CHAPTER 2: FINANCIAL RATIO
2.1 INTRODUCTION OF FINANCIAL RATIO
A financial or accounting ratio is a comparative measure derived from a company's
financial statements, such as the balance sheet and income statement. These ratios
are widely used in accounting to evaluate the overall financial health and
interconnections of businesses and other organizations. They also serve as
indicators for predicting future financial variables like corporate failure, credit rating,
and risk assessment. Financial ratios are commonly employed by management,
accountants, analysts, creditors, and both current and potential shareholders of a
company. Various types of financial ratios are utilized in the analyst industry,
including liquidity ratios, activity ratios, leverage ratios, profitability ratios, and market
ratios. Each of these indicators is a valuable tool for assessing a company's
performance at a specific point in time and over a period. While calculating the ratios
is a straightforward arithmetic operation, their interpretation can be more complex.
Specifically, the relationship must be linked to the calculated financial significance.
2.2 LIQUIDITY RATIO
A liquidity ratio is a metric used to assess a company's ability to fulfil its short-term
obligations or repay maturing debts using the cash it currently holds. It helps
determine whether the company needs to secure additional capital to cover its debt
amount. The main objective of liquidity ratios is to evaluate the availability of short-
term assets for meeting short-term obligations. Companies generally aim for higher
liquidity ratios, as they indicate a greater capacity to meet their short-term
obligations.
Under Liquidity Ratio, there are three ratios which is Current Ratio (CR), Quick Ratio
(QR), and Net Working Capital (NWC). Current Ratio measures the ability of a firm to
meet its short-term obligations by comparing its current assets to its current liabilities.
Quick Ratio focuses on the firm’s ability to meet short-term debt obligation without
relying on the sale of inventory and prepaid items. Finally, Net Working Capital
represent the difference between a firm’s current assets and its current liabilities.
2.3 ACTIVITY RATIO
The term "activity ratio" pertains to a financial measure that demonstrates the
efficiency of a company in utilizing the assets listed on its balance sheet to generate
revenue and cash flow. These ratios, also known as efficiency ratios, are employed
by analysts to evaluate a company's management of inventory, which is essential for
operational adaptability and overall financial well-being. Activity ratios are particularly
valuable when comparing two competing businesses within the same industry to
determine how well a specific company performs in relation to its counterparts
Under Activity Ratio, there 5 ratios. The first category is the average collection period
(ACP), which refers to the average duration a company must wait after making credit
sales before receiving cash. The second category is accounts receivable turnover
(ART), which indicates the effectiveness and efficiency with which a company
manages its accounts receivable. Meanwhile, inventory turnover assesses (ITA) how
efficiently a company utilizes its inventory to generate sales. The next category is
fixed asset turnover (FAT), which measures a company's utilization of its plant and
equipment. Lastly, total asset turnover (TAT) gauges a company's effectiveness in
utilizing all its assets.
2.4 LEVERAGE RATIO
The leverage ratio serves as an indicator of a company's effectiveness in making
financing decisions and its inclination to use debt in funding its assets, which in turn
measures its financial risk. This ratio can be employed to assess the combination of
operating expenses within a company and how changes in output will impact
operating incomes. Additionally, it quantifies the extent to which a company relies on
debt to finance its investments and evaluates its ability to fulfill interest payment
obligations. The leverage ratio comprises three key ratios: the debt ratio, which
measures the proportion of funds provided by creditors compared to owner capital;
the debt-to-equity ratio, which gauges the relationship between funds provided by
creditors and owner capital; and the time interest earned ratio, which evaluates the
company's capacity to meet interest payments.
Under Leverage Ratio there are 3 ratios which is Debt Ratio (DR), calculate the
amount needed to be provided by creditors. After that is Debt-to-Equity Ratio (DER),
calculate the company’s financial leverage. Last is Time interest earned (TIE),
calculate the company’s ability in order to meet its interest payments of debt
obligation.
2.5 PROFITABILITY RATIO
The profitability ratio assesses how well a company manages its working capital,
investment choices, financing decisions, and overall profitability. It gauges the impact
of liquidity, asset management, and debt management on the firm's overall
operational outcomes. Additionally, the profitability ratio reflects the company's ability
to achieve its objectives of maximizing owners' wealth, attracting new capital, and
increasing the relative contribution margin from sales. Furthermore, these proportions
assess a company's ability to generate earnings from its activities, assets listed in the
financial statement, or shareholders' equity. They illustrate the efficiency with which a
business generates income and creates value for its shareholders. Ratios that are
higher, indicating a greater ability to convert revenue into profit, are generally more
desirable than those that are lower.
