Finance Management: Analysis of Two Malaysian Companies' Performance

This report presents a comprehensive financial analysis of two Malaysian companies, DH Sdn Bhd and KC Trading Company, operating in the Fast-Moving Consumer Goods (FMCG) sector. The analysis evaluates their financial performance over a three-year period (2016-2018), focusing on profitability and leverage ratios. The report begins with an introduction to the companies and a literature review of relevant financial analysis techniques. It then delves into the calculation and interpretation of various financial ratios, including margin ratios (gross profit, operating profit, and net profit margins), return ratios (return on total assets, return on common equity, free cash flow margin, cash return on assets, and earnings per share), and leverage ratios (debt to equity, times interest coverage ratio, and debt to total assets). The report provides detailed workings for each ratio and offers insights into the financial health and performance of each company, comparing their strengths and weaknesses. Qualitative factors influencing the financial performance are also discussed, culminating in a conclusion summarizing the key findings and implications of the analysis.

Running Head: FINANCE MANAGEMENT 1
Finance Management

FINANCE MANAGEMENT 2
Contents
1. Introduction...................................................................................................................................3
2. Literature Review..........................................................................................................................3
3. Ratio Calculations..........................................................................................................................4
A: Margin Ratios...............................................................................................................................5
B: Return Ratios................................................................................................................................8
4. Leverage Ratios...........................................................................................................................11
5. Analysis of profitability and leverage ratios................................................................................11
6. Comparison of financial performance..........................................................................................12
7. Qualitative factors........................................................................................................................13
8. Conclusion...................................................................................................................................13
References...........................................................................................................................................14

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1. Introduction
Development in the Malaysian economy directed for a second continuous quarter in
the principal quarter of 2018. The economy extended 5.4% year-on-year in the January –
March period; the outcome came in underneath advertise desires for 5.5% and beneath the
past quarter's 5.9% expansion. In any case, on a quarter-on-quarter regularly balanced
premise, monetary development accelerated to 1.4%, up from the earlier quarter's 1.0%. A
breakdown of the drivers of the yearly development rate indicated that exhibition was led by
versatile private segment spending and solid development in net fares, while fixed
speculation development was almost level and this is because of the fast mover consumer
goods producing company namely DH sdn bhd and KC trading company. DH Sdn Bhd came
into existence in 1984 whereas KC trading company was founded in the year 1947.
2. Literature Review
In perception of Gitman, Juchau & Flanagan, (2015), financial statement analysis
involves a complete analysis of the income statement, balance sheet and cash flows. The
main focus of the ratio analysis is to use the overall findings of decision making process. It
also helps to figure out the unproductive areas if any areas of the palatable performance. By
identifying the good as well as bad area, the companies will be aware of where the efforts
shall be channelized. This can be done only on the basis of the ratio analysis. Ratio analysis is
a technique or say financial measurement methodology which states the performance of the
business in various categories and areas. In finance there are several techniques that aid to
evaluate the overall performance of the company and when it comes to the ratio analysis, it is
the easiest and the reliable tool. It helps various users of the report such as stakeholders,
financiers, shareholder, and creditors. Since the ratio analysis is a powerful tool to assess the
performance on different grounds, this toll has been used for two Malaysian based companies

