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AQ012-3-M-FSA

Individual Assignment

TP036070

Student Name: Nuzha Naashidh


Student ID: TP036070
Intake Code: UCMF1405/08FIN
Module Name: Financial Statement Analysis
Module Code: AQ012-3-M-FSA
Hand In Date: 12th January 2015
Lecturer: WONG

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Table of Contents
QUESTION 1........................................................................3
1. Initial Public Offer (IPO)................................................................3
2. Bonus Issue..............................................................................3
3. Rights Issue..............................................................................3
4. Private Placement.......................................................................4

QUESTION 2........................................................................4
a) Authorised share capital.................................................................4
b) Issued share capital......................................................................4
c) Par value of share........................................................................4
d) Equity account balance and its components.............................................4

QUESTION 3........................................................................6
QUESTION 4........................................................................8
a) Profitability Ratios.....................................................................8
1. Gross profit margin................................................................................. 8
2. Net profit margin.................................................................................... 9
3. Return on asset...................................................................................... 9
4. Return on equity...................................................................................10
b) Liquidity Ratios......................................................................11
1. Working capital.................................................................................... 11
2. Current ratio....................................................................................... 12
3. Quick ratio.......................................................................................... 13
c) Asset management ratios.............................................................13
1. Asset turnover...................................................................................... 14
2. Inventory turnover................................................................................ 14
3. Average collection period........................................................................15
d) Financial structure ratios............................................................15
1. Debt to equity ratio............................................................................... 15
2. Debt ratio........................................................................................... 17
3. Equity ratio......................................................................................... 17
4. Times interest earned............................................................................. 18

Reference List......................................................................20

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QUESTION 1
1. Initial Public Offer (IPO)
When a Company sells or issues its stock to public for the first time, it is known as
Initial public offer (IPO) (Financewithsaurabh.blogspot.com, 2012). This is a direct
offer to the public to invest in the Company. The advertising booklet or prospectus of
IPO includes details of the company, risk associated with it and so on
(Financewithsaurabh.blogspot.com, 2012). IPO is a simple way of issuing shares to
the public. Through this wide distribution of share is possible. However, the costs like
floatation

costs,

publicity

costs

and

legal

costs

are

very

high

(Financewithsaurabh.blogspot.com, 2012).

2. Bonus Issue
Shares offered by a company for free of cost or as a gift on pro rata basis is known as
bonus issues (Ahmed, 2007). The two types of bonus shares are; partly paid up bonus
shares and fully paid up bonus shares (Ahmed, 2007). Bonus shares are issued by
profit making companies that desire to convert their profit into share capital (ISSUE
OF SHARES-I, n.d.). It leads to an increase in share capital and distribution of profit
to the shareholders without any increment in net assets of the company (Ahmed,
2007). Unlike the IPO, bonus shares are issued to the current shareholders. It is issued
from accumulated profit, which implies capitalization of profits (Ahmed, 2007). As
bonus shares are allotted for free, there are zero cashflow between the company and
its shareholders (Ahmed, 2007).

3. Rights Issue
When an existing company offers fresh shares to its current shareholders in proportion
to the amount of shares owned by them is reffered as rights issue
(Financewithsaurabh.blogspot.com, 2012). In order to attract the shareholders, the
company often offers shares at a price below than the market price (Atrill at el, 2011).
This is said to be the most cost effective and straightforward way of issuing shares.
Within recent years by adapting the traditional approach, Accelerated rights issue
came into existence (Atrill at el, 2011). The two phases of this are; initial issue to
institutional investors and issue to the retail component of the shareholders (Atrill at
el, 2011). Unlike IPO rights an existing company can only issue issue to its current

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shareholders (Atrill at el, 2011). This might lead to transfer ownership onto hands of a
particular group resulting unfair business decisions.

4. Private Placement
Private placement is selling securities to a relatively small group of investors selected
by the company in order to raise capital (Financewithsaurabh.blogspot.com, 2012).
Investors include large banks, insurance companies and pension funds. Unlike the
IPO this method is more cost effective. However, like the rights issue, there is fear of
transferring ownership onto the hands of a particular group of people resulting unfair
business decision. The government owned companies normally uses private
placement.

