FINANCIAL PERFORMANCE OF A STATUTORY BODY - CASE STUDY OF SARAWAK TIMBER INDUSTRY DEVELOPMENT CORPORATION (STIDC)

AMIZAH BINTI ROMLEE 2009816066

BACHELOR OF BUSINESS ADMINISTRATION (HONOURS) (FINANCE) FACULTY OF BUSINESS MANAGEMENT UNIVERSITI TEKNOLOGI MARA SARAWAK

MAY 2011

FINANCIAL PERFORMANCE OF A STATUTORY BODY - CASE STUDY OF SARAWAK TIMBER INDUSTRY DEVELOPMENT CORPORATION (STIDC)

DECLARATION OF ORIGINAL WORK

BACHELOR OF BUSINESS ADMINISTRATION (HONS) FINANCE FACULTY OF BUSINESS MANAGEMENT UNIVERSITI TEKNOLOGI MARA SARAWAK

DECLARATION OF ORIGINAL WORK

I, AMIZAH BINTI ROMLEE (I/C Number: 880810-52-5182) Hereby, declare that;

This project paper is the result of my independent work, effort and investigation, except where otherwise stated. It has not already been accepted for any degree and it also not being concurrently submitted for any other degree. All verbatim extracts have been distinguished by quotation marks and sources of my information have been specifically acknowledged.

Signature:

Date: 6th May 2011

LETTER OF SUBMISSION 6th May 2011 The Head of Program Bachelor of Business Administration (Hons) (Finance) Faculty of Business Management Universiti Teknologi Mara Sarawak Jalan Meranek 94300 Kota Samarahan Sarawak

Dear Madam, SUBMISSION OF PROJECT PAPER Enclosed is a project paper entitled, Financial performance of a statutory body case study of Sarawak Timber Industry Development Corporation (STIDC). This report is to analyze the overall financial performance of STIDC especially in terms of efficiency, liquidity, and profitability. I really hope that this report will fulfill the requirements for the Bachelor of Business Administration (Hons) Finance. Thank You.

Yours sincerely,

AMIZAH BINTI ROMLEE 2009816066 Bachelor of Business Administration (Hons) Finance

ACKNOWLEDGEMENTS

I would like to acknowledge Madam Dorothy Kueh and Madam Anita as my advisor for this project for advice and guiding as well as correcting various documents of mine with attention and care. My grateful thanks to my helpful supervisor, Puan Humairah Bt Razali for her support. The supervision and support that she has given truly helps the progression and successful completion of the internship program. Not forgetting, great appreciation goes to the rest of STIDCs staff and KoPUSAKAs staff who has helped me from time to time. I would also like to express my special thanks to my beloved family especially my parents for all their prayers, encouragement, and financial assistance. Without my familys encouragement, I would not have completed this project paper. Besides, I would like to thank my friends especially Fauziah Bt Salleh and Lundy Joe Sibat for their invaluable advices and suggestions regarding this project paper. Last but not least, thanks to ALLAH SWT, who has made all things possible and giving me strength and patience in completing this project paper.

TABLE OF CONTENT DECLARATION OF ORIGINAL WORK LETTER OF SUBMISSION ACKNOWLEDGEMENT LIST OF TABLES LIST OF CHART / GRAPH LIST OF ABBREVIATION ABSTRACT CHAPTER ONE: INTRODUCTION 1.1 Introduction of study 1.2 Background of corporation 1.3 Background of study CHAPTER TWO: PROBLEM IDENTIFICATION 2.1 Problem statement 2.2 Study objective 2.3 Study question 2.4 Scope of study 6 8 8 9 1 2 4 ii iii iv vii viii ix x

CHAPTER THREE: ELEMENTS CONTRIBUTING TO ISSUE 3.1 Performance measurement 3.2 Liquidity and profitability 3.3 Efficiency CHAPTER FOUR: CASE STUDY METHODOLOGY 4.1 Data collection method 4.2 Data analysis technique CHAPTER FIVE: FINDINGS AND ANALYSIS 5.1 Liquidity ratios 5.2 Profitability ratios 5.3 Activity ratios CHAPTER SIX: RECOMMENDATION AND CONCLUSION 6.1 Recommendation 6.2 Conclusion REFERENCES APPENDICES 30 32 33 16 22 26 14 15 10 11 13

LIST OF TABLES

Table 1: Ratio Analysis Table 2: Comparative Analysis Balance Sheet Table 3: Comparative Analysis Income Statement

LIST OF CHART / GRAPH Graph 2.1: Graph 5.1: Graph 5.2: Graph 5.3: Trend of profit / loss Liquidity ratio - net working capital Liquidity ratio - current ratio and quick ratio Profitability ratios - gross profit margin, operating profit margin and net profit margin. Graph 5.4: Activity ratios inventory turnover, account receivable turnover, fixed asset turnover and total asset turnover.

