Financial analysis also calls as financial statement analysis or accounting analysis. It is prepared by those professionals who using ratios that used of information taken from financial statements and other reports such as a certain company annual report. Besides that, a financial analysis is a relationship that indicates about the industry activities, liabilities, current assets, account receivable and so on. It is the process of evaluate some business, some project and budgets to determine their suitable for investment. It also refers as an assessment of the viability, stability and profitability of a business. Financial analysis can extrapolated a company past performed and estimated their performing in future. So, the purpose of doing the financial analysis is in order to avoid the error conclusion about the firm's financial condition. Besides that, it also provides financial position or performance of a company that is useful for user to make economics decisions. There are several measuring instrument may be used to evaluate including horizontal analysis, vertical analysis and ratio analysis.
Ratio analysis helped to identify the strength and weaknesses of a company. It can clearly determines and highlighting all the trends and exposed the strength and weaknesses of a company. It compared past ratio or ratio of other firm in the same or different industry. Other than that, ratio analysis gives a meaningful comparison of firm's financial data with other firms. The company I decided to choose for evaluating the financial position and performance using accounting ratio analysis are London Biscuit Berhad and Apollo Food Holding Berhad.
London Biscuit Berhad is a home grown Malaysian company, it main business philosophy hinges on manufacturing and marketing cakes and snack food which score high in terms of product safety and quality. The company strongly believes that this is the only way to ensure the customer satisfaction and loyalty to the product and the brand it embodies. London Biscuits individually packed and ready to eat products can be divided into 2 main categories namely, corn based snacks and cake products such as Swiss Rolls, Pie Cakes and Layer Cakes. In addition, London Biscuits also manufactures range assorted chocolate confectionery including chocolate-coated peanuts and biscuits, pancake cookies, jelly and puddings, wafer sticks, cup sticks and snack noodles. London Biscuits products can be found in Malaysia and 65 other markets in worldwide. It main overseas markets are China, Hong Kong, Macau, Indonesia, Singapore, Taiwan, Thailand, Vietnam and the Middle East. Next, Apollo Food Holding Berhad is a Malaysia-based company engaged in investment holding and provision of management services. The Company which is manufacturing compound chocolate confectionery products and layer cakes based in Malaysia. Apollo's product mainly divided into two main categories which are Chocolate Wafer products and Layer Cake, Chocolate Layer Cake and Swiss roll products. It wholly owned subsidiaries are Apollo Food Industries (M) Sdn Bhd and Hap Huat Food Industries Sdn Bhd. The Apollo products are distributed in Malaysia and other overseas market which are Singapore, Indonesia, Thailand, Philippines, Vietnam, China, Hong Kong, Taiwan, Japan, India, Middle East, Mauritius, and Maldives.
The comparison between London Biscuit Berhad and Apollo Food Holding Berhad:
Liquidity ratio
Liquidity ratio defined as it its ability to meet debt obligations. It measure the ability of a company to use the cash retire their liabilities immediately and company short-term financial situation. Besides that, it also defined as the question does the assets in a company enough to cover their liabilities and that is will the firm have the resources to pay the creditors?
Net working capital
Net working capital = current assets - current liabilities
London = 109,188,926 - 152,378,455 = - 43189529
Apollo = 102,345,475 - 8,009,467 = 94336008
Conclusion: With the comparison above, London Company having a short-term financial problem because their current liabilities are too much that means their current assets is not enough to cover all their liabilities. In opposite, Apollo Company is having a good financial. They have enough assets to cover their liabilities. In short, London Company having a poor liquidity position, it might under a poor credit risk but for the Apollo Company, they are in good liquidity position, means that they have enough ability to credit their risk or overcome it.
Current ratio
Current ratio = Current assets
Current liabilities
London = 109,188,926
152,378,455
= 0. 716
Apollo = 102,345,475
8,009,467
=12.8
Conclusion: With the information above, London Company has 0.716 available assets that can be converted into the cash for every dollars company owes but for Apollo Company, they have 12.8 available assets can be converted to the cash which is more than number of 17 of the London Company. In short, London Company having a difficult meeting current obligation. They will begin paying their bill slowly, borrowing from its bank and so on. But for the Apollo Company, they have enough resources to pays its debt but if the current ratio continually too high, they may not efficiently using its current assets. It may indicate in working capital management.
Acid-test (quick) ratio
Acid-test (quick) ratio = current assets - (inventory + prepaid expenses)
Current liabilities
London = 109,188,926 - (31,562,835 + 6,227,271)
152,378,455
= 0.469
Apollo = 102,345,475 - (14,569,823)
8,009,467
= 10.959
Conclusion: With the comparison above, London Company cannot effective pay its liabilities currently because it having low quick ratio. They having 0.469 which has less than 1, the inventory is not including from the sum of assets financially that means in this ratio. But for Apollo Company, they had good liquidity when compared to the London Company which is more than 1. That means the company has enough ability to extinguish its current liabilities immediately.
Asset utilization (activity) ratios
Asset utilization (activity) ratios are to determine how effectively a firm or a company is managing its assets. It is necessary to evaluate the activity or liquidity of specific current accounts and it exists to measure the activity of debtors, inventory and total assets.
