DIPLOMA IN BUSINESS

FINANCIAL STATEMENTS ANALYSIS

ASSIGNMENT BRIEF

Course Title Principles of Finance

Course Code FIN 1013

Academic Session September – December 2022

Lecturer Quek Jin Kin

Assessment Group Assignment

Weighting 20%

Released Date 12 September 2022

Submission Due Date 17 October 2022

Date Received

Marks Obtained

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Student’s Declaration

I certify that this assignment is my own work, and appropriately acknowledged wherever
material adapted from other sources. I understand that plagiarism, cheating, collusion, fraud,
fabrication or falsifications of data are not acceptable. I agree that if at any time it is shown that I
have significantly misrepresented material submitted to Crescendo International College, any
marks or credits awarded to me on the basis of that material may be revoked.

Student Name WOANG ZHE KAI Student ID DB2209277

Signature WOANG ZHE KAI Date 15 SEPTEMBER 2022

Student Name YEAP YONG QI Student ID DB2209276

Signature Date 15 SEPTEMBER 2022

YEAP YONG QI

Student Name Student ID DB2209291

CHAN YEW LI

Signature Date 15 SEPTEMBER 2022

CHAN YEW LI

Student Name LOW YI WEN Student ID DB2209266

Signature LOW YI WEN Date 15 SEPTEMBER 2022

Student Name LIM SZE EN Student ID DB2209265

Signature LIM SZE EN Date 15 SEPTEMBER 2022

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 GRADING SHEET

Weighting Marks
No. Assessment
(%) Awarded

1. Calculation of financial ratios 40%

2. Interpretation of financial ratios 20%

3. Recommendation & conclusion 30%

Based on Analysis of financial performance
4.
Overall impression:
 Cover page, Content page
 Headings, subheadings and overall layout
 Correct font, font size and line spacing 10%
 Page number and alignment
 Structure, spelling, grammar, choice of words, etc
 Correct Harvard Referencing style

TOTAL 100%

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Table Of Contents

Calculation of Financial Ratios……………………………………………………….......…5-6

Interpretation of Financial Ratios………………………………………………….........…..….7
Profitability………………………………………………………………………...….…........…..7
Liquidity……………………………………………………………….………………..……...….8
Efficiency………………………………………………………………………………………….9
Debts Obligation………………………………………………………………………..………..10
Recommendation and conclusion, Based on Analysis of financial performance…...…11-12

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INTRODUCTION

Fruit Berhad is planning to expand its business and improve its profitability by means of
business purchase. Two non-listed companies, Orange Sdn. Bhd. and Mango Sdn. Bhd., have
been identified and will be taken into consideration of which company to be purchased at the
next board meeting. It is not expected that the shareholders of the aforementioned entities will
resist the takeover as they will be given high share dividends in the future.

Fruit Berhad is able to acquire only one entity and the board members are requesting for a
review of the financial statements of both entities in order to come up with a conclusion as to
which entity Fruit Berhad should acquire. Hence, the auditors of Fruit Berhad are required to
review both Orange Sdn. Bhd and Mango Sdn. Bhd.

Calculation of Financial Ratios

Orange Sdn. Bhd. Mango Sdn. Bhd. Comparison

Gross Profit RM 1,100/RM 3.800 x RM 1,580/RM 4,400 x Orange VS Mango

Margin 100%=28.95% 100%=35.91% 1 : 1.24

Operating Profit (RM 532+RM 25)/RM (RM 484+RM 32)/RM Orange VS Mango
Margin 3,800 x 100%=14.66% 4,400 x 100%=11.73% 1 : 0.8

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 Return on (RM 532+RM 25)/(RM (RM 484+RM 32)/(RM Orange VS Mango
Capital 950+RM 500+RM 800) 1,500+RM 650+RM 700) 1 : 0.73
Employed x 100%=24.76% x 100%=18.11%

