COMPARISON OF MALAYSIA MANUFACTURING COMPANIES BY FINANCIAL STATEMENT ANALYSIS TOOLS

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1 COMPARISON OF MALAYSIA MANUFACTURING COMPANIES BY FINANCIAL STATEMENT ANALYSIS TOOLS Afagh MALEK, Universiti Teknologi Malaysia, Skudai, Johor Bahru, Malaysia. Maryam MOHAMMADI, Universiti Teknologi Malaysia, Skudai, Johor Bahru, Malaysia. Fardokht NASSIRI, Universiti Teknologi Malaysia, Skudai, Johor Bahru, Malaysia. INTRODUCTION Abstract: One of the best ways to get the expected results from trading in the stock market is acquiring good evaluation of companies performance. Similarly, this study aims at comparing the financial performance of Lb Aluminium Berhad and Seal Incorporated Berhad manufacturing companies, which are listed in the main market of Malaysian stock exchange. The data were gathered from the annual reports of companies during last three years and analysed by financial statement analysis tools, which are financial ratio analysis and comparative financial statement analysis. The results of the study show that both companies had enough attractiveness for share traders, but the Lb Aluminium was more preferred by management and investors, while the Seal Incorporated Berhad was performing better from competitors and creditors' points of view. The findings of the study will help companies to judge their present condition and take decisions about their future steps while taking into consideration financial issues. In order to get a broader view and generalized idea about the financial issues of companies, the nature of business and industry average should be taken into account. A survey based study is suggested to clarify whether market test or profitability ratios have more significant relationship with companies performance from share traders view point. Keywords: financial statement analysis, stock market, industrial products In today s competitive world, many companies try to extend their business credit and attract more customers. This is significantly important for companies in the stock market since their performance has a great influence on investors decision as to buy shares from them. Abu Baker and Naser (2000) argued that investors view the annual report as the main source of corporate information in developing countries, and companies use it as a medium of disseminating information to external interested parties. Since the annual report reflects the commercial reality of the company concerned and financial statement analysis could be beneficial for making informed decision regarding investment in stock market. The financial statement analysis can be considered as a method for evaluating the companies performance and verifying the companies proximity to ideal benchmark in particular in developing countries like Malaysia where the investments' level has an increasing trend. Page 89

2 Similarly, the objective of this study is evaluating the financial condition of two Malaysian Companies in order to determine the competent firm with respect to various perceptions. 1. LITERATURE REVIEW The financial education is vital for progress toward proper utilization of cash and coping with budget deficits and constrains. This study critically reviewes the literature related to financial analysis as a consideration for investment; it also elaborates on importance of financial statement analysis and its development. Chang and Most (1997) believed that financial statements analysis is mainly concerned with the understanding of company accounts and interpretation of the published financial statements in order to enable legitimate users to make informed economic decisions. On the other, hand Norman (2011) defined financial statement analysis as an information-processing system which is designed to provide data for decision-makers. The information is basically derived from published financial statements, but in the process of analysis the use is also, made for non-accounting data such as stock prices and aggregate economic indicators. So, Financial Statement Analysis is an essential tool for making an informed decision. He also asserted that financial analysis is used in evaluating a company s economic situation and predicting its future course for various reasons, including investment purposes. Since its importance will be increased when it is used as a determinant for investing. In this regard, researches have been undertaken on the significance of financial statement for investors to make decision and the importance of utilizing it in the stock market. Study of Nasser and Nuseibeh (2003) on the usefulness of annual reports reveal that the user groups, surveyed in the study rely mainly on information made directly available by the company and do not consult intermediary sources of corporate information in order to make informed decisions.van (2002) indicated that investors in a company s common stock are concerned with present and expected future earnings and the stability of these earnings about a trend with the earnings of other companies. In the stock market, the operating status is the pivotal factor for the stock value. It could be reflected by the financial statement. Therefore, analyzing and researching the account elements from the financial statement are very crucial. If the advanced analyses could be done for these items, there will be more awareness of the financial and operating status of those stock companies. Certainly it will be helpful for stockholders making decisions to buy the target stocks. Besides, compared with the technical indices, these indices are much more reliable, nonvolatile and valid (Han and Chen, 2007). 2. CASE STUDY The LB Aluminium Group is the largest supplier of aluminum extrusion in Malaysia and one of the largest aluminum extrusion manufacturers in South-East Asia. Company s key expertise is in the manufacturing, marketing and trading of aluminum extrusion, expanded mesh, Aluminium sheets and coils. The other company is a diversified conglomerate named SEAL Group of Companies which listed on the main board of Bursa Malaysia.The group is involved in Timber Logging, Sawmilling, Property Management, Property Development and Trading. 3. METHOD The study proceeds with the following steps regarding to financial statement analysis: First of all, data was gathered through annual reports of the companies from their official website then the Microsoft Excel 2010 software was used to perform calculations regarding to Financial ratios analysis, Horizontal analysis, Vertical/Common size analysis, and Indexing method. The numerical data were extracted from the recent three years of Income statements and Balance sheets of case studies. In addition, for a more explicit picture of companies performance, calculations were supported with Excel spreadsheet charts. Page 90

