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1 2 Background information on Gamuda Berhad ...................................................... 1 Background information on YTL Corporation Berhad.......................................... 1 2.1.1 2.2 3 Syarikat Pembinaan YTL ........................................................................ 2
Financial statements of the companies (balance sheet and income statements) 3 3.1 3.2 Balance sheet ............................................................................................... 4 Income statement.......................................................................................... 5
Financial ratio analysis ........................................................................................ 6 4.1 Types of financial ratios ................................................................................ 6 Quick ratio (QR) ...................................................................................... 7 Current ratio (CR) ................................................................................... 7 Debt to equity ratio ................................................................................. 8 After tax profit margin ............................................................................. 8 Gross profit margin ................................................................................. 8 Current assets to total assets ratio ......................................................... 9 Assets to revenue ratio ........................................................................... 9 Current liabilities to net worth ratio ....................................................... 10 Return assets ....................................................................................... 10 Return on equity ................................................................................ 10
4.1.1 4.1.2 4.1.3 4.1.4 4.1.5 4.1.6 4.1.7 4.1.8 4.1.9 4.1.10 5
Financial ratio calculation for the two companies .............................................. 11 5.1 SECTION A YTL Corporation Bhd ......................................................... 11 Quick Ratio (QR) .................................................................................. 11 Current Ratio (CR) ................................................................................ 11 Debt to equity ratio ............................................................................... 11 After tax profit margin ........................................................................... 12 Gross profit margin ............................................................................... 12
Current assets to total assets ratio ....................................................... 12 Assets to revenue ratio ......................................................................... 12 Current liabilities to net worth ratio ....................................................... 12 Return on assets .................................................................................. 13 Return on equity ................................................................................ 13
Section B Gamuda Bhd .......................................................................... 13 Quick Ratio (QR) .................................................................................. 13 Current Ratio (CR) ................................................................................ 13 Debt to equity ratio ............................................................................... 13 After tax profit margin ........................................................................... 14 Gross profit margin ............................................................................... 14 Current assets to total assets ratio ....................................................... 14 Assets to revenue ratio ......................................................................... 14 Current liabilities to net worth ratio ....................................................... 14 Return on assets .................................................................................. 15 Return on equity ................................................................................ 15
5.2.1 5.2.2 5.2.3 5.2.4 5.2.5 5.2.6 5.2.7 5.2.8 5.2.9 5.2.10 6 7
Comparison of financial health between the two companies ............................. 15 Advantages and limitations of financial statement analysis ............................... 21 7.1 7.2 Advantages of Financial statement analysis ............................................... 21 Limitations of financial statement analysis .................................................. 22
This report however, will focus on the financial health of Gamuda Bhd. Data will be obtained from the Gamuda Bhd annual report for the financial year ending 31st July 2013, to analyse some of the financial ratios of the company which are to be compared with the ratios of YTL Corporation Bhd.
the company as a grade 7 contractor. Grade 7 is thus far the highest grade of the CIDB grading system. Moreover, due to the diversity of many construction companies today, YTL as a corporation has many subsidiaries under it. These subsidiaries include; 1. YTL Power international 2. YTL cement 3. YTL Land and development 4. YTL hotels 5. YTL e-solutions 6. Syarikat Pembenaan YTL, and Apart from the above mentioned subsidiaries, YTL has made many other acquisitions not only in Malaysia, but also elsewhere abroad. This report however will only be focussing on Syarikat Pembenaan YTL which is the YTL flagship construction arm.
5. Current liabilities to net worth ratio 6. Current assets to total assets ratio 7. Assets to revenue ratio 8. Gross profit margin 9. Return on assets 10. Return on equity Based on the above mentioned ratios, a comparison will be made between the two chosen companies so as to answer the following questions; Is the company able to meet its financial obligations on time? How much is on hand that can be converted to cash to pay the bills How effective are the operations of the firm Is the firm yielding favourable return or results? How profitable is a company in relation to the assets and the sales that made its profits possible. All these questions will be adequately answered from each of the calculation made for each ratio. From that, all other conclusions and recommendations will be driven.
obligations to provide goods or services to customers in the future. Shareholders equity is sometimes called capital or net worth. Its the money that would be left if a company sold all of its assets and paid off all of its liabilities. This leftover money belongs to the shareholders, or the owners, of the company. The purpose of a Balance Sheet is to report the financial position of a company at a certain point in time. It is divided into two columns. The first column shows what the company owes (liabilities and net worth). The second shows what the company owns (assets) on the right. At the bottom of each list is the total of that column. As the name implies, the bottom line of the balance sheet must always balance. In other words, the total assets are equal to the total liabilities plus the net worth.
