Accounting ratios are the ratios expressed and counted based on the accounting figures derived from financial statements of the company. Accounting ratios are used to interpret financial statements for measuring the business performance of company. Accounting ratios are counted and grouped into five different categories. The five different categories is profitability of company, liquidity of company, asset management of company, debts management and capital gearing of company, market value of investment to ordinary shareholders/ common stockholders. These five categories are using the formula to calculate all the ratios which are used to measure business performance.
There are compare the ratios over the time or between companies. Time value of money and investment appraisal techniques. Inflation is following the price of good up and the money value drops.
Ratios comparison between two companies for business performance measurement under each of the bold headings.
Profitability is measured by following accounting ratios. There are containing Gross profit markup and Gross profit margin. Gross profit markup and gross profit margin are used to measure how far is the extent of gross profit earned by company from the sales made due to its effectiveness and its efficiency in purchasing and production activities. The higher gross profit markup and the higher gross profit margin indicate higher gross profit earned by company from the sales made, showing that company is effective and efficient in controlling the purchase cost by making the purchase at lower cost from supplier and effective in controlling the production cost by the effective use of material and labour to reduce the production cost as well as to increase gross profit earning. The lower gross profit markup and the lower gross profit margin indicate lower gross profit earned by company from the sales made, showing that company is ineffective use of material and labour causing higher production cost to reduce gross profit earning.
Liquidity is a ratio expressed between current assets and current liabilities. If the current ratio decreases lower than the average of industry, smaller amount of current assets can be used to finance its current liabilities or not enough current assets to finance its current liabilities, indicating that company is financially unstable, facing some short-term financial problems. Liquid ratio is used to measure the liquidity of company and how far is the extent odf liquid assets can be used to finance its current liabilities. If the acid-test ratio increase higher than the average of industry, larger amount of liquid assets can be used to finance its current liabilities, indicating that company has high liquidity to finance its short-term liabilities and financially stable. If the acid-test ratio decreases lower than the average of industry, it is less and not enough liquid assets used to finance its current liabilities, indicating that company's liquidity is low and not enough to finance its short-term liabilities, being financially unstable and facing some financial problems.
Assets management is a ratio expressed between cost of sales and the average stock value or the closing stock value, counted in number of times. Average stock value is the average value between opening stock and closing stock. It is shown as follows. Average stock value=(opening stock value+closing stock value)/2. If both opening stock and closing stock are available in question, average stock value is used to calculate stock turnover. If the opening stock is unknown and only the closing stock is available in question, closing stock value is used to calculate stock turnover. The higher inventory turnover indicates a fast stock turnover where the goods purchased kept in store are fast taken out for resale so that the stock is not accumulated and money is not tied up with the stock. The lower inventory turnover indicates a slow stock turnover where the goods purchased kept in store are slowly taken out for resale so that the is accumulated to be larger amount to tie up money, causing short-term financial problem.
Debts management. Debts management contains debts ratio, capital gearing ratio, debts equity ratio, times interest earned, creditor ratio and creditor payment period. Debts ratio is used to measure the debts burden of company and the ability of company to finance its debts. The higher debts ratio indicates that company has a heavy debts burden with larger amount of debts and high interest cost. The lower debts ratio indicates that company has a light debts burden with smaller amount of debts and bearing low interest. Debts equity ratio is used to measure the proportion of company debts in relation to its common equity. If the capital gearing ratio is higher than 0.5:1, the company is operated at high gear with proportion of prior charge debts capital contained in total capital of company, being unstable in view of its capital structure and bearing high interest cost financed by larger proportion of profit.