LIST OF ABBREVIATION STIDC: PUSAKA: FAO: MMKN: NWC: GPM: OPM: NPM: ITO: ARTO: FATO: TATO: Sarawak Timber Industry Development Corporation Perbadanan Kemajuan Perusahaan Kayu Sarawak Food and Agriculture Organization Majlis Mesyuarat Kerajaan Negeri Net Working Capital Gross Profit Margin Operating Profit Margin Net Profit Margin Inventory Turnover Account Receivable Turnover Fixed Asset Turnover Total Asset Turnover

ABSTRACT

This project paper discusses on the financial performance of STIDC in terms of efficiency, liquidity and profitability. The methods that are used by researcher to analyze the financial performance of the corporation are ratio analysis and comparative analysis, sometimes also known as a horizontal analysis. The scope of this study is to covers an analysis of the financial performance of corporation starting from the year 2004 to 2008. The corporation needs to relook at their financials with a view of improving their performance in years to come as resources of timber are depleting in order to support the corporations core business. Furthermore inconsistent profitability due to inconsistent trends in delivering net profit and high expenses incurred by corporation thus makes this study appropriate. This case study is carried out in order that the findings will create an awareness of the problems or issues that affect its performance. Various

recommendations have been suggested in the report in order to improve the performance.

CHAPTER 1 INTRODUCTION 1.1 Introduction of Study The financial statements are helpful to researcher to study financial performance of corporation. It is because balance sheets show changes in owner's equity and risk exposure and it can be increasing, decreasing or remaining the same. Meanwhile, the income statements helps researcher to reveal trends in profit and the cash flow statements can help the operation to understand the timing of cash availability and needs. In addition, the information and data that the researcher can obtain from these three financial statements also can be used to prepare additional financial measures that reveal the strengths and weaknesses of the corporation itself. According to Dr. Laurence M. Crane, an understanding of the overall financial situation requires three key financial documents: the balance sheet summarizes the values of the owned assets and liabilities, an income statement reports the amount of profit the business generates and a cash flow statement reports the sources and uses of the operations cash resources.

1.2

Background of Corporation Sarawak Timber Industry Development Corporation (STIDC) also known as PUSAKA was established in June 1973 under the Perbadanan Perusahaan Kemajuan Kayu Sarawak Ordinance 1973. Its incorporation was initiated following the recommendation of the Food and Agriculture Organization (FAO) of the United Nations, which conducted a comprehensive forest inventory in the state from 1968 to 1972. The functions would be to stimulate by all possible means the planned expansion of wood-based industries throughout Sarawak at a role consistent with the overall interest of the economy, the availability of capital and the technical expertise and effective management of the forest resources. STIDC has four objectives which the first objective is to develop new policies and strategies towards more active promotion and development of timber industry and the marketing of high quality timber-based products suitable for both overseas and domestic markets. Second objective is to develop economical and beneficial harvesting and utilization of the forest resources of Sarawak. The third objective is to create new concepts and strategies in the timber industry so as to ensure that the benefits from the harvesting of the States forest resources will be fairly and equitably shared among the people of the State and Nation. And the last objective is to enable the State Government to have an instrument for the formulation, co-ordination and implementation of the overall timber industry development strategies and to act as catalyst with private sector interest through the encouragement of new industry.

STIDC also plays its role in a different aspect as their functions. First function is to control and co-ordinate the manufacturing standards and trade practices of timber industries. Second function is to make recommendations to the Government as to the methods, measures and policies to be adopted to facilitate the improvement of existing timber industry, and where approved by the Majlis Mesyuarat Kerajaan Negeri (MMKN), to implement and assist in the implementation of the same. The third function is to encourage effective utilization of timber with emphasis on product diversification and quality control. The fourth function is to promote, stimulate and facilitate the development of the timber industry in Sarawak, and in connection with the discharge of its function to assist any person engaged in the production and marketing of timber. The fifth function to provide technical advisory services for the purpose of assisting in the development of existing timber industry and in the establishment of new industries. And the last function of STIDC is to provide training in various aspects of logging operations, activities connected with the timber processing, sawmilling, sales and marketing of timber.

