FINANCIAL MANAGEMENT

Answer No. 1

INTRODUCTION

My selected companies are Apollo Food Holdings Berhad and Oriental Food

Industries Holdings Berhad. This question discusses background of the company, business

activities, prospect and the background of the industry.

COMPANY 1 : Apollo Food Holdings Berhad

i. Background of the company

Apollo Food Holdings Berhad is a Malaysia-based company. It is engaged in investment

holding and provision of management services to subsidiaries. The Company is a public

limited liability company, incorporated and domiciled in Malaysia and is listed on the Main

Board of the Bursa Malaysia Securities Berhad. The registered office of the Company is

located at Suite 1301, 13th Floor, City Plaza, Jalan Tebrau, 80300 Johor Bahru, Johor.

The principal place of business is located at 70, Jalan Langkasuka, Larkin Industrial Area,

80350 Johor Bahru, Johor. The Company’s wholly owned subsidiaries include Apollo Food

Industries (M) Sdn Bhd, and Hap Huat Food Industries Sdn Bhd.

ii. Principal Activities

The principal activities of the Company are investment holding and provision of management

services to subsidiaries.

Details of the wholly-owned subsidiaries (all incorporated in Malaysia) are:

1. Apollo Food Industries (M) Sdn Bhd Manufacture of and trading in compound

chocolates and chocolate confectionery

products and cakes.

2. Hap Huat Food Industries Sdn Bhd Distribution and marketing of compound

chocolates and chocolate.

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iii. Prospects

The Group is expected to face greater challenges ahead in view of the continuing global

economic crisis and market uncertainties despite the gradual reduction of fuel prices and

cost of raw materials. Therefore, they will still continue to focus their efforts on production

efficiency and market research in term of sourcing of raw materials, new overseas markets

and promoting of new products so as to maintain the overall performance of the Group. More

efforts will continue to be spent on internal training to improve the quality of their products to

meet the demand of higher industrial standards and the challenges posed by the products of

other brandings.

With the guidance of their experienced management team, this company is confident

that they would be able to rise up to the challenges in the forthcoming financial year.

COMPANY 2: Oriental Food Industries Holdings Berhad

i. Background of the company

Oriental Food Industries Holdings Berhad (“OFIH”) was incorporated on 8 June 1996 in

Malaysia under the Companies Act, 1965 as a public limited company. OFIH was listed on

the Second Board of Bursa Malaysia Securities in August 2000 and was subsequently

transferred to the Main Board on 13 October 2003.

ii. Principal Activities

OFIH is principally an investment holding company while the OFIH Group has subsidiaries

that are engaged in the following activities:

Subsidiaries of OFIH

Oriental Food Industries Sdn. Bhd. (“OFI”) 100 Manufacturing and marketing of snack

food and confectioneries.

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Subsidiary of OFI

Oriental Food Marketing (M) Sdn. Bhd. (“OFM”) 100 Sales and marketing of snack

food and confectioneries.

iii. Prospects

Despite facing various challenges of competitive markets, increasing materials and

production costs and the appreciation of Ringgit Malaysia against US Dollar, they expects

that the performance of the company will be satisfactory for the coming financial year as the

Group will continuously strive to obtain bigger market share by exploring overseas market

and undertake certain cost saving measures to mitigate the higher materials and production

costs.

Moving ahead, the company will continue to focus on the following key areas:

increase of profitability, implementation of effective cost-control measures, expansion of

production lines, expansion of product portfolio, and enhancement of current products in

terms of quality and variety and packaging innovation.

Meanwhile, their marketing arm will continue to expand overseas into key

geographical markets to achieve their goal of being the preferred snack food and

confectioneries manufacturer.

iv. Background of the industry

Both companies are related to food industry. With the current economic crisis worldwide, the

food industry in Malaysia is also not spared.

With the current global economic crisis, and more jobs are being axed, policymakers

have to place greater emphasis on food production as a measure to address Malaysiaʼs

overdependence on food imported from overseas.

In 2008, Malaysia is currently still a net importer of food products, with annual import

in excess of RM15 billion, despite doubling its export of processed food to more than 80

countries around the world over the last ten years. The total export of food products currently

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stands at over RM10 billion, where two-thirds (or RM6 billion) comes from processed food.

