Professional Documents
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This is an individual coursework that represent 40 percent of your total marks for ACFM
613 Accounting & Finance for managers. Your report should be font size 12 New Times
Roman and would not be longer than 5000 words. Plagiarism declaration should be
included in your report. Harvard referencing is used. Include the box below the cover of
your report to unable marks to be given.
Criteria
Name of Introduction Content Conclusion Total
student & ID 20% 60% 20% 100%
Choose two companies that are listed under the main board of the Bursa Malaysia.
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Analysis of firm’s performance using accounting ratios
Read, complete and sign this statement to be submitted together with your written project
paper.
I confirm that the submitted work is all my own work and is in my own words.
Signature:
Name (BLOCK CAPITAL): HAYDER ABDULHASAN SADIR
ID no: SP 20723
Date: 03 OCTOBER 09
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Analysis of firm’s performance using accounting ratios
TABLE OF CONTENTS
CHAPTER 1 INTRODUCTION 5
1.1 Background of the project paper 5
•Separation of ownership and control 5
•Earnings management 7
•Evaluating the Earning’s of Corporation 9
1.2 Objectives of the Project Paper 10
1.3 Organizations of Project Paper 11
ACKNOLEDGMENTS 49
REFERECES 49
APPENDIX 52
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Analysis of firm’s performance using accounting ratios
TABLE OF FIGURES
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Analysis of firm’s performance using accounting ratios
CHAPTER 1
Introduction
The term separation of ownership and control as Stephen G. Mark (1999), "refers to
the phenomenon associated with publicly held business corporations in which the
shareholders (the residual claimants) possess little or no direct control over management
decisions". Reference to the separation of ownership and control, and concern over its
effect. Smith (1776), wrote about joint stock companies, stated: "The directors of such
companies ... , being the managers rather of other people’s money than of their own, it
cannot well be expected that they should watch over it with the same anxious vigilance
with which the partners in a private copartnery frequently watch over their own. Like the
stewards of a rich man, they are apt to consider attention to small matters as not for their
master’s honour, and very easily give themselves a dispensation from having it.
Negligence and profusion, therefore, must always prevail, more or less, in the
management of the affairs of such a company. It is upon this account that joint stock
companies for foreign trade have seldom been able to maintain the competition against
private adventurers".
We can define the separation of ownership and control with reference to the owner
managed firm. In such a firm, the owner/manager possesses two principal attributes. The
owner/manager makes management decisions of the firm and has a claim to the profits of
the firm. (These claims are sometimes called residual claims to reflect that they accrue
after all costs and fixed claims have been satisfied.) In a large publicly-held corporation,
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Analysis of firm’s performance using accounting ratios
the shareholders own residual claims but lack direct control over management decision
making. Correspondingly, managers have control but possess relatively small (if any)
residual claims.
The advantages and disadvantages of seperation ownership and control, Mark J. Roe
multiple channels of information flowing into the regulators, and the potential for
potentially rigid regulatory monolith. One regulator might miss the problem, but—we
hope—another one catches it. But decentralization’s advantages come with two costs in
porosity. And they’re big ones. First off, a corporate crisis could arise in which no
specialized regulator is immediately equipped to head off the problem; and each may
think the task really belongs to another regulator, thought to be better equipped to handle
Eugene F. Fama and Michael C. Jensen (1983), They argue that "the separation of
bearing but also because of an effective common approach to controlling the agency
hypothesis is that the contract structures of all of these organizations separate the
decisions".
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Analysis of firm’s performance using accounting ratios
The benefits of separating ownership and control come from the interaction of three
factors. First, under certain conditions and for certain types of decisions, hierarchical
decision making may be more efficient than market allocation. Second, due to economies
of scale in both production and decision making, optimal firm size can be quite large.
Third, optimal investment strategy requires investors to be able to diversify and pool and
Under some conditions, hierarchical decision making may be more efficient than
market transactions. Both hierarchical structures and market structures impose transaction
costs. For some types of transactions, market costs may be particularly high. If so, then
Earning’s Management
Before diving into what earnings management is, it is important to have a solid
understanding of what we mean when we refer to earnings. Earnings are the profits of a
particular stock. Companies with poor earnings prospects will typically have lower share
prices than those with good prospects. Remember that a company's ability to generate
profit in the future plays a very important role in determining a stock's price.
deliberately manipulate the company's earnings so that the figures match a pre-
determined target. This practice is carried out for the purpose of income smoothing. Thus,
rather than having years of exceptionally good or bad earnings, companies will try to
keep the figures relatively stable by adding and removing cash from reserve accounts.