1.3

Background of Study A.Gayathridevi (2007) noted that financial performance is an important aspect which influences the long term stability, profitability and liquidity of an organization. Thus, this case study is to study financial performance of STIDC as a Sarawak state government owned statutory body. In order to study STIDCs financial performance, researcher need to access on their annual report starting from the year 2004 - 2008 and some confidential data in order to get necessary data and information that is useful for this study. Usually, financial ratios are said to be the parameters of the financial performance (A.Gayathridevi, 2007). Financial ratio analysis can help investors in making investment decision and predict firms future performance. It can also give early warning about the slowdown of firms financial condition (Ohlson, 1980). Therefore, researcher uses three (3) groups of financial ratios in order to study STIDCs financial performance. Researcher used the following financial ratios because these financial ratios can be useful indicators of a firms performance. Information in financial statement can be used to calculate the financial performance and analyze trends of a firm. Thus, it can be used for comparison with other firm and it can be indicator of future bankruptcy. Followings are the ratios that used by researcher to conduct this study. 1. Liquidity ratios; Net working capital Current ratio Quick ratio, frequently referred as acid test ratio

2. Profitability ratios; Gross profit margin Operating profit margin Net profit margin

3. Activity ratios; Inventory turnover Accounts receivable turnover Fixed asset turnover Total assets turnover

Other than using ratio analysis as a tool to analyse financial performance of STIDC, researcher also used another tool which is comparative study of financial statement of STIDC for five (5) years, starting from the year 2004 - 2008. This comparative study of financial statement is a comparison of financial statement (balance sheet and income statement) of the corporation with the previous years financial statement. Therefore, it will show the changes in the financial statement from the year 2004 - 2008.

CHAPTER 2 PROBLEM IDENTIFICATION 2.1 Problem Statement By reviewed financial statements of STIDC through their annual reports, there is a problem in certain areas which can be improved by the management. The problem that faced by STIDC are as follows: 2.1.1 Lack of resources Timber industry is a core business to STIDC and because of the number of timber keeps decreasing or in another word, the sources of timber are getting limited, thus, it affect the financial performance of STIDC directly. Therefore, the management of STIDC decided to diversify to other project like become one of the house developers in order to support their core business. Other than that, they also depend on their investment on their subsidiaries company like Hardwood Timber Sdn Bhd in order to earn other revenue which is dividend. STIDC has to control this limited sources in order to ensure there is a supply of timber in future. Therefore, STIDC has an authority to take an action for unregistered company and to issue licensed regarding timber in Sarawak. Other than that, STIDC also lack of resources in term of expertise in developing houses since they are new as compared with other competitor who has more experience, advanced technology and other sources. Because of this reason, STIDC might not be able to generate more profit thus the revenue and financial performance of STIDC affected.

2.1.2

Inconsistent profitability As researcher see in five (5) years consecutive annual report of STIDC, there is inconsistent profitability trend which it is not good for the corporation. Below are trend of profit of STIDC.

Trend of Profit / Loss

30,000,000 25,000,000 20,000,000 15,000,000 Amount (RM) 10,000,000 5,000,000 Net Profit / Loss (RM)

0 -5,000,000 -10,000,000
Graph 2.1: Trend of profit / loss.

2004

2005

2006
Years

2007

2008

Based on the chart 2.1, the company incurred lossess in 2004, amounted to -RM2,434,981 and later, it was improved in the year 2005 to RM22,742,241. Then, net profit in the year 2006 dropped to RM5,177,279 meanwhile, in the year 2007 the net profit increase to RM25,859,334 and its become the highest profit among these five (5) consecutive years. However, the profit dropped once again to -RM6,237,386 in the year 2008. Because of this unstable trend, its become a problem to STIDC to have a good financial problem in future. Thus, the management of STIDC need to take any necessary action in order to overcome this problem.

2.1.3

High expenses STIDC has high expenses to cover their operation. It is because there is an increasing amount of their expenditure in term of staff medical expenses, overtime allowance, utility, travelling allowance, training and etc. Because of the expenses increased its effect indirectly on their net profit whereby they need to bear these high expenses. Therefore, they need to cut their unnecessary expenses in order to maximize their profit and its followed the rule of thumb which is minimizing cost in order to maximize profit.

2.2

Study Objective The objectives for this study are as follows: 1. To evaluate the financial efficiency of STIDC from the year 2004 - 2008. 2. To analyse the profitability position of STIDC from the year 2004 - 2008. 3. To analyse the liquidity position of STIDC from the year 2004 - 2008.

2.3

Study Question The study questions are as follows: 1. What is situation of financial efficiency at STIDC for the years 2004 - 2008? 2. What is profitability position at STIDC for the years 2004 - 2008? 3. What is liquidity position at STIDC for the years 2004 - 2008?

2.4

Scope of Study This study focused on financial performance of STIDC. These areas were being selected because the researcher is having her practical training at STIDC and it convenient for researcher to do this study. This data have been collected from secondary data which it covered overall financial performance of STIDC starting from the year 2004 - 2008.

