Financial Ratio Analysis

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1 Background information on Gamuda Berhad

Gamuda Bhd is one of the most prestigious construction companies in Malaysia. Founded in 1976 by Lin Yun Ling and incorporated that same year, the company made it to the main board of Bursa Malaysia in 1992. The Construction Industry Development Board (CIDB) graded the company as a ‘grade 7’ contractor. Grade 7 is thus far the highest grade of the CIDB grading system.

Gamuda Bhd focusses on three core businesses, namely; 1. Engineering and construction

2. Infrastructure concessions, and 3. Property development

Gamuda Bhd executed many major projects not only in Malaysia, but also in the entire Asian continent and the Middle East regions. Among the top most projects the company completed are:

 Stormwater Management and Road Tunnel (SMART) in Malaysia,  Kaohsiung Metropolitan Mass Rapid Transit (KMRT) in Taiwan,  New Doha International Airport (NDIA) in Qatar, and many more,  Durgapur and Panagarh-Palsit Expressways in India,

 Sitra Causeway Bridges in Bahrain, and many more

This report however, will focus on the financial health of Gamuda Bhd. Data will be obtained from the Gamuda Bhd annual report for the financial year ending 31st_{July 2013, to analyse some of the financial ratios of the company which are}

to be compared with the ratios of YTL Corporation Bhd.

2 Background information on YTL Corporation Berhad

YTL Corporation Bhd is one of the elite construction companies in Malaysia. Founded in 1955 by Tan Sri Dato’ Seri Yeoh Tiong Lay, hence the acronym for the company ‘YTL’, has been one of the largest companies listed by Bursa Malaysia. Over the past 19 years, the company had experienced a growth of over 55%, and in the process, served more than 12 million customers in over three continents. The Construction Industry Development Board (CIDB) graded

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the company as a ‘grade 7’ contractor. Grade 7 is thus far the highest grade of the CIDB grading system.

Moreover, due to the diversity of many construction companies today, YTL as a corporation has many subsidiaries under it. These subsidiaries include;

1. YTL Power international 2. YTL cement

3. YTL Land and development 4. YTL hotels

5. YTL e-solutions

6. Syarikat Pembenaan YTL, and

Apart from the above mentioned subsidiaries, YTL has made many other acquisitions not only in Malaysia, but also elsewhere abroad. This report however will only be focussing on Syarikat Pembenaan YTL which is the YTL flagship construction arm.

2.1.1 Syarikat Pembinaan YTL

YTL Corp's flagship construction arm is 100%-owned Syarikat Pembenaan Yeoh Tiong Lay Sdn Bhd (SPYTL), which has successfully completed approximately RM7.25 billion (US$2.1bn) worth of contracts on schedule and on budget (Ytl.com, 2014).

SPYTL is a "Class A" Malaysian Turnkey contractor, which has built up a strong reputation for high quality construction of buildings ranging from schools, army barracks, hospitals, hotels and high-rise office blocks and large scale infrastructure projects on time and on budget. It has won many awards for technological innovation in the building industry (Ytl.com, 2014).

2.2 Scope for the report

Haven chosen the two companies to be evaluated and compared per financial health, this report will focus mainly on the following ratios;

1. Quick ratio (QR) 2. Current ratio (CR) 3. Debt to equity ratio 4. After tax profit margin

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3 5. Current liabilities to net worth ratio 6. Current assets to total assets ratio 7. Assets to revenue ratio

8. Gross profit margin 9. Return on assets 10. Return on equity

Based on the above mentioned ratios, a comparison will be made between the two chosen companies so as to answer the following questions;

 Is the company able to meet its financial obligations on time?  How much is on hand that can be converted to cash to pay the bills  How effective are the operations of the firm

 Is the firm yielding favourable return or results?

 How profitable is a company in relation to the assets and the sales that made its profits possible.

All these questions will be adequately answered from each of the calculation made for each ratio. From that, all other conclusions and recommendations will be driven.

3 Financial statements of the companies (balance sheet and income

statements)

Financial statement can be defined as the end products of the accounting process which summaries the financial position and performance of a business concern in an organized manner (Ross and Williams, 2013). Financial Statements deliver a concise interpretation of the operations of the business. They serve as a vital medium in communicating accounting information to various users of accounts. The major components of a financial statement are:

1. Balance sheet, and 2. Income statement.

The two selected companies will be mainly evaluated and analysed based on the above mentioned components of financial statement. The following are the definition of both balance sheet and income statement

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3.1 Balance sheet

Balance Sheet is a financial statement that summarizes a company’s assets, liabilities and shareholders’ equity at a specific point in time. These three balance sheet segments give investors an idea as to what the company owns and owes, as well as the amount invested by the shareholders.

