Academica Science Journal
Economica Series
No. 1 (1) – 2012
ISSN: 2285 - 8067
AN EMPIRICAL STUDY OF FINANCIAL PERFORMANCE
EVALUATION OF A MALAYSIAN MANUFACTURING COMPANY
Maryam MOHAMMADI,
Universiti Teknologi Malaysia, 81310 Skudai, Johor Bahru, Malaysia.
Afagh MALEK,
Universiti Teknologi Malaysia, 81310 Skudai, Johor Bahru, Malaysia.
Abstract: Accounting principles are useful tools in executing and improving a successful
practice management plan. In today’s competitive environment, evaluating the financial
performance is crucial for companies in manufacturing sector. The analysis of financial
performance reflects the financial position of the company, the level of the
competitiveness in the same sector, and a thorough knowledge about the cost and profit
centres within the firm. Managers, investors, and creditors can then apply this accounting
information provided by financial analysis in their strategic planning and investment
decisions. This study investigates the financial performance of an investment company in
Malaysia for a three-year period from 2009 to 2011, which is assessed using financial
ratios. The findings pointed out that overall company performance reduced remarkably in
the last year of the analysis. This study principally emphasizes on how accounting
information aids budgetary decision-makers to evaluate the company financial
performance, determine its future obligations, and make better investment decisions.
Keywords: Financial performance analysis, financial ratio, balance sheets, income
statements.
INTRODUCTION
The rising intensity of worldwide business competition has led corporations to use different types of
performance assessment tools for evaluating their financial situation. Generally, performance evaluation of
the firms is conducted within the context of financial analysis. As the financial performance has a broad
concept, including economic growth, return, and productivity, using the financial ratios in the performance
assessment can be appropriate for companies and their counterparts [1].
The basic accounting information derived from financial reports does not indicate whether gained profit is
sufficient or not; or are assets being used proficiently? Is the overall productivity efficient? Do the financial
problems exist within the business? To answer such questions, ratio analysis can be performed in which
required data are extracted from income statements and balance sheets [2].
For several years, numerous studies in the literatures have revealed the benefits of the financial ratios [3].
Rees [4] stated that financial ratio analysis responses to the amounts of information held in the set of
financial statements and the problem of comparison between firms with different sizes. Using them, both
analysts and investors would be able to summarize and analyze related quantitative information to obtain
momentous data for appraising the firm’s operation, investigating its situation in the sector, and making
financial decisions [5].
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Academica Science Journal
Economica Series
No. 1 (1) – 2012
ISSN: 2285 - 8067
The strong and weak points of firms regarding liquidity, growth, and profitability can be revealed using
financial ratios [1]. Therefore, it implies whether the firm is operating properly or corrective action is required.
Moreover, ratios make it possible to audit, estimate the bankruptcy, rank the company, approve a loan,
determine the company value, issue the stocks, rate the bond, proceed with acquisitions and mergers, and
stop firm operations in a territory [6-8]. Martikainen, Perttunen, Yli-Olli and Gunasekaran [7] and
Emrouznejad et al. [9] declared that ratio analysis is done through a comparison of the behaviour of a ratio
with some criteria expressing the general success of the economy or industry, and it can also be conducted
with other businesses operating in the same sector.
Numerous empirical studies were conducted to create classification patterns of financial ratios. The principal
objective in these investigations was to state the maximum amounts of data in the initial financial ratios by a
diminished set of factors [10-18].
According to Whittington [19] there are mainly two usages of financial ratios: normative and positive. When
company ratios are compared with some standard values such as mean, the utilization is normative [20]. The
positive application of financial ratios is for forecasting purpose. The practice is prevalent among those
looking for business failure prediction [21-24]. However, efforts to assess the likelihood of the failure instead
of classifications have generally been speculated to generate unsatisfactory results [25].
Beaver [26] stated that forecasting the companies’ performance affects the speed of making capital market
investments decisions. It is noticeable that a country’s economy condition depends on the speed of these
decisions making; hence, the faster these are made, the faster the economy would improve.
