Ratio Analysis

3.0 Liquidity Ratio

3.1 Current Ratio

Current Ratio compares the level of the most liquid assets (current assets) against that of the
shortest maturity liabilities (current liabilities).It expresses the 'working capital' relationship of
current assets available to meet the company's current obligations.[ www.ccdconsultants.com]
According to the calculation done in, Petronas Dagangan Berhad’s current ratio has slightly
decreased from year 2007 to 2008 which is 1.10 to 1.07.When 2008 is compared to 2009 the
current ratio has increase from 1.07 to 1.21. Furthermore, the ratio has increased 1.26 to 1.3 in
year 2010 to 2011.In Overall ratio analysis, it shows the current ratio has increased by 0.214
from 2007 to 2011. Generally the current ratios found in practice fall into the range 1.1 to 1.3. In
this case, the current ratio of this company is 1.31 which is favorable. Moreover this company’s
current ratio is liquid and has the ability to pay its current debts over the period. For improving
current ratio, the company needs to emphasis on its current liabilities more specifically trade and
other payable. Based on the analysis, the accounts payable has increased about RM634, 212,000
and as well as cash has increased to RM482, 196,000 from year 2007 to 2011. The primary
reason that accounts payable increase arises is because of the purchase of stock in short-term
credit through an accounts payable method .The company should use some of the cash to pay off
the current liabilities as often and as early as possible. It would decrease the level of current
liabilities and therefore improve the current ratio.

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3.2 Quick Ratio

Quick Ratio is similar to the current ratio, but it is a more conservative measure. It eliminate
inventory from current assets and then doing the liquidity test is measured by this ratio.
[www.ccdconsultants.com] According to the calculation done, the quick ratio of this company
has decreased 0.93 to 0.84 from year 2007 to 2008. Besides that, the ratio has remained constant
which is 1.01 from year 2009 to 2010 and then has increased slightly 1.07 in year 2011. Overall
ratio analysis, it shows the quick ratio has increased 0.14 from year 2007 to 2011. The increase is
mainly due to increase in accounts receivables as the sales revenue in 2011 was amounting
RM23,267,648,000 has increased with vast difference compared to year 2007 which is only with
RM19,496,360,000. The exclusion of inventories is because some inventories are difficult to turn
into cash. As a convention, ideally, a quick ratio of 1:1 is considered to be satisfactory.
Therefore, this company’s the assets can be quickly converted into cash are sufficient to meet its
current liabilities.

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4.0 Efficiency Ratio

4.1 Debtor Collection Period

Debtor Collection Period shows the average time taken to collect trade debts. In other words, a
reducing period of time is an indicator of increasing efficiency. [www.creditguru.com]. The
debtor collection period has increased from year 2007 to 2008 from 39days to 54 days. This is
mainly due to the increase in credit sales from year 2007 to 2008 which the amounts are RM19,
481,751,000 and RM22, 286,256,000 respectively. However the debtor collection period has
decreased drastically with only 26days in 2009. This is because the company uses shorter credit
term to their customers. This will help the company to retrieve their outstanding cash in less
time. Thus, the debtor collection period in year 2009 with 26days indicates that the company
charges their customers using payment terms of 30days. This means that the customers of the
company need to pay off their credit purchases within a month period or in other word, within 30
days’ time. However, the debtor collection period increase in the year of 2010 and 2011 with 41
days and 42 days respectively. This means that, there is increase in duration in order to collect
the trade debts from customers. This will significantly affect the cash flow of the company. The
increase in days of collection is due to the company did not set the credit limit to the customers.
As a matter of fact, the customer will take it as advantage and make more credit purchase
without any limitation and thus, this will significantly affect the cash flow of the company. As an
overall debtor collection period analysis, Petronas Dagangan should practice timely invoicing as
it sets the payment plan to the customer. Furthermore, it also encourages timely payment. The
timely invoicing can be sending via email, snail mail or interfaced to customers instantly.
Petronas Dagangan should also establish collection via direct debit which is a great means to
continue giving the customer payment terms while contributes Petronas Dagangan Berhad
confidence to collect the cash.

