Financial Ratio Analysis Report: Comparing UMW Holdings and DRB-HICOM

This report provides a financial analysis of UMW Holdings, a Malaysian company listed on the Malaysia stock exchange, with a comparison to its competitor DRB-HICOM. The analysis includes liquidity and capital structure ratios to assess the company's ability to meet its liabilities and its overall financial strength. The report utilizes financial statements from recent years to evaluate UMW Holding's performance, focusing on revenue, profitability, and asset management. Key findings highlight the company's return to profitability after previous losses, its strong position in the automotive sector, and its efforts to manage operating expenses. The report also discusses the company's cash flow, liquidity, and capital structure, providing recommendations based on the analysis. Desklib offers a platform to explore this and many other solved assignments.

Running Head: Financial Ratios
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Financial Ratios
Report
Student Name
3/25/2019

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Executive summary
Analysis is done to know about the company position in the market and to take necessary
decisions. The report is based on the Malaysian company listed in Malaysia stock exchange and
as per the requirement UMW holding has been selected and comparison is done to get the idea
about the industry and its competitor benchmark. The company has good brand image and
dealing in various segments in Malaysian market. The financial analysis of company in this
report includes the liquidity and capital structure ratio that is used to know the company capacity
to meet its liabilities and to know the strength of the company. The report consists of comparison
between two organizations in same industry. This give the practical knowledge and implication
of theoretical knowledge in practical way. Moreover, the objective of this report is to get deep
knowledge of the topic and to understand its implication in businesses units and for investment.
Report also highlights the recommendations and findings by analysis the different aspects of the
organization with others and in the end the study is concluded.

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Table of Contents
Executive summary.....................................................................................................................................1
Introduction.................................................................................................................................................3
Financial Position Analysis...........................................................................................................................4
Cash Flow Statement...................................................................................................................................7
Liquidity Analysis.........................................................................................................................................8
Capital Structure Analysis..........................................................................................................................10
Customer Profitability Analysis..................................................................................................................11
Expansion strategy....................................................................................................................................11
Findings and Recommendations................................................................................................................12
Conclusion.................................................................................................................................................13
References.................................................................................................................................................14

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Introduction
UMW holding is a giant in an industrial enterprise which serves economies of Malaysia as well
as the Asia Pacific region. The group came into existence in 1917 by Chia Yee Soh when he
opened a repair shop named “United Motor Works”, now this UMW group is a multi-million
dollar industrial enterprise and one of the Malaysia’s foremost public listed companies
(umw.com, 2019).
UMW holding is a Malaysia based investment holding company and the company works in
many segments like the automotive segment which include importing, assembling and marketing
of vehicles in the Malaysian market, the equipment segment which deals in trading of heavy
equipment and leasing of that equipment in different sectors such as agriculture, industrial and
construction. Another segment under UMW holding is manufacturing and equipment which
covers manufacturing, assembling and trading of vehicles parts and packaging of lubricants, Oil
and gas segment engaging in trading of oil pipes and supply of products to this industry in bulk.
So UMW holding is involved in various segments in different sectors that is considered as key
strength and contribute to growth and success of the company in the Malaysian market
(Heffernan, 2019).
UMW holding is a company in Malaysia with total revenue of RM11.31billion and net income of
RM378.6million for the fiscal year 2018. The revenue of the company increases due to the high
demand of its product and cutting of operating expenses by the company of 1% to RM10.78B.
The company has the main focus on Toyota automotive business that contributes to its major
portion of revenue that is approximately 50% while remaining revenue is generated from its
other three businesses (umw, 2019).
The purposes of this analysis are to contrast the execution of UMW holding and its greatest rival
DRB-HICOM to set the benchmark for organization. Other one is to know the region of progress
that offer the most encouraging future potential and to break down the security and gainfulness
of this assembling and car division for the long keep running for financial investors.

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Financial Position Analysis
Financial position of any firm indicates its assets and net worth during the year and from its
activities. The main aim behind analyzing the financial position of any business is to get more
about information about the company before investing. This helps in taking right decision with
logic and evidences. Here, UMW holding budgetary position for a long time will be reviewed
and the outline of how business is developing and profiting to its partners. The organization
Income statement and Balance sheet is given below to understand the financial position which
gives a brief about how well UMW holding is performing in the market and its consistency to
remark on its development from most recent 4 years. Primary angle to comprehend the situation
of any organization is to dissect its fiscal report and after that taking a choice to put resources
into a specific stock or not for that reason data is taken from verified sources.
UMW Holdings
Profit and Loss A/c
2018 2017 2016 2015
PROFIT AND LOSS ACCOUNT
(In millions of MYR)
Total revenue 11306.28 11066.64 10436.8 14441.58
Cost of Revenue - (9952.4) (9158.49) (12135.11)
Gross Profit 11306.28 1114.24 1278.31 2306.47
Operating expenses (10783.38) (10942.93) (10921.35) (14305.97)
Operating Income 522.9 123.7 -484.55 135.62
Interest Income 263.25 142.87 182.85 95.84
Other non-operating items - 30.33 19.61 38.55
Net income before taxes 786.15 266.57 -282.1 269.65
Provision for income taxes 142.47 121.68 133.53 267.46
Net income after taxes 643.68 144.89 -415.63 2.19
Minority Interest -117.67 -109.57 -120.87 -39.36
Net income before extraordinary items 526.01 35.32 -536.49 -37.17
Total extraordinary items -148.95 -675.93 -1121.55 -
Net Income 377.06 -640.61 -1658.04 -37.17
Source: (Investing.com, 2018)