Similarly, this study evaluates a company performance, including credit quality, profitability, and liquidity from
2009 to 2011 using financial ratio analysis, which enable the analyst and financial manager to recognize the
company’s strengths and weaknesses.
1. METHODOLOGY
This study utilized the quantitative research methodology. In order to investigate the financial performance,
accounting information were derived from annual reports of the KNM Group Berhad for three consecutive
years. KNM Group is an investment holding company that designs, produces, assembles, and commissions
processing units and equipments for oil and gas, petrochemical, and mineral processing industries through
its group companies. It is composed of two main sections; Group and Company.
Initially, horizontal and vertical analysis for balance sheets and income statements were conducted.
Thereafter, to assess the relationships between various data on balance sheets and income statements,
financial ratios were measured and evaluated for the studied period.
Raw data were analyzed using Microsoft Excel 2010 software. Results are stated through frequency counts
and other descriptive statistics.
2. DATA COLLECTION AND ANALYSIS
This part reveals some important data stemmed from balance sheets and income statements in years of
2009, 2010 and 2011. Different ratios were also calculated and analyzed; so that the financial manager will
be aware of its current financial performance and can then compare it with other industries in the same
sector.
2.1. BALANCE SHEET ANALYSIS
2.1.1 Horizontal analysis of balance sheets for years of 2009, 2010 and 2011
This section shows the major accounting data in balance sheets, and compares the amount of changes
during the three-year period using horizontal analysis for both Group and Company.
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Academica Science Journal
No. 1 (1) – 2012
Economica Series
ISSN: 2285 - 8067
Table 1: Horizontal analysis of balance sheets in 2009, 2010 and 2011
Balance Sheets
2009
2010
2011
Group
Company
Group
Company
Group
Company
Total non-current assets
15.26%
5%
383.05%
337.92%
4.57%
21.19%
Total current assets
29.51%
96.56%
161.96%
29194.97%
-22.6%
219.09%
Total assets
23.04%
1.47%
256.01%
371.93%
-6.94%
35.67%
Total equity
37.19%
35.08%
227.55%
372.72%
10.53%
-3.57%
Total non-current liabilities
3.46%
-*
426.26%
-
27.31%
-
Total current liabilities
16.42%
98.17%
234.47%
199%
-37.9%
4610.34%
Total liabilities
13.65%
98.17%
278.79%
199%
-19%
13628.05%
Total equity and liabilities
23.04%
1.47%
256.01%
371.93%
-6.94%
35.67%
* Data missing at the time of data collection
As it can be seen from Table 1, in the year 2011 the amount of total noncurrent assets was decreased for the
Group due to the decline in amount of intangible assets and investments. Decrease in receivables also
resulted in falling current assets; therefore, total current assets went down remarkably. Moreover, the
amount of payables and loans fell during 2011, in which it brought about the reduction in liabilities.
Meanwhile, Group paid most of its debts with its cash in 2011.
Shown data in above table states year of 2011 has not operated as good as two other years for the
Company as well. Total liabilities grew noticeably, and total assets decreased during 2011, which does not
lead to a good output. Because, the Company had paid its debts by assets, and investments were set by
borrowing money from banks and creditors by the year 2011.
2.1.2 Vertical analysis of balance sheets for years of 2009, 2010 and 2011
This part indicates changes in principal data in the balance sheets during the studied period using vertical
analysis for both Group and Company.
Table 2: Vertical analysis of balance sheets in 2009, 2010 and 2011
Balance Sheets
2009
2010
2011
Group
Company
Group
Company
Group
Company
Total non-current assets
42.54%
99.88%
57.72%
92.68%
64.86%
82.79%
Total current assets
57.46%
0.12%
42.28%
7.32%
35.14%
17.21%
Total assets
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
Total equity
44.46%
99.55%
40.91%
99.71%
48.59%
70.87%
Total non-current liabilities
10.81%
-
17.07%
-
23.35%
19.13%
Total current liabilities
44.73%
0.45%
42.02%
0.29%
28.06%
9.99%
Total liabilities
55.54%
0.45%
59.09%
0.29%
51.41%
29.13%
Total equity and liabilities
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
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Copyright  2012 Academica Science Journal. All rights reserved.
