PROGRAMME:

EXECUTIVE MASTER IN OPERATION

& PROJECT MANAGEMENT

MODULE:
STRATEGIC FINANCIAL
MANAGEMENT
 ASSIGNMENT COVER
HAMBRA EDU SERVICES
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STUDENT’S NAME : SARAVANA RAO

I/C NO / MATRIX NO. : 901121-10-5019
PROGRAMME : EXECUTIVE MASTER IN OPERATION & PROJECT
MANAGEMENT
CLASS DATE : 22nd JANUARY 2022
INTAKE DATE : 17 APRIL 2021
MODULE : STRATEGIC FINANCIAL MANAGEMENT
TRAINER’S NAME : DR ZAMRI BIN ISA
CENTRE : AETC SHAH ALAM
OVERALL MARK
(Fill up by Trainer)

INDICATOR MARK

EFFORT ( 10% )

PRESENTATION (10% )

CONTENT ( 40% )

TOTAL ( 60% )

FINANCIAL MEMORANDUM: HAMMER TOOLS COMPANY (HTC).

Subject: Application of Short-Term Loan from HTC

Dear Sir,

Please do find below my evaluation of financial data analysis for HTC (Hammer Tool Company)
performances in various categories based on balance sheet and income statement provided by HTC
of year 2013 & 2014. I have compared the evaluation based with the current industry average

1.INTRODUCTION.

The motive of this memo prepared is the evaluated value of financial performance of Hammer
Tools Company (HTC) for their proposal of the ariel review of accumulated financial data
represented by HTC for short-term loan application. HTC business of origin as seen here
manufactures various types of high-quality punching and deep drawing press tools for kitchen
appliance manufacturers. Furthermore, in this memo an evaluated value and data represented on
the financial analysis and ratio’s will be made to a highlight the financial performance and position
of HTC for the purpose of the short-term loan application.

1.0 STATEMENT OF FINANCIAL POSITION (BALANCE SHEET) OF

HAMMER TOOLS COMPANY AS AT 31 DECEMBER 2014

Statement of Financial Position

Of Hammer Tools Company as at 31 December 2014
2014 2013
RM RM
ASSETS
Non-current assets
Land 1,000 1,000
Plant and equipment at carrying amount 18,000 16,000
Plant and equipment at cost 31,000 26,000
Accumulated depreciation (13,000) (10,000)

Current assets
Inventories 5,220 5,000
Trade receivable 7,600 6,000
Cash and cash equivalents 1,800 2,000
TOTAL ASSETS 33,620 30,000

EQUITY AND LIABILITIES

Equity attributable to equity holders
Issued ordinary share capital 4,000 4,000
Retained earnings 16,620 14,000

Non-current liabilities
Debentures 4,000 4,000

Current liabilities
Trade payable 2,600 2,000
Accrued expenses 6,400 6,000
TOTAL EQUITY AND LIABILITIES 33,620 30,000
 1.1 EXTRACT OF THE STATEMENT OF COMPREHENSIVE INCOME
(INCOME STATEMENT) OF HAMMER TOOLS COMPANY FOR THE
YEAR ENDED 31 DECEMBER 2014.

Extract of the Statement of Comprehensive Income

of Hammer Tools Company for the year ended 31 December 2014
2014 2013
RM RM
Revenue (all credit) 45,000 40,909
Cost of sales (23,000) (20,909)
Gross Profit 22,000 20,000
Selling and admin expenses (13,000) (11,818)
Other expenses (depreciation) (3,000) (2,000)
Finance costs (412) (400)
Profit before tax 5,588 5,782
Income tax expense (2,235) (2,313)
Profit for the year 3,353 3,469
An ordinary
dividend of RM 733,000 was declared in 2014 and RM 758,000 in 2013.
2.0 FINANCIAL RATIO ANALYSIS.

2.1 PROFITABILITY OF HTC.

Ratios 2013 2014 Industry Average

Gross Profit 20,000/40,909 x 22,000/45,000 x =50%
Margin= Gross 100 100
Profit ÷ Net Sales = 48.89% = 48.89%
Operating Profit 11,818/61,818 x 13,000/68,000 x =15%
Margin = 100 100
Operating = 19.12% = 19.12%
Income ÷ Net
Sales
Net Profit 3,469/61,818 x 3,353/68,000 x =8%
Margin = Net 100 100
Profit ÷ Net = 5.61% = 4.93%
Sales

Gross Profit Margin

- is a metric analysts use to assess a company's financial health by calculating the amount of
money left over from product sales after subtracting the cost of goods sold (COGS). Based
on the calculation done, HTC recorded the same percentage of margin of 48.89% for both
2013 & 2014 respectively which 1.1% lower than industry average marks set. Thus, it
accumulates HTC gross profit generated from it company sales is less than the industry
average. Moreover, it also indicated that the manufacturing efficiency and marketing
effectiveness are below the industry average.

