SIF2005 STATISTICAL PHYSICS

ASSIGNMENT 1:
ENTROPY OF CONSTRUCTION COMPANIES' PERFORMANCE IN
MALAYSIA BASED ON FINANCE

SPG MEMBERS 1. KHAIRUL ANWAR BIN SALAHUDIN (U2000012)

PROJECT LEADER/ EDITOR
2. HAZIQAH FARAHAIN BINTI DZULKHEPLAY (U2000007)
RESEARCHER/ PROJECT DESIGNER
3. MOHD FAEZ BIN HOD (U2000063)
RESEARCHER/ PROJECT DESIGNER
4. AISYAH LIYANA BINTI MOHD ZAMRI (U2000048)
PROJECT DESIGNER/ DATA ANALYST

PEER GROUP SPG4 (2023/2024)

SDG SDG 8 - DECENT WORK & ECONOMIC GROWTH

MySTIE SOCIO-ECONOMIC DRIVERS - BUSINESS & FINANCIAL SERVICES

S&T DRIVERS - AUGMENTED ANALYTICS & DATA DISCOVERY

LECTURER PROF. DR SITHI VINAYAKAM A/L MUNIANDY

1.0 Introduction

Malaysia is a country that is no exception in making construction one of the vital sectors that help in
the development and economic growth of the nation especially in rising markets. Furthermore, the
construction industry is driven by higher investment potential causing the government to strive to
contract with them to provide modern infrastructure for humans. One concept that has attracted
significant attention in the evaluation and analysis of the performance of construction companies is
entropy.

Entropy, a term derived from thermodynamics and information theory, has found applications in
a variety of fields, including finance. Entropy is used as a lens to evaluate the variety and complexity
of financial data and market dynamics in Malaysian construction companies. Entropy analysis, which
quantifies the extent of disorder, uncertainty, or randomness in financial data, provides useful insights
into the efficiency, risk exposure, and resilience of construction companies. In this report, the financial
performance of Malaysian construction companies is evaluated using key financial ratios.

2.0 Literature review

In particular, entropy, anchored in statistical mechanics and thermodynamics, has found application
in many disciplines. The study explores the implementation of entropy to assess the financial
performance of Malaysian construction companies. In response to this criterion, Gibbs entropy
appears as an adequate structure for analyzing Malaysian construction businesses' financial
dynamics.

By applying Gibbs entropy to the financial performance of Malaysian construction companies,

the effectiveness of financial markets in processing information can be evaluated. Higher entropy
levels may suggest higher levels of inefficiency. Specifically, Gibbs entropy is defined by the formula:

𝑆 = −𝑘 ∑ 𝑃𝑖 𝑙𝑛(𝑃𝑖 )

where:
● S is Gibbs entropy
● k is Boltzmann constant
● 𝑃𝑖 is the probability of finding the system in the 𝑖th microscopic configuration

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Practically, by using Gibbs entropy for estimating the entropy of financial performance in construction
companies offers a rigorous and systematic technique for analyzing financial data.

3.0 Data and methodology

In this study, the data of this study were collected from the financial annual report of the construction
companies in Malaysia from 2017 to 2023. We selected some well-known companies that have stable
financials and compared them using entropy.

The decision criteria that we collect from these companies are Earning per Share (EPS). It is a
critical financial metric for companies, particularly in the financial sector. EPS is a financial metric that
measures the portion of a company’s profit attributable to each outstanding share of its common
stock. It is calculated by dividing the company’s net income, after deducting preferred stock dividends
and any other relevant expenses, by the average number of outstanding shares of common stock
during a specific period.

To calculate the sum of EPS from each year (2017-2023), given equation Rj:
𝑛

𝑅𝑗 = ∑ 𝑟𝑖𝑗 (𝑖 = 1,2,3, . . . . , 𝑛, 𝑗 = 1,2,3, . . . , 𝑚)

𝑖=1

where; i: companies
j: years
rij: the value of EPS of a company in a given year

Next, use the following formula to determine the probability of EPS in construction companies:
𝑟𝑖𝑗
𝑝𝑖𝑗 = 𝑅𝑗

Finally, the following equation was used to determine the entropy of the construction
companies:

𝐸𝑖 = −𝑘 ∑𝑚
𝑗=1 𝑝𝑖𝑗 × 𝑙𝑛 (𝑝𝑖𝑗 ) where 𝑘 = 1/𝑙𝑛(𝑚)

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4.0 Analysis and Results

Companies Annual Earnings per Share (EPS)

