FACULTY OF BUSINESS AND MANAGEMENT

BACHELOR OF BUSINESS ADMINISTRATION (HONS.) MARKETING

FINANCIAL MANAGEMENT (FIN420)

ASSIGNMENT ON
FINANCIAL RATIO ANALYSIS

NAME ID GROUP
NUMBER
SARAH MUJAHIDAH BT MOHD JELANI 2020966555 JBC2402A
NURUL ATIQAH BINTI MOHD ZAMRI 2020963729 JBC2402A
NUR LIYANA NATASHA BINTI NAZLI 2020982747 JBC2402A
FATIMAH ZAHRA BINTI ABDUL HADI KAMEL 2020983117 JBC2402A

LECTURER : MADAM NIK NUR SHAFIKA MUSTAFA

SUBMISSION DATE : 23RD DECEMBER 2020
TABLE OF CONTENT
NO. CONTENT PAGE
1 Chapter 1 Introduction 1-2
1.1 Introduction on Financial Ratio
1.2 Liquidity Ratio
1.3 Activity Ratio
1.4 Leverage Ratio
1.5 Profitability Ratio

2 Chapter 2 Financial Ratio Analysis 3-5

2.1 Liquidity Ratio
2.2 Activity Ratio
2.3 Leverage Ratio
2.4 Profitability Ratio

3 Chapter 3 Conclusion and Recommendation 6-7

3.1 Conclusion
3.2 Recommendation (WETHER SHOULD INVEST)

4 References 8
Chapter 1 Introduction.

1.1 Introduction on Financial Ratio

Financial ratio is a tools to measure firm’s financial performance at a point of time and
over certain period of time which is current performance, past performances based on
actual statements and expected performance based on pro forma statement. It is
function to tell whether the company’s financial standing and condition is in good
health or not good. All the item needed to calculate financial ratio is on financial
statement which is balance sheet and income statement. Interested parties are
shareholders, creditors, managers, prospects inventors and regulatory bodies. They
need to know performance of the company before they take an action.

1.2 Liquidity Ratio

The liquidity ratio is used to calculate a company's ability to meet maturing liabilities
by depending on current assets.. It shows how liquid the firms to meet short-term
obligation. In other word, liquidity ratio gives an idea about company’s ability to
convert its assets into cash and pay its current liabilities with that cash if required.
Liquidity ratio consists of current ratio (CR), quick ratio (QR) and net working capital
(NWC).

1.3 Activity Ratio

Activity ratio is to measure effectiveness of a firm in using its resources or assets. It is
to measure effectiveness of a firm in using its resources or assets. This is to measures
efficiency of assets to generate sales and cash. It also called as asset management and
efficiency ratios. It consists of inventory turnover (ITO), fixed asset turnover (FATO),
total asset turnover (TATO) and average collection period (ACP).

1.4 Leverage Ratio

Leverage ratio is to measure the extent to which a firm had been financed by debt. It
shows how firms finance its assets, to determine the capital structure. It is also named
as debt ratio. It consists of debt ratio (DR), debt to equity ratio (DER) and time
interest earned (TIE).

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1.5 Profitability Ratio
Profitability ratio measure the profitability of the firm. It shows the efficiency of firms
in using its investment and assets to generate profit or income. It helps to understand
the profitability of a company at different levels. It consists of gross profit margin
(GPM), operating profit margin (OPM), net profit margin (NPM), return on asset
(ROA) and return on equity (ROE).

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Chapter 2: Financial ratio analysis.

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2.1 Liquidity Ratio
RATIO FORMULA YEAR 2019 YEAR 2020
CURRENT CURRENT ASSETS / 24000000 / 28800000 /
RATIO CURRENT LIABILITIES 10000000 12240000
= 2.4 TIMES = 2.35 TIMES
QUICK (CURRENT ASSETS – (24000000- (28800000 -
RATIO INVENTORY – PREPAID 12000000-300000) / 14400000-360000) /
EXPENSES) / CURRENT 10000000 12240000
LIABILITIES = 1.15 TIMES
= 1.17 TIMES

Interpretation:

The liquidity ratio of Fashion Valet in year 2020 is lower compared to year 2019. This shows
that the company is unable to pay its short-term obligation.

2.2 Activity ratio

RATIO FORMULA YEAR 2019 YEAR 2020
FIXED ASSET SALES / NET FIXED 51000000 / 60000000 /
TURNOVER ASSET 7000000 = 7.29 6440000
TIMES = 9.32 TIMES
AVERAGE (ACC 10000000 / 12000000 /
COLLECTION RECEIVABLE/SALES ) x 51000000 x 360 = 60000000 x 360 =
PERIOD 360 70.59 DAYS 72 DAYS

Interpretation:
The fixed asset turnover of Fashion valet in year 2020 is higher than year 2019, which means
that the company is able to manage and fully utilize its asset very well in order to generate
sales. However, their average collection period in year 2020 is higher compared to year 2019.
This shows that Fashion Valet is not efficient in collecting its debt.

