A Financial Comparison Between Two Companies Finance Essay
Find the most recent financial statements for two companies of same industry which are listed in KLSE (Kuala Lumpur Stock Exchange). Evaluate the financial position and performance for each of these two companies using accounting ratio analysis. You are required to compute and compare the accounting ratios between these two companies, and conclude the results of your finding. The limitations or problems of using accounting ratios for performance analysis should be include in your conclusion.
INTRODUCTION
Accounting ratio is one number that expressed in terms of another relationship between two or various figures and company that can be compared. Example it can be shown in a view from balance sheet, profit and loss account, and budgetary control system or in any accounting organization that shows relationship between accounting data.
The purpose of accounting ratio is simplifies the comprehension of financial statements and condition by successful and unsuccessful firm. Other than that it also helps in the of planning, forecasting and assist management and it helps in case of investors and lending decision of bankers.
The 5 aspect of business measured by accounting ratios is: Profitability that is how far the company earns profit, Liquidity is to measure the financial status, Asset management is how far
the company can manage their finance, Debts management is how they manage their tax, and Market value of investment to ordinary shareholders is how they create their market value book.
FORMULA THAT USED MEASURE EACH ASPECT OR AREA OF BUSINESS
Profitability of company
A) Gross profit markup (%) = Ã- 100
Gross profit = Sales – Cost of the good / Opening stock + Purchase – Closing stock
B) Gross profit margin (%) = Ã- 100
Net sales value = Sales – Return inwards
C) Operating profit margin on sales (%) = Ã-100
D) Profit margin on sales (%) =Ã-100
= Profit after interest, after tax, after preference dividend & after minority interest Ã-100
Net sales value
E) Basic earning power (BEP) = Ã- 100
Total asset = Fixed assets + Current asset
F) Return on Total assets = Ã- 100
= Profit after interest, after tax, after preference dividend & after minority interest Ã-100
Net sales value
G) Return on common equity = Ã-100
= Profit after interest, after tax, after preference dividend & after minority interest Ã-100
( Ordinary share capital + Reserves ) OR (Total assets – Total liabilities)
Liquidity of company
A) Current ratio / Working capital ratio =
B) Liquid ratio / quick ratio / acid – test ratio =
Asset management of company
A) Inventory Turnover or Stock turnover = or
B) Total Assets Turnover =
Total asset = Fixed asset + current asset
C) Debtor Ratio =
D) Days sales outstanding =
Debts management
A) Debts ratio =
Total Debts = Long time liabilities + Current liabilities
Total asset = Fixed assets + Current asset
B) Debts equity ratio =
C) Times interest earned or Interest cover =
Market value of investments to stockholders
A) Earnings per share = =
B) Price earnings ratio =
C) Earnings yield = =
D) Market price per book value ratio = =
Inter-temporal comparisons between two periods are the comparison value that happens between years in one industry for example year 2009 and 2010. Inter-firms comparison between two companies is a different accounting policies and rules and regulation that they created like in IJM BERHAD and GAMUDA BERHAD. Comparison with industry average can measure that is happen in market value to common stockholders in every each industry.
And there are two companies are selected for business performance measurement that is :
IJM CORPORATION BERHAD & GAMUDA BERHAD
BACKGROUND ,INDUSTRY AND BUSINESS TYPE OF THE TWO COMPANY
IJM CORPORATION BERHAD
IJM is a Corporation Berhad is an a international competitive Malaysian conglomerate with business in construction, properties, industries, plantations and infrastructure systematic industry. Joining of three company enterprising local construction – IGB Construction Sdn Bhd was incorporated in 1981, Jurutama Sdn Bhd was incorporated in 1970 as Soon Tat Construction Sdn Bhd and Mudajaya Sdn Bhd incorporated in 1965 as Chye Hin Construction Co Ltd. IJM become grown in reputation and renown internationally in excellent ways of by achieving record by numerous awards.
GAMUDA BERHAD
Gamuda is a Construction , building and engineering like main project on highways, airport runways, highways, railways, tunnels, water treatment plants and dams, to infrastructure privation and the development of new townships and also it is a property and infrastructure company in Malaysia.
The income statements and balance sheets of the two companies information that are required for business performance and it obtain the required information from the related company financial reports via internet .
