The company that is Pelikan International Corporation Berhad has been selected to make comparison on its financial statements from year 2008 to 2009 to analyze business and financial sustainability. Furthermore, clearly explanation about the causes and effects has been made, management action that should be taken to improve company liquidity and relevant calculation and analysis has been made.
Pelikan International Corporation Berhad is a public listed company on the Main Board of Bursa Malaysia Securities Berhad. It is a global well-known German trademark Company which producing high-class writing instrument and have almost 170 years since registered. (Pelikan.com, 2008) Pelikan international corporate berhad undertake in the manufacturing and distribution of writing instruments through its subsidiaries. For instance, art, painting and hobby products, school and office stationery, printer consumables and investment holding. These products was distributes through wholesalers, dealers, retailers and modern trade, which including hypermarkets, schools and specialized stores for luxury items. (corporateinformation.com, 2009)
Pelikan company innovative products accompanies everyone life from kinder garden, to school, college and office or while pursuing hobbies; or refining personal communication, Pelikan offering wide range of product to consumer with highest standards of quality and innovative products to ensure consumer with trustworthy companions. (Pelikan.com, 2008) For example, products that are creative which able to fulfil customer's satisfaction and build up strong brand awareness from consumer with high quality standard. Pelikan guiding principles are quality, innovation, integrity, commitment and teamwork in order to gain improvement on company growth and productivity. (Pelikan.com, 2009)
Pelikan Company's direct subsidiaries held at different countries such as Japan, Indonesia, Malaysia, Singapore, Mexico, Taiwan, India and many more countries. Company operations were carried out in Germany, Switzerland, Italy, rest of Europe, Latin America and other countries. (corporateinformation.com, 2009) Positioned growth of Pelikan International Corporation Berhad has been intend to growth with conform strategies to enlarge both organically via acquisitions. At the year of 2009, global economic was turning down however the Group remained its long term goals and successfully began on a strategic acquisition that increase the business potential and strengthens Pelikan position as a difference internationally brand. In the same year, the Group management adapting to change market strategies with effective cost saving, it is beneficial to long term and short term productivity. (Pelikan.com, 2008)
Ratio Analysis
Financial data of Pelikan International Corporate Berhad was gathered for analyzing the business and financial performance of the company for year 2008 and 2009. The purpose of evaluate these ratios analysis is to perform better understanding of company financial performance whether company management team should maintain, improve or undertake any changes to confront with deteriorate condition. Financial data information was derived from the GROUP income statements, balance sheet, consolidated statement of changes in equity and notes from both year 2008 and 2009; all the financial data sources are attached as Appendices.
Following ratios analysis below will be develop in order to compare both 2008 and 2009 years financial performance and further explanations were given.
Financial Leverage Ratios OR Long-term solvency and stability
Demonstrate the degree of debt that used in a company's capital structure.
Liquidity and Working Capital OR Short-term solvency and liquidity
Descriptions given about company's short-term financial situation or solvency.
