This report consists of four parts. First, the background of the companies - Layhong Berhad and Farm's Best Berhad will be briefly stated. Next, ratio analysis will be discussed in order to obtain a clearly view of these two companies' operation performance. Additional information regarding these two companies will be taken into consideration in evaluating them. Finally, a conclusion is made regarding their performance. Recommendations were suggested on how to improve their current situation.
Background of the Companies
2.1 Layhong Berhad
Lay Hong Berhad is a public listed company incorporated and operating in Malaysia. Their business involves poultry farming and also investment holding activities. The company started its operations in 1960's with a sole proprietary business. The company has many subsidiaries. They are Hing Hong Sdn Berhad, Innofarm Sdn Berhad, Lay Hong Liquid Egg Sdn Berhad, Lay Hong Poultry Processing Sdn Berhad, Sri Tawau Farming Sdn Berhad, etc.
2.2 Farm's Best Berhad
Farm's Best Berhad is a subsidiary of F.C.H. Holdings Sdn. Bhd. They have 3 principal activities. They are Farm's Best food products, integrated poultry operations and also housing development. They business involves in processing, distributing and marketing of poultry products and also manufacturing and wholesaling animal feeds. Besides that, Farm's Best Berhad also engages in property development, trading of poultry products and also investment holding. The company is based in Melaka, Malaysia.
Ratio Analysis
LAYHONG
FARM'S BEST BERHAD
2008 (RM)
2009 (RM)
2008 (RM'000)
2009 (RM'000)
Short-term Solvency
Current Ratio
Current assets
108,283,984
110,424,576
205,339
217,731
Current liabilities
119,864,249
127,723,280
220,532
236,942
0.9
0.86
0.93
0.92
Current Ratio measures a firm's ability to repay debt in short term. Layhong Berhad's current ratio decreased from 0.9 to 0.86 from the year 2008 to the year 2009. Farm's Best Berhad current ratio decreased from 0.93 to 0.92 from the year 2008 to 2009. This ratio indicates that both companies might face problem in repaying their debts in short-term. Their currents assets are insufficient to cover the current liabilities.
Quick Ratio
Current assets - inventory
108,283,984 -28,651,543
110,424,576 - 35,972,553
205,339-20,412
217,731-17,529
Current liabilities
119,864,249
127,723,280
220,532
236,942
0.66
0.58
0.84
0.84
Quick Ratio measures short-term liquidity more harsh than current ratio by subtracting inventory. Layhong Berhad's quick ratio decreased from 0.66 to 0.58 from the year 2008 to 2009. Farm's Best Berhad quick ratio maintained for 0.84 for both the year 2008 and 2009. The ratio shows that Farm's Best Berhad will be more capable to repay short-term debt than Layhong Berhad. However, both their ratio are unfavourable.
Asset Management Efficiency
Payable Turnover
Cost of goods sold
234,710,419
251,200,159
365,155
313,047
Account payable
55,315,369
57,037,581
50,226
37,633
4.24
4.40
7.27
8.32
Payable Turnover measures a firm's ability and efficiency in paying suppliers. Layhong Berhad's payable turnover decreased from 4.24 to 4.40 from the year 2008 to 2009. Farm's Best Berhad payable turnover increased from 7.27 to 8.32 from the year 2008 to 2009. The comparison shows that Farm Best Berhad is more efficient in repaying the suppliers than Layhong Berhad.
Total Asset Turnover
Net sales
317,522,797
350,545,615
400,260
347,903
Total assets
270,370,246
289,863,491
367,125
377,723
1.17
1.21
1.09
0.92
Total Asset Turnover measures efficiency of firm in managing assets. Layhong Berhad's total asset turnover ratio increased from 1.17 to 1.21 from the year 2008 to 2009. Farm's Best Berhad total asset turnover decreased from 1.09 to 0.92 from the year 2008 to 2009. Layhong Berhad has a more favourable ratio as compared to Farm Best Berhad because they generate a higher amount of sales for each dollar of assets.
Debt Financing & Coverage
Debt Ratio
Total liabilities
183,374,415
192,243,879
271,312
287,922
Total assets
270,370,246
289,863,491
367,125
377,723
0.68
0.66
0.74
0.76
This ratio shows proportion of assets that are financed with debt. Layhong Berhad's debt ratio decreased from 0.68 to 0.66 from the year 2008 to 2009 respectively. Farm's Best Berhad debt ratio increased from 0.74 to 0.76 from the year 2008 to 2009. Layhong Berhad has a more favourable debt ratio because they have lesser assets that are financed with debt.
