neighbouring developing markets with operations presently spanning 11 countries, with primary focus in Malaysia, India, United Arab Emirates, China and Indonesia.
WCT Berhad
WCT Berhad is a Malaysia based company involves in the provision of engineering services in Malaysia. The company is operating in three division which are the civil engineering and construction, which include specialization in earthworks, highway construction and related infrastructure works of property development, which develops residential and commercial properties, and property investment.The companu also is holding of assets for capital appreciation and rental income.
The company is also a specialize in providing management services and investment holding. It has 12 direct subsidiaries, including WCT Construction Sdn. Bhd., WCT Land Sdn. Bhd, WCT Overseas Sdn. Bhd. WCT Equity Sdn. Bhd., WCT Offshore (L) Ltd. and WCT (S) Pte. Ltd. Operations are carried out in Malaysia, Middle East, Mauritius, Vietnam and India.
1.3 Comparison of IJM and WCT
1.4 Gross Profit Markup and Margin
The IJM Corporation is higher than WCT Berhad. Therefore, the IJM Corporations has earned more profit because of efficient and effective on purchasing activities, and also lower the production cost due to nicely utilized its material and labour usage.
Operating Profit Margin on Sales
The IJM Corporations is higher than WCT Berhad.This indicate that IJM corporations have effectively utilized its operating expenditures cost and control of the company. It has lower interest cost to increase the profit earnings.
Basic Earning Power (BEP),Return On total Assets (ROA)and Return On Common Equity (ROE)
The IJM corporation is greater than WCT Berhad. This is because IJM corporations have generated from assets to increase profits and effectively utilized capital employed on its business. However the WCT Berhad is greater on the return of assets and return of common equity. This shows that the WCT is better at the use of asset that IJM corporation.
1.5 Liquidity
Current Ratio
IJM corporation is higher than WCT Berhad. This shows that IJM ha stable financial status, because it has sufficient current assets to cover current liabilities.
Acid-test Ratio
The IJM corporation is higher than WCT Berhad. Therefore, IJM corporation have bigger amount of t liquid assets to cover the current liabilities, and also it shows that IJM corporation is stable on its financial status.
1.6 Asset Management
Inventory Turnover
WCT Berhad is better than IJM corporation. WCT Berhad manages to sell its stock quicker thatn IJM corporations which kept in the store. This indicate that WCT is sufficient in financial to clear its liabilities.
Total Asset Turnover
WCT Berhad is higher than IJM corporations. It shows WCT Berhad had effectively utilized the company assets in order to generate business activity to increase the production volume and sales volume for the company. Therefore ,WCT Berhad is more efficient here.
Debtor Ratio and Days Sales Outstanding
IJM corporations is higher than WCT Berhad in the debts and day sales outstanding . This means IJM corporation is risky and might not financially cover the current liabilities, because they given longer time to their debtors owing money.
1.7 Debts Management
Debts Ratio
WCT Berhad is higher than IJM corporation. It means WCT Berhad had heavy burden on their debts and also having high interest cost, therefore, if they can't afford their debts, company may have to sell assets to cover the debts.
Debts Equity Ratio
WCT Berhad is higher than IJM. It means it has higher debts and the finance is unstable.
Time Interest Earned
WCT Berhad is higher than IJM corportation. It means WCT Berhad is having the low interest charge on its available profits.
1.8 Market Value of Investment to Stockholders
IJM corporation is more than WCT Berhad. It shows that IJM corporation have higher profit due to the rate of business growth it is more attractive to common stockholders.
Price/ Earning Ratio
IJM corporation is higher than WCT Berhad. Therefore, the stockholders have to take longer time recover back their share investment because earning per share is slow. However for WCT is lower in the earning ratio, which indicate that is more attractive to shareholders because the shorter period of time.
Earning Yield
WCT Berhad is better than IJM corporation. This is because there are high net income to be returned, thus it can create attractive to the stockholders.
Market Price per Book Value
WCT Berhad is higher than IJM corporation. Thus this is not good because the share market price is higher than the average real asset value yet will be not attractive for the stockholders.
1.9 Conclusion
Business performance of a company can be measured using the accounting ratio. From here, comparison can be made to discuss which company has efficiency.
The business performance in overall IJM and WCT is compared .The IJM corporations have higher profit and shows stability at the profit ratios comparing to WCT Berhad. However, WCT Berhad have heavy burden on their debts comparing to IJMcorporation.It shows that the company may not be sufficient to cover the liabilities of company. But the Market value of investment to stockholders are more attractive from the view of WCT Berhad because of the shorter period.Where the holders may be able to use the profit earnings.
Limitations of Getting Information
The information of the company is not up to date can result in less accurate. Furthermore, historical cost information can't be suitable information for the decision making. Moreover, the account information is only provided the symptoms instead of the causes.
Problems of Inter-firm comparison
The selection of the industry and usefulness will be only based on the averages. Companies usually has different financial and also the risk information. Companies also have their own accounting policies which is strict. Besides that, the size of the company also can affect the comparison.
2.0 The Financial Market
There are many different financial markets. The financial markets deals with different types of financial instruments. Stocks, shares, bonds and mortgages are the various type of financial instrutments. Different financial market serve different types of customers and operate in different part of country.