Profitability Ratios
Illustrate the ability of a company's could produced revenue
Activity ratios OR Efficiency Ratios
Measures turnover by how efficient a company in its operations and use of assets
Shareholder Investment Ratios
Evaluate the performance of a business and the prospect of future growth
Market Value
Help determine the price to book ratio is overvalued or undervalued
Financial Leverage Ratios OR Long-term solvency and stability
The financial leverage ratio indicates the level to which the business rely upon on debt financing. It measure of how much assets a company holds oppose to its equity. (Alim, 2006-2010) Company is using debt and other liabilities to finance its assets when there is a high financial leverage ratio. In other words, company with high leverage ratio is more riskier than a company with lower leverage ratio. A company with high financial leverage ratio state that the possible of difficulty in paying interest and principal as promised while obtaining more funding. Acceptable range of the financial ratio is generally 2:1, and over a long term, it should turndown to 1:3. (Wizard of Business Analysis: Debt to Equity Ratio, 2010) There are few different ratios, however the major element looked at include debt, equity, assets and interest payable. There are three primary financial leverage ratio include debt to equity ratio, interest cover and Gearing ratio. (Investopedia.com, 2010)
Trend Analysis
Performance Area
2008
2009
Trend
Financial Leverage Ratios OR
Long-term solvency and stability
(i) Debt to Equity Ratio
166.74%
151.27%
favorable
(ii) Interest Cover(Times)
2.54 Times
3.19 Times
favorable
(iii) Gearing Ratio
46.50%
41.76%
favorable
Debt to Equity Ratio
The element of this ratio consists of all debt, short term and long term. In common, the higher the debt equity ratio, the lower the extent of protection enjoyed by creditors. This can lead to volatile the earnings as a result of the incremental interest payment. (Wizard of Business Analysis: Debt to Equity Ratio, 2010) The debt-equity ratio is one of the leverage ratio that compares a company's total liabilities relative to its total shareholders' equity. This is a measurement of how much suppliers, lenders, creditors and obligors have compliance to the company versus what the shareholders have compliance. (Loth, 2010) The debt-equity ratio appears often in investment literature and indicates what scale of equity and debt that the company is using to finance its assets. In this case, debt to equity ratio of Pelikan International Corporation Berhad from year 2008 to 2009 has been decrease which is 166.74% to 151.27%. Decreasing in debt to equity ratio represent that Pelikan International Corporation Berhad used less debt for financing, furthermore, the protection level of creditor increase yet equity holder of the company holding more money than its creditor and company facing less risky for difficulties in paying interest and principal. This indicates that for year 2009, Pelikan International Corporation Berhad's financial performance was healthier than year 2008 and less negative impact will incur.
Interest cover (Times)
Interest cover also called as time interest earned, this ratio calculate by using profit before interest and taxes divide interest payable. Company can easily meet its interest burden when profits before interest and taxes suffer a considerable decline, which cause high interest coverage ratio. This ratio is widely used by lenders to evaluate a firm's debt capacity and evaluate the profits whether it is sufficient to pay interest and other finance cost incurred; as well as how many times a company can pay its interest expense on debt with company's earnings before interest and taxes. (Chandra, 2008) A high or increasing Interest Coverage Ratio is generally a positive label; represent the company is readily able to pay its Interest expense with its earnings have been made. In contrast, the lower interest cover ratio incur imply the company is much more risky in liquidity problem and run into bankruptcy. Times interest ratio result must at least get 1.0, showing the company is exclusively able to pay its expense. Depending upon the industry, ratio value of 1.5 to 2.0 is desirable. (Spireframe.com, 2003-2010) Hence, for Pelikan International Corporation Berhad, they did not have to worry about the ability of the company to pay its interest expenses or any other finance cost because the interest coverage ratio from year 2008 to 2009 was basically over the minimal ratio value. Additionally, the company has been meet desirable value which is 2.54times for year 2008 and 3.19 times for 2009. This is due to the profits before interest and taxes were much higher than interest expenses that made by the company. In other word, high degree of Pelikan International Corporation Berhad able to pay its expenses and there is no liquidity problem having in this company.
Gearing Ratio
Gearing ratio is one of the leverage ratio, its purposes is to evaluate the percentage of capital employed that is financed by debt and long term finance. The higher the gearing ratio incur, the higher the dependence on borrowings and long term financing. Whereas, the lower the gearing ratio, the higher the dependence on equity financing. Generally, the higher the degree of gearing, the higher the degree of financial risk is more vulnerable to downturn the business due to the increased volatility of profits which affect the business cycle. (investopedia.com: gearing ratio, 2010) Majority businesses rarely have sufficient equity financing, hence company usually require long-term debt for their company finance growth. In addition, company that relies upon equity financing is unable to sustain company growth for a long period. This is why company introduces debt and cause gearing ratio increase as well increases company's financial risk. Therefore, gearing ratio is calculate in order to comprehend total debt a company can undertake before benefits of growth are exceed by the disadvantages of financial risk. (bized.co.uk, 1996-2010) Table above interpret that gearing ratios for 2008 is 46.70%, whereas for year 2009 it is 41.76%. Thus, Pelikan International Corporate Berhad was less depends on borrowing debt and long-term finance for year 2009 compare with year 2008. Company business cycle would not run into liquidation problem since the gearing ratio decrease at year 2009. Less riskier for company to face financial problem and less introduces debt financing for year 2009 but it means Pelikan International Corporate Berhad was depend more on equity financing for the company. Nevertheless, lower gearing ratio is good for company financial performance but if Pelikan International Corporate Berhad continually dependence on company's equity financing, it might not able to sustain company growth in long term. A better or equal method should undertake to prevent company turn towards financial dilemma.
