Lecture 2

FINANCIAL ANALYSIS

FBF 10103 FINANCIAL MANAGEMENT

 LEARNING OUTCOMES
At the end of this Review the contents of a company’s financial
lecture, students
will be able to:
1 statements.

2 Classify the financial ratio analysis.

3 Examine the limitation of ratio analysis.

Understand who uses financial ratios and how they

4 use them.
 Financial Analysis

What is Financial Analysis?

• The process of reviewing and analyzing a
company's financial statements to make
better economic decisions.

• It used to analyze whether an entity is

stable, solvent, liquid, or profitable
enough to warrant a monetary investment.
 Analysis Tools
FIVE important sets of tools for financial analysis

Comparative financial
statement analysis
(horizontal analysis)

Common-Size Financial
Statement Analysis
Valuation (vertical analysis)

5
Tools

Cash-flow Analysis Ratio Analysis

Financial Statements
Written records that convey the business activities
and the financial performance of a company.
 THE FOUR KEY FINANCIAL STATEMENTS

Balance Sheet Income Statement Statement of Cash Flows Statement of Owner’s Equity
Summary statement of Provides a financial Summary of the firm’s Shows all equity account
operating, investment, and
the firm’s financial summary of the firm’s transactions that occurred
financing cash flows and
position at a given operating results during reconciles them with changes during a given year.
point in time. a specified period. in its cash and marketable
securities during the period.
Company’s Financial Statement
Example of Syarikat Takaful Malaysia Berhad
(year ended December 2021)
Company’s Financial Statement cont’
Example of Top Glove Corporation Berhad
(year ended 31 August 2021)

file:///C:/Users/User/Downloads/TopGloveAR2021.pdf
Which institution is better?
Based on the financial position of the company

Which one is more stable?

Which one is more profitable?
Which one have better performance?
 Ratio Analysis
A method for evaluating financial performance on a relative basis.
 FIVE
Common Categories of Financial Ratios
1 2 3 4 5

Liquidity Ratio Leverage Ratio Turnover Ratio Profitability Ratio Market Ratio
• Ability of the firm • Refers to the • Measure the speed • To evaluate the • Relate a firm’s
to satisfy its short- degree to which a with which various firm’s profits with market value, as
term obligations firm uses debt accounts convert respect to its sales, measured by its
as they come due. financing and to into sales or cash. assets, or the current share price,
• A firm with the effects of • Measure how owners’ investment to certain accounting
greater liquidity debt financing. efficiently a firm • Among the most values.
will have an easier • High ratio manages inventory, closely scrutinized • Give insight into how
time paying its indicates the firm disbursements, and of all financial ratios. investors in the
bills and is less takes large collections marketplace believe
likely to become amount of debt the firm is doing in
insolvent. beyond its terms of risk and
capacity. return.
 Ratios
Formula

Liquidity Ratio Leverage Ratio Turnover Ratio Profitability Ratio Market Ratio

• Current ratio = • Total debt ratio = • Inventory turnover = • Profit margin = • Price-earning ratio =
Current asset Total assets −Total equity Cost of Goods Sold Net Income Price per Share
Current liabilities Total assets Inventory Total Equity Earnings per Share

• Quick ratio =
Current asset−inventory
Current liabilities
• Debt-equity ratio = • Days’ sales in inventory • Return on asset (ROA) • Market-to-book ratio =
Total debt 365 days Market Price per Share
Total equity
=
Inventory Turnover
= Net Income
Total Asset Book Value per Share

• Cash ratio = • Equity multiplier = • Receivables turnover = • Return on equity (ROE)

Cash Total assets Sales Net Income
= Total Equity
Current liabilities Total equity Accounts receivable

• Net working capital to • Days’ sales in

• Long-term debt ratio =
total assets = Long term debt receivables =
Net Working Capital 365 days
Long term debt+ Total equity
Total Assets Receivables turnover

• Interval measure = • Times interest earned • Fixed asset turnover =

Current assets EBIT Sales
Average daily operating costs
ratio =
Interest Net fixed assets

• Cash coverage ratio • Total asset turnover =

EBIT+ Depreciation Sales
=
Interest Total asset

.
 Example
Ratio Analysis

Example 1: Liquidity Measurement

Ramana’s Famox Plantation (M) Sdn Bhd has current asset of RM11,680,
current liabilities of RM9,230, and inventory of RM3,540. What is the
current ratio?

Answer:
1.27.
Indicates that the company has RM1.27 of current assets for every RM1 of
current liabilities
 Example
Ratio Analysis

Example 2: Profitability Measurement

Timber Line Sdn. Bhd. has sales of RM29 million, total assets of RM37
million, and total debt of RM13 million. If the profit margin is 9%,
1. What is net income?
2. What is ROA?

Answer:
1. RM2.16 million
2. 5%
 Historical
Seasonal effects
Information

Manipulation of
LIMITATIONS financial statements
Inflationary
Effects OF RATIO
ANALYSIS
Changes in Operational
accounting policies changes
 Users of Ratio Analysis
Internal External

Management team, employees, Financial analysts, retail

and owners investors, creditors, competitors,
tax authorities, regulatory
authorities, and industry
observers
 Summary
What have you learned today?

• Financial analysis is a process of reviewing and analyzing a company's

financial statements to make better economic decisions.

• Review financial statement includes analysis on company’s balance sheet,

income statement, statement of cash flows, statement of owner’s equity.

• Categories of financial ratios are liquidity ratio, leverage ratio, turnover

ratio, profitability ratio, market value ratio.

• However, ratio analysis still have limitations due to the historical

information, seasonal effects, inflationary effects, manipulation of
financial statements, changes in accounting policies, or operational
changes.
 Exercise
Ratio Analysis

Question 1: Inventory Turnover

The Strong Nail Corporation has ending inventory of RM420,000, and cost
of good sold for the year just ended was RM4,225,000. What is the inventor
y turn over?
 Exercise
Ratio Analysis

Question 2: Leverage Ratio

Kid Pet Rocks Inc. has a total debt ratio of 0.44.

1. What is debt-equity ratio?
2. What is its equity multiplier?
Thank you
End of Lecture 2