A Study on Comparison of Profitability of Financial Ratio in

Food Industry

PREPARED BY
Name No Matrix

Andy Yanto Bin Mohd Ali 05DAT15F2010

Yusri Bin Abdul Halim 05DAT15F2022

Mohd Ramdan Saini Bin Abdullah Abdul 05DAT15F2050

Malik

Tsenlydia Binti Jimmy 05DAT15F2099

Noor Izati Binti Mohd Zamri Lopek 05DAT15F2100

SUPERVISOR

ENCIK ZAIDI BIN BASLI

 DECLARATION OF ORIGINALITY FORM

This research report entitled A Study on Comparison of Profitability of Financial Ratio in

Food Industry is prepared by Andy Yanto Bin Mohd Ali, Yusri Bin Abdul Halim, Mohd
Ramdan Saini Bin Abdullah Abdul Malik, Tsenlydia Binti Jimmy, Noor Izati Binti Mohd
Zamri Lopek submitted to the Commerce Department to fulfil the partial of the Diploma of
Accountancy.

Name of Student Matrix No. Signature

Andy Yanto Bin Mohd Ali 05DAT15F2010
Yusri Bin Abdul Halim 05DAT15F2022
Mohd Ramdan Saini Bin Abdullah Abdul Malik 05DAT15F2050
Tsenlydia Binti Jimmy 05DAT15F2099
Noor Izati Binti Mohd Zamri Lopek 05DAT15F2100

Verified by:

Encik Zaidi bin Basli

Commerce Department

Date:
 TABLE OF CONTENT

Declaration of Original Form

Table of Content
Abstract
Acknowledgement

CHAPTER 1-INTRODUCTIONS
1.1 Research Background
1.2 Problem Statement
1.3 Research Objective
1.4 Research Questions
1.5 Research Contribution/Significance
1.6 Limitation Of Study
1.7 Summary

CHAPTER 2-LITERATURE REVIEW

2.1 Introduction
2.2 Definition of Construct
2.3 Theoretical Framework
2.4 Previous Research Finding
2.5 Summary

CHAPTER 3- METHODOLOGY
3.1 Introduction
3.2 Research Design
3.3 Research Sampling Technique
3.4 Research Instrument
3.5 Data Collection Procedure
3.6 Data Analysis
3.7 Summary
CHAPTER 4- CONCLUSION
4.1 Results
4.2 Discussion
4.3 Conclusion
4.4 Reference
4.5 Appendices
4.6 Research Planning Table (Gantt Chart)
Acknowledgement