Long-term Debt to Total Capitalization
Long-term debt
42,270,291
42,743,415
50,780
50,980
Long-term debt + stokeholders equity
42,270,291+86,995,831
42,743,415+97,619,612
50780+95,813
50980+89,801
0.33
0.3
0.35
0.36
This ratio indicates the extent where long-term debt is used as permanent financing. Layhong Berhad's ratio decreased from 0.33 to 0.3 from the year 2008 to 2009. Farm's Best Berhad long-term debt to total capitalization increased from 0.35 to 0.36 from the year 2008 to 2009. There is no significant difference of the ratio between these two companies. However, Layhong Berhad shows a less-risky position because its ratio is decreasing.
Debt to Equity
Total liabilities
183,374,415
192,243,879
271,312
287,922
Stokeholders equity
86,995,831
97,619,612
95,813
89,801
2.11
1.97
2.83
3.21
Debt to Equity Ratio measures debt's portion relative to equity base. Layhong Berhad's debt to equity ratio decreased from 2.11 to 1.97 from the year 2008 to 2009. Farm's Best Berhad debt to equity ratio increased from 2.83 to 3.21 from the year 2008 to 2009. In comparison, Layhong Berhad financed their company with smaller portion of debt as compared to Farm Best Berhad. This may put Farm Best Berhad in a more risky position.
Times Interest Earned
Operating Profit
11,903,216
17,947,158
8,585
7,026
Interest Expense
6,780,045
6,172,502
10,274
12,584
1.76
2.91
0.84
0.56
Times Interest Earned indicates how many times the interest payments will be covered by operating earnings. Layhong Berhad shows an increase of time interest earned from 1.76 to 2.91 from the year 2008 to 2009. Farm's Best Berhad has 0.84 times interest earned for the year 2008 and 0.56 for the year 2009(decrease). Layhong Berhad gives a more favourable ratio as compared to Farm Best Berhad. Farm Best Berhad's operating profit is unable to cover the interest expense.
Overall Efficiency & Performance
Net Profit Margin
Net profit
5,123,171
11,774,656
-2,519
-4,530
Net sales
317,522,797
350,545,615
400,260
347,903
0.02
0.03
-0.01
-0.01
Net Profit Margin the portion of net profit over revenues. Layhong Berhad net profit margin increased from 2% to 3% from the year 2008 to 2009. Farm's Best Berhad has 1% of net loss margin for both the year 2008 and 2009. Obviously, Layhong Berhad performed better than Farm Best Berhad as Farm Best Berhad has negative profit margin(incur losses).
Return on Total Assets
Net earnings
11,903,216
17,947,158
7,755
8,054
Total assets
270,370,246
289,863,491
367,125
377,723
0.04
0.06
0.02
0.02
Return on Total Assets measures the ability of a firm to manage assets and generate profits. Layhong Berhad return on assets increased from 4% to 6% from the year 2008 to 2009. Farm's Best Berhad return on total assets maintained at 2% for the year 2008 and 2009 respectively. This shows that Layhong Berhad is generating more profits from their total assets. They are better in managing their assets as compared to Farm Best Berhad.
Return on Equity
Net earnings
4,713,940
11,016,252
-6,291
-4,789
Stokeholders equity
86,995,831
97,619,612
95,813
89,801
0.05
0.11
-0.07
-0.05
This ratio measures percentage of return on stockholder's investment. Layhong Berhad ROE increased from 5% to 11% from the year 2008 to 2009. Farm's Best Berhad returns on equity are -7% and -5% for the year 2008 and 2009. This shows that Layhong Berhad is generating profit for the shareholders whereas Farm Best Berhad is causing their shareholders to incur losses.
Market Ratios
Earnings per common share
Net earnings
4,713,940
11,016,252
-6,914
-6,483
Average common shares outstanding
46,240,000
46,240,000
55,530
55,530
10cents
24cents
(12.45)cents
(11.67)cents
This ratio shows return to common stock shareholders on each share owned. Layhong Berhad EPS increased from 10 cents to 24 cents from the year 2008 to 2009. Farm's Best Berhad EPS are -12.45 and -11.67 cent the year 2008 and 2009 respectively. This shows that Layhong Berhad is more favourable as it is able to generate profit for the common shareholders. On the other hand, Farm Best Berhad's shareholders aregenerating losses from their shares.