The main export markets are Singapore, United States, Indonesia, Japan, The Netherlands

and Thailand.

The sales of food products in the more developed countries, where the annual

growth rates are only 2-3%, however, trends towards variety, food safety and companies to

develop strategies to meet the quality. A better insight into the performance and dynamics of

global food markets will help Malaysian increasingly varied needs in different markets. While

the strategy may be to increase their presence in developing countries, in developed

countries, food retailers and suppliers would have to think of product differentiation.

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Answer No. 2

Based on the company’s 3 years financial statement, the financial ratios are calculated as

below:

COMPANY 1 : Apollo Food Holdings Berhad

FINANCIAL RATIO 2007 2008 2009

Debt ratio

=Total liability 22,432,805 x 100 23,818,664 x 100 21,565,141 x 100

Total Asset 193,182,135 200,862,484 210,527,264

=10.24%
=11.61% =11.86%

Debt equity ratio

=Debt 22,432,135 x 100 23,818,664 x 100 21,565,141 x 100

Equity 170,747,330 177,043,820 188,962,123

=13.14% =13.45% =11.41%

Net profit margin

=Net profit 24,553,275 x 100 20,974,490 x 100 20,918,303 x 100

Sales 154,272,027 181,144,065 175,337,429

=15.92% =11.58% =11.93%

Return on equity

Net Income 24,553,275 x 100 20,974,490 x 100 20,918,303 x 100

Shareholder's Equity 170,747,330 177,043,820 188,962,123

=14.38% =11.84% =11.07%

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Dividend-payout

ratio

=Dividend per share 10.95 11 11

EPS 26.22 26.22 26.15

=0.42
=0.42 =0.42

 8760,000,00 = 0.1095

80,000,0000

 9,000,000 =0.11

80,000,000

COMPANY 2: Oriental Food Industries Holdings Berhad

 Total liability = Current liabilities + Long term liabilities

2007

13,872,876 + 9,230,342 = 23,103,218

2008

15,981,851 + 13,723,764 = 29,705,615

2009

11,446,161 + 12,884,306 = 24,330,467

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 Total Asset=Current asset + Fixed asset

2007

72,782,115 + 41,402,777 = 114,184,892

2008

81,418,955 + 39,807,963 = 121,226,918

2009

88,108,961 + 42,614,718 = 130,723,679

FINANCIAL RATIO 2007 2008 2009

Debt ratio

=Total liability 23,103,218 x 100 29,705,615 x 100 24,330,467 x 100

Total Asset 114,184,892 121,226,918 130,723,679

=18.61%
=20.23% =24.50%

Debt equity ratio

=Debt 23,103,218 29,705,615 24,330,467

Equity 91,081,674 91,521,303 106,393,212

=25.36% =32.45% =22.86%

Net profit margin

=Net profit 8,371,380 4,639,629 9,766,635

Sales 125,508,573 124,397,459 118,440,509

=6.67% =3.72% =8.25%

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Return on equity

Return on Equity = 8,371,380 4,639,629 9,766,635

Net Income 91,081,674 91,521,303 106,393,212

Shareholder's Equity
=9.19% =5.06% =9.18%

Dividend-payout

ratio

=Dividend per share 5 7 3.5

EPS 13.9 7.7 16.3

=0.35 =0.91 =0.21

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Answer No. 3

Trend of the ratio for 3-year period as below:

COMPANY 1: Apollo Food Holdings Berhad

FINANCIAL 2007 2008 2009 Trend of the

RATIO ratio

Debt ratio 11.61% 11.86% 10.24% ok

Debt equity ratio 13.14% 13.45% 11.41% ok

Net profit margin 15.92% 11.58% 11.93% poor

Return on equity 14.38% 11.84% 11.07% poor

Dividend-payout 0.42 0.42 0.42 maintain

ratio

COMPANY 2: Oriental Food Industries Holdings Berhad

FINANCIAL 2007 2008 2009 Trend of

RATIO the ratio

Debt ratio 20.23% 24.50% 18.61% ok

Debt equity 25.36% 32.45% 22.86% ok

ratio

Net profit 6.67% 3.72% 8.25% ok

margin

Return on ok

equity 9.19% 5.06% 9.18%

Dividend-payout 0.35 0.91 0.21 poor

ratio

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i. Financing policy (aggressive and / or conservative approach)

Both companies are using aggressive approach. In food industry the company usually

are being financed by short term sources, i.e trade payable, other payable and accrual,

borrowing interest bearing like bank overdraft.

ii. Capital structure.

