Note: The references of the aforementioned formulas have been stated in the respective explanation of each ratio analysis.

To: Board of directors 

From:  Sayeem Hussain 

Date: 22^th of January 2015

REF: Performance analysis of SapKen Berhad for the year ended 30 April 2014.

Dear sir/madam/miss,
I have pleasure in submitting analytical financial report to evaluate the performance of SapKen Bhd with dignity to its previous year, 2014 and industry average. The analysis rotated around the financial ratios are liquidity ratios, profitability ratios, working capital efficiency ratios and financial risk ratios. All calculation of ratios have been done in appendix1.

I would like your company to have a look at this analysis since it will help you in your business strategies and sales performance. The report has been prepared of each ratio explanation and comparing analysis is also placed along with it.

In case, if you have any further interpretation , please feel free to reach me with this postal address and I shall be of immediate help. Thank you.

Sincerely,

Sayeem Hussain

Heads of Accounting Dept. SapKen

Liquidity ratios

Current ratio: It indicates of a business by comparing current asset to current liabilities. It is extensively used to test of liquidity of a business and measures the ability of a business pay off short- term liabilities over the period of next 1 years or its business cycle.  The higher current ratio is more capable for a company to pay of its obligations (Crfonline.org, 2015).

As we can see from Appendix 1 that SapKen Berhad 2014 rato is $2.19 when industry average and SapKen Berhad 2013 ratio were $1.90 and $2.14. A current ratio significantly higher than the industry average as well also previous year 2013 could indicate of the unnecessary assets. Thus, SapKen Berhad 2014 may consider to be acceptable in order to the current ratio is higher more than comparing both year.

Quick ratio:  It is also known as acid -test ratio is a liquidity ratio. It is a measure of liquidity of a company that how capable a company to meet its short- term of financial liabilities. It is indicated of company’s financial strength or weakness. Quick ratio is more than industry averages means a liquid current position. It helps us to determine whether a business would be able to pay off all its debts by using its most liquid assets.  (Accountingexplained.com, 2015).

From the report analysis, we can clearly look at that quick ratio of SapKen Berhad 2014 ratio is $1.47 where industry averages 2014 and SapKen Berhad 2013 ratios were $1.27 and 1.52. As we can clarify that SapKen Berhad 2014 is higher than industry and on the other hand previous year of SapKen Berhad was slightly higher than SapKen Berhad 2014. Hence, higher ratio is more favorable for its obligation and comparing two result of SapKen Berhad 2014 is slightly lower $ .05 from SapKen Berhad 2013 and SapKen Berhad 2014 ratio is higher $.20 than industry averages. Comparing the two result of SapKen Berhad is not better position. SapKen Berhad must have hard look of its individual assets.

Profitable ratios

ROCE: Return On Capital Employed is short form of ROCE. It is profitable ratio that measure of efficiently how a company can make profit by expressing its net operating profit as a percentage of its capital employed. It is also long-term profitable ratio in order to effectively assets are achieving while consideration long - term financing (My Accounting Course, 2015). Higher ratio would be more favorable because more profits are generated by each capital employed.

From the appendix 1, it is clearly shown that SapKen Berhad 2014 is higher ratio than SapKen Berhad 2013 and industry average 2014. The higher ratio of SapKen Berhad indicates that company is employing its capital effectively and it is generating shareholder value.

Profit/ sales: It is actually profit margin ratio. It is a profitable ratio that measure of its company net income earned by comparing the net income to net sales of a company. It shows that what percentage of sales are left of net income and how well a company able to manage its expenses of its net sales (My Accounting Course, 2015).

It is clearly shown in Appendix1 that ratio of SapKen Berhad 2014 is higher than SapKen Berhad 2013 and industry average 2014. If the ratio is higher then, it favorable for company. SapKen Berhad has positive investment quality because it is higher ratio.

Gross profit margin: It is used as an indicator for financial health of business in terms of measure of company’s manufacturing and distribution ability during processing of production. It can be used to compare of a company with its competitors and to identify how efficiently business is using its labor and materials in production area and indicator used to asses of a company's excluding fixed cost and core activities. High gross profit margin indicates that more money is left over for other operating expenses and low gross profit margin indicates that either the business is unable to control its production cost or inventory costs or the prices are set too low (Inc., 2015).

From Appendix 1, we can understand that SapKen Berhad 2014 is lower than industry average and SapKen Berhad 2013. It means that SapKen Berhad generates a low level revenue to pay for operating expenses and net profit.

Working capital efficiency ratios

Assets turn over: It is an efficiency ratio to measure of company’s ability to promote the product of its assets by comparing net sales with averages total assets. It is a measure of generate how company using the assets at its disposal promote sales. ‘‘ Higher turnover ratios mean the company is using its assets more efficiently and lower ratios mean that the company isn't using its assets efficiently and most likely have management or production problems” (My Accounting Course, 2015).

If we look at our calculation of assets turnover ratio form appendix 1, we can clearly see that previous year of SapKen Berhad and industry averages 2014 were higher than SapKen Berhad 2014. Its means that company have not used its assets with efficiency or the company’s employees are not more efficiency to use its assets.

Inventory turnover (times): It indicates that how many times the inventory is being turned or sold  in a period by compering cost of goods sold with averages inventory. This ratio is very important to turnover depends on two main component such as stock purchasing and sales. Both are closely related with inventory. If inventory doesn’t match with each other, the inventory will not turn efficiently. Thus both department must be in tune with each other to improve its turnover (My Accounting Course, 2015). Inventory turnover measure how efficient a company can control its merchandise. High turn is more significant to sell effectively the inventory its buys.  