The Operating Profit Margin

- The operating margin measures how much profit a company makes on a dollar of sales after
paying for variable costs of production, such as wages and raw materials, but before paying
interest or tax. Such analyzed data here accumulated as 19.12% margin of operating profit
for the year 2013 & 2014 which is higher 4.12% than industry average as HTC as exceeded
on the cost of indirect operating expenses or non-operating items, such as interest expenses.

Net Profit Margin

- measures how much net income or profit is generated as a percentage of revenue. It is the
ratio of net profits to revenues for a company or business segment. The higher the net
profit margin the better it is for loan application. In this case HTC has recorded 5.61% of
margin on 2013 which on part of the industry average and 4.93% in 2014 which lower than
the industry average.

3.0 ACTIVITY & LIQUIDITY.

 Ratio 2013 2014 Industry Average
Total Asset Turnover= 61,818/30,000 x 100 68,000/33,620 x 100 1.6%
(Sales/ Total assets) =2.06 =2.02
Inventory Turnover = 20,909/5,000 x 100% 23,000/5,220 x 100 8.0%
(Cost of goods = 4.18 = 4.41
sold/inventory)

Total Asset Turnover

- measures the company’s ability to use assets to generate sales. As the ideal level at this ratio
level varies greatly, a very low figure could mean the company maintains too many of assets
or not deploying the assets in sales area as well, where on the other hand the high figure
depicts the assets have been used tom produce good sales numbers. Such in this case, HTC
has been deploying its assets very well were producing good numbers between 2013 and
2014 above the industry average marked.
Inventory Turnover

- is a financial ratio showing how many times a company has sold &
replaced inventory during a given timeline. In this case, HTC has a good inventory
management. It maintains at ratio of 4.41 at 2014 and 4.14& 2013 respectively.

Ratio 2013 2014 Industry Average

Current Ratio = 13,000/8,000 x 100% 14,620/9,000 x 100% 1.50%
 (Total Current assets / =1.63% = 1.63%
Total current
liabilities)
Quick Ratio= (13,000 -5,000) / 8,000 (14,620-5,220) / 9,000 1.00%
(Current Assets – X 100% x 100%
inventories) / current = 1.00 = 1.04%
liabilities)

Current Ratio

- notable as the liquidity ratio where the company’s ability to pay its debt within a year. It
also tells such companies could maximize its current assets in balance sheet to satisfy its
current debts or other payables. A current ratio that is in line with the industry average or
slightly higher is generally considered acceptable. A current ratio that is lower than the
industry average may indicate a higher risk of distress. In this case, HTC has maintained
higher from industry average mark in the margin of 1.63% in 2013 and 2014.

Quick Ratio

- defined as indicator to any company liquidity in short-term level positions and measures the
company ability to meeting its short-term obligations with its liquid assets. Ideally, this ratio
should be 1:1. If it is higher, the company may keep too much cash on hand or have a poor
collection program for accounts receivable. If it is lower, it may indicate that the company
relies too heavily on inventory to meet its obligations. By here, HTC has quick ratio higher
in 2014 above the industry average mark and 1:1 ratio (1.00%) in 2013.

Ratio 2013 2014 Industry Average

 Receivable Days 6,000/40,909/365 7,600/45,000,365 45.00 days
(Accounts Receivable/ =53.53 days =61.64 days
Average Sales Per
Day)
Payable Days 6,000 x 365 / 20,909 6,000 x 365 / 23,000 Unknown
(Accounts Payable x =104.74 days = 101.57 days
365) / Net Credit
Purchases

Receivable Days
- notable as the receivables turnover ratio is an accounting measure used to quantify a
company's effectiveness in collecting its accounts receivable, or the money owed by
customers or clients. This ratio measures how well a company uses and manages the credit it
extends to customers and how quickly that short-term debt is collected or is paid. As the
case here HTC has average number of accounts receivable is outstanding. As being seen the
number increases from 2013 to 2014. This is same due to same or lower than the company’s
expressed credit terms.

Payable Days
- defined as financial ratio that indicates the average time (in days) that a company takes to
pay its bills and invoices to its trade creditors, which may include suppliers, vendors, or
financiers. The ratio is typically calculated on a quarterly or annual basis, and it indicates
how well the company’s cash outflows are being managed. As here HTC has reduced its
lower margin payable days as comparing from 2013 and 2014.