Market value of investment to stockholders it contain earning per share, earnings per share is used to measure the business growth of company. Higher earnings per share indicates higher rate of growth in company business bringing to higher profit earnings, being attractive to common holders. Lower earnings per share indicates lower rate of growth in company business bringing to lower profit earnings, being not attractive to common stockholders. Earning ratio is measure how many times and how long the period taken by common stockholders in using their profit earnings to recover back their share investment (money invested in buying the share). Higher price/ earning ratio indicates that earnings per share is very low in relation to the share market price where common stockholders have to take more times and longer period using their profit earnings to recover back their share investment , being not attractive to common stockholders. Lower price indicates that earning per share is very high in relation to the share market price where common stockholders take less times and shorter period using their profit earnings to recover back their share investment, being attractive to common stockholders. Earnings ratio is to measure how many times and how long the period taken by common stockholder in using their profit earnings to cover back their share investment (money invested in buying the share). Higher price/ earnings ratio indicates that earnings per share is very low in relation to the share market price where common stockholders have to take more times and longer period using their profit earnings to recover back their share investment, being not attractive to common stockholders. Lower price indicates that earnings per share is very high in relation to the share market price where common stockholders take less times and shorter period using their profit earnings to recover back their share investment, being attractive to common stockholders. Earnings yield is to measure the net income return to common stockholders/ ordinary shareholders. If earning yield increase higher than the average of industry, indicating high net income return and attractive to common stockholders. If earning yield decreases lower than the averageof industry, indicating low net income return and less attractive to common stockholders. If the market price/ book value ratio increases higher than the average of industry. Indicating that the share market price rises too high above its real assets value, being not attractive to common stackholders. If market price/ book value ratio decreases lower than the average of industry, indicating that the share market price drops bellow its real assets value, being attractive to common stockholders.
The Profitability of company
Gross Profit markup (%) = X100
Gross profit margin (%) = X100
Operating profit margin on sales (%) = X100
Profit margin on sales (%) = X100
Basic earning power (BEP) = X100
Return on Total assets= X 100
Return on common equity= X100
Liquidity of company
Current Ratio=
Acid-test ratio=
Assets Management of company
Inventory Turnover = Or
Total Assets Turnover=
Debtor Ratio=
Day Sales Outstanding=
Debts management of company
Debts Ratio=
Debts Equity ratio=
Times interest earned or Interest cover=
Market value of investment to stockholders
Earnings per share=
Price earnings ratio=
Earnings yield=
Market price per book value ratio=
IJM Corporation Berhad and WCT Berhad are selected for business performance measurement. IJM Corporation Berhad is one of Malaysia's leading constructions groups and is listed on the main board of Bursa Malaysia. Its business activities encompass construction, property development, manufacturing and quarrying, infrastructures concessions and plantations. The IJM Corporation Berhad headquartered is located at Selangor, Malaysia; IJM's regional aspirations have seen it establish a growing presence in neighbouring developing markets with operations presently spanning 11 countries. IJM's phenomenal growth over the past two and a half decades is the result of its unwavering focus on its core competencies, diversification into strategically related businesses and selective expansion into new markets. IJM was born in 1983 with an overarching purpose of competing more effectively against bigger foreign rivals. The Company rapidly established itself as a professionally managed construction group and soon gained market acceptance. Over the years, the Company progressively built on its competitive prowess, financial capacity and repute to strengthen its footing as a serious local contractor. IJM's undertaking as a property developer began as a natural progression from its vast experience and expertise in construction. The Group's property arm has since grown considerably. Listed on the Main Board of Bursa Malaysia, IJM Land Berhad is presently one of the largest property developers in Malaysia with sprawling townships, commercial buildings and high-rise condominiums under development in key growth areas throughout the country. On the other hand, WCT Berhad is companies that run the business