Basic

FINANCIAL
MANAGEMENT
For Engineers

 Interpreting Financial
Data
 Analysing
Financial
Statements

Financial analysis is a
technique of examining
financial statements to
help the entrepreneur
analyse the financial
position and performance
of the business.
 Analysing
Financial
Statements

Financial analysis involves

two basic steps:
Generating information
from the financial
statements.
Interpreting the results.
 Analysing
Financial
Statements

The financial
statements (cash flow,
income statement and
balance sheet) will give
the us a relatively
complete financial
picture of the business.
 Analysing
Financial
Statements

For example, the cash

flow statement may tell
us that our business pay
bills on time or have
positive monthly cash
balances.
 Assessing
The Health
of The
Business

A helpful tool that can be used to predict

the success, potential failure and
progress of the business is financial
ratio analysis.
 Assessing
The Health
of The
Business
By spending time doing financial ratio
analysis, we will be able to spot trends in
the business and compare the financial
performance and condition with the
average performance of similar businesses
in the same industry.
 Financial
Ratios
We will only focus on the main ratios that can be
easily used. The ratios are grouped together
under the following key areas:
Liquidity ratios
Profitability ratios
Activity ratios
Financial leverage ratios
Financial Statements

JATI DIRI SDN BHD

 Liquidity refers to the
availability of liquid assets
to meet short-term
obligations.

Thus, liquidity ratios

measure the ability of the
business to pay its
monthly bills. These ratios
are the most commonly
Liquidity used of all the financial
ratios.
 The importance of the
business’ ability to pay its
monthly bills is the reason
why current assets and
current liabilities are
separated in the balance
sheet.

Liquidity
 Liquidity Ratios
The difference between
the two, known as
working capital,
represents a safety net
that protects the business
from a financial disaster.

The most widely used

liquidity ratios:

Liquidity  Current ratio

 Quick ratio.
 Liquidity Ratios
Current ratio = Total current assets
Total current liabilities

One of the most common measures of

financial strength, this ratio measures
whether the business has enough current
assets to meet its debt obligations with a
margin of safety. A generally acceptable
current ratio is 2 to 1; however, this will
depend on the nature of the industry and
the form of its current assets and
liabilities.
Liquidity
 Liquidity Ratios
Quick ratio = Current assets – inventory
Current liabilities

Sometimes called the “acid test

ratio”, this is one of the best
measures of liquidity. By excluding
inventories which could take some
time to turn into cash unless the
price is ”knocked down,” it
concentrates on real, liquid assets.
Liquidity
 LIQUIDITY RATIOS

2010 2011 2012

2010 2011 2012

 Liquidity Position of Jatidiri Sdn Bhd

The liquidity of Jatidiri Sdn Bhd

refers to its ability to meet loan
obligations as it relates to its
current assets and current
liabilities. In terms of liquidity
position, a current ratio of at least
2 and a quick ratio of at least 1 are 2010 2011 2012

considered adequate. The

company’s current ratios for three
years were about 2 and its quick
ratios were more than 1. These
ratio figures indicate that Jati Diri
has not been facing difficulties in
meeting its financial obligations.
2010 2011 2012
 Profitability Ratios
These ratios measure business
performance and ultimately
indicate the level of success of
business operations.

Some of the commonly used

profitability ratios:
 Gross profit margin
 Net profit margin
Profitability  Return on aset
 Return on equity.
 Gross profit margin = Gross profit
Sales

This ratio measures the

percentage of sales proceeds
remaining (after obtaining or
manufacturing the goods
sold) to pay the overhead
expenses of the business.

Profitability
 Net profit margin = Net profit before tax
Sales

This measures the

percentage of sales proceeds
left after all expenses
(including inventories),
except income taxes. It
provides a good opportunity
to compare the return on
Profitability income of the business with
the performance of similar
businesses.
 Return on assets = Net profit after tax
Total assets

This measures how efficiently

profits are being generated from the
assets used in the business. The
ratio will only have meaning when
compared with the ratio of others in
similar industry. A low ratio in
comparison with the industry
average indicates an inefficient use
Profitability of business assets.
 Return on equity = Net profit after tax
Equity

The return on equity (also known as

return on investments - ROI) is
perhaps the most important ratio of
all as it tells you whether or not all
the efforts put into the business is
yielding an appropriate return on
the equity generated, in addition to
achieving the strategic objective.
Profitability
 PROFITABILITY RATIOS

2010 2011 2012

2010 2011 2012 2010 2011 2012

 PROFITABILITY RATIO

2010 2011 2012

 PROFITABILITY RATIO

2010 2011 2012

2012 2011 2010
Profitability of Jatidiri Sdn Bhd

The increase in ROA and ROE between 2010 and

2012 is remarkable and shows that the company
increased its sales while increasing the utilization of its
assets used to generate these sales. And to achieve
these results, the revenues and total assets have to
increase proportionately. In the short term, this would
be a good trend, but if it continues, it could be a sign
that the company is not keeping a big investment in
assets, because note that as the denominator in this
ROI calculation, a low asset figure can be used to help
drive up the overall result.
 The activity ratios measure
how efficiently the
business uses its assets to
generate sales.

