CEKAP AUTO PARTS

I) EXECUTIVE SUMMARY Mokhtar has established Cekap Auto Parts in 2003 which is located in the west coast in Malaysia. He has vast experience in automobile industry since he already worked as technician, executive and manager. During his working time, he developed many contacts with dealers and service technician. Mokhtar has doubled his store size by the third year of operations and confident that his sales would keep growing to the recent levels. However, he already used most his available funds in expanding the business and need external fund to ensure the future growth of the company. The problem that is worrying him is the net income had been declined and cash flow is weak. He figured out that he had better take a look at his firms financial situation and try to improve it. Since he has limited knowledge in finance and accounting, through the recommendation of his friend, he recruits Hashim, a second semester MBA student, with an accountancy degree holder and was interested in concentrating in finance, to help him analyze his financial position over five years. He hopes that through this analysis, he would be able to come with some convincing arguments to influence the commercial loan committee in granting the loan.

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II) PROBLEM STATEMENT In order to survive in competitive business world, each businessman need to know there are many things that may help them to gain competitive advantage. Basically people will use their experiences and knowledge to do a business. Recently using experience and knowledge are not enough because today technology, advertisement, talent, knowledge about the competitors, market structure and forecast about the future; play as major factor to survive in business world. Management decision also not exclude, because its a main part in running a business. Cekap Auto Parts running by a businessman who had many years of experiences in automobile business. Stated as technician then become part manager, he able to running his own business with 15 years of experiences. Even though with the 15 years of experiences, some problems have been detected. First of all is about the forecasting using by Mokhtar, where he predict and confident that his sales would keep growing at or above the recent level. This is made based on his observation about his good sales for past few years. With his forecasting, Mokhtar used up most of his available funds in expanding the business and was well aware that future growth would have to be funded with external funds. These ideas are really risky because the external fund such bank not confirms yet to grant a loan to him. He also wrongful to use his entire available fund in expands business because he should keep some fund to running the business. Mokhtar actual problem arise when the stores net income figures had been on the decline and his cash flow situation had gotten pretty week. This probably result from the decision to expand the business without prepares any backup plan to running the business. The integrity involve when Mokhtar try to hide the situation from his suppliers. Thus if the supplier found out about the problems, they probably will not invest anymore to Cekap Auto Parts. Based on Mokhtars knowledge in running the business, his knowledge was very limit. Thus with the limit knowledge, he decide to recruit Hashim to help him doing some financial problems. Hashim who accountancy degree holder and persuit his MBA major in finance try to investigate and give some idea to help Mokhtar. Even Hashim fulfil requirement as financial executive, yet he

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has no experience with the real business world. Hence his suggestion and recommendation are wonder by people. In order to increase his business, Mokhtar need to make a loan from bank, but the commercial loan committee is going some convincing arguments as to why they should grant him the loan. Based on the study, the exercises seek on the Financial Ratio Analysis and decision making made on Cekap Auto Parts.

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III) CASE BACKGROUND Cekap Auto Parts was established by Mokhtar in 2003 located in the west coast of Malaysia. Mokhtar has vast experience in automobile industry started as technician, executive and manager in his old work place. Then with all his experience in automobile servicing, he decides to open auto parts store because during his working time, he developed many contacts with dealer and service technicians. After few years of good business, he decides doubled his store size by the third year of operations and confident his sales would keep growing to the recent levels. However, he had used most of his available fund in expanding the business and need external fund for the future growth of the company. The problem that worries him is the net income had been on decline and weak cash flow. Since he has limited knowledge in finance and accounting, through the recommendation of his friend, he recruits Hashim, a second semester MBA student, with an accountancy degree holder and was interested in concentrating in Finance, to analyze his financial condition and position. He hopes that through this analysis, he would able to come with some convincing arguments to influence the commercial loan committee in granting the loan.

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IV) SOLUTION TO PROBLEMS Question 1: Comments on Cekaps compound growth rate in sales relative to its earnings growth rate over the past five years. Compound Growth Rate is the year-over-year growth rate of an investment over a specified period of time. In this case, we will look the growth rate over 5 years in Cekap Auto Parts. The compound annual growth rate is calculated by taking the number of years (5th) root of the total percentage growth rate, where 5 years is the number of years in the period being considered. 2007 net sales $600,000 and net income $19,960, on 2008 net sales $655,000 and net income $28,475. Meanwhile on 2009, the net sales increase to $780,000 but net income drop to $16,952 and on 2010 both net sales and net income back in line increase to $873,600 and $29,929. Last year on 2011, the net sales increase to $1,013,376 but net income drop to $20,920. The Compound Growth Rate would be the net sales on 2011 and divided with net sales on 2006 ($1,013,376 / $600,000 = 1.6889). Then raised to the power of (since 1/# of years = 1/4), then subtracting from the resulting number. Then, 1.6889 rose to power = 1.13999. (This could be written as 1.6889^0.25). Then 1.13999 -1 = 0.13999 or it could be like 13.99% or 14%. Thus the Compound Growth Rate for four years is equal to 13.99% or 14% representing the smoothed annualized gain the company over their investment time horizon. Cekaps sales have increased by an average compound rate of 13.99% or 14% per year over the period, 2007-2011. In comparison, its net income has increase from $19,960 thousand in 2007 to $28,475thousand in 2008. The net income decrease in 2009 to $16, 952 thousand then there are highly increase in 2010 where net income become $29,929 thousand and decrease back to $20,920 thousand in 2011. With all of these data, its show that the stability net income of the company still rocky and fluctuate.