As we can see that calculation of Inventory turnover shows compering industry average and SapKen Berhad 2013 were higher turn than SapKen Berhad 2014. It means that SapKen Berhad 2014 is lower than them. Lower inventory indicates that SapKen Berhad 2014 is not able to sell inventory and now it is worthless to the company.

Account receivable collection period: It is also known as day sales outstanding. It is a measure of number of days that it takes a company to collect its credit accounts or its accounts receivable. It shows that how a company is very good to collect cash from customer. Lower ratio is more favorable because companies can collect earlier cash from their customer and company can use this cash for others processes (My Accounting Course, 2015).  

It is clearly shown in calculation that ratio of SapKen Berhad 2014 is lower than SapKen Berhad 2013 and industry averages. SapKen Berhad would able to collect cash from their customers very earlier than previous year of SapKen Berhad and industry averages. 

Accounts payable payment periods: It indicates to a measure of the number of days that a company takes an entity to pay its suppliers. Increasing numbers of days means that company is paying its suppliers too lowly and it also indicates of worsening financial position (Accountingtools.com, 2015).  

As we can clearly see in our calculation of Accounts payable payment periods that previous year of SapKen Berhad and industry average 2014 were more number of days than SapKen Berhad 2014. It shown that SapKen Berhad 2014 is decreasing number of days than SapKen Berhad 2013 and industry average 2014. Its means SapKen Berhad is paying its suppliers very fast and also suppliers are demanding first payment terms.

Financial risk ratios

Gearing: It is one of the major ratios to understand capital structure of a company for everyday by financial analysis and banks. It express long-term financial position of a business as well relationship between company’s borrowing and its own funds.

From appendix 1, we can clearly see that previous year of SapKen Berhad was lower than SapKen Berhad 2014. The higher ratio means that the company will have to pay interest on an annual basis though financial results are not better and it can be lead to bankruptcy due to SapKen Berhad unable to repay its debt.

On other hand, when industry average was 32.72%, and SapKen Berhad 2014 is 27.49%.  At this point, the calculation shows that SapKen Berhad 2014 is lower than industry average. It means that SapKen Berhad is placed in a highly cyclical industry, and so can not afford to become overreached in the face of an inevitable downturn in sales and profits (Accountingtools.com, 2015).

                                                                                                                    

 Conclution: Accounting ratios are an important tools used accountants and other for interpreting accounting statement. A company is able to know financial performance by ratio analysis whether is strong or not. SapKen Berhad financial performance was somehow good. We have found some difficult situation SapKen Berhad by calculating and comparing against industry average and SapKen Berhad 2013. The company’s employees are not more efficiency to use its assets. SapKen Berhad should look hard and may take action on it.    

References

Accountingexplained.com, (2015). Quick Ratio | Acid Test | Formula | Example | Accounting Explained. [online] Available at: http://accountingexplained.com/financial/ratios/quick-ratio [Accessed 21 Jan. 2015].

Accountingexplained.com, (2015). Return on Capital Employed (ROCE) Formula | Example | Analysis. [online] Available at: http://accountingexplained.com/financial/ratios/return-on-capital-employed [Accessed 22 Jan. 2015].

Accountingtools.com, (2015). Accounts Payable Days Formula - AccountingTools. [online] Available at: http://www.accountingtools.com/accounts-payable-days-formula [Accessed 21 Jan. 2015].

Accountingtools.com, (2015). Gearing Ratio - AccountingTools. [online] Available at: http://www.accountingtools.com/gearing-ratio [Accessed 21 Jan. 2015].

Crfonline.org, (2015). Ratios and Formulas in Customer Financial Analysis. [online] Available at: https://www.crfonline.org/orc/cro/cro-16.html [Accessed 21 Jan. 2015].

Financialmemos.com, (2013). Gearing Ratio Formula, Calculation and Analysis with Examples. [online] Available at: http://financialmemos.com/gearing-ratio-formula-calculation-and-analysis-with-examples/ [Accessed 21 Jan. 2015].

Inc., C. (2015). Gross Profit Margin interpretation | Analysis | Calculator. [online] Ccdconsultants.com. Available at: http://www.ccdconsultants.com/calculators/financial-ratios/gross-profit-margin-calculator-and-interpretation?tab=interpretation [Accessed 21 Jan. 2015].

My Accounting Course, (2015). Asset Turnover Ratio | Analysis | Formula | Example. [online] Available at: http://www.myaccountingcourse.com/financial-ratios/asset-turnover-ratio [Accessed 21 Jan. 2015].

My Accounting Course, (2015). Days Sales Outstanding (DSO) Ratio | Formula | Calculation. [online] Available at: http://www.myaccountingcourse.com/financial-ratios/days-sales-outstanding [Accessed 22 Jan. 2015].

My Accounting Course, (2015). Inventory Turnover Ratio | Analysis | Formula | Example. [online] Available at: http://www.myaccountingcourse.com/financial-ratios/inventory-turnover-ratio [Accessed 21 Jan. 2015].

My Accounting Course, (2015). Profit Margin Ratio | Analysis | Formula | Example. [online] Available at: http://www.myaccountingcourse.com/financial-ratios/profit-margin-ratio [Accessed 22 Jan. 2015].

My Accounting Course, (2015). Return on Capital Employed ROCE | Analysis | Formula | Example. [online] Available at: http://www.myaccountingcourse.com/financial-ratios/return-on-capital-employed [Accessed 22 Jan. 2015].

Smallbusiness.wa.gov.au, (2015). Gross Profit Margin Ratio. [online] Available at: http://www.smallbusiness.wa.gov.au/profit-margin-ratio-s-and-break-even-analysis/ [Accessed 21 Jan. 2015].