The balance sheet show: Assets = Liabilities + Shareholders’ Equity

A balance sheet thus, provides full information about a company’s assets, liabilities and shareholders’ equity.

Assets are possessions that a company owns that have value. This usually means they can either be sold or used by the construction company to make products or provide services that can be sold. Assets include physical property, such as plants, trucks, equipment and inventory. It also includes things that can’t be touched but nevertheless exist and have value, such as trademarks and patents. And cash itself is an asset. So are investments a company makes. Liabilities are amounts of money that a company owes to others. This can include all kinds of obligations, like money borrowed from a bank to launch a new product, money owed to suppliers for materials, payroll a company owes to its employees, taxes owed to the government. Liabilities also include obligations to provide goods or services to customers in the future.

Shareholders’ equity is sometimes called capital or net worth. It’s the money that would be left if a company sold all of its assets and paid off all of its liabilities. This leftover money belongs to the shareholders, or the owners, of the company.

The purpose of a Balance Sheet is to report the financial position of a company at a certain point in time. It is divided into two columns. The first column shows what the company owes (liabilities and net worth). The second shows what the company owns (assets) on the right. At the bottom of each list is the total of that column. As the name implies, the bottom line of the balance sheet must always “balance.” In other words, the total assets are equal to the total liabilities plus the net worth.

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The balance sheet is one of the most important pieces of financial information issued by a company. It is a snapshot of what a company owns and owes at the point in time. The income statement, on the other hand, shows how much revenue and profit a company has generated over a certain period.

3.2 Income statement

The income statement, also called an earnings statement or a profit and loss statement, is an accounting statement that matches a company’s revenues with its expenses over a period of time, usually a quarter or a year. The components of the income statement involve a company’s recognition of income and the expenses related to earning this income. Revenue less expenses results in a profit or loss (Tracy, 1999).

The income statement is a flow measure statement meaning that each value on an income statement represents the cumulative amount of that item through the given accounting period. Thus, the revenue on a first quarter income statement equals the cumulated amount of all sales during the first three months of the firm’s fiscal year. The revenue on the second quarter income statement equals the cumulated amount of all sales during the second three months of the firm’s fiscal year. The same applies to expenses and therefore profits.

Therefore, each of the company’s balance sheet and income statement can be found in ‘APPENDIX A’

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4 Financial ratio analysis

Ratio analysis is an integral and very important method or technique used for financial analysis. The purpose of financial analysis is to diagnose the information content in financial statements so as to judge the profitability, financial soundness of the firm and chalk out the way to improve existing performance (Gopal, 2008). This analysis is very important as it allows a company to measure its financial health or make a comparison with other market competitors.

Moreover, the use of financial analysis is not only limited to firms or companies. Other entities such as ‘Trade creditors’ use financial analysis to be sure that a construction company is in a position to pay their dues, in a short period of time. Suppliers of long-term debt also use this technique to ensure that the company would be able to generate sufficient liquid funds to pay the loan instalment and interest before they lend out money. Furthermore, shareholders and investors, employees and management, and government regulatory agencies also use financial for various reasons and purposes.

4.1 Types of financial ratios

As financial analysis deemed very important for any company’s survival, there are different types of ratios on which the financial health of a company could be analysed. These categorisation of ratios serve different purposes, depending on the purposes on which it is meant to be used. According to (Gopal, 2008), the following are the types of ratios used for financial analysis;

1. Liquidity ratios: they measure the firm’s ability to meet current obligations. 2. Leverage ratios: these ratios show the proportion of debt and equity in

financing the firm’s assets.

3. Activity ratios: they reflect the firm’s efficiency in utilising the assets, and 4. Profitability ratios: these ratios measure overall performance and

effectiveness of the firm.

However, for the purpose of these report, only a chunk of the above mentioned ratios are selected to be calculated for the comparison in financial health of the two selected companies. Therefore, as the definitions of each selected ratio will be given, its category will be clearly mentioned from the above mentioned types or category of ratios. The following are the definitions;

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7 4.1.1 Quick ratio (QR)

QR also known as the Acid test ratio, and also under the liquidity ratios, is the measurement of company’s ability to pay short term liabilities with cash or other near cash assets. Another view is that, provided creditors and debtors are paid at approximately the same time, a view might be made as to whether the business has sufficient liquid resources to meet its current liabilities (Wood and Sangster, 2005). The formula to calculate QR is:

(Cash + Account Receivable) / Current Liabilities

From the above definition, QR can thus be understood as a ratio that looks only at a company’s most liquid assets and compares them to the liabilities. This tests whether the construction company or any other business can meet its obligations even if adverse circumstances arise. It is important to notice that cash is the most liquid asset a company could have, and so therefore, a company should have a bit of a high QR ratio in order for the company to cater for its current liabilities. But too much cash shouldn’t also be encouraged in a company as that excess cash can be invested elsewhere to earn the company more profit.