Academica Science Journal
No. 1 (1) – 2012
Economica Series
ISSN: 2285 - 8067
Based on Table 2, it can be interpreted that total liabilities for the Group increased from 2009 to 2010 but fell
in 2011 due to the decrease in amount of payables and loans. However, the Company had a smaller amount
of assets in contrast to the Group during three years. The assets for the Company were mostly belonged to
the noncurrent assets during the period.
2.2. INCOME STATEMENT ANALYSIS
2.2.1 Horizontal analysis of income statements for years of 2009, 2010 and 2011
This section highlightes the important information in income statements, and evaluates changes during the
three-year period using horizontal analysis for both Group and Company.
Table 3: Horizontal analysis of income statements in 2009, 2010 and 2011
Income Statements
2009
2010
2011
Group
Company
Group
Company
Group
Company
Revenue
35.33%
238.45%
105.57%
-26.36%
-27.25%
-93.28%
Cost of sales
27.90%
-
99.88%
-
-22.34%
-
Gross profit
62.31%
238.45%
121.86%
-26.36%
-39.94%
-93.28%
Results from operating activities
44.10%
279.98%
127.37%
-31.23%
-60.10%
-98.08%
Profit before tax
45.96%
283.51%
110.68%
-29.85%
-69.56%
-94.59%
Profit for the year
34.94%
245.39%
80.31%
-15.67%
-23.31%
-96.19%
Table 3 illustrates profit for the Group was risen considerably from 2009 to 2010, but diminished in 2011. As
a matter of fact, revenue, gross profit and net profit were grown in 2009 and 2010 but declined significantly
during 2011. The main reason was on account of the decrease in sales in 2011, so it affected the revenue
and profit.
Amounts of revenue, gross profit and net profit for the Company were different by far from the Group.
Revenue was lessened immensely for both years 2010 and 2011, because Company had a low level of sale
during these two years.
2.2.2. Vertical analysis of income statements for years of 2009, 2010 and 2011
This part demonstrates vertical analysis of data in income statements for both Group and Company.
Table 4: Vertical analysis of income statements in 2009, 2010 and 2011
Income Statements
2009
2010
2011
Group
Company
Group
Company
Group
Company
Revenue
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
Cost of sales
-74.12%
-
-72.07%
-
-76.94%
-
Gross profit
25.88%
-
27.93%
-
23.06%
-
Results from operating activities
18.20%
96.50%
20.23%
90.12%
11.09%
28.81%
Profit before tax
17.51%
96.50%
17.94%
91.94%
7.51%
74.02%
Profit for the year
15.16%
78.52%
13.30%
90.15%
14.02%
51.06%
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Copyright  2012 Academica Science Journal. All rights reserved.
Academica Science Journal
No. 1 (1) – 2012
Economica Series
ISSN: 2285 - 8067
Table 4 shows in the year of 2009, the Group was allocated the largest amount of net profit by 15.16 percent
growth in regard to the previous year; however, the highest profit was assigned to the Company in 2010 with
90.15 percent growth.
2.3. RATIO ANALYSIS
This section summarizes the results of ratio analysis for both Group and Company, which are used to assess
company performance.
Table 5: Summary of ratio analysis
Ratio
2009
2010
2011
Group
Company
Group
Company
Group
Company
Current Ratio
1.28
0.26
1.01
25.42
1.25
1.72
Acid Test Ratio
1.17
0.26
0.95
25.42
1.15
1.72
Inventory Turnover
20.97
-
0.15
-
0.12
-
Account Receivable
2.49
2495.95
2.81
1.76
1.82
0.04
Days' Sales in Average Accounts Receivable
146
0.14
130
207
201
9683
Debt Ratio
0.555
0.005
0.591
0.003
0.514
0.291
Times-Interest-Earned Ratio
27.13
187.68
9.53
-
3.32
0.05
Rate on Return on Net Sales
0.15
0.79
0.13
0.90
0.14
0.51
Rate of Return on Total Assets
0.172
0.292
0.137
0.085
0.074
0.018
Rate of Return on Ordinary Shareholders'
Equity
0.39
0.33
0.28
0.09
0.135
0.002
According to liquidity ratios, the Group in 2009 had a stronger financial position and quite sufficient liquid
assets to maintain business operations. Group could pay its current liabilities with its current assets during
the period. However, Company was more capable of paying its current liabilities with its current assets in
