This group assignment of Financial Management will assess the positions financial performances for six types of different companies which are listed on the Bursa Malaysia Berhad (Bursa Malaysia) and its based on three main sectors of business industrie

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University Degree Business and Administrative studies

1.0        INTRODUCTION

Financial analysis is the  on the  with which   and  are  in a firm. It reviews the  and  of the company , and value and safety of debtors’ claims against its assets. Financial analysis employs techniques such as ‘funds flow analysis’ and financial ratios to understand the problems and opportunities inherent in an investment or financing decision

Further, the financial analysis will be done on some important financial ratios to assess the company strength and also the value for the investors to invest in their company. Hence, the company that has the stronger financial standing and potential for growth will finally be the choice of investors.

2.0        METHODOLOGY

This group assignment of Financial Management will assess the position’s financial performances for six types of different companies which are listed on the Bursa Malaysia Berhad (Bursa Malaysia) and its based on three main sectors of business industries. The details names of six companies and its sectors for financial statement analyses as follows:

 

All of the data’s financial reports are from the years 2000 until 2009, which selected from DataStream at the Faculty of Economics and Management, University Putra Malaysia (UPM) and the annual reports of the companies. Three financial statements have been mainly approached, which are Profits and Loss Accounts, Balance Sheets, and Cash Flow Statements.

3.0        FINANCIAL RATIOS ANALYSES

In this group assignmend,  we are uses the same common financial ratios applications as follows:  

3.1        Liquidity Ratios

These ratios can measure the liquidity of a company. Companies have to ensure that they have the liquidity required to meet all their commitments. Liquidity ratios attempt to measure a company's ability to pay off its short-term debt obligations. It is essential for a company the measuring of the cash flows over the time to be aware of the liquid resources available to afford the obligations.  The most used liquidity ratios are: current ratio and acid test ratio.  These would examine the relationship between liquid resources held and creditors due for payment in the near future.

  • Current ratio:  this kind of ratio shows the size of the relationship between current assets (cash and assets which would become cash in a short time) and current liabilities (creditors falling due within one year), enhancing the comparability between firms.  The result of the division expresses the times that the current assets would cover the current liabilities.

The current ratio can give a sense of the efficiency of a company's operating cycle or its ability to turn its product into cash. Companies that have trouble getting paid on their receivables or have long inventory turnover can run into liquidity problems because they are unable to alleviate their obligations.

The higher the current ratio, the more capable the company is of paying its obligations. A ratio under 1 times suggests that the company would be unable to pay off its obligations if they came due at that point. While this shows the company is not in good financial health, it does not necessarily mean that it will go bankrupt - as there are many ways to access financing - but it is definitely not a good sign. The ideal ratio is 2 times, that is, for every RM1 of current liabilities, a firm should have RM2 of current assets.

  • Acid Test ratio:  It is another reflection of the liquidity of a business It tells you if the business could meet its current obligations with quickly convertible assets. To calculate it, we have to take the current assets, subtract the stock or inventory and divided the result by the current liabilities.

The higher the current ratio, the more capable the company is of paying its obligations. A ratio under 1 times suggests that the company would be unable to pay off its obligations if they came due at that point. While this shows the company is not in good financial health, it does not necessarily mean that it will go bankrupt - as there are many ways to access financing - but it is definitely not a good sign. The ideal ratio is 2 times, that is, for every RM1 of current liabilities, a firm should have RM2 of current assets.

3.2        Profitably Ratios

A class of financial metrics that are used to assess a business's ability to generate earnings as compared to its expenses and other relevant costs incurred during a specific period of time. For most of these ratios, having a higher value relative to a competitor's ratio or the same ratio from a previous period is indicative that the company is doing well. These ratios can indicate a company’s productivity of capital used, productivity of total asset used, and effectiveness of pricing policy.