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namely, DH Sdn Bhd and KC Trading Company. In opinion of Grant, (2016), the ratios are
divided into different categories such as profitability, liquidity, and solvency. Based on the
findings of the two companies with respect to the profitability and the solvency, the results
have been arrived. It was evident from the income statement that revenue has increased from
RM5271047 to RM5509538 and the same have finally increased to RM6010281, whereas in
case of KKC trading company the situation is similar as the revenue increased but at a slower
pace comparatively. Overall both the companies are performing below satisfactory level,
however DH still has the scope to improve and can bring back itself. In terms of profitability,
only in terms of gross margin, KC Trading Company is ahead, otherwise in all the rest of the
sectors DH plays a vital role and is performing better than KC Trading Company.
3. Ratio Calculations
DH Sdn Bhd KC Trading Company
SOLVENCY 2016 2017 2018 2016 2017 2018
Debt to Equity Debt 2.51 2.30 2.64 1.47 1.70 2.40
Equity
Times interest
coverage ratio EBIT
10.87 10.32 7.39 0.65 0.41 -0.67
Interest Expense
Debt to Total Assets Debt 0.71 0.70 0.72 0.63 0.66 0.73
Total Assets
DH Sdn Bhd KC Trading Company
PROFITABILITY 2016 2017 2018 2016 2017 2018
Net Profit
Net income 0.96
%
0.95
%
0.74
%
0.57% 0.37% -
1.48%
Net sales
Operating Margin
Operating profit 9.46
%
9.61
%
9.35
%
2.40% 2.38% 0.56%
Net sales
Return on Equity
Net income 9.50
%
9.17
%
7.47
%
2.13% 1.69% -
7.89%
Net Equity

FINANCE MANAGEMENT 5
Gross Profit Margin
Gross profit 9.34
%
9.45
%
9.21
%
12.66
%
12.30
%
11.76
%
Net sales
DH Sdn Bhd KC Trading Company
2016 2017 2018 2016 2017 2018
Total Asset turnover Net Sales 2.83 2.95 2.97 1.40 1.64 1.54
Average total Assets
Cash return on assets
ratio Cash return
0.02 0.01 0.02 0.20 0.12 0.08
Total Assets
DH Sdn Bhd KC Trading Company
Particulars 2016 2017 2018 2016 2017 2018
Earnings per share Net income 32.01 33.03 28.28 0.41 0.22 -1.59
Weighted Average
Equity shares
A: Margin Ratios
It includes various types of the ratios such as gross profit, operating profit and the net
profit margin. In this section a detailed analysis has been undertaken to get an insight of the
mentioned ratios thorough figures and tables.
Gross Profit Margin: It is also known as Gross Margin ratio, which is calculated to
assess the financial health of the company. The financial health of the company is calculated
by the amount of money left from the sales which are done by the company by deducting the
cost of goods sold by the company. It is a major tool of analysis done by the researchers in
order to monitor the performance of the company in relation with the performance of its
competitors (Liang, Lu, Tsai & Shih, 2016).

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2016 2017 2018
0.00%
2.00%
4.00%
6.00%
8.00%
10.00%
12.00%
14.00%
Gross Profit Margin
Gross Profit %
The gross profit margin of DH Sdn Bhd displays a fluctuating result as the ratio
dropped from 9.34% to 9.21% over the period of last three years. As per the graph above, it
can be seen that KC trading on the other hand despite falling, but still manages to be upside
of DH Sdn Bhd. The gross profit basically indicates the efficiency and at present on a
comparative level, KC Trading is efficient, however on the individual level, the company
needs to improve the statistics to be back in game. DH Sdn Bhd on the other hand, fell down
with a lower percentage and yet it also needs to cautious and immediate actions must be taken
(Omar, Koya, Sanusi & Shafie, 2014).
Operating Profit Margin: It is a ratio which helps in the calculation of profit of the
company before paying its taxes. The amount is generally calculated by deducting the
variable costs of the company; variable cost such as salary, wages, cost of raw materials etc.
Such of ratios helps in analysing the element of risk present in the organization. Such ratios
help the management in taking crucial decisions for the benefit of the organization (Uechi, et
al 2015).
Net Profit Margin: It is a kind of a ratio which shows net income which are
generated by any organization in relation with the percentage of revenue. In other words it is