CHAPTER 3 ELEMENTS CONTRIBUTING TO ISSUE 3.1 Performance Measurement During the last two decades, the performance measurement literature underscored some relevant features and characteristics of performance measures and measurement systems, which are, must reflect relevant nonfinancial information, based on key success factors of each organization (Clarke, 1995); should be implemented as means of articulating strategy and monitoring organization results (Grady, 1991); should be based on organizational objectives, critical success factors and customer needs and monitoring both financial and non-financial aspects (Manoochehri, 1999); must accordingly change

dynamically with the strategy (Bhimani, 1993); must meet the needs of specific situations in relevant manufacturing operations, and should be long-term oriented, as well as simple to understand and implement (Santori and Anderson, 1987); must make a link to the reward systems (Tsang et al., 1999); financial and non-financial measures must be aligned, and used within a strategic framework (McNair and Mosconi, 1987; Drucker, 1990); should stimulate the continuous improvement processes (Kaplan and Norton, 1992, 1993; Flapper et al., 1996; Neely et al., 1997; Medori and Steeple, 2000); must be easy to understand and to use (Kaplan and Norton, 1996; Ghalayini et al., 1997); must be clearly defined and have a very explicit purpose (Flapper et al., 1996; Neely et al., 1997); and should allow a fast and rigorous response to changes in the organizational environment (Bititici et al., 1997; Medori and Steeple, 2000).

3.2

Liquidity and Profitability Abuzar, M. A. (2004) noted that the efficient management of the broader measure of liquidity, working capital, and its narrower measure, cash, are both important for a companys profitability and well being. In the words of Fraser (1998) "there may be no more financial discipline that is more important, more misunderstood, and more often overlooked than cash management." However, as argued vividly by Nicholas (1991) companies usually do not think about improving liquidity management before reaching crisis conditions or becoming on the verge of bankruptcy. Various other techniques have been suggested to improve liquidity and cash positions and to increase the efficiency of their management and in turn profitability. These include credit insurance (Brealey and Myers, 1996; Unsworth, 2000; and Raspanti, 2000), factoring of receivables (Brealey and Myers, 1996; Summers and Wilson, 2000). However, as measures of liquidity, both the working capital and liquidity ratios have come under criticism for various reasons. Hawawini et al. (1986), for example, argue that the concept of working capital requirement is a better measure of a firms investment in its operating cycle than the traditional concept of net working capital. Similarly, Finnerty (1993) points out that the traditional liquidity ratios, such as the current ratio or quick ratio, include both liquid financial assets and operating assets in their formula. Thus, from an ongoing concern point of view, the inclusion of operating assets which are tied up in operations is not useful. These shortcomings of working capital and liquidity ratios have led researchers and analysts to advocate other measures of liquidity that are more indicative of cash availability. The net cash conversion cycle, or the cash gap has been suggested by many as a possible supplement or replacement

to the working capital and current ratios as measures of available liquidity (see Gitman (1974), Richard and Laughlin (1980), Boer (1999), and Gentry et al., (1990). This same approach was expressed recently by Fraser (1998) who argues that liquidity and cash gap management starts with a simple task for financial managers by making certain that their billings, collections, and payables systems are operating efficiently. The direct effect of liquidity is not only on the cash position and the troubles it may cause to financial managers, but it rather effects the company's profits in a more direct way. This direct effect stems from the need of the company to borrow to finance the working capital requirements and cash gaps. Friedman (1962) asserts that a company's sole responsibility appears to be only to maximize profits in compliance with the law. Moreover, Friedman (1970) reinforces this argument considering that the manager's only responsibility is to conduct the business in accordance with the shareholders desires to make as much money as possible conforming to the basic rules of society. Nowadays, it is widely recognized that corporations need to act in a socially responsible way in order to contribute to social well-being and competitiveness and financial success of the firm. In addition, Sanger (2001) noted that working capital represents a safety cushion for providers of short-term funds of the company, and as such they view positively the availability of excessive levels of working capital and cash. However, from an operating point of view, working capital has increasingly been

looked at as a restraint on financial performance, since these assets do not contribute to return on equity.

3.3

Efficiency Other studies like Callen et al. (2000) and Fullerton and McWatters (2001) provide support that JIT implementation improves firm performance through lower inventory levels, reduced quality costs, and greater customer

responsiveness with higher profits. With only two exceptions (Balakrishnan et al., 1996; Sakakibara et al., 1997), these studies all contend that strategies aimed at increasing inventory performance (primarily through reduced inventory levels) are positively related to increases in value added defined as an increase in market share, sales, and profitability.

CHAPTER 4 CASE STUDY METHODOLOGY 4.1 Data Collection Method This chapter discusses the methods that used by researcher in order to obtain the relevant data and information. They are as follows: 4.1.1 Secondary data 4.1.1.1 Journals Journals are other source that available in library, online database, google and yahoo search engine. These sources are easy to be accessed and easily to be obtained by researcher in order to get the relevant journals. 4.1.1.2 Annual report From annual report of STIDC, any financial problem that faced by them can be detected. And, annual reports from year the year 2004 - 2008 are used for this study. 4.1.1.3 Website Other relevant information and data regarding financial performance of STIDC can be gathered from their official website (http://www.sarawaktimber.org.my).