There are some major financial markets such as
Money Market
This is the financial market which deal with short-term, highly liquid debt securities in which the funds are borrowed and loaned for a short period usually less than a year.
Capital markets
Capital market is the financial markets which deals with stocks and shares, the intermediate or longer debts in which the funds are borrowed and loaned for a longer period of one year or more
Mortgage markets
The mortgage markets is the financial market which deals with loans particularly on residential , commercial , industrial of real estate and farming lands.
Consumer credit markets
This is the financial market that deals with loans especially on auto and appliances, as well as loans to education sectors .
Primary Market
The primary market is the financial market which deal with issuing securities and shares. This is the financial market of corporations that will raise their capital for investment and development purposes.
Secondary Market
The secondary market is the existing and outstanding securities on financial assets that are traded among investors when they have been issued the securities from the corporations.
Initial public offering market.
This is the financial market of corporations which is 'Go Public" in offering their securities and shares to the public for the very first time.
Private Market
This is the financial market of where transactions are worked out privately and directly between both parties without having them going to public. The transactions and terms will be structured in the manner of where appealing to the both parties. This can be seen at the bank loans transactions and placements of debt with the insurance organizations.
2.1 Methods to transferring capital and funds between savers and
borrowers.
Direct transfer from savers to borrowers.
This happen when the corporation issues and sells its stocks or bonds to the savers directly without have to go through any financial institution. When this happen the borrower directly deliver its securities to savers by giving money to the corporation.
From here the capital and fund is directly transferred from savers to corporation who are the borrowers.
Process:
Indirect transfer from savers to borrowers through investment banking house.
The indirect transfer from savers to borrowers through investment banking house.
This happens when the investment bank underwrites the issuance of a corporation securities where the investment bank serves as a middleperson to facilitate the issuance of corporations securities . Usually this involve purchasing the securities of corporation and resell the same securities of the corporation to savers so that the money paid by savers will purchase the corporation securities. This will go through the investment bank and to be received by the corporation which acts as a borrower.
Therefore , the corporation's securities and saver's money is merely pass through the investment banking house. In there, the capital or fund is indirectly transferred through the investment banking house from savers to the corporation as a borrower.
Indirect transfer of savers to borrowers through financial intermediary
Indirect transfer from savers to borrowers through a financial intermediary
This take place when a financial intermediary such as a bank or a mutual fund will obtain funds from savers by issuing its own securities or a certificate of deposit to the savers. The financial intermediary will then uses the fund from savers to purchase and hold securities of other corporations as investment. In this case, the capital and fun is transferred from savers to financial intermediary when savers pay the money to the financial intermediary for the exchange to receiving certificate of deposit issued by the financial intermediary. Mostly savers are more preferring to hold the certificate of deposit and the securities of the financial intermediary because they are safer and more liquid than mortgages and loan.
The example of some financial intermediary are like CIMB mutual funds. Financial intermediaries will greatly increase the efficiency of the money and capital markets.
2.2 The Financial Investment Banking House
The investment banking house is the organization that will do task and distribute the issue of business corporation securities in order to help and assist the corporation to obtain fund for financing. The example of some investment banking house in Malaysia is the CIMB bank , Maybank and Affin bank.
2.3 Financial Intermediaries
The intermediaries are the specialized firms that will facilitate and transfers funds from savers to the demanders of capital or borrowers. The intermediaries are large, there is an economic of scale fomr analyzing the credit worthiness of potential borrowers. The intermediaries are also experts in procressing and collecting loans, pooling risk and thus helping individual savers to diversity the fund of investment.
Commercial banks
The commercial banking server wide variety of savers and borrowers. This financial intermediary handles the checking accounts and through the Federal Reserve System expand and contract the money supply. These days, the commercial bank are providitn and ever widening range of services including stock brokerage services and insurance. The difference of commercial bank and investment banking is that the commercial bank lends out money to borrowers where else the investment banking house assist the business corporation to raise capital and funds from savers.
Saving and loan associations
The saving and loan associations traditionally will serve individual saverand residential or commercial mortgage borrowers . The process of collecting funds from small savers and lending out the money to house buyers and other types of borrowers later in the needs. The significance of the saving and loan associations is to create the liquidity in the capital market.
Mutual fund savings
The mutual fund savings is particularly same with the saving and loan association. The process of accepting savings from individual and lending them out to the longer term basis. This usually happen when borrowers wishes to have a house and home plan and other consumer goods.
Credit union
The credit union is the cooperative associations. The union have a common bond so that the unions collect savings from member and loaning to other members who in need of funds to finance the auto purchases, house improvement and house mortgage. Credit union is consider the cheapest source of fund available in to the individual borrowers.
Pension Funds
The pension funds are the retirement funds by corporation and government agencies to their workers. The funds are administrated primarily by the trust deparments of commercial banks or by the life insurance companies. The fund primarily will invest in bonds, stocks mortgages and real estate.
Life insurance companies
The company collects savings by the form of annual premiums and will invest these funds towards the stocks, bonds real estate and mortgages and making payments to beneficiaries of the insured parties. The insurance companies also do have offered the variety of tax-deferred saving plans which is specially designed for participants when retiring .
