Ratio Analysis 2

2. Ratio Analysis

Definition: expresses the relationship among selected items of financial statement data. Financial ratio classified into three categories, liquidity ratio, profitability ratio and solvency ratio.

Current Ratio

A liquidity ratio that measures a company’s ability to pay short term obligations.

Current Ratio 2010 = Current AssetsCurrent Liabilities

= 35,343,809 35,774,652

= 0.99= 0.99 : 1

The ratio of 0.99: 1 means that for every ringgit of current liabilities, Hwa Tai has RM0.99 of current assets.


= 36,746,539 37,634,489

= 0.98= 0.98 : 1

The ratio of 0.98 : 1 means that for every ringgit of current liabilities, Hwa Tai has RM0.98 of current assets.


= 35,795,328 45,486,169

= 0.79= 0.79 : 1

The ratio of 0.79 : 1 means that for every ringgit of current liabilities, Hwa Tai has RM0.79 of current assets.

2010 2009 2008

0.99 0.98

0.790.80.83000000000000

10.65000000000000

2

Current Ratio and Acid Test RatioCurrent Ratio Acid Test Ratio Series 3

Based on the output of current ratio, for every three year, Hwa Tai ratio is under 1.

Because of this matter, Hwa Tai would be unable to pay off its obligations. This data

shows that the company is not in a good financial health but it does not mean that Hwa

Tai will go bankrupt.

Acid Test ratio

This indicator to determine whether a firm has enough short-term assets to cover its

immediate liabilities without selling inventory. The acid-test ratio is far more strenuous

than the working capital ratio, primarily because the working capital ratio allows for the

inclusion of inventory assets.

Acid Test Ratio 2010 = Cast + Short Term Investment + Receivables (Net)Current Liabilities

= 28,530,006 35,774,652

= 0.80= 0.80 :1

http://www.investopedia.com/terms/a/acidtest.asp


= 31,403,261 37,634,489

= 0.83= 0.83 :1


= 29,411,898 45,486,169

= 0.65= 0.65 : 1

Acid test ratio for the respective three years shows that Hwa Tai always gain less than 1 ratio. Its

shows that this company cannot pay their current liabilities and should be looked at with extreme

caution. This acid test ratio is much lower compare to current ratio, it means the current assets

for this company in highly dependent on inventory.

Receivable Turnover

This ratio measure used to quantify a firm's effectiveness in extending credit as well as collecting

debts. The receivables turnover ratio is an activity ratio, measuring how efficiently a firm uses its

assets.

Receivables Turnover 2010 = Net Credit Sales

Average Net Receivables

= 77,016,224 25,424,055

= 3.03= 3.03 times

Average collection period 2010 = 365 days

Receiveables Turnover= 365

3.03= 120.49= every 120 days

A high ratio implies either Hwa Tai operates on a cash basis or that its extension of credit and

collection of accounts receivable is efficient. Based on the output, Hwa Tai receivables are

collected on average every 120 days.

Receivables Turnover 2009 = Net Credit SalesAverage Net Receivables

= 72,125,922 27724051

= 2.60 = 2.6 times



2.60 = 140.30= 140 days

Based on the output, Hwa Tai receivables are collected on average every 140 days.

Receivables Turnover 2008 = Net Credit SalesAverage Net Receivables

= 80,245,698 29129452.5

= 2.75 = 2.75 times



2.75 = 132.50= 132 days

Based on the output, Hwa Tai receivables are collected on average every 132 days. From the data

in the three respective years, Hwa Tai took mostly more than 100 days to collect debts from the

creditor and it will cause problem in running the business. Furthermore, this matter will decrease

the confidence of the investor to invest in this company.

Inventory Turnover

This ration showing how many times a company's inventory is sold and replaced over a period

Inventory Turnover 2010 = Cost of Goods SoldAverage Inventory

= (54,393,416) 5,735,449

= -9.489.48 times

Days in Inventory 2010 = 365 daysInventory Turnover

= 365-9.48

= -38.49= 38.49 days

In 2010, 9.48 times Hwa Tai inventory is sold and replaced over a period. High inventory levels

are seems unhealthy because it represents an investment with a rate of return of zero and it will

give trouble to the company if the prices begin to fall.