FORMULA
Ratio with formula
(Profitability of Company)
IJM Corporation Berhad
Gamuda Berhad
Gross Profit markup (%) =
Ã- 100
= 31.16%
Gross profit = Sales – Cost of the good
RM2455143000 – RM2032167000
= RM422976000
Cost of the good sales =
RM1580125000 + RM363348000 + RM8595000 + RM19973000 + RM19260000 + RM40866000
= RM2032167000
Ã- 100
= 20.81%
Gross profit margin (%) =
Ã- 100
= 23.76%
Net sales value = Sales – Return inward
RM2455143000 – 0
=RM 2455143000
Ã- 100
= 17.23%
Operating profit margin on sales (%) =
Ã-100
= 18.65%
Ã- 100
= 10.58%
Profit margin on sales (%) =
Ã-100
= 8.29%
Ã- 100
= 11.43%
Basic earning power(BEP)=
Ã- 100
Total assets =
RM6959529000 + RM5598766000
= RM12558295000
= 5.96%
Total assets = RM2347737000+RM4203173000
= RM6550910000
Ã- 100
= 3.97%
Return on Total assets=
Ã- 100
Total assets =
RM6959529000 + RM5598766000
= RM12558295000
= 2.65%
Total assets = RM2347737000+RM4203173000
= RM6550910000
Ã- 100
= 4.28%
Return on common equity=
Ã-100
= 6.48%
Ã- 100
= 8.62%
Ratio with Formula
(Liquidity of Company)
IJM Corporation Berhad
Gamuda Berhad
Current Ratio=
= 2.09:1
= 2.18 : 1
Acid-test ratio=
Liquid asset = Current asset -inventory
RM5598760000 -RM 529320000
= RM5069446000
= 1.89:1
Liquid asset = Current asset-inventory
RM4203173000 – RM79738000
= 4123435000
RM4123435000
RM1930241000
= 2.14 : 1
Ratio with Formula
( Assets Management of Company)
IJM Corporation Berhad
Gamuda Berhad
Inventory Turnover =
or
= 5.78 times
= 25.49 times
Total Assets Turnover=
= 0.32 times
= 0.37 times
Debtor Ratio=
= 0.54 : 1
= 0.65 : 1
Days sales outstanding=
0.54365days
= 197.1days
0.65365days
= 237.25days
Ratio with Formula
(Debts management of company)
IJM Corporation Berhad
Gamuda Berhad
Debts ratio=
Total Debts = Long time liabilities + current Liabilities = RM3303461000 +RM112250000
= RM3415711000
Total assets = Fix asset + Current asset
RM3415711000 + RM2685225000
= RM6100936000
= 0.49 : 1
Total Debts = Long time liabilities + current Liabilities = RM1312946000 + RM1930241000 = RM3243187000
Total assets = Fix asset + Current asset
RM2347737000 + RM4203173000 = RM6550910000
= 0.50 : 1
Debts equity ratio=
= 1.19 : 1
= 1:1
Times interest earned or Interest cover=
= 3.72 times
= 5.93 times
Ratio with Formula
(Market value of investment to stockholder of company)
IJM Corporation Berhad
Gamuda Berhad
Earnings per share=
=
= RM0.25
= RM0.14
Price earnings ratio=
OR
= 19.2 times
= 22.86 times
Earnings yield=
=
100 / 75 X RM 0.25
RM0.48
= 6.94%
= 5.83%
Market price per book value ratio=
=
=
= 1.24 : 1
=
= 1.99 : 1
The Ratio Comparison between two companies for business performance measurement under each of the bold headings
Profitability of the two companies:
Gross profit markup and gross profit margin for the (Gamuda Berhad) is lower than (IJM Corporation Berhad) because the ineffective and inefficient in purchasing from supplier causing higher purchase cost, ineffective use of material and labor causing higher production cost to reduce gross profit earning. For operating profit margin on sales, (Gamuda Berhad) have a lower profit earned by company from the sales made for the ineffective control on expenditures and interest cost, incurring higher operating expenses and higher interest costs to reduce the profit earning but profit margin on sales, (Gamuda Berhad) have higher profit earned by company from the sales that is made for the effective control on its expenditures and interest costs, incurring lower operating expenses and lower interest costs to increase the profit earning than the second company.
Liquidity of the two companies:
The current ratio is first company is higher than second company because first company has larger amount of current assets can be used to finance its current liabilities and that will indicates the company is financially stable and able to finance its short-term liabilities. For acid-test ratio, first company is also higher than the second company is because that the first company has a larger amount of liquid assets that can be used to finance its current liabilities and the company has high liquidity to finance its short-term liabilities and financially stable.
