Analysing Company Accounts ABC Trading Sdn Bhd Profit & Loss Account Year Ending 30 June 1980

Sales Trading profit Long term interest payable Taxation Profit after tax Less: Ordinary dividends Profit retained for the year Balance Sheet As at 30 June 1980 Ordinary Share Capital Retained profit Shareholders funds Long term debt Capital employed Fixed assets Working capital Net Assets Return on Equity 500 300 800 200 1000 600 400 1000 (Return on Ordinary/common Shareholder's funds) RM'000 2000 210 30 180 80 100 60 40

Profit after tax/Ordinary shareholders' funds = 100/800 = 12.5% Return on Net assets Profit before long term interest and tax/Capital employed = 210/1000 = 21.0% (Earnings Before Interest and tax or EBIT) This measure indicates the performance achieved regardless of the method of financing. It is also the same as: Profit/Sales x Sales/Net Assets = Profit/Net Assets 210/2000 x 2000/1000 =210/1000 10.5% x 2.0 = 21.0% How a company can increase its return on net assets? * Increasing the profit (return) * Reducing the net assets employed (investment) How can the PBIT(line 36&37) be increased? * Increasing the revenue from sales * Reducing expenses for the same level of sales How can net assets employed be reduced?

* Reduce fixed assets * Reduce working capital How can fixed assets be reduced? * Better plant lay out, increase efficiency, good maintenance, rent premises How can working capital be reduced? * Reduce current assets like stock, debtors, cash or increase current liability.

Financial Ratio Analysis Precision Engineering Sdn Bhd Balance Sheet As at 30 June 1981 1981 Shareholders' Funds Ordinary RM1.00 shares Retained profit Long term loan Capital employed Fixed assets Factory & machinery less: Accumulated depreciation Current assets Stock Debtors Cash Less: Current liabilities Net Assets 30 15 45 10 55 1980 30 10 40 10 50

35 14 21 35 20 4 59 25 34 55

30 10 20 30 15 5 50 20 30 50

Profit & Loss Account Year Ending 30 June 1981 Sales Cost of sales Gross profit Less: Selling & Admin expenses Loan interest payable Profit before Tax Tax Profit after tax Ordinary dividend Retained profit 120 80 40 25 1 14 6 8 3 5 100 70 30 20 1 9 3 6 3 3

Performance Ratios

Return on equity: Return on Net assets: Profit Margin: Net Asset turnover:

Profit after tax/Shareholders' Funds = 8/45 = 17.8% PBIT / Net Assets = 15/55 = 27.3% PBIT / Sales = 15/120 = 12.5% Sales/Net assets = 120/55 = 2.18 times Sales/Fixed assets = 120/21 = 5.7 times Sales/Working Capital = 120/34 = 3.5 times

(profit available to the shareholders

Stock turnover: Debtor turnover: Debtors outstanding (days):

Sales/stock = 120/35 = 3.4 times Sales/Debtors = 120/20 = 6.0 times Debtors x 365 / Annual sales =20 x 365 /120 =61 days

Financial Status Ratios A measure of the company's ability to meet its liabilities: * Solvency ratios - dealing with long term liabilitis * liquidity ratios - dealing with short term liabilities Solvency Ratio Debt ratio: Debt equity ratio: Interest cover:

Long term debt/Capital employed = 10/55 = 18.2% Long term debt/Shareholders' funds = debt/equity = 10/45 = 22.2% PBIT/Loan interest payable +15/1 = 15 times

Liquidity ratios Current ratio: Current assets/Curent liabilities = 59/25 =2.36 times This ratio indicates to what extent short term assets are adequate to settle short term liabilities. Acid test: Liquid assets(debtors + cash) / Current liabilities = 24/25 = 0.96 times It excludes stock on the grounds that stock may take several months to turn into cash.

Stock Market Ratios Earnings per share: Price/earnings ratio; Profit after tax / No of ordinary shares issued = 8/30 = 26.7 cents Market price per share/Earnings per share = 300 cents/26.7 cents = 11.2 (assume makt price at 300 cents)

Dividend yield (net): Dividend per share/Market price per share = 10.0cents/300 cents = 3.3% This indicates the current income yield provided for an investor in relation to the present market price of the share. Dividend cover; earnings per share/Dividend per share = 26.7 cents/10.0 cents = 2.7 times This measures the number of times the actual dividend could have been paid out of the year's earnings.

Dividend payout ratio:

Dividends per share/ earnings per share = 10.0 cents/ 26.7 cents = 37.5%

(profit available to the shareholders)

5 = 0.96 times

(setiap satu share, keuntungan 26.7 cents)

26.7 cents = 11.2

300 cents = 3.3% e present market

0 cents = 2.7 times ut of the year's earnings.

6.7 cents = 37.5%