QUESTION 1

a) Current Ratio

The current ratio is computed by the following formula:

Current assets
Current liabilities

5,851.6
The current ratio for IOI Group in financial year 2016 =
3824.4

= 1.530

6,035
The current ratio for IOI Group in financial year 2017 =
3,639.6

= 1.658

IOI Group’s current ratio for the year 2016 was 1.530, and 1.658 for 2017. The basic
interpretation of the figures is; IOI Group has RM1.53 in current assets for every
RM1 in current liabilities in 2016, and it also has RM 1.66 in current assets for every
RM1 in current liabilities in 2016. At first glance, it would seem that the figure for
2017 is higher than 2016’s thus denoting an increase of liquid assets for IOI Group.
The benchmark for this ratio, according to Clemens and Dyer (as cited in Sathye,
Bartle, Vincent, and Boffey, 2013) is 2 to 1, whereby 1.5 to 2 represents satisfactory
holdings of liquid assets by IOI Group.

A more in-depth analysis of the figures for current assets for both years shows
that IOI Group had RM5,851.6 million worth of current assets on its books for 2016,
and RM6,035 of current assets in 2016. The figures show that IOI Group had
increases in the value of current assets by roughly RM150 million in 2017 compared
to 2016. The increase of current assets from 2016 to 2017 was 3.13%. From details in
IOI Group’s Annual Report, it appears the slight increase was due to increases mainly
in inventories, receivables, and cash and bank balances, pointing to increased capital
expansions for the Group. The increases was offset by significant decreases in short-
term investments in the capital and equity markets, perhaps pointing to a decreased
focus on short-term funding for the Group too.

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 For the figures in IOI’s current liabilities, there was RM3,824.4 million worth
of current liabilities as opposed to RM3,639.6 million of current liabilities in 2017. As
opposed to current assets, the value of IOI’s current liabilities actually showed a fall
of roughly RM200 million going into 2017 from the previous year. The percentage
change in current liabilities between 2016 and 2017 was -4.83%. The ever informative
Annual Report shows that current liabilities decreased overall for all categories except
for trade and other payables. This bears out the increase in corresponding accounts in
the current assets section whereby the increase was due to raised interests in
inventories and receivable. The path of expansion the Group is taking may require it
to research new avenues of productivity, or open up new plantations in its various
regions, thus incurring increased payables in the process.

Taken as a whole, it would seem that on an individual basis, IOI Group’s

current ratio figures for 2016 and 2017 was due to increased commitments by their
management to increase the conglomerate’s business reach by raising plantation and
manufacturing output at the expense of stock market funds, while at the same time
decreasing the claims made by it from creditors by lessening loans and investment
costs. All this points towards increased growth by the company on the bottom line and
less reliance on conventional modes of finance from banks and the stock markets. To
simplify it further, IOI Group is striving to be more independent, and funding its own
growth and expansion from its own earnings than being dependent on third-party
sources of funds.

For instance, its manufacturing operations in Germany in the previous 2016

financial year has brought in two production plants and is developing a new excipient
for pharmaceutical application (Annual Report, 2017). Another case of IOI’s
expansion for the long-term is its newly constructed 100,000 MT per annum specialty
oils and fats plant in Xiamen, the People’s Republic of China, catering affluent
customers in China and North East Asia. All this points towards to IOI having the
confidence in its operations and extending them further despite the current sluggish
economy in recent years.

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b) Acid-test Ratio

The acid-test ratio is formulated as the following:

Current assets−Inventory
Current liabilities

5,851.6−2,284.4
The acid-test ratio for IOI Group in financial year 2016 =
3,824.4

= 0.93

6,035−2,707.7
The acid-test ratio for IOI Group in financial year 2017 =
3,639.6

= 0.91

The quick ratio, also known as the acid-test ratio, is a more stringent form of the
current ratio detailed above. From the formula above it is clear that the main
difference between it and the current ratio is the exclusion of inventories in
calculation, inventories being generally considered the least liquid of current assets.
Thus, only highly liquid current assets like cash and bank deposits are left. According
to Clemens and Dyer (as cited in Sathye, Bartle, Vincent, and Boffey, 2013), the ideal
benchmark for this ratio is parity, or 1. This means should the situation arise, a
business can easily meet the claims of its creditors in the short term from its assets
alone without including inventories.

