Topic 6 - FS Analysis

ACC466
Lecturer: Wan Mardyatul Miza Wan Tahir

Topic outcome
At the end of this topic, you
should be able to perform
financial statement analysis
using relevant accounting
ratios.
Key Financial Statements
Statement
of Profit or
Loss
Statement Statement
of Financial of
Changes in Financial
Equity statements Position
Statement
of Cash
Flows
Statement of Profit or loss
Statement of Financial Position
Financial Ratios Analysis
Leverage/
Efficiency/
Debt
Asset
management/
management
Gearing
Liquidity Profitability
Financial
Ratio
Current Assets
Current ratio
Current liabilities
Liquidity
Current assets
Indicate the (exc. CS &
company position prepayment)
to meet its current Acid test ratio
obligations
Current liabilities
Liquidity
Current ratio
= Current assets
Current liabilities
= 368,460/175,152
= 2.10
For every RM1 of current

liabilities, the firm has
RM2.10 of current asset
Current Assets
Current ratio
Current liabilities
Liquidity
Current assets
(exc. CS &
prepayment)
Indicate the Acid test ratio
company position
to meet its current Current liabilities
obligations
Liquidity
Acid test ratio/Quick ratio

= Current assets – CS - Prepayment
Current liabilities
= (368,460-326,097)/ 175,152
= 0.24
For every RM1 of current

liabilities, the firm has
RM0.24 of current asset
excluding closing inventory
and prepayment
Liquidity
Possible causes poor liquidity Suggestion
The company holding too much stock, poor debt Promote cash sales, given cash discount etc.
collection, poor cash management etc.
Efficiency/Asset management
COGS@COS
Inventory
turnover Average
stock@Closing
Stock
Average stock:
Average
(Closing Stock
receivables +Opening Stock)/2
Average
collection period *OS (additional info)
Credit sales
Efficiency
Sales
Fixed asset
Indicate the turnover
effectiveness in Non current
assets
assets utilisation
in generating
Sales
revenue Total asset
Current assets
turnover
Total asset
Non current
assets
Efficiency
Inventory turnover:
= Cost of Goods Sold/Cost of sales
Closing inventory
= 354,874/326,097
=1.09
The firm replaced its

stock/inventory 1.09
times in a year
COGS@COS
Inventory
turnover Average
stock@Closing
Stock Average receivables:
(Closing rec’ble
Average +Opening rec’ble)/2
receivables
Average
collection period *Opening receivables
Credit sales (additional info)
Efficiency
Sales
Fixed asset
effectiveness Non current
assets
in assets
utilisation in
Sales
generating Total asset
Current assets
revenue turnover
Total asset
Non current
assets
Efficiency
Average collection period:

=Account receivables x *360 days
Credit sales
=(28,651/509,457) x *360 days
=20 days
The firm takes 20 days to

collect its debts from its
account receivables
*Refer information provided in
the question (360/365 days a
year)
COGS@COS
Inventory
turnover Average
stock@Closing
Stock
Average stock:
Average
(Closing Stock
Average
Credit sales
Efficiency
Sales
Fixed asset
assets
in assets
utilisation in
Sales
Current assets
revenue turnover
Total asset
Non current
assets
Efficiency
Fixed assets turnover:
= Sales
Non-current assets
= 509,457/18,517
=27.51
The firm generates RM27.51

of its sales from RM1 of its
net fixed assets
COGS@COS
Inventory
turnover Average
stock@Closing
Stock
Average stock:
Average
(Closing Stock
Average
Credit sales
Efficiency
Sales
Fixed asset
assets
in assets
utilisation in
Sales
Current assets
revenue turnover
Total asset
Non current
assets
Efficiency
Total assets turnover:

= Sales
Non-current asset + current asset
Total assets turnover:
=509,457/386,977
=1.32
The firm generates

RM1.32 of its sales from
RM1 of its total assets
Efficiency
Possible causes efficiency problem: Suggestion
The company holding too much stock, poor debt Promote cash sales, given cash discount,
collection, poor cash management, under introduce effective stock control system, pricing
utilization fixed asset etc. policy, credit term etc.
Leverage/ Debt management/ Gearing
Total liabilities
Debt
Total assets
Total liabilities
Leverage Debt-to-equity
Equity
Indicate the
financial
stability and EBIT
structure Times interest
earned
Interest
expense
Leverage
Debt ratio:
= Non-currentliability + current liability
Non-current assets + current asset
= (28,694+175,152)/386,977
=0.5267 @ 52.67%
52.67% of its assets are

financed by debts.
Total liabilities
Debt
Total assets
Total liabilities
Equity
Indicate the
financial
stability and EBIT
earned
Interest
expense
Leverage
Debt-to-equity ratio:
= Total liability
Equity
=(28,694+175,152)/183,131
=1.1131 @ 111.31%
111.31% of debt used
compared with total equity.
Total liabilities
Debt
Total assets
Total liabilities
Equity
Indicate the
financial
stability and EBIT
earned
Interest
expense
Time interest earned: Leverage
= EBIT
Interest
= 54,050/8,345
=6.48
The firm has 6.48 times of

