SELECT 2 LISTED COMPANIES OF BURSA SAHAM MALAYSIA FROM TRADING/SERVICES SECTOR AND EVALUATE THE COMPANIES ASSET MANAGEMENT

AND LEVERAGE RATIOS USING THEIR FINANCIAL STATEMENTS FOR THE YEAR 2011

INTRODUCTION A financial statement (or financial report) is a written report which quantitatively describes the financial health of a company. This includes an income statement and a balance sheet, and often also includes a cash flow statement. Financial statements are usually compiled on a quarterly and annual basis. It is also a formal record of the financial activities of a business, person, or other entity. A financial statement is often referred to as an account, although the term financial statement is also used, particularly by accountants. Financial statements are prepared to report a companys financial situation and the income operations. Financial Statements must be prepared according to the standard of accounting. For a business enterprise, all the relevant financial information, presented in a structured manner and in a form easy to understand, are called the financial statements. They typically include four basic financial statements, accompanied by a management discussion and analysis. There are statement of financial position: also referred to as a balance sheet, reports on a company's assets, liabilities, and ownership equity at a given point in time, statement of comprehensive income: also referred to as a profit and loss statement (or a "P&L"), reports on a company's income, expenses, and profits over a period of time. A profit and loss statement provides information on the operation of the enterprise. These include sales and the various expenses incurred during the processing state. Then statement of changes in equity: explains the changes of the company's equity throughout the reporting period and statement of cash flows: reports on a company's cash flow activities, particularly its operating, investing and financing activities. For large corporations, these statements are often complex and may include an extensive set of notes to the financial statements and explanation of financial policies and management discussion and analysis. The notes typically describe each item on the balance sheet, income statement and cash flow statement in further detail. Notes to financial statements are considered an integral part of the financial statements.

TWO SELECTED COMPANIES Two companies has been selected from Bursa Saham Malaysia, they were Tradewinds (M) Bhd. The Tradewinds Group is today a key corporate player in Malaysia, with a strong foundation in the food and plantation industries and a
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diversified range of trade ventures that complement our stellar reputation as a leading business entity. Defined by a precise corporate and business direction, we continuously move forward to invest and capitalise on new growth opportunities while upholding the values that have made us what we are today - deep-rooted values that place our customers, partners, shareholders, employees, the environment and the community at large as our No. 1 priorities. With a singular track record of quality products and services backed by a dedicated, focused and customer-driven management team, the Tradewinds Group has come a long way, and is today committed to leaving our mark on the future.Tradewinds (M) Berhad (Tradewinds) is one of the largest groups listed on the Main Market of the Malaysian stock exchange - Bursa Malaysia Securities Berhad. The Group, in harnessing its strength, experience and expertise in its core businesses of oil palm and sugar, continues to surge forward in pursuit of new global ventures. Guided by a clear corporate and business direction, the Tradewinds Group is well positioned to capitalise on emerging opportunities in the market-place, locally and globally. Principally an investment holding company, Tradewinds' subsidiary companies are involved in the cultivation of oil palm, the production of crude palm oil, purchasing and milling of paddy, importing and distribution of rice and sugar refining and distribution. Our businesses, strengthened by an unblemished track record of delivering quality products over the years, continue to gain ground as we move towards becoming a world-class conglomerate. The other company is Air Asia Berhad is a Malaysian low-cost airline headquartered in Kuala Lumpur. It is Asia's largest low-fare, no-frills airline and a pioneer of low-cost travel in Asia. Air Asia group operates scheduled domestic and international flights to over 400 destinations spanning 25 countries. The company was an Asias leading airline was established with the dream of making flying possible for everyone. Since 2001, AirAsia has swiftly broken travel norms around the globe and has risen to become the world's best. AirAsia continues to pave the way for low-cost aviation through our innovative solutions, efficient processes and a passionate approach to business. Together with our associate companies, AirAsia X, Thai AirAsia, Indonesia AirAsia, Philippines' AirAsia Inc and AirAsia Japan , AirAsia is set to take low-cost flying to an all new high with our belief, "Now Everyone Can Fly".

