COMPREHENSIVE CASE 4

BKAR2023 Financial Accounting and Reporting 2 (A191)

Financial Statement Analysis
DUE DATE: 22 December 2019

A sustainable business and mission requires effective planning and financial management. Ratio
analysis is a useful management tool that will improve our understanding of financial results and
trends over time, and provide key indicators of organizational performance. For instance,
managers will use ratio analysis to pinpoint strengths and weaknesses from which strategies and
initiatives can be formed. Meanwhile, funders may use ratio analysis to measure results against
other organizations or make judgments concerning management effectiveness and mission
impact. There are many other users of financial statement that may find ratio analysis is
important for them to make decision of the company that they are interested in.

There are four major types of ratios; (i) liquidity ratios – to measure the company’s short term
ability to pay its maturating obligations, (ii) activity ratios – to measure of how effective the
company uses its assets, (iii) profitability ratios – to measure the degree of success or failure of
a given company or division for a given period of time and (iv) leverage ratios – to measure the
degree of protection for long term creditors and investor. The ratios formulas are provided on
the next page.

This case putting you in a senior consultant position with given business scenario. For each
scenario, you must identify the major issues or problems, analyze and evaluate the situation,
present alternatives, and make recommendations. The internal situation analysis normally
requires financial analysis. Based on available financial information, you assess the firm’s
financial performance, assess its strengths and weaknesses, and provide suggestions for future
planning. A common approach is to calculate various ratios using major items from the firm’s
financial position statement and profit or loss and comprehensive income statement. Ratio
analysis is a powerful means to evaluate the firm’s financial position and help understand the
overall picture of the firm. This analysis can be more effectively performed with the use of
Microsoft Excel to facilitate and simplify the work.

The financial analysis can be made on a historical basis and also by comparing similar firms in
the industries. The former method is based on a trend analysis to evaluate the firm’s present
ratios in comparison with those of previous years to find the direction that the firm is moving
forward and evaluate the effectiveness of its past strategy. The latter method is based on cross-
sectional analysis to determine the firm’s performance relative to its major competitors and the
industry average.

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Table 1.0: A Summary of Financial Ratios

Liquidity Ratios
1. Current ratio

2. Quick ratio

Activity Ratios
1. Inventory turnover

2. Total asset turnover

3. Account receivable turnover

Profitability Ratios
1. Profit margin on sales

2. Return on assets

3. Earnings per share

Leverage Ratios
1. Debt to assets ratio

2. Debt to equity ratio

3. Time interest earned

4. Book value per share

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REQUIRED:

1. Assume that you are in the position of senior consultant, you are required to download the annual
report of TWO Malaysian public listed companies (PLC) (i.e. Company X and Company Y) from
the Main Market (http://www.bursamalaysia.com). Make sure both companies are from the same
sector.
2. Briefly describe the main business activity of the companies. Highlight the key performance of the
companies, e.g. by total sales, total profit, total asset, total liabilities.
3. Compute the ratios for both companies using the financial information presented on the company’s
financial statement based on the list of ratios provided in the Table 1.0. You also have to intepret the
ratios. The interpretations of each ratios results are compulsory. The analysis and interpretation of the
ratios can be made on a historical basis or trend analysis for at least two recent years (i.e. 2018 and
2017).
4. Assume that your company has assigned you a case in which a client (Client A) is interested to invest
in the companies that you are working on in Question 1. Advise your client which information (ratios)
that are important to be analysed in order to decide whether or not to invest. Give your justifications
and critical analysis based on the ratios that you have computed (trend analysis).
5. To strengthen your justifications to Client A, provide comparison for each of the ratio between
Company X and Company Y. Communicate your preference to Client A and justify your opinion.
You may use cross-sectional analysis to determine the firm’s performance relative to its major
competitors and the industry average. (Must be based on critical analysis).
6. Assume that your company also assign you to consult Client B regarding his concern whether to
provide financial assistance to Company X and Company Y or not. Client B asks your help in
assessing whether both companies are able to pay or not its obligation in the future. Calculate the
relevant ratios and give your justifications. You may carryout the ratio analysis using trend analysis,
and to strengthen your justifications, you may use cross sectional analysis to compare Company X
with Company Y (for the relevant ratios).

Notes:
i. The ratios provided in Table 1.0 are based on the items of Statement of Financial Position and
Statement of Profit or Loss and Other Comprehensive Income (FAR 2 syllabus). You may
use ratios for items of Cash Flow Statement if you considered it as necessary to explain your
case.
ii. This analysis can be more effectively performed with the use of Microsoft Excel to facilitate
and simplify the work. For ratios computation, you are encouraged to use Microsoft Excel
and create your own formula using cells and shows the formula that you use by printing out
the formula page. Thus, you do not have to perform double work for ratios computation and
you can put aside your calculator. Please see the illustrations provided in the next page.
iii. Use your own creativity to come out with the comprehensive yet interesting report to your
clients.

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Illustration for ratio computation using Microsoft Excel (the example is based on years 2014 vs.
2015)

Sheet 1

Ratios computation
Company A 2014 2015
Aset Company A 2014 2015
Current assets 20,000 30,000 Current ratio

Current Assets 2 2
Liability Current Liabilities
Current Liabilities 10,000 15,000

Sheet 1(i)

Ratios computation
Company A 2014 2015
Aset Company A 2014 2015
Current assets 20000 30000 Current ratio

Current Assets =SUM(C6/C10) =SUM(D6/D10)

Liability Current Liabilities
Current Liabilities 10000 15000

The above illustrations are from the same sheet of Microsoft Excel. The first illustration is the normal
appearance of Microsoft Excel when you do your work using this application. The second illustration
shows the formulas that you used to compute the current ratio. You need to print out and hand over both
of the sheets to prove that you have applied this technique in Microsoft Excel. You may get the second
sheet display by clicking the drop item <Formulas> and click at <Shows Formulas>. You may return to
the Sheet 1 display by clicking at <Shows Formulas> for the second time. Good luck.

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SUBMISSION GUIDELINE

 This is a group project. Every group must identify the companies and get approval from
the lecturer before proceed with the project.
 You need to submit the report (hardcopy and softcopy) by 15 December 2019. You need
to attach the annual report of both companies (softcopy only).
 Report format:- Font type Times New Roman, 12 font size, references APA format.
 You also need to present your report to class during Week 14 (15 – 19 December 2019).
 Your project will be assessed in terms of Knowledge (5%) and Teamwork (5%).