4.1.2 Current ratio (CR)

Current ratio which also known as working capital ratio, falls under the category of liquidity ratios. It is defined as the link between current assets and current liabilities. In other words, CR measures company’s ability to use current assets to pay for current liabilities. Therefore, the formula to calculate current ratio is;

Current Assets / Current Liabilities

Moreover, the interpretation of current ratio can thus be: CR of 2:1 is considered satisfactory. The arbitrary ratio of 2:1 should not be, blindly, followed. Firms with less than 2:1 ratio may be meeting the liabilities, without difficulty, though firms with a ratio of more than 2:1 may be struggling to meet their obligations to pay (Gopal, 2008). Another interpretation can be, if the company’s CR is less than 1:1, then it is an indication that the company does not expect to receive enough revenue to pay its current liabilities. Therefore, the company needs to sell long term assets or raise cash through debt or shareholder-investor financing.

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8 4.1.3 Debt to equity ratio

This ratio falls under the leverage ratios. It is also known as External-Internal Equity ratio. It can be defined as the measurement that shows the relative claims of outsiders and owners against the firm’s assets (Gopal, 2008). The formula to calculate debt to equity ratio is;

Total Liabilities / Net Worth

Its main interpretation can be to indicate the extent to which debt financing has been used in business. The preferred range for this ratio should be less than 2:1. High debt to equity ratio can have a great impact of a company as one begins to wonder whether that company can service its debt. Gopal 2008, emphasise that high debt to equity ratio may be unfavourable as the firm may not be able to raise further borrowing, without paying higher interest, and accepting stringent conditions. He further stress that, the situation creates undue pressures and unfavourable conditions to the firm from the creditors. 4.1.4 After tax profit margin

This ratio fall under the profitability ratios. As the name implies, it can be defined as the percentage of revenue that becomes profit after taxation. The formula to calculate this ratio is;

Net profit after Tax / Revenues

The interpretation can thus be; after tax profit margin indicates the overall efficiency of a company’s management in construction, administering and selling the products. It also has a direct relationship with the return on investment. If net profit is high, with no change in investment, return on investment would be high. However, if there is fall in profits, return on investment would also go down (Gopal, 2008).

4.1.5 Gross profit margin

This ratio is also under profitability ratio. The only difference it has with after tax profit margin is that gross profit margin is the percentage of the revenue left after paying construction costs, rent, labour, material, maintenance, and equipment costs ‘before taxation’. The formula for calculating this ratio is;

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According to Gopal, 2008, a company can have high gross profit margin if:  High sales price, cost of goods remaining constant

 Lower cost of goods sold, sales price remaining constant

 A combination of factors in sales price and costs of different products, widening the margin. Etc.

Gopal, 2008 also asserts that, a company may have fall in gross profit margin if:

 Purchase of raw materials, at unfavourable rates

 Over investment and/or inefficient utilisation of plant and machinery, resulting in higher cost of production

 Excessive competition, compelling to sell at reduced price. 4.1.6 Current assets to total assets ratio

This is the measurement of how much current assets from the total assets do construction company have. In other words, how liquid a construction company’s assets are. The formula to calculate this ratio is;

Current Assets / Total Assets

Therefore, if a construction company have a high current assets to total assets ratio, then it can be translated as that company have most of its assets in form of current assets and would be very liquid. This ratio also falls under the liquidity ratios.

4.1.7 Assets to revenue ratio

This is the measurement of how efficiently a construction company is using its assets. The formula to calculate this ratio is;

Total Assets / Revenues

Assets are used to make sales. If the company manages the assets well, sales would more and likewise profits would be up. A company’s capacity to make sales show its operating performance. However, this ratio should be interpreted carefully. Between two firms, a firm having old assets, with lower depreciated book value of fixed assets, may generate more sales compared with a firm, with new fixed assets purchased recently (Gopal, 2008).

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10 4.1.8 Current liabilities to net worth ratio

This ratio indicates the amount due to creditors within a year as a percentage of owners' (or stockholder's) capital. In other words, it contrasts the funds that creditors temporarily are risking with the funds permanently invested by the owners. The smaller the net worth and the larger the liabilities, the less security for the creditors. The formula to calculate this ratio is thus;

Current Liabilities / Net Worth

So again, if the company’s current liabilities are greater than the company’s net worth, the short term creditors would have more capital at risk.

4.1.9 Return assets

The Return on Assets Ratio is the relationship between the profits of your company and your total assets. It is a measure of how effectively you utilized your company’s assets to make a profit. It is a common ratio used to compare how well you performed in relationship to your peers in your industry (Auerbach, 1995). The formula to calculate this ratio is;

Net profit after Tax / Total assets

Therefore, if a company is run efficiently, then that company will have a high return on assets. Likewise, if a company is run inefficiently, then that company will have a low return on assets. Moreover, a rise in return on assets may at first seem good, but turn out to be unimpressive if other companies in the construction industry have been posting higher returns and better enhancements in return on assets.