For IOI group, the acid test ratio figure for 2016 was 0.96, while the figure for
2017 was 0.91. The interpretation is in 2016, IOI Group’s really liquid assets were
0.96 times current liabilities, and while in 2017, its current assets excluding
inventories was 0.91 times current liabilities. IOI’s ratio figures for 2017 was slightly
lower than that in 2016, denoting at a surface level that it holds less liquid assets.

From the numbers above, it is clear that while current assets as a whole
increased, the proportion of increases of the inventories component was higher than
the increase in current assets, at 3.13% for current assets compared to 18.50% for
inventories. Meanwhile, as noted above, current liabilities actually decreased by
4.83% from 2016 to 2017. The exponential increase of inventories from 2016 and
2017 is significant in explaining the overall increase in current assets for IOI Group.
A proof in point is that it gets additional inventories from its Indonesian subsidiary

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group, PT Sawit Nabati Agro (“SNA Group”) which has 11,200 hectares or newly
matured palm oil (Annual Report, 2017).

The IOI Annual Report breaks down “Inventories” into cost and net realisable
portions. Inventories valued at cost include raw materials, plantation produce,
nurseries supplies, semi-finished (aka work-in-progress) inventories, finished goods,
and others. Excluding “others”, all inventories show rises in value. This supports
previous reasoning that the company is currently expanding its business reach by
either raising production and/or opening new plantations of palm oil. This is a sort of
long-term investment that increases inventories at the cost of more liquid assets like
cash and short-term investments.

As the quick ratio is merely a stringent measure of liquidity for any company,
the less than ideal figures shown for IOI Group should not be a cause of concern and
alarm. As long as the company’s fundamentals are secure, there is no need to have on
hand large amounts of liquid assets as those can be invested in capital or company
growth to further improve the company’s situation.

c) Inventory Turnover Ratio

The inventory turnover ratio is calculated by the following formula:

Net sales
Inventory

The inventory turnover ratio for IOI Group in financial year 2016

9,346.9
=
2318.225

= 4.03

The inventory turnover ratio for IOI Group in financial year 2017

11,691.6
=
2724.975

= 4.29

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Cost of Sales is used as the denominator in this case, while inventories here are
represented by average inventories based on quarterly figures from IOI Group. From
the figures above, it can be seen that IOI Group is able to turnover its inventory 4.03
times in 2016, and 4.29 times in 2017.

From a cursory standpoint, the increase in inventory turnover is favourable for

IOI Group since palm oil is a commodity high in demand especially among Third
World economies due to its relatively cheaper prices compared to other oils. The
increased turnover points to greater demand for IOI’s palm oil and oleo chemical
products by its business and country clients. The issue here is that whether the figures
given are in-line with those of the industry.

In-depth analysis for each figure shows that that sales actually showed a
significant increase of 25.08% from 2016 to 2017. While inventory rose by 17.55%
from 2016 to 2017. The increased inventory turnover figure between these 2 years
was partly influenced and masked by the fact that sales rose by a percentage greater
than the rise in inventories. A greater amount of sales naturally means increased
inventory turnover. But to see whether the Group is actually experiencing fast or at
least efficient inventory turnover, it is necessary to look at the figures for IOI’s rivals
and the industry as a whole. For the sake of simplicity, the oleo chemicals division is
grouped under the palm oil industry since it is used in the processing and refining of
palm oil products. Furthermore, the Annual Report states that, gains from IOI’s
plantation segment increased by 40% whilst gains from its resource-based
manufacturing segment increased by 20%. The primary reason attributed was the
higher average selling price for both segments (IOI Annual Report, 2017).