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Question 2: Construct the cash flow statement and develop a fair assessment of the firms sources and uses of cash for 2008 to 2011.

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EXPLANATIONS OF CEKAP AUTO PARTS CASH FLOW STATEMENT YEAR/CF PATTERN 2008 2009 2010 2011 OPERATIONS + + INVESTMENTS 0 0 0 FINANCING + -

For the year 2008, a Cekap Auto Parts has generated cash but do nothing in term of investment activity. For the financing activity it showed that a Cekap Auto Parts had paying off debt and purchasing or re-purchasing of their stocks. In year 2009, operations for a Cekap Auto Parts showed that they did not making money or has fewer sales that resulted to lose. Even though they did not generate too much profit for this year but they still investing in new equipments and plants and buying additional assets. (Most probably Mokhtar had used up most of his available funds). Financing activity indicate that this company still borrow from creditors to back up and support their operating cost and investment activities. 2010 activities revealed that the company still cannot generate a lot of cash due to less in sales (if continuously happen may lead to bankruptcy) and do nothing in investment activities (neither selling off their assets nor buying additional assets). Even though operations activity does not stimulate but they still not borrow from creditors. 2011 showed better indicator than before where they are able to generate a lot of cash but still freeze in investing activities and able to pay off their debt.

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FAIR ASSESSMENT Common size income statement and common size balance sheet are developing in order to develop a fair assessment of the firms sources and uses of cash for year 2008 till 2011. Apart from that, the common size statement provides useful information regarding the relative trend of the various assets, liabilities, revenues and expenses items.

COMMON SIZE OF INCOME STATEMENT 2007 % Net sales Cost of goods sold Gross Profit Selling & Admin expenses Depreciation Miscellaneous expenses EBIT 100 80 20 5 4 0 11 2008 % 100 82 18 2 4 1 11 2009 % 100 84 16 2 4 1 9 2010 % 100 81 19 4 3 1 11 2011 % 100 84 16 5 3 1 7

Interest on ST loans Interest on LT loans Interest on mortgage Total interest Before tax earnings Taxes NET INCOME

3 1 2 6 5 1 4

2 1 2 5 6 2 4

2 2 2 6 3 1 2

2 2 2 6 5 1 4

1 1 2 4 3 1 2

Cost of goods sold (COGS) is the amount includes the cost of the materials used in creating the good along with the direct labor costs used to produce the good. COGS for company Cekap Auto Parts is high (range between 80 percent up to 84 percent). This indication is not good for Cekap Auto Parts.

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Hashim should pay close attention to the cost of sales because when it increases it reduces a companys earnings and earnings drive stock prices. In general, a companys sales should grow faster than its cost of sales. For the other expenses (selling & admin expenses and miscellaneous expenses) it showed that the company is able to control their expenses effectively. For the selling and administrative expenses, the company should try to minimize cost as possible as lowest as 2 percent in year 2008 and 2009. Earnings before interest and taxes is lower in year 2009 (nine percent) and 2011 (seven percent) compared to others due to high cost of goods sold. Interest on short term loans is slightly decline which is good for the company because do not bear with high interest. Interest on mortgage is constant over the five years and the best lowest total interest is in year 2011 which only four percent compared to other year at five percent and six percent. Taxes showed the decline trend which is absolutely good sign for the company (from two percent to one percent). Net income for the company is only four percent in year 2007, 2008 and 2010 meanwhile drop to 2 percent for the year 2009 and 2011.

