MBA Accounting Module: Financial Ratio Analysis and Performance Review

This assignment presents a comprehensive financial analysis of Megajaya Corporation for the years 2016 and 2017. It begins with the calculation of various financial ratios, including current ratio, quick ratio, inventory turnover, average collection period, debt ratio, debt-equity ratio, operating profit margin, net profit margin, return on assets, and return on equity. The calculations are based on the provided financial statements. Following the calculations, the assignment includes a discussion on the company's leverage position and profitability performance. The discussion assesses the company's debt levels, capital structure, and how these factors influence its financial health. The profitability analysis evaluates the company's ability to generate profits, comparing its performance against the previous year and discussing the implications for shareholders and overall business objectives.

MBA Accounting

a. Compute the following ratios for 2016 and 2017
2017 2016
i. Current ratio
Current assets (CA) 472,800 461,400
Current liabilities (CL) 153,800 130,600
Current Ratio (CA/CL) 3.07 3.53
ii. Quick ratio
Current Assets (CA) 472,800 461,400
Stocks (S) 17,000 7,140
Current liabilities (CL) 153,800 130,600
Quick ratio ((CA -
S)/CL) 2.96 3.48
iii. Inventory turnover
COGS 386,200 232,800
Average inventory (I) 17,000 7,140
Inventory turnover
(COGS/I) 22.72 32.61
iv.
Average collection
period
Net credit sales (NS) 550,100 346,100
Accounts receivables (AR) 110,100 108,150
((AR/NS) * 365) 73.05 114.06
v. Debt ratio
Total debt (D) 490,500 144,700
Total Assets (A)
2,332,80
0
1,080,90
0
(D/A) 0.21 0.13
vi. Debt-equity ratio
Loan from bank (D) 490,500 144,700
Equity (E)
1,238,60
0 729,000
(D/E) 0.40 0.20

vii. Operating profit margin
Operating profit (OP) 141,100 97,700
Net Sales (NS) 550,100 346,100
(OP/NS)*100 25.65% 28.23%
viii
. Net profit margin
Net profit (NP) 119,600 87,700
Net Sales (NS) 550,100 346,100
(NP/NS)*100 21.74% 25.34%
ix. Return on assets
Net profit (NP) 119,600 87,700
Total assets (A)
2,332,80
0
1,080,90
0
(NP/A)*100 5.13% 8.11%
x. Return on equity
Net profit (NP) 119,600 87,700
Total equity (E)
1,238,60
0 729,000
(NP/E) * 100 9.66% 12.03%
b. Discussion on corporations leverage position and
profitability performance
Leverage Position:
In an industry where there are few barriers to change, income and benefits are associated with
switching from a business with high share margins. Changes in income can bring an organization
into liquidation as it will not be able to meet its growing mandatory commitments and meet its
labor costs. As duties are neglected, lenders can file a case at the liquidating court to sell
corporate assets to recover their relevant obligations.
The debt to equity ratio of company shows that compared to 2016, debt-equity has increased
from 0.20 to 0.40. This indicates that total stake of debt in capital structure also increases to
40%. Thus company has improved its leverage position over past year, and is still at safe position

from shareholders perspectives. But weighted cost of capital for the company is still high due to
more proportion of equity than debts.
Profitability Performance
Profitability ratios appear to be the most well-known measurements used in the silver test and
usually fall into two classes: margin ratios and report ratios. The proportions of the margins
provide an insight, from a number of specific points, into the ability of a contract group to turn it
into an advantage.
Compared to 2016, profitability performance of the company has been declined, as operating
profit, and net profit margin is lower than previous year.
Return ratios offer some unique ways to analyze how well an organization is generating returns
for investors. Some basic examples of benefit ratios are the different ratios of total income,
resource output (ROA), and return on value (ROE). Others remember the return on grant capital
(ROIC), the return on capital employed (ROCE).
Company’s ROA and ROE has also declined compared to 2016, as company has earned less
income as compared to 2016. This also indicates inefficiency of company in fulfilling the basic
objectives of shareholders which is high return to their shares. Overall performance of the
company is not good from profitability perspective, but it has improved its WACC through
increasing the proportion of debt in capital structure.