ASSET MANAGEMENT RATIO Asset management (turnover) ratios compare the assets of a company to its sales revenue. Asset management ratios indicate how successfully a company is utilizing its assets to generate revenues. Analysis of asset management ratios tells how efficiently and effectively a company is using its assets in the generation of revenues. They indicate the ability of a company to translate its assets into the sales. Asset management ratios are also known as asset turnover ratios and asset efficiency ratios. Asset management ratios are computed for different assets. Common examples of asset turnover ratios include fixed asset turnover, inventory turnover, accounts payable turnover ratio, accounts receivable turnover ratio, and cash conversion cycle. These ratios provide important insights into different financial areas of the company and its highlights its strengths and weaknesses. High asset turnover ratios are desirable because they mean that the company is utilizing its assets efficiently to produce sales. The higher the asset turnover ratios, the more sales the company is generating from its assets. Financial ratios indicate relationships between different financial statement items. Management can use these ratios to evaluate a company's performance over time or against industry averages. Asset management ratios measure a company's success in generating sales through prudent management of its assets, such as accounts receivable, inventory and fixed assets. The balance sheet summarizes a company's assets, while the income statement shows sales, expenses and profits. Calculate the receivables turnover ratio, which is the ratio of credit sales to accounts receivable. Credit sales refer to purchases that you invoice and the customer pays later. This ratio measures a company's ability to collect its outstanding receivable accounts. A high ratio means that receivables are low relative to sales, which could mean that customers are paying their invoices promptly.

Compute the inventory turnover ratio, which is the ratio of cost of goods sold to inventory. A high ratio could mean that the company is converting its inventory into sales faster. Do not compare the inventory turnover ratios of companies with different methods of calculating the cost of goods sold. Determine the average collection period, also known as the days' receivables ratio or the days' sales outstanding. It is 365 divided by the receivables turnover ratio. It indicates the average length of time to collect on overdue accounts. For example, if the receivables turnover ratio is six, the days' receivables are about 61 days (365/6). If the company's credit terms require full payment in 45 days, it means that the company is on average 16 days (61 - 45) behind on its account collections. Determine the days' sales in inventory, also known as the days' inventory ratio. It is equal to 365 divided by the inventory turnover ratio. It indicates how many days an
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inventory item stays in stock before a sale. For example, if the inventory turnover ratio is 10, the days' inventory ratio is about 37 days (365/10). Compute the fixed asset turnover ratio, which is the ratio of sales to the book value of fixed assets. It measures a company's effectiveness in generating sales from its fixed assets. Companies normally depreciate the cost of a fixed asset, such as plant and equipment, over its useful life. The book value is equal to the acquisition cost minus the accumulated depreciation. For example, if sales are $10,000 and the book value of fixed assets is $8,000, the fixed asset turnover ratio is 1.25 ($10,000/$8,000). Calculate the total asset turnover ratio, which is the ratio of sales to total assets. This is a broad measure of the company's ability to generate sales from its total assets, which include both current and fixed assets.

THE FORMULA FOR ASSET MANAGEMENT RATIO Account Receivable Turnover The Receivables Turnover and Days' Receivables Ratios assess the firm's management of its Accounts Receivables and, thus, its credit policy. In general, the higher the Receivables Turnover Ratio the better since this implies that the firm is collecting on its accounts receivables sooner. However, if the ratio is too high then the firm may be offering too large of a discount for early payment or may have too restrictive credit terms. The Receivables Turnover Ratio is calculated by dividing Sales by Accounts Receivables. (Note: since Accounts Receivables arise from Credit Sales it is more meaningful to use Credit Sales in the numerator if the data is available.)