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Analysis of firm’s performance using accounting ratios
alter financial reports to either mislead some stakeholders about the underlying economic
accounting numbers.
of revenues, profits, or earnings per share figures through aggressive accounting tactics.
Aggressive earnings management is a form of fraud and differs from reporting error.
pattern seek loopholes in financial reporting standards that allow them to adjust the
financial analysts. These adjustments amount to fraudulent financial reporting when they
fall 'outside the bounds of acceptable accounting practice'. Drivers for such behaviour
of the difficulty lies in the accepted recognition that there is no such thing as a single
'right' earnings figure and that it is possible for legitimate business practices to develop
It is relatively easy for an auditor to detect error, but earnings management can
involve sophisticated fraud that is covert. The requirement for management to assert that
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Analysis of firm’s performance using accounting ratios
the accounts have been prepared properly offers no protection where those managers
have already entered into conscious deceit and fraud. Auditors need to distinguish fraud
that there are three general measures of earnings: as reported earnings, operating
earnings, and pro forma earnings. All three measures have uses in the appropriate
settings. These measures, their use, and meaning are summarized here:
measure and has a long history, having been used for the S&P 500 and
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Analysis of firm’s performance using accounting ratios
corporate reports. The use of this measure seems to come from internal
• Pro forma earnings: Originally, the use of the term pro forma meant a
were made for an “as if” review. In such cases, pro forma measures are
very useful. However, the specific items being considered in an “as if”
review must be clear. In some recent cases, “as if” has come to mean “as if
the company didn’t have to cover proper expenses.” In the most extreme
Such abuses not withstanding, pro forma earnings do have a place and
In such cases, pro forma earnings are defined for the particular analysis.
In this project we will estimate the finicial performance for two companies for each
one for 2007 and 2008 after that we will compare the finincial performance between
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Analysis of firm’s performance using accounting ratios
Planning for the future – guide in estimating future cash flows. External uses include
This project paper include five chapters: Chapter one an Introduction, chapter two is
a Literature Review, chapter three is the arithmatic Analysia and its results, chpter
four is Discussion and Conclusions for the results of the calculations and then finally
we have Appendix.
Literature
Introduction Analysis
Review
Discussion &
Appendix
Conclusion
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Analysis of firm’s performance using accounting ratios
CHAPTER 2
LITERATURE REVIEW
2.1 Introduction
Over the past decade, financial institutions have placed a significant amount of
time and resources into developing ways of measuring and improving risk and
return.
little co-ordination between risk and finance also capital management initiatives
regulatory view was created rather than one aligned to business imperatives.
risk. Banks therefore strive tomaximize returns within the boundaries of defined
performance indicators using risk measures derived from regulatory & economic
capital which answer questions such as how much capital is needed to support the
bank’s total risk and target credit rating? how much capital is needed to support a
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Analysis of firm’s performance using accounting ratios
Accounting profit is the difference between price and the costs of bringing to
In the accounting sense of the term, net profit (before tax) is the sales of the firm
less costs such as wages, rent, fuel, raw materials, interest on loans
ambiguous. Revenue may also be ambiguous when different products are sold as a
package, or "bundled." Within US business, the preferred term for profit tends to
Gross profit is profit before Selling, General and Administrative costs (SG&A),
like depreciation and interest; it is the Sales less direct Cost of Goods (or services)
Sold (COGS), Net profit after tax is after the deduction of either corporate tax (for
income taxes.
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Analysis of firm’s performance using accounting ratios
between companies and the need to look beyond ratios. Comparison of one
company with another can provide valuable clues about the financial health of an
For example if one company values its inventories by the LIFO method and
another firm by average cost method, then direct comparisons of financial data
such as inventory valuations are and cost of goods sold between the two firms
may be misleading.
market value whichever is lower" (instead of the presently favored "fair value",
debts) and "recognizing profits only after realizing sales", etc. If "philosophy" is
meant in the professional sense (i.e., not merely as an "attitude"), one comes to the
following conclusion:
of values (in general, but particularly, of assets, equities, etc.), and from othe hand
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Analysis of firm’s performance using accounting ratios
that these values should be represented in a "prudent" and objective rather than an
between some (i) person(s), (ii) an object, and (iii) changeable circumstances.
This implies a potential for sudden or unexpected fluctuations in value such that
its representation at one moment of time may no longer correspond to the reality
at another moment. This creates a dilemma. On one side, accounting and financial
statements are supposed to represent "reality", on the other side, this reality is in
constant flux. Hence, neither a "conservative" value nor a "fair" value satisfies the
ontological quest posed by a realist ontology. One solution to this problem would
error estimates (e.g., its standard deviation), or to use a "multiple value approach."