4.2

Data Analysis Technique The data of this study have been analyzed by ratio analysis and comparative financial statement which it also known as a horizontal analysis. The data entered into Microsoft Excel and the result has been summarized in table form and chart.

CHAPTER 5 FINDINGS AND ANALYSIS This chapter discusses the findings based on analysis carried out by the researcher. A.Gayathridevi (2007) noted that in financial analysis, a ratio is used as a benchmark for evaluating the financial position and performance of firm. In a corporate world, financial ratios are one of the most common tools to make any managerial decision making because we can gain information regarding a firms financial performance since it involved the comparison of various figures from the balance sheet and income statement. In addition, ratios also can serve as indicators or clues for troublesome issues for the firm. Other than that, we can use ratios analysis to track firm performance from time to time and to make relative performance comparison. And, we can use it to determine a firms strengths and weaknesses in certain area and this would give a great help in implementing plans that improve profitability and liquidity for the firm. The finding and analysis for liquidity ratios, profitability ratios and activity ratios are as follows: 5.1 Liquidity ratios Generally, liquidity ratios are useful to company since it can provide information about their ability to meet its short term financial obligation by looking at ability of a company to pay its current debt by using its current asset. Usually, the higher the value of liquidity ratios, the greater the margins of safety a firm have to cover their short term obligation. There are three ratios that are frequently used in liquidity ratios. They are net working capital, current ratio and quick ratio.

Liquidity Ratios
400,000,000

350,000,000 300,000,000
250,000,000 Amount (RM) 200,000,000 150,000,000 100,000,000 50,000,000 0 2004 2005 2006 Years 2007 2008 Net Working Capital

Graph 5.1: Liquidity ratio - net working capital.

Net working capital (NWC) ratio is calculated by current asset minus current liabilities. It can be used to measure overall firms liquidity and it is expressed as an absolute number. NWC also can be a safety cushion in order to against liquidity crisis whereby liquidity crisis is when a firm is not able to meet their debt obligation when it is due, day to day operation cost or expand the business. As seen from the graph above 5.1, STIDCs liquidity decreases from year 2004 to 2005 by 1.5309 % (RM5,414,384). Then, in year 2006 the liquidity of corporation increases by 1.6945% (RM5,901,253). Later, the corporations liquidity in the year 2007 to 2008 keeps decreasing by 9.6555% (RM34,195,171) and 20.8149% (RM66,599,038) respectively. Thus, it makes liquidity in the year 2008 lowest among these five years because the current asset in the year 2008 is the lowest as compared previous years. The reason why current asset in 2008 are lower is due to lower trade receivables and cash and bank balances in their current assets. Corporation has to bear with existing trade receivables and trade receivable from its subsidiaries which

amounted to RM247,000 and it was the highest amount of trade receivable (from subsidiaries) among the five years under study. Besides, corporation also have a lot of provision for doubtful debts which cost the corporation about RM11,346,443 and it means that corporation needs to increase its provision for doubtful debts for 117.4357% in 2008. Since the corporation has increased their provision for doubtful debt in 2008, it resulted in the total amount of trade receivable becoming lower as compared with other years. Meanwhile, the corporation has less cash and bank balances in their current asset for 2008 as compared with other years. In the year 2004, 2005 and 2006 corporation has both deposits with licensed bank and licensed finance companies while in the year 2007 and 2008 corporation only has a deposit with licensed bank. Even though corporation does not have any deposit with licensed finance companies in 2007, the deposit with licensed bank in 2007 is 18.3256% higher than deposit with licensed bank in 2008. Thus, it makes cash and bank balances in the year 2008 are the lowest as compared with other years. Furthermore, there are only other payables that contributed in current liabilities. Other payable is consisting of sundry payables, payables due to subsidiaries and associates. The amounts of other payables in current liabilities are due to unsecured subsidiaries and associates, interest free and have no fixed terms of repayment.

Liquidity Ratios
10
8 6 Ratios (Times) Current Ratio Quick Ratio

4 2
0 2004 2005 2006 Years 2007 2008

Graph 5.2: Liquidity ratio - current ratio and quick ratio.