Account receivable turnover
Account receivable turnover = net credit sales
Average accounts receivable
London = 223,434,122
26,305,732 + 22,772,367
2
= 9.1
Apollo = 159,531,255
20,472,957 + 21,296,157
2
= 7.6
Conclusion: This ratio is the ratio that represents the number of time the firm collecting its credit during the year. For the London Company, they need collect about more 9 days then only they can finished to collecting their credit. For the Apollo Company, they need about 7 days to collect all the credit during this year. So, with this comparison, we know that Apollo Company is more efficiency than the London Company. This shows that the company has the ability to collect its credit from their debtors.
Average collection period
Average collection period = accounts receivable
Daily credit sales
London = 26,305,732
223,434,122
365
= 43
Apollo = 20,472,957
159,531,255
365
= 47
Conclusion: The ratio above show the cash collecting effort makes by both companies. From the ratio above, we know about the London Company need about 43 days to collect their money and for the Apollo Company, they need about the average of 47 days then only they have ability to collect their money. With the comparison of the both company, London Company are more efficiency to collect back their outstanding when compared with the Apollo Company.
Inventory turnover ratio
Inventory turnover ratio = costs of goods sold
Average inventory
London = 169,284,276
(31,562,835 + 33,055,440)
2
= 169,284,276
32309137.5
= 5.24
Apollo = 114,034,444
(14,569,823 + 12,208,778)
2
= 114,034,444
13389300.5
= 8.52
Conclusion: From the calculating above, London Company has used 5.24 times sold their inventory but Apollo Company has used 8.52 times sold their inventory. That means Apollo Company indicates a greater sales efficiency and it has a lower risk of loss. Usually the company which has high number is more stable because the turnover directly affected its profit. For London Company which has number of 5.24, the company might hold too much inventory or old inventory or its control might be poor. Excess inventory represents that an investment with a low or zero rate of return.
Fixed asset turnover
Fixed asset turnover = net sales
Total fixed asset
London = 223,434,122
392,174,946
= 0.6
Apollo = 159,531,255
124,806,077
= 1.28
Conclusion: Apollo Company has using its fixed assets more efficient to generate their sales or income when comparing with the London Company which are 0.6. The higher the ratio, the better because the company has less money tied up in fixed assets. For this ratio, Apollo Company has effectively uses its plant and equipment but for London Company, their ratio might be low because maybe they over invested in plant and equipment.
Total asset turnover
Total asset turnover = net sales
Total assets
London = 223,434,122
501,363,872
= 0.45
Apollo = 159,531,255
227,151,552
= 0.7
Conclusion: In this ratio, Apollo Company is more effectively in generating its sales by using its assets when comparing with the London Company. The higher the ratio, the smaller the investment required to generate the sales. In this ratio, Apollo Company has the higher ratio compared to the London Company, that means the Apollo Company invest a smaller amount then it enough to generate a lot of sales. So, the company is in higher profitability than the London Company.
Profitability ratio
Profitability ratio showed an indication of firm's financial situation during the year. It shows the return on sales and capital employed. Besides that, it also shows how well the firm is performing in order to generate the profit and how effectively the firm is being managed and the company's ability to earn profit and return on investment.
Gross profit margin
Gross profit margin = gross profit
Net sales
London = 54,149,846
223,434,122
= 24.2%
Apollo = 45,496,811
159,531,255
= 28.5%
Conclusion: In this ratio, Apollo Company is in high gross profit margin. London Company has 24.2% in gross profit but Apollo Company they having 28.5% in gross profit margin. In short, the Apollo Company has well revenue is utilized to cover their costs of goods sold. Higher ratio shows that the company has greater efficiency in turning raw material into income. For London Company, the company has low gross profit when compare with Apollo Company, without an adequate gross profit, the company maybe will not be able to pay its operating and other expenses and build for the future.
Net profit margin
Net profit margin = net profit
Net sales
London = 18,065,326
223,434,122
= 0.08
= 8%
Apollo = 24,676,992
159,531,255
= 0.15
=15%
Conclusion: This ratio is to calculate how profitability the company generated from income or revenue. London Company has generated 8% in this ratio but Apollo Company generated 15% which is higher than the London Company. This shows that the Apollo Company operating its company very well and they are effectively to converting revenue into profit. Besides that, this also show that the Apollo Company is good in control their costs. In opposite, a low ratio will give the higher risk to company, they may decline in sales such as the London Company.
Return on total assets
Return on total assets = net income
Average total assets
London = 18,065,326
(501,363,872 + 447,756,032)
2
= 18,065,326
474559952
= 0.038
Apollo = 24,676,992
(227,151,552 + 210,527,264)
2
= 24,676,992
218839408
= 0.113
Conclusion: This ration show that the profits generate of company in each $1 in assets. London Company generated 0.038 profits in each $1 but for Apollo Company, they generate 0.113 profits in each $1. Both of the companies are generated less profit, but with the comparison, Apollo Company is generated more profit than London Company. But for the company which has larger initial investment, they might have lower return in sales. Besides that, for the London Company, low return results might cause from the company's low basic earning power plus or high interest costs such as debt.
