i) Ratio Analysis

a) Profitability
1. Gross Profit Margin
Gross Profit
Gross Profit Ratio = x 100%
Sales

28,210
Gross Profit Ratio18 = x 100%
108,500
= 26%

26,745
Gross Profit Ratio17 = x 100%
89,150
= 30%

26,240
Gross Profit Ratio16 = x 100%
82,000
= 32%

2. Net Profit Margin

Net Income
Net Income Margin = x 100%
Sales

4,510
Net Income Margin18 = x 100%
108,500
= 4.16%

5,522
Net Income Margin17 = x 100%
89,150
= 6.19%

5,595
Net Income Margin16 = x 100%
82,000
= 6.82%
 1

b) Liquidity Ratio
3. Current Ratio

Total Current Assets

Current Ratio =
Total Current Liability

38,195
Current Ratio18 =
29,380
= 1.30 :1

32,564
Current Ratio17 =
23,260
= 1.40 :1

32,207
Current Ratio16 =
21,471
= 1.50 :1

4. Quick Ratio

Total Current Assets - Inventory

Current Ratio =
Total Current Liability

38,195 - 7,595
Current Ratio18 =
29,380
= 1.04:1

32,564 - 8,023
Current Ratio17 =
23,260
= 1.06:1

32,207 - 9,100
Current Ratio16 =
21,471
= 1.08:1
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b) Activity Ratio

5. Asset Utilisation Ratio

Sales Revenue
Asset Utilisation Ratio =
Total Asset

108,500
Asset Utilisation Ratio18 =
71,928
= 1.51:1

89,150
Asset Utilisation Ratio17 =
64,725
= 1.38:1

82,000
Asset Utilisation Ratio16 =
63,382
= 1.30:1

6. Fixed Asset Turnover

Sales Revenue
Fixed Asset Turnover =
Net Fixed Asset

108,500
Fixed Asset Turnover18 =
33,733
= 3.22 times

89,150
Fixed Asset Turnover18 =
32,161
= 2.77 times

82,000
Fixed Asset Turnover18 =
31,175
= 2.63 times
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7. Debtors Collection Period

Account Receivable x 365

Debtors Collection Period =
Sales

16,350 x 365
Debtors Collection Period18 =
108,500
= 55 days

12,701 x 365
Debtors Collection Period17 =
89,150
= 52 days

11,907 x 365
Debtors Collection Period16 =
82,000
= 53 days
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d) Gearing
Total Liabilities
8. Debt Ratio =
Total Asset

41,880
Debt Ratio18 =
71,928
0.58:1

31,260
Debt Ratio17 =
64,725
0.48:1

29,471
Debt Ratio16 =
63,382
0.46:1

Shareholder funds
9. Equity Ratio =
Total Asset

30,048
Debt Ratio18 =
71,928
0.42:1

33,465
Debt Ratio17 =
64,725
0.52:1

33,911
Debt Ratio16 =
63,382
0.46:1
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Total Liability
10. Debt to Equity Ratio
Total Equity