Current ratio is calculated by dividing total current asset with total current liabilities. Current asset of a corporation is an asset which can converted into a cash in a short time of period (not exceeding than one year) and its can be consist of cash and bank balances, inventories, trade receivable and other receivables. Meanwhile, current liabilities is an obligation that need to be met by corporation and its can be consist of short term borrowings, tax payable, trade payables and other payables. Normally, current ratio will be used to measure the firms ability to meet its short term obligation and the greater the current ratio, the easier for a firm to pay off their current liabilities. As researcher seen from the graph 5.2 above, the corporation seem to have an ability to meet their short term obligation from the year 2004 - 2008. It is because the accepted benchmark for the current ratio is 2:1. Thus, it will be easier for the corporation to pay off their current liabilities since there is a higher current ratio for the five years and at the same time, the corporation has a great margin of safety to creditors. However, there will be a problem to corporation if the current ratio is too high because it indicates the corporation is unable to utilize its asset

efficiently. On the other hand, the corporation is not in a position to meet its current liabilities in times if the corporation has a current ratio less than 2:1 whereby the corporation does not have enough current assets to cover each dollar of their current liabilities. Other than that, there is a dramatic change in current ratios for the years 2006 and 2008 by 3.7733 times. The current ratio in the year 2006 is the highest while the current ratio in the year 2008 is the lowest for the period covered in the study. The reason why this happened is because corporation has lowest current liabilities of RM45,810,879 in the year 2006 and they also have a lowest current asset of RM317,379,239 in the year 2008. The lowest current liabilities in the year 2006 are due to lowest of other payables as a single contributor in current liabilities whereby payables from subsidiaries company of STIDC has the lowest contribution in other payables by RM833,490. Meanwhile, the lowest current asset in the year 2008 is due to lower trade receivables and cash and bank balances in their current assets. Quick ratio is also known as an acid test ratio and it is calculated by dividing current asset minus inventory with current liabilities. The ideal benchmark for quick ratio should be 1:1. The current asset that used in quick ratio is cash and bank balances, trade receivable and other receivable. Meanwhile, the current liabilities that are used in quick ratio are only other payables which it consist of sundry payable and due to subsidiaries and associates. It is used to measure the firms ability to meet its short term obligations except that the inventory is excluded from the current assets since it is difficult to liquid quickly and have uncertain liquidity values. A firm has to find buyer if they wants to liquidate inventory or turn it into cash. However, finding a buyer is not always easy

especially in a slow economy. Thus, it only concentrates on the actual current asset and actual value of current asset. The trends of quick ratio are similar with current ratio for the five years whereby 2006 has highest quick ratio compared to other years and the ratio decreased in the year 2007 until 2008. The reason why this happened is same what happened with net working capital and current ratio. Not only that, but also the amount of inventory that corporation owned in the year 2007 is increasing by 4.7805% (RM1,813,735) and 2.5288% (RM959,437) in the year 2008. Since the ideal benchmark for quick ratio is 1:1, its shows that the corporation are in a good position to meet their short term obligation without any stress. However, if the corporation has less than 1:1 of their quick ratio, the corporation need to rely too much on inventory or other asset to pay its short term liabilities and its shows the corporation has unsound financial position. Therefore, to maintain the corporations liquidity and not being in a situation to sell any of their inventories in order to meet their obligation, the corporation should have a quick ratio greater than 1:1.

5.2

Profitability ratios Profitability ratios are used to measure the firms ability to earn the maximum profit they could by maximizing their resources or in other words, how success the firm in generating profits by using their assets. A firm should be profitable if their firm has enough liquidity and very efficient in their production. In order to survive and grow in a long period of time, the firm should earn profit as much as possible. Profitability ratios consist of gross profit margin, operating profit margin and net profit margin.

Profitability Ratios
120

100 80 60 Ratios (%) 40 20 0 -20

2004 2005 2006 2007 2008

Gross Profit Margin

Operating Profit Margin Net Profit Margin

Years

Graph 5.3: Profitability ratios - gross profit margin, operating profit margin and net profit margin.

Gross profit margin (GPM) is calculated by dividing gross profit with sales, then multiply by hundred percent and it is to measure direct production cost of the firm. Gross profit can be increased for some reason such as decreasing in a cost of production or the reasonable selling price while gross profit also can be decreased due to increasing cost of production or selling the goods at a lower price.

In the graph 5.3 above, the GPM was so good for the past five years. It is because, they have 100% of GPM in the year 2005 and 2006, 97.2560%, 96.8767% and 98.6953% for the years 2004, 2007 and 2008 respectively. This shows that the corporation has an ability to control their cost of sales and set up reasonable price for their services and products. The cost of sales influence the gross profit directly, thus it give a higher gross profit if there is a low cost of sales involved. Meanwhile, the revenue of corporation also contributes in GPM as well as OPM and NPM. In the year 2007, the corporation has the highest revenue of RM83,075,350 as compared with other years. This revenue came from different resources such as gain on disposal of other investment, gross dividend from subsidiaries and other investment, interest income, management fees, registration fees, rental income, timber premium, other services and other operating income. In addition, timber premium is the largest revenue among these resources of income for corporation. Operating profit margin (OPM) is calculated by dividing operating profit with sales, then multiply by hundred percent. It can be used to measure the overall operating efficiency of the firm and its also measure a firms profit after take variable cost (administrative and other operating expenditure) in consideration. In addition, a higher OPM indicates more efficiency in firms core business. The corporation has a positive improvement in operating efficiency for the year 2005 and it registered the highest OPM among those five years. It is because, OPM in the year 2005 is 53.0915% higher as compared with 8.9703% in the year 2004. The reason why 2005 has the highest OPM is because the corporation has recovered their doubtful debts by RM10,545,000. Thus, it affects operating profit for corporation. Other than that, corporation has positive earnings (profit) in their