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COMMON SIZE BALANCE SHEET 2007 % ASSETS Cash & Marketable Securities Account receivable Inventories Gross fixed assets Accumulated depreciation TOTAL ASSETS LIABILITIES & EQUITY Short term bank loans Account payable Accruals Long Term bank loans Mortgage loans Common stock (100000 shares) Retained earnings TOTAL LIABILITIES & EQUITY 37 3 32 32 -4 100 2008 % 38 4 33 32 -7 100 2009 % 7 4 48 48 -7 100 2010 % 3 10 50 47 -10 100 2011 % 2 12 52 47 -13 100

19 1 1 12 22 42 3 100

18 1 1 12 21 40 7 100

14 2 1 19 26 31 7 100

14 2 1 18 25 30 10 100

14 2 1 17 25 30 11 100

Cash and marketable security are extremely decline from 37 percent (2007), 38 percent (2008), seven percent (2009), three percent (2010) and only two percent for the year 2011. This is not a good sign for the Cekap Auto Parts. Account receivable rose from three percent in year 2007 to 12 percent in year 2011. Inventories also showed increasing trend which from 32 percent (2007), 33 percent (2008), 48 percent (2009), 50 percent (2010) and the highest is 52 percent for the year 2011. Gross fixed asset is rise up till 48 percent (2009) and then slightly drop to 47 percent for the rest of the year.

The highest short term bank loans are 19 percent for the year 2007 and start to be constant from year 2009 till 2011 which percentage of 14. Accruals are constant over the five years. For the long term bank loans, the trends shows an increasing percentage from 2007 till 2009 with 12 percent, 12 percent and 19 percent respectively and the slightly decrease to 18 percent and 17 percent. Common stock pattern is continuously decline from 42 percent, 40 percent, 31
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percent, 30 percent and 30 percent respectively meanwhile retained earnings is keep growing from 3 percent till 11 percent.

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Question 3: Calculate the financial ratios of Cekap in order to get good grasp of what is going on with the companys performance.

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CALCULATION OF FINANCIAL RATIOS OF CEKAP AUTO PARTS FROM YEAR 2007 TO 2011

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Question 4: Hashim knows that he should compare Cekaps condition with appropriate benchmark. How should he go about obtaining the necessary comparison data? Hashim should collect industry averages of the key financial rations. Some useful sources for industry ratios are from BURSA Malaysia. Financial statement analysis tool assists Hashim in looking deep within a quarterly or annual financial statement of a private company (in any monetary currency) to determine how well or poorly a Cekap Auto Parts has performed as compared to a chosen industry over the time periods in question. A comprehensive in-depth financial statement ratio analysis report is generated to reveal the critical information needs to make informed decisions. To properly judge how well a Cekap Auto Parts is performing it is imperative that the company be compared to the performance of the industry in which it competes. The industry analysis performed herein provides the latest of data, usually less than 30 days old, for every industry within the public markets. In assessing the significance of various industry financial data, Hashim should engage in financial ratios analysis, the process of determining and evaluating financial ratios. A financial ratio is a relationship that indicates something about an industry's activities, such as the ratio between the industry's current assets and current liabilities or between its accounts receivable and its annual sales. The basic sources for these ratios are the Cekap Auto Parts financial statements within the industry that contain figures on assets, liabilities, profits, and losses. Industry ratios are only meaningful when compared with other information. Since individual companies are most often compared with industry data, ratios help Hashim understand a company's performance relative to that of competitors and are often used to trace performance over time. In addition to the industry average, the industry leaders (within the size category) ratios or cross sectional analysis could also be collected from the internet such as www.securities.com (example company: PROTON Holdings Berhad, UMW Holdings Berhad, Oriental Holdings Berhad, Mintye Industries Berhad, APM Automotive Holdings Berhad and so on) and used for comparison. Cross sectorial analysis used to compare the financial ratios of two or more companies in similar lines of business. Example for this analysis is show below:
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RATIO COMPARISON BETWEEN CEKAP AUTO PARTS AND PROTON HOLDINGS BERHAD RATIO FOR THE YEAR 2011 Current Ratio Quick ratio Inventory Turnover Total Assets Turnover Debt To Total Assets Profit Margin Return On Assets Return On Equity Gross Profit Margin CEKAP AUTO PARTS 3.92 0.83 1.52 0.95 0.59 0.02 0.02 0.07 0.16 PROTON HOLDINGS BERHAD 1.742 1.1936 6.15 1.17 0.2936 0.0713 0.0203 0.6288 0.1718

The current ratio shows of companys ability to meet short-term debt obligations. The higher the ratio, the more liquid the company is. Cekap Auto Parts has higher current ration compared to Proton Holdings Berhad. It indicates that the liquidity become much well because there is increment in current assets. Cekap Auto Parts can manage itself in order to satisfy its short term obligation by using good current assets. Proton Holdings Berhad has a better quick ratio compared to Cekap auto Parts. Meaning that, Proton Holdings Berhad has better capability to pay its short term debts. The differences between Cekap Auto Parts and Proton Holding Berhad are totality far. It showed that Proton Holdings Berhad has really strong sales (fast in selling their products) and have many cycle in one year meanwhile Cekap Auto Parts implies poor sales and therefore excess in inventory. Total assets turnover for Cekap Auto Parts is slightly low compared to Proton Holdings Berhad. Even though Cekap Auto Parts does not have big problems in

