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To : xxxxxxxxxxxxxxx

From : xxxxxxxxxxxxxxx
Date : xx/xx/xxx
Title : xxxxxxxxxxxxxxx

We have calculated the financial analysis of Gelang Tali Bhd for the year ended 30
June 2008 based on the prepared financial statement (as per appendix). The ratios are
categorized into five different categories. These ratios are compared with the two years
previous ratios to analyze the company’s performance. The analysis of this ratio will give an
indicator for the users in making decision. The analyses of the performance are as follows:

Profitability Ratios
This ratio measures how effectively the firm uses its assets to make profits. Gross
profit margin, profit margin, return on capital employed and asset turnover ratio are classified
under this ratio.
The gross profit margin shows an increasing pattern for the year 2006 to 2008. The
ratios are 38.2%, 40.3% (increase by 2.1%) and 45.7% (increase by 5.4%) for the year 2006,
2007 and 2008 respectively. For year 2008, the company this ratio shows that the company is
making 45.7 sen of gross profit for every RM1 sales made. This shows that the company is
good in managing its sales and cost of sales.
The profit margin ratio for 2006 to 2008 are 10.5%, 15.6% (increase by 5.1%) and
12.1% (decrease by 3.2%). The decrease in year 2008 indicates that the profit of the year for
the company is affected due to a high operating expense. For improvement purposes, the
company can try to reduce its operating expenditure or review its pricing strategy.
For return on capital employed, the ratio are 18.1% in 2006, 16.4% in 2007 (decrease
by 1.7%) and 16.7% in 2008 (increase by 0.3%). There is a decline percentage from 2006 to
2007 but no significant movement between 2007 and 2008. ROCE is used to prove the value
the business gains from its assets and liabilities. The ROCE is used to measure the efficiency
of the company in utilizing its capital in generating the revenues. It should be higher than the
company’s borrowing rate since a high borrowing rate will jeopardize the shareholder’s
earnings.
Asset turnover ratio shows a decreasing pattern for year 2006 to 2008. The ratio for
2006 to 2008 is 1.5 times, 1.4 times (decrease by 0.1) and 0.96 time (decrease by 0.44). The
declining pattern shows that there is a possibility that low sales are made and high acquisition
of noncurrent assets. Due to that, assets may not fully utilize to produce sales. Therefore, to
improve this ratio, the company should try to increase its production capacity, so assets are
efficiently used or disposed any idle fixed assets.

Liquidity Ratios
It shows the firm’s ability to meet their short term financial obligations that is whether
the company has the resources to pay its creditors when they are due. Current ratio and quick
ratio are classified under this category.
The current ratio for 2006 to 2008 are 1.5 times, 1.2 times (decrease by 0.3) and 0.9
time (decrease by 0.3) respectively. This shows a declining pattern for this ratio. The ratio of
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0.9 in year 2008 indicates that for every RM1 for current liabilities, the company only has 90
sen of current as a back up. This ratio indicates that the company will be having problem in
paying its current obligation on time. To improve this ratio the company should reduce the
current liabilities and generate more cash by increasing its sales.
The quick ratio for the company also shows a decreasing pattern. The ratios are 1.0
time, 0.8 time (decrease by 0.2) and 0.6 time (decrease by 0.2) for year 2006 to 2008
respectively. In year 2008, the ratio indicates that for every RM1 of current liability, the
company is only able to pay RM0.62 sen. This means that the company will not be able to
pay its current liabilities without selling its inventories which are the least liquid out of the
total current asset.
Overall, the liquidity ratios are low. This may due to the company uses short term
sources to finance the purchase of long term assets. If this pattern continues, the company
may face insolvency because of difficulty in paying its debt. Therefore, to improve the
liquidity position, the management can promote more cash sales to solve the cash flow
problems and discount can be given to encourage sales. The company also can invest in
marketable securities instead of cash in hand in generating income.

Long term solvency ratio


This category of ratio measures the level of debt in the firm. It shows whether more debt
financing is used to finance the company’s assets and operation as compared to equity
financing. Debt ratio and capital gearing ratio are listed under this category.
There is a decreasing pattern in the debt ratio from 2006 to 2008 that are 38.2%, 32.7%
(decrease by 5.5%) and 29.6% (decrease by 3.1%) respectively. The ratio of 29.6% in 2008
shows that 29.6% of its assets are financed by debt while another 70.4% are financed using
shareholder’s equity. This ratio shows that the company is good in its financing strategies.
This is because the company uses its long term financing to finance its long term assets and
vice versa.
The capital gearing ratio for year 2006 to 2008 is 9.9%, 7.6% (decrease 2.3%) and 19.6%
increase by 12%). This ratio is calculated to test the long-term financial position of a firm.
Capital gearing ratio is important to the company and the prospective investors. It must be
carefully planned as it affects the company's capacity to maintain a uniform dividend policy
during difficult trading periods. It reveals the suitability of company's capitalization. The
increase in year 2008 indicates that the company is financing more by equity shares rather
than using interest bearing fund.