operation for year 2004 - 2008. A profit (from operation) that stated in income statement is after charging staff cost, depreciation of property, plant and equipment, rental of premises, provision for doubtful debts, loss on disposal of investment, auditors remuneration, directors remuneration, expenses in connection with winding up of Borneo Pulp & Paper Sdn Bhd, lease rental of equipment and loss on disposal of property, plant and equipment. Net profit margin (NPM) is calculated by dividing net profit with sales, then multiply by hundred percent and it is used to measure the profitability after consideration of all revenues and expenses. NPM also known as a return on sales which its provide a measure of bottom line profitability. In addition, NPM also can be used to determine how well a firm can survive from competition and adverse condition such as rising cost and declining sales in future. Beside, this ratio also used to indicate how much to earn sufficient profits for corporations in order to cover all of their expenses including cost of goods sold (cost of industrial land lots sold), and finance cost (interest expense). Therefore, by having a higher NPM helps a firm to stand adverse economic condition and it has an opposite implication if there is a lower NPM. The graph 5.3 also indicates that NPM in 2005 is the highest as compared to those five years and the lowest NPM is in the year 2008. It is because the income tax for both years (2005 and 2008) is calculated at the different Malaysian statutory tax rate of 28% for the 2005 and 26% for the year 2008. Even though 2008 has a lower tax rate and income not subject to tax, it does not mean corporation has a lower taxation because corporation need to bear with higher expenses not deductible for tax purposes, under provision of deferred tax in prior years for company and subsidiaries, and under provision of tax expense

in prior years for company and subsidiaries. Thus, there is a large amount of tax expense that need to bear by corporation in the year 2008 and it have huge impact on their net profit for the year.

5.3

Activity ratios Activity ratios are used to measure the efficiency in firms asset and it is also known as an asset utilization ratios. The greater the turnover of activity ratios, the more efficient of firms asset and these ratios can prove the relationship between sales and various assets of the firm. This ratio consists of inventory turnover, account receivable turnover, fixed asset turnover and total asset turnover.

Activity Ratios
2.5 2 1.5

Inventory Turnover
Account Receivable Turnover Fixed Asset Turnover Total Asset turnover

Ratio(Times)

0.5 0
-0.5

2004

2005

2006
Years

2007

2008

Graph 5.4: Activity ratios inventory turnover, account receivable turnover, fixed asset turnover and total asset turnover.

Inventory turnover (ITO) is calculated by dividing cost of goods sold with inventory. It is commonly used to measures the number of times of inventory is replaced during a year and also indicates how efficient a corporation selling its product. Since the ITO for the corporation are not good enough, its shows that the corporation does not has a good inventory policy. It is because, the corporation has a decreasing (negative or zero) ITO which it indicates sales movement of corporation is slower. Inventory can be considered as an investment for the firm and it is important for the firm to maximize its inventory

turnover. It is because the higher ITO indicated that the firm has higher sales but by having a high turnover also can cause a problem too like the corporation might facing with insufficient inventory (out of stock) when it is needed. However, by having too low ITO can cause a problem to corporation when they want to sell their inventory because the price of inventory can be decrease if they holding their obsolete inventory in a long period of time. The cost of sales is involved directly in corporations gross profit whereby the cost of sales in the year 2004, 2007 and 2008 is below than 3.5% of revenue. Its include cost of industrial land lots sold which it is inventory for the corporation. However, there is no cost of sales in the year 2005 and 2006 which corporation might be holding obsolete inventory for those years and this can be prove by looked at industrial land lots (as an inventory) for the year 2005 and 2006 where there is no changes on the amount of industrial land lots. Thus, it gives a zero ITO for the year 2005 and 2006. Account receivable turnover (ARTO) is calculated by dividing sales with account receivable and it can be used to indicate how rapidly the corporation is collecting its credit sales. A higher ARTO indicates that the firms collection or credit policy is good. However, a higher ARTO can have negative impact like a firm may loss a potential sale due to strict in their credit sales. From the graph 5.4 above, the corporation has improved its ARTO whereby the year 2008 is the highest ARTO of 2.0202 times as compared with other years. It was a good improvement for the corporation to collect their credit sales since their faced losses in the year 2008. Thus, a corporation has a good credit policy in the year 2008 whereby it has a higher ARTO as compared with other years.