Next, these ratios provides a greater insight of the financial performance in a company, in other words, it determines if the company is making a good profit and return on its asset and investment. These ratios can also tell us how well the company is managed compared to the industry average. Under this category we can find four sub-divisions:

  • Return on capital employed: it is the percentage obtained from the net profit before interest and taxation divided by the capital employed which reveals the business performance, taking into account the long-term capital invest and the profit generated by it.  

Furthermore, it also indicates that the efficiency and profitability of a company’s capital investment. In other words, it is an indicator of how well a company is utilizing capital to generate revenues. It should be normally higher than the rate company borrows at, otherwise any increase in borrowings will reduce shareholders’ earnings.

  • Return on equity or return on ordinary shareholder’s funds:  it express on percentage the profits for the shareholders according to their stake in business. A ratio that measures a company's earnings before interest and taxes (EBIT) against its total assets. The ratio is considered an indicator of how effectively a company is using its assets to generate earnings before contractual obligations must be paid. The greater a company's earnings in proportion to its assets, the more effectively that company is said to be using its assets.

  • Gross profit margin:  percentage obtained from the division of the gross profit (difference between sales and the cost of sales) of a company and the sales which gives us the profitability before other expenses are taken into account. However,  if the company has low gross profit margins may be it due to insufficient sales volume or higher costs of goods sold.  Costs of goods sold may be higher due to expensive sources of goods.  It could also be due to higher labour costs, high production wastage and lower selling price.

  • Net profit margin:  it is the result of the net profit before interest and taxation which represents the profit before any expenses of servicing long-term finance are subtracted divided by sales and then multiplied by 100 to get the percentage. Hence, It measures how much out of every dollar of sales a company actually keeps in earnings. Profit margin is very useful when comparing companies in similar industries. A higher profit margin indicates a more profitable company that has better control over its costs compared to its competitors.

3.3        Efficiency Ratios

These ratios can measure a company's ability to convert different accounts within their balance sheets into cash or sales. Companies will typically try to turn their production into cash or sales as fast as possible because this will generally lead to higher revenues. Hence, these ratios will indicate whether the assets are too high, too low or reasonable for the firm’s current and projected operating levels. They show the amount of sales generated for every dollar of asset investment.

These ratios are meaningful when compared to peers in the same industry and can identify business that is better managed relative to the others.  Also, efficiency ratios are important because an improvement in the ratios usually translate to improved profitability.

  • Asset turnover: measures a firm's efficiency at using its assets in generating sales or revenue - the higher the number the better. It also indicates pricing strategy: companies with low profit margins tend to have high asset turnover, while those with high profit margins have low asset turnover. This ratio is more useful for growth companies to check if in fact they are growing revenue in proportion to sales.

  • Stock turnover: measures how well a company coverts stock into revenues. It is closely similar to asset turnover and is also a measure of efficiency. Stock turnover is more specific than asset turnover. It measures how well the company is making use of the part of its working capital that has been invested in stock. A too high inventory means higher carrying costs and higher risk of stocks becoming obsolete whereas too low inventory may mean the loss of business opportunities. It is very essential to keep sufficient stock in business.
  • Receivable turnover: indicates the velocity of debt collection of a firm. In simple words it indicates the number of times average debtors (receivable) are turned over during a year.

  • Payable turnover: this ratio is similar to the debtors turnover ratio. It compares accounts payable with the total credit purchases. It signifies the credit period enjoyed by the firm in paying creditors.

3.4        Investment ratios

Investment ratios are the ratios used by the investors when deciding whether a share should be bought, sold or held. These means that the investors ratios’ sub-division explaining next are a fundamental tool for the investors who hold share in a company to assess the returns on their investment.

  • Earnings per share:  to calculate we have to divide the earnings available to ordinary shareholders by the number of ordinary share in issue.  This would show the measure of share performance and it would help asses the investment potential of a company’s share.

  • Price earning ratio: this type of ratio is very relevant for investors. Basically, it gives us an indication of the confidence that investors have in the future prosperity of the business.  The price earning (P/E) is a company's price-per-share divided by its earnings-per-share.