2017 2018 2019 2020 2021 2022 2023

ZECON 11.77 9.69 -15.07 27.58 -4.36 -2.85 1.44

DKLS 5.75 5.97 6.28 14.04 17.08 12.68 30.27

GADANG 28.33 14.46 6.57 5.23 1.41 5.71 - 4.03

ECONBHD 15.09 8.89 1.90 0.18 0.82 -2.87 -1.11

MELATI 2.03 2.02 2.10 1.89 1.97 16.35 14.52

MUHIBBAH 27.40 30.11 7.86 -25.50 -0.70 -2.41 -1.10

GAMUDA 24.80 20.93 28.61 15.00 23.41 31.82 70.64

Table 1: Annual data of EPS for companies from 2017 until 2023

Companies Entropy

ZECON 0.78197

DKLS 1.04859

GADANG 0.86150

ECONBHD 0.48342

MELATI 0.63446

MUHIBBAH 0.79808

GAMUDA 1.12039
Table 2: Entropy of construction companies in Malaysia based on EPS

Based on Table 1 and Table 2, we can conclude that DKLS and Gamuda have high entropy among
other companies (>1). The high entropy shows that stock prices imply greater randomness and less
predictability. From Table 1, we can analyze that from DKLS and Gamuda’s EPS, even if they have

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a high EPS, they show the company has less predictability and may be associated with a high-risk
company’s profit.

Despite the other companies, ZECON, GADANG, ECONBHD, MELATI and MUHIBBAH, they
have lower entropy (<1) which shows that stock prices imply lower randomness and higher
predictability. From Table 1, we can analyze that these companies, show high predictability and may
be associated with a low-risk company’s profit.

Therefore, we can conclude that with this entropy from all the companies, we can calculate the
risk and uncertainty in financial markets and next we can see which are more stable market
environments. A company with stable and consistent EPS over time may be perceived as less risky
by investors, leading to lower entropy in its stock prices. Understanding the interplay between these
factors can help investors assess the financial health and market dynamics of a company.

5.0 Discussions

The results show that Malaysia's economic growth and the construction industry are strongly
correlated. Due to its substantial contribution to capital formation, employment creation, and revenue
generation, the construction industry has been a major driver of the nation's overall economy,
supporting both Malaysia's socioeconomic development and the gross domestic product (GDP). The
eighth goal of the Sustainable Development Goals (SDG) is to promote employment, decent work for
all, and inclusive and sustainable economic growth. In order to manage growing debt, trade conflicts,
and economic uncertainty while promoting equitable pay and decent jobs for youth, achieving Goal 8
requires an extensive reconstruction of the financial system. In the long term, sustainable economic
growth has the power to build a better society, raise living standards, and offer decent employment
for all.

To implement our plan for green and equitable development, the National Energy Transition
Roadmap, or NETR, is significant. The industry's progress in innovation and adoption of sustainable
building methods can be influenced by the entropy of construction companies' performance. Higher-
performing companies might be more willing to spend more on green technology research and

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development, which could speed up the adoption of energy-efficient building materials and
construction methods.

Furthermore, the primary goal of the New Industrial Master Plan (NIMP) is to promote industrial
innovation and higher-quality production to raise economic complexity. A high entropy may be a sign
of instability, which influences finances and economic expansion. High entropy might result in the
NIMP being less successful if it depends on a steady and expanding building industry to sustain
industrial development.

6.0 References

[1] Goldstein, S., Lebowitz, J. L., Tumulka, R., & Zangh`ı, N. (2019). Gibbs and Boltzmann Entropy
in Classical and Quantum Mechanics. https://arxiv.org/pdf/1903.11870.pdf
[2] Martin. (n.d.). Economic Growth. United Nations Sustainable Development.
https://www.un.org/sustainabledevelopment/econ
[3] McCarty, J., & Smirnov , S. L. (2022). 1.5: The Boltzmann Distribution and the Statistical
Definition of Entropy. Chemistry LibreTexts.
https://chem.libretexts.org/Courses/Western_Washington_University/Biophysical_Chemistry_
(Smirnov_and_McCarty)/01%3A_Biochemical_Thermodynamics/1.05%3A_The_Boltzmann_
Distribution_and_the_Statistical_Definition_of_Entropy
[4] Raza Ali Khan, Mohd Shahir Liew, & Zulkipli Bin Ghazali. (2014). Malaysian Construction Sector
and Malaysia Vision 2020: Developed Nation Status. Procedia - Social and Behavioral
Sciences, 109, 507–513. https://doi.org/10.1016/j.sbspro.2013.12.498
[5] DKLS: DKLS INDUSTRIES BHD (7528). (2023, June 28). KLSE Screener.
https://www.klsescreener.com/v2/stocks/view/7528
[6] GADANG: GADANG HOLDINGS BHD (9261). (2024, April 1). KLSE Screener.
https://www.klsescreener.com/v2/stocks/view/9261
[7] Screener. (n.d.). KLSE Screener. https://www.klsescreener.com/v2/
[8] ZECON: ZECON BERHAD (7028). (2024, April 2). KLSE Screener.
https://www.klsescreener.com/v2/stocks/view/7028