The balance sheet is one of the most important pieces of financial information issued by a company. It is a snapshot of what a company owns and owes at the point in time. The income statement, on the other hand, shows how much revenue and profit a company has generated over a certain period.
According to Gopal, 2008, a company can have high gross profit margin if: High sales price, cost of goods remaining constant Lower cost of goods sold, sales price remaining constant A combination of factors in sales price and costs of different products, widening the margin. Etc. Gopal, 2008 also asserts that, a company may have fall in gross profit margin if: Purchase of raw materials, at unfavourable rates Over investment and/or inefficient utilisation of plant and machinery, resulting in higher cost of production Excessive competition, compelling to sell at reduced price.
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12
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3.
2.4:1
0.9:1
1.3:1
0.5:1 to 2.7:1
4.
9%
10%
2.2%
8.7% to 0.6%
5.
20%
10%
17%
6.
0.38:1
0.6:1
7.
27%
25%
29%
19% to 55%
8.
0.5:1
0.4:1
1.12:1
0.32:1 to 2.4:1
9. 10.
3% 10%
6% 10%
6.5% 16.7%
From the above table, difference in ratio can be seen clearly between the two companies. Therefore, based on the averages and range for the ratios indicated in the table above, a comparison can be drawn in Table 2 as thus; Table 2: Comparison for the two companies S/N Ratios 1. Quick Ratio (QR) YTL Corporation Bhd Gamuda Bhd Comments Bhd can be
YTL with QR of 0.5:1 Gamuda has a QR of Gamuda means there is RM 0.5 in 1.2:1. quick assets to Which
every RM 1.00 of current assets to pay every RM to 3.1:1, then there is also a liabilities. This however 1.00 of current liabilities. room for Gamuda to increase should not be This is good because its QR so as to become even is even more liquid. As for YTL, they need to convert considered good as a Gamudas
company is considered greater than the required might liquid when it has a QR minimum of ratio 1:1 of 1:1 or greater.
inventory and other current and long term assets to cash or raise cash through debt so as to meet the required range.
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2.
with
CR
means there is 2.55 in 2.3:1 it has 2.3 current the required range of 2.1 to current assets to pay assets to pay every RM 0.6. Their CRs are to be every RM 1.00 in current 1.00 of its current considered good since they the can both pay for their current is liabilities. However, each of
Since range
0.6. YTL therefore is a bit between 2.1 to 0.6, and the companies should strive to higher than the required Gamuda has 2.3, this attain the required CR range range but also should be can be considered good in order to be more secured considered good since because the company and avoid risk of not being YTL can pay its current can still be able to pay able to pay for their current liabilities. 3. Debt to equity ratio for its current liabilities. liabilities.
YTL with debt to equity Gamuda Bhd has a debt Gamuda takes the age here. ratio of 2.4:1 means that to equity ratio of 0.9:1. As for YTL, even though they the creditors have put Meaning that, creditors are within the required range, RM 2.4 in the business have put RM 0.9 in the they indeed need to be more for every RM 1.00 the business for every RM cautious so as to give
owners have put in. The 1.00 the owners have creditors more confidence. range is between 0.5 put in. The range is and 2.7. YTLs ratio of between 0.5 and 2.7. 2.4 should be Gamudas ratio is
considered good as it considered very good as falls within the range. But it falls within required also it is important to range, and just slightly notice that YTLs ratio is below average of 1.3. above the average mark Therefore, this can be a of 1.3. Therefore, YTL strong should be cautious as creditors they can easily indication that for the
beyond the border line of debt. 2.7 which will let one begins to wonder
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whether the company can service its debt. 4. After tax profit margi n YTL with after tax profit Gamuda have a 10% Both the companies
margin of 9% means that after tax profit margin. performed well in the financial 9% means that 9% of its Meaning that, after the year 2013, although Gamuda revenue becomes profit deduction of tax, 10% of earns a bit higher, but all are after deduction of tax. its revenue becomes considered generally good.