of engineering & construction, property management, assets management. WCT Berhad Established on 14 January 1981 as WCT Earthworks & Building Contractors Sdn Bhd, the Company became a public company on 1 April 1994. WCT made its debut on the Malaysia Stock Exchange on 16 February 1995. The Company assumed its present name WCT Berhad since 5 June 2008 to reflect the diverse businesses within the WCT Group of Companies. Over the years, with continuous hard work, perseverance, and beliefs in management productivity and efficiency, WCT has elevated its standing and solid reputation in the construction industry both local and abroad. As a team, we strived through the period of slow economic growth in the mid-1980s, as well as the financial crisis in the late 90s. These periods have not only strengthened our position in the construction and property industry but also propelled us into expanding our products and services to include project management, construction design, value engineering and assets management in F1 & international racing circuit, high-rise and special purpose building, international airport, hydroelectric dam, Iconic infrastructure, township planning & development, racecourse, commercial property development & management, expressway & highway, BOT Toll Concessions. Over a period of 30 years, WCT has completed more than 300 Construction Projects valued at RM16.5 billion with Global Presence in the Middle East, India, Vietnam and Malaysia and has delivered in excess of 12,000 units of residential and commercial properties amounting to sales value of RM3.0 billion. In assets investment, WCT owns shopping malls, grade-A offices, hotels, commercial buildings, and has equity ownership in three BOT Toll Highway Concessions in India. The WCT Berhad of the construction capabilities and track records are recognized both locally and abroad. WCT is the recipient of several distinguished awards including the highly acclaimed Builder of the Year Award in 2002, Special Project Award for Sepang International F1 Circuit in 2001 and the International Achievement Award in 2004 by the Construction Industry Development Board of Malaysia (CIDB). The Ministry of International Trade and Industry of Malaysia has accorded WCT with the prestigious Export Excellence Award twice, once in 2004 and another in 2008. In 2008, WCT was also named as the Best Brand in Engineering & Construction of the Brand Laueate Award 2007-2008 by the Asia Pacific Brand Foundation.
Ratio with formula
Calculation for 1st company(IJM)
Calculation for 2nd company(WCT)
Gross profit markup=
=31.16%
=8.23%
Gross profit margin=
=23.76%
=7.60%
Operating profit = margin on sale
=18.65%
=5.23%
Profit margin on sales =
=8.29%
=3.15%
Basic earning power=
6 959,529,000+ 5 598 766 000= 12 558 295 000
=5.96%
1 925 297 000+2 553 187 000=
4 478 484 000
=5.45%
Return on total assets=
=2.56%
=3.28%
Return on common equity=
=6.48%
388,856+369,256+492,134=1,250,246
=11.77%
Current ratio=
=2.09:1
=1.14:1
Acid-test ratio=
=1.89:1
5,598,776-529,320=5,069,446
=1.35:1
2,553,187-113,709=2,439,478
Inventory turnover=
=5.78times
=37.92times
Total assets turnover=
=0.54:1
=1.04times
Debtor ratio=
=054:1
=0.32:1
Day Sales outstanding=
0.54365days=197.1days
0.32365days=116.8days
Debts ratio=
=0.49:1
3,303,461+112,250+2,685,225=6,100,936
=0.67:1
1,183,958+1,807,550=2,991,508
Debts equity ratio=
=1.19:1
=2.39:1
Times interest earned or interest cover=
=3.72 times
=4.85 times
Earnings per share=
=0.25
=0.19
388856/0.5=777 712
Price earnings ratio=
=19.2 times
=13.68 times
Earnings yield=
=6.94%
=9.74%
Market price per book value=
=
=1.24:1
=
=1.61:1
1.2)Conclusion
The two companies had been selected for business performance is IJM Corporation Berhad and WCT Berhad. I think that the IJM Corporation has a better performance, because the IJM Corporation Berhad has gained many awards. IJM Corporation Berhad also has their own business strategy, so that they can achieve the goal or target they want. Malaysian Corporate Governance Index Merit Award 2010 had been give away to IJM Corporation Berhad, IJM Corporation Berhad was presented with the Malaysian Corporate Governance Index 2010.
2.0Question 2
Define the financial market is organizations and people who are lack of fund and wanting to borrow money are brought to gather with those having surplus fund lending out in the financial market so that those lack of fund can borrow money from those having surplus fund in the market. Markets for sale and purchase of stocks (shares), bonds, bills of exchange, commodities, futures and options, foreign currency, etc., which work as exchanges for capital and credit. See also capital market and money market. Financial markets are typically defined by having transparent pricing, basic regulations on trading, costs and fees and market forces determining the prices of securities that trade. Some financial markets only allow participants that meet certain criteria, which can be based on factors like the amount of money held, the investor's geographical location, knowledge of the markets or the profession of the participant.
