Ratio analysis is a quantitative analysis of information in a companys financial statement. Normally it is used by a company as an indicator of comparison from year to year basis or as an indicator to compare two or more companies in the same industry. It measures the strength and weakness, performance, activity, financing and liquidity of a company.
Trend analysis is a technical analysis that tries to predict the future movement of a stock based on passed data. It used to calculate the percentage change for one account over a period of time of two years or more.
Cross-sectional ratio analysis is to evaluate the target company's efficiency and to make the best investment choices among a group of competitors or the industry. It compares one company against the industry it operates within, or directly against certain competitors within the same industry.
Perdana Petroleum Berhad is an investment holding company in Malaysia on gas and oil industry since year 1988. As an investment holding company, it contribute became a licensed dealer and systematically developed its sources from the brown field sector in the operation and maintenance in year 1988. The Talisman Malaysia, Sabah Shell, ExxonMobil, Petronas Carigali and the Sarawak Shell are the secured significant contracts from the oil major. It was continuing expansion of the gas industry and upstream oil with the line, Petra Perdana separately from the providing integrated brown field service and expanded its to the offshore marine service. Nowadays, offshore marine services are including in Petra Perdana, whereas the integrated brown field is focuses in Petra energy.
The Perdana Petroleum Berhad, operates based on the established the international benchmarks on practice to make sure the sustainability. It guarantees compliance to regulatory requirement and its also assures the interests of all stakeholders. The group has instituted accounting standards, board-level committees and risk management to maintain the interest of the shareholders at the corporate level. The group has in place policies in quality assurance, environment protection and the air and oil pollution in the hazardous work environment both on on-shore and off-shore.
There are two core services which is Integrated Brown Field service and Offshore Marine service. The Integrated Brown Field services segment, it provides service consists of top-side major maintenance hook-up commission and construction, maintenances and operations, equipment manufacturing and packaging, design of processed equipment and investment holding segment, while the Offshore Marine services segment, it provides services consist of vessels for the upstream oil and gas industry, mooring and anchoring of non-self propelled marine vessels, ranging from towing, transporting of drilling equipment and production chemicals and project materials.
Deleum Berhad
Deleum Berhad, an established service company in Malaysia on oil and gas industry since year 1982. As an investment holding company, it contribute to a wide range of supporting specialized products and services in the exploration and production sector to the oil and gas industry with the cooperation of subsidiaries.
Deleum operates based on strong belief of achieving equitable business advantage with its business partner and customers. By optimizing equipment availability, developing improvement programs increases productivity and reduce downtime of processing the products. Deleum constructed an integrated facility in Senawang to provide its customer gas turbine overhaul and repair services.
There are three core products and services which is
* Power and Machinery (P&M)
* Oilfield Services (OS)
* Maintenances, Repair and Overhaul (MRO)
For Power and Machinery (P&M) segment, it focuses more on the life cycle of gas turbine generators and compressor packages, the supply, installation, repair and maintenance of valve and flow generator. To meet customers' requirement, other than provide equipment supply, it also provides complete gas turbine packages/plants turnkey solutions such as Built-Own-Operate (BOO).
Oilfield Services (OS) provide and support specialized products and services for drilling, completion and production services. It also concerns the work-over and abandonment of platform and wells.
Repair, servicing and maintenance of generators, pump and valves are under the segment of Maintenance, Repair and Overhaul (MRO). Other than that, Deleum also deliver improved performance of rotating equipment to customer either onshore or offshore.
Petra Energy
Petra Energy Berhad, an established service company in Malaysia on upstream oil and gas industry. It spearheads a group of subsidiary companies. It contribute to a comprehensive range of supporting specialized products and service in the exploration and production sector for the integrated brown field service for the upstream oil and gas with the cooperation of subsidiaries.
Petra Energy as an integrated provider for topside major maintenance hook-up construction and commissioning for the onshore and offshore oil and gas installation. The design, engineering, fabrication, hook-up, procurement, construction, installation and commissioning are include in offshore marine service that are around in the encompasses all surface engineering capabilities.
Petra energy policy on Quality to maintain the best quality system, an optimum planned and developed relation to the management functions.
There are four services which is
* oil field production optimization services
* engineering, maintenance and manufacturing services
* equipment packaging and fabrication of process equipment & boilers
* top-side major maintenance, hook-up commissioning & construction services
Our services are integrated or executed basis that to ensure operations efficiency, faster project turn-around and reduce cost for the clients.