First of all, we would like to extend thanks to Allah SWT for giving us space and
opportunity to live on this earth and carry out our responsibilities as a human being. We are
grateful that we are still breathing and successfully fulfilling our responsibilities as a student
in general and are able to carry out this research project perfectly.
Without help, support and encouragement of our parents, we certainly cannot afford
to carry out this research project perfectly. We would like to extend our sincere thanks to our
parents.
We would like to express our deepest gratitude to Politeknik Kuching Sarawak for
giving us the opportunity to conduct this Research on ‘A study on Comparison of
Profitability of Financial Ratio in Food Industry’. We are grateful to be able to
use all the facilities and equipment provided at this Politeknik Kuching Sarawak to complete
our research project.
We also would like to thank Sir Zaidi Bin Basli, our research supervisors and our
Research and Methodology lecturer, for his patient guidance, enthusiastic encouragement and
useful critiques of this research work. Special thanks given to Sir Zaidi Bin Basli, for his
advice and assistance in keeping our progress on schedule.
Besides, we also would like to thank Madam Hasimah Binti Saleh, our Research and
Methodology lecturer who also often assist us in indirectly contributing to the idea of a good
idea for our research project so that we can make this research project seamlessly
We would also like to extend our thanks to Commerce Department of Politeknik
Kuching Sarawak for the help in offering us the resources and meeting space for us in
running the research.
Next, we are very happy to be able to work together in this group which is represented
by (Tsenlydia Binti Jimmy, Noor Izati Binti Mohd Zamri Lopek, Yusri Bin Abdul Halim,
Andy Yanto Bin Mohammad Ali and Mohammad Ramdan Saini Bin Abdullah Abdul Malik )
to make this project a success. Thanks to the cooperation given by each one of our group
members who have worked hard and easy, we are able to complete this project.
Introduction
A financial ratio or accounting is a relative magnitude of two selected numerical
values taken from an enterprise’s financial statements (wiki). Accounting Ratio is a way of
expressing the relationship between one accounting result and another, which is intended to
provide a useful comparison. Accounting ratios form the basis of fundamental analysis. An
accounting ratio compares two aspects of a financial statement, such as the relationship (or
ratio) of current assets to current liabilities. The ratios can be used to evaluate the financial
condition of a company, including the company’s strengths and weaknesses.
Financial ratios quantify many aspects of a business and are an integral part of the
financial statement analysis. Financial ratios are categorized according to the financial aspect
of the business which the ratio measures. Liquidity ratios measure the availability of cash to
pay debt. Activity ratios measure how quickly a firm converts non-cash assets to cash assets.
Debt ratios measure the firm’s ability to repay long-term debt. Profitability ratios measure the
firm’s use of its assets and control of its expenses to generate an acceptable rate of return.
Market ratios measure investor response to owning a company’s stock and also the cost of
issuing stock. These are concerned with the return on investment for shareholders, and with
the relationship between return and the value of an investment in company’s shares. Financial
ratios allow for comparisons between companies, between industries, between different time
periods for one company and between a single company and its industry average. Ratios
generally are not useful unless they are benchmarked against something else, like past
performance or another company. Thus, the ratios of firms in different industries, which face
different risk, capital requirements, and competition, are usually hard to compare.
Financial performance analysis is the process of determining the operating and
financial characteristics of a firm from accounting and financial statements. The goal of such
analysis is to determine the efficiency and performance of firm’s liquidity, profitability and
other indicators that the business is conducted in a rational and normal way that ensuring
enough returns to the shareholders to maintain at least its market value. The ability of an
organization to analyze its financial position is essential for improving its competitive
position in the market place. Through a careful analysis of its financial performance, the
organization can identify opportunities to improve performance of the department, unit or
organizational level. In this context researcher has undertaken an analysis of financial
performance of food industry.
1.2 Problem Statement
The purpose of this study is to measure and evaluate the performance of the selected
companies in Malaysia which is Danone and Nestle and compare them to each other. The
analysis of the financial conditions of the companies would help reaching to conclusions.
There is evidence that financial management affects the overall performance of a food
industry. The question arises is whether the accounting ratios especially current ratio, quick
ratio, inventory turnover, total asset turnover and gross profit margin can be used to give
strategies for better financial performance in terms of financial ratios analysis for optimal
profitability. The study will give an insight into the financial condition of the two companies
based on the financial statements that lead to the level of their performance. The above
statements show that some studies found that financial ratios is a good tool that support
decision making. This study needs to analyse whether analysis of current ratio, quick ratio,
inventory turnover, total asset turnover and gross profit margin that has the biggest influence
in affecting the food industry value.

1.3 Research Objective

The main objective of this research is to study and compare the overall financial
performance of selected public sector between Nestle Berhad and Danone Berhad by
referring to the annual report of the companies. More specifically, it seeks to dwell upon
mainly:
i. To examine the relationship between Inventory Turnover Ratio (ITR) on Gross Profit
Margin (GPM) of Nestle Berhad and Danone Berhad
ii. To determine which companies between Nestle Berhad and Danone Berhad has
highest ability to pay short-term obligations by using Liquidity Ratio which are
Current Ratio (CR) and Quick Ratio (QR)
iii. To analyze the factors determining the behaviour of liquidity and profitability of the
Nestle Berhad and Danone Berhad.
iv. To find out the efficiency of financial operation between Nestle Berhad and Danone
Berhad.