Companies expands its business the capital requirements that arises from the basic

sources such as equity and debt financing.

The debt ratio is compares a company's total debt to its total assets, which is used to gain a

general idea as to the amount of leverage being used by a company. Based on the above

table, from 2007 to 2009, the percentage of debt ratio decrease by 1.37% for Apollo’s

company and oriental’s company is decrease by 1.62% that shows both companies are less

dependent on leverage, i.e., money borrowed from and/or owed to others. The lower the

percentage, the less leverage a company is using and the stronger its equity position.

Therefore, based on debt ratio Oriental company is more risky than Apollo.

Debt equity ratio is another leverage ratio that compares a company's total liabilities

to its total shareholders' equity. This is a measurement of how much suppliers, lenders,

creditors and obligors have committed to the company versus what the shareholders have

committed. To a large degree, the debt-equity ratio provides another vantage point on a

company's leverage position, in this case, comparing total liabilities to shareholders' equity,

as opposed to total assets in the debt ratio. The percentage of the debt equity ratio also

decrease by 1.73% from 2007 to 2009 for Apollo’s company and Oriental’s company

decrease by 2.5% that indicate the company is using less leverage and has a stronger

equity position.

iii. Dividend policy

Dividend payout ratio identifies the percentage of earnings (net income) per common

share allocated to paying cash dividends to shareholders. The dividend payout ratio is an

indicator of how well earnings support the dividend payment.

From 2007 to 2009, the trend dividend payout ratio for Apollo’s company is maintain but for
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oriental’s company is low. This policy helps company to establish a certain percentage of

earning to be paid to owners in each dividend per share.

The dividend policy for Oriental’s company is dividends on ordinary shares are

recognised as a liability when declared by the Board of Directors before the balance sheet

date. Dividends when declared by the Board of Directors after the balance sheet date but

before the financial statements are authorised for issue will be accounted for in the next

financial year.

iv. Operating performance

Net profit margin often referred to simply as a company's profit margin, the so-

called bottom line is the most often mentioned when discussing a company's profitability.

While undeniably an important number, investors can easily see from a complete profit

margin analysis that there are several income and expense operating elements in an income

statement that determine a net profit margin. It behoves investors to take a comprehensive

look at a company's profit margins on a systematic basis. The objective of margin analysis is

to detect consistency or positive/negative trends in a company's earnings. Here, both

companies have positive profit margin analysis translates into positive investment quality. To

a large degree, it is the quality, and growth, of a company's earnings that drive its stock

price.

Return on equity ratio (ROE) indicates how profitable a company is by comparing its

net income to its average shareholders' equity. The return on equity ratio (ROE) measures

how much the shareholders earned for their investment in the company. Both companies,

the percentage of ROE is low from 2007 to 2009. The higher the ratio percentage in 2007

(14.38%), the more efficient management is in utilizing its equity base and the better return

is to investors.

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Answer No. 4

i. FINANCING POLICY

The company use several types of financing to meet their capital requirement. Both

companies use current liabilities as a major source of financing for current asset. The main

source of short term financing as follows:

Types of source of financing Apolo Oriental

Spontaneous financing -Trade payables -Trade payables

-Other payables -Accruals

-Deposit received -Proposed Directors’ fees

-Other payables

Non-spontaneous financing Nil -Bank loan

Alternative sources Nil Nil

a. Trade payables

Trade payable also known as trade credit. Account payable is the largest single

categories of short term financing. In year 2009, the credit term of Apollo, are the normal

credit terms granted to the Group ranges from 7 to 60 days and Credit terms for oriental is

granted to the Group vary from cash term to 90 days. Therefore the company might stretch

the account payable with late payment and pay within 60 days or 90 days.

b. Accrual

An accrual is a kind of debt that has been incurred or accumulated over a period of time,

but has not been paid yet. The most items accrued are taxes and wages.

c. Bank loan

Oriental company use bank loan. Loan is the borrowing from the bank. The bank loan

can be divided 2 basic categories. These are secured and unsecured loan.