4. RETURN OF CAPITAL.
 Ratio 2013 2014 Industry Average
Return of Assets (3,469/30,000) x 100% (3,353/33,620) x 100% 10.00%
(Net Profit/ Total = 11.56% = 9.97%
Assets)
Return Of Equity (3,469/18,000) x 100% (3,353/20,620) x 100% 20.00%
(Net Income/ = 19.27% = 19.27%
Common equity)

Return Of Assets (ROA)

- extinguishes as that indicates how profitable a company is in relation to its total assets.
Corporate management, analysts, and investors can use ROA to determine how efficiently a
company uses its assets to generate a profit. The metric is commonly expressed as a
percentage by using a company's net income and its average assets. A higher ROA means a
company is more efficient and productive at managing its balance sheet to generate profits
while a lower ROA indicates there is room for improvement. HTC ROA has gone below the
industry average mark on 2014, while was above in 2013 which meant their management is
inefficient in expressed terms.

Return Of Equity (ROE)

- defined as Return on equity (ROE) is a measure of financial performance calculated by
dividing net income by shareholders' equity. Because shareholders' equity is equal to a
company’s assets minus its debt, ROE is considered the return on net assets. ROE is
considered a gauge of a corporation's profitability and how efficient it is in generating
profits. HTC ROE is lower than the industry average mark, which indicates here poor
management performance or on the other hand highly conservative business approach.

5. CAPITAL STRUCTURE.
 Ratio 2013 2014 Industry Average
Debt Ratio 12,000/30,000 13,000/33,620 0.50
(Total Debt: Total = 0.40 =0.39
Assets)
Interest Cover 3,353/412 3,469/400 25.00
(Times interest = 8.14 =8.67
earned)

Debt Ratio
- extinguishes in manner as the proportion of a company’s assets that are financed by debt. A
ratio greater than 1 shows that a considerable portion of a company's debt is funded by
assets, which means the company has more liabilities than assets. A high ratio indicates that
a company may be at risk of default on its loans if interest rates suddenly rise. A ratio below
1 means that a greater portion of a company's assets is funded by equity. HTC has below
than 1.0mark debt ratio which is accumulated good and also lower than the industry
average mark.

Interest Cover
- defined as the interest coverage ratio is a debt and profitability ratio used to determine how
easily a company can pay interest on its outstanding debt. The interest coverage ratio is
calculated by dividing a company's earnings before interest and taxes (EBIT) by its interest
expense during a given period. HTC has performed well and has a far low interest cover
ratio for 2 years in a row, hence it’ll able to handle interest payment for additional debt.

6. INDUSTRY AVERAGES.
 Gross Profit Margin 50%
Operating Profit Margin 15%
Net Profit Margin 8%
Return Of Assets 10%
Return Of Equity 20%
Current Ratio 1.5
Quick Ratio 1.0
Debt: Total Assets 0.5
Time Interest Earned 25
Receivable Days 45 days
Inventory Turnover 8
Assets Turnover 1.6

Above table refers the industry averages as a indication for the above evaluation and financial analysis done
for HTC.

7. CONCLUSIONS & RECOMMENDATIONS.

Ought to make the conclusion on HTC’s financial data analysis accumulated here is purely based
on its profitability, activity & liquidity, return of capital and its capital structure as to be explained
as follows.
As moving into profitability, HTC profit is below the industry average mark and the data
accumulated on their profit gained from 2013 and 2014 are stagnant. Gross profit of HTC is
generated from the sales that is less than the industry average mark. As supporting the case here
HTC’s Net Profit Margin is lower than the industry average and decreases from 2013 to 2014.
Furthermore, the terms of activity & liquidity of HTC total asset turnover figures are marked
above of industry average fixated, which means the company ahs been deploying its assets very
well, thus produce numbers of good sales. They also possess a good inventory management. Such
implement here maintains at ratio of 4.41 and 4.18 for 2013 and 2014 respectively.
Moreover, HTC implements the ability to pay its near-term obligations, where comparable to
industry average mark, HTC has a higher current ratio which means the company may be able to
pay its bills on time, the company has money in cash or safer investments that can be put into
better use of the business advantages. The quick ratio data accumulated of HTC in 2014 indicates
the company may keep too much cash on hand or have poor collection structure for accounts
receivable.
The average number of days accounts receivable analyzed as outstanding in 2013 and 2014 has
increased. This should be lower than the company’s expressed credit terms. The annual turnover of
HTC accounts payable has been reduced as compared between 2013 & 2014.
The return of capital (ROA) of HTC has gone below the mark of industry average in 2014, and was
above in its preceding year of 2013, where it brings the sight of their management is inefficient.
HTC’s return of equity ratio is lower than the average marked, where it indicated the poor
management performance or a highly conservative business approach as it needed.
In addition, with HTC’s capital structure, HTC’s interest cover, it indicates here the company
can’t handle its interests’ payments. HTCs has a very far low interest cover ratio for two years in a
row, as being compared into industry average mark, hence here HTC will not be able to handle
interest payment for additional debt.
As a conclusion for this memorandum, I’m not recommending HTC’s application for a short-term
loan with BankBest Bank.

If there is any inquiry regarding this application, please do not hesitate to contact me further
clarification if needed.

Thanks, and Regards,

SARAVANAN RAO