Ratios
Petra Energy Bhd.
Perdana Petroleum Bhd.
Deleum Berhad
1
Current Ratio =
= 1.34x
= 1.30x
= 1.65x
2
Acid-test Ratio =
= 1.30x
= 1.26x
= 1.58x
3
Stock Turnover =
= 46.89x
= 45.14x
= 37.27x
4
Debtor Ratio =
= 110.28 days
≈ 111 days
= 142.19 days
≈ 143 days
= 130.44 days
≈ 131 days
5
Gross Profit Percentage =
=11.32%
= -10.17%
= 19.03%
6
Net Profit Percentage =
=0.42%
= -28.41%
= 7.57%
4. Accounting Ratios
Current Ratio and Acid-test Ratio
blog-currentratiodefn.gif
Current Ratio
Acid-test Ratio
Perdana Petroluem Bhd.
1.30 x:1
1.26 x:1
Petra Energy Bhd.
1.34 x:1
1.30 x:1
Deleum Bhd.
1.65 x:1
1.58 x:1
Current ratio is a liquidity ratio that measures company's ability to pay its debt in short term. As the year of 2010, Deleum Berhad has 1.65x in current assets for every Ringgit Malaysia of current liabilities while Petra Energy Berhad and Perdana Petroleum Berhad have 1.34x and 1.30x. Therefore, Deleum Berhad has effective current ratio concept which has sufficient short term assets to meet short term liabilities. The high ratio means company has more liquidity and able to pay short-term debt. Besides that, Petra Energy Berhad has RM1.34 for every RM1 of the debts while Perdana Petroleum Berhad only has RM1.30 for every RM1 of the debts. Both companies' business are not well placed to the debts and need extra finance and time to pay creditors.
acid-test-ratio.gif
Acid-test ratio is to measure whether the company has sufficient current assets that are readily convertible to cash to pay short term debts because inventory is less liquid than the other current assets and is ignored. It also helps to determine whether a business would be able to pay off all its debts by using its most liquid assets. Acid-test ratio of Deleum Berhad is 1.58x. It means every Ringgit of Deleum Berhad's current liabilities it has 1.58x of very liquid assets to cover its immediate debts. It converts into cash quickly and obligation easily. Petra Energy Berhad and Perdana Petroleum Berhad have 1.30x and 1.26x in the acid-test ratio which they have large amount of inventories and current liabilities. They can try to convert long-term investment into cash.
Stock Turnover Ratio
Perdana Petroleum Bhd.
Petra Energy Bhd.
Deleum Bhd.
45.14 times
46.89 times
37.27 times
ratios-stock-turnover (1).gif
Stock turnover is to measure how efficient a business is at maintaining a right level of stock Petra Energy Berhad turns its inventory over 46.89 times per year, so on average, it is carrying its inventory for 7 days only (365/46.89 times per year). It means Petra Energy Berhad has a strong sales or ineffective buying. Petra Energy Berhad buys too often in small quantities; therefore the buying price is higher. Petra Energy Berhad maybe has the problem getting enough stock.
Perdana Petroleum Berhad turns its inventory over 45.14 times per year, so on average, it is carrying its inventory for 8 days (365/45.14 times per year). Perdana Petroleum Berhad also has strong sales or ineffective buying. It is unhealthy because it represents an investment with a rate of return of zero. It makes Perdana Petroleum Berhad up to trouble if the prices begin to fall. Seasonal demand may cause the Perdana Petroleum Berhad that having a high ratio. Deleum Berhad turns its inventory over 37.27 times per year, so on average, it is carrying its inventory for 9 days (365/37.27 times per year). Selling season caused the Deleum Berhad having a high ratio which implies strong sales or ineffective buying. For example, sales of Deleum will increase during National day. This leads to a change in stock turnover.
Debtors Ratio
Perdana Petroleum Bhd.
Petra Energy Bhd.
Deleum Bhd.
143 days
111days
131 days
ratios-debtor-days.gif
It measures how long it takes to collect debt (in days). Petra Energy Berhad collects its accounts receivable in 111 days. It means that Petra Energy Berhad has inefficiency in debt collection. It is over the acceptable standard which is 30-60 days. Collection policy which Petra Energy Berhad applied is not good since it has high debtor ratio. Petra Energy Berhad may neglect on capability of customers which the ability to pay back the debt.
