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Ratio analysis is a powerful tool of financial analysis. A ratio is defined as “The Indicated
Quotient of Two Mathematical Expressions” and as “The Relationship between Two or More
Things”. In financial analysis, a ratio is used as a benchmark for evaluating the financial
position and performance of firm. The absolute accounting figures reported in the financial
statement do not provide a meaningful understanding of the performance and financial
position of a firm. The relationship between two accounting figures, expressed
mathematically is known as a financial ratio. Ratios help to summaries large quantities of
financial data and to make qualitative about the firm’s financial performance. The point to
note is that a ratio reflecting a quantitative relationship helps to form a qualitative judgment.
Such is the nature of all financial ratios.
Liquidity refers to the ability of a firm to meet its short-term financial obligations
when and as they fall due.
The main concern of liquidity ratio is to measure the ability of the firms to meet their
short-term maturing obligations. Failure to do this will result in the total failure of the
business, as it would be forced into liquidation.
A. Current Ratio
The Current Ratio expresses the relationship between the firm’s current assets and its
current liabilities. Current assets normally include cash, marketable securities, accounts
receivable and inventories. Current liabilities consist of accounts payable, short term notes
payable, short-term loans, current maturities of long term debt, accrued income taxes and
other accrued expenses (wages).
Current assets
Current Ratio = ________________
Current liabilities
Significance:
It is generally accepted that current assets should be 2 times the current liabilities. In a
sound business, a current ratio of 2:1 is considered an ideal one. If current ratio is lower than
2:1, the short term solvency of the firm is considered doubtful and it shows that the firm is
not in a position to meet its current liabilities in times and when they are due to mature. A
higher current ratio is considered to be an indication that of the firm is liquid and can meet its
short term liabilities on maturity. Higher current ratio represents a cushion to short-term
creditors, “the higher the current ratio, the greater the margin of safety to the creditors”.
From the above statement the fact is depicted that the liquidity position of the Hup Seng
Industries Berhad limited is satisfactory because all the three years current ratio is not below
the standard ratio 2:1.
60,000,000.0
40,000,000.0
20,000,000.0
1.92 1.83 1.64
0.0
2017 2018 2019
Year
B. Quick Ratio
Measures assets that are quickly converted into cash and they are compared with current
liabilities. This ratio realizes that some of current assets are not easily convertible to cash e.g.
inventories.
The quick ratio, also referred to as acid test ratio, examines the ability of the business to
cover its short-term obligations from its “quick” assets only (i.e. it ignores stock). The quick
ratio is calculated as follows
Current Asset - Inventory
Quick Ratio =
Current Liabilities
Significance:
The standard liquid ratio is supposed to be 1:1 i.e., liquid assets should be equal to current
liabilities. If the ratio is higher, i.e., liquid assets are more than the current liabilities, the short
term financial position is supposed to be very sound. On the other hand, if the ratio is low,
i.e., current liabilities are more than the liquid assets, the short term financial position of the
business shall be deemed to be unsound. When used in conjunction with current ratio, the
liquid ratio gives a better picture of the firm’s capacity to meet its short-term obligations out
of short-term assets.
Interpretation:
As a quick ratio of 1:1 is considered satisfactory as a firm can easily meet all current
claims. It is a more rigorous and penetrating test of the liquidity position of a firm. But the
liquid ratio has been decreasing year after year which indicates a high operation of the
business.
From the above statement, it is clear that the liquidity position of the Hup Seng Industries
Berhad limited is satisfactory. Because the entire three years liquid ratio is not below the
standard ratio of 1:1.
CHART 3.2.2 QUICK RATIO
60,000,000.0
40,000,000.0
20,000,000.0
1.92 1.83 1.64
0.0
2017 2018 2019
year
The average collection period measures the quality of debtors since it indicates the speed of
their collection.
The shorter the average collection period, the better the quality of debtors, as a short
collection period implies the prompt payment by debtors.
The average collection period should be compared against the firm’s credit terms and
policy to judge its credit and collection efficiency.
An excessively long collection period implies a very liberal and inefficient credit and
collection performance.
The delay in collection of cash impairs the firm’s liquidity. On the other hand, too low
a collection period is not necessarily favorable, rather it may indicate a very restrictive
credit and collection policy which may curtail sales and hence adversely affect profit.
365 days
Average collection period =
Account Receivable ratios
Significance:
Average collection period indicates the quality of debtors by measuring the rapidity or
slowness in the collection process. Generally, the shorter the average collection period, the
better is the quality of debtors as a short collection period implies quick payment by debtors.
