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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.

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.

2014

Current Ratios = 3.6: 1

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

liabilities.

2015

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

liabilities.

current liabilities.

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.

2014

2015

Stocks = RM 284,640

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 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.

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 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

= 59.4 : 1

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:

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.

= 212.6

= 136.0

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.

= 172.6

= 107.6

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

= 21.7%

2015

= 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 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

= 0.19%

2015

= 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

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