A main reason inventory turnover for IOI was lower in 2016 then 2017 was
the decision to strip IOI of its RSPA certificate (Dowd, 2017). It was not able to earn
CSPO premiums on oil, which affected the group’s sales of certified sustainable palm
oil to its customers in Europe, which was Malaysia’s third largest market for refined
palm oil products, the biggest being China, followed by India. Nonetheless, the
impact was slight as it regained its certificate three months later, and continued on its
operations, leading to its slight increase in turnover in 2017. The mitigating factor was
the sheer demand for refined palm oil from China and India, regardless of sustainable

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production or not. This was the single largest factor saving IOI Group’s turnover of its
palm oil products.

Besides, the slight increase for its turnover ratio was partially explained by the
challenging environment of its oleochemicals segment, of which it is currently
restructuring to become more specialised. Inventories were not moving as fast also
because of the sluggish global economy and a volatile USD/MYR exchange rates,
which has a negative effect on sales abroad for IOI Group.

d) Account Receivable Turnover Ratio

The account receivable turnover ratio is computed as the following:

Net sales
Account receivable

The account receivable turnover ratio for IOI Group in financial year 2016

9,346.9
=
1,214.725

= 7.70

The account receivable turnover ratio for IOI Group in financial year 2017

11,691.6
=
1,496.525

= 7.81

The accounts receivables ratio shows the efficiency in which a company is able to
recover its receivables. Naturally, there is no set benchmark for this ratio, but the
general consensus is that the figure should be as high as possible, a high number
denoting the company is efficient in recovering debts owed to it. In this case, cost of
sales is taken as the denominator, while account receivables is actually the average
figure, taken from the quarterly reports of 2016 and 2017 respectively.

For IOI Group, the figures for 2016 and 2017 are 7.70 and 7.81 respectively.
There is a slight increase in the frequency IOI Group is able to collect sums owed it
by debtors. The increase in net sales of 25.08% from 2016 to 2017 has already been

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dealt with in the previous section, so the only figure left is account receivables. From
the annual report, it is noted that receivables rose by 23.20% from 2016 to 2017.
Hence, it can be concluded that sales rose more than receivables, meaning that the
company is efficient in collecting its debts. The Annual Report further states that the
standard credit terms granted by IOI to its debtors in the usual way of business ranges
from 7 to 120 days. Debts are collected within a week of inception to a quarter of the
financial year, depending on type and amount.

Besides, IOI is also known for its conservative and prudent financial
strategies, particularly in regard to its operations. This is advantageous for IOI as this
filters out customers who may be more likely to take a long time in paying their debts.
A potential downside is that it might drive away potential customers, but with IOI
Group's reputation as an efficient player in the palm oil and resource-based
manufacturing market, it is unlikely in the present case for IOI to scare potential
customers. As a case in point, IOI announced in 2017 that it had entered into an
agreement to sell a 70% stake in specialty oil and fats company Loders Croklaan to
Bermuda-based Bunge Ltd. for RM3.94bil. The proceeds from the sale went to reduce
debt. This undoubtedly helps to explain IOI's slight increase in receivables as it
divests itself of the receivables involved in the managing of its former subsidiary.

e) Days’ Sales in Average Receivables to the Nearest Day Ratio

The days’ sales in average receivables to the nearest day ratio is calculated by using
the formula:

Account receivable
×365
Net credit sales

The days’ sales in average receivables to the nearest day ratio for IOI Group in
financial year 2016

1,214.725
= ×365
9.346 .9

= 47.44 days

The days’ sales in average receivables to the nearest day ratio for IOI Group in
financial year 2017

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 1,496.525
= ×365
11,691.6

= 46.72 days

This ratio basically is an extension of accounts receivables ratio; the sole difference
being it measures average receivables collection in days instead of times. As before,
the shorter the time, the more efficient the company is in collecting its debts. The
sums in this ratio is the exact same as used in section (d). Hence, any explanations
relating to the individual figures and trends have already been dealt with in (d).