EBIT to cover its interest.
Earning before interest and

taxation (EBIT)
Leverage
Possible causes leverage problem Suggestion
Borrowing more than is necessary Adopt optimal capital structure
Profitability
Gross profit
Gross profit
margin
Sales
Net profit
Net profit
margin
Sales
Profitability
Net profit
Indicate the Return on
assets
financial Total assets
performance
of the business
in term of EBIT
profitability ROCE Equity
Capital
employed Non current
liabilities
Profitability
Gross profit margin:
= Gross profit
Sales
= 154,583/509,457
=0.3034 @ 30.34%

of gross profit from RM100
of sales.
Profitability
Gross profit
Gross profit
margin
Sales
Net profit
Net profit
margin
Sales
Profitability
Net profit
assets
performance
of the business
in term of EBIT
Capital
liabilities
Profitability
Net profit margin:
= Net profit
Sales
= 34,279/509,457
=0.0673 @ 6.73%
of net profit from RM100 of
sales.
Profitability
Gross profit
Gross profit
margin
Sales
Net profit
Net profit
margin
Sales
Profitability
Net profit
assets
performance
of the business
in term of EBIT
Capital
liabilities
Profitability
Return on assets :
= Net profit
Total assets
= 34,279/386,977
=0.0886 @ 8.86%
The firm generates RM8.86 of

net profit from RM100
investment of total assets.
Profitability
Gross profit
Gross profit
margin
Sales
Net profit
Net profit
margin
Sales
Profitability
Net profit
assets
performance
of the business
in term of EBIT
Capital
liabilities
Profitability
Return on capital employed
(ROCE)/Return on investment
(ROI):
= EBIT
Equity + Non-current liability
=54,050/(183,131+28,694)
=0.2552 @ 25.52%
of operating profit from
RM100 invested in capital
employed
Profitability
Possible causes of profitability problem Suggestion
High COGS, high operating expenses, ineffective Reduce COGS, reduce operating expenses and
pricing policy review selling price.
Types of Ratio Comparisons
• Trend Analysis (internal comparison)
– Comparison of the ratios year by year in a firm.
• Cross-Sectional Analysis (external comparison)
– Comparison among a cross-section of firms,
countries, entire populations, industry average
etc.
Uses and Limitations of Ratio Analysis
Uses
– Comparison purposes (year by year or industry average)
– Evaluate current performance
– Assess the efficiency of operations
Limitations
• Comparison with industry average is difficult
• Average performance in industry may not be
desirable
• Seasonal factors
• Inflation
• Different accounting and operating practices
• Difficult to conclude the ratios good/bad
Exercise
Key answer (a)
Current ratio = 3.33 times
Quick ratio = 2.42 times
Inventory turnover ratio = 3.45 times
Average collection period = 46 days
Debt ratio = 47.73%
Time interest earned = 10 times
Fixed asset turnover = 1.83 times
Net profit margin = 18.41%
Return on asset = 18.41%
Answer (b)
Comments:
(i) Asset management ratio
Vanillin Bhd is less efficient than its industry peers by referring to inventory
turnover ratio and average collection period. Based on inventory turnover
ratio, the company change its inventory 3.45 times in a year as compared to
industry average 5 times a year. While, average collection period indicate
that, the company took 46 days to collect its debts from debtors which is
longer than industry average ie 35 days. However, fixed asset turnover of the
company is higher than industry average (1.83 times) explained that the
company is more efficient in generating its revenue from investment on fixed
asset as compared to industry average (1.20 times).
(i) Leverage ratio
Leverage ratio measure the level of debt or borrowing in a company. Based on
debt ratio and times interest earned, the company is considered highly
leverage as compared to industry average. Debt ratio of 47% is higher than
industry average of 40%. The debt ratio explain financing structure of a
company, which means, 47% financed by debt and balance of 53% financed
by asset. The times interest earned of the company is 10 times, while average
industry is 13 times and it is higher than the company. This can be explained
that, the company only have 10 times of its operating profit to cover its
interest.

Topic 6 - FS Analysis

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ACC466

Lecturer: Wan Mardyatul Miza Wan Tahir

For every RM1 of current

Acid test ratio/Quick ratio

For every RM1 of current

The firm replaced its

Average collection period:

The firm takes 20 days to

The firm generates RM27.51

Total assets turnover:

The firm generates

52.67% of its assets are

The firm has 6.48 times of

Earning before interest and

The firm generates RM30.34

The firm generates RM8.86 of

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