Asset Management of the two companies:
The inventory turnover for the first company is higher than the second company because the first company has a fast stock turnover where the goods purchased and kept in the store are fast taken out for resale so that the stock is not accumulated and money is not tied up with the stock. For total assets turnover, the first company is also higher than the second company because first company has a higher sales generated from the assets for the effective use of assets in business activities to increase the production. Other than that, the debtor ratio and DSO, the first company is higher than the second company because the company has given longer credit time to allow debtor’s owing and causing longer time taken by the company to collect money slowly from debtors so that larger debtor balance is collected to tie up money and bringing it to shortage of money for paying back liabilities and facing short-term financial problem.
Debts Management of the two companies:
The debts ratio for the first company is higher than the second company because the first company has a heavy debts burden with larger amount of debts and bearing high interest cost. Company with heavy debts burden is risky for not able to finance or not able to pay back its debts or maybe it is being forced to dispose or to sell its assets for paying back the debts. But for debts equity ratio, the first company is lower than the second company because the second company has a light debts burden with smaller amount of debts and bearing low interest. And the times interest earned for the first company is higher than the second company because it has a bearing high interest charges in relation to its available profit.
Market value of investment to stockholders:
Earnings per share and earnings yield for the first company is lower than the second company, this indicates that the company has lower growth in business profit and resulting lower net income available to each unit share and being less attractive and lower value to the common stockholders. Due to lower earnings per share, stockholders or shareholders have to use more times of profit earning and more times of net cash inflow and longer period to recover back their share investment. This shows the confirmation by the price earnings ratio for the first company is being higher than the second company. Market price per book value for the first company is higher than the second company, this indicates that the company share price has inequitably risen up above its real asset value or book value and being not realistic to stockholders.
Conclusion
In my conclusion, the first company Gamuda Berhad’s performance is better than the IJM corporation Berhad, and this indicated (Gamuda Berhad) has better performance, because first company has a higher rate in the 5 aspect of business that measured by accounting ratio. In information problems, the base information is out of date and analysis of accounting information, and they will only identify symptoms but not the causes and this will make the company to have information problems. For inter-firm problems, every companies have to select their industry norms and the usefulness of norms based on the averages and different company have different business and financial problems and the impact on analysis. so in this matter they have theur own way to solve their problems.
QUESTION 2
Identify and discuss three different ways for transferring capital or fund from savers to borrowers in the financial market.
ANSWER QUESTION 2
INTRODUCTION
Financial market means it is a organization and people who be found to borrow money from those having some valuable metals to be exchanged at efficient by market price and also they refer to the stock market, wall street, even markets. In this field there are many different kind of financial market each market use different kind of matted, terms, types of parts of country and customer and the asset banking. By the ending from the any type of this helps them in business grown big and investors make money and give them a lot of profit. At the same time the trading of the stock and bonds that they get in financial market take place direct between buys and sellers and also financial market can be a good relationship by domestic or international business level in communication.
There are many various of types in financial market that is physical asset markets to deal with the tangible, real and physical products such as computer, machinery, real estate and other assets the financial market deal with different types of instruments such as stocks or shares, bonds, notes, mortgagees and other claims or real assets with derivative securities whose values derived from changes in the price of other assets. Spot market refer to deals being bought or sold for on the delivery within a few days where future market refers future market deals bought or sold future delivery at some future date such six months or a year in to the future.
There are some major financial markets like money markets who deals asset in short term and highly liquid debt securities in borrowing and lending with original maturities in a short periods between less than one year for example it involves like certificate of deposit, federal funds and asset-backed securities. Capital markets is who deals for securities where companies and governments can intermediate or long-term debts in a periods of one year or more than one years and also it include stock market. Montage market is a market who deals with loans on residential, commercial, industrial real estate and farmland and the federal government has confirmed that a major economic role in the mortgage loan market because real estate development is a major sector of the U.S. Economy. Consumer credit market is markets that deals with loans and autos and appliances, as well as loans for education and vacations and provide good services. Primary markets is an market which is corporations raise capital by issuing new securities or new shares like governments or public sector institutions can obtain funding the sale of a new market issue. A secondary market which is the existing and already outstanding securities or financial assets are traded among investors after they have been issued by the corporations and also called as aftermarket where have been issued securities and instruments such are bought and sold. Initial public offering (IOP) market that is firm by offering securities to the public for the first time and often often issued by smaller, younger companies seeking to expand, but can also be done by large private companies looking to become publicly traded. Private market is all about transactions that worked privately and directly between two parties without going to public by independently and also they called breakup value market.