The respective sums 47.44 days and 46.72 days for 2016 and 2017
respectively merely reinforce the fact that IOI Group has improved slightly in
collecting its debts from one financial year to another. Doubtless, as shown in the
previous section, the slight improvement was partly caused by sales growing at a
greater pace than receivables, meaning a greater piece of the pie to be collected. But
the increase in revenues was not unduly affected when time came for debtors to meet
their obligations.

(b) Evaluate the trend of cash flows

IOI group’s operating cash flow decreased from RM1,632.0 million to RM1,287.7
million in 2017. As operating cash flow describes the day to day usage of cash, it is
not surprising to find that this was the largest cash flow component for IOI Group, as
any company has a large operating cash flow relative to the other two components. It
shows on first glance that IOI is putting enough ready cash for its daily operations.
During 2017, there was two interim dividends declared having a total payout of
approximately RM597.1 million. The dividends were declared out of the total net cash
of RM1,287.7 million generated from operating activities for 2017. The total dividend
payout was approximately 46% of the Group’s net cash flow generated from
operating activities (Annual Report, 2017). This shows that IOI Group’s net decrease
in operating cash flow from 2016 to 2017 was because of the need to placate investors
to make them retain company stock.

Another indicator in the Annual Report was the increase in trade receivables
from negative RM19 million to negative RM199.7 million from 2016 to 2017. The

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vast increase in trade receivables was due to IOI Group’s positive expansion in the oil
palm segment, whereby positive global prices and yield improvements promises more
business to be done with its overseas clients. Another explanation was the
reinstatement of its RSPO certification which saw its business clients slowly coming
back due to restored confidence in IOI Group’s ways of doing business (Annual
Report, 2017).

However, on a positive note, the working capital changes for IOI Group
showed a slight increase in the black from RM1,835.9 million in 2016 to RM1,967.1
million in 2017. This shows that IOI has increased its proportion of current assets
flow those if its current liabilities. All in all, the slight increase points to increased
attention by IOI Group to increase the conglomerate’s business reach by raising
plantation and manufacturing output at the expense of stock market funds, while at the
same time decreasing the claims made by it from creditors by lessening loans and
investment costs. The outcome of this expansion strategy leads to increased growth by
the company on the bottom line and less reliance on conventional modes of finance
from banks and the stock markets, thus justifying the higher need for liquid assets for
the near term.

Meanwhile, IOI’s investing cash flow went from being negative RM803.2
million to RM410.5 million negative, an improvement of some RM400 million. Form
the Annual report, the main reason seems to be additional cash flow from acquisition
of IOI Oleo GmbH in Germany in 2016 (Annual Report, 2016). The cash outflow was
a one-time event in 2016, leading to a RM400 million cash outflow being booked for
2016, which affected overall investing cash flow. Other than that, there was no
extraordinary cash items within the Annual Report, except RM 25 million of cash
inflow form the disposal of assets held for sale. Although the Annual Report was not
forthcoming on the details, it is sufficient to make an educated surmise that the assets
in question were the disposal of intangible assets like product rights to its many
subsidiaries, not to mention its separate property arm. Another exception was a net
outflow of RM497.9 million for additions to property, plant, and equipment, up from
negative RM458.6 million in 2016. As explained before, the years 2016 and 2017 saw
IOI Group in the midst of expanding its operations to various countries, hence the
increased net outflow of cash in areas such as purchases of land, equipment, and
plants. Since its oleochemical and especially its palm oil divisions require much land,

9
and equipment to process into its final tradable form, the increased net outflow for
additional expansion is justified. In 2017, since there was no similar outflow, cash
outflow from investing activities were almost the same as the previous year.