QUESTION 2
a) Authorised share capital
Authorised share capital or Nominal capital is the maximum amount of shares a
company can raise during its lifetime (ISSUE OF SHARES-I, n.d.). This is mentioned
in the memorandum of Association of the company. The Authorised share capital of
Pensonic for the years 2012 and 2013 was 200,000,000 shares worth RM100,000,000.

b) Issued share capital


Part of Authorised share capital which a company decides to issue to the public is
known as issued share capital (ISSUE OF SHARES-I, n.d.). Issued share capital of
Pensonic for the years 2012 and 2013 was 92,620,000 shares worth RM 46,310,000.

c) Par value of share


The minimum value at which a share can be issued is known as a par value (SHARE
CAPITAL, n.d.). Par value of share for Pensonic in the years 2012 and 2013 was RM
0.50.

d) Equity account balance and its components

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Many companies prepare a financial statement called Changes in owners equity due to
complex ownership structures and changes that take place during the year regarding
their equity (Readyratios.com, 2012). This statement consists of two main parts;
Capital invested by owners and retained profit by the business (Readyratios.com,
2012).
Share premium of Pensonic for the year 2012 was RM 21,360,893 and it has remained
the same in the year 2013.
Retained earnings for the year 2012 was RM 3,901,029. However, it has increased to
RM 6,606,662 in the year 2013. This increased has occurred to an increase in overall
earning by the company.

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QUESTION 3
PENSONIC

C
Category
Profitability ratios

Name of the ratio

Gross profit margin

Net profit margin

Liquidity Ratios

Formula
2012
56,537,744
100
348,642,601
16.22

Gross profit
100
Sales
Net profit
100
Sales

Return on asset

Net profit
100
Average total asset

Return on equity

Net profit
Average owners equity

Working capital

Current ratio

Quick ratio

Current Assets - Current Liabilities


Current Asset
Current Liability
Current Assets-Closing Stock
Current Liability

2013
64,762,821
100
362,515,382

(10,987,343)
100
348,642,601
3.15
(10,987,343)
100
241,523,243+ 223,421,105
2
8.29
(10,987,343)
100
85,299,585+97,139,543
2
12.04
181,516,192145,037,200
36,478,992

181,516,192
145,037,200
1.25:1
181,516,19288,860,507
145,037,200
0.64 :1

17.86
3,562,202
100
362,515,382

(
(

0.98
3,562,202
240,017,451+241,523,243
2
1.48
3,562,202

87,796,557+85,299,585
2
4.12

172,581,702139,100,21
33,481,487
172,581,702
139,100,215

1.24 :1
172,581,70275,059,82
139,100,215
0.70 :1

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Asset Management
Ratios

Individual Assignment

Asset turnover

Net sales
Average total asset

Inventory turnover

CGS
Average inventory

Average Collection
period

Financial Structure
Ratios

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A verage amount of accounts receivable


365
Credit s ales

Debt to equity ratio

Total liability
100
Total owne r ' s equity

Debt ratio

Toatal Liability
100
Total Asset

Equity ratio

Times Interest earned ratio

348,642,601
241,523,243+223,421,105
2
1.49 times
292,104,857
88,860,507+86,154,197
2
3.34 times

Total owne r ' s equity


100
Total asset
Income before interest and taxes
Interest expense

362,515,382
240,017,451+241,523,24
2
=1.51 times
297,752,561
75,059,829+88,860,507
2
3.63 times

--------

-------

156,223,658
100
85,299,585
183.15
156,223,658
100
241,523,243

152,220,894
100
87,796,557
173.38
152,220,894
100
240,017,451

64.68
85,299,585
100
241,523,243
35.32
(11,063,994)
372,180
29.73

63.42
87,796,557
100
240,017,451
36.58
3,922,906
64,711
60.62

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QUESTION 4
a) Profitability Ratios
Profitability ratios are classes of financial metrics that help investors assess a
business's ability to generate earnings compared with its expenses and other relevant
costs incurred during a specific period (Tracy, 2012). When these ratios are higher
than a competitor's ratio or than the company's ratio from a previous period, this is a
sign that the company is doing well.

1. Gross profit margin


The gross profit margin looks at cost of goods sold as a percentage of sales (Tracy,
2012). This ratio looks at how well a company controls the cost of its inventory and
the manufacturing of its products and subsequently passes on the costs to its
customers. The larger the gross profit margin, the better for the company (Tracy,
2012).

Gross profit margin


18.50%
17.86%

18.00%
17.50%
17.00%
16.50%

16.22%

16.00%
15.50%
15.00%
2012.0

2013.0

Gross profit margin is said to be the key to show the companys performance.
According the above graph during the year 2012, company shows a gross profit
margin of 16.22%. However, there has been a slight increase in the year 2013 to

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17.86% (an increase of 1.64%). This increase has occurred in the year 2013, due to an
increase in sales compared to an increase in cost of goods sold.
2. Net profit margin
When doing a simple profitability ratio analysis, net profit margin is the most often
margin ratio used. The net profit margin shows how much of each sales dollar shows
up as net income after all expenses are paid (Tracy, 2012).