Mattessich's Accounting and Analytical Methods, 1964: 220-231) but have not
concerned, financial practice often attributes a risk factor to each share price. The
the cautious than optimistic side). This principle has been the pivot of accounting
practice (even of most of its theories) until the last decade of the twentieth century
"fair values". But some experts may argue that this resulted in occasional
overvaluations in the stock market with billions of dollars in losses to the public.
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Analysis of firm’s performance using accounting ratios
(unrealistically low) accounting book values and (much higher) share prices in the
the other side, tries to sail safely through the Skylla of conservative and the
Tom Farin (1995), In his article the author reviewed two levels of
profitability, its ROE. By setting standards for the ratios in the tree diagram and
boards can diagnose major reasons for negative changes in their institution’s
profitability. If the reasons for changes in performance are identified early in the
"In a case like Fort Knox Savings and Keep (FKS&K), as performance
improves, management and boards can begin to identify reasons for the
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Analysis of firm’s performance using accounting ratios
represented far more than the improvement to FKS&K’s ROA that occurred over
Its three years increase in core profitability would seem to position FKS&K
for continued ROEs in the 1.4% range. But before drawing this conclusion one
needs to determine if the factors comprising core profitability will remain steady.
It must also be determined whether credit risk or interest rate risk is likely to
interfere with FKS&K’s ability to continue to deliver ROA at the 1.4% level".
were about Fraudulent financial reporting which is a matter of grave social and
economic concern. Recent news abounds with corporate fraud scandals (e.g.
Enron, WorldCom, Qwest). The purpose of this study was to explore the fraud
examined an extended time period both pre- and post-fraud years. Statistically,
there was not much difference in the ratios of fraud versus nonfraud firms. Those
ratios found significant were not consistent across the time periods. A
They Found that "The results of this study provide empirical evidence of the
findings should be useful to both standard setters and auditors in their prescription
and application of ratio analysis for the detection of financial statement fraud".
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Analysis of firm’s performance using accounting ratios
There were several limitations to this study. First, the identified fraud firms
were limited to public firms with discovered fraud that were subject to SEC
Financial statement fraud might have occurred but had not been detected or
fraud and the need for an adequate sample size, the sample extends over a long
period. Such maturation often results in changing conditions within the sample
period which can also impact the model data and the prediction period. Owing to
sample size limitations, the use of a “hold out” sample to validate the discriminant
model was not feasible. Finally, there does not exist an acceptable theoretical
foundation for the selection of financial ratios for decision making. The ratios
were selected.
financial ratios obtained form balance sheet, income statement and cash flow must
be partitioned into several clusters and found the representative indicators from
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Analysis of firm’s performance using accounting ratios
evaluated with the FMCDM method, whether the number of alternatives is large
or not. Besides, comparing one airline with others can identify the competitive
strength and weakness of itself. It is useful for that the airline can realize the
with those of a matched sample of U.S. companies, and explain any observed
differences in the ratios based on the above three factors. In general, the results
indicated that the liquidity, activity, and coverage ratios of the Latin American
companies were lower than those of the U.S. companies. The profitability ratios
varied, however, with the profit margin on sales generally higher for the Latin
American companies, the return on assets mixed, and the return on equity ratios
not significantly different between the Latin American and U.S. companies.
Finally they concluded that with the growth of financial markets and businesses in
Latin America there are tremendous investment opportunities for U.S. investors.
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Analysis of firm’s performance using accounting ratios
The results and subsequent discussion in this study suggest that a successful and
Issham Ismail (2006), The main purpose of his study was to identify the
crisis, during economic crisis and post-economic crisis period. Single and
corrected variances and standard errors were used for data analysis. This study
found that traditional tools particularly EPS is able to correlate and had a
relationship with stock return and this study revealed that EVA also able to
correlate with stock return and it is superior in explaining the variations of the
conditions.The finding disclosed that a component of EVA was not had a better
relationship with stock return than EVA. While, this study indicates that EVA had
a better relationship with stock return over a longer period of the study. The
finding revealed that neither positive EVA (value creators) nor negative EVA
(value destroyers) had a relationship with stock return. However, the positive
EVA (value creators) had a better relationship with earnings than negative EVA
(value destroyers) and this study indicates that value creators have better earnings
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Analysis of firm’s performance using accounting ratios
multiplier than value destroyers. While the combination of traditional tool and
EVA will not lead to increase the ability in developing relationship with stock
return.