There are six ratios in profitability ratio which are Gross Profit Margin (GPM),
Operating Profit Margin (OPM), Operating Ratio (OR), Net Profit Margin (NPM),
Return on Equity (ROE) and Return on Total Assets (ROA). Higher ratios are more
favorable than lower ratios.
2.5 PROFITABILITY RATIO
A company's financial performance and position in respect to the market are
evaluated and analysed using market ratios, which are numerical measurements.
These ratios shed insight on several aspects of a corporation's operations, finances,
operational effectiveness, and valuation. They are established by contrasting various
financial data points or indications from a corporation's cash flow statement, income
statement, and balance sheet. They also help the company analyse their financial
health, spot trends, and aid investors, analysts, and other stakeholders in making
defensible investment choices.
The market ratio consists of three ratios: Dividend Yield (DY), Book Values per Share
(BVPS), and Price Earnings Ratio (PER). Dividend Yield measures the current return
on investment per share. Book Values per Share indicates the value of equity per
common stock share. Lastly, Price Earnings Ratio reflects investors' preference for
company shares based on available earnings.
CHAPTER 3: FINANCIAL RATIO ANALYSIS
3.1 LIQUIDITY RATIO
3.1.1 Current Ratio = Current Assets / Current Liabilities
Company/Year 2021 2022 Result
Maxis 2,850 / 5,746 2,781 / 4,443 Increase
= 0.50 Times = 0.63 Times
Digi 1,422,614 / 2,932,070 4,054,746 / Decrease
= 0.49 Times 8,357,424
= 0.48 Times
3.2.2 Quick Ratio = (Current Assets - Inventory) / Current Liabilities
Company/Year 2021 2022 Result
Maxis (2,850 - 50) / 5,746 (2,781 - 80) / 4,443 Increase
= 0.49 Times = 0.61 Times
Digi (1,422,614 – 21,780) / (4,054,746 - 33,035) / Increase
2,932,070 8,357,424
= 0.47 Times = 0.48 Times
3.2.3 Net Working Capital = Current Assets - Current Liabilities
Company/Year 2021 2022 Result
Maxis (2,850 - 5,746) (2,781 - 4,443) Decrease
= -RM 2,896 = -RM1662
Digi (1,422,614 - 2,932,070) (4,054,746 - 8,357,424) Decrease
= -RM1,509,456 = -RM4,302,678
Analysis:
snsnsn
3.2 ACTIVITY RATIO
3.2.1 Average Collection Period = Account Receivable/ Net Sales (365)
Company/Year 2021 2022 Result
Maxis 1,068 / 9,241 (360) 1,226 / 9,789 (360) Increase
= 43 Days = 47 Days
Digi 6,330 / 54,506 (360) 6,773 / 79,523 (360) Decrease
= 42 Days = 31 Days
3.2.2 Accounts Receivable Turnover (ARTO) = 365 / Average Collection Period
Company/Year 2021 2022 Result
Maxis 365 / 43 365 / 47 Decrease
= 8.49 Times = 7.77 Times
Digi 365 / 42 365 / 31 Increase
= 8.69 Times = 11.77 Times
3.2.3 Inventory Turnover (ITO) = Net Sales / Inventory
Company/Year 2021 2022 Result
Maxis 9,241 / 50 9,789 / 80 Decrease
= 184.82 Times = 122.36 Times
Digi 6,336 / 21,780 6,773 / 33,035 Decrease
= 0.30 Times = 0.21 Times
3.2.4 Fixed Assets Turnover (FATO) = Net Sales/ Net Fixed Assets
Company/Year 2021 2022 Result
Maxis 9,241 / 19,593 9,789 / 20,264 Increase
= 0.47 Times = 0.48 Times
Digi 6,336 / 6,417 6,773 / 33,484 Decrease
= 0.99 Times = 0.20 Times
3.2.5 Total Asset Turnover (TATO)= Net Sales/Total Assets
Company/Year 2021 2022 Result
Maxis 9,241 / 22,443 9,789 / 23,045 Increase
= 0.41 Times = 0.42 Times
Digi 6,336 / 7,840 6,773 / 37,539 Decrease
= 0.81 Times = 0.18 Times
Analysis:
Snsnsn
3.3 Leverage Ratio
3.3.1 Debt Ratio (DR) = Total Liabilities (TL) / Total Assets (TA)
Company 2021 2022 Result
= 5,746 / 22,443 = 4,443 / 23,045
Maxis Decrease
= 0.26 times = 0.19 times
= 7,207,004 / 7,839,815 = 21,224,800 / 37,539,237
Digi Decrease
= 0.92 times = 0.57 times
3.3.2 Debt-to-Equity Ratio (DER) = Total Liabilities (TL) / Total Equity (TE)
Company 2021 2022 Result
= 5,746 / 6,725 = 4,443 / 6,371
Maxis Decrease
= 0.85 times = 0.70 times
= 7,207,004 / 632,811 = 21,224,800 / 16,314,437
Digi Decrease
= 11.39 times = 1.30 times