Current Ratio RM 1,920/RM RM 2,680/RM Orange VS Mango

2,170=0.88 times 2,130=1.26 times 1 : 1.43

(RM 1,920-RM (RM 2,680-RM 880)/RM Orange VS Mango

Quick Ratio 680)/RM 2,170=0.57 2,130=0.85 times 1 : 1.49
times

Inventory RM 680/RM 2,700 x RM 880/RM 2,820 x 365 Orange VS Mango

Turnover Days 365 days=91.93 days days=113.9 days 1 : 1.24

Receivable RM 890/RM 3,800 x RM 1,100/RM 4,400 Orange VS Mango

Turnover Days 365 days=85.49 days x365 days=91.25 days 1 : 1.07

Payable RM 970/RM 2,700 x RM 900/RM 2,820 x 365 Orange VS Mango

Turnover Days 365 days=131.13 days days=116.49 days 1 : 0.89

Gearing Ratio (RM 500+RM 800)/RM (RM 700+RM 650)/RM Orange VS Mango
950 x 100%=136.84% 1,500 x 100%=90% 1 : 0.66

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 Interest (RM 532+25)/RM (RM 484+RM 32)/RM Orange VS Mango
Coverage 25=22.28 times 32=16.13 times 1 : 0.72

Table 1: The table above shows the two entities’, Orange Sdn. Bhd. & Mango Sdn. Bhd.,
financial ratios and their comparison as per annum.

Interpretation of financial ratios

1. Profitability

 Gross Profit Margin

 The profitability of Mango Sdn. Bhd. is better than Orange Sdn. Bhd. The factor
that impacts this margin is the revenues that have been earned by these two
entities. Higher revenues tend to increase the Gross Profit Margin. Hence, Mango
Sdn. Bhd. is more profitable in term of Gross Profit Margin than its competitior.

 Operating Profit Margin

 The profitability of Mango Sdn. Bhd. is worse than Orange Sdn. Bhd. The factors of
this is the amount of expenses. If you had much expenses, the higher your
operating profit margin the higher your revenue. Operating profit margin is often
used as a way to identify how well a business is being managed and how efficiently it
can generate profits.

 Return on Capital Employed

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  The profitability of Mango Sdn. Bhd. is worse than Orange Sdn. Bhd. The higher is
Orange Sdn. Bhd. Therefore, the higher ROCE implies the capital employment
strategies of a company are more efficient.

2. Liquidity

 Current Ratio

 The liquidity of Mango Sdn. Bhd. is better than Orange Sdn. Bhd. The higher is
Mango Sdn. Bhd. This is because Mango Sdn. Bhd. using its assets more efficiently
than Orange Sdn. Bhd. If current ratio that is lower than industry average may
indicate a higher risk of distress or default.

 Quick / Acid-Test Ratio

 The liquidity of Mango Sdn. Bhd. is better than Orange Sdn. Bhd. The higher is
Mango Sdn. Bhd because a higher quick ratio signals the Mango Sdn. Bhd. can be
more liquid the asset, the better able it is to service short-term obligations.

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3. Efficiency

 Inventory Turnover Days

 The efficiency of Mango Sdn. Bhd. is worse than Orange Sdn. Bhd. decision on
pricing, marketing, manufacturing, and purchasing. Besides, the higher
inventory turnover can reduce the amount of capital that they are have tied up in
their inventories.

 Receivable Turnover Days

 The efficiency of Mango Sdn. Bhd. is worse than Orange Sdn. Bhd. The shorter
the Receivable Turnover Days, the better it is for us because it is used to quantify
a firm’s effectiveness in extending credit and in collecting debts on that credit.

 Payable Turnover Days

 The efficiency of Mango Sdn. Bhd. is better than Orange Sdn. Bhd. A long
Payable Turnover Days indicates the Orange Sdn. Bhd. may be in financial distress
or slow payment to suppliers for purchases on credit and thus resulting in a
delay in payment.

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4. Debts Obligation

 Gearing ratio

 The debts obligation of Mango Sdn. Bhd. better than Orange Sdn. Bhd.
Therefore, if the higher gearing ratio have higher amounts of debts to service.
Companies with lower gearing ratio calculations have more equity to rely upon as
financing is needed.

 Interest Cover

 The debts obligation of Mango Sdn. Bhd. is worse than Orange Sdn. Bhd. A
higher interest coverage indicates stronger financial health and the Orange Sdn.
Bhd. is more capable of meeting interest obligations. Also, the lower the interest
coverage, the greater the Mango Sdn. Bhd. debt and the possibility of bankruptcy.