This is good because the profit. This indicates that company performed Gamuda performed very
very well in 2013 as it is well in the financial year within range. 5. Gross profit margi n YTL with 20% gross Gamuda has 10% gross YTL performed better here. As profit margin mean that profit margin. Meaning for Gamuda, the company for every RM 1.00 of that for every RM 1.00 of according to Gopal, 2008, project financing, there is project financing, there is should have high gross profit RM 0.20 in gross profit. RM 0.10 in gross profit. margin if high sales price, cost This is very good as it is However this should be of goods remaining constant. just above the average considered as good as it Also lower cost of goods sold, line of 17% is below the 17% sales mark. constant. price And remaining finally a the required 2013.
average
Therefore, the company combination of factors in sales should look for ways to price and costs of different increase margin. its profit products, margin. Etc. widening the
6.
Curre nt
YTL has current assets Gamuda, with current Gamuda is far more liquid to total assets ratio of assets to total assets than YTL. Therefore, YTL
assets 0.38:1. This is however ratio of 0.6:1 comes very should consider selling some to total lower than the required close to the required of its long-term assets in order asset ratio range. Therefore most of range of 0.7 and 0.8. to gain cash which is the most YTLs assets are not in Meaning that, most liquid asset, and thus current assets form, and Gamudas assets are in increasing its liquidity.
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so
therefore is
company
considered very liquid. to Gamuda has 25% of Both companies are efficiently
revenue ratio of 27% assets to revenue ratio. using their assets. means that the company Meaning the company is is efficiently using its efficiently using its
assets. This is because assets as the ratio falls the ratio falls within the within the required range required range of 19% to and just below average. 55%.
8.
YTL
has
liabilities to net worth liabilities to net worth requirement on which short ratio of 0.5:1. Since this ratio of 0.4:1. Since this term creditors should put their ratio falls within the ratio falls within the basis on towards extending required range of 0.32 to required range of 0.32 to each of the companys credit. 2.4, then short can credit term 2.4, then short can credit term Therefore, both companies easily have greater net worth than to the their respective current
creditors extend
company without taking company without taking liabilities. any risk. 9. any risk.
Return YTL has a 3% of return Gamuda has a 6% of Both companies are efficient on on assets. Meaning that return on assets. in using their Gamuda assets. Bhd
for every RM 1.00 in 0.60 in profit for every seems better in efficiency. assets employed in the RM 1.00 in in assets YTL should improve further as the it ratio is below average.
falls within the required business. And since this However it is considered good range of 21.7% to 2.0%, falls within the required anyway. it means the company is range of 21.7% to 2.0%, efficiently using its it means the company is using its
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improvement since the considered very good as average is at 6.5%. it is very well on top of the average mark of 6.5% 10. Return YTL has a 10% of return Gamuda has a 10% of Both companies have the on equity on equity, meaning that return on equity, same percentage of return on
there is RM 0.10 in profit meaning that there is RM equity. As though 10% is for every RM 1.00 in 0.10 in profit for every considered good, the two equity invested in the RM 1.00 in equity companies should try
business. 53% to 5.4% is invested in the business. increase return on equity and the required range, with 53% to 5.4% is the at least meet the average level average of 16.7%. required range, of with or maybe even higher.
16.7%.
increase their return on the company should try equity at least to the increase their return on average level. equity at least to the average level.
Therefore, from the comparison made, it is easier and clearer now for one to understand and see the differences between the two giant construction companies. The comments made however, are simply an understanding, and in way, a judgement on each of the ratio comparison made.
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8. Ratios are an effective means of communication and informing about financial soundness made by the business concern to the proprietors, investors, creditors and other parties. 9. Ratio analysis is an effective tool which is used for measuring the operating results of the enterprises. 10. It facilitates control over the operation as well as resources of the business. 11. Effective co-operation can be achieved through ratio analysis. 12. Ratio analysis provides all assistance to the management to fix responsibilities. 13. Ratio analysis helps to determine the performance of liquidity, profitability and solvency position of the business concern.