3 4. DATA COLLECTION AND ANALYSIS This section discusses the issues related to financial statement analysis of each company and tries to categorize best-performing companies under different group (s) of financial ratios in order to discern which company is more preferred by investors, money lenders and suppliers Income statement analysis Table 1 summarizes the most significant changes related to horizontal and vertical analysis of companies income statement during the studied period. Table 1. Summary of income statement analysis Company Factor Trend/Year Further Points SIB 1 Net Profit Increase/ Decline in administrative expenses LAB 2 Profit before tax Decrease/2009 Lower margin due to fall in Aluminium price LAB Cost of Sale Increase/2009 Material and inventory costs SIB Inventory Decrease/ Beneficial based on JIT; disadvantageous in case of unplanned orders 1 Seal Incorporated Berhad 2 Lb Aluminium Berhad As it is shown in Table 1, the SIB s net profit had an upward trend while LAB s net profit decreased by the end of 2009, which leads to reduction of net profit. As a whole, in year 2009 although the sales volume for LAB registered a slight growth which was moderated by reduced selling prices owing to lower raw material costs, profit before taxation saw a substantial decrease of 57.6 percentage to $3.0 million as a result of lower margins. The lower margins were due to an unexpected slump in aluminium prices brought about by the global financial crisis which resulted in rising cost of sales by LAB for higher material and inventory costs. The vertical analysis of income statements showed that the high administrative expenses of SIB Company in 2008 led to loss rather than profit but, the considerable reduction of administrative expenses in 2009 and 2010 increased SIB s profit consequently. Further, there was a low percentage of inventories to total assets on the income statement of SIB during studied period. The inventories of SIB Company represented logs and are stated at cost. Although based on JIT principles which assert the expression of only make what you can sell and not make what you will (or might) sell [6] the zero inventory can be considered as an ideal situation, but in reality the unplanned customer orders will necessitate the existence of inventory. Page 91

4 4.2. Balance sheet analysis The balance sheets analysis clarified that the total assets of LAB Company were much more than SIB Company which is due to the nature of LAB business. LAB is a large manufacturer, who requires heavy investment in property, plant and equipment. This will justify the higher levels of debt financing requirement of LAB compare to SIB which is a diversified conglomerate of Timber lodging, Sawmilling Company and some service firms such as Property Management, Property Development and Trading. As another point at 2009 the Seal Company placed 1.61 million dollar with institutional Bond Fund. Although this investment declined the company s cash and cash equivalents significantly at that time, they generated 2.94 million dollar cash from financing at In addition, Seal Company s total equity was higher percentage of its total equity and liabilities compared to LAB Company. This indicates that SIB used little debt in its capital structure as supported by a debt to capital ratio of 0.44 percent Ratio analysis In order to have a better evaluation of companies performance with respect to various perspectives, ratio analysis was done. Table 2 below summarises the results of companies ratio analysis. The profitability ratios are most often used and considered by those outside a firm specially the Return on assets and Return on equity which are commonly used ratios for competitors and share traders. Based on table 2 this group of ratios shows superiority of SIB s performance; therefore, SIB can be considered as a better company from competitors and share trader s points of view. Ratios Table 2: Summary of ratio analysis Company SIB LAB Preferred by Profitability Competitors,Share traders Liquidity Creditors Asset Management Management Capitalisation Potential creditors (Consider nature of business ) Market Test Investors, Share traders Page 92