The study concluded that combination of traditional tool and EVA will not
lead to increase ability in developing the relationship with the stock return,
however in some cases the combination had a better relationship with the stock
return but the percentage increase is very nominal. These findings are in line with
2.4 Summary
Malaysian AE Models Holding BHD. for both years for 2007 and 2008
separetaly.
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Analysis of firm’s performance using accounting ratios
CHAPTER 3
RESULTS OF ANALYSES
3.1 Introduction
This chapter describes the steps taken to analysis the financial performance for
Financial analysis is a scientific tool. It has assumed important role as a tool for
appraising the real worth of an enterprise, its performance during a period of time
and its pit falls. Financial analysis is a vital apparatus for the interpretation of
financial statements. It also helps to find out any cross-sectional and time series
linkages between various ratios. Unlike in the past when security was considered
and advances, nowadays the entire lending is need-based and the emphasis is on
the financial viability of a proposal and not only on security alone. Further all
business decision contains an element of risk. The risk is more in the case of
relationship of related items and groups of items of the financial statements. They
provide in a summarized and concise form of fairly good idea about the financial
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Analysis of firm’s performance using accounting ratios
profit, are some of the obvious benefits of financial analysis. Hopefully, ongoing
analysis will help the farm manager identify past mistakes and learn from them by
A word of caution: the need for accurate record keeping is critical because
decisions are no better than the information they are based on. Financial measures
evaluate their performance over time. Comparing financial documents from past
statements to past statements reveal what has been happening to the farm
business' financial situation. The balance sheets show changes in owner's equity
and risk exposure (whether they have been increasing, decreasing or remaining
the same); the income statements reveal trends in profit; and, the cash flow
statements can help the farmer understand the timing of cash availability and
needs.
The information from these three financial statements also can be used to
prepare additional financial measures that reveal the strengths and weaknesses of
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Analysis of firm’s performance using accounting ratios
the farm. These additional financial measures can be used to make several
comparisons.
First, the current performance of the farm can be compared to its historical
understand how and why the actual outcome of the business differs from what
that is below the average indicates that additional profits are possible because
identify why and take appropriate management action. These comparisons are
very useful but sometimes difficult to do because of the personal nature of the
organizations.
one has invested their time and capital in owning and operating a
farm.
However most users of financial statements are concerned about what will
happen in the future. Stockholders are concerned with future earnings and
dividends. Creditors are concerned with the company's future ability to repay its
debts. Managers are concerned with the company's ability to finance future
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Analysis of firm’s performance using accounting ratios
expansion. Managers must pay attention to the financial ratios used by external
Data were obtained from the annual reports in the websites for each company
(Muda Holdings Berhad and Malaysian AE Models Holdings Behard) after being
chosen through the main market in the official web site for Bursa Malaysia
Company background
It's considered pioneered the paper milling and packaging in Malaysia with it's
first paper mill in Tasek, Penang in 1964 and it's first corrugator plant in Petaling
Jaya in 1971. Today, it's own one of the largest integrated paper mill and
Except for one corrugated box plant in Qingyuan, China, it's manufacturing
activities are mostly centred in Peninsular Malaysia where it has two factories for
paper milling, four factories for making corrugated boxes, a factory for multi-wall
paper bags and a factory for PE laminated paper, paper bags and paper-based
stationery. It's plants have been awarded the ISO 9001, OHSAS 18001, and ISO
14001 accreditation.
Core Business
It's manufacture high grade industrial brown paper, paper boards, corrugated
boxes, multi-wall paper bags, PE laminated paper for industrial and food
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Analysis of firm’s performance using accounting ratios
application, flat, satchel and self-opening-style paper bags for food and non-food
retail outlets, paper pallets and honeycomb for packaging and furniture industries,
paper-based stationery, trading in imported paper and paper related products for
Company background
Founded by the CEO/Group MD Datuk Dr. Jimmy KS Lim and his business
MAEMODE 7075).
models to local clients. In mid 1980s, the company started the trading business in
ventured into material handling business and formed a strategic partnership with
Maruyasu Kikai - a material handling specialist from Japan. From there on, the
company further developed the technology and started penetrating into overseas
market via setup of subsidiary companies. Today, MAE is well equipped with the
technology and resources to provide turnkey material handling solution and has
established a global network to serve its clients’ needs in both domestic and
overseas markets, including Europe, USA, Middle East and Asia regions, with
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Analysis of firm’s performance using accounting ratios
Core Business
coal and mineral, food and beverage processing, automotive, airport, electrical
and electronic, pulp and paper, postal and courier services, wholesales and
Business Philosophy
A. Financial Ratios:
We will use the accounting Ratios in fig (2) to analyse the fiancial performance of
the companies.