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UMW Holdings
Balance Sheet
2018 2017 2016 2015
STATEMENT OF FINANCIAL POSITION (In millions of MYR)
Cash & Short Term Investments 2445.84 2464.98 2854.32 3923.09
Total Accounts Receivable 1032.35 956.33 920.11 1842.8
Inventories 1531.6 1410.75 1931.19 1889.96
Other Current Assets 175.62 406.84 51.17 11.51
Total Current Assets 5185.41 5216.91 5785.05 7667.36
Net Property, Plant & Equipment 3455.65 2948.35 7949.04 8390.42
Total Investments and Advances 1904.37 1729.58 2033.21 2005.03
Long term receivables 34.62 34.62 47.76 42.49
Other Assets 110.62 121.27 471.38 94.78
Total Assets 10690.67 10095.73 16286.44 18225.3
Current Portion LT Debt 349.99 55.38 189.98 759.94
Accounts Payable 707.85 915.13 1002.64 1281.64
Short term debt 184.97 636.47 2449.35 2996.65
Other Current Liabilities 1265.89 1582.6 686.11 770.93
Total Current Liabilities 2508.7 3652.88 4752.01 6337.98
Long-Term Debt 2298.25 2069.72 3715.78 2289.76
Provision for Risks & Charges 2833.21 2761.57 6355.11 6046.35
Deferred Taxes 34.75 41.5 46.37 27.48
Minority Interest 1271.07 1131.18 2145.71 2799.41
Other Liabilities 153.3 153.21 908.01 186.2
Total Liabilities 6266.08 7048.48 11567.88 11640.84
Common Equity 584.15 584.15 584.15 584.15
Additional Paid in capital - - 794.48 794.48
Retained Earnings 2760.38 2452.9 2899.04 4760.52
Other Appropriated Reserves 1080.07 10.2 440.89 445.31
Total Equity 4424.59 3047.25 4718.56 6584.46
Source: (Investing.com, 2018)
The financial position of UMW holding is analyzed with the help of information given above.
Profit & loss statement of the company and Balance sheet of the company showed that they had
improved from last years. Company showed negative return from past years but in FY18 UMW
holding came back to its profitability position from net loss of -640.61million to profit of
377.06million in just one year. It is additionally seen that organization revenues are same in

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these years yet their profit varies. As of now they decreased their operating expenditures by 1%
and followed different sources to generate the income that have positive impact on profits. Profit
before taxation is dramatically increased amid this year from last year profit that was
266.57million. It is further area of focus that organization is managing in different sectors so its
general profits are not giving the clear idea of its fundamental backups. Balance sheet of the
organization shows that company has increasingly current assets as constrast to its current
liabilities which is a decent pointer because prganization can pay its quick installment
commitment effectively on scheduled time. The primary area of concern which makes UMW
holding an alluring venture is that they greater equity portion in their capital structure. It is
likewise watched that UMW holding has been able to survive in the market despite of its instable
performance from past years their assets diminished and they were operating in losses yet as of
now the company overcome its losses and showed a profit and also improved its assets and
equity position. The problem behind this major decline in performance of the company is
assumed to be the threat of rivalry in the industry as there are numerous competitors in Malaysia
in automotive sector like Proton Malaysia is a tough competitor of Toyota Malaysia which is a
brand under UMW holding. Most of the revenue of UMW holding is generated through its
automotive sector that seems to be the reason of improved revenue in its financial position in
market (Yunus, 2018).
UMW holding pretax profit rose by 189% because of its better performance in other sectors,
mainly from automotive sector car sales that include Perodua car sales increase by 11% and
Toyota Malaysia by 7% as compare to its competitor Proton in automotive sector. Sales target
achieved for the year for Toyota was 70,000 units and Perodua was 209,000 units and the group
equipment sector was also grew up by 14% (Hwang, 2018).In 2018, company showed a phase of
growth by successfully restructuring their capital structure, investing in different sector portfolio
and focusing on innovation. Long term debt of company has been increased by RM230 million
from previous year. It indicate that UMW holding is focusing on raising money to invest in
different strategies to expand its business operation. It is observed that performace of the
company is improving and it is found that the company maintains a tight command over its
operating expenses (Holland, 2019).