Additional Information and Critical Issues
4.1 Layhong Berhad
i. Various successful business activities
Layhong Berhad achieved high growth throughout the years. They eventually became the leading producer of fresh farm eggs in Malaysia. Their secret here is the constant efforts on aggressive and focussed marketing campaigns. Besides, they provide a wide range of chicken related foods such as frozen chicken, nuggets, frankfurters, fried chicken and others. In December 2008, they ventured into retail supermarket business in the East Malaysia and also the suburban town of Sabah. Currently, there are 10 supermarket outlets operate by the company under the name G-mart. These supermarkets enable the company to market the company products directly to end consumers and they enjoy better profit as well as reduce cash flow risks.
ii. Award achievements of the company
Layhong Berhad had devoted a lot of energy in manufacturing high quality of Halal food products. This is showed by their manufacturing activities. They are strictly implemented according the food standards such as Good Manufacturing Practices certification for animal feed production (GMP), Veterinary Health Mark (VHM), and ISO. Lay Hong Berhad had been recognized and also been awarded the Outstanding Layer Farm Award in 2007 by the Agro-Based Industry and Minister of Agriculture as a result of its contribution of care towards the environment. As a result, Lay Hong Berhad had been recognized and awarded Outstanding Layer Farm Award in 2007 by the Agro-Based Industry and Minister of Agriculture.
4.2 Farm's Best Berhad
i. Overall performance review
For financial year ended 31 December 2009, the company integrated poultry operations had made a loss about RM0.2 million compare to a profit of RM3.7 million in year 2008. This performance drop was mainly caused by decrease in average selling prices of processed poultry products and live broilers. Although imported raw materials price (corn and soy bean meal) was reduce, it was not enough to offset its effect.
As for egg layer division, improvement was shown with a lower loss of around RM3.6 million in 2009 compared to RM6.0 million in 2008. This is because of a better average selling price of table eggs due to lower production costs.
Housing development division showed improvement with a profit of RM0.95 million compare to a loss of RM0.64 million in 2008. This was caused by increase sales of houses at Krubong, Melaka (Peninsula Park project) after the completion of a bridge connecting the project site to Batu Berendam (Taman Melaka Baru). Moreover, compulsory acquisition by the local state government on part of its development land in Tanjung Minyak, Melaka also result in additional profit.
ii. Strategic measures to improve company
Management of the company had appoints external consultants to provide useful advice on cost cutting and energy savings measures. They also take efforts to increase sales of further processed products which offer higher profit margins. Besides, they also take steps to dispose non-core assets of the company.
Conclusion and Recommendations
Both the companies might have difficulties in repaying their debts in short term. Both their current assets are unable to cover all the current liabilities. Therefore, they should ensure that their current assets are always sufficient to cover the current liabilities. In the aspect of asset management efficiency, both the companies performed moderately and equally. There was a decrease in Farm's Best's asset turnover ratio in 2009. They might consider disposing their old assets and replace them with more productive ones.
Farm's Best Berhad used a larger portion of debts rather than equity to finance their activities. This may put them in a riskier position as compared to Layhong Berhad. They should consider using more equities rather than debt financing. Besides, the operating profit of Farm's Best Berhad profit was unable to cover the interest expense. Layhong Berhad performed well in terms of overall efficiency and performance ratio as compared to Farm's Best Berhad. They generated a high portion of earnings on the stockholders' equity. The earnings actually increased from 5% to 11% in only a year's period, which is a huge increase. Besides, Layhong Berhad was actually giving increasing returns to their shareholders. On the other hand, Farm's Best Berhad was causing their shareholders to be in a loss. Farm's Best Berhad might consider to venture into new business or to eliminate their existing non-profitable business.
As a conclusion, we would prefer to invest in Layhong Berhad. This is because they can promise a better return of profits as compared to Farm's Best Berhad. Besides, we would be more confident towards Layhong Berhad as they finance their operation with lesser debt and more equity, which will be less risky as compared to Farm's Best Berhad. In short, Layhong Berhad is a more favourable company to be invested in as compared to Farm's Best Berhad.