There are three different ways of transferring capital or funds from savers to borrowers in financial markets and they are following picture:
TRANSFER OF CAPITAL OR FUND BETWEEN SAVERS ( MONEY LENDRE ) AND THOSE WHO NEED CAPITAL OR FUND ( BORROWERS )
1. Direct transfer from savers to borrowers:
When a corporation take place in issues and sells stocks or bonds strata way to saver without giving any financial institution so the corporation as borrower will delivers securities to savers who in turn give money to the corporation and the capital directly transfersed from savers to corporation (borrower).
Business Corporation Issue corporation’s securities to Savers
(Borrower) Receive capital or funds from (Money lender)
2. Indirect transfer from savers to borrowers though investment banking house:
Investment bank is a unwritten the issues of corporations securities as a middlemen to the facilitate the issues by purchase and then resell the same corporation so that the money paid by savers for purchase. The investment bank receive money merely pass thought banking house.
Issue corporation’s Resell corporation’s
Securities to securities to
Business Investment Savers
Corporation Banking (money
(Borrower) House Lender)
Receive fund from Receive fund from
3. Indirect intermediately such as a bank or mutual funds from saver by issuing securities or certificate of deposit to savers. Than it used the fund collected to purchase and hold the securities as investment and the funds transferred from saver intermediary when pay money to financially exchange for receiving certificate of deposit . future than that this fund to other corporation paying money out of fun because they are safer and more liquid them mortgage and loans.
Issue Corporation’s Issue intermediary’s
Securities to Securities to
Business Financial Savers
Corporation (Money
(borrower) Intermediary Lender)
Receive fund from Receive fund from
Investment Banking House
Can be say that organization that underwrites and distributes the upcoming new issue of latest business corporation’s securities to assist corporation that is fund for financial. For example, a businessperson who produces shoes may purchase a machine that automatically stitches leather that hopes in the time saved will allow for the production of more shoes and increased sales or another example investment banking house are Merrill Lynch and Morgan Stanley Dean Witter.
Financial Intermediaries
There are some specialized in financial firm that transfer of funds from savers to be demanders of capital or event borrower. The financial intermediaries generally huge and they gain in economies of scale in analyzing the creditworthiness of potential borrower, in processing and collecting loans, and in pooling risk and for the helping individual savers to diversity their funds investments.
Following are major financial intermediaries
Commercial bank is a financial intermediary which collects credit from lenders in the form of deposits and lends in the form of loans holds deposits for individuals and businesses in the form of checking and savings accounts and certificates of deposit of varying maturities while a issues loans in the form of personal and business loans as well as mortgages and also they handled checking accounts and thought which is Federal Reserve System expended or contracted the money supply. They also provides an ever-widening service, stock brokerage service and insurance and they are different from investment bank they lend out money to borrows and investment banks assist business corporation to raise capital or fund from savers.
Saving and loan association is a specializes in accepting savings deposits and making mortgage and other loan like collect funds from many small savers and lend out the money to house buyers and other kind of borrowers and it more significant economic function of the saving and loan association to create liquidity in capital markets.
Mutual saving funds is a savings that has no stockholders and reinvests all profits in itself and the savings banks are owned their depositors and borrowers because there are no stockholders to please, mutual savings banks are often very conservative with how they invest deposits.
Credit unions is a non-profit financial institution that owned and operated entirely by members and also it provide financial services for their members, including savings and lending. In large organizations and companies may organize credit unions for their members and employees, respectively. They are often the chepast source of funds available to individual to borrowers.
Pension funds is a retirement plans funded by corporation or government agencies for their workers and administered by trust departments of commercial banks or by life insurance companies. It also a funds invest primarily in bonds, stocks, mortgages and real estate.
Life insurance companies is a collect saving that form or annual premiums and invest in stocks, bonds, real estate and montage, finally make payments to the beneficiaries of the insured parties. It also have many kind of tax deferred saving plans to provide benefits to the participants when they retire.
Mutual funds collect money from savers and use to buy stocks, long-term bonds and short-term debt instruments that issued by government or business units and thus reduce risk by investment diversification, achieve economies of scale in analyzing securities, managing portfolios, buy and selling securities. They also designed to meet objective in different types of savers and they used as interest bearing checking account such as money market funds.
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