Ratio analysis is used to compare the relationship of the company's financial statement at one point in time no matter there are internal or external to the business. It also helps to adjust the business running accordingly. Besides that, it also can call as trend analysis.
Trend analysis is used to analysis and compares the financial position of the business difference between a month, quarter year or a year once time as date range and closing date of the business activity in the form or percentage. It also helps to determine whether the changes in the period of time are having any balances that are unusual change.
Cross-sectional ratio analysis is used to analyse the financial ratio of a company that has the same analysis ratio with other companies in the same industry to develop the important decision.
Distinguish the public company from private company.
In a private company, the minimum number of members is two persons and the maximum number of members not more than fifty members and not includes past and present employees. The numbers of directors in private company, there are no limit members but must have at least three directors in the company. Besides that, the shares cannot be sold to the outsider. Before upgrade to public company, the behind name of the company is with the word "private limited".
When in a public company, the minimum number of members is seven and the maximum number of members is no limit. Besides that, in the number of directors, at least must have three directors and the position is being rotated by retired. In public company, the shares can be sold to the public market and help the company raise the fund. When change the company from private company to public company, behind the name of the company is compulsory to change the word to "limited".
Select THREE (3) public listed companies in Malaysia from the same industry. Explain in detail about the business industry, business operation, types of products manufactured or services provided, etc. Students have to register the companies that they selected with the lecturer before end of WEEK 3. The selection of companies would be on a first-come-first-serve basis, as there should NOT be a repetitive of the same companies with the other groups.
KHIND Holdings Berhad is a Malaysia leading electrical and electronics appliances company founded by Cheng King Fa. Khind has been increasing its business in Malaysia, Singapore and Hong Kong in this current year. Driven by his clear vision, the business succeeded and in the late seventies, developed to include the production of electrical equipment and lamps. The next decade observed Khind's growing venture into the increase export market. It was around this time that Khind also brought in a set of professional managers into the family business. In 1996, the company took the big step of investing in Material Resource Planning (MRP) software and their accounting software could not keep up with the company's rapid growth. In 1992 Khind's manufacturing expanded to comprise fans and other household appliances and by the turn of the time, the Group was allocating audio-visual products and white goods. Khind has more than 200 "innovatively-designed" products for the consumers. Khind exports their products to more than 50 countries around the world in 2010. It is a biggest export market is the Middle East area. The Company also exports their products to the Association of South East Asian Nations (ASEAN). Khind is an original equipment producer (OEM) to Japanese and European customers. Company are provided in the form of text, graphic, audio, downloads, links, or source codes (collectively 'Services and Materials'). KHIND retains all rights to such Services and Materials. The Services and Materials are intended only for KHIND's customers and are provided only for your reference.
For Panasonic Corporation, Panasonic Industrial provides the business and retail sector with a variability of point-of-sale product solutions for applications across various types of plans. Retail stores can enjoy small and lightweight components for bar code readers and security tags; casinos can expect accurate equipment with our secure input devices, and fuel stations can rely upon our owing products for card readers. Panasonic Systems delivers complete enterprise solutions for all industries, ensuring "best in the trade" one-stop solutions and systems solutions integration. Panasonic operations in North America include R&D Centers, manufacturing bases, the highly valued Panasonic Customer Call Center in Chesapeake, VA, business-to-business and industrial solutions companies and consumer products, sales and service networks throughout the U.S., Canada and Mexico. Products manufactured by Panasonic are Televisions, Professional Displays, DLP projector & LCD projector, digital cameras, audio products, video cameras and others electric components. Panasonic offer some of non-periodical information on Panasonic product to users through the web service system and send non-periodical PANASONIC product sales, discount or other related commercial service information to users through network service system in East Asia.
For Milux Corporation Berhad (Milux), it is a Malaysia-based investment holding company. The Company also provides management services through its subsidiaries and engaged in dealer in gas cookers, electrical household appliances and their related products, manufacturing of gas cookers, electrical household appliances and their related products, and manufacturing of enamel products. The Company operates in two business segments: home appliances, which include manufacturing and dealing in household appliances and their related products, and others, which is engaged in investment holding and provision of management services. Principle Activities Milux Corporation Berhad is through its subsidiaries, manufactures and markets gas cookers, enamel products, electrical household appliances, and related products in Malaysia and Indonesia. It offers table-top gas cookers, cast-iron burners and other product, as well as electrical household appliances comprising slow cookers, bread toasters and other. The company also engages in manufacturing and retailing ice cream, creameries, and snack bars, as well as in property development. It exports its products to Asia, South America, the Middle East, and Africa. The company was formerly known as T.H. Hin Corporation Berhad and changed its name to Milux Corporation Berhad in 2006. Milux Corporation is based in Petaling Jaya, Malaysia. Since its beginning in 1977, Milux has always required to provide top quality and innovative products which are in line with the company's philosophies emphasizing "Quality, Safety and Reliability". As one of the top suppliers of household appliances, Milux has be committed to not just to delivering top quality products, but also to continue delivering excellent customer service to better serve our customers.