 The unsecured term loan is a promise to pay a debt.

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For example oriental repayable by 36 to 60 equal monthly instalment effective from

various drawn down dates.

 The secured term loan is a form debt in which specific asset have been pledged to

guarantee payment.

Oriental was secured by a fixed change over its land held for development and

covered by a corporate guarantee from the Company. It is repayable over 24 monthly

instalments commencing from October 2006. The term loan was fully settled during

the financial year.

The cost of bank loan

 Interest on term loans for oriental is chargeable at the rates ranging from 2.45% to

5.15% (2008: 4.28% to 5.00%) per annum during the financial year.

 Interest on bank overdraft for oriental is chargeable at the rate of 9.5% (2008: 9.5%)

per annum during the financial year.

Therefore interest on bank overdrafts is higher because the quantity of the loan is small

because of the fixed cost involved in providing and servicing loan.

ii. CAPITAL STRUCTURE

Capital structure is the combination of debt and equity to finance a company. It is usually

measured as either ratio of debt to equity or ratio debt to asset. The theoretical question

that has received much attention in finance literature has been whether the capital

structure of a firm affects market value or not.

In the theory of firm's capital structure and financing decisions, the Pecking

Order Theory or Pecking Order Model was developed by Stewart C. Myers and

Nicolas Majluf in 1984. It states that companies prioritize their sources of financing (from

internal financing to equity) according to the law of least effort, or of least resistance,

preferring to raise equity as a financing means of last resort. Hence, internal funds are
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used first, and when that is depleted, debt is issued, and when it is not sensible to issue

any more debt, equity is issued. This theory maintains that businesses adhere to a

hierarchy of financing sources and prefer internal financing when available, and debt is

preferred over equity if external financing is required.

The Pecking Order Theory explains the inverse relationship between profitability and

debt ratios:

1. Firms prefer internal financing.

2. They adapt their target dividend payout ratios to their investment opportunities, while

trying to avoid sudden changes in dividends.

3. Sticky dividend policies, plus unpredictable fluctuations in profits and investment

opportunities, mean that internally generated cash flow is sometimes more than

capital expenditures and at other times less. If it is more, the firm pays off the debt or

invests in marketable securities. If it is less, the firm first draws down its cash balance

or sells its marketable securities, rather than reduce dividends.

4. If external financing is required, firms issue the safest security first. That is, they start

with debt, then possibly hybrid securities such as convertible bonds, then perhaps

equity as a last resort. In addition, issue costs are least for internal funds, low for debt

and highest for equity. There is also the negative signaling to the stock market

associated with issuing equity, positive signaling associated with debt.

This theory is applied to both companies because there have hierarchy of financing that

firm will follow. This theory states if the company can not use internally generated cash flow,

they will issue debt. If they are unable to do this, they will issue equity as a last resort. This

company have less leverage. It means that they use internally generated fund. Thus it could

avoid issuing equity which is costly as the company can use internally generated fund.

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iii. Dividend policy

Dividend policy determines what happens to the value of the firm as the dividend

increase or decrease, holding everything else (capital budgeting and borrowing) constant.

Both companies recognise dividend in the financial statements upon approval by

shareholders at the forthcoming Annual General Meeting.

Companies use passive residual theory that focuses to internal need for capital. It is

also important that the payment of dividends reduce the amount of retained earning. Thus,

the company should retain its earnings as long as it has economically viable investment

opportunities.

References:
1. http://www.bursamalaysia.com/website/bm/
(listed company, annual report, Apollo/Oriental, 2007-2009)

2. http://www.investopedia.com/university/ratios/cash-flow-indicator/ratio4.asp

listed company, annual report, Apollo, 2007-2009

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