4.1.10 Return on equity

This is the 'final measure' of profitability to evaluate overall return. This ratio measures return relative to investment in the company. Put another way, Return on Net Worth indicates how well a company leverages the investment in it. The formula to calculate this ratio is;

Net profit after Tax / Equity

Furthermore, this ratio can simply tell the investor how well a company has used the capital from its shareholders to make profits.

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5 Financial ratio calculation for the two companies

The following calculations are to find out the various ratios mentioned earlier. However the ratios are to be categorised into two sections. The first section is for company A (YTL Corporation Bhd). The second section will be for company B (Gamuda Bhd). All data presented herein are obtain from the respective companies 2013 annual reports, specifically the financial statements which comprises the ‘income statement’ and ‘balance sheet’. Also some ratios will be expressed in percentage (%), while others would be expressed as in normal ratios e.g. 1:1 Therefore, the calculations are as follows:

5.1 SECTION ‘A’ YTL Corporation Bhd

5.1.1 Quick Ratio (QR)

Formula = (Cash +Account Receivable) / Current Liabilities Cash = 668,315

Account Receivable = 3,537,001 Current Liabilities = 8,109,706

Therefore, QR = (668,315 + 3,537,001) / 8,109,706 = 0.5:1 5.1.2 Current Ratio (CR)

Formula = Current Assets / Current Liabilities Current Assets = 20,719,379

Current Liabilities = 8,109,706

Therefore, CR = 20,719,379 / 8,109,706 = 2.55:1 5.1.3 Debt to equity ratio

Formula = Total Liabilities / Net Worth Total Liabilities = 38,061749

Net Worth = 15,557,745

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12 5.1.4 After tax profit margin

Formula = Net profit after tax / Revenues Net profit after tax = 1,845,782

Revenue = 19,972,948

Therefore, 1,845,782 / 19,972,948 = 0.09 or 9 % 5.1.5 Gross profit margin

Formula = Gross profit / Revenue Gross profit = 4,156,379

Revenue = 19,972,948

Therefore, 4,156,379 / 19,972,948 = 0.2 or 20 % 5.1.6 Current assets to total assets ratio

Formula = Current Assets / Total Assets Current Assets = 20,719,379

Total Assets = 53,619,494

Therefore, 20,719,379 / 53,619,494 = 0.38:1 5.1.7 Assets to revenue ratio

Formula = Total assets / Revenues Total Assets = 53,619,494

Revenue = 19,972,948

Therefore, 53,619,494 / 19,972,948 = 2.7 or 27 % 5.1.8 Current liabilities to net worth ratio

Formula = Current Liabilities / Net Worth Current Liabilities = 8,109,706

Net Worth = 15,557,745

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13 5.1.9 Return on assets

Formula = Net profit after tax / Total Assets Net profit after tax = 1,845,782

Therefore, 1,845,782 / 53,619,494 = 0.3 or 3% 5.1.10 Return on equity

Formula = Net profit after tax / Equity Net profit after tax = 1,845,782

Equity = 15,557,745

Therefore, 1,845,782 / 15,557,745 = 0.1 or 10 %

5.2 Section ‘B’ Gamuda Bhd

5.2.1 Quick Ratio (QR)

Formula = (Cash +Account Receivable) / Current Liabilities Cash = 1,230,210

Account Receivable = 1,915,986 Current Liabilities = 2,480,759

Therefore QR = (1,230,210 + 1,915,986) / 2,480,759 = 1.2:1 5.2.2 Current Ratio (CR)

Formula = Current Assets / Current Liabilities Current Assets = 5,716,548

Current Liabilities = 2,480,759

Therefore, CR = 5,716,548 / 2,480,759 = 2.3:1 5.2.3 Debt to equity ratio

Formula = Total Liabilities / Net Worth Total Liabilities = 4,702,317

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Therefore, debt to equity ratio = 4,702,317 / 5,106,848 = 0.9:1 5.2.4 After tax profit margin

Formula = Net profit after tax / Revenues Net profit after tax = 550,059

Revenues = 3,883,120

Therefore, 550,059 / 3,883,120 = 0.1 or 10% 5.2.5 Gross profit margin

Formula = Gross profit / Revenue Gross profit = 512,187

Therefore, 512,187 / 3,883,120 = 0.1 or 10 % 5.2.6 Current assets to total assets ratio

Formula = Current Assets / Total Assets Current Assets = 5,716,548

Therefore, 5,716,548 / 9,809,165 = 0.6:1 5.2.7 Assets to revenue ratio

Formula = Total assets / Revenues Total Assets = 9,809,165

Therefore, 9,809,165 / 3,883,120 = 2.5 or 25% 5.2.8 Current liabilities to net worth ratio