Prepare a schedule of SIX (6) accounting ratios or measure of resource utilization for the three companies. You are required to:
Define each ratio used
Ratio
Definition
i. Current ratio
It is also called 'working capital ratio'. Current ratio shows that the ability of a company using its current assets to pay current liabilities. The higher of the current ratio, the more capable to the company to pay off its obligation.
ii. Profit margin ratio
It is known as 'operating performance ratio'. It measures how much out of every dollar of sales a company actually keeps in earnings. It is normally used to compare with other companies in similar industries. The higher the profit margin, the more profitable the company is.
iii. Debt to total assets ratio
This ratio is an indicator of financial leverage. It is used to measure a company's financial risk by determining how much of company's assets have been financed by current and long-term liabilities.
iv. Payout ratio
Payout ratio shows that the percentage of net income paid to shareholders in the form of cash dividends. Investors may use this ratio to decide what companies are doing with their earnings. The lower the ratio, the more secure the dividend as smaller dividends are easier to pay out than greater dividends.
Ratio
Definition
v. Acid-test ratio
It is known as 'quick ratio'. It shows how well the current liabilities are covered by cash and by items with a ready cash value.
vi. Times interest earned ratio
It indicates how many times the company can cover its interest charges. And also shows the company's ability to pay interest expenses.
B) Show the ratio formulae
i. Current Ratio=
Ii. Profit Margin Ratio=
iii. Debt to Total Assets Ratio= ,
Which total liabilities= short-term liabilities + long-term liabilities
Iv. Payout Ratio=
V. Acid-test Ratio=
Vi. Times Interest Earned Ratio=
C) Show the figures used clearly
Milux Corporation Berhad
Panasonic Manufacturing Malaysia Berhad
KHIND Holdings Berhad
Current ratio
= 2.4792
= 4.4284
= 4.2392
Profit margin ratio
= 0.0617
= 0.1268
= 0.1135
Debt to total assets ratio
= 0.4186
= 0.2033
= 0.2664
Pay-out ratio
= 0
= 0.0019
= 0
Acid-test ratio
= 1.2946
= 4.2744
= 4.1313
Times interest earned ratio
= 3.4477
= 4.8465
= 2.6330
D) Interpret the ratio
(i) Current Ratio
Current ratio is a financial ratio measurement that measure whether the company has enough or not resource to pay off its debt. If this ratio is below 1, then the company may have problem in paying its liabilities in a period of time. The higher this ratio is, mean that company has more capable in paying its obligations. A decrease in current ratio mean that company may having a decreasing power in efficiently utilize of current assets.
(ii) Profit Margin Ratio
Profit margin ratio is measurement that measure how much profit that company earned had been translated into profits. If this ratio is lower mean that a decline in sales will have a highly risk that it will result in a net loss. The higher this ratio is meaning the company is effective in converging sales revenue into profit.
(iii) Debt to Total Assets Ratio
Debt to total asset ratio range is from 0.00 to 1.00. A lower value of this ratio is favorable for company. It mean that a lower portion of company's assets claimed by its creditor. Company will find that it is easy to obtain loans for new investment or project. Otherwise, company will have a higher risk in operation due to a higher debt to total assets ratio.
(iv) Payout Ratio
Payout ratio indicates that how well earnings profit cover its dividend payment. A low payout ratio will make investor loss confidence on company and seek for other dividend stock. Otherwise, a high payout ratio will attract new investor to buy company's dividend stock. Mature company will tend to have a higher payout ratio.
(v) Acid-test Ratio
Acid-test ratio has a conservative look at a company's liquidity. It consider only on the most liquid assets. It measures the ability of a company to use its quick asset to pay its current liabilities. The higher of the ratio is the best position of the company. If a company has a low quick ratio, it may prove that company has difficulty in convert their inventory into cash.
(vi) Times Interest Earned Ratio
Times interest earned ratio is a measurement of how a company's ability meets its debt obligation. If the ratio is bellow 1, meaning company is generating not enough cash from its operations to cover its interest. Then, company would have to use cash to pay off its borrow funds.
6．Compare and comment on the performance of the three companies using the ratios calculated in part (5) above.
Current ratio
The current ratio of Panasonic Manufacturing Malaysia Berhad is higher than other two companies. It is because the amount of current assets (RM574,346,000) is higher than other two companies and the amount of current liabilities (RM129,695,000) is lower than Milux Corporation Berhad so the current ratio will higher. That means Milux Corporation Berhad has enough money to pay their liabilities such as debt.
But if the companies is unable to pay their liabilities, their company will not face the problem of bankrupt because there are many ways to access financing however this definitely is not a good sign.
