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INTRODUCTION

LIQUIDITY RATIOS

Liquidity ratios measure the extent to which assets can be turned into cash quickly. Liquidity
ratios try to assess how much cash the entity has available in the short term. Liquidity ratios
measure a company's ability to pay debt requirements and its margin of safety through the
calculation of metrics including the current ratio, quick ratio and operating cash flow ratio. We
can do this by calculating two liquidity ratios known as the current assets ratio and the acid test
ratio.

CURRENT ASSETS RATIO


In most circumstances we can expect that current assets will be in excess of current liabilities.
The current assets ratio will then be at least 1 : 1. If this is not the case, the entity may not have
sufficient liquid resources for example current assets that can be quickly turned into cash
available to meet its immediate financial commitments. The current assets ratio is calculated as
follows:
A current ratio below 1 is a strong danger sign that the company is headed for trouble. A ratio
below 1 means the company is operating with negative working capital; in other words, its
current debt obligations exceed the amount of money it has available to pay those debts.
However, many lenders and analysts believe that the current ratio isn’t a good enough test of a
company’s debt-paying ability because it includes some assets that aren’t easy to turn into cash,
such as inventory.

The calculation of the current asset ratios is as follows:

TANJUNG OFFSHORE BERHAD

2014

Current assets = RM 176,265,735

Current liabilities = RM 44,736,555

RM 176,265,735 ÷ RM 44,736,555= 3.6


Current Ratios = 3.6: 1

So TANJUNG OFFSHORE BERHAD has RM 3.60 of current assets for every RM 1 of current
liabilities.

2015

Current assets = RM 118,906,137

Current liabilities = RM 46,125,438

118,906,137 ÷ 46,125,438= 2.6

Current Ratios = 2.6: 1

So TANJUNG OFFSHORE BERHAD has RM 2.60 of current assets for every RM 1 of current
liabilities.

TANJUNG OFFSHORE BERHAD current assets decrease by RM 1.00 for every RM 1 of


current liabilities.

ACID TEST RATIO

The acid-test ratio, also known as the "quick ratio," is used to highlight the short-term liquidity
and solvency of an organization. Investors and lenders use the acid-test ratio as a more severe
version of the current ratio, often looking for a "pass" or "fail" value. All of the information
necessary to calculate the acid-test ratio can be found on the company's most recent balance
sheet. It is probably a better measure of an entity’s immediate liquidity position than the current
assets ratio because it may be difficult to dispose of the stocks in the short term. The acid test
ratios calculated as follows:
Companies are expected to have a ratio of at least 1.0, which means they have enough existing
liquid assets to cover their bills. Several factors can impact this figure; the timing of asset
purchases, timing of raised capital, allowances for bad debt and accounts receivable management
policies are all significant determinants of the acid-test ratio.

The calculation of the current asset ratios is as follows:

TANJUNG OFFSHORE BERHAD

2014

Current assets = RM 176,265,735

Current liabilities = RM 44,736,555

Stocks = RM 1 416 507

(176,265,735 – 1 416 507) ÷ 44,736,555 = 3.9

Acid test ratios = 3.9: 1


2015

Current assets = RM 118,906,137

Current liabilities = RM 46,125,438

Stocks = RM 284,640

(118,906,137 - 284,640) ÷ 46,125,438 = 2.6

Acid test ratios = 2.6: 1

There is no single, hard-and-fast method for determining a company's acid-test ratio, but it is
important to understand how data providers arrive at their conclusions.

INVESTMENT RATIOS
Investment ratios which are used to assess the performance of a company's shares, for example,
price earnings ratio, earnings per share and earnings yield. In addition to being of great interest to
the ordinary shareholders, investment ratios are also of interest to potential investors, analysts
and competitors.

DIVIDEND YIELD

A financial ratio that indicates how much a company pays out in dividends each year relative to
its share price. Dividend yield is represented as a percentage and can be calculated by dividing
the dollar value of dividends paid in a given year per share of stock held by the dollar value of
one share of stock. The first investment ratio that you might find useful is the dividend yield. It
usually applies to ordinary shareholders and it may be calculated as follows:
DIVIDEND COVER

Another useful investment ratio is called dividend cover. The Dividend Coverage Ratio, also
known as dividend cover, is a financial metric that measures the number of times that a company
can pay dividends to its shareholders. The dividend coverage ratio is the ratio of the company’s
net income divided by the dividend paid to shareholders. It is calculated as follows:

This is ratio shows the number of times that the ordinary dividend could be paid out of current
earning. The dividend is usually described as being x times covered by the earning. Thus, if the
dividend is covered twice, the company would be paying out half of its earnings as an ordinary
dividend.