Average Collection Period The Days' Receivables Ratio is calculated by dividing the number of days in a year, 365, by the Receivables Turnover Ratio. Therefore, the Days' Receivables indicates how long, on average, it takes for the firm to collect on its sales to customers on credit. This ratio is also known as the Days' Sales Outstanding (DSO) or Average Collection Period (ACP).

Inventory Turnover

The Inventory Turnover and Days' Inventory Ratios measure the firm's management of its Inventory. In general, a higher Inventory Turnover Ratio is indicative of better performance since this indicates that the firm's inventories are being sold more quickly. However, if the ratio is too high then the firm may be losing sales to competitors due to inventory shortages. The Inventory Turnover Ratio is calculated by dividing Cost of Goods Sold by Inventory. When comparing one firms's Inventory Turnover ratio with that of another firm it is important to consider the inventory valuation methid used by the firms. Some firms use a FIFO (first-in-first-out) method, others use a LIFO (last-in-first-out) method, while still others use a weighted average method.

Average Inventory Sales Period The Days' Inventory Ratio is calculated by dividing the number of days in a year, 365, by the Inventory Turnover Ratio. Therefore, the Days' Inventory indicates how long, on average, an inventory item sits on the shelf until it is sold.

Fixed Assets Turnover The Fixed Assets Turnover Ratio measures how productively the firm is managing its Fixed Assets to generate Sales. This ratio is calculated by dividing Sales by Net Fixed Assets. When comparing Fixed Assets Turnover Ratios of different firms it is important to keep in mind that the values for Net Fixed Assets reported on the firms' Balance Sheets are book values which can be very different from market values.

Total Assets Turnover The Total Assets Turnover Ratio measures how productively the firm is managing all of its assets to generate Sales. This ratio is calculated by dividing Sales by Total Assets.

LEVERAGE RATIO
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Any ratio used to calculate the financial leverage of a company to get an idea of the company's methods of financing or to measure its ability to meet financial obligations. There are several different ratios, but the main factors looked at include debt, equity, assets and interest expenses. Leverage ratio is a financial term used to describe the way that a company invests its assets. Specifically, it describes the amount of equity a company has in relation to its debt. Knowing how to calculate leverage ratio is useful because it allows you to determine how fiscally responsible a company is. It also helps you make more informed decisions regarding personal investments in a company. A ratio used to measure a company's mix of operating costs, giving an idea of how changes in output will affect operating income. Fixed and variable costs are the two types of operating costs; depending on the company and the industry, the mix will differ. Determine the amount of debt the company has. This is the total amount of money that the company owes to any outside sources. It can be found on the company balance sheet in the liabilities section.

Determine the amount of equity the company has. This is the total value of the company's assets minus any company debt. It can be found on the company balance sheet in the assets section.

Divide the company's debt by its equity. The result is the leverage ratio. For example, if the company had $1,000 worth of debt and $4,000 worth of equity you would divide 1,000 by 4,000 to get a leverage ratio of 1/4 or 0.25. THE FORMULA Debt Ratio

Debt Ratio = Total Liabilities X 100 Total Assets

Debt-equity ratio

Equity Multiplier
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Interest Coverage ratio

The Debt Ratio, Debt-Equity Ratio, and Equity Multiplier are essentially three ways of looking at the same thing: the firm's use of debt to finance its assets. The Debt Ratio is calculated by dividing Total Debt by Total Assets. The Debt-Equity Ratio is calculated by dividing Total Debt by Total Owners' Equity. The Equity Multiplier is calculated by dividing Total Assets by Total Owners' Equity.

TRADEWINDS (M) BHD Asset Management Ratio

= RM6,933,456 RM57,724 = 120.11

The account receivable turnover for the Tradewinds (M) Bhd is satisfactory and indicate the efficiency of the credit department in credit collection.

= 365 120.11 = 3.04 days The average collection period for Tradewinds is satisfactory.

= RM1,373,061 RM57724 = 23.79 Inventory turnover for Tradewinds of 23.79 times is much better if it is compared with the industry average of 6.6 times. That mean Tradewinds can sell its inventory 23.79 times in a year.