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4.2 Collection by creditor

Collection by creditor days is an indication of a company’s trustworthiness in the eyes of its

suppliers and creditors, since it depicts how long they are willing to wait for payment. In addition
to that, the higher the number the better it is because all companies want to maintain cash. At the
same time, a company that is particularly slow to pay its obligations may be a company which
having trouble in generating cash, or one trying to finance its operations with its suppliers’ funds.
[www.creditguru.com] Based on the creditors’ collection period analysis, the days it took to pay
to their supplier have increase from 56 days in year 2007 to 79 days in year 2007. The increase is
mainly due to the drastic increase in trade payable of the company in which it has increased from
RM2,716,861,000 to RM4, 427,969,000. The increase in trade payable is correspond with the
increase in cost of sale for year 2007 to year 2008 which is from RM17, 787, 386,000 to
RM20,501,018,000. However in year 2009, the creditors’ payment period has decreased vastly to
35days. This is mainly due to decrease of trade payable of the year by RM 2,152,305,000. The
reason trade payable decreased during the year is because Petronas Dagangan Berhad has settled
the outstanding trade payable as it has comes due. Nevertheless, the creditors’ collection periods
has increased in year 2010 by 59 days and slightly decreased in year 2011 by 58days. The reason
behind the increase is due to increase in trade payable in 2010. The company has substantially
purchased in longer credit term and this contributes the company to assert cash and thus
enhances the credit worthiness of the company. As a way of improvement, Petronas Dagangan
Berhad should purchase stocks in longer credit term as the company able to maintain their cash
and this is considerably affect the cash flow of the company.

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4.3 Inventory Turnover

Days sales of inventory is a financial measure of a company's operation that devotes investors a
thought of how long it takes a company to turn its inventory including goods that are work in
progress, if applicable into sales. Generally, the shorter the days sales of inventory the better it is.
Based on the calculation done, the days sales of inventory in year 2008 is longer by 19 days
compared to year 2007 which is only 10days. The reason for increase in day’s sales of inventory
is because some of the stocks might be obsolete. However the difference is not that significant.
Furthermore, the days’ sales of inventory has decreased exceptionally in year 2009 with only 7
days and later on increase again in year 2010 and 2011 with 15 and 14 days respectively. The
reason of the decreased days’ sales of inventory is because of the vigorous demand in sales. In
year 2009 achieved the most top sales compared to the other four year which is RM
24,351,105,000. This shows the company is probably using Just in Time (JIT) method in order to
avoid stock obsolesces. JIT is an inventory strategy which employs to increase efficiency and
decrease waste by receiving goods only as they needed in the production process, thereby
reducing inventory costs. As a matter of improvement, Petronas Dagangan Berhad should focus
on purchasing only stocks that able to sell consistently. In addition, a few stocks take a long
duration to sell, so the slow moving stocks can drag down the company’s overall inventory
turnover.

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5.0 Profitability Ratio

5.1 Gross Profit Margin

Gross profit margin reflects the firm’s basic pricing decisions and its material costs. The greater
the margin and the more stable the margin over time, the greater the company’s expected
profitability.[ http://www.ccdconsultants.com] According to the calculation done, the gross profit
margin decreases tremendously from 8.8% to 7.0% in year 2007 to 2009. The reason for getting
a bad result is because the cost of sale has increase and shows the company is unable to control
its production costs. If compared 2007 and 2009, the cost of sale has increased from RM
17,787,386,000 to RM 22,654,617,000. Furthermore, in year 2009 to 2010 the gross profit
margin has increased dramatically from 7% to 9.6%. This is because the cost of sale in year 2010
has decreased by RM18, 707,642,000 compare to year 2009 by RM 22,654,617. Moreover the
gross profit has increased from RM 1,713,005,000 RM 1,979,400,000 in year 2009 to 2010. In
this case, it indicates the low cost of sales of the company to maximizing the gross profit. The
company might get crude at far lower costs than its competitors; it has a distinct advantage and
will result in more return flowing to the shareholders. To improve the gross margin, the company
should increase prices, but the company may also try reducing the amount paid for the goods
sold as well. This may require negotiating with the company’s suppliers for better deals.

