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Comparison of Malaysia Manufacturing Companies by Financial Statement

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Article · January 2012

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 Academica Science Journal No. 1 (1) – 2012
Economica Series ISSN: 2285 - 8067

COMPARISON OF MALAYSIA MANUFACTURING COMPANIES

BY FINANCIAL STATEMENT ANALYSIS TOOLS

Afagh MALEK,
Universiti Teknologi Malaysia, 81310 Skudai, Johor Bahru, Malaysia.
Maryam MOHAMMADI,
Universiti Teknologi Malaysia, 81310 Skudai, Johor Bahru, Malaysia.
Fardokht NASSIRI,
Universiti Teknologi Malaysia, 81310 Skudai, Johor Bahru, Malaysia.

Abstract: One of the best ways to get the expected results from trading in the stock
market is acquiring good evaluation of companies’ performance. Similarly, this study aims
at comparing the financial performance of Lb Aluminium Berhad and Seal Incorporated
Berhad manufacturing companies, which are listed in the main market of Malaysian stock
exchange. The data were gathered from the annual reports of companies during last three
years and analysed by financial statement analysis tools, which are financial ratio analysis
and comparative financial statement analysis. The results of the study show that both
companies had enough attractiveness for share traders, but the Lb Aluminium was more
preferred by management and investors, while the Seal Incorporated Berhad was
performing better from competitors and creditors' points of view. The findings of the study
will help companies to judge their present condition and take decisions about their future
steps while taking into consideration financial issues. In order to get a broader view and
generalized idea about the financial issues of companies, the nature of business and
industry average should be taken into account. A survey based study is suggested to
clarify whether market test or profitability ratios have more significant relationship with
companies’ performance from share traders’ view point.

Keywords: financial statement analysis, stock market, industrial products

INTRODUCTION
In today’s competitive world, many companies try to extend their business credit and attract more customers.
This is significantly important for companies in the stock market since their performance has a great
influence on investors’ decision as to buy shares from them.
Abu Baker and Naser (2000) argued that investors view the annual report as the main source of corporate
information in developing countries, and companies use it as a medium of disseminating information to
external interested parties. Since the annual report reflects the commercial reality of the company concerned
and financial statement analysis could be beneficial for making informed decision regarding investment in
stock market.
The financial statement analysis can be considered as a method for evaluating the companies’ performance
and verifying the companies’ proximity to ideal benchmark in particular in developing countries like Malaysia
where the investments' level has an increasing trend.

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 Academica Science Journal No. 1 (1) – 2012
Economica Series ISSN: 2285 - 8067

Similarly, the objective of this study is evaluating the financial condition of two Malaysian Companies in order
to determine the competent firm with respect to various perceptions.

1. LITERATURE REVIEW
The financial education is vital for progress toward proper utilization of cash and coping with budget deficits
and constrains. This study critically reviewes the literature related to financial analysis as a consideration for
investment; it also elaborates on importance of financial statement analysis and its development.
Chang and Most (1997) believed that financial statements analysis is mainly concerned with the
understanding of company accounts and interpretation of the published financial statements in order to
enable legitimate users to make informed economic decisions.
On the other, hand Norman (2011) defined financial statement analysis as an information-processing system
which is designed to provide data for decision-makers. The information is basically derived from published
financial statements, but in the process of analysis the use is also, made for non-accounting data such as
stock prices and aggregate economic indicators. So, Financial Statement Analysis is an essential tool for
making an informed decision . He also asserted that financial analysis is used in evaluating a company’s
economic situation and predicting its future course for various reasons, including investment purposes.
Since its importance will be increased when it is used as a determinant for investing.
In this regard, researches have been undertaken on the significance of financial statement for investors to
make decision and the importance of utilizing it in the stock market. Study of Nasser and Nuseibeh (2003) on
the usefulness of annual reports reveal that the user groups, surveyed in the study rely mainly on information
made directly available by the company and do not consult intermediary sources of corporate information in
order to make informed decisions.Van (2002) indicated that investors in a company’s common stock are
concerned with present and expected future earnings and the stability of these earnings about a trend with
the earnings of other companies.
In the stock market, the operating status is the pivotal factor for the stock value. It could be reflected by the
financial statement. Therefore, analyzing and researching the account elements from the financial statement
are very crucial. If the advanced analyses could be done for these items, there will be more awareness of the
financial and operating status of those stock companies. Certainly it will be helpful for stockholders making
decisions to buy the target stocks. Besides, compared with the technical indices, these indices are much
more reliable, nonvolatile and valid (Han and Chen, 2007).