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2.3 Leverage ratio
RATIO FORMULA YEAR 2019 YEAR 2020
DEBT TOTAL DEBT / TOTAL 20,700,000 x100 23,740,000 x100
31,000,000 35,240,000
RATIO ASSET
=66.77% =67.37%
TIME EARNING BEFORE 4000000 / 1000000 6000000 / 1500000
INTEREST INTEREST TAX / = 4 TIMES = 4 TIMES
EARNED INTEREST

Interpretation:
The debt ratio of Fashion Valet increase from year 2019 to 2020 . A high debt ratio in 2020
indicates that the company is not efficient at managing their debt and is at high financial risk.
On the other hand, the company’s time interest earned ratio remains constant from year 2019
to 2020 which means that the company maintains to have sufficient funds to pay its debt
obligation based on current income.

2.4 Profitability ratio

RATIO FORMULA YEAR 2019 YEAR 2020

NET NET PROFIT / SALES X 1800000 / 51000000 2500000 / 60000000
PROFIT 100 x 100 = 3.53% x 100 = 4.17%
MARGIN
RETURN NET PROFIT / TOTAL 1800000 / 31000000 2500000 / 35240000
ON ASSET ASSET X 100 x 100 = 5.81% x 100 = 7.09%

Interpretation:

The profitability ratio of Fashion Valet in year 2020 is higher than year 2019, represents higher
profit margin which means that the company is able to maximize shareholder wealth and earn
more per Ringgit.

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Chapter 3: Conclusion and Recommendation.
3.1 Conclusion.
As a conclusion, we can conclude that financial analysis describes the health and profitability
of an organization and provides an understanding of how the company performs its business.

Liquidity ratios indicate the ability of a corporation to perform its short-term financial
commitment, which is if the company has the money to pay the creditor when payment is due.
Based on the findings of the 2019 and 2020 ratio study for Fashion Valet, the liquidity ratio
suggests that the current ratio for 2020 is lower than for 2019. It indicates that there are barely
enough capital assets in 2020 to offset its current liabilities without selling stock.

Activity ratios, help financial manager and investors to asses how well the firm is managing its
assets in generating sales. Other than that, only fixed asset turnover shows that in a year 2020
is better than 2019. However, average collection period in year 2020 is higher compared to
year 2019. We can conclude that firm’s efficient in using its equipment to generate sales but
take longer time to collect their receivables.

Leverage refers to the use of capital or loans that have been lent. The amount of debt or
borrowing in a company is calculated by leverage ratios. It reveals that 2019 is better than 2020
in one year. A higher debt level will be pointed to by creditors and financial institutions because
it will increase the possible losses that could arise in the event of liquidation.

Profitability ratios calculate how the business uses its assets efficiently to make money. These
ratios often reflect the cost management performance of the organization and its pricing
strategy. The profitability ratio suggests that 2020 is higher than 2019 in one year. The
efficiency of the firm to get higher returns indicate a good performance. Finally, the 2020 return
on asset shows that the higher return on assets is due to the quality of the use of its assets.

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3.2 Recommendation.
According to the overall Fashion Valet’s financial ratio analysis, overall the company has a
good financial health and is very efficient at converting its investments into profits. It is highly
recommended for shareholders to invest into this company because as we can see from its net
profit margin ratio, the company is making higher profit over time and have high potential to
grow dramatically hence investors will gain substantial returns on their investments. By
investing into this company, it will help to increase the company’s capital that can be used in
boosting the firm’s value by expanding their operations and invest in better product
development.

Apart from that, Fashion Valet might have higher debt in the current year, however, the firms
face no problem in meeting its debt obligation. If the investors can contribute in raising the
firm’s financial capital, Fashion Valet will have sufficient fund to focus on high value-added
activities such as in research and marketing field. Therefore, Fashion Valet can maximize its
profit and preserve a stable cashflow without having to rely on debt financing. Besides,
shareholder value for this company has high prospect to surge up since the company is very
good at maximizing its asset to generate more profit, causing return on asset (ROA) will
increase simultaneously. Last but not least, the company has the ability to improve its liquidity
ratio by monitoring its account receivable effectively. For example, firm should submit
invoices to customer and collect payment as quickly as possible to avoid from running out of
liquid asset. It can be concluded that Fashion Valet has high potential to increase its earnings
over time which will lead to higher capital gains and dividends for the shareholders.

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Reference
Maverik, J. B. (2018, August 7). How Can a Company Quickly Increase Its Liquidity Ratio.
Retrieved from https://www.investopedia.com
Newman, P. (n.d.). 7 ways to improve liquidity. Retrieved from
https://www.entrepreneur.com/article/187606
Miranda Marquit. (n.d.). 7 Things You Must Know About a Company.
Retrieved from https://money.usnews.com/money/blogs/the-smarter-mutual-fund-
investor/2013/02/22/