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Analysis of firm’s performance using accounting ratios
Profitability ratios:
The best way of assessing profitability is to calculate a ratio known as the return on
Profit
––––––– ∗ 100
Capital
The gross profit ratio enables us to judge how successful the entity has been at trading. It
is calculated as follows:
The gross profit ratio measures how much profit the entity has earned in relation to
the amount of sales that it has made. The definition of gross profit does not usually cause
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Analysis of firm’s performance using accounting ratios
any problems. Most entities adopt the definition which we have used in this book, namely
sales less the cost of goods sold, and so meaningful comparisons can usually be made
Mark-up ratio
The gross profit ratio complements another main trading ratio: for convenience, we will
Mark-up ratios measure the amount of profit added to the cost of goods sold. The
cost of goods sold plus profit equals the sales revenue. The mark-up may be reduced to
stimulate extra sales activity, but this will have the effect of reducing the gross profit.
However, if extra goods are sold, there may be a greater volume of sales and this will
Owners sometimes like to compare their net profit with the sales revenue. This can be
expressed in the form of the net profit ratio, which is calculated as follows:
It is difficult to compare fairly the net profit ratio for different entities. Individual
operating and financing arrangements vary so much that entities are bound to have
different levels of expenditure, no matter how efficient one entity is compared with
another. Thus it may only be realistic to use the net profit ratio in making internal
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Analysis of firm’s performance using accounting ratios
comparisons. Over a period of time, a pattern may emerge, and it might then be possible
to establish a trend.
Liquidity ratios
Liquidity ratios measure the extent to which assets can be quickly turned into cash.
In other words, they try to assess how much cash the entity has available in the short term
(this usually means within the next twelve months). For example, it is easy to extract the
total amount of trade debtors and trade creditors from the balance sheet, but are they too
high? We cannot really tell until we put them into context.We can do this by calculating
two liquidity ratios known as the current assets ratio and the acid test ratio. Current assets
In most circumstances we can expect that current assets will be in excess of current
liabilities. The current assets ratio will then be at least 1 : 1. If this is not the case, the
entity may not have sufficient liquid resources (i.e. current assets that can be quickly
turned into cash) available to meet its immediate financial commitments. Some textbooks
argue that the current assets ratio must be at least 2 : 1, but there is no evidence to suggest
It may not be easy to dispose of stocks in the short term as they cannot always be quickly
turned into cash. In any case, the entity would then be depriving itself of those very
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Analysis of firm’s performance using accounting ratios
assets that enable it to make a trading profit. It seems sensible, therefore, to see what
would happen to the current ratio if stocks were not included in the definition of current
assets. This ratio is called the acid test (or quick) ratio. It is calculated as follows:
Like the current ratio, the acid test ratio is usually expressed as a factor (or occasionally
position than the current assets ratio because it may be difficult to dispose of the stocks in
the short term. Do not assume, however, that if current assets less stocks are less than
current liabilities, the entity’s cash position is vulnerable. As we explained above, some
of the current liabilities may not be due for payment for some months. Some textbooks
suggest that the acid test ratio must be at least 1 : 1, but again there is no evidence to
Efficiency ratios:
Traditional accounting statements do not tell us how efficiently an entity has been
managed, that is, how well its resources have been looked after. Profit may, to some
accounting profit is subject to a great many arbitrary adjustments, and it is not entirely
reliable. What we need to do is to put whatever evidence we have into context, compare it
with earlier accounting periods and, if possible, with other similar entities.
There are very many different types of ratios that we can use to measure the efficiency
of an entity, but in this book we will cover only the more common ones.
Stock turnover ratio The stock turnover ratio may be calculated as follows:
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Analysis of firm’s performance using accounting ratios
A simple average is usually used to calculate the average stock, i.e. (Opening stock +
closing stock).
The stock turnover ratio is normally expressed as a number (e.g. 5 or 10 times) and not as
apercentage.