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 Profitability Orange Sdn. Bhd. Mango Sdn. Bhd.
Gross Profit Margin 28.95% 35.91%
Operating Profit Margin 14.66% 11.73%
Return on Capital Employed 24.76% 18.11%
Recommendation and conclusion, Based on Analysis of financial performance

Efficiency Orange Sdn. Bhd. Mango Sdn. Bhd.

Inventory Turnover Days 91.93 days 113.90 days
Receivable Turnover Days 85.49 days 91.25 days
Payables Turnover Days 131.13 days 116.49 days

Debts Obligation Orange Sdn. Bhd. Mango Sdn. Bhd.

Gearing Ratio 136.84% 90%
Interest Cover 22.28 times 16.13 times

Liquidity Orange Sdn. Bhd. Mango Sdn. Bhd.

Current Ratio 0.88 Times 1.26 Times
Acid Test Ratio 0.57 Times 0.85 Times

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Based on the analysis of financial performance above, the board of directors ought to acquire
Orange Sdn. Bhd. for some reasons.

First and foremost, the difference of Gross Profit Margin between Orange Sdn. Bhd. and Mango
Sdn. Bhd. is 1.24 times. The Operating Profit Margin is 2.93% difference between them. The
Return on Capital Employed is 6.65% difference between them. Orange Sdn.Bhd’s profitability
is higher than Mango Sdn.Bhd, although Orange Sdn. Bhd.’s gross profit margin is lower than
Mango Sdn. Bhd’s, Orange Sdn.Bhd.’s profitability is still higher than Mango Sdn. Bhd’s due to
its higher ratios, such as Operating Profit Margin and Return on Capital Employed. In other
words, Orange Sdn.Bhd. is more skilful in their capital usage and generating shareholders’ value
and these financial ratios are essential because a business’s aim is at earning profits and any big
companies would review at a small company’s profitability ratios first when contemplating on
whether to purchase it or not.

Moreover, the Inventory Turnover Days of Orange Sdn. Bhd. has 21.97 days faster than its
competitor. Also, the Receivable Turnover Days of Orange Sdn. Bhd. has 5.76 days faster than
Mango Sdn. Bhd. The Payable Turnover Days of Orange Sdn. Bhd. has 14.64 days slower than
Mango Sdn. Bhd. In terms of efficiency, Orange Sdn.Bhd. is once again higher than its
competitior, Manga Sdn.Bhd. That is supported by the lower of both inventory turnover days and
receivable turnover days contrasted to Mango Sdn. Bhd. For context, the inventory turnover days
indicates that the company is swift enough to sell and replace its inventories whereas fewer
receivable turnover days also shows that Orange Sdn.Bhd. is effective enough in extending credit
and in collecting debts on that credit when compared to its competitor.

In addition, in terms of debt obligation, Mango Sdn. Bhd.’s gearing ratio is 34% lower than
Orange Sdn. Bhd. This means that Mango Sdn. Bhd. has lesser debt to write off compared to its
competitor. On the other hand, Orange Sdn. Bhd.’s interest coverage is 6.15 times higher than
Mango Sdn. Bhd. This indicates that Orange Sdn Bhd. is more capable in handling debts as its
PBIT is higher than its competitor. However, the debt obligation metrics are not usually taken
into consideration as a company’s value is more towards profitability.

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Last but not least, on the matter of liquidity, Mango Sdn. Bhd.’s current ratio and quick ratio are
higher than Orange Sdn. Bhd.’s 0.38 times and 0.28 times respectively. This indicates that it is
more capable in settling its short-term obligations by using its most liquid assets and not
disposing its non-current assets at the same time. It also means that Mango Sdn. Bhd.’s
shareholders’ have invested more capital into the business than its competitor, hence making
their total assets’ value higher. However, a business’s aim is at making profits so these two
financial ratios can be omitted when the board directors deciding on which to purchase when it
comes to business purchasing.

As a conclusion, Orange Sdn.Bhd. is more efficient in protecting the shareholders’ value and
generating revenues. Therefore, Orange Sdn.Bhd. should be the top choice for the board of the
directors.

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