Perdana Petroleum Berhad takes 143 days to receive payments owned from the customers and clients. Perdana Petroleum Berhad has inefficiency in collecting the debt from customers. The period can't be accepted since the standard period is between 30 to 60 days. Perdana Petroleum Berhad does not notice that customers are having problem in term of money. Deleum Berhad collects its accounts receivable in 131 days. Deleum Berhad maybe trust in customers and clients, not going to check the customer's character in term of honesty which will try his or her best to pay back the debt if he or she is honest.
Gross Profit Percentage/ Margin
Perdana Petroleum Bhd.
Petra Energy Bhd.
Deleum Bhd.
-10.17%
11.32%
19.03%
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Gross Profit Percentage refers to the ratio of gross profit to net sales. Petra Energy Berhad has gross profit margin of 11.32%. It generated RM0.11 of gross profit for every Ringgit in sales. Petra Energy has more sources used to pay additional expenses and future savings. Lack of promotion may influence Petra Energy Berhad's gross profit percentage. Customers may switch off to other competitor's product.
Perdana Petroleum Berhad has a negative value of gross profit margin which -10.17%. Perdana Petroleum Berhad lose RM0.10 of money for every Ringgit in sales. Perdana Petroleum Berhad can't able to control its production cost. Lack of sales is the main reason of having this negative value of margin. Perdana Petroleum maybe set too low price for their products which lead to suffer loss of company. High cost of raw material also caused the low gross profit percentage.
Deleum Berhad has gross profit margin of 19.03%. It means Deleum Berhad generated RM0.19 of gross profit for every Ringgit in sales. It can make a reasonable profit since it have positive value of gross profit margin. Labour cost may also cause the Deleum having only 19.03% margin of gross profit.
Net Profit Percentage/ Margin
Perdana Petroleum Bhd.
Petra Energy Bhd.
Deleum Bhd.
-28.41%
0.42%
7.57%
ProfitMargin-equ.gif
Net profit margin/ percentage is the percentage of revenue remaining after deducting all operating expenses, taxes, interest and preferred stock dividends from company's sales. It shows that profit return at the trading level and at the operational level. Deleum Berhad has 7.57% of net profit margin because it is more efficient at converting sales into actual profit. It is profitability that has better control over its costs compared to its competitors. However, -28.41% net profit of Perdana Petroleum Berhad indicates high risk that declines in sales in the result of decreasing profit and suffering losses. The percentage of net profit is 0.42% which is small profit in Petra Energy Berhad. It might take a long-term loan to increase its production capacity.
5. Performances of three companies
Liquidity ratios
a) Current ratio
Current ratio indicates whether the company has sufficient short term assets to meet the short term liabilities. It also called working capital ratio or bankers' ratio. If the current assets of a company are two times the current liabilities (2:1), then the company has the ability to face short term obligation. On the other hand, the company with current liabilities greater than the current assets will be facing liquidity problems.
Deleum Berhad has highest current ratio of 1.65x (1.65:1) as compared to Petra Energy Berhad has lower current ratio of 1.34x (1.34:1) and Perdana Petroleum Berhad has lowest current ratio of 1.30x (1.30:1).
In other words, Deleum Berhad has current assets of 1.65 times the current liabilities, Petra Energy Berhad has current assets of 1.34 times the current liabilities and Perdana Petroleum Berhad has current assets of 1.30 times the current liabilities.
This indicates Deleum Berhad has the ability to face short term obligation as compared to Petra Energy Berhad and Perdana Petroleum Berhad. From the ratios calculated, it indicates both of the Petra Energy Berhad and Perdana Petroleum Berhad face the liquidity problem due to they have low current ratio and inabilitiy to meet the short term obligation. Thus, this indicates both companies considered are risky and they should improve their current ratio to achieve the level between 1.5x (1.5:1) to 2.0x (2.0:1) to be considered satisfactory.
b) Acid-test ratio
Acid-test ratio measures the "instant" debt-paying ability of a company. It is almost similar to the current ratio except the exclusion of the inventory form the calculation. It ignores inventory and concentrates on assets that can be turn into cash, if liquidity problems occurs. This indicates whether the company has sufficient liquid resources to meet its current liabilities.
Deleum Berhad has highest acid-test ratio of 1.58x (1.58:1) as compared to Petra Energy Berhad has the lower acid-test ratio of 1.30x (1.30:1) and Perdana Petroleum Berhad has the lowest acid-test raio of 1.26x (1.26:1).