Another important area to examine, from the point of view of efficiency, relates to fixed
assets. Fixed assets (such as plant and machinery) enable the business to function more
efficiently, and so a high level of fixed assets ought to generate more sales.We can check
this by calculating a ratio known as the fixed asset turnover ratio. This may be done as
follows:
The fixed assets turnover ratio may also be expressed as a percentage. The more times
that the fixed assets are covered by the sales revenue, the greater the recovery of the
Investing in fixed assets is all very well, but there is not much point in generating extra
sales if the customers do not pay for them. Customers might be encouraged to buy more
by a combination of lower selling prices and generous credit terms. If the debtors are
slow at paying, the entity might find that it has run into cash flow problems. Thus it is
important for it to watch the trade debtor position very carefully.We can check how
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Analysis of firm’s performance using accounting ratios
successful it has been by calculating the trade debtor collection period. The ratio may be
calculated as follows:
The average trade debtors are usually calculated by using a simple average [i.e g
(opening trade debtors + closing trade debtors)]. The closing trade debtors figure is
sometimes substituted for average trade debtors. This is acceptable, provided that the
A similar ratio can be calculated for the trade creditor payment period. The formula is
as follows:
The average trade creditors amount would again be a simple average of the opening and
closing balances, although it is quite common to use the closing trade creditors. The
Investment ratios:
The various ratios examined in the previous sections are probably of interest to all users
are some other ratios that are primarily (although not exclusively) of interest to
The first investment ratio that we might find useful is the dividend yield. It usually
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Analysis of firm’s performance using accounting ratios
The dividend yield measures the rate of return than an investor gets by comparing the
Dividend cover
This ratio shows the number of times that the ordinary dividend could be paid out of
current earnings. The dividend is usually described as being x times covered by the
earnings. Thus, if the dividend is covered twice, the company would be paying out half of
Another important investment ratio is that known as earnings per share (EPS). This ratio
enables us to put the profit into context, and to avoid looking at it in simple absolute
terms. It is usually looked at from the ordinary shareholder’s point of view. we may use
the following formula to calculate what is called the basic earnings per share.
The above definition uses the term ‘non-equity shares’. Preference shares are an example
of such shares.
Capital gearing ratio
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Analysis of firm’s performance using accounting ratios
The last ratio that we are going to consider is the capital gearing ratio. Companies are
financed out of a mixture of share capital, retained profits and loans. Loans may be long-
addition, the company may have set aside all sorts of provisions (e.g. for taxation) which
it expects to meet sometime in the future. These may also be regarded as a type of loan.
From an ordinary shareholder’s point of view, even preference share capital can be
classed as a loan, because the preference shareholders may have priority over ordinary
finances itself from a high level of loans, there is obviously a higher risk in investing in
1. The higher the loans, the more interest that the company will have to pay, and that
2. If the company cannot find the cash to repay its loans, the ordinary shareholders may
not get any money back if the company goes into liquidation.
As far as item 1 is concerned, there will be no particular problem arising if profits are
increasing, because the interest on its loans will become a smaller and smaller proportion
of the total profit. But it could become a problem if profits are falling and the interest is
to pay out any ordinary dividend. There are many different ways of calculating capital
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Analysis of firm’s performance using accounting ratios
B. Calculations
Below the calculations for the Ratios analysis for the companies (Muda Holdings
MALAYSIAN AE
Muda Holdings MODELS
Type of Berhad HOLDINGS
Function
Ratios BERHAD
2007 2008 2007 2008
Current Asset ratio 0.92 0.93 1.38 1.32
Ratio Analysis
Acid test Ratio 0.58 0.53 1.3 1.26
Profit before taxation 5.4% 13.1% 13.4% 14.3%
ROCE
Net profit 4% 11% 10.1% 9.8%
Profitability Gross Profit ratio (GP) 16.9% 19.9% 23.3% 21.5%
ratios
Mark-up Ratio 20.34% 24.8% 30.4% 27.3%
Net profit Ratio 3.3% 7.8% 6.06% 6.48%
Stock Turnover Ratio 5.2 4.7 16.4 23.1
Fixed Asset Turnover ratio 1.6 1.8 4.1 3.5
Effeciency
Ratios Trade Debtor Collection
78 65 241 226
Period
Trade Creditor payment Period 15 10 41 27
Dividend Yield (return) 4.29% 4.03% 2.18% 2.56%
Dividend Cover Ratio 2.98 7.19 16.4 12.66
Investment
Earnings Per Share 0.158 0.506 0.171 0.19
Trend Ratios
Price Earning (PE ) Ratio 3.7 12.3 5.3 5.14
Capital Gearing Ratio 0.1 0.05 0.14 0.15
3.4 Summary
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Analysis of firm’s performance using accounting ratios
After being familier with how to standardize financial statements for comparison
purposes and how to compute important financial ratios, and after we got this results
from the calculations based on the mentioned formulas, they are ready now to interpretate
in the next chapter to get idea about the health and performance for those companies.