Similarly, a higher collection period implies as inefficient collection performance which, in
turn, adversely affects the liquidity or short term paying capacity of a firm out of its current
liabilities. Moreover, longer the average collection period, larger is the chances of bad debts.
Interpretation:
The shorter the collection period, the better the quality of debtors. Since a short collection
period implies the prompt payment by debtors. Here, collection period decrease from 2017 to
2019. Therefore the average collection period of Hup Seng Industries Berhad for the three
years are satisfactory.
Chart 3.3.1 Average Collection Period
49.39
50
41.76 43.53
40
Ratio
30
20
0
2017 2018 2019
Year
B) Receivable turnover
Accounting ratios that measure a firm's ability to convert different accounts within their
balance sheets into cash or sales. Companies would like to convert those accounts into cash
as fast as possible. This type of turnover ratios shows if they are able to do so or not.
Sales
Receivable Turnover :
Accounts Receivables
Significance:
Interpretation:
The accounts receivable turnover ratio is an accounting measure used to quantify a company's
effectiveness in collecting its receivables or money owed by clients. From 2017 to 2019,
receivable turnover ration higher from 7.39 times to 8.40 times. A high receivables turnover
ratio indicate that Hup Seng Industries Berhad’s collection of accounts receivable is efficient
and has a high proportion of quality customers that pay their debts quickly.
8.50 8.40
8.00
ratio
ratio
7.50 7.39
7.00
6.50
2017 2018 2019
Year
C) Inventory Turnover:
This ratio measures the stock in relation to turnover in order to determine how often the
stock turns over in the business.
It indicates the efficiency of the firm in selling its product. It is calculated by dividing he cost
of goods sold by the average inventory.
Significance:
Interpretation:
A higher turnover ratio is always beneficial to the concern. In this the number of times the
inventory is turned over has been increasing from one year to another year. This increasing
turnover indicates immediate sales. And in turn activates production process and is
responsible for further development in the business. This indicates a good inventory policy of
the company. Thus the stock turnover ratios of Hup Seng Industries Berhad, for the three
years are satisfactory.
197,610,952 204,250,655
200000000 186,463,785
150000000
Ratio
100000000
50000000
24,857,496 25,414,315 24,297,063
7.5 7.78 8.41
0
2017 2018 2019
Year
The total asset turnover ratio compares the sales of a company to its asset base. The ratio
measures the ability of an organization to efficiently produce sales, and is typically used by
third parties to evaluate the operations of a business. Ideally, a company with a high total
asset turnover ratio can operate with fewer assets than a less efficient competitor, and so
requires less debt and equity to operate. The result should be a comparatively greater return to
its shareholders.
Sales
Total Asset Turnover :
Total Assets
Significance:
Net sales are the amount of revenue generated after deducting sales returns, sales
discounts, and sales allowances.Average total assets are the average of aggregate assets at
year end of the current or preceding fiscal year.
Total turnover ratio is increasingly from year to another year. A higher ratio is generally
favorable, as it indicates an efficient use of assets. Hup Seng Industries Berhad have high
total asset turnover ratio that can operate with fewer assets than a less efficient competitor,
and so requires less debt and equity to operate. The result should be a comparatively greater
return to its shareholders.
200,000,000
Ratio
150,000,000
100,000,000
50,000,000
1.23 1.3 1.32
0
2017 2018 2019
Year
Net Sales
¿ AssetsTurnover :
Net Fixed Assets
Significance:
This ratio gives an ideal about adequate investment or over investment or under
investment in fixed assets. As a rule, over-investment in unprofitable fixed assets should be
avoided to the possible extent. Under-investment is also equally bad affecting unfavorably
the operating costs and consequently the profit. In manufacturing concerns, the ratio is
important and appropriate, since sales are produced not only by use of working capital but
also the capital invested in fixed assets. An increase in this ratio is the indicator of efficiency
in work performance and a decrease in this ratio speaks of unwise and improper investment
in fixed assets.
Interpretation:
The fixed assets turnover ratio is decreasing year after year. The overall lower ratio
indicates the poorer utilization of the fixed assets.
Thus the fixed assets turnover ratio for the three years of Hup Seng Industries Berhad are
not satisfactory as such there is under utilization of the fixed assets.