Return on common equity
Return on common equity = earnings available to common stockholders
Average stockholders' equity
London = 18,065,326
(199,330,061 + 168,662,503)
2
= 18,065,326
183996282
= 0.1
Apollo = 24,676,992
(80,000,000 + 80,000,000)
2
= 24,676,992
80000000
= 0.3
Conclusion: London Company earned 0.1 number of profit when the shareholder investing $1 in the company. In opposite, Apollo Company earned 0.3 number of profit when the shareholder investing $1 into the company. With the comparison, Apollo Company ratio is more than the London Company ratio. With the number of 0.1, the London company income is lower than their expenses. With this kind of result, London company shareholder might lost the confident to the company, their might start to switch to other company which can generate more income for them or they will show low active behavior in this investment.
Market value ratios
Market value ratios are the ratios relate the firm's stock price to its earnings (or book value) per share. Usually, investors use these ratios to evaluate and monitor the progress of their investments. Besides that, these ratios give management an indication of what investors think of the company's past performance and future prospects.
Earning per share
Earning per share = (net income - preferred dividends)
Total common shares outstanding
London = 18,065,326
12,776,040
= 1.41
Apollo = 24,676,992
80,000,000
= 0.3085
Conclusion: For the calculation in above, London Company invest per share in the company can get 1.41 profit but for the Apollo Company, they invest per share can get only 0.3085. In this type of result, London Company is able to generating more income to their shareholders. But for Apollo Company, maybe they have too much shareholders, so they need to distribute their income into smaller amount.
Book value per share
Book value per share = (total stockholder's equity - preferred dividends)
Shares outstanding
London = 248,777,109
12,776,040
= 19.47
Apollo = 203,176,465
80,000,000
= 2.54
Conclusion: For the result of the ratio above, we know that the investors in London Company need pay more $19.47 in the company. For the Apollo Company, they need pay more $2.54 in the company. This situation is depending on the market value. The more increase the market value in the market, the more increase the book value per share in the company.
Dividend ratios
Dividend payout = dividends per share
earning per share
London = 0
17.31
= 0
Apollo = 20
30.58
= 0.65
Conclusion: From this kind of ratio, London Company get 0 dividend payout but for Apollo Company they have about 0.65 dividend payout. Normally, high growth firms in early life generally have low or zero payout ratios such as the London Company.
Leverage ratio
Leverage ratio also called as the debt management ratio. It shows the extent that debt is used in a company's capital structure. Besides that, it is the ratio that using to evaluate a company's liability to use it asset efficiently to generate revenue. Leverage ratio indicates a company ability to meet its long term obligations as they become due and it concentrates on the long-term financial and operating structure of the business. Company which has high leverage may face the problem such as bankruptcy.
Debt ratio
Debt ratio = total liabilities
Total assets
London = 252,586,763
501,363,872
= 0.5
= 50%
Apollo = 23,975,087
227,151,552
= 0.106
= 10.5%
Conclusion: In this ratio, the London Company has higher debt ratio compared to the Apollo Company which is 10.5%. London Company maybe is indicated low borrowing capacity of a firm, which in turn of lower the financial flexibility. Besides that, London Company has suppliers more than half of the total financing. Creditors may be reluctant to lend the firm more money, and management might probably be subjecting the firm to the risk of bankruptcy if it sought to increase the debt ratio.
Debt / equity ratio
Debt / equity ratio = total liabilities
Stockholder's equity
London = 252, 586,763
199,330,061
= 1.27
Apollo = 23,975,087
80,000,000
= 0.3
Conclusion: In this ratio, that shows that London Company have investing $1 equity but they need to pay their debt for a $1.27. For the Apollo Company, they need to pay $0.3 only when they investing $1 in equity. With compared the both ratio, London Company is in higher debtor than the Apollo Company. The company which having a higher debt will be more risky than others company, and most of the investors will not investing their money on them.
Times interest earned (interest coverage) ratio
Time interest earned ratio = earning before interest and tax
Interest expenses
London = 17,594,691
6,032,744
= 2.92
Apollo = 32,247,766
0
= 0
Conclusion: In the ratio above, London Company have 2.92 time interest earned ratio but for the Apollo Company, they don't have any interest expenses. So, for the Apollo Company, that means that they use more equity to purchase the assets in the company. This situation may due to Apollo Company have much more shareholders. So, they not need pays any interest expenses because they didn't apply any loan.
Conclusion, insides this financial statement, we can see that the strength and weaknesses of the both company which are London Company and Apollo Company. From the liquidity ratio, we can say that the Apollo Company is more stable and well control in their all types of ratio. They have enough ability to avoids their company from being a heavily debtor. After that, depend on the leverage ratio, we can says that Apollo Company is stable depend to the London Company, they also have more ability to management their debt. Besides that, depend on the profitability ratio and market value ratio, we also can says that the Apollo Company is more stable than the London Company. Insides all types of ratio in the profitability ratio, we can see that the company is earning profit currently than the London Company. In short, I have conclusion that the Apollo Company is more stable and more profitability than the London Company.