Formula = Current Liabilities / Net Worth Current Liabilities = 2,480,759

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15 Therefore, 2,480,759 / 5,106,848 = 0.4:1 5.2.9 Return on assets

Formula = Net profit after tax / Total Assets Net profit after tax = 550,059

Total Assets =

Therefore, 550,059 / 9,809,165 = 0.1 or 10% 5.2.10 Return on equity

Formula = Net profit after tax / Equity Net profit after tax = 550,059

Equity = 5,106,848

Therefore, 550,059 / 5,106,848 = 0.1 or 10%

6 Comparison of financial health between the two companies

Having calculated all the financial ratios that are mentioned in the scope for this report, with all the variations of ratios seen from the calculations made for the two selected CIDB grade 7 construction companies, at this stage, it is now deemed essential that, a comparison be made, to evaluate the financial health for the two companies, so as to see which company performed best in the financial year 2013. The comparison however, is only limited to the ratios calculated earlier.

However, before the comparisons are drawn, it is important to see clearly, in table format, all the final ratios calculated for the two companies, and the required range and average at which each ratio is considered financially healthy. Table 1 illustrate all the findings of the calculate ratios for the two companies and the range and average requirement for each ratio.

Table 1. Calculated ratios for the two companies

S/N Ratio YTL Gamuda Average Range

1. Quick Ratio (QR) 0.5:1 1.2:1 1.5:1 3.1:1 to 1.2:1 2. Current Ratio

(CR)

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16 3. Debt to equity

ratio

2.4:1 0.9:1 1.3:1 0.5:1 to 2.7:1

4. After tax profit margin 9% 10% 2.2% 8.7% to 0.6% 5. Gross profit margin 20% 10% 17% - 6. Current assets to total asset ratio

0.38:1 0.6:1 - 0.70:1 and 0.80:1 7. Assets to revenue ratio 27% 25% 29% 19% to 55% 8. Current liabilities to net worth ratio

0.5:1 0.4:1 1.12:1 0.32:1 to 2.4:1

9. Return on assets 3% 6% 6.5% 21.7% to 2.0%

10. Return on equity 10% 10% 16.7% 53% to 5.4%

From the above table, difference in ratio can be seen clearly between the two companies. Therefore, based on the averages and range for the ratios indicated in the table above, a comparison can be drawn in Table 2 as thus;

Table 2: Comparison for the two companies

S/N Ratios YTL Corporation Bhd Gamuda Bhd Comments 1. Quick

Ratio (QR)

YTL with QR of 0.5:1 means there is RM 0.5 in quick assets to pay every RM 1.00 of current liabilities. This however

should not be

considered good as a company is considered liquid when it has a QR of 1:1 or greater.

Gamuda has a QR of 1.2:1. Which means there is RM 1.2 in quick assets to pay every RM 1.00 of current liabilities. This is good because Gamuda’s is even greater than the required minimum of ratio 1:1

Gamuda Bhd can be considered more liquid than YTL. But since the range is up to 3.1:1, then there is also a room for Gamuda to increase its QR so as to become even more liquid. As for YTL, they might need to convert inventory and other current and long term assets to cash or raise cash through debt so as to meet the required range.

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17 2. Curre nt Ratio (CR) YTL with CR of 2.55:1 means there is 2.55 in current assets to pay every RM 1.00 in current liabilities. The required range is between 2.1 to 0.6. YTL therefore is a bit higher than the required range but also should be considered good since YTL can pay its current liabilities.

Gamuda with CR of 2.3:1 it has 2.3 current assets to pay every RM 1.00 of its current liabilities. Since the required range is between 2.1 to 0.6, and Gamuda has 2.3, this can be considered good because the company can still be able to pay for its current liabilities.

Both companies do not meet the required range of 2.1 to 0.6. Their CR’s are to be considered good since they can both pay for their current liabilities. However, each of the companies should strive to attain the required CR range in order to be more secured and avoid risk of not being able to pay for their current liabilities.

3. Debt to equity

ratio

YTL with debt to equity ratio of 2.4:1 means that the creditors have put RM 2.4 in the business for every RM 1.00 the owners have put in. The range is between 0.5 and 2.7. YTL’s ratio of

2.4 should be

considered good as it falls within the range. But also it is important to notice that YTL’s ratio is above the average mark of 1.3. Therefore, YTL should be cautious as they can easily go beyond the border line of 2.7 which will let one begins to wonder

Gamuda Bhd has a debt to equity ratio of 0.9:1. Meaning that, creditors have put RM 0.9 in the business for every RM 1.00 the owners have put in. The range is between 0.5 and 2.7. Gamuda’s ratio is considered very good as it falls within required range, and just slightly below average of 1.3. Therefore, this can be a strong indication for creditors that the company can service its debt.

