Liquidity Ratios
Liquidity ratios are an important class of financial metrics used to determine a debtor's ability to
pay off current debt obligations without raising external capital. Liquidity ratios measure a
company's ability to pay debt obligations and its margin of safety through the calculation of metrics
including the current ratio, quick ratio, and cash ratio.
The current ratio measures a company's ability to cover its short-term liabilities with its short-term
assets. Based on its current ratio in 2022, it has RM0.63 of current assets for every Ringgit of
current liabilities, RM0.50 in 2021, and RM0.63 in 2020. Maxis had a significant decline in 2021, as
a result of really high borowings. The company's total borrowing of RM2,034 million comprises
RM262 million from lease liabilities, RM500 million from term loans, and RM1,272 million from
Islamic Medium Term Notes (Sukuk Murabahah). This comprehensive borrowing strategy
encompasses diverse financial instruments to address capital expenditures and working capital
requirements, showcasing the company's deliberate approach to financing its operations.
The quick ratio focuses on the most liquid assets (excluding inventory) to cover short-term
liabilities. The quick ratio in 2020 is the highest where for every Ringgit of current liabilities, Maxis
can only pay of RM0.63 from its current assets, and RM0.50 in 2021, and RM0.62 in 2022. Maxis
experienced a decrease in 2021, for the same reason as mentioned above where Maxis had a very
high borrowing. Inventories do not play a huge role in the tellecommunication industry. For Maxis,
the inventories comprise of tellecommunications materials and supplies, and devices and
equipment.
The cash ratio measures a company's ability to cover short-term liabilities with its available cash.
Maxis had the highest cash ratio in 2021 where RM0.20 of cash covers every Ringgit of current
liabilities, and RM0.16 in 2020, and RM0.14 in 2022. Maxis had RM1,164 million of cash because
Capital Expenditure was decreased and because they focused on working capital initiatives. They
also had prudent cash management measures. As for 2022, Maxis only had RM601 million of cash
because they intensified their investment by investing over RM1.1 billion in capital expenditure.
In summary, Maxis' liquidity is somewhat unfavorable, with current assets insufficient to cover
liabilities, and cash reserves not fully meeting short-term obligations.
Liquidity ratios are a type of financial indicator that assesses a debtor's capacity to repay existing
debt commitments without borrowing external money. Liquidity ratios use parameters such as the
current ratio, quick ratio, and cash ratio to assess a company's capacity to satisfy debt obligations
and margin of safety.
The current ratio assesses a company's capacity to meet its short-term commitments with its shortterm assets. According to its current ratio in 2022, it has RM0.63 of current assets for every Ringgit
of current liabilities, RM0.50 in 2021, and RM0.63 in 2020. Maxis saw a decline in 2021 as a result
of extremely high borowings. The company's entire borrowing of RM2,034 million is made up of
RM262 million in lease obligations, RM500 million in term loans, and RM1,272 million in Islamic
Medium Term Notes (Sukuk Murabahah). This comprehensive borrowing plan includes a variety of
financial instruments to handle capital expenditures and working capital requirements,
demonstrating the company's thoughtful approach to funding its operations.
To cover short-term liabilities, the quick ratio prioritizes the most liquid assets (excluding
inventories). The quick ratio in 2020 is the highest, with Maxis only able to pay RM0.63 from
current assets for every Ringgit of current liabilities, RM0.50 in 2021, and RM0.62 in 2022. Maxis
saw a reduction in 2021 for the same reason as previously mentioned: Maxis had a very large
borrowing. In the telecommunications business, inventories play a minor role. Maxis' inventory
include communications materials and supplies, as well as devices and equipment.
The cash ratio assesses a company's capacity to meet short-term commitments with cash on
hand. Maxis had the greatest cash ratio in 2021 (RM0.20 of cash for every Ringgit of current
liabilities), followed by RM0.16 in 2020 and RM0.14 in 2022. Maxis has RM1,164 million in cash
due to lower capital expenditure and a focus on working capital activities. They also practiced
smart monetary management. Maxis only had RM601 million in cash in 2022 since they increased
their investment by more than RM1.1 billion in capital expenditure.
Overall, Maxis' liquidity is unfavorable with current assets inadequate to pay liabilities and cash
reserves insufficient to satisfy short-term obligations.
Accounts Receivable Turnover evaluates how effectively a firm collects receivables. Maxis had the
largest turnover in 2021, suggesting speedier collection; Maxis collected receivables 17.91 times
on average that year, 12.81 times in 2020, and 16.91 times in 2022. The considerable difference
between 2020 and 2021 is related to a change in trade receivables policy, which increased credit
periods to 120 days in both 2021 and 2022 from 60 days in 2020. The modest decrease in 2022 is
affected by greater trade receivables of RM788 million compared to RM421 million in 2021.
Asset turnover demonstrates how well a corporation uses its assets to produce sales. Maxis
showed a progressive improvement over the course of three years. Maxis has asset turnover ratios
of less than one, which is normal for corporations in the telecommunications sector due to huge
asset bases, and it is predicted that they would progressively turn over their assets through sales.
Maxis' asset turnover was 0.41 in 2020, 0.42 in 2021, and 0.43 in 2022.
The Capital Intensity Ratio calculates the number of assets required to create one unit of income.
Maxis had a declining tendency, with 2.44 in 2020, 2.38 in 2021, and 2.33 in 2022. This suggests
that Maxis has grown more efficient in its asset use. This can be seen in Maxis' investment in
technology, as Maxis has taken considerable strides to invest in IT systems and digitalize our internal
operations, making them more efficient. The introduction of the Maxis Digital Citizen program has
helped to further this goal by creating a digital-first culture among our workers and consumers.
