Essay on the relationship of accounting ratios in balance sheets
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Accounting Ratios are the ratios show the
relationship between accounting data in a balance sheet, profit and loss
account in a particular organization. The accounting ratios are used to measure
the performance in an organization. There are five different categories for
calculating five different aspects of the business performance, it is
profitability of company, liquidity of company, asset management of company,
debts management and capital gearing of company, and market value of investment
to ordinary shareholders/common stockholders. First, profitability of company
is measuring gross profit markup, gross profit margin, operating profit margin
on sales, profit margin on sales, basic earning power (BEP), return on total
assets (ROA), and return on common equity (ROE).
In calculating liquidity of company, there are
using the current ratio and liquid ratio.
Asset management of company are using inventory
turnover, fixed assets turnover, total assets turnover, debtor ratio, debtor
payment period, days sales outstanding (DSO).
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This essay has been submitted to us by a student
in order to help you with your studies. This is not an example of the work
written by our professional essay writers.
In debts management and capital gearing of
company, debts ratio, capital gearing ratio, debts equity ratio, times interest
earned, creditor ratio, and creditor payment period are apply.
In market value of investment to ordinary
shareholders / common stockholders measured about earning per share, price or
earnings ratio, dividend cover, earnings yield, dividend yield, price or cash
flow ratio, and also market price or book value ratio.
There are three ways to compare the accounting
ratio for the business performance measurement. First, inter-temporal
comparison between two periods means that compare the accounting ratio with the
past year financial statement. Second, inter-firms comparison between two
companies is measure the accounting ratio between the two same industry companies.
Third, comparison with industry averages. I choose the inter-firms comparison
to measure the business performance in Gamuda Berhad and WCT Berhad.
Gamuda Berhad is a leader in turnkey and B.O.T.
civil engineering infrastructure and township development, with projects and
investments in South East and Far East Asia, Indochina, South Asia and the
Middle East. In infrastructure concession, they expertise covers highways and
expressways, bridges, dams and hydropower, tunnels, hydraulic engineering and
water treatment, railways and mass-rapid transit systems, marine works and
ports, and building, which are delivered through general contracting, design
and build, turnkey, as well as Build-Operate-Transfer methods.
WCT Berhad is a company that hands-on, experienced
and capable workforce in engineering & construction and property
development and management. WCT Berhad also an ownership of one of the largest
fleet of modern construction machineries in the Middle East and Malaysia.
From the income statements and balance sheets in
the financial statement can measure the accounting ratio for the both
companies. The business performance can exactly measure from there. I found the
information of the both companies from the link below.
http://www.wct.com.my/CMS/Home/1/0.aspx, http://www.gamuda.com.my/.
Financial Statement Analysis
Below is an accounting ratio for two companies.
2.1 Profitability
2.2 Liquidity
Ratio
Ratio with Formula
Calculation for Gamuda Berhad
Calculation for
WCT Berhad
Gross Profit Markup
Gross Profit Margin
Operating Profit Margin on Sales
Profit Margin on Sales
Basic Earning Power
Return on Total Assets
Return on Common Equity
Ratio
Ratio with Formula
Calculation for Gamuda Berhad
Calculation for
WCT Berhad
Current Ratio
Acid-test Ratio
2.3 Asset Management
Ratio
Ratio with Formula
Calculation for Gamuda Berhad
Calculation for
WCT berhad
Inventory Turnover
Total Assets Turnover
Debtor Ratio
Day Sales Outstanding
2.4 Debts Management
Ratio
Ratio with Formula
Calculation for Gamuda Berhad
Calculation for
WCT Berhad
Debts Ratio
Debts Equity Ratio
Times Interest Earned or Interest Cover
2.5 Market Value of Investment to Stockholders
Ratio
Ratio with Formula
Calculation for Gamuda Berhad
Calculation for
WCT Berhad
Earnings Per Share
Price Earnings Ratio
Earnings Yield
Market Price Per Book Value Ratio
Comparison between Gamuda Berhad and WCT Berhad
Below is the ratios comparison between two
companies for business performance measurement.
3.1 Profitability
Gross profit markup and gross profit margin:
Gamuda having the higher gross profit markup and
gross profit margin compare to WCT. That means Gamuda indicate the higher gross
profit earned by the company from the sales made. This showing Gamuda Berhad is
effective and efficient in controlling the purchase cost by making the purchase
at a lower cost from the supplier. Besides, Gamuda also effective in
controlling the production cost by using the material and labour to reduce the
production cost.
Operating profit margin on sales:
In operating profit margin on sales, Gamuda
applies the higher margin than WCT. This mean that Gamuda is the company best
to look at the change in operating margin over to WCT. The higher margin is
mean it is earning more per dollar of sales.
Profit margin on sales:
Gamuda shows the higher profit margin compare to
WCT. Gamuda earned high profit from the sales and the firm is effective control
on the expenditure and interest cost. Compare to WCT, the company indicates
high operating expenses and high interest cost than Gamuda. WCT was earned
lesser profit than Gamuda.