EARNINGS PER SHARE

Earnings per share or EPS is an important financial measure, which indicates the profitability of
a company. It is calculated by dividing the company’s net income with its total number of
outstanding shares. It is a tool that market participants use frequently to gauge the profitability of

a company before buying its shares. The following formula is used to calculate what is called the
basic earnings per share:
The above definition use the term ‘non-equity shares’. Preference shares are an example of such
shares. In published accounts you will sometimes see other definition of the EPS. The
calculations involved in obtaining them are often highly complex. EPS enables a fair comparison
to be made between one year’s earnings and another by relating the earnings to something
tangible.

PRICE TO EARNING RATIO

The price-earnings ratio (P/E ratio) is the ratio for valuing a company that measures its current
share price relative to its per-share earnings. The price-earnings ratio is also sometimes known as
the price multiple or the earnings multiple. It is calculated as follows:
ASSET MANAGEMENT/EFFICIENTCY
The efficiency ratio is typically used to analyze how well a company uses its assets and liabilities
internally. An efficiency ratio can calculate the turnover of receivables, the repayment of
liabilities, the quantity and usage of equity, and the general use of inventory and machinery. This
ratio can also be used to track and analyze the performance of commercial and investment banks.
Analysts use efficiency ratios, also known as activity ratios, to measure the performance of a
company's short-term or current performance. All of these ratios use numbers in a company's
current assets or current liabilities, quantifying the operations of the business.

An efficiency ratio measures a company's ability to use its assets to generate income. For
example, an efficiency ratio often looks at aspects of the company, such as the time it takes to
collect cash from customers or the amount of time it takes to convert inventory to cash. This
makes efficiency ratios important, because an improvement in the efficiency ratios usually
translates to improved profitability. These ratios can be compared to peers in the same industry
and can identify businesses that are better managed relative to the others. Some common
efficiency ratios are accounts receivable turnover, fixed asset turnover, sales to inventory, sales to
net working capital, accounts payable to sales and stock turnover ratio.

STOCK TURNOVER RATIO


Stock turnover is a ratio showing how many times a company's stock is sold and replaced over a period
of time. The days in the period can then be divided by the stock turnover formula to calculate the days it
takes to sell the stock on hand. It is calculated as sales divided by average stock. Stock turnover is
calculated as sales divided by average stock.

Average stock is calculated as: (opening stock + closing stock)/2. Using average stock accounts for any
seasonality effects on the ratio. Inventory turnover is also calculated using the cost of goods sold (COGS),
which is the total cost of stock. Analysts divide COGS by average stock instead of sales for greater
accuracy in the calculation of stock turnover. This is because sales include a markup over cost. Dividing
sales by average stock inflates stock turnover.

= x DAYS
TANJUNG OFFSHORE STOCK TURNOVER RATIO FOR 2015:

= 192.7 : 1

TANJUNG OFFSHORE STOCK TUNROVER RATIO FOR 2014:

= 59.4 : 1

TRADE DEBTOR COLLECTION PERIOD RATIO

Investing in fixed asset is all very well, but there is not much point in generating extra sales if the
customers do not pay for them. Customers might be encourage to buy more by a combination of
lower selling prices and generous credit terms. If the debtors are slow at paying, the entity might
find that it has run into cash flows problem. So it is important for it to watch the trade debtor
position very carefully. We can check how successful it is has been calculating the trade debtors
collecting period. The ratio must be calculate as follows:

DAVERAGE TRADE DEBTORS x 365 Days = x Days

TOTAL CREDIT SALES

The average trade debtors term is usually calculated by using a simple average [i.e. ½ (opening
trade debtors + closing trade debtors)]. The closing trade debtors figure is sometimes substituted
for average trade debtors. This is acceptable, provided that the figure is representative of the
overall period.