A valuation ratio of a company's current share price compared to its per-share earnings. The higher the PE ratio, the more the market is willing to pay for each dollar of annual earnings. Companies with high PE ratios are more likely to be considered "risky" investments than those with low PE ratios, since a high PE ratio signifies high expectations. Comparing PE ratios is most valuable for companies within the same industry.

  • Dividend yield:  the dividend is the payment companies make to shareholders out of their excess earnings. The dividend yield is the comparison of companies' dividends, in other words, it relates the cash return from a share on their investment in the company. That's the dividend amount divided by the stock price.

  • Dividend Payout Ratio:  this is the combination of the dividends per share and earning per share figure and it would tell us how easily a business could pay its dividend from profits.  To calculate it we just need to divide the dividend per share by earning per share. For example, Assume dividend payout out for Company XYZ is 0.1, that fore; Company XYZ distributed 10% of its  as dividends last year and retained the remaining 90% for other operating needs.

3.5        Gearing Ratios

The gearing ratio focuses on long-term financial stability of an organization. It measures long-term loans as a proportion of a company’s capital employed. It will help to show how a company’s is upon borrowed cash. In turn, that indicates how vulnerable they might be to financial setbacks. It also would shows the relationship between the amount finance by the owners of the company and the amount financed by outsiders . Moreover, the  financial ratio compares some form of owner's equity (or capital) to borrowed funds. Gearing is a measure of financial leverage, demonstrating the degree to which a firm's activities are funded by owner's funds versus creditor's funds.

  • Gearing ratio:  it is the percentage given as a result of the long-term liabilities divided by the capital employed. To analyze if a gearing ratio has an acceptable level it has to be consider the growth of profits and cash flows. The higher a company's degree of leverage, the more the company is considered risky. As for most ratios, an acceptable level is determined by its comparison to ratios of companies in the same industry.

  • Debt ratio: A ratio that indicates what proportion of debt a company has relative to its assets. The measure gives an idea to the leverage of the company along with the potential risks the company faces in terms of its debt-load.  A debt ratio of greater than 1 indicates that a company has more debt than assets, meanwhile, a debt ratio of less than 1 indicates that a company has more assets than debt. Used in conjunction with other measures of financial health, the debt ratio can help investors determine a company's level of risk.

Next, the ratio also indicates what what proportion of debt a company has relative to its assets. The measure gives an idea to the leverage of the company along with the potential risks the company faces in terms of its debt-load. In general, the lower the company's reliance on debt for asset formation, the less risky the company is since excessive debt can lead to a very heavy interest and principal repayment burden. However, when a company chooses to forgo debt and rely largely on equity, they are also giving up the tax reduction effect of interest payments. Thus, a company will have to consider both risk and tax issues when deciding on an optimal debt ratio.

  • Times interest covered or interest cover ratio:  this kind of ratio measures the amount of profit available to cover interest payable.  The lower the level of profit coverage the greater the risk to lenders that interest payments will not be met. When the interest coverage ratio is smaller than 1, the company is not generating enough cash from its operations EBIT to meet its interest obligations. The Company would then have to either use cash on hand to make up the difference or borrow funds. Typically, it is a warning sign when interest coverage falls below 2.5x.

4.0        FINANCIAL ANALYSIS OF KWANTAS CORPORATION BERHAD AND TSH RESOURCES BERHAD

4.1         COMPANY BACKGROUND                

4.1.1        Kwantas Corporation Berhad

Kwantas Corporation Berhad was incorporated in 1995 as an investment holding company and listed on the Main Board of Bursa Malaysia (formerly known as Kuala Lumpur Stock Exchange) in 1996. The Kwantas Group is an integrated palm oil producer which operates the following:

  • oil palm plantations and oil mills
  • palm kernel crushing plant
  • palm / soya bean oil refinery plants
  • shortening plants
  • biomass power plant
  • bulking installation and facilities
  • trading of palm and soya bean oils and fats products

Other activities which the Group is involved in are the wholesaling and supply of diesel and lubricants, and the operation of a stone and gravel quarry.