2. CASE STUDY
The LB Aluminium Group is the largest supplier of aluminum extrusion in Malaysia and one of the largest
aluminum extrusion manufacturers in South-East Asia. Company’s key expertise is in the manufacturing,
marketing and trading of aluminum extrusion, expanded mesh, Aluminium sheets and coils.
The other company is a diversified conglomerate named SEAL Group of Companies which listed on the main
board of Bursa Malaysia .The group is involved in Timber Logging, Sawmilling, Property Management,
Property Development and Trading.

3. METHOD
The study proceeds with the following steps regarding to financial statement analysis:
First of all, data was gathered through annual reports of the companies from their official website then the
Microsoft Excel 2010 software was used to perform calculations regarding to Financial ratios analysis,
Horizontal analysis, Vertical/Common size analysis, and Indexing method. The numerical data were
extracted from the recent three years of Income statements and Balance sheets of case studies.
In addition, for a more explicit picture of companies’ performance, calculations were supported with Excel
spreadsheet charts.

Page 90 Copyright  2012 Academica Science Journal. All rights reserved.

 Academica Science Journal No. 1 (1) – 2012
Economica Series ISSN: 2285 - 8067

4. DATA COLLECTION AND ANALYSIS

This section discusses the issues related to financial statement analysis of each company and tries to
categorize best-performing companies under different group (s) of financial ratios in order to discern which
company is more preferred by investors, money lenders and suppliers.

4.1. Income statement analysis

Table 1 summarizes the most significant changes related to horizontal and vertical analysis of companies’
income statement during the studied period.

Table 1. Summary of income statement analysis

Company Factor Trend/Year Further Points

1
SIB Net Profit Increase/2009-2010 Decline in administrative expenses

2 Lower margin due to fall in Aluminium

LAB Profit before tax Decrease/2009
price

LAB Cost of Sale Increase/2009 Material and inventory costs

Beneficial based on JIT;

SIB Inventory Decrease/2009-2010 disadvantageous in case of unplanned
orders

1
Seal Incorporated Berhad
2
Lb Aluminium Berhad

As it is shown in Table 1, the SIB’s net profit had an upward trend while LAB’s net profit decreased by the
end of 2009, which leads to reduction of net profit.
As a whole, in year 2009 although the sales volume for LAB registered a slight growth which was moderated
by reduced selling prices owing to lower raw material costs, profit before taxation saw a substantial decrease
of 57.6 percentage to $3.0 million as a result of lower margins. The lower margins were due to an
unexpected slump in aluminium prices brought about by the global financial crisis which resulted in rising
cost of sales by LAB for higher material and inventory costs.

The vertical analysis of income statements showed that the high administrative expenses of SIB Company in
2008 led to loss rather than profit but, the considerable reduction of administrative expenses in 2009 and
2010 increased SIB’s profit consequently. Further, there was a low percentage of inventories to total assets
on the income statement of SIB during studied period. The inventories of SIB Company represented logs and
are stated at cost. Although based on JIT principles which assert the expression of “only make what you can
sell and not make what you will (or might) sell” [6] the zero inventory can be considered as an ideal situation,
but in reality the unplanned customer orders will necessitate the existence of inventory.

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 Academica Science Journal No. 1 (1) – 2012
Economica Series ISSN: 2285 - 8067

4.2. Balance sheet analysis

The balance sheets analysis clarified that the total assets of LAB Company were much more than SIB
Company which is due to the nature of LAB business. LAB is a large manufacturer, who requires heavy
investment in property, plant and equipment. This will justify the higher levels of debt financing requirement
of LAB compare to SIB which is a diversified conglomerate of Timber lodging, Sawmilling Company and
some service firms such as Property Management, Property Development and Trading.
As another point at 2009 the Seal Company placed 1.61 million dollar with institutional Bond Fund. Although
this investment declined the company’s cash and cash equivalents significantly at that time, they generated
2.94 million dollar cash from financing at 2011. In addition, Seal Company’s total equity was higher
percentage of its total equity and liabilities compared to LAB Company. This indicates that SIB used little
debt in its capital structure as supported by a debt to capital ratio of 0.44 percent.

4.3. Ratio analysis

In order to have a better evaluation of companies’ performance with respect to various perspectives, ratio
analysis was done. Table 2 below summarises the results of companies’ ratio analysis.
The profitability ratios are most often used and considered by those outside a firm specially the Return on
assets and Return on equity which are commonly used ratios for competitors and share traders. Based on
table 2 this group of ratios shows superiority of SIB’s performance; therefore, SIB can be considered as a
better company from competitors’ and share trader’s points of view.