5 The second group of ratios is indicating the firm's ability to meet short-term obligations and are important for creditors The SIB Company performed better than LAB in this regard; therefore, the creditors are willing were to lend money to SIB rather than LAB. The third group is Asset management ratios which are mostly used by managers for internal monitoring as a measure of managerial effectiveness. The superiority of LAB s performance is an indication of its managerial effectiveness. The capitalization ratios on the other hand are extremely critical for potential creditors who are concerned with the firm's ability to generate the cash flow necessary for making interest payments. Although SIB has better performance regarding to this group of ratios, selection of preferred company from money lenders viewpoint depends on the nature of the industry. The different nature of these companies makes judgment impossible about their performance. The last group of ratios is market test ratios which are more interesting for investors. The data analysis shows that the LAB Company is more attractive for investors and share traders. CONCLUSIONS This study conducts a comparative financial measurement of Lb Aluminium Berhad and Seal Incorporated Berhad companies with the help of Financial Statement Analysis tools. The results of study show that companies had different behavior toward various groups of ratios which made overall judgment about their performance impossible. Hence, the performance of firms was analyzed with respect to different perceptions which revealed that the Seal Incorporated Berhad is preferred by competitors and creditors for its competency regarding to profitability and liquidity ratios while the Lb Aluminium Berhad would be preferred by management and investors as a result of being more attractive with respect to asset management and market test ratios. On the other hand, both companies are enough qualified to be favorite for share traders. The findings of investigation provide the chance for both companies to judge their present condition and take decisions about their future steps while taking into consideration financial issues. To have a more reliable judgment about companies performance it could be of benefit to compare companies with their counterparts of the same business nature; in addition, the industry average can be taken into consideration. Indeed, a survey based study can be conducted to determine the most attractive company according to share traders which will examine whether profitability or market test ratios have more significant relationship with companies performance from share trader s point of view. BIODATA - Afagh MALEK received Master s degree and Bachelor s degree in the field of Industrial Engineering. She has worked as an Expert of Quality management systems, Expert of marketing and market research and Expert of enviromental management systems in dominant companies of Iran. Her research interests are supply chain management, performance measurement and finance. - Maryam MOHAMMADI received Bachlor s degree in Industrial Engineering system planning and analysis in 2009, and Master s degree in Industrial Engineering from Universiti Teknologi Malaysia in Her research interests are finance, supply chain managment, modeling in stochastic environments and optimization for manufacuring systems. - Fardokht NASSIRI received Bachelor's degree in Industrial Engineering in Science & Culture University in 2007.She received Master's degree in Industrial engineering from Universiti Teknologi Malaysia (UTM) in Her research interests are in operation research, supply chain management, optimization and simulation. Page 93

6 REFERENCES 1. Abu Baker, N.; Naser, K. Empirical evidence on corporate social disclosure (CSD) practices, in Jordan, Intl. J. Commerce Manage, 10(3/4), 2000, pg Chang, L.S., Most, K.S. An international comparison of investor uses of financial statements, in International Journal of Accounting, 17(1), 1981, pg Han, S., Chen, R.C. Using SVM with Financial Statement Analysis for Prediction of Stocks, in Communications of the IIMA, 7(4), 2007, pg Naser K., Nuseibeh R. Quality of financial reporting: Evidence from the listed Saudi non-financial companies, in Int. J. Acct., forthcoming, Norman, A. S. Financial analysis as a consideration for stock exchange investment decisions in Tanzania, in Journal of Accounting and Taxation, 3(4), 2011, pg Ohno, T. Toyota production system. Japan: Diamond Sha and Toyota Motor Corp, Van, H. Financial Management Policy. (12th ed.). Pearson Ed. Inc.: New Delhi, India, Page 94