FINANCE MANAGEMENT 7
a ratio which represents
net profits in relation
with the actual revenue of
the company (Altman,
et al 2017).
2016 2017 2018
-2.00%
-1.50%
-1.00%
-0.50%
0.00%
0.50%
1.00%
1.50%
Net Profit Margin
Net Profit %
The net profit margin is one of the core elements to decide the profitability of the
business. The users of the reports are keen to know how much company earns and what’s left
from it for the investors and the shareholders. The NPM have declined a little bit from 0.96%
to 0.74% and in case of KC Trading Company, the ratio has decreased and fallen into the
negative zone. From 2016 KC fall down to 0.37% and eventually to -1.48%. A negative net
profit indicates that company is not able to recover the costs in an efficient manner. The
major reasons behind the negative net profit are the increased financial costs to $7885652
from $4975070 and other expenses as well. In case of DC Sdn Bhd, the profits have declines
due to increase in the prime costs of the company, mainly a hike has been observed in the raw
material costing. Overall it can be said that profits are not satisfactory and the position is
under average over the period of last three years (Khadafi, Heikal & Ummah, 2014)..
2016 2017 2018
0.00%
2.00%
4.00%
6.00%
8.00%
10.00%
12.00%
Operating Profit Margin

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B: Return Ratios
Return on Total Assets: It is a ratio which indicates the profit making of the
company. In other words it shows the performance of the company in relation to its total
assets. It provides a brief insight regarding the performance of the company, depicting how
well the company has utilized the assets to generate enough revenue. The return on total
assets of the company is generally displayed in percentage, the higher the percentage the
higher the efficiency of the company (Easton & Sommers, 2018).
DH Sdn Bhd
KC Trading
Company
201
6
201
7
201
8 2016 2017 2018
Return on Total
Assets
Net Sales 2.83 2.95 2.97 1.40 1.64 1.54
Average total
Assets
The return on total assets has increased in case of DH Sdn Bhd and the same has been
reversed in case of KC Trading Company. As per the current scenario, DH company looks
equally efficient as that of the KC Trading Company as the return on total assets have
increased from 2.83 times to 2.97 times over the period of last three years. There is a growing
trend in general. On the other hand figuratively, KC trading company have been 1.40
initially, increased a bit to 1.64 next year and again fell down to 1.54 times. This implies KC
has not utilised the assets in the proper manner and hence, the sales have increased but only
by 7.15% (Grant, 2016).
Return on Common Equity: It is a ratio which represents the return which has been
received by the investors of equity in a particular company. In other words the return on
equity is calculated by dividing the net income of the company with the shareholder’s equity
which are invested by the equity shareholders of the company. However the shareholders

FINANCE MANAGEMENT 9
equity is equal to the company assets minus the debt owned by the company. Hence it can
also be said as the return on the net assets in relation to the equity invested by the
shareholders of the company. Such type of ratios is very useful for the company and its top
management to analyse the efficiency of the company. The higher ratio suggests the high
profit making capacity of the company (Pratt, 2016).
The return on equity has been positive but a decreasing one for DH Sdn bhd and KC
Trading Company faces a negative phase in return on equity as well due to negative profits.
This technically implies the shareholders received nothing.
2016 2017 2018
-10.00%
-5.00%
0.00%
5.00%
10.00%
15.00%
Return on Equity
Return on Equity %
Free Cash Flow Margin: It is considered to be one of the important ratios of the
company where the management of the company analyses cash of the company after the
general accounting of the cash outflows. These cash outflows are generally made for day to
day operations of the business along with the maintenance of capital assets of the company.
Such ratios help in understanding the performance of the company in deal with cash and non-
cash activities. It also provides a clear idea of the cash which are being handled by the
company for a particular period of time (Robinson, Henry, Pirie & Broihahn, 2015).
DH Sdn Bhd KC Trading Company
Free cash flow margin 2016 2017 2018 2016 2017 2018
Cash from operations 69563 33660 58335 4370993 2972625 2190358

