Financial Ratio Analysis

Table of Contents 1 Background information on Gamuda Berhad ...................................................... 1

2 Background information on YTL Corporation Berhad .......................................... 1

2.1.1 Syarikat Pembinaan YTL ........................................................................ 2

2.2 Scope for the report ...................................................................................... 2

3 Financial statements of the companies (balance sheet and income statements) 3

3.1 Balance sheet ............................................................................................... 4

3.2 Income statement .......................................................................................... 5

4 Financial ratio analysis ........................................................................................ 6

4.1 Types of financial ratios ................................................................................ 6

4.1.1 Quick ratio (QR) ...................................................................................... 7

4.1.2 Current ratio (CR) ................................................................................... 7

4.1.3 Debt to equity ratio ................................................................................. 8

4.1.4 After tax profit margin ............................................................................. 8

4.1.5 Gross profit margin ................................................................................. 8

4.1.6 Current assets to total assets ratio ......................................................... 9

4.1.7 Assets to revenue ratio ........................................................................... 9

4.1.8 Current liabilities to net worth ratio ....................................................... 10

4.1.9 Return assets ....................................................................................... 10

4.1.10 Return on equity ................................................................................ 10

5 Financial ratio calculation for the two companies .............................................. 11

5.1 SECTION ‘A’ YTL Corporation Bhd ......................................................... 11

5.1.1 Quick Ratio (QR) .................................................................................. 11

5.1.2 Current Ratio (CR) ................................................................................ 11

5.1.3 Debt to equity ratio ............................................................................... 11

5.1.4 After tax profit margin ........................................................................... 12

5.1.5 Gross profit margin ............................................................................... 12

5.1.6 Current assets to total assets ratio ....................................................... 12

5.1.7 Assets to revenue ratio ......................................................................... 12


5.1.9 Return on assets .................................................................................. 13

5.1.10 Return on equity ................................................................................ 13

5.2 Section ‘B’ Gamuda Bhd .......................................................................... 13

5.2.1 Quick Ratio (QR) .................................................................................. 13

5.2.2 Current Ratio (CR) ................................................................................ 13

5.2.3 Debt to equity ratio ............................................................................... 13

5.2.4 After tax profit margin ........................................................................... 14

5.2.5 Gross profit margin ............................................................................... 14

5.2.6 Current assets to total assets ratio ....................................................... 14

5.2.7 Assets to revenue ratio ......................................................................... 14


5.2.9 Return on assets .................................................................................. 15

5.2.10 Return on equity ................................................................................ 15

6 Comparison of financial health between the two companies ............................. 15

7 Advantages and limitations of financial statement analysis ............................... 21

7.1 Advantages of Financial statement analysis ............................................... 21

7.2 Limitations of financial statement analysis .................................................. 22

8 Recommendations/suggestions to improve the financial performance of the

companies ................................................................................................................ 24

9 Conclusion ........................................................................................................ 25

10 Reference ....................................................................................................... 26

1

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

2

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

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

4

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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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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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;

Gross profit / Revenue

9

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).

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


Therefore, CR = 20,719,379 / 8,109,706 = 2.55:1


Formula = Total Liabilities / Net Worth

Total Liabilities = 38,061749

Net Worth = 15,557,745

Therefore, 38,061749 / 15,557,745 = 2.4:1

12


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 %


Formula = Gross profit / Revenue

Gross profit = 4,156,379

Revenue = 19,972,948

Therefore, 4,156,379 / 19,972,948 = 0.2 or 20 %


Formula = Current Assets / Total Assets


Total Assets = 53,619,494

Therefore, 20,719,379 / 53,619,494 = 0.38:1


Formula = Total assets / Revenues


Revenue = 19,972,948

Therefore, 53,619,494 / 19,972,948 = 2.7 or 27 %


Formula = Current Liabilities / Net Worth


Net Worth = 15,557,745

Therefore, 8,109,706 / 15,557,745 = 0.5:1

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5.1.9 Return on assets

Formula = Net profit after tax / Total Assets



Therefore, 1,845,782 / 53,619,494 = 0.3 or 3%


Formula = Net profit after tax / Equity


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


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



Therefore, CR = 5,716,548 / 2,480,759 = 2.3:1


Formula = Total Liabilities / Net Worth

Total Liabilities = 4,702,317

Net Worth = 5,106,848

14

Therefore, debt to equity ratio = 4,702,317 / 5,106,848 = 0.9:1


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%


Formula = Gross profit / Revenue

Gross profit = 512,187


Therefore, 512,187 / 3,883,120 = 0.1 or 10 %


Formula = Current Assets / Total Assets



Therefore, 5,716,548 / 9,809,165 = 0.6:1


Formula = Total assets / Revenues



Therefore, 9,809,165 / 3,883,120 = 2.5 or 25%


Formula = Current Liabilities / Net Worth


Net Worth = 5,106,848

15

Therefore, 2,480,759 / 5,106,848 = 0.4:1

5.2.9 Return on assets

Formula = Net profit after tax / Total Assets


Total Assets =

Therefore, 550,059 / 9,809,165 = 0.1 or 10%


Formula = Net profit after tax / Equity


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)

2.55:1 2.3:1 1.2:1 2.1:1 to 0.6:1

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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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.

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.

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


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


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.

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.

21

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.

22

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.

23

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.

24

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.

25

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.

26

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

International (P) Ltd., Publishers.

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.

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