3. Based on historical data: The ratios are calculated from past financial statements, and thus no indicators of future. Such ratios may provide information about the past. But, for forecasting the future, there are many factors that may change, in future. Market conditions and management policies may not remain the same, as they were earlier. 4. Qualitative factors are ignored: Ratios are expressed in quantitative form only. Qualitative factors are ignored. A high current ratio may not guarantee liquidity, as current assets may be high due to inclusion of obsolete inventory and non-paying debtors. 5. Ratios alone are not adequate: Ratios are means of financial analysis and they are not end in themselves. They are indicators. They cannot be taken as final regarding good or bad financial position of the business. 6. Over use could be dangerous: Over use of ratios as controls on managers could be dangerous. If too much reliance is placed on ratios, management may concentrate in improving the ratios, rather than dealing with significant issues. For example, reducing assets rather than increasing profits can improve the return on capital employed. 7. Window Dressing: The term window dressing means manipulation of accounts in a way so as to conceal the actual facts and present the financial statements, in a way, to show better position than what actually it is. For example, a high current ratio is considered as an indicator of satisfactory liquidity position. To show an impressive current ratio, firm may postpone credit purchases. 8. Problems of Price level Changes: Financial analysis based on accounting ratios will give misleading results, if effects of change in price level are not taken into account. For example, two companies that have set up plant and machinery in two different periods, with a long gap, may give misleading results. Firm that has purchased the plant and machinery, very earlier, would have lower amount towards depreciation when compared with the firm that has set up the machinery, quite later. So, the operating results of both the firms vary substantially. The financial statements of the two firms cannot be compared, without making suitable changes to the price level changes.
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9. No fixed Standards: No fixed standards can be laid down for ratios. Though current ratio 2:1 is normally required, firms those enjoy adequate arrangements with banks to provide additional credit, as and when needed, may be able to manage with lesser current ratio. It is, therefore, necessary to avoid any rule of thumb
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6. Current assets to total assets ratio: Gamuda is far more liquid than YTL. Therefore, YTL should consider selling some of its long-term assets in order to gain cash which is the most liquid asset, and thus increasing its liquidity. 7. Assets to revenue ratio: Both companies are efficiently using their assets. 8. Current liabilities to net worth ratio: Both companies meet the requirement on which short term creditors should put their basis on towards extending each of the companys credit. Therefore, both companies have greater net worth than their respective current liabilities. 9. Return on assets: Both companies are efficient in using their assets. However, Gamuda Bhd seems better in efficiency. YTL should improve further as it ratio is below average. However it is considered good anyway. 10. Return on equity: Both companies have the same percentage of return on equity. As though 10% is considered good, the two companies should try increase return on equity and at least meet the average level or maybe even higher.
9 Conclusion
In conclusion, it is important to note that the use of financial ratios is a time tested method of analysing a business. Financial ratio analysis is neither sophisticated nor intricate. It is just a simple comparison between specific pieces of information obtained from the companys balance sheet and income statement. Moreover, Ratios are meaningless, if detached from the details from which they are derived. Ratios are based on the data of the company concerned. So, ratios are relevant to that particular company only, which are based on the circumstances and policies of that company. If those ratios are compared to any other company, where the circumstances and policies adopted are totally different, conclusions drawn based on the divergent data would be meaningless. It may, therefore, be concluded that the ratio analysis, if done mechanically, is not only misleading but, equally, dangerous (Gopal, 2008). To say a final word on ratio analysis, conclusions on study of single ratios, in isolation, are dangerous.
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10 Reference
Auerbach, A. 1995. Healthy Business Guide, Zions First National Bank Cash Flow Analysis. 5th ed. Utah: Financial Proformers, Inc. Gopal, C. C. R. 2008. Financial management. New Delhi: New Age International (P) Ltd., Publishers. lincoln indicators. 2014. Standing up for shareholders. [online] Available at: http://www.lincolnindicators.com.au/content/filestore/research/top-15financial-ratios.pdf [Accessed: 23 Mar 2014]. Periasamy, P. 2010. A Textbook of Financial Cost and Management Accounting. New Delhi: Himalaya Pub. House. Ross, A. and Williams, P. 2013. Financial management in construction contracting. Chichester, West Sussex: Wiley-Blackwell. Tracy, J. A. 1999. How to read a financial report. New York: Wiley. Van Horne, J. C. and Wachowicz, J. M. 2009. Fundamentals of financial management =. Bei jing: Qing hua ta xue chu ban she. Wood, F. and Sangster, A. 2005. Frank Wood's business accounting 1. Harlow, England: FT/Prentice Hall.
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