a) Introduction – Company’s background, future prospective and development

London Biscuits Berhad (LBB) is a home grown Malaysian company that has become one of the major
confectionery manufacturers domestically. It was founded in 1981 as a savoury corn snacks manufacturer and
was taken over by the Liew family 13 years later. Subsequently, it was able to boost the growth of the business
after the purchase of new factory premises which leads to the increase of productivity of existing products and
invention of new product types. LBB is primarily engaged in the manufacturing and trading of confectionery
and other related foodstuffs. It manufactures a wide range of goods from cake products such as Swiss rolls to
snack products such as potato chips (London Biscuits Berhad 2019). The targeted market of LBB is mainly on
young consumers as its sweet and tasty products are able to delight the younger generations’ palates. The
group’s financial trend is on a downward slope as its revenue marked a decline of about 29% over the past three
years. However, the group remain confident as LBB is planning to launch potato chips with premium
flavourings and novelty cakes with more refined sponge texture with the hope that these will serve to bolster the
business through future challenges (London Biscuits Berhad 2018).

b) List of Board of Directors (BOD)

Figure 1: List of Board of Directors from 2015 to 2018

Table 1: Ratio of board independency from 2015 to 2018

The BOD of LBB initially consists of nine members, in which three of the members are independent
directors, resulting in a 0.33 ratio of board independency. In 2018, a restructuring of BOD leads to a decrease in
the number of Board members. The reason for the restructuring was to ensure that the current board composition
complies with the Main Market Listing Requirements (MMLR) enhanced by Bursa Malaysia at the end of
November in 2017 which requires at least half of the Board members to be represented by Independent
Directors (ZICO 2017). As such, the ratio of board independency increased to 0.50.

c) Ratios Analysis

Table 2: Definition of ratios (Kenton 2019)

i) Liquidity

Table 3: Calculations for liquidity ratios

The latest figure obtained from current ratio reveals that the business has RM1.07 of current assets available
to cover every RM1 of current liability. Over the years, the current ratio has improved from 0.82 to 1.07 times.
This is because there is a higher growth rate in the current assets of 41.1% than the current liabilities of 8.5%.
The increase was mainly attributed to the hike in trade receivables of the group (London Biscuits Berhad 2018).

Although the quick ratio increased from 0.73 to 0.98 times, the company may not be able to fully settle its
current liabilities instantaneously as the liquid assets is insufficient to cover it. The quick ratio is also lower than
the current ratio, indicating that the company’s current assets are highly dependent on inventory.

As for the cash ratio of LBB, it has worsen throughout the four years and shows sign of financial distress as
the ratio is at a very low figure of 0.06 times. This implies that the business might not be able to pay off its
current liabilities with only cash and cash equivalents and its main sources of cash flows lies heavily on
borrowings.

In short, the group might be experiencing short-term liquidity crisis.

ii) Assets Management

 Table 4: Calculations for assets management ratios

The inventory turnover indicates that the business takes a longer time to sell and replace their stocks. It
initially increase during 2016 and 2017 but plunged tremendously in 2018, recording only 8.72 times in the
inventory turnover and 42 days’ sales in inventory. This means that the business has weaker sales in 2018, as
shown in the 27.5% drop in revenue gained through the sales of products. According to the review of financial
statements by LBB, the main contributing factor which put a dent on the revenue growth is due to the reduced
sales in exports which were caused by the competitive market in the ASEAN region amid fluctuating Ringgit
currency rates (London Biscuits Berhad 2018). It also gives a hint that the business could be poor in forecasting
consumers’ demand which would lead to a risk of having obsolete stocks.

Furthermore, the receivables turnover has dropped from 2.27 to 1.45 times while debtors’ days rose from
161 days to 252 days. This shows that the firm has poor performance in debt collection as the debtors’ days
greatly exceed the credit term of 180 days given by LBB to its customers. In view of this, LBB is currently on
the lookout for a suitable candidate to head the Financial and Accounting Department in which he or she would
be mandated to propose guidelines and procedures on credit control and other matters (London Biscuits Berhad
2018).

