SUGGESTED SOLUTION FAR670 JULY 2020

QUESTION 1

A. KREETAX BHD

2019 2018
RM'000' % RM'000' %
Net revenues 40,386 100 41,932 100
Cost of sales 25,786 63.8 28,088 67.0
Gross profit 14,600 36.2 13,844 33.0
Marketing, administration 9,044 22.0 8,862 21
and research costs
Asset impairment and exit - 1,024 2.4
costs
(Gains)/ losses on disposal 6 0.0 92 0.2
of business unit
Amortisation of intangibles 26 0.1 23 0.1
Operating income 5,524 14.1 3,843 9.2
Interest and other expenses 1,237 3.1 1,240 3.0
Earnings from continuing 4,287 10.6 2,603 6.2
operations before tax

2019 2018
GPM 36.2% 33%
OPM 14.1% 9.2%
EBT 10.6% 6.2%

Based on the ratios calculated above, it shows that the company operating profit
margin increasedfrom 9.2% in 2018 to 14.1% in 2019. The significant increase in
profitability in 2019 was not driven by an increase in revenues and in fact, net
revenues were lowerthan 2018. Instead the company's improved profitability in 2009
was driven primarily by its higher gross profit margin (or lower COS) that increased
from 33% in 2018 to 36.2%in 2019. Another driver of the company's improved
profitability in 2019 was a lower amount or no asset impairment and exit costs.

(12 marks)

B.

Net profit margin = Net income

Net Sales

2019 2018
=RM280,000/ RM3,500,000 =RM249,000/RM4,150,000

=8% = 6%

1
 Total assets turnover= Net income
Average total assets

2019 2018
=RM280,000/ RM1,000,000 =RM249,000/ RM1,200,000
= 3.5 times = 3.46 times

ROA = Net profit margin x Total asset turnover

2019 2018
=8% x 3.5 =6% x3.46
=28% = 20.76%

Based on the DuPont analysis, the result shows that a significant increase in
ROAfrom 20.76% to 28% in 2019 is due to the increases in NPM that
increased from 6% to 8% in 2019. Total assets turnover remained almost the
same for both years.
(10 marks)
(Total: 22 marks)
QUESTION 2

i. The ratios present a contradictory picture of the company's liquidity. Based

on the increase in its current ratio from 1.6 to 2.1, the company appears to
have strong and improving liquidity. However, based on the decline of the
quick ratio from 1.0 to 0.8, its liquidity appears to be deteriorating. Because
both ratios have exactly the same denominator, current liabilities, the
difference must be the result of changes in some asset that is included in the
current ratio but not in the quick ratio (e.g.inventory).
(10 marks)

ii. The company says sales in inventory has deteriorated from 30 days to 55
days, meaning that the company is holding increasingly larger amounts of
inventory relative to sales. The decrease in days sales in receivables implies
that the company is collecting receivables faster. If the proceeds from the
collections were held as cash, there would be no effect on either the current
or quick ratio. However if the proceeds from the collections were used to
purchased inventory, there would be no effect on the current ratio and a
decline in the quick ratio as shown in this company. Collectively, the ratios
suggest that liquidity is declining. The lower quick ratio in 2019 which is on
contradiction to an increase in current ratio is explained by the higher days
sales in inventorywhich indicates that company may have an inventory
problem.
(14 marks)
2
B. TWO situations are:

i. When during the year the company declares a convertible bond / convertible
preferred stock issue into shares of new common stock
ii. When certain stock options or warrants are exercised
iii. When company declares a stock dividend.
(4 marks)
(Total: 28 marks)

QUESTION 3

In evaluating the solvency position, students need to calculate the following ratios:

i. debt ratio = total debt/ total assets

ii. debt to equity ratio = total debt / shareholders equity
iii. TIE = EBIT / interest

Nidia Bhd Win Bhd

(RM ‘000) (RM ‘000)
2019 2018 2019 2018
Short-term borrowings 14,280 7,140 1,639 2,831
Current portion of long-term interest- 3,140 1,730 3,903 3,068
bearing debt
Long-term interest-bearing debt 26,910 2,030 25,026 21,320
Total shareholders’ equity 142,080 147,730 140,823 134,112
Total assets 395,820 375,990 285,684 245,117
EBIT 19,660 12,350 16,252 30,646
Interest payments 14,200 5,800 1,689 1,513

Nidia Bhd Win Bhd

2019 2018 2019 2018

Debt ratio 44330/395,820 10900/375990 30568/285684 27219/245117
=11.2% =2.9% =10.7% =11.1%
Debt to equity 44330/142,080 10900/147730 30568/140823 27219/134112
= 31.2% =7.4% =21.7% =20.3%

a. Nidia’s leverage ratios (debt and debt to equity ratios) all increased significantly
in 2019 (refer % in table). Nidia’s debt ratio increased from 2.9% to 11.2% and
its debt/equity ratio increased from 7.4% in 2018 to 31.3% in 2019. On the
other hand, Win’s leverage ratios appear fairly similar for 2018 and 2019. Debt
ratio in fact, dropped slightlyin 2019 from 11.1% to 10.7% and its debt/equity
ratio only increased slightly from 20.3% to 21.7%. In 2018 all two Nidia’s
leverage ratios were significantly lower than Win Bhd. However, In 2019, the
opposite was true where both ratios are higher than Win Bhd. Win’s capital

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 structure seems fairly constant over the 2 years, whereas Nidia's capital
structure has shifted toward more debt. The increased in both leverage ratios
suggesting weakening solvency for Nidia's.

(20 marks)

b. Comparing year-to-year, we observe that leverage ratios of Nidia Bhd

increased because of significant increase in all types of borrowings. Short term
borrowings and current portion of long-term interest borrowings doubledthe
amount of 2018 in 2019. In 2019, the long-term interest bearing debt is 13
times more than the amount in 2018 or an increase of about 1225.6% from
2018. The increased in debt is without a similar increase in total assetsand
shareholders’ equity. Total assets increased by about 5.3% in comparison to a
very large increase of 1225.6% in total debt. For debt/equity ratio, the increased
in total debt is not supported by the increased in equity and in fact the equity
decreased √from RM 147,730 to RM 142080 in 2019.

(12 marks)

Nidia Bhd Win Bhd

2019 2018 2019 2018
TIE 19660/14,200 12350/580 16252/1689 30646/1513
=1.38X =21.3X =9.6X =20.3X

c. The ability to carry debts is evaluated based on TIE ratio. The results of TIE
show that both companies interest coverage ratio (TIE) decreased from 2018 to
2019. The decreased is mainly due to the decreased in EBITand an increased
in interest payment. Win’s TIE dropped from 20.3x to 9.6x in 2019 due to a
significant decrease in EBITfrom 30,646 to rm16,252. the interest for 2019 only
increase slightly from 1513 to 1689. However, the TIE for Win Bhd is still high
in 2019.

For NidiaBhd, the TIE has dropped significantly from 21.3x to only 1.3x in 2019.
The small TIE in 2019 is mainly due to a very large increase in long term
interest bearing debt in 2019 (1225.6%) not supported by the same increase in
EBIT. In general for the year 2019, Nidia’s ability to cover interest payments is
weaker than Win Bhd.

(18 marks)

(Total: 50 marks)