Net profit margin


1.50%

0.98%

1.00%
0.50%
0.00%
-0.50%

2012.0

2013.0

-1.00%
-1.50%
-2.00%
-2.50%
-3.00%
-3.50%

-3.15%

Pensonic has not maintained their net profit percentage during these two years.
During the year 2012, Pensonic has a net profit margin of -3.15% because of net loss.
However, there was an increase in the year 2013 to 0.98%. When comparing both
years, in the year 2012 companys sales was lower than 2013. And at the same time
the selling and distribution expenses were high in the year 2012 compared to the year
2013 leading to a loss in the year 2012.
Mainly this ratio will give the overall picture of the companys profitability. Cutting
down the expenses and increasing the total revenue is best way to improve this ratio.

3. Return on asset
The Return on Assets ratio is an important profitability ratio because it measures the
efficiency with which the company is managing its investment in assets and using
them to generate profit (Accountingformanagement.com, 2011). It measures the

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amount of profit earned relative to the firm's level of investment in total assets. The
higher the return, the more profit is gained by the company.

Return on asset
4.00%
1.48%

2.00%
0.00%
-2.00%

2012.0

2013.0

-4.00%
-6.00%
-8.00%
-10.00%

-8.29%

In the year 2012 there was negative of -8.29%. It increased from -8.29% to 1.48% in
the year 2013. In the year 2013, increased in return occurred because there was a high
net profit compared with the total assets, while in the year 2012 there was a net loss.
Therefore, the top management has to find ways to increase their profit with using the
companys existing capital. They can dispose their some assets or increase the sales
by applying more effective marketing strategies. For example, Pensonic is focusing
more on increasing sales and gaining market share by expanding to overseas market.
This can increase the return on asset if done wisely. And also Pensonic has disposed
some of its unused assets in order to increase its revenue.

4. Return on equity
The Return on Equity ratio is perhaps the most important of all the financial ratios to
investors in the company. It measures the return on the money the investors have put
into the company (Tracy, 2012). This is the ratio potential investors look at when
deciding whether or not to invest in the company (Tracy, 2012).

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Return on equity
6.00%

4.12%

4.00%
2.00%
0.00%
-2.00%

2012.0

2013.0

-4.00%
-6.00%
-8.00%
-10.00%
-12.00%
-14.00%

-12.04%

ROE is much better in the year 2013 compared to 2012. In the year 2012 there was a
negative figure of -12.04%. This had increased to 4.12% in the year 2013. Huge
increase occurred in the year 2013 due to a huge increment in companys earnings.
To increase this ratio Pensonic has to increase its earnings, or else have to reduce their
equity by redeeming some of their shares, which is not towards fulfilling the
shareholders needs.

b) Liquidity Ratios
This is a ratio use to measure the businesss liability to pay its short-term financial
obligations and cash needs (Tracy, 2012). Generally the higher the ratio, the better the
company is able to cover short-term debts.

1. Working capital
Working capital is used in order to find out whether the company is capable of
fulfilling its short-term obligation (Tracy, 2012). When the working capital ratio his
higher the business will be able to settle its short-term debts with a surplus current
assets (Tracy, 2012).

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Working capital
37,000,000

36,478,992

36,000,000
35,000,000
34,000,000

33,481,487

33,000,000
32,000,000
31,000,000
2012.0

2013.0

A positive working capital means a good sign that Pensonic is having enough money
to settle its short-term debts. In the year 2012 working capital is 36,478,992 and it
decreased to 33,481,487 in the year 2013. This is due to a high fall in current assests
compared to the fall in current liabilities.

2. Current ratio
Current ratio explains how easily a business can pay off its current debts (What is a
Current Ratio?, n.d.). This is also referred as liquidity. This is an important ratio for
banks, investors and even for the creditors, as they look into the liquidity of the
business when investing or giving loans. 1.5 is the favourable amount for current ratio
as it consists of closing inventories (What is a Current Ratio?, n.d.). The result is in
the form of X:1.5

Current ratio
1.25
1.25

1.25

1.25
1.25
1.24
1.24

1.24

1.24
1.24
1.24
1.23
2012.0

2013.0

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In the year 2012 current ratio was 1.25:1.5 and it decreased slightly t0 1.24:1.5 in the
year 2013. This might be due to a decrease in closing inventories for the year 2013.
As Pensonic is a manufacturing company, due to this high inventory the current asset
could over-inflate leading to a high current ratio.