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3 8 1
Less: Capital
expenditure 7530 5135 8196 2005954 5264417 0
62033 28525 50139 4170397
9
2446184
1
2190358
1
Cash Return on Assets: It is a type of ratio which is useful for comparing the
business of the company with the other competitor’s in the industry. In other words it is a
type of ratio which helps in analysing the performance of the company with their competitors
in the same industry. Such type of ratio helps in analysing the total amount of cash flow in
the organisation while handling the assets of the company. Since it measures how much cash
is generated through assets, a proper flow or the movement stays. The cash return ratio has
been stable in case of DH Company in the range of 0.02 and 0.01. and has fallen down from
0.20 to 0.08 times for KC Trading company respectively. The increase depicts the positive
outlook on part of both the companies (Williams & Dobelman, 2017).
DH Sdn Bhd
KC Trading
Company
2016 2017 2018 2016 2017 2018
Cash return on assets
ratio Cash return
0.02 0.01 0.02 0.20 0.12 0.08
Total Assets
Earnings per Share: It is a tool which helps in calculating the overall profitability of
the company. The profitability is calculated on the basis of the amount which is invested into
the company by the equity share holders and the assets which are being held by the company.
The earning per share is calculated by the profit earned by the company with the total
outstanding shares of the company (Edwards, Schwab & Shevlin, 2015).
DH Sdn Bhd
KC Trading
Company
Particulars 201 201 201 2016 2017 2018

FINANCE MANAGEMENT 11
6 7 8
Earnings per
share Net income
32.0
1
33.0
3
28.2
8 0.41 0.22 -1.59
Weighted Average Equity
shares
4. Leverage Ratios
Debt Ratio: It is a type of solvency ratio which helps in analysing the solvency
capacity of the company. The ratio is generally calculated as a division of total liabilities of
the company with the total assets of the company. The companies which have higher
liabilities are more often to face more risks than the companies with lower liabilities. In other
the lesser the ratio, the high will be the risk taking capacity of the company and vice versa.
Debt to Equity Ratio: It is a type of ratio which is calculated by dividing the total
liabilities of the company with the shareholders equity. Such ratios are generally available in
the financial statements. These ratios show the growth and risk taking capacity of the
company to invest in a particular business (Falk & Steiger, 2018).
The debt to equity ratio of KC trading was 1.70 times and it increased to 2.70 times
over the period of the last three years. This also implies that company has shifted its
interested to invest in the funds. In case of DH Company, debt to equity ratio was 2.51 times
and the same reached to 2.64 times respectively in the year 2018 (Indrawan, Suyanto & Mulyadi,
2017).
5. Analysis of profitability and leverage ratios
From the overall analysis it can be stated that the in terms of profitability DH
Company is ahead of KC Trading Company. Whether it’s net profit or the return on equity,
DH has maintain a fair share but when compared to the past results the company is not
performing up to the mark. The profitability has been judged in terms of the net profit, return

FINANCE MANAGEMENT 12
on equity, return on assets and various other elements and when observed in detail it was
found that In the financial year 2016, DH delivered 9.5% return to the shareholders, dropping
till 9.17% in the year 2017 and followed by 7.47% in the year 2018. KC Trading fell from
2.13% to -7.89% thereby indicating no returns are delivered. The operating margin ratios in
case of KC Trading company have fallen to an unacceptable level with 0.56% only and the so
is the case of DH Sdn Bhd as compared to the last year performances. This implies the
companies are not having proper managerial forces and the operations are not handled as it
must be. Therefore the finding states that operating margin is a critical point for both the
companies and in order to improve them, the company needs to revise the pricing structure
and must increase the conversion rate. Overall DH Sdn Bhd is profitable and has the higher
capacity to settle the cost of finance effectively (Grant, 2016).
6. Comparison of financial performance
On the comparative level, DH Sdn Bhd Company is similar to KC trading company in
terms of debt and total assets. The ratios are almost in the same range and vary from 0.63 to
0.72. Although DH Sdn Bhd is ahead but not much, this ratio implies how much assets are
financed via debt, it can be observed that both the companies follow the approach of low
financing through debt.
The performance of DH Sdn Bhd is outstanding if comparing with KKC Trading
company as the company is giving return to the shareholders and in terms of EPS, 28.28 is
the EPS of the current year whereas for KC Trading Company it is not even positive. The
assets have also been utilised in a better manner to generate the revenue for the company.
The major strength of DH Sdn Bhd is its ability to make the shareholders happy by
giving them the returns they deserve however in lieu of catering the services to shareholders;
the company is little bit negligent towards realizing the cash. On the contrary in case of KC