3.3.3 Time Interest Earned (TIE) = Earnings Before Interest and Taxes / Interest
Company 2021 2022 Result
= 1,762 / 454 = 1,811 / 630
Maxis Decrease
= 3.88 times = 2.87 times
= 1,729 / 210 = 1,467 / 257
Digi Decrease
= 8.23 times = 5.7 times
Analysis:
Snsnsn
3.4 Profitability Ratio
3.4.1 Gross Profit Margin = Gross Profit / Net Sales
Company 2021 2022 Result
= 2,225 / 9,241 = 2,252 / 9,789
Maxis Decrease
= 24.08 % = 23.01 %
= 3,070 / 6,336 = 3,197/ 6,773
Digi Decrease
= 48.45 % = 47.20 %
3.4.2 Operating Profit Margin = EBIT / Net Sales
Company 2021 2022 Result
= 1,762 / 9,241 = 1,811 / 9,789
Maxis Decrease
= 19.07 % = 18.5 %
= 1,729 / 6,336 = 1,467 / 6,773
Digi Decrease
= 27.29 % = 21.66 %
3.4.3 Operating Ratio = Total Operating Expenses / Net Sales
Company 2021 2022 Result
= 3938 / 9,241 = 4265 / 9,789
Maxis Increase
= 42.94 % = 43.57 %
= 834 / 6,336 = 906 / 6,773
Digi Increase
= 13.16 % = 13.38 %
3.4.4 Net Profit Margin = EAT / Net Sales
Company 2021 2022 Result
= 1,308 / 9,241 = 1,181 / 9,789
Maxis Decrease
= 14.15 % = 12.06 %
= 1,162 / 6,336 = 764 / 6,773
Digi Decrease
= 18.34 % = 11.28 %
3.4.5 Return on Common Equity = EAT / Net Worth
Company 2021 2022 Result
= 1,308 / 16,697 = 1,181/ 18,602
Maxis Decrease
= 7.83 % = 6.35 %
= 1,162,000 / 632,811 = 764,000 / 16,314,437
Digi Decrease
= 183.63 % = 4.68 %
3.4.5 Return on Total Assets = EAT / Total Assets
Company 2021 2022 Result
= 1,308/ 22,443,000 = 1,181/ 23,045
Maxis Decrease
= 5.83 % = 5.12 %
= 1,162,000 / 7,839,815 = 764,000 / 37,539,237
Digi Decrease
= 14.82 % = 2.04 %
Analysis:
Snsnsn
3.5 Market Ratio
3.5.1 Earning Per Share (EPS) = (NI- PS Dividend) / # of Common Shares
Outstanding
Company 2021 2022 Result
= (1,308 – 15) / 7,826 = (1,182 –15) / 7,830
Maxis Decrease
= RM 0.17 = RM 0.15
= (1,162,105 – 0) /7,775,000 = (763,497 – 0) / 8,121,872
Digi Decrease
= RM 0.15 = RM 0.094
3.5.2 Dividend Per Share (DPS) = Cash Dividend to Common Stockholders / #
of Common Shares Outstanding
Company 2021 2022 Result
= 1,330 / 7,826 = 1,566 / 7,830
Maxis Increase
= RM 0.17 = RM 0.20
= 1,135,150 / 7,775,000 = 1,010,750 / 8,121,872
Digi Decrease
= RM 0.15 = RM 0.12
3.5.3 Dividend Payout Ratio (DPR) = Cash Dividend to Common
Stockholders / (Net Income - Preferred Dividends)
Company 2021 2022 Result
= 1,330 / (1,308 – 391) = 1,566 / (1,182 – 391)
Maxis Increase
= 1.45 % = 1.98 %
= 1,135,150 / (1,162,105 - = 1,010,750 / (763,497 -
Digi 303,225) 363,677) Increase
= 1.32 % = 2.53 %
3.5.4 Dividend Yield (DY) = Dividends Per Share / Market Price of a Share
Company 2021 2022 Result
= 0.17 / 4.84 = 0.20 / 3.84
Maxis Increase
= 3.51 % = 5.2 %
= 0.15 / 3.98 = 0.12 / 3.95
Digi Decrease
= 3.77 % = 3.04 %
3.5.5 Book Values Per Share (BVPS) = Tangible Net Worth / # of Common
Shares Outstanding
Company 2021 2022 Result
= 5,223,000 / 7,826,000 = 7,095,000 / 7,830,000
Maxis Increase
= RM 0.67 = RM 0.91
= 384,811 / 7,775,000 = -2,380,563 / 8,121,872
Digi Decrease
= RM 0.05 = - RM 0.29
3.5.6 Price Earnings Ratio (PER) = Market Price Per Shares / Earnings Per
Share
Company 2021 2022 Result
= 4.84 / 0.17 = 3.84 / 0.15
Maxis Decrease
= 28.5 times = 25.6 times
= 3.98 / 0.15 = 3.95 / 0.094
Digi Increase
= 26.53 times = 42.02 times
Analysis:
Snsnsn
CHAPTER 4: CONCLUSION AND RECOMMENDATION
4.1 CONCLUSION
Liquidity Ratio
For Liquidity Ratio, MAXIS has better performance in 2022 compared to 2021. Both its
current ratio and quick ratio is higher in 2022 than 2021. It means that MAXIS can pay off its
short-term debts as they become due. But DIGI performance in 2022 is bad compared to
2021 because both the Current Ratio and Net Working Capital decrease while Quick Ratio
increase. MAXIS has shown better performance as higher liquidity ratio is more preferred by
firm because it has higher ability to meet short-term obligations. This means that MAXIS is
better than DIGI in paying off its short-term debts as they become due.