3. Quick ratio
Quick ratio is calculated in order to detect whether the company is in a position to pay
its short-term debts quickly (Tracy, 2012). This is also an important ratio for banks,
investors and even for the creditors, as they look into the liquidity of the business
when investing or giving loans. 1 is the favourable amount for current ratio as it
eliminates closing inventories from current assest. The result is in the form X:1
(Tracy, 2012).

Quick ratio
0.71
0.7
0.69
0.68
0.67
0.66
0.65
0.64
0.63
0.62
0.61

0.70

0.64

2012.0

2013.0

In the year 2012, quick ratio of Pensonic is 0.64:1 and in the year 2013 it has
increased to 0.70:1. This slight increase might be due to a reduction in inventories and
also a reduction in current liabilities. This ratio indicates that Pensonic is currently not
in a good position to pay its short-term debts. This will lead to a loss in investors and
other lenders to lose interest in this business.

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c) Asset management ratios


These ratios are typically used to identify how well a business uses its resources
internally. Or else it is the capability of management to operate the business,
especially when using assets to generate income (Tracy, 2012).
1. Asset turnover
Asset turnover or capital turn over is calculated in order to find out how efficiently the
business is utilizing its existing assets to generate revenue (Doehring, 2001). The
higher the asset turn over the better it is. However, the lower the ratio which means
the company is not efficient or having managerial problems.

Asset turnover
1.52

1.51

1.51
1.51
1.5
1.5

1.49

1.49
1.49
1.48

2012.0

2013.0

Asset turnover rate for Pensonic is 1.49 for the year 2012 and it increased to 1.51 in
the year 2013. This increase might be due to an increase in revenue in the year 2013
compared to 2012. Pensonic is in a favourable position as the ratio of 1 shows that the
sales are equivalent to average assets for the year.

2. Inventory turnover
Inventory turnover measures how quickly the inventories are sold to customers and
replaced with the new stock (Tracy, 2012). Investors are interested in knowing the
amount of stocks tied as inventories as there is a limited amount to spend on
inventories. And excess stocks cannot be kept. Therefore, the higher the inventory
turnover the better it is.

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Inventory turnover
3.7

3.63

3.6
3.5
3.4

3.34

3.3
3.2
3.1

2012.0

2013.0

Inventory turnover for the year 2012 is 3.34 times. It increased to 3.63 times in the
year 2013. This increase might be due to an increase in revenue as they are focusing
more on increasing sales and gaining market share by expanding to overseas market.

3. Average collection period


Average collection period ratio is used to find the average days of time a company
takes in order to collects the amount owed to them (Tracy, 2012).
For the Company Pensonic they do not provide information on credit sales and also
accounts receivables for the whole company.

d) Financial structure ratios


This 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
(Tracy, 2012). There are several different ratios, but the main factors looked at include
debt, equity, assets and interest expenses.

1. Debt to equity ratio


The Debt to Equity Ratio measures how much money a company should safely be
able to borrow over long periods of time. It does this by comparing the company's
Long Term Liabilities and dividing it by the amount of Shareholders Equity (Kennon,
2012). The analysis result is percentage. The ratio measures how the company is

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leveraging its debt against the capital employed by its owners. If the liabilities exceed
the net worth then in that case the creditors have more stake than the shareowners
(Kennon, 2012).

Debt to equity ratio


184.00%

183.15%

182.00%
180.00%
178.00%
176.00%
173.38%

174.00%
172.00%
170.00%
168.00%
2012.0

2013.0

In the year 2012 debt to equity ratio was 183.15%. It reduced to 173.38% in the year
2013. In the year 2013 the long-term liability is lower than 2012, as a result the ratio
is low.
Equity Ratios have more investments from their shareholders than from suppliers,
creditors, and lenders. This in case means that they are in a good financial position to
pay for their creditors. But the amount of debt depends on the size of the firm as well.
This is because the larger companies can take more debt without much harm to the
company comparing to smaller companies.
The most obvious way to improve this ratio and better position your business to
survive any potential slowdown - either from the business itself or from outside
influences - is to increase equity or lower debt or both. They could increase their
assets by generating more cash in the business, more accounts receivables, more
inventory or any fixed assets that does not have to be financed with additional debt as equity is what is left over after you subtract out liabilities from assets.

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2. Debt ratio
The debt ratio gives an indication of companys total liabilities in relation to their total
assets (Tracy, 2012). The higher the ratio, the more leverage the company is using
and the more risk it is assuming. Both total assets and liabilities can be found on the
balance sheet. Here the results are shown in percentage (Debt Ratio, 2012). Lower
value of debt ratio is favourable. The higher the ratio, a high proportion of companys
assets is alleging by its creditors.