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managing their assets, but they should give extend attention to pricing strategy in order have high in total assets turnover. Cekap Auto Parts has higher in debt to total assets compared to Proton Holdings Berhad. High debt ratio shows that a corporation has a high level of financial leverage. Apart from that, it indicates that the management of debt seems to be good in Cekap Auto Parts because they are not depending too much on debt in order to finance their assets. Proton Holdings Berhad has better profit margin compared to the Cekap Auto Parts. Meaning that, Proton Holdings Berhad managements able to carry more in dollar for their stockholders. Returns on assets seem to be similar for both companies. Return on equity and gross profit margin for Cekap Auto Parts is just slightly decrease by 0.01. In terms of profitability there is not much different for both companies.

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Question 5: Besides comparison with the benchmark, what other types of analyses could Hashim perform to comprehensively analyze the firms condition? Besides comparison with the benchmark, Hashim could perform common size analyses of the financial statements (income statement and balance sheet statement) and a DuPont analysis of the return on assets and the return on equity. Common size income statement is an income statement in which each item is reported as a percentage of revenue (also known as turnover or sales).This technique used to express quantities as a percentage of a base figure is called common-size analysis. This technique is also known as vertical analysis. Common size income statements are basically used for analysis purposes where each item on the face of income statement is expressed in relation to revenue so that users can easily understand that how different expenses and other incomes and gains adds up to gross profit and net profit. This is widely used in ratio analysis and serves as a vital tool start up a financial analysis of the key areas of performance and then detailed ratios are applied on each item afterwards. Although common size income statements do not provide a detailed financial analysis of income statement and its items but it does help in comparing the financial performance of the company with the preceding accounting periods known as trend-analysis or time-series analysis. The good thing about common-size analysis that Hashim should know is that it is really easily to do and also interpreting the results is not so difficult. Even Mokhtar, who are not proficient in analysis techniques, can gain insight of companys financial performance to some extent from common size financial statements such as income statement and statement of financial position. (Please refer to the Question 2 for the data and explanations of income statement common size). A common size balance sheet is the items are expressed as percentages of total assets or total liabilities instead of as ringgit amounts. For example, a common-size statement may express all cash as 10% of total assets, fixed assets as 25%, and so forth. A common-size statement is most useful when one attempts to compare a company to similar companies of different size or
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when one is comparing year-to-year variations in capital structure in the same company. (Please refer to the Question 2 for the data and explanations of income statement common size). A type of analysis that examines a company's Return on Equity (ROE) by breaking it into three main components: profit margin, asset turnover and leverage factor. By breaking the ROE into distinct parts, investors can examine how effectively a company is using equity, since poorly performing components will drag down the overall figure. With this system, Cekap Auto Parts able to pinpoint areas of weaknesses and suggest improvement to enable ROE to increase. The equity multiplier is used to measure of financial leverage, allowing the investor to determine what portion of the ROE is the result of debt. Savvy investors understand that it is possible for a company with weak sales results and poor margins to artificially increase its ROE by taking on an extraordinary amount of debt. ROE=Net Profit Margin x Total Assets Turnover x Equity Multiplier DuPont System of Analysis RATIOS (2011) Net Profit Margin Total Assets Turnover Equity Multiplier ROE (Cekap Auto Parts) = 0.04598 CEKAP AUTO PARTS 0.02 0.95 2.42 PROTON HOLDINGS BERHAD 0.0713 1.17 1.42

ROE (Proton Holdings Berhad) =0.11846 Above comparison showed that Proton Holdings berhad has better ROE for the year 2011. Meaning that, this company is more likely to be one that is capable of generating cash internally. Companies that boost a high return on equity with little or no debt are able to grow without large capital expenditures, allowing the owners of the business to withdrawal cash and reinvest in elsewhere.
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Question 6: Comment on Cekaps liquidity, asset utilization, long-term solvency and profitability ratios. What arguments would have to be made to convince the bank that they should grant Cekap the loan? 1. Liquidity ratio Liquidity ratio is used to measure a firm ability to satisfy its short-term obligations as they come due. In addition, liquidity refers to solvency of the firms overall financing positionthe ease with which it can pay its bills. The two basic measures of liquidity are the current ratio and the quick ratio. The firms overall liquidity is quite good with a current ratio of 3.92 and it has improved quite a bit over the past three years. However, much of its current assets are tied in inventory, since its quick ratio is only 0.83.