41,880
Debt to Equity Ratio18 =
30,048
1.40:1

31,260
Debt to Equity Ratio17 =
33,465
0.93:1

29,471
Debt to Equity Ratio16 =
33,911
0.87:1
 6
ii) For every RM1 spent on sales, ABC Limited get RM 0.26 in gross profit in
the year 2018, RM 0.30 in year 2017, and RM 0.32 in year 2016. The Gross
Profit has reduced from the year 2016 to 2018. This might be due increase in
the cost of production. ABC Limited must find out ways to reduce the
prodcution cost for higher gross profit ratio for coming years. For every RM1
spent on sales, ABC Limited get RM 0.0416 in net income in the year 2018.
RM 0.0619 in net income in the year 2017, and RM 0.0682 in net income in
the year 2016. The net income gradually decresed along the years due to many
cost that the company incurred. ABC Limited in 2018, states 1.30 current
ratio, indicates the companies current asset can cover up for every RM 1 of
current liabilities. In 2017, states 1.40 current ratio, indicates the companies
current asset can cover up for every RM 1 of current liabilities. In 2016, states
1.350 current ratio, indicates the companies current asset can cover up for
every RM 1 of current liabilities.Next, this indicates the company is bad in
term of managing current assets because the current ratio decreased from 1.50
in 2016 to 1.30 in 2018. ABC Limited in 2018, states 1.04 current ratio, in
2017, the current ratio of the company is 1.06, in 2016, the current ratio of the
company is 1.08, indicates the companies current asset can cover up current
liabilities even excluding the inventories. Because the current asset of the
company is higher than 1, this indicates the company manage their liquidity
well as the current ratio is more than 1. Firstly, the companies current assets
can cover up currrent liabilities as for every RM 1 of the current liabilities can
be covered with RM1.59 of current assets. Next, this indicates the company
needment improve in term of managing current assets because the current ratio
decreased from 1.08 in 2016 to 1.04 in 2018. ABC Limited in 2018, states
1.51 asset utilisation ratio, in 2017, the asset utilisation ratio of the company is
1.38, in 2016, the asset utilisation ratio of the company is 1.30, indicates the
company earned RM1.51 for each RM1 of assets held by the company in year
2018, company earned RM1.38 for each RM1 of assets held by the company
in year 20187, company earned RM1.30 for each RM1 of assets held by the
company in year 2016. An increasing asset utilization means the company is
being more efficient with each RM1 of assets it has. ABC Limited in 2018,
states 3.22 times fixed asset turnover, in 2017, 2.77 times fixed asset turnover,
in 2016, 2.63 timed fixed asset turnover. The fixed asset turnover ratio is an
efficiency ratio that measures a companies return on their investment in
property, plant, and equipment by comparing net sales with fixed assets. A
higher fixed asset turnover ratioin this company over 5 years indicates that a
company has more effectively utilized investment in fixed assets to generate
revenue. ABC Limited's debtors collection period increases to 55 days in year
2018 compared to previous year which is 52 days only in year 2017. ABC
Limited's debtors collection period decreases to 52 days in year 2017
compared to previous year which is 53 days in year 2016.This indicates that
ABC Limited are in a little higher risk as there is chances their creditors might
missing in action, bankrupt, or death, which gives ABC Limited negative
effect. The management need to take certain action to not further increase the
accoun receivable turnover. The ratio for year 2018, 2017, and 2016 is less
than 1, which 0.58, 0.48, and 0.46 respectively .This indicates that ABC
higher fixed asset turnover ratioin this company over 5 years indicates that a
company has more effectively utilized investment in fixed assets to generate
revenue. ABC Limited's debtors collection period increases to 55 days in year
2018 compared to previous year which is 52 days only in year 2017. ABC
Limited's debtors collection period decreases to 52 days in year 2017
compared to previous year which is 53 days in year 2016.This indicates that
ABC Limited are in a little higher risk as there is chances their creditors might
missing in action, bankrupt, or death, which gives ABC Limited negative
effect. The management need to take certain action to not further increase the
accoun receivable turnover. The ratio for year 2018, 2017, and 2016 is less
than 1, which 0.58, 0.48, and 0.46 respectively .This indicates that ABC
Limited did not depend on debt or liabilities in running their business
operation. This concludes that ABC Limited has more effective management
system in 2016 compared to 2017 and 2018.

iii) Some of the most important limitations of ratio analysis include first,
historical information. Information used in the analysis is based on real past
results that are released by the company. Therefore, ratio analysis metrics do
not necessarily represent future company performance. Next is Inflationary
effects. Financial statements are released periodically and, therefore, there are
time differences between each release. If inflation has occurred in between
periods, then real prices are not reflected in the financial statements. Thus, the
numbers across different periods are not comparable until they are adjusted for
inflation. Third is Changes in accounting policies. If the company has changed
its accounting policies and procedures, this may significantly affect the
financial reporting. In this case, the key financial metrics utilized in ratio
analysis are altered and the financial results recorded after the change are not
comparable to the results recorded prior to the change. It is up to the analyst to
be up to date with changes to accounting policies. Changes made are generally
found in the notes to financial statements section. Fourth is Operational
changes. A company may significantly change its operational structure,
anything from their supply chain strategy to the product that they are selling.
When significant operational changes occur, the comparison of financial
metrics before and after the operational change may lead to misleading
conclusions about the company’s performance and future prospects. Fifth is
Seasonal effects: An analyst should be aware of seasonal factors that could
potentially result in limitations of ratio analysis. The inability to adjust the
ratio analysis to the seasonality effects may lead to false interpretations of the
results from the analysis. Sixth is Manipulation of financial statements. Ratio
analysis is based on information that is reported by the company in their
financial statements. This information may be manipulated by the company’s
management to report a better result than its actual performance. Hence, ratio
analysis may not accurately reflect the true nature of the business, as the
misrepresentation of information is not detected by simple analysis. It is
important that an analyst is aware of these possible manipulations and always
complete extensive due diligence before reaching any conclusions.
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