In other words, Deleum Berhad has quick assets of 1.58 times the current liabilities, Petra Energy Berhad has quick assets of 1.30 times the current liabilities and Perdana Petroleum Berhad has quick assets of 1.26 times the current liabilities.
This indicates Deleum Berhad has the sufficient liquid resources to meet its current liabilities and ability to quickly converting receivables into cash as compared to Petra Energy Berhad and Perdana Petroleum Berhad. From the ratio calculated, it indicates Petra Energy Berhad has low acid-test ratio would generally concluded that it is over-leveraged and large amount of inventories as compared to Deleum Berhad. Furthermore, Perdana Petroleum Berhad has lowest acid-test ratio would generally concluded that it is over-leveraged, want to grow sales, or slow in collecting the receivable from debtors.
Efficiency ratios
a) Stock turnover
It measures the efficiency of inventory management. It is the relationship between the volume of goods sold and inventory. It indicates the number of times the initial inventory is replaced in the period.
Petra Energy Berhad has highest stock turnover of 46.89 times as compared to Perdana Petroleum Bhd has low stock turnover of 45.14 times and Deleum Berhad has lowest stock turnover of 37.27x.
In other words, Petra Energy Berhad turns its inventory into sales 46.89 times per year and 7 days to keep the inventory in its warehouse before being sold. While, Perdana Petroleum Berhad turns its inventory into sales 45.14 times per year and 8 days to keep the inventory in its warehouse before being sold. For Deleum Berhad turns its inventory into sales 37.27 times per year and 9 days to keep the inventory in its warehouse before being sold.
This indicates Petra Energy Berhad has fastest moving stock, ability to satisfy customer and sufficient of stock. Therefore, Petra Energy Berhad is efficiently in managing its stock. The faster the stock to be sell off then it will tied up not much of the company funds even Petra Energy Berhad has highest stock level as compared to Perdana Petroleum Berhad and Deleum Berhad. Nevertheless, Petra Energy Berhad has highest sales as compared to Perdana Petroleum Berhad and Deleum Berhad
From the ratio calculated, Perdana Petroleum Berhad has low stock turnover. It has lowest sales and lowest stock level as compared to Petra Energy Berhad and Deleum Berhad. It would generally concluded that there is a risk that Perdana Petroleum Berhad has obsolete or outdated or damaged stock which is difficult to sell that eat in the company profit. But, seasonal demand and lowest cost of sales cause Perdana Petroleum berhad to have high stock turnover.
Deleum Berhad has lowest stock turnover. It has slowest moving stock. Therefore, Deleum Berhad is not efficiently in managing its stock as compared to Petra Energy Berhad and Perdana Petroleum Berhad. It would generally concluded that there is a risk that Deleum Berhad has obsolete or outdated or damaged stock which difficult to sell.
b) Debtor receivable days
It measures the efficiency of the business in managing the accounts receivable. It is the relationship between credit sales and accounts receivable.
Petra Energy Berhad has lowest debtor receivable a day of 111 days as compared to Deleum Berhad has high debtor receivable days of 131 days and Perdana Petroleum Berhad has highest debtors receivable days of 143 days. But, three of the companies have over the acceptable standard which is 30-60 days.
This indicates that Petra Energy Bhd is not efficiently in managing the accounts receivable and no proper credit control system even it has the lowest debtors receivable days due to it has been over the acceptable standard. It would generally concluded that generally concluded that it is providing longer credit period to penetrate the market and introducing new products also bad debts with doubtful debt may increase. Nevertheless, Petra Energy Berhad may neglect the capacity of customers which their ability to repay the debt, which is credit risk.
From the ratio calculated Both Perdana Petroleum Berhad and Deleum Berhad extremely not efficiently in managing the accounts and no proper credit control system due to they have been over the acceptable period more than Petra Berhad. This would generally concluded that it is hard to sell off its stock so it forced to sell to customers on a longer credit terms and provide longer credit period to penetrate the market and introducing new producs also bad debts with doubtful debt may increase. Furthermore, Perdana Petroleum Berhad does not concern about customer financial problem and Deleum Berhad does not concern about customer credit worthiness which examine the customers 5 C's in term of character, capacity, collateral, capital and condition.
Profitability ratios
a) Gross profit margin
The purpose is to measure the amount of gross profit made out of every single Ringgit of sales for that particular year.
Deleum Berhad has the highest gross profit margin of 19.03% as compared to Petra Energy Berhad has high gross profit margin of 11.32% and Perdana Petroleum Berhad has negative value of gross profit margin of -10.17%.