1.1 Current ratio

Figure 1.1: Current ratio graph The current ratio shows of companys ability to meet short-term debt obligations. The higher the ratio, the more liquid the company is. The current ratio is calculated as equal to current assets divided by current liabilities. From the graph above, it shows that the current ratio of Cekap has improved even though for year 2007 to 2009 it fluctuated by increasing and decreasing in its ratios.

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The current ratio is increasing from 3.40 times in 2007 to 3.78 time in 2008. It indicates that the liquidity become much better because there is increment in current assets. However, it declines from 2008 to 2009 by 0.24 because the current assets slightly go down and current liabilities increase. Fortunately, it keeps increasing from 2009 to 2011. Cekap can manage itself in order to satisfy its short term obligation by using good current assets. 1.2 Quick ratio

Figure 1.2: Quick ratio graph Quick ratio is also known as the acid test ratio. The quick ratio is a measure of the ability of a company to pay its short-term debts. As with all ratios, how high a quick ratio should be varies among industries, but usually a quick ratio of 1:1 or higher is considered good. From the graph, initially, it shows an increasing in quick ratio from 2007 to 2008 which is 1.89 times and 2.10 times respectively. It is because total current assets have increased from 2007 to 2008 without considering inventories. However, the quick ratio totally drops from 2008 to 2009 by 1.45 times because cash and marketable securities decrease in large number of amount whilst the RM500,000 of inventories should be ignored. Therefore it represent that Cekap is doing fairly poor in managing their yield. But, Cekap shows an improvement since then as it increases from 2009 to 2010 with the ratios of 0.65 and 0.83 respectively.
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We can assume that the firms overall liquidity is quite good in term of current ratio since the latest ratio is 3.92 times and it has improved quite a bit over the past three year. Then, there is much of its current assets are tied in inventory, since its quick ratio is only 0.83 times. But it is still good because it increases from previous year. The ability of the firm to pay off its current liabilities from its cash reserves is good either and has improved significantly over the past five years.

2. Asset utilization ratio Asset utilization ratio or activity ratio defines as an accounting ratio that measure a firm'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.

2.1 Average Collection Period

Figure 2.1 : Graph for average collection period The average collection period has to do with the relationship between Accounts Receivable and the time frame in which those outstanding payments are received. The information of ACP allows the company to anticipate cash flow generated by services rendered. A high collection period shows a high cost in extending credit to customers.

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According the graph, it illustrates that ACP of Cekap is keep increasing from 2007 to 2009 with collection period are 12.22 days, 15.44 days and 16.19 days respectively. But, there is a large gap between 2009 to 2010 because the ACP increases to 49.53. From the balance sheet we can see the total account receivable in that year slightly increases which makes ACP become higher. In 2011, ACP decreases a little but yet still pretty high for retail business in order to pay back outstanding payments within a specified period. 2.2 Inventory Turnover

Figure 2.2 : Graph for inventories turnover

A ratio showing how many times a company's inventory is sold and replaced over a period. The days in the period can then be divided by the inventory turnover formula to calculate the days it takes to sell the inventory in hand. A low turnover implies poor sales and, therefore, excess inventory. A high ratio implies either strong sales or ineffective buying.

Based on the graph, inventories turnover in Cekap has increased from 1.92 to 1.99 for year 2007 and 2008 respectively. It is good to have inventories in hand but the company cannot hold or store too many parts in order to prevent any defects on the inventories. Then, the graph shows a decrease from 2008 to 2009 by 0.68 because the inventories rise from RM 270,000 to RM500,000. Meaning that Cekap increases its stocks in year 2009 and continuously add it until 2011. The inventories turnover for 2010 and 2011 are 1.37 and
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1.52 respectively. It shows an improvement made by Cekap since it can manage its inventories well over the three years.

2.3 Total assets turnover

Figure 2.3: Graph for total assets turnover The amount of sales generated for every dollar's worth of assets. 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. Based on the graph, we can observe that, total assets turnover or TATO quite steady and has similar trend every year compared to inventories turnover. In 2011, it can be seen that Cekap has the highest TATO which is 0.95. From year 2009 until 2011, the graph shows the increasing TATO in Cekap since, it adds total number assets and maintaining the fixed assets throughout these three years. But, to be save it cannot have too many assets since it will be depreciated and can cause the value will decline. Overall, Cekap does not have a big problem in managing its assets since the inventories turnover and TATO has increased year by year. It indicates that the company is efficient to handle and manage its assets with no doubt.
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3. Long-term solvency ratio The long-term solvency or financial leverage of a company is to get an idea of the company's methods of financing or to measure its ability to meet financial obligations. There are several different ratios, but the main factors looked at include debt, equity, assets and interest expenses.