Basic earning power (BEP)/ Return on common
equity (ROE):
WCT shows the higher profit in the BEP and ROE.
This mean WCT company show the high profit in generated from the total assets
used and the capital employed due to the effectiveness and efficiency of using
the assets and capital in business activities.
Return on total assets (ROA):
In return on total assets different with the BEP
and ROE. Gamuda shows the higher profit in ROA rather than WCT. Gamuda can
effectiveness using the assets in the business activities to increase the
production volume and sale volume at the lower cost to increase the profit
earning than WCT.
3.2 Liquidity
Current ratio and Acid test ratio:
Both company having the higher ratio in the
current ratio and acid test ratio. This means that both companies are having
the large amount of current assets that can be used to finance their current
liabilities. Their company financial is stable and able to finance its short
term liabilities. However, Gamuda having the higher ratio than WCT which is
mean that financial in Gamuda is more stable than WCT.
3.3 Asset Management
Inventory turnover:
In the measurement of inventory turnover that
shows the WCT having the higher inventory turnover rates compare to Gamuda.
This means that WCT having the fastest stock taken out for resale. The stock of
WCT will not accumulate and the money will not tied up with the stocks.
Total asset turnover:
WCT shows the higher total asset turnover
compare to Gamuda. WCT is more effectiveness and efficiency of using the assets
in the business activities to increase the production volume and sales volume.
please read out :ACC 204 Corporate Accounting and Reporting
Disclaimer
This essay has been submitted to us by a student
in order to help you with your studies. This is not an example of the work
written by our professional essay writers.
Debtor ratio and Days sales outstanding (DSO):
Gamuda having the higher debtor ratio and days
sales outstanding compare to WCT. Gamuda has given the longer credit time to
the debtor who owing money. The longer time to collect money from the debtors
will cause financial in Gamuda facing the short term financial problems.
3.4 Debts Management and Capital Gearing
Debts ratio:
WCT having the higher debts ratio compare to
Gamuda. WCT will having the heavy debts burden and the company will bearing the
high interest cost. They will face the unstable financial pay back the debts
and it could cause to sell the assets to pay back the debts.
Times interest earned/Interest cover:
WCT shows the high debts equity ratio compare to
Gamuda. High debts equity ratio in WCT means that it is always accompanied with
low time interest earned and it also bearing the high interest charges.
However, Gamuda having the low debts equity ratio and this is means the company
having a high time interest earned compare to WCT. The company is bearing the
low interest charges.
3.5 Market Value of Investment to Ordinary
Shareholders
Earning per share:
Earning per share is to measure the business
growth of the company. WCT having the higher earnings per shares compare to
Gamuda. This is represents WCT having the high rate of growth compare to
Gamuda. This can attracts more common stockholders to invest in WCT.
Price earnings ratio:
Gamuda having the highest prices earning ratio
compare to WCT. So, stockholders in Gamuda need to take more times and the
longer period to recover backs their share investment. Therefore, WCT will more
attractive to invest because the company will recover back the share investment
faster than Gamuda.
Earnings yield:
WCT shows the highest percentage in earning
yield compare to Gamuda. The WCT Berhad is having the high net income return
and this is more attractive to the common stockholders.
Market price per book value:
Gamuda is indicating the highest share market
price compare to WCT. Gamuda will not attractive to common stockholders because
the share market price rises high above the real asset value.
Conclusion
By measurement in accounting ratio of financial
statement, two of the companies are showing the different business performance.
Gamuda Berhad and WCT Berhad are the two companies which are in the same
industry. In profitability of company, Gamuda is earning the higher profit
compare to the WCT. In liquidity of company, Gamuda also shows the stable
financial compare to WCT. In asset management of company, WCT operates in the
fast stock turnover than Gamuda. Other than that, WCT also can collect the
money from the debtor faster than Gamuda. This will make WCT more liquid in
their financial. In market value of investment to ordinary shareholders, WCT
will attracts more shareholders to invest in their company because they can get
the high net income return and having the shortest time to get the investment
money compare to Gamuda.
There are many problems to get the information
because the base of the information is always out of date. The historical cost
information may not be the most appropriate information because if the
inflation effect happens, this may not be applies in. Beside that, the
information in published accounts is summarized information, we cannot get the
detail information and the analysis of accounting information not the root of
the problems.
On the other hand, there are many problems in
the comparison inter-firm also. Different companies are having the different
financial and business risk. The companies will also using the different
accounting policies. There will having the impacts of the size of the business
and its comparators on risk, and the impacts of different environments on
results.
5.0 Financial Markets
Financial markets is a market who is having
surplus fund or capital that lending out to the organization or people who are
lacking capital or fund in their business. There are many different types of
financial markets. Every different financial market serves different types of
customers and operating in different country. Financial markets are deal with
stocks or shares, notes, mortgages, bonds and so on. Financial market also operates
as the spot market or future market. Spot market deals in being bought for on
the spot delivery within a few days, however, future market deals in being
bought for on the future delivery at some future date such like a few months or
a year in the future. There are various types markets in the financial markets.
lp you with your studies. This is not an example
of the work written by our professional essay writers.