Conclusion
In conclusion, the calculation of the leverage ratio interpret Pelikan International Corporate Berhad having better performance at year 2009 compare year 2008. From the table we can realize that at year 2009, debt to equity ratio and gearing ratio of the company was reduce. This good condition represents company financial getting better and smooth but not turns towards liquidity dilemma. Pelikan International Corporate Berhad should continue improve their financial performance by continue decreasing debt to equity ratio and gearing ratio. lower debt to equity ratio and lower gearing ratio incurred due to company was less borrowing on debt for financing purpose. Creditors were enjoyed high degree of protection and less volatile in company earnings. Thence, investors are more willing to invest for this improvement because returns are more stable, merely, Pelikan might appear difficulty in financial in the future if its continue use equity financing rather than long term financing and borrowing debt. Necessary precautions step should consider before any decision have been make based on the interest of the company. Moreover, interest coverage ratio proves that ability of Pelikan International Corporate Berhad to repay interest and principal increase. Company able to repay its interest and principal as many time compare with year 2008. Confidence and trust increase from investor, creditors, and shareholder to continue invest and support in this company for further company's prospect. Customer can also build up the confidence towards the company's product by knowing the company financial performance.
Liquidity and Working Capital OR Short-term solvency and liquidity
Liquidity and working capital ratio also called as short-term solvency and liquidity. It is a measurement seek to determine a firm's ability in achieve its current obligations in variety ways like using those assets converted into cash. (Mark, 2002-2007) Short period were using to convert assets into cash known as liquid assets, which also indicate as current assets in company's financial statements. Current assets generally represent the resources of daily operations of the firm's long-term capital investment. Amount of current assets over current liabilities is mention as net working capital. Two major used liquidity ratios are current ratio and quick ratio. (Netmba.com, 2001-2010) Following ratio that include in calculating liquidity and working capital are net working capital to sales ratio, average collection period, number of day's inventory, receivables and payables and operating cycle. A more detail explanation was given below with table.
Trend Analysis
Performance Area
2008
2009
Trend
Liquidity and Working Capital OR
Short-term solvency and liquidity
(i) Net Working Capital
22%
0.20%
adverse
to Sales Ratio
(ii) Current Ratio
1.63:1
1.49:1
adverse
(iii) Quick Ratio
0.94:1
0.86:1
adverse
(iv) Average Collection Period (days)
85 days
89 days
adverse
(v) Number of days inventory
204 days
230 days
(vi) Number of days receivables
85 days
89 days
(vii) Number of days payables
82 days
78 days
(viii) Operating cycle
289 days
319 days
Net working Capital to Sales Ratio
This ratio computes by current assets minus its current liabilities to indicates company's liquid assets after achieve short term obligations oppose to its need for liquidity which represented by sales. It is one of the ways to evaluate firm's ability to meet short-term emergencies. Greater sales have more funds flowing in and out of its current asset investments, therefore, company need to have greater net working capital to protect itself in order to avoid suspend in the cycle such as labor strike or unpredictable late payment by customers. (Frank et al, 2009) From the table, shows that the net working capital ratio decreases from year 2008 that is 22% whereas, year 2009 is 20%. In other word, the ability Pelikan International Corporation Berhad to meet its immediate obligation reduces from year 2008 to 2009. Company should ensure there are enough liquid assets relative to its liquidity for the coming year in order to prevent liquidation problem incur. Net working capital is higher the better especially when the company is dependence to any significant degree on creditor money to finance assets. Loans are normally the cause that tied up company working capital requirement to minimum.