Gamuda takes the age here. As for YTL, even though they are within the required range, they indeed need to be more cautious so as to give creditors more confidence.

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18 whether the company

can service its debt. 4. After

tax profit margi

n

YTL with after tax profit margin of 9% means that 9% means that 9% of its revenue becomes profit after deduction of tax. This is good because the company performed very well in 2013 as it is within the required range.

Gamuda have a 10% after tax profit margin. Meaning that, after the deduction of tax, 10% of its revenue becomes profit. This indicates that Gamuda performed very well in the financial year 2013.

Both the companies performed well in the financial year 2013, although Gamuda earns a bit higher, but all are considered generally good.

5. Gross profit margi

n

YTL with 20% gross profit margin mean that for every RM 1.00 of project financing, there is RM 0.20 in gross profit. This is very good as it is just above the average line of 17%

Gamuda has 10% gross profit margin. Meaning that for every RM 1.00 of project financing, there is RM 0.10 in gross profit. However this should be considered as good as it is below the 17%

average mark.

Therefore, the company should look for ways to increase its profit margin.

YTL performed better here. As for Gamuda, the company according to Gopal, 2008, should have high gross profit margin if high sales price, cost of goods remaining constant. Also lower cost of goods sold, sales price remaining constant. And finally a combination of factors in sales price and costs of different products, widening the margin. Etc. 6. Curre nt assets to total asset ratio

YTL has current assets to total assets ratio of 0.38:1. This is however lower than the required range. Therefore most of YTL’s assets are not in current assets form, and

Gamuda, with current assets to total assets ratio of 0.6:1 comes very close to the required range of 0.7 and 0.8. Meaning that, most Gamuda’s assets are in

Gamuda is far more liquid than YTL. Therefore, YTL should consider selling some of its long-term assets in order to gain cash which is the most liquid asset, and thus increasing its liquidity.

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19 so therefore the

company is not considered very liquid.

form of current assets

and therefore

considered very liquid. 7. Assets

to reven

ue ratio

YTL with assets to revenue ratio of 27% means that the company is efficiently using its assets. This is because the ratio falls within the required range of 19% to 55%.

Gamuda has 25% of assets to revenue ratio. Meaning the company is efficiently using its assets as the ratio falls within the required range and just below average.

Both companies are efficiently using their assets.

8. Curre nt liabiliti es to net worth ratio

YTL has a current liabilities to net worth ratio of 0.5:1. Since this ratio falls within the required range of 0.32 to 2.4, then short term creditors can easily extend credit to the company without taking any risk.

Gamuda has a current liabilities to net worth ratio of 0.4:1. Since this ratio falls within the required range of 0.32 to 2.4, then short term creditors can easily extend credit to the company without taking any risk.

Both companies meet the requirement on which short term creditors should put their basis on towards extending each of the company’s credit. Therefore, both companies have greater net worth than their respective current liabilities.

9. Return on assets

YTL has a 3% of return on assets. Meaning that there is RM 0.30 in profit for every RM 1.00 in assets employed in the business. And since this falls within the required range of 21.7% to 2.0%, it means the company is efficiently using its assets. However, there is a room for

Gamuda has a 6% of return on assets. Meaning that there is RM 0.60 in profit for every RM 1.00 in assets employed in the business. And since this falls within the required range of 21.7% to 2.0%, it means the company is efficiently using its assets. Therefore this is

Both companies are efficient in using their assets. However, Gamuda Bhd seems better in efficiency. YTL should improve further as it ratio is below average. However it is considered good anyway.

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20 improvement since the

average is at 6.5%.

considered very good as it is very well on top of the average mark of 6.5%

10. Return on equity

YTL has a 10% of return on equity, meaning that there is RM 0.10 in profit for every RM 1.00 in equity invested in the business. 53% to 5.4% is the required range, with average of 16.7%. Therefore this is to be considered good as there is a return on investment for shareholder. However, the company should try increase their return on equity at least to the average level.

Gamuda has a 10% of return on equity, meaning that there is RM 0.10 in profit for every RM 1.00 in equity invested in the business. 53% to 5.4% is the required range, with average of 16.7%. Therefore this is to be considered good as there is a return on investment for shareholder. However, the company should try increase their return on equity at least to the average level.

Both companies have the same percentage of return on equity. As though 10% is considered good, the two companies should try increase return on equity and at least meet the average level or maybe even higher.

Therefore, from the comparison made, it is easier and clearer now for one to understand and see the differences between the two giant construction companies. The comments made however, are simply an understanding, and in way, a judgement on each of the ratio comparison made.