Debt ratio
65.00%

64.68%

64.50%
64.00%
63.42%

63.50%
63.00%
62.50%
2012.0

2013.0

From the above chart it can be identified that Pensonic is having a high debt ratio. In
the year 2012 they have 64.68% as their debt ratio. This has been decreased to
63.42% in the year 2013. In the year 2012, company is having the high liability
amount compared to 2013.

3. Equity ratio
Equity ratio measures the amount of assets owned by the company from shareholders
investments (Tracy, 2012). This ratio is calculated by comparing total owners equity
to the total assets of the company. The higher the equity ratio, the better, this is
because it will attract new investors or creditors towards the company. And the low
equity ratio shows risk for the creditors.

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Equity ratio
37.00%
36.58%
36.50%
36.00%
35.50%

35.32%

35.00%
34.50%
2012.0

2013.0

Above graph indicates that Pensonic is having an equity ratio of 35.32% in the year
2012 and it increased to 36.58% in the year 2013. This is not a favourable indication
as the total creditors are higher than the total owners equity.

4. Times interest earned


Times interest earned or interest coverage ratio tells us how easily a company is able
to pay interest expenses associated to the debt they currently have (Tracy, 2012). The
ratio is designed to understand the amount of interest due as a function of companys
earnings before interest and taxes.
It measure of the number of times a company could make the interest payments on its
debt with its earnings before interest and taxes. The company should not own a stock
that has an interest coverage ratio under 1.5. An interest coverage ratio below 1.0
indicates the business is having difficulties generating the cash necessary to pay its
interest obligations (Tracy, 2012). The history and consistency of earnings is
tremendously important. The more consistent a companys earnings, the lower the
interest coverage ratio can be (Tracy, 2012).

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Times Interest earned ratio


60.62

-29.73

In 2012, interest coverage ratio was -29.73. It increased rapidly in the year 2013 to
60.62. This means in the year 2013 Pensonic have a higher profit to cover their
interest. However, again in the year 2012, it shows a negative balance. The main
reason for this is a huge net loss in the year 2012.
However, because the interest coverage ratio is based on current earnings and current
expenses, it primarily focuses a company's short-term ability to meet interest
obligations. In the mean time lesser-leveraged positions do not always mean that
companies are operating efficiently. This is because tax benefits result from certain
levels of debt.

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Reference List
Ahmed, N. (2007) Corporate Accounting. Delhi: Atlantic Publishers &Dist.
Atrill, P.et al. (2011) Accounting and introduction. Australia: Pearson higher
education.
Accountingformanagement.com, (2011). Debt to Equity Ratio. [online] Available at:
http://www.accountingformanagement.com/debt_equity_ratio.htm [Accessed 11 Jan.
2015].
Doehring, A, T. (2001). ANALYZING THE EFFICIENCY OF Y OUR OPERATION.
[ebook] Available at: http://www.centrec.com/assets/efficiency.pdf [Accessed 7 Jan.
2015].
Financewithsaurabh.blogspot.com, (2012). Welcome To Finance With Saurabh.: Issue
Mechanism of Shares. [online] Available at:
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[Accessed 11 Jan. 2015].
ISSUE OF SHARES-I. (n.d.). [ebook] Available at:
http://www.mu.ac.in/myweb_test/TYBCOM%20study%20material/TYBCOM%20FINAL-%20Paper%20-%20III%20-%20PDF.pdf [Accessed 4 Jan. 2015].
Kennon, J. (2012). Is Your Debt to Equity Ratio Off Balance?. [online] About.com
Money. Available at:
http://beginnersinvest.about.com/cs/financialratio/g/debttoequity.htm [Accessed 4 Jan.
2015].
Readyratios.com, (2012). Statement of Changes in Equity. [online] Available at:
http://www.readyratios.com/reference/accounting/statement_of_changes_in_equity.ht
ml [Accessed 6 Jan. 2015].

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SHARE CAPITAL. (n.d.). [ebook] Available at:


http://www.cr.gov.hk/en/publications/docs/062008_ch2-e.pdf [Accessed 4 Jan. 2015].
Tracy, A. (2012). Ratio Analysis Fundamentals: How 17 Financial Ratios Can Allow
You to Analyse Any Business on the Planet. RatioAnalysis.net.
What is a Current Ratio?. (n.d.). [ebook] Available at:
http://www.liquidassetsaccounting.com/resources/images/common/Current
%20Ratio.pdf [Accessed 11 Jan. 2015].

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Appendix

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