Fixed assets turnover (FATO) is calculated by dividing sales with net fixed asset and it can be used to measure the efficiency with which the corporation has been using its fixed assets to generate revenue such as property, plant and equipment. If there is a decreasing in FATO, its shows that the firm already invests in improper investment in fixed assets or ineffectiveness of management in using corporations fixed asset. Normally, it would take a year or more for the corporation to utilize all of the investment in their fixed asset. The highest FATO is in the year 2005 with 0.1745 times as compared with the lowest FATO in 2006 with 0.1137 times. However, FATO for the corporation is quite low and this indicates that the corporation is too much investing in their fixed asset. It can be prove by changes of fixed asset from the year 2004 - 2005. Furthermore, the corporation invests too much in their fixed asset such as project development, property, plant and equipment, and invests in their subsidiaries and associates. Total asset turnover (TATO) is calculated by dividing sales with total asset and its indicates the efficiency of the firm uses all its assets to generate sales. This ratio also considers all assets of corporation including fixed assets and current assets. Fixed asset consist of property, plant and equipment, investment in subsidiaries and associates, and other investment while current asset include inventories, trade receivable, other receivable and cash and bank balances. If there is a problem either in ITO, ARTO or FATO, then it does affect TATO directly. A higher TATO shows that a corporation using its asset (fixed asset and current asset) efficiently in order to generate as much sales as possible while a lower TATO shows that a corporation is not using its assets effectively to generate adequate sales.

When we compare with FATO, TATO are not utilized all of corporations assets to generate their revenue. However, an increasing TATO in the year 2005 and 2007 from previous year would be a good indication that the firm is using its assets efficiently in their operation and this change also can be an indication of increased in a corporation managerial effectiveness. It is because, their revenue are not depending too much on their direct selling of timber resources and product but they are more depend on their other resources of income like their investment in subsidiaries and associates, interest income, management fees, registration fees, and timber premium. Thus, it keeps TATO decreasing from year 2004 until 2008. The reason why it keeps decreasing from year to year is because the resources of income keep decreasing from year to year. The other resources of income include timber premium, rental income, registration fees, gross dividends from subsidiaries and other investment, interest income and management fees.

CHAPTER 6 RECOMMENDATION AND CONCLUSION 6.1 Recommendation The findings of this study have implied the financial performance of STIDC has highlighted some areas of concern. There are ways that STIDC could do in order to improve the STIDCs financial performance. Therefore, this chapter discusses the recommendation and suggestion to improve the overall financial performance of STIDC based on findings and analysis made by researcher. 6.1.1 Lack of resources Lack of resources of timber affect the financial performance of STIDC directly since timber industry is a core business to STIDC. Therefore, they should take an action to overcome this issue such as continuing with housing project in order to support their core business. Besides that, they should involve actively in infrastructure development project especially in Sarawak as what they did in Tanjung Manis by develop Tanjung Manis as a new township with proper airport, roads, deep water port, administration and commercial centre. In addition, they should have a proper plan to planted timber in order to have continues supply of timber in future. For instance, by participating in new tax incentive for forest plantation development which offered by government recently would help the corporation in their timber plantation plan.

6.1.2

Inconsistent profitability As researcher see in five (5) years consecutive annual report of STIDC, there is inconsistent profitability trend and as we can see in the findings, there is inconsistent in delivering net profit from the year 2004 - 2008. Therefore, by diversifying in other sectors like housing project and infrastructure development project could help to increase their profitability for long term of period.

6.1.3

High expenses High expenses that are incurred by STIDC due to an increasing amount in staff medical expenses, overtime allowance, utility, travelling allowance, training and etc. Therefore, they should minimize their expenses and maximize their profit by reduce unnecessary expenses.

6.2

Conclusion Analysis of financial performances provides a great assistance in locating the weak spots at the corporation. Therefore it is useful for corporation to make a good decision and helps in financial forecasting and planning. By looking at overall financial performance of STIDC starting from the year 2004 until 2008, they have unsound financial performance because they have inconsistent profitability due to inconsistent trend in delivering net profit as noted by Abuzar, M. A. (2004): the efficient management of the broader measure of liquidity, working capital, and its narrower measure, cash, are both important for a companys profitability and well being. However, STIDC still can generate profit by reduce unnecessary expenses and diversify in other sector to support their core business as suggested by Bhimani, (1993): They must accordingly change dynamically with the strategy and must be clearly defined and have a very explicit purpose (Flapper et al., 1996; Neely et al., 1997). In terms of efficiency, they are quite efficient in collecting credit sales from their creditor since the account receivable turnover has increased from year to year. Thus, it shows that the corporation has a good collection or credit policy. Meanwhile, the liquidity of STIDC keep declined from year to year align with argument from Nicholas, 1991: companies usually do not think about improving liquidity management before reaching crisis conditions or becoming on the verge of bankruptcy. However, they still have an ability to meet their short term and long term obligation because the current and quick ratio has more than the accepted benchmark of 2:1 and 1:1 respectively.

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