= (49,769,251)5684149

= (8.76)= 8.76 times


= 365(8.76)

= -41.69= 41.69 days


= (63,838,577)5855317.5

= (10.90)= 10.90times


= 365 (10.90)

= -33.48= 33.48 days

Profit Margin

This probability ratio measures how much out of every ringgit of sales a company actually keeps in earnings.

Profit Margin 2010 = Net IncomeNet Sales

= 385,127 77,016,224

= 0.01= 0.50= 0.50%


= 2,051,989 72,125,922

= 0.03= 2.85= 2.85%


= 415,178 80,245,698

= 0.01= 0.52= 0.52%

Higher profit margin indicates a more profitable company that has better control over its costs

compared to its competitors. Based on the output in 2010, Hwa Tai got 0.50% profit margin. It

means that the company has a net income of RM0.005 for each ringgit of sales. And this number

did not show the good performance during 2010. Same goes to 2008, the company only has a net

income of RM0.0052 for each ringgit of sales. However, this company had little increased their

profit margin in 2009 which the company has a net income of RM0.0285 for each ringgit of

sales.

Asset Turnover

It measures the amount of sales generated for every ringgit’s worth of assets.

Asset Turnover 2010 = Net SalesAverage Assets

= 77,016,224

56502750.5= 1.363052654= 1 times


= 72,125,922

59901160.5= 1.20 = 1 times


= 80,245,698

63626216.5= 1.26 = 1 times

Asset turnover measures a firm's efficiency at using its assets in generating sales or revenue. The

higher the number the better. It also indicates pricing strategy, companies with low profit

margins tend to have high asset turnover, while those with high profit margins have low asset

turnover. But for Hwa Tai, they experienced low profit margin but still low in asset turnover.

Return on Assets

This indicator show how profitable a company is relative to its total assets. ROA gives an idea as

to how efficient management is at using its assets to generate earnings. It also known as return on

investment.

Return on Assets 2010 = Net IncomeAverage Assets

= 385,127 56502750.5

= 0.01 = 0.68 = 0.68%


= 2,051,989 59901160.5

= 0.03 = 3.43 = 3.43%


= 415,178 63626216.5

= 0.01 = 0.65 = 0.65%

ROA will tells company what earnings were generated from invested capital (assets). ROA for

public companies can vary substantially and will be highly dependent on the industry. The ROA

figure gives investors an idea of how effectively the company is converting the money it has to

invest into net income. The higher the ROA number, the better, because the company is earning

more money on less investment. From the outcome from three respective years, Hwa Thai does

not show the good ROA because they only got 0.68% for 2010, 3.43% in 2009 and 0.65% in

2008. We can conclude that, Hwa Tai earning less money on high investment.

Return on Common Stockholders’ Equity

This ratio show how many ringgit of net income the company earned for each ringgit invested by

the owner.

Return on common 2010 = Net Income - Preffered DividendsStockholder's Equity Average Common Stockholders' Equity

= 385,127 40042400

= 0.01 = 0.96 = 0.96%


= 2,051,989 40042400

= 0.05 = 5.12 = 5.12%


= 415,178 40042400

= 0.01 = 1.04 = 1.04%

From the result, it seems that in 2009, the owner of the company gain more profit compared to

year 2010 and 2008.

2010 2009 20080.00%

200.00%

400.00%

600.00%

800.00%

1000.00%

1200.00%

Return on Common Stockholders' Equity

Column2

Perc

enta

ge

From the graph, it shows that this company is not doing well because the percentages keep on

fluctuating from three respective years.

Earnings Per Share

The portion of a company's profit allocated to each outstanding share of common stock. Earnings

per share serve as an indicator of a company's profitability. Earnings per share are generally

considered to be the single most important variable in determining a share's price. It is also a

major component used to calculate the price-to-earnings valuation ratio. From the company’s

annual report, it already stated that the Earning Per share for Hwa Tai company’s is RM1 for

2010, RM5 for 2009 and RM1 for 2008. From here we can conclude that, Hwa tai shows

increasing rate during 2009.