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Analysis of firm’s performance using accounting ratios
CHAPTER 4
4.1 Introduction
In this chapter we will interpretate the accounting results in Ch.3. The term
entity’s past or future performance. There are three main reasons why this is so. We
quantitative matters that can be easily translated into financial terms. The data are
presented in absolute amounts such as thousands or millions of Ringit. The numbers are
not mean very much in isolation. Although comparative figures for the preceding year
may be of some help, greater and wider comparisons need to be made before the figures
Third reason is Structural. Financial accounts are prepared on the basis of a series of
accounting rules. They contain a restricted amount of information and some arbitrary
assessments have to be made about the treatment of certain matters, e.g. bad debts,
depreciation and stock valuation. They are usually prepared for a past period of time,
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Analysis of firm’s performance using accounting ratios
limited to two accounting periods (at best), and they do not take into account the impact
of inflation (in some countries this can be significant, even over a one-year period).
Liquidity:
The most Critical Ratios are Liquidity ratios , if a company (or an entity) is not
business for very long no matter how profitable it could turn out to be in the long
run.
RM000
40,405
20.3%
Value
32,212
Muda
17,200
Malaysian AE
63.5%
10,520
From Fig (3) we see how Muda had increased it's cash at the bank (63.5%), In
absolute amount it’s a large increase in the cash flow. In other hand we see MEA
had a decrease of (20.3%) from its cash on 2007, but still less than twofold the
cash for MUDA because of it's core business which need high liquidity.
45
Analysis of firm’s performance using accounting ratios
With relating the cash amouts to the total current assets and total current
MAE still doing better in spite of the decreasing in cash amounts on 2008.
Percentage (%)
17%
12.7% 12.3%
9.6%
Cash flow relted to Current Assets and Current Liabilities
Muda Malaysian AE
5.5%
5.1%
3.5% 3.3%
Financial year
From fig(5) we can see how Current Assets Ratios relates without and with
Inventories.
Normaly the limits is (0.5 - 2), We see that MAE has more stable performance in
45
Analysis of firm’s performance using accounting ratios
1.38
1.32 1.3
1.26
Value
0.93 0.92
Financial year
RM000
445,879
444,175
Value
36,575
91
Financial year
Figure 6: Comparison for Current Assets with cash generated from operations
45
Analysis of firm’s performance using accounting ratios
We can see that both have already ingaged in a major capital investment project
which is effecting on its low liquidity. We can see also that Muda has a small
investment comparing to that one for MAE. Same time it has more than three fold
from MAE for the current assets which mean more stable on the long term.
The overall verdict is that the companies appear not to have any immediate
liquidity problems.
Profitability:
According to the available data in the annual report, we can see from
RM000
78,434
61,298
Value
Comparison
41,670 on Profits' amounts43,623
Muda Malaysian AE
36,388
28,972
22,898 22,882
19,364
16,421
5,699
2,586
Financial Year
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Analysis of firm’s performance using accounting ratios
profit attributable to equity shareholders, The profit from the operations and
They are all increase and in absolute terms they are very large amounts.
ROCE (in terms of net profit befors tax and interest, Net profit after tax) are taken
into account as a proportion of what the shareholders had invested in the business
30.4%
27.3%
24.8%
23.3%
Comparison
16.9% of Profitability Ratios
Muda Malaysian AE
11%
6.5% 6.06%
4% 3.3%
Financial year
as a reutrn, but the results of 2008 is being better as a return comparing with
For MAE was almost steady state. In broad terms the company still in
approximate stable level. It's being acceptable as a return comparing with that
45
Analysis of firm’s performance using accounting ratios
The gross profit also Mark up, Muda company sells the product with a price (17-
20%) more than it takes. The Net profit is being between (3.3%) on 2007 and
(7.8%) on 2008. In other side we see MAE sells the product with a price (17-20%)
more than it takes. The Net profit is being between (6%) on 2007 and (6.5%) on
The overall verdict both companies appears to be in stable and good profitability
performance on 2008.
Effeciency:
We must treat the stock turnover ratios that we have calculated with some
caution because we think that the cost of sales includes production costs and so
23.1
16.4
Value
Muda Malaysian AE
4.7 5.2
Financial year
45
Analysis of firm’s performance using accounting ratios
we do not have a separate figure of the purchases. The stock turnover appears to
The performance for the trade debtor collection period, and tade creditor
payment goes down for both companies on 2008. For tade creditor going down less
the normal limits that put from both companies, and in Muda case it's far form the
lowest limit, which means that the suppliers are more serious with this company
and has less trust so they shorted the payment period to (10)days, This is a very
short period. However, the purchases probably include production costs. If these
costs were taken out of purchases we would have a more realistic result for the
trade creditor payment period. In other side we see MAE has problem with it's
debtors, which represent risk on the company. The overall verdict seems to do
241
Value
226
Value
180
Muda 78 Malaysian AE 90
Figure Normal
5: 65Comparison of Debt
margins for trade creditRatios
terms granted for customers.