Activity Ratio
As for Activity Ratio, Both MAXIS and DIGI show bad performances in 2022 compared to
2021. MAXIS Average Collection Period increase, and Account Receivable Turnover,
Inventory Turnover decrease. While DIGI Average Collection Period decrease, their
Inventory Turnover, Fixed Assets Turnover, and Total Asset Turnover also decrease. While
DIGI has shorter debt collection period both companies still is not efficient in handling firm’s
operations. This means that both DIGI and MAXIS are not efficient in leveraging the assets
on its balance sheet to generate revenues and cash.
Leverage Ratio
As for Leverage Ratio, Both MAXIS and DIGI show good performances in 2022 compared to
2021 because both their Debt Ratio and Debt to Equity Ratio decrease. This means that
both companies are efficient in measuring the extent to which the firm uses debt to finance
their investment. And While their Time Interest Earned decrease both companies still have
the ability to meet its financial obligations.
Profitability Ratio
For Profitability Ratio, Both MAXIS and DIGI show bad performances in 2022 compared to
2021 because their Gross Profit Margin, Operating Profit Margin, Net Profit Margin, Return
on Common Equity, and Return on Total Asset decrease. While only their Operating Ratio
increase. This means that these two companies do not have the ability to satisfy the firm’s
goal to maximize the owner wealth to attract new capital.
Market Ratio
For Market Ratio MAXIS show good performance in 2022 compared to 2021. Its Dividend
per Share, Dividend Payout Ratio, Dividend Yield, and Book Values Per Share increase.
While DIGI shows bad performances in 2022 compared to 2021 because the company
Earning Per Share, Dividend Per Share, Dividend Yield, and Book Values Per Share
decrease. This means that MAXIS is better than DIGI in tracking their financial performance
to understand the position of their company.
In conclusion, even if the financial ratios performances in the year 2021 is better than the
year 2022 for both companies still able to make improvement in their financial ratios. Overall,
I MAXIS has better performances than DIGI in the year 2022 because MAXIS show better
performance in their Liquidity and Market ratio, as they have higher liquidity to meets their
short-term obligations and they also can track their financial performances better to
understand their company position in stock market.
4.2 RECOMMENDATION
Even though both MAXIS and DIGI are well known companies, both of their financial ratios
show bad performance in the year 2022 compared to in 2021. So, both companies need to
change their strategies on how they run their business, to improve the financial performance
and efficiency of their company. Here is few suggestions and recommendation on how they
can achieve this:
First, both MAXIS and DIGI can Increase the profitability by improving their marketing and
sales efforts, expanding into new markets, or introducing new products and services. Both
companies can also reduce expenses by optimizing operations, cutting unnecessary
expense, or negotiating better supplier contracts. Both companies need to do these steps so
that they can continue to grow and compete within their industries.
Furthermore, they can improve on managing liquidity and working capital by monitor and
manage their inventory levels effectively to avoid excess or shortage. Then, optimize
accounts payable and receivables processes for better cash flow management. Also, they
can implement efficient cash management techniques, such as short-term investments or
accessing credit facilities when needed.
After that, both MAXIS and DIGI need to be able to reduce their debt and improve solvency,
so that they can meets their financial obligations. To do that, they need pay off high-interest
debt or refinance loans at lower interest rates. This is because the higher the interest rate,
the higher the amount of money they need to pay to clear the debt. So, these companies
need to negotiate better terms with creditors to improve repayment conditions. They can also
improve solvency by strengthen the balance sheet by increasing equity through additional
investments or issuing new shares. This can lead to them to find new revenue stream and
increase their profits in order to pay for their debt.