Money markets
This is the short term financial market. Money
market deals with the high liquid debt securities in which of the funds are
borrowed for a short period of less than one year.
Capital markets
This is the long term financial market. Capital
market is a financial market that deals with the stocks or shares, intermediate
in which funds are loaned for a long period of one year or more than one year.
Mortgage markets
Mortgage market is a financial market that deals
with loans on residential, commercial, industrial real estate and farmland.
Consumer Credit Markets
Consumer credit market is dealing with loans on
autos and appliances, like education loan, vacations and so on.
Primary markets
This is the financial market in which
corporations raise fund by issuing new securities or new shares.
Secondary markets
Secondary market is a financial market which is
existing and already outstanding securities or other financial assets are
traded among investors after they have been issued by the corporations.
Initial public offering (IPO) markets
This is for the new establisher who is first
time offering securities or shares to the public.
Private market
Private market means that a financial
transaction is worked out privately and directly between two parties without
going to the public.
6.0 Transfer of Capital between Savers and
Borrowers
There are three types of ways to transfer the
capital or funds between the savers and borrowers.
6.1 Direct transfer from savers to borrowers
This method applies to a company issues and
sells the stocks or bonds directly to the savers without go through any financial
institution. So, the borrower will be the corporation who direct delivers the
securities to the savers. The savers who are in turn the money to corporation.
This is show the capital or fund directly transferred from savers to
corporation.
Indirect transfer from savers to borrowers
through investment banking house
This method indicates that the business
corporation as a borrowers. The business corporations will issues the
corporation’s securities or shares to the investment banking house. The
investment banking house will resells the corporation’s shares to the savers or
the money lender. The investment banking house will be the middle man and
receive the fund from the money lender and give the money to the borrowers or
the business corporation.
6.3 Indirect transfer from savers to borrowers
through a financial intermediary
This method takes place when a financial
intermediary as a bank or a mutual fund obtains fund from savers by issuing its
own securities or certificate of deposit to savers. After that, the financial
intermediary uses the fund that collected from the savers to purchase and hold
the securities of other corporations as an investment. The capital or fund that
transfer from the savers to the financial intermediary when savers pay money to
financial intermediary in exchanging for receiving certificate of deposit or
securities issued by the financial intermediary. The financial intermediary
will further transfer the fund to other corporation by paying money out of the
fund to purchase securities of other corporation. Most of the savers will
prefer to hold the securities and the deposit of the financial intermediary
because they are more safe and liquid compare to the mortgages and loans. So,
financial intermediary is efficiency of money and capital markets.
7.0 Investment Banking House
Investment banking house is an organization that
underwriting and distributes the new issue of corporation’s securities to
assist corporation obtain fund for financing.
7.1 Financial Intermediary
Financial intermediary is a financial firm that
are transfer the capital or funds from the savers to the borrowers. Normally,
they will analyze the potential of the borrowers when they receive the
application from the borrowers. They are helping the individual savers to
diversify their fund investment, processing and collecting loans and pooling
risk. There are several types of the financial intermediaries.
Commercial banks
Commercial bank is a financial institution that
provides the service that accepting deposits and giving the business loans to
the corporation. Commercial bank is different compare to the investment bank.
Investment bank is assist the business corporation to raise the capital or fund
from the savers but the commercial bank is providing loan or lent out the money
to the borrowers.
Saving and loan associations
A savings and loan association is a financial
institution that accepting saving deposits and making mortgage loans to the
borrowers. Saving and loan association is similar to bank. They have served
individual savers and residential and commercial mortgage borrowers where they
collect funds from many small money savers and they lend out to the house
buyers and the other types of borrowers. They create the liquidity in the
capital market.
Mutual savings fund
Mutual savings fund is almost similar with the
savings and loan associations. They also accept savings from the individuals
and then lend out the money for the long term basis to the home loaner and the
consumers.
Credit unions
Credit union normally will apply in a smaller
operation. That is designed for the special group or membership of the people
in a particular company or association. Credit unions are make loans for the
individuals like auto purchase, house improvement and house mortgage.
Pension funds
Pension fund is a retirement plans that provide
by the corporation or government agencies. The pension fund is been invested
for the long term growth, provides the pension for the employees when they
reach the age of the retirement or the end of the working years.
Life insurance companies
Life insurances company is sell insurance
products to their existing customers. They collect the payment of insurance in
the annual premiums and then they invest these funds in the stocks, shares,
bonds, real estate and mortgage. But they also provide the insurance cover to
the consumer when the payment periods.
Mutual funds
Mutual fund is a financial intermediary that
collects funds from the savers and then uses it to buy the stock, long term
bonds and short term debt instruments issued by businesses or government units.
Further in the next chapters you will learn:ACCT 31600 Accounting Theories and Practic
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