3.89
3.90
3.83
3.80
3.70
Ratio
3.60 3.56
3.50
3.40
3.30
2017 2018 2019
Year
A leverage ratio is any one of several financial measurements that look at how much capital
comes in the form of debt (loans) or assesses the ability of a company to meet its financial
obligations. The leverage ratio category is important because companies rely on a mixture of
equity and debt to finance their operations, and knowing the amount of debt held by a
company is useful in evaluating whether it can pay off its debts as they come due. Several
common leverage ratios are discussed below.
A) Debt Ratio
The debt ratio is a financial ratio used in accounting to determine what portion of a
business's assets are financed through debt. A company's debt ratio offers a view at how the
company is financed. This provides a clear indication of the amount of leverage held by a
business. The company could be financed by primarily debt, primarily equity, or an equal
combination of both.
The debt ratio takes into account both short-term and long-term assets by applying both
in the calculation of the total assets when compared with total debt owed by the company.
Total Liabilities
Debt Ratio:
Total Assets
Table 3.4.1 Debt Ratio
Interpretation:
Debt ratio for Hup Seng Industries Berhad are higher every year. The higher levels of
liabilities compared with assets are considered highly leveraged and more risky for lenders.
This helps investors and creditors analysis the overall debt burden on the company as well as
the firm’s ability to pay off the debt in future, uncertain economic times. The larger the debt
ratio the greater is the company's financial leverage. Hup Seng Industries Berhad have higher
debt ratios and better off looking to equity financing to grow their operations.
0.35
0.34
Ratio
0.34
0.33 0.33
0.33
0.33
0.32
2017 2018 2019
Year
B) Debt Equity Ratio
This ratio indicates the extent to which debt is covered by shareholders’ funds. It reflects the
relative position of the equity holders and the lenders and indicates the company’s policy on
the mix of capital funds. The debt to equity ratio is calculated as follows:
Total Debt
Debt Equity Ratio:
Total Equity
Significance:
It is a long term solvency ratio which indicates how much part of the capital is provided
by shareholders and how much part by creditors. Also termed as external internal ratio, a 1:1
ratio indicates creditors and shareholders have equal contribution in total capital. A ratio
higher than 1:1 means the portion of assets contributed by shareholders is more, which
creditors like because it gives more creditability of their money to them. A ratio lower than
1:1 means the contribution of assets by creditors is more, which shareholders like to get
money from creditors.
Interpretation:
The debt to equity ratio is increasing year after year indicating that outside creditors for
the company has decreased over the years.. For the company also, the servicing of debt is
more burdensome and consequently its credit standing will adversely affected. Therefore debt
to equity ratio is not satisfactory for Hup Seng Industries Berhad.
0.05
0.05
0.04 0.04
0.04
Ratio
0.03
0.02
0.01
0
2017 2018 2019
Year
The times interest earned ratio, sometimes called the interest coverage ratio, is a coverage
ratio that measures the proportionate amount of income that can be used to cover interest
expenses in the future.
In some respects the times interest ratio is considered a solvency ratio because it measures a
firm’s ability to make interest and debt service payments. Since these interest payments are
usually made on a long-term basis, they are often treated as an ongoing, fixed expense. As
with most fixed expenses, if the company can’t make the payments, it could go bankrupt and
cease to exist. Thus, this ratio could be considered a solvency ratio.
Table 3.4.3 Time Interest Earned
2017
EARNINGS BEFORE INTEREST AND TAX (RM) 56,120,619
INTEREST EXPENSE (RM) 21,614
Profitability ratios are a set of measurements used to determine the ability of a business to
create earnings. These ratios are considered to be favorable when they improve over a trend
line or are comparatively better than the results of competitors. Profitability ratios are derived
from a comparison of revenues to difference groupings of expenses within the income
statement.
Operating Income
Operating Profit Margin:
Revenue
The operating profit margin ratio indicates how much profit a company makes after
paying for variable costs of production such as wages, raw materials, etc. It is also
expressed as a percentage of sales and then shows the efficiency of a company
controlling the costs and expenses associated with business operations. Furthermore,
it is the return achieved from standard operations and does not include unique or one
time transactions .
Interpretation:
Hup Seng Industries Berhad increased from 13.95% to 16.54% every year for
operating proft margin indicative of how well it is managed because operating
expenses such as salaries, rent, and equipment leases are variable costs, rather
than fixed expenses. The operating profit margin shows Hup Seng Industries Berhad
performs in comparison to its peers, in particular, and efficiently manages its expenses
so as to maximize profitability.