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7 Advantages and limitations of financial statement analysis

Financial statement analysis or simply financial ratio analysis is an important technique to measure the financial health of a company, or making a comparison between two or more companies to analyse the financial health of the companies to be financially evaluated and analysed. As important as this might seem, this technique has so many advantages as we all can agree on. However, it also comes along with so many limitations. These limitations sometimes can hinder the investor or any other user of financial ratio analysis from being accurate in analysing the financial health of a particular company. Therefore, this report will now describe the advantages of financial ratio, and its limitations alike.

7.1 Advantages of Financial statement analysis

Ratio analysis is necessary to establish the relationship between two accounting figures to highlight the significant information to the management or users who can analyse the business situation and to monitor their performance in a meaningful way (Periasamy, 2010). The following are the advantages of ratio analysis as described by Periasamy, 2010:

1. It facilitates the accounting information to be summarized and simplified in a required form.

2. It highlights the inter-relationship between the facts and figures of various segments of business.

3. Ratio analysis helps to remove all type of wastages and inefficiencies. 4. It provides necessary information to the management to take prompt

decision relating to business.

5. It helps to the management for effectively discharge its functions such as planning, organizing, controlling, directing and forecasting.

6. Ratio analysis reveals profitable and unprofitable activities. Thus, the management is able to concentrate on unprofitable activities and consider to improve the efficiency.

7. Ratio analysis is used as a measuring rod for effective control of performance of business activities.

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8. Ratios are an effective means of communication and informing about financial soundness made by the business concern to the proprietors, investors, creditors and other parties.

9. Ratio analysis is an effective tool which is used for measuring the operating results of the enterprises.

10. It facilitates control over the operation as well as resources of the business.

11. Effective co-operation can be achieved through ratio analysis.

12. Ratio analysis provides all assistance to the management to fix responsibilities.

13. Ratio analysis helps to determine the performance of liquidity, profitability and solvency position of the business concern.

7.2 Limitations of financial statement analysis

Ratio analysis is a useful tool to raise relevant questions on a number of managerial issues. It provides clues to investigate those issues, in detail, further (Gopal, 2008). Therefore, ratios by themselves mean nothing as they have severe limitations. While using the ratios, care has to be taken in respect of the following. Gopal, 2008 describes the limitations as follows:

1. Absence of identical situations: Ratios are useful in judging the efficiency of business, only when they are compared with the past results of the firm, with identical circumstances, or with the results of similar businesses. It is difficult to obtain identical situations for different firms. Circumstances do not remain the same, even, for the same firm between two different periods. Comparison becomes difficult due to lack of uniformity of situation between two companies.

2. Change in accounting policies: Management has a choice about the accounting policies. The management of different companies may adopt different accounting policies regarding valuation of inventories, depreciation, research and development expenditure and treatment of deferred revenue expenditure etc. The differences between the definitions of items in the balance sheet and profit and loss statement make the interpretation of the ratios difficult. Comparison would be meaningful and valuable if their base is similar.

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3. Based on historical data: The ratios are calculated from past financial statements, and thus no indicators of future. Such ratios may provide information about the past. But, for forecasting the future, there are many factors that may change, in future. Market conditions and management policies may not remain the same, as they were earlier.

4. Qualitative factors are ignored: Ratios are expressed in quantitative form only. Qualitative factors are ignored. A high current ratio may not guarantee liquidity, as current assets may be high due to inclusion of obsolete inventory and non-paying debtors.

5. Ratios alone are not adequate: Ratios are means of financial analysis and they are not end in themselves. They are indicators. They cannot be taken as final regarding good or bad financial position of the business. 6. Over use could be dangerous: Over use of ratios as controls on

managers could be dangerous. If too much reliance is placed on ratios, management may concentrate in improving the ratios, rather than dealing with significant issues. For example, reducing assets rather than increasing profits can improve the return on capital employed.

7. Window Dressing: The term ‘window dressing’ means manipulation of accounts in a way so as to conceal the actual facts and present the financial statements, in a way, to show better position than what actually it is. For example, a high current ratio is considered as an indicator of satisfactory liquidity position. To show an impressive current ratio, firm may postpone credit purchases.

8. Problems of Price level Changes: Financial analysis based on accounting ratios will give misleading results, if effects of change in price level are not taken into account. For example, two companies that have set up plant and machinery in two different periods, with a long gap, may give misleading results. Firm that has purchased the plant and machinery, very earlier, would have lower amount towards depreciation when compared with the firm that has set up the machinery, quite later. So, the operating results of both the firms vary substantially. The financial statements of the two firms cannot be compared, without making suitable changes to the price level changes.