The payables turnover of LBB surged tremendously from 8.32 times in 2015 to 21.24 times in 2018. In other
words, the group used about 18 days to repay its suppliers. This ratio is generally preferable to creditors as it
suggests creditworthiness, yet the group should take advantage of the credit terms extended by suppliers to ease
the cash flow position. In fact, the group’s low amount in cash and bank balances proved that the high payables
turnover has resulted in the cash flow burden.

Overall, the group has poor management on assets.

iii) Financial Leverage

 Table 5: Calculations for financial leverage ratios

LBB’s total debt ratio registered 0.55 times, which has escalates from 0.14 times since 2015. This suggests
that a greater portion of the group’s assets is funded by equity. The increase is mainly attributed by the
additional property, plants and equipment (PPE) acquired by the company.

Additionally, the debt to equity ratio crept up to 1.21 from 0.70 times. The increment is due to a 31% rise in
the total liabilities over the four years of operation, following the hike in bank borrowings to finance the capital
expenditure for PPE (London Biscuits Berhad 2018). This implies that the business is currently more dependent
on external funds than internal funds.

As mentioned above, the group has considerable high bank borrowings which no doubt would lead to higher
interest payments. Hence, there is a shrink in the times interest earned ratio from 1.27 to 0.87 times. This
indicates that the company has fewer earnings available to meet the interest payments. Taking this into
consideration, the Board is keeping track of its cash flow while examining alternate venues of funding, such as
through the capital markets (London Biscuits Berhad 2018).

To summarise, the business is at a high gearing level.

iv) Profitability

Table 6: Calculations for profitability ratios

 The profit margin of LBB has improved in the course of four years. This ratio illustrates that the group is
able to yield RM9.60 of net profit from each dollar of sales. Based on vertical analysis, the selling and
distribution as well as administrative expenses slide by 48.6% and 2.9% respectively. This could be caused by
the contracting sales but it may also signify that the group has good control over its expenses.

Moreover, the ROA ratio measures the percentage of profit earned in relation to its assets. The group has
recently acquired new plant and machinery in which the resources took up majority of the total assets. The
positive ROA ratio shows that the assets are used efficiently as it is able to generate profit for the business.

LBB’s ROE progress from 3.74% to 8.03%. The percentage concludes that for every RM1 the investor
contributes into the business, he or she will be able to garner a return of RM8.03. This improvement is
favourable as higher return would drive up the share price thus, attracting more investors to invest in the
business. However, the ratio is slightly lower than the interest rate of borrowings made by the company which is
8.5%.

Generally, the profitability of the group is on an upward trend.

d) Peer analysis using DuPont Method

Table 7: Calculations for DuPont Identity

DuPont analysis breaks down ROE into three components, allowing investors to determine the financial
activities that affect the changes in ROE the most hence comparing the operational efficiency of two similar
firms (Hargrave 2019).

As indicated in the table above, LBB recorded a higher profit margin of 9.6% while Oriental Food only
managed to obtain a profit margin of 3.88%. This is because LBB has successfully generated more sales locally
than the amount of sales gained by Oriental Food through export sales. Evidently, LBB is more favourable
locally as about 74% of its revenue comes from local sales whereas Oriental Food’s local sales only account for
about 37% of the group’s revenue (Tay 2017).

In terms of assets efficiency, LBB pales in comparison with its peer. The company’s TAT ratio stands at a
mere 0.38 while Oriental Food achieved a ratio of 1.15 (Lee 2019). This is so as the total assets acquired by
LBB is approximately four times more than that of Oriental Food but the difference in their sales revenue is only
a mere twenty thousand Ringgit.

Conversely, the equity multiplier ratio of LBB is 0.85 times more than Oriental Food. The ratio indicates
that LBB borrowed more money to finance the assets as compared to Oriental Food. However, the additional
borrowings did not generate proportionate revenue to the business, which means that the leverage may not be
adding any real value to the firm (Hargrave 2019).

To sum up, the higher ROE recorded by LBB in comparison with Oriental Food is mainly contributed by
two factors, namely profit margin and equity multiplier. The higher profit margin could be due to LBB having
better goodwill than Oriental Food while higher equity multiplier is because LBB utilize more loans to finance
its assets instead of using cash.

(1500 words)