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Cash Flow Statement
UMW Holdings
Operating Cash Flow Statement
h from Operating 2018 2017
786.15 266.57
reciation/Depletion 203.41 405.83
- -
erred Taxes - -
-Cash Items -395.49 -277.03
- -
h Payments - -
h Taxes Paid 138.81 131.92
h Interest Paid 130.65 233.47
nges in Working Capital -1206.36 733.94
h flow from operating -612.29 1129.31
Source: (Investing.com, 2018)
The table above showcased operating cash flow statement over 2 years period ended 2018.
UMW holding is attempting to overcome its losses by expanding its operation so it can be seen
that company extended altogether and has capacity for continuous development in current
financial year. In spite of profitable growth company has negative operating cash flow due to
different elements; Firstly because of depreciation which is a non-cash item and secondly due to
its cash conversion cycle. Mainly in automotive sector buyers pay in installments that lead to
longer duration of account receivables for the company and influences its cash flow
performance. UMW holding overall cash flow statement indicates positive inflow of cash in
contrast with 4 years statement. Financing activities of the company adds to its development in
positive way since cash flow from financing activities was RM1162.33 million and net cash flow
was RM130 million for FY18 (Investing.com, 2018). UMW holding is benefitting because of its
automotive and equipment sector as major revenue come from these two segments. Cash flow
from operating activities includes main contribution of operation from sale of cars in the
Malaysia market. Revenue and profits of the company are improving and company is
endeavoring to manage its market position against its rivals.

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Liquidity Analysis
UMW Holdings
Ratios Formulas 2018 2017 2016 2015
Current Ratio Current Assets/Current liabilities 2.07 1.44 1.21 1.20
Quick Ratio Total current assets – Total
Inventories/ Total current liabilities
1.45 1.05 0.81 0.91
Source: (Bloomberg, 2018)
Cash conversion cycle
Notes:
Days sales outstanding + Days Inventory – Days Payable
For 2017 54+33-29= 58
For 2018 45+28-31= 42
Inventory Days= Average Inventory/COGS * 365
Payable days= Average Account Payable/ COGS*365
Receivable Days: Average Account Receivables/ Revenue*365
Average= Beginning Balance + Ending Balance/ 2
Source: (Robinson, et al., 2015)
DRB-HICOM
Ratios Formulas 2018 2017 2016 2015
Current Ratio Current Assets/Current liabilities 0.58 0.54 0.49 0.54
Quick Ratio Total current assets – Total
Inventories/ Total current liabilities
0.49 0.46 0.42 0.44
Source: (Bloomberg, 2018)
Cash conversion cycle
Notes:
Days sales outstanding + Days Inventory – Days Payable
For 2017 79+230-66= 243
For 2018 79+217-75= 221
Inventory Days= Average Inventory/COGS * 365
Payable days= Average Account Payable/ COGS*365
Receivable Days: Average Account Receivables/ Revenue*365
Average= Beginning Balance + Ending Balance/ 2
Source: (Robinson, et al., 2015)
Assumption: Beginning inventory and ending inventory is considered as closing balance of
previous year as beginning inventory and closing balance of current year as ending inventory
balance.

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Ratio analysis is utilized to decide the financial feasibility of the business on the basis of various
classifications. It examines the business on different dimensions for example profitability,
solvency, efficiency, liquidity and the relevant market position (Bragg, 2008). An investor or a
client analyze on each perspective before investing in the company. The calculation of different
ratios is done and cash conversion cycle of the company is calculated to compare it with its rival
in the market mainly from DRB-HICOM. These analyses provide the overview of position of the
company in market and its effect in the growth of company for long run. On critically evaluating
the liquidity position of UMW holding it is known that company has maintained the good
position in term of its current assets and current liabilities.
From above calculation of liquidity ratio it is known that company has maintained its current
ratio at 2.07 which demonstrates the value of assets UMW holding have in current situation to
meet its immediate liabilities that will arise in a span of one year. Most of the companies are not
able to keep the standard ratio of 2:1 (Fridson & Alvarez, 2011). In contrasting the UMW
holding liquidity position with its rival DRB-HICOM it is seen that in all the years UMW
holding kept up good liquidity position as in manufacturing sector and automotive sector and if
comparison is done with DRB-HICOM in same industry than it is identified that they would
unable to maintain its assets as per industry standard which may bring company in trouble to
meeting its liabilities on time.
Focusing on the company cash conversion cycle, that is used to know the time taken by the
company to convert its stock into cash, and to collect cash from its debtors and to pay all
liabilities to its creditors (Henry, 2015). From calculation, UMW holding cash conversion cycle
is determined for two successive years that show somewhere around 60 days the organization
takes to change over its stock and to pay its creditors. That demonstrates wastefulness in the
operation of the company which implies the company is producing income from customers later
and paying to its suppliers on time is an issue as company needs to keep up enough working
capital to meet its momentary liabilities. The debtors of the company are more and company has
high outstanding receivables that need to be focused on and UMW holding attempt to speed up
their collection period. But in this industry, conversion of inventory takes time as different
companies follow different approaches like for inventory management just in time is followed by
UMW holding.