The final cash flow, financing, went from negative RM678.8 million to
negative RM1,308.4 million, a 100% sum. From the Annual Report, the biggest
change from 2016 to 2017 was the massive increase of term loan repayments, which
went from negative RM194.8 million to negative RM1,574.7 million. This was due to
some foreign denominated notes being paid at maturity. A research report from Bursa
Malaysia stated that it was due to high USD debt exposure by IOI Group, which
constituted some US$1,543m in USD-denominated debts (ex derivative contracts) at
the end of the 2015 financial year (The Star, 2016). The volatility if the Ringgit
against the USD also resulted in a net foreign currency translation loss of
RM853.9mil on foreign currency-denominated borrowings (Kok, 2015).

Another report by Bursa also sheds light on IOI’s largely negative financing
cash flow. Dividends rose from RM504.1 million to RM 565.9 million, indicating that
IOI Group’s cash flow decreased because of the need to keep shareholders happy. As
it is embarking on a period of expansion geared for the long term, it is necessary to
inform and maintain shareholders who might not see the point of long-term capital
gains in exchange for short-term results, hence the dividend payments.

Overall, IOI group’s cash and cash equivalents was still in the red at
RM1,938.2 million and RM1,522.1 million from 2016 to 2017. As for the cash and
cash equivalents, the Annual Report showed a decrease from RM1.9 billion as at 30
June 2016 to RM1.5 billion as at 30 June 2017, mainly to a decrease in net cash from
operating activities and an increase in net cash used in financing activities. The main
reason attributed was IOI Group’s positive expansion into Malaysian as well as
international markets with expansions in both the oleochemicals and palm oil sector in
various countries, namely Germany, Germany, Malaysia and Indonesia among others
(Annual Report, 2017).

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QUESTION 2

CYCLE WORLD SDN BHD

Budgeted Income Statement
For the Year ending June 30, 2019

RM RM Percent of
Total
Sales revenue 488,000 100 %
Cost of goods sold (354,000) 72.54 %
Gross profit 134,000 27.46 %
Operating expenses
Salary and commission expense 92,000 18.85 %
Rest expense 16,000 3.28 %
Depreciation expense 4,000 0.82 %
Insurance expense 1,600 0.33 %
Miscellaneous expense 24,000 4.92 %
Total operating expenses 137,600 28.20 %
Operating loss (3,600) - 0.74 %
Interest expense (450) - 0.09 %
Net loss (4,050) - 0.83 %
Table 1: Vertical Analysis for Cycle World Sdn Bhd Balance Sheet

A scrutiny of the budgeted income statement reveals that cost of goods sold is
somewhat high relative to total revenue, at 72.54 %. As the formula for cost of goods
sold is beginning inventory + purchases during the period – ending inventory, the
high figure could be explained by the fact of obsolete inventory cluttering up, hence
increasing the need to maintain and sell them. Another possible explanation is that the
carrying costs associated with the inventory, like direct labour costs, supplies and so
forth is eating too much into the company’s profitability. To remedy the condition, Mr

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Fong could consider using a chase strategy for his goods. A chase strategy involves
matching output (bicycles brought in) with sales forecast for bicycles, and varying
either workforce rates or production depending to peak times. An advantage of such a
strategy is that it reduces inventory carrying costs, meaning that bicycles are brought
in and sold when demand for them is high and vice versa. Sales figures would also be
met in time, hence reducing cost of sales.

Another way is actually to increase the revenue for the company. Increasing
sales revenue is a common way but as long as it is effective in pulling the company
out of the red it is effective. Since this is a bicycle store, it is imperative for Mr. Fong
to understand his market; how many in the local community are cycling, the type of
bicycles required by cyclists, price range of bicycles needed, additional equipment
required like helmets, greasing lube, and others. Knowing the market and the forces
facing it is an important part of succeeding in the business. Hence, Mr Fong should
devote some time in market analysis to accurately ascertain his market’s needs, then
only he can meet them adequately.