The current ratio can give the effectiveness of a company's operating cycle. Besides that, if the current ratio is lower than 1, the company should increase their current assets otherwise the company will face the problem of cash flow. The current ratio of other two companies is higher than 1, so they also have ability to paid their liabilities.
Profit Margin Ratio
The higher profit margin ratio is Panasonic Manufacturing Malaysia Berhad (0.1268) and the lower profit margin ratio is Milux Corporation Berhad (0.0617).
The lower profit margin ratio shows that the company is incapable to control their production costs and their earning low amount from sales but also want to pay the fixed costs from the revenue. For example, the company has increase at a greater rate than sales but do not control their cost, it will lead the company to a lower profit margin. So the company should increase their revenue and control their costs at the same time.
Panasonic Manufacturing Malaysia Berhad is a more profitable company. It is because they have a better control their costs compare to other company.
Debt to total assets ratio
The higher debt to total assets ratio is Milux Corporation Berhad and the lower debt to total assets is Panasonic Manufacturing Malaysia Berhad.
The mean of the lower debt to total assets is the company is less dependent on leverage and the stronger its equity position, so Panasonic Manufacturing Malaysia Berhad can borrow money from bank to pay their liabilities.
When the ratio is higher, the company is measured to take on more risk. When the ratio is greater than one that means the half of assets of company are financed through debt.
Pay-out ratio
Panasonic Manufacturing Malaysia Berhad is the higher ratio of Pay-out ratio. That means this company is a willingness to share the earning of company with inventors. It will attract more inventors to investment the company.
Acid-test ratio
Panasonic Manufacturing Malaysia Berhad is the higher ratio of Acid -test ratio and the lower Acid-test ratio is Milux Corporation Berhad.
The acid-test ratio is lower than the working capital is means the current assets are highly dependent on the inventory. The higher of the ratio, the more financially secure a company is in the short term. The ratio of these three companies is greater than one, so there will not face the problem of unable to pay their short-term liabilities.
On other hand, increasing the acid-test ratio generally indicates that company is rapidly changing receivables into cash, and simply able to cover its financial obligations.
Times interest earned ratio
The higher ratio of times interest earned is Panasonic Manufacturing Malaysia Berhad and the lower times interest earned ratio is KHIND Holdings Berhad.
However, the high ratio is means that the companies have a disagreeable lack of debt or pay down too much with earning that could be used for other projects. And the ratio is below 2.5, the company will consider a warning sign of financial distress.
If the company cannot earn more income to cover their interest payments, the company will eventually owing the interest payment.
Discuss the limitations of ratio analysis.
Defination
Ratio analysis is a tool that individuals use to carry out a quantitative study of information in a company's financial statements. It was one of the significant techniques of financial analysis that quantities are changed into ratios for comparisons with earlier period ratios and ratios of other firms in the same or different industries. It shows the trends and also the strengths or weaknesses of a firm.
Limitation
Although it was a usefull tool to compute the performance of a company, but some limitation exists to it, which is:
Distorted by Inflation
Inflation is a complicating factor in use of ratio analysis, if did not exercise some care on it, it may not oly distort ratios and maybe the whole interpretation of observed trends. As we all known, financial statements are prepared according the Generally Accepted Accounting Principle (GAAP) and it was mainly oriented towards historical cost information.Due to this, assets value show in balance sheets will be in cost, as opposed to some measure of their current value. It may misleading the fianancial statement, and yet, to show their assets in marketvalue would need appraisal because appraiser cannot exactly agree an an asset's value. Typically, accountant will record the assets at it cost value until they are sold or diposed.
Therefore, inflation affects inventory values and depreciation, profits are affected,such as increases in income and net profit may indicate improved of performance, but in fact, increases may have resulted from inflation not improved sales.
Different accounting praticle lead to misaccurate in comparing
There are many different accounting praticle can be applied to the companies. It mean that different companies will use different method to value their inventory, such as LIFO or FIFO method, if the companies compute the ratio and compared by used different inventory valuation method, the comparison would not be accurate. Another issue is deprecation, different companies used different depreciation method, such as straight line method, declining balance method, and sum-of-the-years'-digits method. The different of the method will lead to different financial statement and it won't lead to a valid comparison.
Misleading if based on false or window-dressed accounting information
It was normal that the ratio will be misleading if based on the false accounting information; this is because the ratio is drawn from accounting records, if the false information occurs, example like absence of some important info, it will affect the figure of ratio, and lead to the disaccurate of comparison.
The ratio also will be misleading if the financial statement was using window-dressing. Window dressing is a strategy used by managers when near the year end purposely to improve the quality of the fund performance before presenting it to shareholders or clients. This is completely against the concept of financial and business ethics and flies in the face of corporate governance. Some data maybe changed and diferrent to the original after window dressed, and this will make the acurracy of the ratio that calculated decrease.
In conclusion, ratio analysis is very useful tools to judge the performance of the companies, but must very careful about the limitation that mentioned above and make adjustment as necessary.