1.4 Research Questions

The research questions that were asked included:
1. Does Current Ratio predict survival of both companies?
2. Does Quick Ratio predict survival of both companies?
3. Does Inventory Turnover Ratio predict survival of both companies?
1.5 Research Contribution/Significance

The main purpose of this research is to study on comparison of profitability of

financial ratio in food industry. For this research, the researcher chose Danone and Nestle as
subject for this research. This research is essential to compare profitability through financial
ratio analysis as tools for evaluating the performance of food industry in Malaysia. The study
made use of secondary data to obtain relevant financial information. The data collected were
analysed using different categories of ratios. Hence, the application of various categories of
ratios becomes more dependable indicators of the liquidity of a company than the net
working capitals. The study concludes that the application of appropriate financial ratios to
interpret the financial statement of the company is crucial and useful for decision making.

1.6 Limitation of Study

The study suffers from certain limitations.
 Study exclusively depends on the published financial data, so it is subject to all
limitations that are inherent in the condensed published financial statements.
 Relatively small sample size. For this reason, this findings cannot be generalize to the
broader community based on this study alone.
 This study consists of analysing the financial data of Public Companies which are
Nestle Bhd and Danone Bhd researchers need to be careful in publishing the result of
the study to any parties where researchers need to ask a prior approval from the
company itself.

1.7 Summary

Overall, the researchers carried out the study on comparison of financial performance
between Nestle Bhd and Danone Bhd within 2012 until 2016. The researchers used the
annual report and financial performance from Nestle Bhd and Danone Bhd in analysing and
publishing the result of study where researchers have to ask a prior approval from the
company itself.
Literature Review
2.1 Introduction
To answer the research question identified in this research, the researcher has to
assess the financial performance of Nestle Bhd and its comparison with Danone Bhd. The
financial performance assessment method itself is based on established literature (Gitman &
Zutter, 2012; Ross, Westerfield, & Jaffe, 2010; Bodie, Kane, & Marcus, 2011). The
performance analysis assessment is divided into 6 parts: current ratio, quick ratio, debt ratio,
total assets turnover ratio, inventory turnover and gross profit margin. The specific formulas
and methods to perform the financial performance assessment and company valuation will be
elaborated in this chapter.

2.2 Definition of Construct

Financial Ratio Analysis

Financial ratios are used to evaluate overall financial condition of a company in a
standardized measurement, standardized measurement is important to perform a financial
performance comparison in various companies (Groplelli, A, & Nikhbat, 2000). Financial
ratios are concentrating on several key areas of responsibility to view a company’s
performance comprehensively to find the strength and weakness points of a company’s
performance. Based on (Gitman & Zutter, 2012) ratio analysis involves measurement and
interpretation of financial ratios to analyze the overall performance of a company. Financial
ratio analysis is also used in avoiding problems of comparing financial performance different
size of companies in a standardized measurement (Ross,Westerfield, & Jaffe, 2010). The
researcher used the financial ratio analysis calculation based on Gitman’s Principle of
Managerial Finance, Gitman’s view of investigating financial performance has four ratio
categories to be magnified, there are: liquidity ratios, activity ratios, debt ratios and
profitability ratios.

Current Ratio
The current ratio is a liquidity ratio that measures a firm's ability to pay off its short-
term liabilities with its current assets. The available cash resources to satisfy these obligations
must come primarily from cash or the conversion to cash of other current assets (Gitman &
Zutter, 2012).
 If the ratio result less than 1, it indicates that the liabilities of the company are greater
than the assets which implied the obligations of the company would be unable to be paid off
by the time it is due. It tells the business owner or investor that the company’s financial
health is not good, it also may indicate issues with company’s liquidity. The formula to find
this ratio is:
Current Ratio = Current Assets / Current Liabilities