3.1 Debt to total assets

Figure 3.1 : Graph of debt to total assets ratio Debt to total asset ratio indicates the financial leverage of the company. Its percentage of total asset that financed by creditor, liabilities and debt. High debt ratio shows that a corporation has a high level of financial leverage. From the figure above, it can be seen that Cekap has high level of financial leverage. It is showed by the percentage of the debt to total asset ratio from year 2007 to year 2011. The debt ratio of this company is more than 50%. In year 2007, the debt ratio is 56% and it is decreasing in the next year to 53%. There is slightly increasing in 2009 from 2008 by 9% to make the debt ratio become 62%. This indicates that in year 2009, most of the assets of the company are financed by the debt. After that year it keeps continuing to decrease to 60% and to 59% for year 2010 and 2011 respectively.
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The debt ratio in 2011 shows that the management of debt seems to be good in Cekap compared to previous year. It is because they are not depending too much on debt in order to finance their assets.

3.2 Time Interest Earn (TIE)

Figure 3.2: Graph of time interest earn Time interest earned (TIE) used to measure company ability to meets its obligation. It indicates how many times a company can cover the interest charges on pretax basis. The high ratio can indicate the company has an undesirable lack of debt or is paying down too much debit with earning that could be used for other project. Figure above shows the Time Interest Earned of Cekap from year 2007 to 2011. The TIE for 2007 is increasing from 1.75 to 2.15 in 2008. It shows that the company able to pay 2.15 times the interest using their earning. For the year 2009, the TIE slightly decreases to 1.48 and increase again in 2010 by 0.37 from 2009. However, in 2011 TIE is declining and it indicates the high interest of the borrowing that they made in 2011. From the year 2007 until 2011, we can see that the company is growing and keep making the profit since they can cover their interest using their earned.

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4. Profitability ratio 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.

4.1 Profit Margin

Figure 4.1: Graph of Net Profit Margin

Net profit margin is after-tax net income divided by net sales which is a measure of management's ability to carry a dollar of sales down to the bottom line for the stockholders. In other words, net profit margin refers to that which is left for the owners from a dollar of sales after all expenses and taxes have been paid.

From the graph, it seems like net profit margin (NPM) for Cekap fluctuates over the five years. From 2007 to 2008, NPM has increased by 1%. Then, it goes down from 2008 to 2009 which is 4% to 2%. Cekaps NPM increases and decreases from 2009 to 2010 and from 2010 to 2011 by 1%. The highest NPM is in year 2008. The fluctuation in NPM
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because of the expenses incurred by Cekap goes up and down over the 5 years. Overall, the companys performance is good since the NPM is always positive and the profit is increasing as well.

4.2 Return on assets

Figure 4.2 : Graph of Return on Assets Return on assets (ROA) is a measure of asset intensity which is , it will indicates how much profit a company generated for each dollar in assets brought to the company. In other word, it showed an effectiveness of a company in generating profits with its available assets. A measure of profit show how a percentage of the capital that is handled. High profit margin indicates good cost control, whereas a high asset turnover ratio demonstrates efficient use of the assets on the balance sheet. Based on the graph above, we can see the trend for Cekaps ROA is quite similar with NPM. It keeps fluctuating over the five years. The highest ROA is in year 2008 which is more than 3%. It indicates most efficient use of the assets in the company. In year 2011 it declines from 2010 but still in positive ratio. Cekap just needs to do some improvement to ensure the ROA is higher in the next coming year.

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4.3 Return on equity

Figure 4.3: Graph of Return on Equity Return in equity (ROE) reveals how much profit a company earned in comparison to the total amount of shareholder equity found on the balance sheet. A business that has high return on equity is more likely to be one that is capable of generating cash internally. Companies that boost a high return on equity with little or no debt are able to grow without large capital expenditures, allowing the owners of the business to withdrawal cash and reinvest in elsewhere. From the graph Figure 4.3 above, it shows that ROE goes up and down over the five years just like NPM and ROA. The difference is only because of the constant number of common stock in Cekap Auto Parts. The highest ROE is in year 2010 which is 9% compared to other years like in 2008, the ROE almost achieved to 9% and it declines from 2010 to 2011 by 2% since the net profit in that year decreases. Shareholders equity is the lowest in 2007 which is on 5%.

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From the ROA and ROE calculation, it can be conclude that Cekap can do more activities to improve their assets management in order to get higher returns from year to year by using internal and external financial sources.

4.4 Gross profit margin

Figure 4.4: Graph of Gross Profit Margin

Referring to the figure above, it can be shown that from 2007 to 2009, the graph is declining continuously. Even though Cekaps total sales is increasing over the five years, but the cost of good sold (COGS) increases as well in the first three years which affect the gross profit in those years. Then, when the COGS in 2010 is started to decrease so the gross profit become higher in that year. GPM for 2010 is 19% and it declines to 16% in 2011. The highest GPM is in year 2007 with 20% margin. For the overall, the companys margin is good since the relation between sales and gross profit is good and it shows the positive margin2 throughout five years.