16.00%
15.50%
14.96%
15.00%
Ratio
14.50%
13.95%
14.00%
13.50%
13.00%
12.50%
2017 2018 2019
Year
Net Income
Net Profit Margin :
Net Sales
Significance:
An objective of working net profit ratio is to determine the overall efficiency of
the business. Higher the net profit ratio, the better the business. The net profit ratio
indicates the management’s ability to earn sufficient profits on sales not only to cover
all revenue operating expenses of the business, the cost of borrowed funds and the
cost of merchandising or servicing, but also to have a sufficient margin to pay
reasonable compensation to shareholders on their contribution to the firm. A high
ratio ensures adequate return to shareholders as well as to enable a firm to with stand
adverse economic conditions. A low margin has an opposite implication.
Table 3.5.2 Net Profit Margin
Interpretation:
In the year 2017 the Net Profit is 14.83%, but in the year 2018-2019 it was decreased to
13.98% and 13.42%. Which may due to excessing selling and distribution expenses.
Therefore the performance of the management should be appreciated. Thus, decreasing in the
ratio over the previous periods indicates slower in the operational efficiency of the business.
Hup Seng Industries Berhad do not achieve good profit from business.
Chart 3.5.2 Net Profit Margin
14.50%
13.98%
14.00%
Ratio
13.50% 13.42%
13.00%
12.50%
2017 2018 2019
Year
This ratio is also known as the profit-to-assets ratio. This ratio establishes the relationship
between net profits and assets. As these two terms have conceptual differences, the ratio may
be calculated taking the meaning of the terms according to the purpose and intent of analysis.
Usually, the following formula is used to determine the return on total assets ratio.
Net Income
Return on asset :
Total Assets
Significance:
This ratio measures the profitability of the funds invested in a firm but doe not reflect on the
profitability of the different sources of total funds. This ratio should be compared with the
ratios of other similar companies or for the industry as a whole, to determine whether the
rate of return is attractive. This ratio provides a valid basis for inter-industry comparison.
Interpretation:
The return on total assets ratio is decreasing year after year . This decreasing ratio
indicates not effective for funds invested. Therefore the return on Total Assets ratio for the
three years reveals not satisfactory condition of the business.
18.20% 18.17%
18.10%
18.00%
Ratio
17.90%
17.80% 17.73%
17.70%
17.60%
17.50%
17.40%
2017 2018 2019
Year
This ratio shows the profit attributable to the amount invested by the owners of the business.
It also shows potential investors into the business what they might hope to receive as a return.
The stockholders’ equity includes share capital, share premium, distributable and non-
distributable reserves. The ratio is calculated as follows:
Net Income
Return on Equity :
Total Equity
Significance:
This ratio measures the profitability of the capital invested in the business by equity
shareholders. As the business is conducted with a view to earn profit, return on equity capital
measures the business success and managerial efficiency. It reveals whether the firm has
earned a reasonable profit to its equity shareholders or not by comparing it with its own past
records, inter-firm comparison and comparison with the overall industry average. This ratio is
of significant use in the ratio analysis from the standpoint of the owners of the firm.
Interpretation:
In the year 2017, the return on equity ratio is 27.18% but in the year 2018 it reduced to
27.14%, which may due to capital investment . And in the year 2019 it increased to 27.36%.
Therefore the return on equity ratio for the three years reveals a satisfactory condition of the
business.
27.30%
27.25%
Ratio
27.20% 27.18%
27.15% 27.14%
27.10%
27.05%
27.00%
2017 2018 2019
Year
. The market value ratios are important for investors, management, etc as these ratios are used
to decide whether the valuation of the shares are overvalued, undervalued or at par with the
market. These ratios are used for making investment decisions in stocks of companies.
Earnings per share is one of the most important variables for determining a company’s
share prices. A high EPS indicates that the company is more profitable and has more
profits to distribute to shareholders.
Net Income
Earnings per share :
Average Outstanding Shares of Company
Earnings per share is also major component in the price-to-earnings ratio calculation for
valuing a company, which measures a company’s value as a factor of its current share
price relative to its EPS.
Table 3.6.1 Earnings per share
Interpretation:
Earnings per share for Hup Seng Industries Berhad decreasing from 2017 to 2019
indicates a company’s ability to produce net profits for common shareholder is lower.
Earning per share is the same as any profitability or market prospect ratio. Lower ratio
means the company not profitable and the company has less profits to distribute to its
shareholders. There are no preferred shares outstanding for Hup Seng Industries Berhad.
for weighted average shares outstanding during the year.
5.19
5.2
5.1
5
2017 2018 2019
Year