Quick Ratio
The quick ratio measures a company’s ability to pay its short-term obligations using
its most liquid assets. This ratio reflects a company’s financial durability in term of meeting
its short-term debts and gives information about company’s short-term liquidity (Gitman &
Zutter, 2012). The formula to find this ratio is:
Quick Ratio= Current Assets- Inventory/ Current Liabilities

Debt Ratio
The debt ratio used to measure a company’s debt to its total assets, or the proportion
of total assets that financed by the company’s creditors. The higher ratio of debt indicating
higher proportion of debt in a company’s balance sheet compared with its assets (Gitman &
Zutter, 2012). The formula to find debt ratio is shown below:
Debt Ratio= Total Liabilities/ Total Assets

Total Assets Turnover

Total asset turnover measures a company’s efficiency of using assets in order to
generate sales. The ratio reflects the productivity of assets that are managed by a company.
The formula to find total asset turnover is:
Total Assets Turnover= Sales/ Total Sales

Gross Profit Margin

The gross profit margin gives a measurement of how much a company gained gross
profit in total sales. This ratio is used to evaluate company’s ability to control the cost of
generating profit, lower costs will imply to higher gross profit margin a company earned in
every sales (Gitman & Zutter,2012). The formula to find the gross profit margin is:
Gross Profit Margin= Sales – COGS/ Sales
Inventory Turnover
Inventory turnover ratio is used to measure the liquidity or activity of inventory that a
company owns, it calculates the number of time the company’s inventory sold in a certain
period. This ratio indicates the liquidity of products that company sold (Gitman & Zutter,
2012). The formula to find the inventory turnover is:
Inventory Turnover= Cost of Goods Sold/ Inventory

2.3 Theoretical Framework

Liquidity Ratios:
Liquidity ratios are reflecting the overall liquidity of a company. The liquidity is
needed to satisfy a company’s short-term debt obligations. The higher liquidity ratio
indicating the company is in good financial condition and has a higher margin of safety to
satisfy its current liabilities.

Leverage Ratio:
The debt ratios or can be called leverage ratios are measuring a company’s ability of
satisfying its financial obligations. These ratios also reflecting the proportion of debt and
equity a company is using, comparing debt to its total assets composition. These ratios used
to identify the financial healthiness of a company in term of solvency.
Activity Ratio:
Activity ratios are indicating the management capability of a company in generating
revenue from assets utilization, turning inventory into sales, and the ability to manage the
payables and receivables in its activity.

Profitability Ratio:
Profitability ratios are measuring company’s performance in earning profit related to
sales, assets, and equity. These ratios give measurement about profitability, resources usage
effectively, and efficiency of a company in generating profit.