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5.2 Net Profit Margin

Net profit margin is an indicator of how efficient a company is and how well it controls its costs.
The higher the margin is, the more effective the company is in converting its revenue into actual
profit.[ http://www.ccdconsultants.com]. According to the calculation done, the net profit margin
has decreased for three consecutive years starting from year 2007 , 2008 to 2009 which has
decreased from 3.3% to 3.0% and then to 2.4%. In short, his is mainly due to the cost of sale has
increased from RM17,787,386,000 in year 2007 to RM22,654,617,000 in year 2009. The
increase in cost of sales is because the company did not buy the stocks or inventories in a bulk
and this will absolutely increase the cost of the stocks as the company might miss out the
discount terms for those stocks purchased. In contrast, the net profit margin has increased from
the year 2009 to 2011 which is from 2.4% to 3.8%. This is due to the slight decrease of cost of
sale from the year 2009 to 2011 in which the amount has decreased from RM22, 654,617,000 to
RM21, 166,944,000. This shows a little improvement of the company in consuming the
inventories as the difference between amount of revenue and cost of sales is not significant. In
more depth, the price of oil and gas are subsidies by ruling government. Therefore, the selling
price is cannot be increased according to the company’s want. To improve the ratio can be done
by decreasing material costs or making the oil and gas products more efficiently. Volume
discounts are a good way to lower the material costs. [http://www.river-cities.com/ratios]

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5.3 Return on Asset

Return on asset (ROA) is an indicator of how profitable a company is relative to its total assets.
ROA gives an idea as to how efficient management is at using its assets to generate earnings. In
other word, ROA also assures what earnings were generated from invested assets. ROA for
public companies like Petronas Dagangan Berhad can vary considerably and will be highly
dependent on the industry. Based on the ratio analysis done, the ROA of the company has
decreased slightly from 9.92% to 7.76% in the year 2007 to 2008. Later on, the ROA of the
company also increase slightly from 7.76% to 8.84 in the year 2008 to 2009. In addition, the
ratio has also increased slightly in the year 2010 and 2011 with 16.49% and 18.13% respectively.
Nevertheless, the difference of increase and decrease of ROA is no that significant. Therefore,
the overall ratio analysis shows that the company is efficient in using its assets to generate
earnings. This is proven when there is increase in net profit of the company from the year 2007
to 2011 with RM646, 639 to RM875, 927 respectively.

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5.4 Return on Equity

Return on Equity (ROE) is the amount of net income returned as a percentage of shareholders
equity. Return on equity measures a corporation's profitability by revealing how much profit a
company generates with the money shareholders have invested. Based on the calculation done,
ROE for the year 2008 has decrease by 16.85% compared to year 2007 with ratio of 18.25%. The
ratio has also decreased slightly to 13.81% in the year 2009. The decrease in ROE for year 2009
is mainly due to decrease in net profit for the year which is only RM581, 759. However, the
ROE has increased in the year 2010 and 2011 with 16.49% and 18.13% respectively. The
increase is mainly due to increase in sales and thereafter the profit of the company for the
respective years. This has substantially increased the profit margin of the company and thus it
reflects the increase in ROE for the both years. However, ROE can be improved by increasing
the company’s financial leverage. Financial leverage refers to the amount of obligations a
company holds; as the company raises its debts, the ROE is improved. This is because of the
asset will increase if debts are added. Besides, equity is computed by deducting debts from
assets, thus, the company can decrease its equity by using this leverage. However, increasing
debt can have other opposing effects on the business, such as repayment obligations and fixed
interest, so this must be done providentially.