2010. But in 2009, it did not have enough liquid assets to maintain operations.
During 2010 and 2011, the Group was not able to return on its investments in inventories quickly. However, it
had the most ability to collect cash from credit customers in 2010. Nevertheless, all three years had a similar
rate but not very remarkable due to the small amount of rates, and Group could convert average receivables
into cash about two times during these years. Adversely, Company had a very big amount in 2009, which is
not satisfactory because it shows credit is too high. However, this amount is very low in 2010 and 2011,
which means the Company was not able to collect cash from credit customers quickly.
Large amounts in “days' sales in average accounts receivable” ratio states the Group was not very
successful at converting receivables into cash because it took a long time in all three years. By the year
2010, the Company could collect cash in 207 days that is not good as well. But a noticeable point is the
Company could change account receivables into cash in almost one day in 2009. The reason for this rapid
alteration was because of the amount of sale in which was enormously higher than the amount of net
account receivables during 2009.
The acceptable rates of the debt ratio for Group show that it utilized debts to invest in assets effectively, and
creditors were not worried to receive their loans in a long period. Company had also a low-risk debt in all the
three years.
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ISSN: 2285 - 8067
The “times-interest-earned” ratio for both Group and Company indicates in 2009 profit from operations could
cover interest expenses, and they had more abilities to pay interest than the other two years.
The amount of “return on net sales” ratio reveals Group had reasonable sales dollars earned as net profit in
these three years. However, in 2009, it had more sales dollars that were providing profit to the business, and
fewer sales dollars were absorbed by expenses. Company also earned profit by sales dollars in the threeyear period.
Both Group and Company were also able to earn profit from assets, and response to creditors and
shareholders, according to their acceptable rate of return on total assets. However, it was more significant in
2009, and the return on investments for creditors and shareholders was improved in that year.
The rate of return on ordinary shareholders for the Group gradually fell from 2009 to 2011. The Company
had an acceptable ratio in earning profit from each dollar invested by ordinary shareholders in 2009. In
contrary, it was not capable of converting invested dollars to profit during 2010 and 2011.
CONCLUSIONS
In this study, the performance of a manufacturing company was measured over the three-year period from
2009 to 2011. According to resultant assessments, it can be interpreted that during year 2011, company did
not operate well, and overall firm’s performance in terms of profitability, liquidity, and credit quality declined
due to deterioration in the company’s operating environment.
Revenue and Net Profit for the year 2011 reduced remarkably, mostly because of decrease in sales and
order intakes. Generally, in 2011, KNM Group Berhad had low and insufficient sales due to the global
financial crisis, a slowing economy, and oil price fluctuations in the world. Therefore, shareholders have not
received satisfactory dividends in 2011 compared to years 2009 and 2010. It induced financial market
participants to be extremely risk averse, and creditors may be worried about their loans that Group may not
be able to pay its debts duly. Directors should consider the circumstances of the Group in 2011, and find the
reasons of decline in sales.
BIODATA
- Maryam MOHAMMADI received Bachlor’s degree in Industrial Engineering – system planning and analysis
in 2009, and Master’s degree in Industrial Engineering from Universiti Teknologi Malaysia in 2012. Her
research interests are finance, supply chain managment, modeling in stochastic environments, and
optimization for manufacuring systems.
- Afagh MALEK received Master’s degree and Bachelor’s degree in the field of Industrial Engineering. She
has worked as an expert of quality management systems , expert of marketing and market research and
expert of enviromental management systems in dominant companies of Iran. Her research interests are
supply chain management, performance measurement and finance.
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