2.4 Previous Research Finding

Numerous studies have attempted to explain about Comparison of Profitability of
Financial Ratio in Food Industry.
Nadya Marsha, Isrochmani Murfaqi, (2017), found that this research agree with
earlier research conclusion by Baba, B.U. (2014) that both liquidity and profitability ratios
which ROA, CR, and ATR is a part of, have a significant effect on firms' value.
Moreover, Panesh Kumar Goyal, (2017) extended their analysis and revealed that the
use of financial indicators has a significant positive effect on investment taken by
Investors,financial indicators represented in ratio analysis plays a vital role in a business
planning process and figuring out the strength, weaknesses, and opportunities of a
business enterprise and high significance to individual ratios doesn't always result in a good
decision so Sometimes higher profitability may be accompanied with low liquidity.
Later, Habimana Theogene, Tom Mulegi, Nyompano Hosee, (2017) stated that the
study concluded that ratios analysis is a good way to evaluate the financial results in order to
measure its performance. Other researcher that agreed that this topic is interesting is Baba
(2014) who investigate the effect of accounting ratios on firms' value using Malaysian listed
companies. The method he used is multiple regression analysis which resulted in revealing
that both liquidity and profitability ratios have a significant effect on firms' value.
However, studies on comparison of profitability of financial ratio in food industry
were strongly advised to always compare and keep watch on the financial ratios compute
from each year financial statement. This is because as shown by this work, financial ratios
influences significantly on firm’s value and can help in finding out what is needed for the
company to flourish.
2.5 Summary
In this chapter, from what has been know about Comparison of Profitability of
Financial Ratio in Food Industry which is Nestle Bhd and Danone Bhd has been analyzed.
About profitability of financial ratio are the most importance thing that’s need to be focus by
Nestle Bhd and Danone Bhd. The theoretical framework has been prepared for better
understanding about ratio analysis which is liquidity ratio, leverage ratio, activity ratio and
profitability ratio.
The research method that used to collect the relevant secondary data within the Nestle
Bhd and Danone Bhd content will be discussed in the next chapter 3.
Methodology
3.1 Introduction
Research methodology describes sequential steps that are used to solve the problem in
this research. The methodology of this research also applied in identifying problem, finding
objectives, gathering data, and conclusion section where the research questions can be
answered by performing steps. Since the purpose of this research is to compare a better
insight into the financial performance of food industry and the effect of various independent
variables on the dependent variables. A descriptive research was adopted to obtain necessary
data for the study. In this study, profitability proxy by Gross Profit Margin (GPM) is our
dependent variable which Financial ratio analysis measured by Inventory Turnover Ratio
(ITR), Current Ratio (CR), Quick Ratio (QR), Debt Ratio (DR) and Total Asset Turnover
Ratio (TATR) are our independent variable. Gross Profit Margin (GPM) is a measure of the
overall effectiveness of the firm in generating profit with available assets (Van-Horne and
Wachowicz, 2005). This study made use of secondary data which were extracted from annual
reports, financial statements, journals, seminar papers, periodicals and other related
publications of food industry. The secondary data collected were analyzed by carrying out
detailed financial analysis in order to identify the financial strengths and weaknesses of the
company.

3.2 Research Design

In conducting this research proposal, the available data on the study are secondary source
of data. The population of food quoted companies was two (2)
1) Nestle Berhad
2) Danone Berhad

Because of limited data of food industry, the researcher has decide to use two (2)
companies: Nestle Bhd and Danone Bhd. The data used for the analysis were extracted from
the annual reports and financial statement of the two (2) selected companies for the research
proposal for the five (5) years from year 2012 to 2016. The data extracted from this
publication related to the food industry of Inventory Turnover Ratio (ITR), Current Ratio
(CR), Quick Ratio (QR), Debt Ratio (DR), Total Asset Turnover Ratio (TATR) and Gross
Profit Margin (GPM) all on yearly basis.
 Descriptive analysis is the first step of this analysis, it will help researchers to
describe relevant aspects of financial management and provide detailed information about
each relevant variable.

3.3 Research Sampling Techniques

The researcher has examined annual reports and collects the data of 14 firms’ observations.
The sample consist Food and Beverages firms that have 5 years non-missing data during the
sample period.

Table: Firms that are used in the Analysis

No. Stock Code Company Name
1 ADES PT Akasha Wira International Tbk.
2 CEKA PT Cahay Kalbar Tbk.
3 DAVO PT Davomas Abadi Tbk.
4 DLTA PT Delta Djakarta Tbk.
5 ICBP PT Indofood CBP Sukses Makmur Tbk.
6 INDF PT Indofood Sukses Makmur Tbk.
7 MYOR PTMayora Indah Tbk.
8 MLBI PT Multi Bintang Indonesia Tbk.
9 ROTI PT Nippon Indosari Carpindo Tbk.
10 PSDN PT Prasidha Aneka Niaga Tbk.
11 SKLT PT Seka rLaut Tbk.
12 STTP PT Siantar Top Tbk.
13 AISA PT Tiga Pilar Sejahtera Food Tbk.
14 ULTJ PT Ultrajaya Milk Industry & Trading Co. Tbk.
3.4 Research Instrument
Secondary Data

Secondary data refers to data that was collected by someone other than the user. Study
exclusively depends on the published financial data, so it is subject to all limitations that are
inherent in the condensed published financial statements. Common sources of the researcher
include financial statement of Nestle Bhd and Danone Bhd from 2012 to 2016.