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Arguments that can be made to get the loan: i) Good liquidity (current ratio). From the ratios calculated above, we see that the liquidity ratio especially current ratio is good condition since it keeps increasing and improving over the past three years which is from 2009 to 2011. It brings the meaning that Cekap Auto Parts has an ability to pay its short-term obligation by using its current assets. ii) Total asset turnover had improved. In term of total asset turnover (TATO), it measures a firm's efficiency at using its assets in generating sales or revenue. From the analysis, we can say that Cekap Auto Parts also has a good TATO in generating sales using its assets since it has improved from 2009 to 2011. Even though net income not so high but it manages to make sales and get higher TATO in year 2011. iii) Positive profitability In term of profitability, it cannot be argued regarding the profit margin in Cekap is quite good. Even though there is a fluctuating in net income, it still made profit without making any losses since 2007. It can be proved that Mokhtar already tried his best in managing his business and should expand his store to make sure he can achieve his target. Eventually, it will make his company to be known and can be a benchmark to other companies in the same industry. Therefore, Cekap Auto Parts has shown a good asset management. So, the commercial committee should grant Mokhtar the loan in order to help in expanding the store to be broader.

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Question 7: If you were the commercial loan officer and were approached by Mokhtar for a short term loan of RM 50,000, what would your decision be? Why? Based on the calculation on the firms liquidity, solvency and profitability ratios, I would give the short term loan because all the ratios showed that the company has a good liquidity, solvency and profitability ratios even though it may try harder in making profit since there are still fluctuating amount of profits. Therefore, as a commercial loan officer I believe Mokhtars company can grow in the future and hope he can manage well the company with the loan provided, especially to boost its profit. However, I would not give the loan if the company fails to maintain or increase the amount of profits and its ratios in the future.

Question 8: What recommendations should Hashim make for improvement, if any? Cekap needs to reduce its miscellaneous expenses where its keep growing until 2010, and cash and marketable securities showed the decreasing since 2007 until 2011. Since both items can be handling, the company should be no problem in the future. The firm needs to improve its inventory management, and credit collection policies. We said that because in the quick ratio, the percentage is 0.83 where the current assets are tied in the inventory. Further, the cost of sales and miscellaneous costs should be looked into and brought down more in line with its level in 1997. This will improve the liquidity and profitability of the company.

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Question 9: What kinds of problems do you think Hashim would have to cope with when doing a comprehensive financial statement analysis of Cekap Auto Parts? What are the limitations of financial statement analysis in general?

i) Types of problems do you think Hashim would have to cope with when doing a comprehensive financial statement analysis of Cekap Auto Parts Analysis of Financial statement is the systematic process of identifying the financial strength and weaknesses of the firm by establishing the relationship between the items of the Balance Sheet and income statement. Since Hashim is still studying in second semester MBA student and just interns in Mokhtars company, we are pretty sure that there are some problems that Hashim has to face to do comprehensive financial statement analysis of Cekap Auto Parts. It is because Hashim is inexperience to analyze the financial analysis and the possibility to misleading information might happen. In order to consult businessman, he needs to have knowledge about finance and accounting especially in term of future growth, profit, loan and so on and so forth. One of the problems that Hashim might have to cope with is comparison of financial data. Comparison of one company with another can provide valuable clues about the financial health of an organization. Unfortunately, differences in accounting methods between companies sometimes make it difficult to compare the companies' financial data. For instance if one firm values its inventories by LIFO method and another firm by the average cost method or FIFO method, then direct comparison of financial data such as inventory valuations and cost of goods sold between the two firms may be misleading. Hashim as an analyst should keep in his mind the lack of comparability of the data before drawing any definite conclusion. Nevertheless, even with this limitation in mind, comparisons of key ratios with other companies and with industry average often suggest avenues for further investigation.

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Other problem is an inexperienced analyst like Hashim may assume that ratios are sufficient in themselves as a basis for judgment about the future. Nothing could be further from the truth. Conclusions based on ratios analysis must be regarded as tentative. Hashim should know that Ratios should not be viewed as an end, but rather they should be viewed as starting point, as indicators of what to pursue in greater depth. In addition to ratios, other sources of data should be analyzed by Hashim in order to make judgment about the future of an organization. Hashim should look, for example, at industry trends, technological changes, changes in consumer tastes, changes in broad economic factors, and changes within the firm itself. A recent change in a key management position, for example, might provide a basis for optimization about the future.

ii) The limitations of financial statement analysis in general

1. Selection of comparison benchmark

Diversified companies are difficult to classify for comparison purposes. Each company might have their own ways of managing their businesses probably in term of preparation financial statement or calculation certain assets or products or level of companies performance. The diversification is good but it hardly to use to make any comparison benchmark between those companies. 2. Accounting procedures differ. Companies have a choice of accounting methods for example, inventory LIFO, FIFO average inventories and depreciation methods, either straight line basis or reducing balance. These differences impact ratios and make it difficult to compare companies using different methods. Not standardization means we cannot make any of companies as benchmark to see how the companies performance either in the other company or same industry.