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Capital Structure Analysis
UMW Holdings
Ratios Formulas 2018 2017 2016 2015
Debt to Equity
Ratio
Total Liabilities/ Total Shareholder
Equity
1.41 1.42 2.45 1.76
Debt to Asset Ratio Total Liabilities/ Total Assets 0.58 0.59 0.71 0.64
Equity to Assets Total Shareholder Equity/ Total Assets 0.41 0.30 0.29 0.36
Debt to Revenue Total Liabilities/ Revenue 0.55 0.64 0.45 0.45
Assumption: Total Liabilities are taken into account instead of Total debt Source: (Bloomberg,
2018)
DRB-HICOM
Ratios Formulas 2018 2017 2016 2015
Debt to Equity
Ratio
Total Liabilities/ Total Shareholder
Equity
3.2 3.29 4.0 3.53
Debt to Asset Ratio Total Liabilities/ Total Assets 0.76 0.65 0.80 0.78
Equity to Assets Total Shareholder Equity/ Total Assets 0.24 0.23 0.20 0.22
Debt to Revenue Total Debt/ Revenue 2.57 2.80 2.75 2.41
Source: (Bloomberg, 2018)
The examination of capital structure of UMW holding and its rival DRB-HICOM is given with
utilizing distinctive financial ratios. The structure of any company is analyzed to find the ratio in
which equity and debts are used to get the funds, the major portion of equity indicates the strong
structure as it is safer to get the money from shareholders but it increases the cost of capital. On
other side if a company has major portion of debt in its capital structure it become difficult for
company to survive because more borrowing means paying of more interest to the holders that
will be burdensome for the company and break its growth. In comparison between the debt
equity ratios of these two companies UMW holding has maintained it at 1.41 for FY18 and
taking a glimpse at DRB-HICOM, the company maintained debt equity ratio at 3.2 (Drb-Hicom,
2017) which indicate that the company has vast majority of the assets financed by debt that leads
to trouble in near future for the company because of increase in payment of interest to the
holders which directly increase the cost of borrowing and affect the company profitability after
interest and taxes.

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Customer Profitability Analysis
Customer profitability analysis gives an understanding of incomes and expenses to a customer
and it is done by relegating all expenses to singular customers that assist in getting to targeting
the customers who brings more revenue to the organization and identifying non profitable
customers (Ryals, 2008). Customer analysis of UMW holding is troublesome as company has
different segments to operate but major one is Toyota Malaysia and Perodua and for that sector
main customers are high profile professionals as well as average income person. In this sector
mainly expenses of the company is incurred on advertisement, services, branch maintenance. So
cost per customer remains less and revenue per customer assumed to be high which can be
analyzed from its operating margin. Company has operating margin and net profit margin of
4.62% and 5.69% respectively that indicate the profit per customer is higher compare to cost per
customer (Marketwatch, 2019). The major threat in this industry is high competition due to that
many companies are struggling and fighting to gain the customers base in market.
Expansion strategy
The two driving players UMW holdings and DRB-HICOM are doing well in heavy equipment,
manufacturing and in automotive. There are numerous rivals in same industry in Malaysia
market which serve indistinguishable products to customers however principle rivalry is in
between these two players. The strategy that can be used by UMW holding to improve its
performance and to regain its brand positioning the company should focus on its main segments
by acquiring other players in the market and by maintain more flow of working capital to meet
the daily requirements of the business. As from analysis it is known that company has good
structure, company should increase its borrowing from the market and invest in further
expansion of automobile segment that is more beneficial and profit making segment for UMW.
That strategy brings more revenue for the company to make it stable in this competitive market
against its rivals. UMW holding in the current circumstances has less working capital that
showed that the company has to make some moves to meet its daily requirements and
operational expenses. Company has to increase its operation. Furthermore their operating cash
flow statement analysis focuses on amount of cash inflow maintained by company which can be
considered as an ideal viewpoint for the company (Ying, 2018).