3.5 Data Collection Procedure

Problem Statement

Research Objectives

Literature Review

Data Collection

Data Analysis

Conclusion and Recommendation

Problem Identification
Explain the problem identification, research scope and limitation based on the case
background

Research Objective
Explain the theories used to reach the main purpose of this research

Data Collection
The data gathering process that related with the main research topic

Literature Review
The basic thinking and benchmark to perform the analysis
Data Analysis
The analyzed and calculated data as the core of this research

Conclusion and Recommendation

Shows the result of this research objective and conclude it to answer the entire research
problem

3.6 Data Analysis

Financial Ratio Analysis
Financial ratios are used to evaluate overall financial condition of a company in a
standardized measurement, standardized measurement is important to perform a financial
performance comparison in various companies (Groplelli, A, & Nikhbat, 2000). Financial
ratios are concentrating on several key areas of responsibility to view a company’s
performance comprehensively to find the strength and weakness points of a company’s
performance. Based on (Gitman & Zutter, 2012) ratio analysis involves measurement and
interpretation of financial ratios to analyze the overall performance of a company. Financial
ratio analysis is also used in avoiding problems of comparing financial performance different
size of companies in a standardized measurement (Ross,Westerfield, & Jaffe, 2010). The
researcher used the financial ratio analysis calculation based on Gitman’s Principle of
Managerial Finance, Gitman’s view of investigating financial performance has four ratio
categories to be magnified, there are: liquidity ratios, efficiency ratios, leverage ratios and
profitability ratios.

3.7 Summary
Overall, the researchers carried out the study by using secondary data such as annual
report from Nestle Bhd and Danone Bhd within 2012 until 2016. The researchers also used
descriptive analysis and financial ratio analysis that involve calculation on liquidity ratio,
efficiency ratio, leverage ratio and profitability ratio.
Conclusion
4.1 Results
Liquidity Ratio
Financial Ratio Current Ratio Quick Ratio
2012 35,205,000 35,205,000−9,125,000
= 0.91x = 0.67x
38,753,000 38,753,000

2013 30,060,000 30,066,000−8,382,000

= 0.91x = 0.66x
32,917,000 32,917,000

2014 33,961,000 33,961,000−9,172,000

= 1.03x = 0.75x
32,895,000 32,895,000

2015 29,434,000 29,434,000−8,153,000

= 0.88x = 0.64x
33,321,000 33,321,000

2016 32,042,000 32,042,000−8,401,000

= 0.85x = 0.63x
37,517,000 37,517,000

Efficiency Ratio
Financial Ratio Total Assets Turnover Ratio Inventory Turnover
2012 92,186,000 92,186,000
= 0.73x = 10.10x
126,229,000 9,125,000

2013 92,158,000 92,158,000

= 0.77x = 10.99x
120,442,000 8,382,000

2014 91,612,000 91,612,000

= 0.69x = 9.99x
133,450,000 9,172,000

2015 87,785,000 88,785,000

= 1.48x = 10.89x
60,006,000 8,153,000

2016 89,469,000 89,469,000

= 0.68x = 10.65x
131,901,000 8,401,000

Leverage Ratio and Profitability Ratio

Leverage Ratio Profitability Ratio
Financial Ratio
Debt Ratio Gross Profit Margin
2012 63,625,000 92,186,000−48,398,000
= 50% = 0.47x
126,229,000 92,186,000

2013 56,303,000 92,158,000−48,111,000

= 47% = 0.48x
130,442,000 92,158,000

2014 61,566,000 91,612,000−47,553,000

= 46.13% = 0.41x
133,450,000 91,612,000

2015 60,006,000 88,785,000− 44,730,000

= 48.39% = 0.496x
123,992,000 88,785,000

2016 65,920,000 89,469,000−44,199,000

= 49.98% = 0.51x
131,901,000 89,469,000
4.2 Discussion