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Ratio Analysis And Liquidity Ratios Finance Essay

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Date added: 17-06-26


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As we can see that the highest current ratio among 2005-2009 is belong to year 2007 which is 1.23. Generally, the higher the current ratio means the better of the firm financial performance. But in year 2009, current ratio decrease to 1.04. It does not seem well in the financial performance of the firm. As we can see that the overall current ratio graph is show unstable while current ratio increase in the first three years and decline in year 2008 and 2009. Moving on to Quick ratio of texchem group, we can clearly see that the best year in quick ration is belonging to year 2007 which resulting 1.01 after excluded inventory of the firm. The reason of calculate quick ratio is to determine how much inventory occupy in the firm. Generally, investor will focus on quick ratio rather than current ratio. For texchem group in year 2007, we can see that the inventory of the firm in that year is not much, the reason may be because of the inventory turnover in year 2007 is high, so that firm do not hold so much of inventory. Therefore the quick ratio of year 2007 is above 1 compare to other years.

Activity Ratios

This section of activity ratio measure about the firm activities aspects of Texchem group performance among year 2005 to 2009. In activity ratio, we will discuss on inventory turnover, average collection period in times, and average payment period in times. Below show the inventory turnover of Texchem group from year 2005 to 2009. According to the result show in the inventory graph above, we can see the inventory turnover of Texchem in year 2007 and 2008 are the same high which result of 17.37 and 17.38 times. It is almost the same in these two years. In year 2005, inventory turnover is 13 times but slightly decrease in year 2006 to 12.81. In year 2006 to 2007, we can say that was a critical moment among the year. May be because of the economy of year 2007 is doing well, that is why the inventory turnover increase rapidly from 12.81 to 12.37. Although in year 2008 is the global economy crisis, but it seem does not affect Texchem performance. Graph above showing the average collection period of Texchem group from year 2005 to 2009. Average collection period meaning how fast for a firm take time to collect back the money from daily sale on credit. In finance view, the faster a firm can collect back the money which on credit meaning the better of the firm financial. For Texchem group, in the first three from 2005 to 2007 are almost the same which is 0.20 to 0.21 times annually. But in 2008, because of increase in sale and decrease in account receivable, so it affect the average collection period during the year. In my opinion, there is also another reason on why the average collection period in year 2008 was decrease. On my view, year 2008 was economy crisis year which affect every firm’s financial performance, for those firm who dealing with Texchem may be required to extend the payment period in order for them to ride off from the storm. For Texchem group itself, they also hope every firm who deal with them are able to pay them back in this hard situation. So they are willing to extend the collection period to their customer. Average payment period for Texchem group is showing on above. The highest payment time is in year 2009. This was because of decreasing in purchases. From RM49, 319,331 in year 2008 decrease to RM20, 912,618 in year 2009. There was RM28, 406,713 gap between 2008 and 2009. From year 2005 to year 2007, Texchem group purchases and invest minimum of RM32, 022,911 and maximum of RM37, 003,539 in property. This made the firm have to pay much more times within a year. However, in year 2009, it seem Texchem does not manage their finance very well. As resulted in the annual report of Texchem group, in year 2009, account payable of Texchem group was increase to RM157, 865,237 from RM149, 806,355. This made Texchem group have to pay more compare to previous year. In order to clear the payment, Texchem group have to pay more times within a year in order to clear the account. So in year 2009, average payment period of Texchem group was increase to 7.54 times a year. Total assets indicate on how well is a firm fully utilizes its assets to generate sales. The highest assets turnover was 2.13 on year 2008. According to the result showed on above, the overall of the firm performance was quite satisfied. Because we can see the growth of the assets turnover was increase in every years except year 2009. In my opinion, Texchem did very well in utilizing their assets to generate sales especially in year 2008 which a year of economy crisis.

Profitability Ratio

In this section, we discussing on how much of revenue generate by Texchem Group in order to attract more people to invest in Texchem. Under Profitability ratio, we discuss about gross profit margin, operating profit margin, net profit margin, earning per share, return on assets (ROA), and return on equity (ROE). Graph above show the Gross Profit Margin and Operating Profit Margin of Texchem Group. The overall of gross profit margin is showing decrease from year 2005 to 2008. However, in year 2009, gross profit margin slightly increase from 16.23% to 19.19%. The peak is in year 2005. Moving on to operating profit margin which is measure on the profit that generate after deduce costs and expenses but excluding interest, taxes, and preferred stock dividends. However, it does not seem good during these five years time. We can see that it decreasing from 2005 to 2009 except year 2007. The worst year was 2009 which is 0.97% generated in that year only. This is not good for Texchem financial because it still need to pay for interest, taxes, and preferred stock dividends. 2009 was a dangerous year. Net profit Margin is measure the profit after operating profit deduced those interest, taxes, and preferred stock dividends. As the operating profit margin stated previously, we already can predict that Texchem will show to be negative. Unfortunately, in year 2008 and 2009, it shows negative 0.12 and 0.9 of net profit margin. In year 2007 was a critical year which generated profit of 1.4 much higher than year 2006. However, it was drop rapidly in year 2008. Moving to earning per share, it measure on how much of money can be earn from each outstanding share during a period of time. Obviously, the best year to be invest in Texchem is year 2005 which earn 15.03 sen per share. In my opinion, i will not invest in Txchem in year 2008, because that year was global economy crisis year. Stock market was affected by the economy crisis as well. The last part of profitability ratio will be calculating on return on assets(ROA) and return on equity(ROE). ROI is also known as ROI (Return on investment) which measure on how much a company generate profit with the assets that they having in hand. Obviously, in years 2008 and 2009, both ROA and ROE does not seem to get any return and firm having a hard time to pay their shareholders due to the loss of financial.

Debt Ratio

Debt ratio measure the number of total assets which borrow from third party being used to generate profit. In debt ratio, the greater of the ratio indicate the more assets can be use to generate profit. Debt ratio of Texchem group show decreasing in the first three years and increasing in the last two years. According to the data on above, 2005 was a best year which having more people’s funds to be used in investment. However, the overall performance were remaining in the range of 67% to the highest 71%. The time interest earn ratio was substantially increase and decreasing over the years. In year 2005 and 2006, it shows negative of 106.12 and 107.48. Although it was increase in year 2007, but in 2008 it had been pull down the ratio back to negative of 62.52 by the economy crisis. The overall performance of Texchem in time interest earning ratio was bad among these years.
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