= 365 23.79

= 15.34 days The average inventory sales period for Tradewinds of 15.34 days is better and this indicates that the company takes shorter time to sell its inventory.

= RM6,933,456 RM4,326,167 = 1.6 times Total fixed asset turnover ratio for Tradewind is 1.6.

= RM6,933,456
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RM7,961,143 = 0.87 times The performance of Tradewinds is satisfactory

Leverage Ratio Debt Ratio

Debt Ratio = Total Liabilities X 100 Total Assets

= RM4,553,478 X 100 RM7,961,143 =57.2%

Debt-equity ratio

Debt equity ratio =Long term liabilities X 100

Shareholders equity = RM1,768,535 X100 RM2,064,484 = 85.66% The debt equity ratio is higher.

Equity Multiplier

= RM7,961,143 RM2,064,484
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= 3.86 times

Interest Coverage ratio = Profit before interest and tax Interest expenses = RM897,033 RM229,226 =3.9 times

AIR ASIA Berhad Asset Management Ratio

= RM4,495,141 RM1,109,775 = 4.05 times

The account receivable turnover for the Air Asia is satisfactory and indicate the efficiency of the credit department in credit collection.

= 365 4.05 = 90.1 days

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The average collection period for Air Asia is unsatisfactory.

= RM389,833 RM19,730 = 19.75 Inventory turnover for Air Asia of 19.75 times is much better if it is compared with the industry average of 6.6 times. That mean Tradewinds can sell its inventory 19.75 times in a year.

= 365 19.75

= 18.48 days The average inventory sales period for Air Asia of 18.48 days is better and this indicates that the company takes shorter time to sell its inventory.

= RM4,495,141 RM1,599,876 = 2.8 times Total fixed asset turnover ratio for Air Asia is 2.8.

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= RM4,495,141 RM8,586,451 = 0.52 times The performance of Air Asia is unsatisfactory

Leverage Ratio Debt Ratio

Debt Ratio = Total Liabilities X 100 Total Assets

= RM2,194,072 X 100 RM8,586,451 = 25.63

Debt-equity ratio

Debt equity ratio =Long term liabilities X 100

Shareholders equity = RM2,192,450X100 RM4,036,397 = 54.38% The debt equity ratio is higher.

Equity Multiplier
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= RM8,586,451 RM4,036,397 = 2.13 times

Interest Coverage ratio = Profit before interest and tax Interest expenses = RM777,017 RM368,007 =2.11 times

Conclusion The account receivable turnover for the Tradewinds and Air Asia are satisfactory and very efficient in credit collection where the Tradewinds is 120.11 times better than Air Asia 4.05 times. For the receivable turn over, Tradewinds is 3.04 days better Air Asia 90.1 days. Meanwhile, average collection, Tradewinds was 23.79 times better than Asia, 2.8 times. And for inventory turnover, Tradewinds is also better 15.34 days better than Air Asia , 18.48 days to sell the inventory. Then, for fixed assets turnover the ratio for Tradewinds is 1.6 times, meanwhile Air Asia is 2.8 times. Lastly for total asset management turnover, Tradewinds is 0.87 times and Air Asia is 0.52 times.

For Leverage ratio, Debt ratio for Tradewinds is 57.2% and Air Asia is 25.63%. Debt equity ratio for Tradewinds is 85.66 and Air Asia is 54.38%. On Equity Multiplier for Tradewinds 3.86 times and Air Asia 2.13 times. Lastly Interest coverage ratio for Tradewinds is 3.9 times and Air Asia 2.11 times. Overall summary based on the calculation on the above assets management and leverage ratio shows that Tradewind (M) Berhad has a better performance as compared to Air Asia for the year 2011.

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Reference 1) www.twinds.com.my/ 2) http://www.airasia.com 3) http://en.wikipedia.org/wiki/AirAsia

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