The oil palm plantations are located within close proximity to Lahad Datu where the oil palm fruits can be easily and quickly transported to the nearby oil mills and refinery for processing. In 2008, Kwantas had 37,500 hectares of plantation land, out of which 15,800 hectares had been planted. As part of its expansion plan, Kwantas is constantly looking at opportunities to expand its plantation landbank to increase the supply of fruits for the production of crude palm oil (CPO).

4.1.2        TSH Resources Berhad

TSH has been involved in oil palm plantations in Sabah, Malaysia since the late 1980s and expanded our plantation activities to West Sumatra and Kalimantan, Indonesia in 2003. TSH was planted areas in Sabah and Indonesia totaled more than 20,000 ha. The Company optimistic outlook on the future of oil palm industry and presently TSH have approximately 60,000 ha of land bank in Indonesia and are continuously seeking for opportunities to further increase its plantation hectare age in Indonesia.

TSH Group was floated on the Second Board of Bursa Malaysia Securities Bhd (Bursa Malaysia) in 1994 and ascended to the Main Board of Bursa Malaysia in 2000 and TSH was completed the listing of our subsidiary, Ekowood International Berhad (EIB), on the Main Board of Bursa Malaysia in 2004.  On credit standing, TSH are rated AA- by Malaysia Rating Corporation Bhd.

TSH have 3 palm oil mills in Sabah, Malaysia and another in West Sumatra, Indonesia with a combined processing capacity of close to 1.5 million tonnes of fresh fruit bunches (FFB) per annum. On Sabah–based palm oil mills are located along Tawau - Lahad Datu - Sandakan highway or more fondly known as Sabah Oil Palm Belt.Representing 70% of total planted areas in Sabah, Sabah Palm Oil Belt produces an average of 18 million tonnes of FFB per annum to sustain our throughput demand. TSH’s 4th palm oil mill is located in Padang, West Sumatra, Indonesia.  The fifth palm oil mill is under construction in Palangkaraya and is scheduled for commissioning by 1st quarter of 2010. This mill is to cater for FFB crop from TSH’s plantation in Kalimantan Tengah.

4.2        FINANCIAL DATA

4.2.1        Income Statement – Kwantas Corporation Berhad

Summaries of Income Statement of Kwantas Corporation Berhad from the years 2000  to 2009

4.2.2        Income Statement – TSH Resources Berhad

Summaries of Income Statement of TSH Resources Berhad from the years 2000  to 2009

4.2.3        Balance Sheets – Kwantas Corporation Berhad

Summaries of Balance Sheets of Kwantas Corporation Berhad from the years 2000  to 2009

4.2..4        Balance Sheets – TSH Resources Berhad

Summaries of Balance Sheets of TSH Resources Berhad from the years 2000  to 2009

4.2.5        Cash Flow Statement – Kwantas Corporation Berhad

Summaries of Cash Flow Statement of Kwantas Corporation Berhad from the years 2000  to 2009

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4.2.6        Cash Flow Statement – TSH Resources Berhad

Summaries of Cash Flow Statement of TSH Resources Berhad from the years 2000  to 2009

4.3        CALCULATION OF  FINANCIAL RATIOS ANALYSES

4.3.1         Liquidity ratios

 The calculation  of Liquidity ratios and results of Kwantas Corp. in financial year from 2000 to 2009

Figure 2.2

The calculation of Liquidity ratios and results of TSH Resources in financial  year from 2000  to 2009

 

  1. Profitably Ratios

The calculation of Profitability Ratios and results of Kwantas Corp. in financial year from 2000 ...

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This group assignment of Financial Management will assess the positions financial performances for six types of different companies which are listed on the Bursa Malaysia Berhad (Bursa Malaysia) and its based on three main sectors of business industrie
Document Details
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  • Level
    University Degree
  • Subject
    Business and Administrative studies
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