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5.5 Return on Capital Employed

The return on capital employed (ROCE) ratio, expressed as a percentage, complements the return
on equity (ROE) ratio by adding a company's debt liabilities, or funded debt, to equity to reflect a
company's total "capital employed". This measure narrows the focus to gain a better
understanding of a company's ability to generate returns from its available capital base.
[http://accounting4management]. Based on the calculation done, the ROCE of the company has
decrease slightly from year 2007 to 2008 by 13.86% to 10.55%. The reason of the decrease is
because increase in the company’s debt liabilities especially in trade payable by RM
2,716,861,000 in year 2007 to RM4, 427,969,000. This is because of increase in sales demand of
the company. Subsequently, starting from year 2009 to 2011, the ROCE increased constantly
with difference of 1%. The increase in ROCE is corresponding with the amount of total equity
and total liabilities for the relevant years. In overall ROCE analysis, it shows Petronas Dagangan
Berhad consistent in generate the returns from its available capital base. However, as a way of
improvement the company can increase the ROCE ratio by cutting down the cost so as to
increase the profit margin ratio. The company may also purchase inventories at cheaper cost in
order to generate the return more efficiently.

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6.0 Gearing Ratio

6.1 Debt Ratio

Debt ratio is a ratio that shows what proportion of debt a company has relative to its assets. The
ratio gives an idea to the leverage of the company along with the potential risks the company
faces in terms of its debt-load.[ http://accounting4management] Based on the calculation done,
the debt ratio has increased from year 2007 to year 2008 from 0.46 to 0.54. This reason of this
increase is due to increase in trade payables. However, the debt ratio has decreased in year 2009
by 0.36. The primary reason that that trade payable decrease is because of the company has pay
off the trade payable obligation in short term credit. This is proven when the creditors’ collection
period has decrease from 79days in 2008 to only 35days in year 2007 which is within the 60 days
credit term. In year 2010 and 2011, the debt ratio has slightly increased to 0.42 and 0.43
respectively. This is because of the increase in recurring obligations of the company that spring
up from the purchase of trade products, raw materials and renders used in production and sale of
goods. As an overall debt ratio analysis, the debt ratio below 1 indicates that a company has
more assets than debt. In this case, Petronas Dagangan Berhad has good financial health, thus the
company’s level of risk is low. However, the company can lower their debt ratio by increasing
the asset of the company without taking on any debt to pay for them. This can generate more
cash in the business, more inventories or any fixed assets that does not have to be credited with
addition obligation as equity will be recognized after subtract out liabilities from assets.

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7.0 Conclusion

In nutshell, Petronas Dagangan Berhad is currently performing well in terms of production and
also financial performance. Financial statement analysis has determined the wellness of the
company and makes educated predictions about future appreciation growth. In short, based on
the financial statement analysis, the company’s liquidity ratio, efficiency ratio, profitability ratio
and gearing ratio are favorable to Petronas Dagangan Berhad. Moreover, this gives a positive
view about the company to the current investors and encourages prospective investors to invest
in the company. The favorable results shows that investor will able to make wise investing
decision and maximize their return as well as minimize their exposure to risk. However, the
company should always adopt and implement better production and financial strategies in order
to meet competitive edge in the market.

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8.0 Referencing

About PDB,viewed 28 March 2013,

<http://www.mymesra.com.my/>

Accounting for management, viewed 27 March 2013,

<http://accounting4management.com/>

Bursa Malaysia, viewed 12 March 2013,

<http://www.bursamalaysia.com/market/>

Current ratio Interpretation, viewed 29 March 2013,

<http://www.ccdconsultants.com/documentation/financial-ratios/current-ratio-
interpretation.html>

Financial Statement Analysis, viewed 30 March 2013,

<http://www.creditguru.com/ratios/ratiopg1.htm>

Net Profit Margin, viewed 28 March 2013

<http://www.river-cities.com/ratios>

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