Table 2: Summary of ratio analysis

Company Preferred by
Ratios
SIB LAB

√ Competitors ,Share traders

Profitability

√ Creditors
Liquidity

√ Management
Asset Management

√ Potential creditors (Consider

Capitalisation nature of business )

√ Investors, Share traders

Market Test

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 Academica Science Journal No. 1 (1) – 2012
Economica Series ISSN: 2285 - 8067

The second group of ratios is indicating the firm's ability to meet short-term obligations and are important for
creditors The SIB Company performed better than LAB in this regard; therefore, the creditors are willing were
to lend money to SIB rather than LAB.
The third group is Asset management ratios which are mostly used by managers for internal monitoring as a
measure of managerial effectiveness. The superiority of LAB’s performance is an indication of its managerial
effectiveness. The capitalization ratios on the other hand are extremely critical for potential creditors who are
concerned with the firm's ability to generate the cash flow necessary for making interest payments. Although
SIB has better performance regarding to this group of ratios, selection of preferred company from money
lenders’ viewpoint depends on the nature of the industry. The different nature of these companies makes
judgment impossible about their performance.
The last group of ratios is market test ratios which are more interesting for investors. The data analysis
shows that the LAB Company is more attractive for investors and share traders.

CONCLUSIONS
This study conducts a comparative financial measurement of Lb Aluminium Berhad and Seal Incorporated
Berhad companies with the help of Financial Statement Analysis tools.
The results of study show that companies had different behavior toward various groups of ratios which made
overall judgment about their performance impossible. Hence, the performance of firms was analyzed with
respect to different perceptions which revealed that the Seal Incorporated Berhad is preferred by competitors
and creditors for its competency regarding to profitability and liquidity ratios while the Lb Aluminium Berhad
would be preferred by management and investors as a result of being more attractive with respect to asset
management and market test ratios. On the other hand, both companies are enough qualified to be favorite
for share traders.
The findings of investigation provide the chance for both companies to judge their present condition and take
decisions about their future steps while taking into consideration financial issues.
To have a more reliable judgment about companies’ performance it could be of benefit to compare
companies with their counterparts of the same business nature; in addition, the industry average can be
taken into consideration. Indeed, a survey based study can be conducted to determine the most attractive
company according to share traders which will examine whether profitability or market test ratios have more
significant relationship with companies performance from share trader’s point of view.

BIODATA
- Afagh MALEK received Master’s degree and Bachelor’s degree in the field of Industrial Engineering. She
has worked as an Expert of Quality management systems , Expert of marketing and market research and
Expert of enviromental management systems in dominant companies of Iran. Her research interests are
supply chain management, performance measurement and finance.
- Maryam MOHAMMADI received Bachlor’s degree in Industrial Engineering – system planning and analysis
in 2009, and Master’s degree in Industrial Engineering from Universiti Teknologi Malaysia in 2012. Her
research interests are finance, supply chain managment, modeling in stochastic environments and
optimization for manufacuring systems.
- Fardokht NASSIRI received Bachelor's degree in Industrial Engineering in Science & Culture University in
2007.She received Master's degree in Industrial engineering from Universiti Teknologi Malaysia (UTM) in
2011. Her research interests are in operation research, supply chain management, optimization and
simulation.

Page 93 Copyright  2012 Academica Science Journal. All rights reserved.

 Academica Science Journal No. 1 (1) – 2012
Economica Series ISSN: 2285 - 8067

REFERENCES
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Intl. J. Commerce Manage, 10(3/4), 2000, pg. 18-34.
2. Chang, L.S., Most, K.S. An international comparison of investor uses of financial statements, in „
International Journal of Accounting”, 17(1), 1981, pg. 43-60.
3. Han, S., Chen, R.C. Using SVM with Financial Statement Analysis for Prediction of Stocks, in „
Communications of the IIMA”, 7(4), 2007, pg. 63-72.
4. Naser K., Nuseibeh R. Quality of financial reporting: Evidence from the listed Saudi non-financial
companies, in „ Int. J. Acct.”, forthcoming, 2003.
5. Norman, A. S. Financial analysis as a consideration for stock exchange investment decisions in
Tanzania, in „ Journal of Accounting and Taxation”, 3(4), 2011, pg. 60-69.
6. Ohno, T. Toyota production system. Japan: Diamond–Sha and Toyota Motor Corp, 1987.
7. Van, H. Financial Management Policy. (12th ed.). Pearson Ed. Inc.: New Delhi, India, 2002.

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