Furthermore, Maxis personnel received 130,000 hours of training to help them grow and develop,
which improved customer service and happiness, technical competency, and labor efficiency.
Fixed Asset Turnover evaluates the effectiveness of fixed assets in producing sales. Maxis' turnover
increased steadily, reaching 0.47 in 2020, 0.48 in 2021, and 0.49 in 2022. This indicates that in 2022,
Maxis produced RM0.49 in net revenue for every Ringgit of fixed assets possessed. This is owing to
Maxis' large investments, as well as the reasons described above under Capital Intensity Ratio.
Leverage Ratios:
1. Total Debt Ratio:
o
2020: 0.69
o
2021: 0.70
o
2022: 0.72
Analysis:
The Total Debt Ratio measures the proportion of a company's assets financed by debt. Maxis
experienced a gradual increase in the total debt ratio over the three years.
Possible Reasons:
Increased borrowing for expansion, acquisitions, or other investment opportunities could contribute
to the rising trend.
Maxis might be using debt as a strategic tool to fund its growth initiatives.
2. Debt to Equity Ratio:
o
2020: 2.27
o
2021: 2.34
o
2022: 2.62
Analysis:
The Debt to Equity Ratio indicates the proportion of a company's financing that comes from debt
relative to equity. Maxis showed an increasing trend, indicating higher reliance on debt.
Possible Reasons:
Strategic decisions to leverage debt for financing business operations or capital projects.
The company might be taking advantage of low-interest rates to fund expansion.
3. Equity Multiplier:
o
2020: 3.27
o
2021: 3.34
o
2022: 3.62
Analysis:
The Equity Multiplier is a measure of financial leverage and represents the amount of assets a
company controls relative to its equity. Maxis demonstrated a consistent increase.
Possible Reasons:
Maxis might be using debt to magnify returns on equity, potentially to fund projects with expected
high returns.
The company could be pursuing an aggressive growth strategy that requires significant capital.
Overall Trends and Possible Effects:
Maxis is increasingly relying on debt financing, as evident from the rising trends in Total Debt
Ratio, Debt to Equity Ratio, and Equity Multiplier.
The company's leverage ratios suggest a deliberate strategy to use debt as a tool for financing
rather than relying solely on equity.
Positive and Negative Effects:
Positive: Debt can be a cost-effective way to fund expansion, and if used judiciously, it can
enhance returns on equity.
Negative: High levels of debt increase financial risk and interest expenses, potentially impacting
profitability.
Underlying Reasons:
Maxis may be pursuing growth opportunities, such as infrastructure investments or technological
advancements, that require substantial capital.
The company might be confident in its ability to generate returns that exceed the cost of debt.
The Total Debt Ratio calculates the percentage of a company's assets that are funded by debt.
Maxis' total debt ratio gradually increased over the course of three years. In 2020, the debt ratio was
0.69, 0.70 in 2021, and 0.72 in 2022. Borrowing for growth, acquisitions, or other investment
possibilities may increase, contributing to the upward trend. For example, the increase in debt ratio
in 2022 is most likely owing to Maxis increasing their capital expenditure by more over RM1.1 billion,
as
previously
noted
in
the
Cash
Ratio
section.
The Debt to Equity Ratio denotes the proportion of a company's funding that comes from debt as
opposed to equity. Maxis exhibited a growing trend, showing a greater reliance on debt, with the
highest being 2.62 in 2022, 2.34 in 2021, and 2.27 in 2020. This is because Maxis continues to
prioritize investments in its operating skills in order to better service consumers, enhance network
coverage
and
quality,
and
create
operating
efficiency
in
the
long
run.
The Equity Multiplier is a financial leverage metric that measures the amount of assets a firm owns
in comparison to its equity. Maxis showed a continuous growth, with the largest increase being 3.62
in 2022, followed by 3.34 in 2021, and 3.27 in 2020. Maxis may use debt to boost returns on shares,
perhaps to fund initiatives with high predicted returns. The organization may be following an
aggressive
expansion
strategy
that
necessitates
substantial
resources.
As seen by rising trends in Total Debt Ratio, Debt to Equity Ratio, and Equity Multiplier, Maxis is
more reliant on debt financing. The leverage ratios of the corporation indicate a purposeful strategy
to use debt as a tool for financing rather than depending entirely on equity. The level of debt that
Maxis is now bearing is not optimal. Investors should consider how a firm may do if it couldn't borrow
as cheaply, because credit markets change over time.
Hayes, A. (2023, December 17). Understanding Liquidity Ratios: Types and their importance.
Investopedia. https://www.investopedia.com/terms/l/liquidityratios.asp
Murphy, C. B. (2023, May 24). Receivables Turnover Ratio defined: Formula, importance,
examples, limitations. Investopedia.
https://www.investopedia.com/terms/r/receivableturnoverratio.asp
Hayes, A. (2023a, December 16). What is the debt ratio? Investopedia.
https://www.investopedia.com/terms/d/debtratio.asp
Hayes, A. (2023a, November 2). Leverage ratio: what it is, what it tells you, how to calculate.
Investopedia. https://www.investopedia.com/terms/l/leverageratio.asp
Team, C. (2023, December 4). Activity ratios. Corporate Finance Institute.
https://corporatefinanceinstitute.com/resources/accounting/activity-ratios/