Finance
Assessing the Financial Performance of ABC SDN. BHD using Ratios
ABC SDN. BHD. appears to have had a difficult year in 2010. The firm can be assessed using the consolidated accounts, with ratio analysis to assess the current position of the firm comparing this current performance with the previous years. When assessing a firm it is important to look not only at potential trends and patterns in the firms' performance, but consider this in a broader context, including performance against industry benchmarks.
Ratios may be used to measure different aspects of the firms' performance, including profitability, efficiency and liquidity. A primary concern of business and of significant interest to shareholders is the profitability of the firm. There are different profitability ratios generally used, the two most important at the gross profit margin and the net profit margin.
The gross profit margin is the revenue less the direct costs (cost of goods sold), expressed as a percentage of the revenue. An initial look at the gross profit margin, which shows it increases from 10.78% in 2009 to 14.48% in 2010, may appear positive, and it does indicate some operating improvements, with a relevant reduction in the direct costs. However, when looking at the components of the equation the picture is not as positive. While the percentage has increased, both the level of revenue used to create the profit and the actual gross profit have decreased; the total revenue earned in 2010 showed a significant decrease falling by 39.13%. This is notable as the accounts also state that no major changes took place in operations. This may be a cause for concern.
Table 1; Gross profit margin
2009
2010
Revenue (a)
200,062,000
121,777,000
Cost of goods sold (b)
178,500,000
104,145,000
Gross Profit (c) (a-b)
21,562,000
17,632,000
Gross profit margin (c/a)*100
10.78%
14.48%
The most important profit figure will be the net profit margin. The net profit margin (after tax), as this is the profit after all costs and other items, and is the bottom line for investors, and is one of the figures they are most interested in. The net profit and the net profit margin both show a decrease in 2010. The figure may indicate a potential problem, when it is considered that of the net profit figure included a significant level of profits from an acquisition.
Table 2; Net profit margin
2009
2010
Revenue (a)
200,062,000
121,777,000
Net profit after tax (b)
3,963,000
1,881,000
Net profit margin (b/a)*100
1.98%
1.54%
The net profit margin falls from 1.98% to 1.54%. This places the firm below the logistics industry average which is 2.78% (MSN Money, 2013). The fall in both revenues and profit may be a cause for concern, so it is necessary to look at other measures, such as efficiency and liquidity.
The return on assets indicates the efficiency of asset uses, showing the net profit as a percentage of the assets. It would be expected for this to show a decrease when the profit have fallen, unless there has also been a decrease in the asset bas. However, the fall is dramatic, dropping from 18.81% in 2009 to 5.85% in 2010. However, when examining this, it is notable that there has been a large increase in the asset base, which has risen by 52.73%. The rise in the asset base indicates a major purchase, which would also fit in with the profits that were included in the net profit as originating from a post acquisition investment.
Table 3; Return on assets
2009
2010
Net profit (a)
3,963,000
1,881,000
Total assets (b)
21,067,000
32,175,990
Return on assets (a/b)*100
18.81%
5.85%
While the return on assets appear to be low, the industry average is 4.48% (MSN Money, 2013), which is below the current level.
The return on equity shows the net profit as a percentage of the shareholder funds. It would be expected for this to decline with the lower profit level, and this is what is seen, with the return on equity falling from 42.80% in 2009, a figure which was particularly, falling to 16.86% to 2010. The fall in the 2010 does not take the firms below the industry average of 12.98% (MSN Money, 2013). However, while there is a fall in the return, it should be noted that there has been a 20.5% increase in the level of equity of the firm.
Table 4; Return on equity
2009
2010
Net profit (a)
3,963,000
1,881,000
Total equity (b)
9,260,000
11,158,100
Return on equity (a/b)*100
42.80%
16.86%
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