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3. Different fiscal year end Companies may have different fiscal year ends making comparison difficult if the industry is cyclical. The fiscal or financial year between companies in the industry should be the same to ease the comparison. If not, we cannot make comparison and cannot make as a benchmark to be followed by other companies. 4. Not free from bias In many situations, the accountant has to make a choice out of various alternatives available, for instance, choice in the method of depreciation choice in the method of inventory valuation. Since, the subjectivity is interest in personal judgment, the financial statements are therefore not free from bias. As a result, financial analysis also cannot be said to be free from bias. 5. Window dressing The term window dressing means presentation of account that conceals vital facts and showing better position than what it actually is. On account of such a situation, financial analysis may not be a definite indicator of good or bad management.

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V) CONCLUSION AND RECOMMENDATIONS As Mokhtar hire Hashim to help him in raise fund, it is a nice decision. Hashim as MBA student hold accountancy degree and interested in finance. He also able to calculate and determined which part of area that need improvement and made change. The given tables of income statement and balance sheet statement for five years may elaborate Cekap Auto Parts business situations. As overall for conclusion, Cekap Auto Parts making a better financial management structure in order to stabilize their business. Even though operated for few years, Cekap Auto Parts able to maintain their profitability even there are some fluctuate between the five years. Between the five years of financial statement in income statement and balance sheet, we can elaborate that their financial management are better and showed improvement year-over-year. Finally, in financial calculation, we seen there are few things that they need to keep maintain or increase in order to gain profitability in the future. Problems not only come from the financial side, but we also need to consider many things such as competitors, business situation and management. In our recommendations, we would like to suggest some ideas and facts. First of all is about the ratios. Actually all ratios seem to be good, but there are several things that we would like to emphasis such as quick ratio. Even there are increase from 0.65 to 0.83, it still need improvement because it show the current asset tied in inventory. This will make risk to the business because probably the assets would worn-out and foul. Then we would like focus on debt ratio. We realized that the company manage their debt in good effort but they need not depend on the debt to much because it will increase the payment for interest and it wasted. TIE (Times Interest Earned) they are reduce the figure from the highest 2.15 and it reduce to 0.37, it showed that the business keep growing and making profits since they can cover the interest using their earned. Even the figures are good, in short term it is not good because it wasted. With the interest we paid, we can use it as the sources to invest in other company. On the ROA (return On Asset), it only showed 3% and its mean that there still efficient in using all asset in the company even the figure are little. The company need to keep increase the figure to ensure the profits are higher with all single ringgit come into this company. Some suggestion that we can do to increase
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the ROA start with employees awareness on company performance, work efficiently and set a goal. With all of this, the employees are clearly view their targets set by the company. The other thing that need to concern is about the competitors. Mokhtar need to know what his business competitors strategies and he need at one step ahead in order to gain competitive advantage and make survive in this business. This is because nowadays, with limit knowledge, experiences are not enough because good business strategies come with all factors such as technologies, innovation, talent, spirit, knowledge and experiences. With all of this, we believe Mokhtar may gain profit in future. Then Mokhtar really need to know the actual market conditions. Even he has many experience in auto servicing business, that not guarantee for him to survive in now days. He also needs to know, determine and forecast future technologies. Probably with new technologies, his business may not supply the parts that need. For example, maybe in future we have vehicles that made from plastic or fibre glass; hence parts from Mokhtars shop dont need any more. In the story its said that Mokhtar well aware that future growth will be funded with external fund. This should not predict by him because its too risk. Let say that he not able to make loan and the result he cannot running the business. Then, he really need to study about the future growth and try to avoid any risk. Another suggestion is about the decision made by Mokhtar. Mokhtar who had a long time in auto parts business should know and aware all decisions made by him will affect the business. Mokhtar should not use his entire available fund to increase his store plant in order to increase his business. He should slowly increase his business as to reduce any risk. He cannot straight jump to the decision and he need to consider everything factors around. Another thing is the decision to use Hashims decisions probably may hesitate by other employees in the company since Hashim has no experience in real business. Mokhtar should hire another business consultant in order to help him increase his business. Then he may ask Hashim learn from the consultant and in future hire Hashim as his finance executive.

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ATTACHMENT

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