It is various type such as physical assets markets are called tangible assets markets or real assets markets to deal with the tangible. The financial markets are deal with different types of financial instruments such as stocks or share. Spot market refers to the deals being bought or sold for on the spot delivery within a few days whereas future market refer on the future delivery at some future date such as six month ore one year.
There are many different financial markets. Each financial market deals with a different type of financial instruments in terms of its maturity and the asset backing it. Different financial markets serve different types of customers and operate in different parts of the country. Financial markets differ from physical asset markets to deal with the tangible, real and physical products such as computers, machinery, real estate and other physical assets whereas the financial markets are deal with different types of financial instruments such as stocks or shares, bonds, notes, mortgages and other claims on real assets as well as with the derivative securities or commodities whose values are derived from changes in the prices of other assets.
There are some major follows is money markets is dealing with short term, highly liquid debt securities in which funds are borrowed or loaned for short periods of less than one year. Financial market in which financial instruments with high liquidity and very short maturities and trade. Capital markets the financial market dealing with shock or share, intermediate or long-term debts in which funds are borrowed or loaned for long periods of one year or more than one year. Mortgage market this is market dealing with loans on residential, commercial, industrial real, estate and farmland. Market mortgage loans and servicing right are bought and sold between mortgage originators, mortgage market is extremely large and liquid. A large percentage of newly originated mortgage are sold by their originators into the secondary market. The secondary mortgage market helps to make credit equally available to all borrowers across.
Consumer credit markets this is the financial market dealing with loans on autos and appliance, as well as loans for education, vacation and so on. Primary markets this is the financial market in which corporations raise capital and by issuing new securities or new share. Secondary markets this is the financial market in which the existing and already outstanding securities or other financial assets are trade among investors after they have been issued by the corporations. Initial public offering markets this is the financial market in which firms or corporations "go public" by offering securities or share to the public for the first time.
Private market this is the financial market transactions are worked out privately and directly between two parties without going to public where the transactions may be structured in any manner that appeals to the two parties.
First of all, the direct transfer from savers to borrowers. It takes place when a corporation issues and sells its stocks or bonds directly to savers without passing through any financial institutions so that the corporation as borrower directly delivers its securities to savers who in turn give money to the corporation.
This is shown in the following diagram:
Business Issue corporation's securities to
Corporation Receive capital or fund from Savers
Between indirect transfer from savers to borrows through investment banking house it takes place when an investment bank underwrites the issuances of a corporation's securities who are the investment bank serves as a middleman to financial the issuance of corporation's securities by purchasing the securities of corporations and then resell the same securities of the corporation to savers so that the money paid by serves for purchase. . Therefore, the corporation's securities and the savers money merely pass through the investment banking house. By this, the capital or fund is indirectly transferred through investment banking house form savers to corporation (borrower). This is the diagram as below:
Issue corporations Resell corporations
Business securities to Investment securities to Savers
Corporation Banking House
Receive fund from Receive fund from
Indirect transfer from savers to borrows through a financial intermediary its takes place when a financial intermediary such as a bank or a mutual fund obtains fund from savers by issuing its own securities or certificate of deposit to servers. . In this case, the capital or fund is transferred in exchange for receiving certificate of deposit or securities issued by the financial intermediary. The fund to purchase securities of financial intermediary because they are safer and more liquid than mortgages and loans. This is the diagram as shown in below:
Issue corporations Issue intermediary's
Business securities to Financial own securities to Savers
Corporation Intermediary
Receive fund from Receive fund from
In the other hand, the financial intermediaries, these are specialised financial firms that facilitate the transfer of capital or borrowers. Since the financial intermediaries are generally large, they gain economies of scale in analyzing the creditworthiness of potential borrowers, in processing and collecting loans, and in pooling risks. . Maturity intermediation involves a financial intermediary issuing liabilities against it that have maturity different from the assets it acquires with the different from the assets it acquires fund raised. Financial intermediaries bears risk on behalf of investors by investigating their savings across various sectors of business.