TANJUNG OFFSHORE TRADE DEBTOR COLLECTION PERIOD RATIO FOR 2015:

= 212.6

TANJUNG OFFSHORE TRADE DEBTOR COLLECTION PERIOD RATIO FOR 2014:

= 136.0

TRADE CREDITORS PAYMENT PERIOD RATIO

A similar ratio can be calculate for the trade creditors’ payment period, the formula is as follows:
The average trade creditors’ amount is usually just an average of the opening and closing
balances. Many accountants use the closing balance, and you also may have to because you may
not always be given the information to calculate an average balance. The trade creditors should
be related to credit purchases (although this information will often not be available), and weeks
or months may be substituted for the number of days. Like the trade debtor collection period, it is
not usual to express this ratio as a percentage.

TANJUNG OFFSHORE TRADE CREDITORS PAYMENT PERIOD RATIO FOR 2015:

= 172.6

TANJUNG OFFSHORE TRADE CREDITORS PAYMENT PERIOD RATIO FOR 2014:

= 107.6

GROSS PROFIT MARGIN

Gross profit ratio is one of four main profitability ratio. It describe relationship between gross
profit and total net sales revenue. By this they can determine their company’s financial health
and business model by knowing the amount of money left over from revenue after accounting for
the cost of goods sold. This is done to measure how much profit the company has earned in
relation to the amount of sales that they have made. The formula to calculate gross of profit is :
Tanjung Offshore Berhad

2014

Gross Profit : RM 23,274,886

Sales Revenue : RM 107,344,762

Gross profit ratio = (23,274,886 ÷ 107,344,762) x 100


= 21.7%

TANJUNG OFFSHORE BERHAD makes 21.7% of gross profit in 2014

2015

Gross Profit : RM 5,748,196

Sales Revenue : RM 60,606,042

Gross profit ratio = (5,748,196 ÷ 60,606,042) x 100


= 9.5%
TANJUNG OFFSHORE BERHAD makes 9.5% of gross profit in 2015.
So, TANJUNG OFFSHORE BERHAD gross profit decreasing through this two years.

NET PROFIT MARGIN

Net profit margin is the percentage of revenue left after all expenses have been deducted from
sales. This accounting is done to know the amount of profit that a business can extract from its
total sales. The formula to calculate net profit ratio is :
TANJUNG OFFSHORE BERHAD

2014

Net profit before taxation : RM 205,000

Total sales revenue : RM 107,344,762

Net profit margin = (205,000 ÷ 107,344,762) x 100

= 0.19%

TANJUNG OFFSHORE BERHAD net profit margin on 2014 was 0.19%.

2015

Net profit before taxation : RM 73,804

Total sales revenue : RM 60,606,042

Net profit margin = (73,804 ÷ 60,606,042) x 100

= 0.12%

TANJUNG OFFSHORE BERHAD net profit margin on 2014 was 0.12%.

This shows that TNAJUNG OFFSHORE BERHAD net profit margin is decreasing from 2014 to

2015.

CONCLUSION

The financial statement analysis helps to pinpoint the areas where in the managers have shown
better efficiency and the areas of inefficiency. For example, using financial ratios, it I possible to
analyze relative proportion of production, administrative and marketing expenses. Any favorable
or unfavorable variations can be identified and reasons thereof can ascertained to pinpoint
managerial efficiency and deficiency judging the short term and the long term of the company on
the basis of financial analysis, long term as well as short term solvency or liquidity of concern
for example ; ability to meet short term liabilities. Debenture holders and lenders judge the
ability of the company to pay the principal amount and interest on the basis of financial analysis.

REFERENCES

Websites:

How to Use Financial Reports to Find the Current Ratio. (n.d.). Retrieved May 12, 2018, from
http://www.dummies.com

Staff, I. (2017, December 12). Acid-Test Ratio. Retrieved May 12, 2018, from
https://www.investopedia.com
Ross, S. (2015, January 13). How do I calculate the acid test ratio on a balance sheet? Retrieved May 12,
2018, from https://www.investopedia.com

Current ratio - explanation, formula, example and interpretation. (2017, October 28). Retrieved May 12,
2018, from https://www.accountingformanagement.org

Books:

Dyson, J. R. (2010). Accounting for non-accounting students(7th ed.). Harlow: Pearson.