Price Earnings Ratio

A valuation ratio of a company's current share price compared to its per-share earnings.

Price Earnings Ratio 2010 = Market Price per Share of StockEarnings Per Share

= 0.561

= 0.56= 0.56 times


= 0.565

= 0.112= 0.11 times


= 0.561

= 0.56= 0.56 times

In general, a high price earning suggests that investors are expecting higher earnings growth in

the future compared to companies with a lower price earning. However, the price earnings ratio

doesn't tell us the whole story by itself. It's usually more useful to compare the price

earnings ratios of one company to other companies in the same industry, to the market in general

or against the company's own historical price earning. It would not be useful for investors using

the price earnings ratio as a basis for their investment to compare the price earning of a

technology company (high price earning) to a utility company (low price earning) as each

industry. It is important that investors note an important problem that arises with the price

earning measure, and to avoid basing a decision on this measure alone. The denominator

(earnings) is based on an accounting measure of earnings that is susceptible to forms of

manipulation, making the quality of the price earning only as good as the quality of the

underlying earnings number.

Payout Ratio

The amount of earnings paid out in dividends to shareholders. Investors can use the payout ratio

to determine what companies are doing with their earnings. For Hwa Tai, no dividend was paid

or declared by the company since the end of the previous financial year. The directors do not

recommend the payment of any dividends in respect of the financial year ended 31st December

for the three respective year.

Debt to Total Asset Ratio

A ratio that indicates what proportion of debt a company has relative to its assets. The measure

gives an idea to the leverage of the company along with the potential risks the company faces in

terms of its debt-load.

Debt to Total Assets Ratio 2010 = Total Debt

Total Assets

= 16,029,961 55,460,793

= 0.289032308= 28.90323079= 28.90%

Debt to Total Assets Ratio 2009 = Total Debt

Total Assets

= 15,632,505 57,544,708

= 0.271658429= 27.16584295= 27.10%

Based on the information of debt to total assets ratio for 2010 and 2009, the percentage of Hwa

Tai is below than 30%. For this ratio, the higher percentage, it will give no benefits to the

company because the company has to pay the higher interest to all their debt. Because of this

matter, Hwa Tai have to pay less than 30% of their interest.

Time Interest Earned

A metric used to measure a company's ability to meet its debt obligations. It is calculated by

taking a company's earnings before interest and taxes (EBIT) and dividing it by the total interest

payable on bonds and other contractual debt. It is usually quoted as a ratio and indicates how

many times a company can cover its interest charges on a pretax basis. Failing to meet these

obligations could force a company into bankruptcy. Also referred to as "interest coverage ratio"

and "fixed-charged coverage".

Times Interest Earned 2010 = Income before Income Taxes and Interest ExpensesInterest Expenses

= 722,004 (336,877)

= -2.14322735= 2.14times


= 2,221,382 (169,393)

= -13.11377684= 13.11times


= 457,177 (41,999)

= -10.88542584= 10.88times

From these three respective years result, we noticed that ratio for TIE is decrease from year 2008

to 2010. We can say that this company has to struggle in order to survive the company

performance and to gain higher profit margin. Basically, for a good company, they need to have

higher TIE because they will become easier for them to pay all the interest.

RATIO 2010 2009 2008

Current Ratio 0.99:1 0.98:1 0.79:1

Acid Test ratio 0.80:1 0.83:1 0.65:1

Receivables Turnover 3.03times 2.6times 2.75times

Average Collective Period 120days 140days 132days

Inventory Turnover 9.48times 8.76times 10.9times

Days in Inventory 38days 41days 33days

Profit Margin 0.50% 2.85% 0.52%

Assets Turnover 1times 1times 1times

Return on Assets 0.68% 3.43% 0.65%

Return on Common Shareholder Equity

0.96% 5.12% 1.04%

Earnings Per Share RM1 RM5 RM1

Price Earnings Ratio 0.56times 0.11times 0.56%

Debt to Total Assets Ratio 28.9% 27.10%

Time Interest Earned 2.14times 13.11times 10.88times

1.1 Summary for Liquidity Analysis, Profitability Analysis and Solvency Analysis

Ratio Analysis 2

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