Efficiency ratios
Efficiency ratios or asset management ratios measure how effectively the firm is
managing its assets in generating sales. It also shows the firm’s efficiency in collecting debts
and it’s efficiency in turning over its stocks into sales. Ratios listed under this category are
accounts receivable collection period, inventory turnover ratio and accounts payable payment
period.
Accounts receivable collection period in year 2006 to 2008 are 30.3 days, 25.5days
(decrease by 4.8 days) and 22.2days (decrease by 3.3 days) respectively, records a decreasing
pattern throughout the years. This ratio indicates the number of days taken by the firm to
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collect its accounts receivable and a reflection of the company’s credit policy. Therefore, the
ratio calculated in 2008 means that it takes 22.6 days for the company to collect payment
from its debtors. The decreasing rate indicates that the company is getting more effective and
efficient in extending credit and collecting debts by practicing a strict credit policy. It also
may indicate that the company is operating more on a cash basis.
On the other hand, inventory turnover ratio in year 2006 to 2008 also shows a declining
rate as the ratios calculated are 50.4days, 35.9days (decrease by 14.5days) and 20.1days
(decrease by 15.8days) respectively. In 2008, the ratio shows that it takes 20.1 days to turn
over its stocks into sales. The declining pattern recorded gives a picture that from year to
year, the company’s stocks takes a faster time to be sold. This is a good indication that the
company has better sales strategy and its goods are highly demanded in the market. It may
also indicate that the company does not have overstocking problems.
The accounts payable payment period for 2006 to 2008 calculated are 51.7 days 82.4
days (increase by 30.7days) and 130.1days (increase by 47.7days) respectively. The pattern
shows that the payment period is increasing throughout the years. This means that the
company is taking a longer time to pay for the purchase of materials and labour. The figure in
2008 shows that it takes 130.1 days for the company to settle its debts. A longer period is
better as it gives the company the opportunity to pay at the slowest possible time without
damaging its credit ratings. This is because, accounts payables are interest free loans.
Overall, the efficiency ratios are getting better and it shows that the company is efficient
in its stock management, debts collection and payment period without damaging the
company’s position.

Shareholders’ investment ratios


This category of ratio indicates what investors think of the company’s past
performance and future prospects. It measures the investor’s perception and judgment
towards the firm’s growth potential. Earnings per share, dividend per share, dividend cover,
price earnings ratio and dividend yield are ratios listed under this category.
The earnings per share for 2006 to 2008 is 22.2 sen, 28.1sen (Increase by 5.9sen) and
29.6 sen (increase by 1.5sen) respectively. As for EPS in year 2006 to 2007, it recorded a
significant increase but as for 2007 to 2008 there’s only a slight increase in EPS. EPS
indicates the profit earned per unit of issued ordinary share. The EPS for year 2008 shows
that for every unit of ordinary shares, investors will receive 29.6 sen of profit.
As for dividend per share calculated are 7.2 sen, 8.5sen(increase by 1.3sen), 9.1sen
(increase by 0.6sen) respectively for year 2006 to year 2008. Dividend per share for year
2006 to 2007 shows an increase in value while for 2007 to 2008 shows a slight increase
compared to the previous year. This ratio indicates the amount of dividend receive by
ordinary shareholders for each unit of ordinary share held. In year 2008, it shows that
shareholder will receive dividend of 9.1 sen for each unit of shares held.
A dividend cover ratio tells us how easily a business can pay its dividend from profits.
Dividend cover recorded are 2.5times, 2.6times (increase by 0.1time) and 3.3times (increase
by 0.7time) for past three years respectively. There’s a increasing patter in this ratio where
dividend cover for year 2006 to 2007 records a slight increase with a slight increase in year
2007 to 2008. the figure calculated in 2008 shows that firm's profit attributable to
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shareholders was 3.3 times the amount of dividend paid out and the company can easily
afford to pay its dividend.
Price earnings ratio is 2.5, 3.1 (increase by 0.6), 3.4 (increase by 0.3). Price earning ratio
in year 2006 to 2007, it only increases slightly. For the year 2007 to 2008, it increases but at a
much lower value. This ratio shows how much investors are willing to pay for the company
shares. It indicates that for year 2008, there is an increase in the investors confidence in the
firm’s future prospect.
While for dividend yield is 7.2%, 7.5% (increase by 0.3%), 9.1% (increase by 1.6%).
Dividend yield recorded a slight increase in year 2006 to 2007 and as for 2007 to 2008, it
recorded a significant increase. Dividend yield provides return on shares. This means that the
investors will earn 9sen of RM 1 invested in the company.
As a conclusion, we can see that there is only a small changes in the company’s
performance for year 2008 compared to the previous years. This means the company is able
to maintain its performance but there are also a number of problems that the company is
facing that should be taken into consideration seriously. The analysis shows that the company
has a very strong capability in managing its efficiency and gearing ratios. This is because
there is an improvement made the company throughout the years. From the investor’s point
of view, we are still able to attract the investor’s interest and retain the investor’s confidence
towards the company since the company is able to give returns to the investor.
In terms of profitability ratios, the company is doing well since there is a slight increase.
However, the company needs to work harder on increasing its sales and efficiency in
managing its assets so that there will be a lot of improvement in the future. The major
concern of the company is in terms of liquidity ratios. This is because based on the analysis
that we have made, the company will be having difficulty in paying its current obligation.
Once the company is incapable in paying its obligations, the company will lose the trust of
many parties i.e. external or internal. If this situation continues to happen, the company will
be facing many problems and may be declared insolvency in the future.
Prepared by,
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