The most widely used

efficiency ratios for
planning purposes:

 Inventory turnover
Activity  Debtors turnover
Ratios  Total assets turnover.
 Inventory turnover = Cost of sales
Average inventory

Inventory turnover (stock turnover)

measures the number of times inventory
have been converted into sales and
indicates how liquid the inventory is. All
other things being equal, the higher the
turnover figure, the more liquid the
business is. Inventory turnover can be
used to calculate the average age of
inventory, i.e. the number of days it takes
for the firm to sell to consumers to sell
Activity the product it is currently holding as
inventory.
Ratios Average age of inventory = 365 days ÷ Inventory
turnover
 Debtors turnover = Total Credit Sales
Debtors

Debtors (account receivable) turnover

measures business liquidity by dividing
the sales that the business makes on
credit by the amount of debtors. If
debtors are excessively slow in being
converted to cash, the liquidity of the
business will be severely affected.
Generally, a higher turnover figure is
better. Debtors turnover can be used to
calculate average collection period, i.e.
Activity the approximate amount of time it takes
to for the firm to receive payments from
Ratios customers.
Average collection period = 365 days ÷ Debtors turnover
 Assets turnover = Net Sale
Total Assest

Asset turnover ratio is the ratio of a

company's sales to its assets. It is an
efficiency ratio which tells how
successfully the company is using its
assets to generate revenue. If a
company can generate more sales
with fewer assets it has a higher
turnover ratio which tells it is a good
company because it is using its
Activity assets efficiently. A lower turnover
Ratios ratio tells that the company is not
using its assets optimally.
 ACTIVITY RATIO

2010 2011 2012

 ACTIVITY RATIO

2010 2011 2012

 ACTIVITY RATIO

2010 2011 2012

 Activity of Jatidiri Sdn Bhd

Overall, Jatidiri Sdn Bhd was not efficient in

using its assets to generate sales. While the
inventory turnover increased from 8.4 times
in 2010 to 9.9 times in 2011, this ratio fell to
9.0 times in 2012. It indicates that the 2010 2011 2012

company was relatively slow in replacing its

inventory. However, the company’s was
somewhat efficient in converting its account
receivables into cash as evidenced by its
debtors turnover ratios which increased
from 11.0 times in 2010 to 11.8 times in 2010 2011 2012

2011. Again In 2012, the debtors turnover

increased to 13 times. The company’s
asset turnover in 2010 was 0.9 times and it
increased to 1.1 times in 2011. However the
turnover dropped to 1.0 in 2012.
2010 2011 2012
 These ratios indicate the extent
to which the business is able to
meet all its debt obligations from
sources other than cash flow.
It answers the question: If the
business suffers from reduced
cash flow, will it be able to
continue to meet the debt and
interest expense obligations from
other sources?
Some of the commonly used
Solvency solvency ratios:
 Debt to equity
Ratios  Debt to assets
 Times interest earned.
 Debt to equity = Total liabilities
Equity

Debt-to-equity ratio (also known as

leverage or gearing ratio) indicates
the extent to which the business is
dependent on debt financing versus
equity to fund the assets of the
business. Generally speaking, the
higher the ratio, the more difficult it
will be to obtain future borrowings.
Solvency
Ratios
 Debt to assets = Total liabilities
Total assets

This measures the percentage

of assets being financed by
liabilities. Generally speaking,
this ratio should be less than 1,
indicating adequacy of total
assets to finance all debt.
Solvency
Ratios
 Times interest earned = Profit before interest & tax
Interest expense

Times interest earned (or

interest coverage ratio) is the
ratio of earnings before interest
and tax (EBIT) to interest
expense during a given period.
It is a solvency ratio measuring
the ability of a business to pay
Solvency off its debts.
Ratios
 SOLVENCY RATIO

2010 2011 2012

2010 2011 2012

2010 2011 2012

 Exercise: Solvency of Jatidiri Sdn Bhd

Please give your

opinion with regard to
solvency position of the
company.
THANK YOU