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9. No fixed Standards: No fixed standards can be laid down for ratios. Though current ratio 2:1 is normally required, firms those enjoy adequate arrangements with banks to provide additional credit, as and when needed, may be able to manage with lesser current ratio. It is, therefore, necessary to avoid any rule of thumb

8 Recommendations/suggestions to improve the financial

performance of the companies

The recommendation as already made in the comparison section of this report based on each ratio are as follows:

1. QR: Gamuda Bhd can be considered more liquid than YTL. But since the range is up to 3.1:1, then there is also a room for Gamuda to increase its QR so as to become even more liquid. As for YTL, they might need to convert inventory and other current and long term assets to cash or raise cash through debt so as to meet the required range.

2. CR: Both companies do not meet the required range of 2.1 to 0.6. Their CR’s are to be considered good since they can both pay for their current liabilities. However, each of the companies should strive to attain the required CR range in order to be more secured and avoid risk of not being able to pay for their current liabilities.

3. Debt to equity ratio: Gamuda takes the age here. As for YTL, even though they are within the required range, they indeed need to be more cautious so as to give creditors more confidence.

4. After tax profit margin: Both the companies performed well in the financial year 2013, although Gamuda earns a bit higher, but all are considered generally good.

5. Gross profit margin: YTL performed better here. As for Gamuda, the company according to Gopal, 2008, should have high gross profit margin if high sales price, cost of goods remaining constant. Also lower cost of goods sold, sales price remaining constant. And finally a combination of factors in sales price and costs of different products, widening the margin. Etc.

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6. Current assets to total assets ratio: Gamuda is far more liquid than YTL. Therefore, YTL should consider selling some of its long-term assets in order to gain cash which is the most liquid asset, and thus increasing its liquidity. 7. Assets to revenue ratio: Both companies are efficiently using their assets. 8. Current liabilities to net worth ratio: Both companies meet the requirement on

which short term creditors should put their basis on towards extending each of the company’s credit. Therefore, both companies have greater net worth than their respective current liabilities.

9. Return on assets: Both companies are efficient in using their assets. However, Gamuda Bhd seems better in efficiency. YTL should improve further as it ratio is below average. However it is considered good anyway. 10. Return on equity: Both companies have the same percentage of return on

equity. As though 10% is considered good, the two companies should try increase return on equity and at least meet the average level or maybe even higher.

9 Conclusion

In conclusion, it is important to note that the use of financial ratios is a time tested method of analysing a business. Financial ratio analysis is neither sophisticated nor intricate. It is just a simple comparison between specific pieces of information obtained from the company’s balance sheet and income statement.

Moreover, Ratios are meaningless, if detached from the details from which they are derived. Ratios are based on the data of the company concerned. So, ratios are relevant to that particular company only, which are based on the circumstances and policies of that company. If those ratios are compared to any other company, where the circumstances and policies adopted are totally different, conclusions drawn based on the divergent data would be meaningless. It may, therefore, be concluded that the ratio analysis, if done mechanically, is not only misleading but, equally, dangerous (Gopal, 2008).

To say a final word on ratio analysis, conclusions on study of single ratios, in isolation, are dangerous.

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Financial Ratio Analysis

Table of Contents

1 Background information on Gamuda Berhad

2 Background information on YTL Corporation Berhad

2.2 Scope for the report

3 Financial statements of the companies (balance sheet and income

statements)

3.1 Balance sheet

3.2 Income statement

4 Financial ratio analysis

4.1 Types of financial ratios

5 Financial ratio calculation for the two companies

5.1 SECTION ‘A’ YTL Corporation Bhd

5.2 Section ‘B’ Gamuda Bhd

6 Comparison of financial health between the two companies

7 Advantages and limitations of financial statement analysis

7.1 Advantages of Financial statement analysis

7.2 Limitations of financial statement analysis

8 Recommendations/suggestions to improve the financial

performance of the companies

9 Conclusion

10 Reference

Auerbach, A. 1995. Healthy Business Guide, Zions First National Bank Cash

Flow Analysis. 5th ed. Utah: Financial Proformers, Inc.

Gopal, C. C. R. 2008. Financial management. New Delhi: New Age

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lincoln indicators. 2014. Standing up for shareholders. [online] Available at:

http://www.lincolnindicators.com.au/content/filestore/research/top-15-financial-ratios.pdf [Accessed: 23 Mar 2014].

Periasamy, P. 2010. A Textbook of Financial Cost and Management

Accounting. New Delhi: Himalaya Pub. House.

Ross, A. and Williams, P. 2013. Financial management in construction

contracting. Chichester, West Sussex: Wiley-Blackwell.

Tracy, J. A. 1999. How to read a financial report. New York: Wiley.

Van Horne, J. C. and Wachowicz, J. M. 2009. Fundamentals of financial

management =. Bei jing: Qing hua ta xue chu ban she.

Wood, F. and Sangster, A. 2005. Frank Wood's business accounting 1. Harlow,

England: FT/Prentice Hall.