Based on the budgeted income statement, on obvious way for Mr. Fong to
reduce his operating loss in to address the extremely high figure of salary and
commissions. The RM92,000 figure is a whopping 66.86% of total expenses and
18.85% of total revenue and represents an altogether too high sum for the company. It
is assumed that the management is paying out a high base salary coupled with a high
level of commissions. This is detrimental to the company as it costs too much relative
to its size to fork out such a high sum just for selling bicycles. To remedy the
situation, Mr Fong should set lower fix salary for sales personnel. Since commission
are in account for their monthly salary, lower salary and higher commission can
motivate sales personnel to be more aggressive in getting their sales, which results in
higher quotation. This method could reduce the amount of salary and also result in
higher sales revenue. Furthermore, having sales tied to commissions is a great way to
empower employees and tie their pay with the company’s performance. They will
surely put more effort to increase sales because without it, they will have less income.

Mr. Fong could also address his miscellaneous expenses (4.92%).

Miscellaneous expenses consists of fees such as advertising fees, car and truck
expenses, training fees, home office expenses, tax preparation fees, petty cash,

12
utilities etc. Reviewing the amount spent in each sector should be done to enhance the
efficiency. For instance, advertising could be looked at by exploiting the use of social
media instead of traditional modes of advertising like newspapers and magazines.
Social media advertising has the advantage of being accessible to a younger
generation and also helps to save costs. Another cost is utilities, like water and
electricity bills, whereby too high a usage can also impact a business like Mr Fong’s.
To control it, it might be possible to invest in energy saving appliances like lights and
fans, all of which might not mean much, but has a stacked impact in the long run.

Besides, Mr Fong could use a more efficient way to manage his inventory. For
instance, only keep minimum amount of stock. This can reduce the needs of getting a
huge plant/warehouse, and it will reduce the portion of rent expense. By knowing the
market’s needs, suitable bicycle models can be stocked which will increase turnover
and reduce carrying and write-off costs due to obsolescence. Besides, having a fast
turnover inventory will create the impression that business is flowing well and in turn
attract people to shop there as an average consumer will easily follow the bandwagon
in purchasing items either for the first time or repeatedly.

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References

Bursa Malaysia. (n.d.) Research Reports. Retrieved from

http://www.bursamalaysia.com/market/listed-companies/research-
repository/research-reports#/?counter=1961

Dowd, L. (2016). Ioi group vs rspo: history repeating itself? Retrieved from
http://www.ethicalcorp.com/ioi-group-vs-rspo-history-repeating-itself

IOI Corp (2017). Annual Report. Retrieved from

http://www.ioigroup.com/Content/IR/IR_Reports

IOI Corp (2016). Annual Report. Retrieved from

http://www.ioigroup.com/Content/IR/IR_Reports

Kok, C. (2015, November 16). Ioi corp hit by weakening ringgit and cpo price. The
Star. Retrieved July 20, 2018 from
https://www.thestar.com.my/business/business-news/2015/11/16/ioi-corp-hit-
by-weakening-ringgit-and-cpo price/

Sathye, M., Bartle, J., & Boffey, R. (2013). Credit analysis and lending management.
Tilde University Press

Tuah, Y. (2017, July 2017). Ioi could record strongest quarterly headline profit in
financial year 2017. The Borneo Post. Retrieved July 20, 2018 from
http://www.theborneopost.com/2017/07/21/ioi-could-record-strongest-
quarterly-headline-profit-in-financial-year-2017/

The Star (2016, August 24). IOI Corp hit by foreign exchange losses. The Star.
Retrieved July 20, 2018 from https://www.thestar.com.my/business/business-
news/2016/08/24/ioi-corp-hit-by-foreign-exchange-
losses/#GzQXfwbVM5chvs1u.99
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