In other words, Deleum Berhad earn gross profit of RM 0.19 for every RM1.00 in sales before any expenses were paid, Petra Energy Berhad earn gross profit of RM0.11 for every RM1.00 in sales before any expenses were paid and Perdana Petroleum Berhad loss RM0.10 for every RM1.00 in sales before any expense were paid.
This indicates Deleum Berhad has highest gross profit margin due to it has better control of sales and cost of sales.
From the ratio calculated, Petra Energy Berhad has high gross profit margin and high sales but it has high cost of sales and high borrowing cause it to have only 11.32% of gross profit margin. This would generally conclude that Petra Energy Berhad customers may switch to others company and it is purchasing at high price.
Perdana Petroleum Berhad has negative value of gross profit margin. Due to its cost of sales is higher than its sales cause it to have -10.17%. This would generally conclude that Perdana Petroleum Berhad maybe set too low price for their products which lead to suffer loss of company.
b) Net profit margin
This measures the ability of the business to generate net profit from every single Ringgit of sale. It evaluates the efficiency of the business in controlling all costs relating to sales.
Deleum Berhad has highest net profit margin of 7.57% as compared to Petra Energy Berhad has high net profit margin of 0.42% and Perdana Petroleum Berhad has negative value of net profit margin of 28.41%.
This indicates that Deleum Berhad is efficient in controlling all costs relating to sales as comparing to the Petra Energy Berhad and Perdana Petroleum Berhad. Thus, Deleum Berhad achieves satisfactory return on its investment. From the ratio calculated, Petra Energy Berhad not efficient in generating profit from the sales would generally concluded that high expenses might cause the Petra Energy Berhad to generate small profit. Perdana Petroleum Berhad extremely not efficient in generating profit from sales would generally concluded that it has high cost of sales, low sales, high expenses and investing in risky investment might cause Perdana Petroleum Berhad to generate negative value of profit.
6. Limitations of Ratio Analysis
Ratio analysis is a useful tool used to analyse quantitative information from a company's financial statements. We can derive information about a company's performance, liquidity and financing of a particular company through the analysis.
Ratios can be easily manipulated by an accountant of a company or the higher authorities of a company. They can misuse these ratios for window dressing. Some companies do this in order to provide a better picture regarding their company's performance. Window dressing is a tactic used to improve the exterior of a fund or a portfolio to the shareholders or the customers. Among the common 'creative accounting techniques 'used here would be through the manipulation of valuation of assets or valuation of marketable securities. Revaluations of assets are done to give a better picture on the profitability level of the company which mislead the accounting users.
In ratio analysis, only quantitative information is taken into account whereas qualitative information is not. Qualitative data such as management's quality, regulatory changes and changes in the domestic and global economies should also be taken into account. Ratio analysis can provide information about a company's financial situation. When nonfinancial data is ignored, we cannot show whether the company's overall performance is good or bad. For instance, a high current ratio indicates that a company has a very good liquidity position. On the other hand, if inventories are a huge part included in the current asset, it does not indicate a sound liquidity position.
Besides, ratio analysis is based on historical data's as they are being calculated based on historical financial statements. Historical cost of accounting is the prime source of data which is used for investment ratio analysis. However, it is not enough to make a decision or a sound judgement as the information is outdated already. The use of historical cost of accounting can be misleading when used to calculate the asset valuation because the company's balance sheet could be distorted by inflation. Inflation might have occurred when the data is collected and the figure would have been adjusted which means the real value is different from the value reported in the balance sheet.
Next, comparing the ratios of one company to another company in an industry is not possible due to differences either in size of the company or the accounting procedures of the company. It will be difficult to measure the accuracy of the ratio analysis of a company particularly if it is large and has many divisions. If each division of the company provide different products and services, different ratios have to be used to calculate and analyse them. Different companies have different ways to value their inventory or stock. Some may prefer to use last-in-first-out (LIFO) method and some may prefer first-in-first-out method in the valuation of inventory. So, the ratio analysis is difficult to be compared with another company as it will not give us the accurate results.
Lastly, wrong interpretation of ratio analysis can also occur. For instance, in computing the debt to equity ratio, they may have different opinion on treating the preference share capital. Some of them may look at it as a part of debt and some will look at it as a part of equity. So this may mislead them to wrong decision making. There are also cases where accountants of the company are biased and they help their company to produce better figures in financial statements in order to get loans. This is the disadvantage of ratio analysis.