60
Normal margins for trade credit terms granted by suppliers. 41
27
30
10 15
Financial year
Financial year
45
Analysis of firm’s performance using accounting ratios
Investment:
The Investment Ratios analysis are summerized in Fig(11) & (12) to show the
From the fig (11) we can see how the shareholders for Muda Co. will be sad to
get paid a small rate of their dividends, same time we see that earning per share
goes up sharply on 2008, which is very good indicatir, Clearly, the company has
had a policy for some time of retaining most of its earnings and of only paying a
small proportion of them in dividends. There could, therefore, be pressure from the
shareholders to increase the level of dividends paid out but obviously the impact on
50.6
4.
29
5
4.
03 Dividend Yield (return)
4
Value
7.19 1
5.14 5.3
2.98 3.7
Financial year
45
Analysis of firm’s performance using accounting ratios
In other side we see the share holders for MAE got less paid than 2007 and that
related for the need for money for the investment of the company (as expalined in
For Gearing, as it's being clear from the chart that Muda company more safe, in
other Side MAE has increased on 2008 which mean the financial risk will
increase, and therefore the cost of capital of the firm will also increase.
5.3
5.14
0.14
0.15
0.1
Value
0.1
0.05
Muda Malaysian AE
0.05
Financial year
• Although this study considered two years of data (2007&2008), the time
period of analysis is still relatively short and only involeves years during the
45
Analysis of firm’s performance using accounting ratios
are used to calculate ratios may increase or decrease at the end of the accounting
period because of seasonal factors. Such changes may distort the value of the
4.3 Conculusions:
The study examined the financial performance for two Malaysian companies
from the main market list in Bursa Malaysia website which are Muda Holdings
The evaluating was done by using the Financial Accounting Ratios (Liquidity
In general it was found that Malaysian AE Models Holding Bhd had more
Milion which effected on it's liquidity to be less than in 2007, also it has
relatively higher effeciency (in spite of some long debtors) reach five times that
for Muda in time they had an appoximate stable level performance for the
Profitability and finally Muda had better performance for the Investment.
45
Analysis of firm’s performance using accounting ratios
Acknowledgments
The researcher gratefully acknowledge and would like to thank Dr. Wong for her big
support and help to do this simple project. Also the researcher gratefully acknowledge
References:
Volume 2, Issue 2.
Corporate Earnings, Standard & Poor’s, retrieved May14, 2002, from Standard &
Poor’s.
Enya He, 2006, ' Separation of Ownership and Control: Implications for Board
45
Analysis of firm’s performance using accounting ratios
Farin, 1995, ' Evaluating Financial Performance Using the Income Tree - Part
One',
ScienceDirect.
Kaminski, Wetzel & Guan, 2004, ' Can financial ratios detect fraudulent financial
reporting?', Managerial Auditing Journal, Vol. 19, No. 1, pp. 15-28, Retrieved
modern value-based measures. The case of earnings and EVA® in the Athens
http://www.law.harvard.edu/programs/olin_center/.
from http://www.law.harvard.edu/programs/olin_center/.
45
Analysis of firm’s performance using accounting ratios
companies during pre and post Merger', International Research Journal of Finance
http://www.Eurojournals.com/finance.htm.
Network.
Discuss', Student Law Journal, Retrieved December 7, 2004, from Student Law
Journal.
Wan Mahmood, Wan Mansor & Norfarah Hani, 2008, ' Creating Wealth for
retrieved April 12, 2009, from MPRA Munich Personal RePEc Archive
http://mpra.ub.uni-muenchen.de/14602/
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Analysis of firm’s performance using accounting ratios
Appendix
The reference data for Muda Holdings Berhad which already got from the annual report
1. Balance sheet:
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Analysis of firm’s performance using accounting ratios
45
Analysis of firm’s performance using accounting ratios
2. Income Statements
45
Analysis of firm’s performance using accounting ratios
45
Analysis of firm’s performance using accounting ratios
45
Analysis of firm’s performance using accounting ratios
The reference data for Malaysian AE Holding Bhd. which already got from the annual
report
1. Income Statements
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Analysis of firm’s performance using accounting ratios
2. Balance Sheets
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Analysis of firm’s performance using accounting ratios
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Analysis of firm’s performance using accounting ratios
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Analysis of firm’s performance using accounting ratios
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