Financial Statement Analysis

You have been recently employed by a local bank as a financial analyst. One of your first job assignments is to analyze the current financial condition of Cemerlang Bhd. You are given the following year 2020 balance sheet and income statement information for both of the companies. In addition, you are told that Cemerlang Bhd has 10,000,000 shares of common stock outstanding, currently trading at RM9 per share, and has made annual purchases of RM210,000,000.

You are required to perform cross-sectional analysis and to prepare analysis reports for the company. The analysis involves calculating certain financial ratios and comparing these calculated ratios with the industry average ratios that are provided. You are also told to base your analysis on five categories of ratios: (a) liquidity ratios, (b) activity ratios, (c) debt ratios, (d) profitability ratios, and (e) market ratios.

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Use the following guidelines to complete this job assignment. First, identify which ratios you need to use to evaluate Cemerlang Bhd in terms of its (a) liquidity position, (b) business activity, (c) debt position, (d) profitability, and (e) market comparability. Next, calculate these ratios. Finally, compare these ratios to the industry average ratios provided in the problem and answer the following questions for the company.

1. Based on the provided industry average information, discuss the firms liquidity position. Discuss specific areas in which the firm compares positively and negatively with the overall industry.

(6 marks)

2. Based on the provided industry average information, what do the firms activity ratios tell you? Discuss specific areas in which the firm compares positively and negatively with the overall industry.

(7 marks)

3. Based on the provided industry average information, discuss the firms debt position. Discuss specific areas in which the firm compares positively and negatively with the overall industry.

(6 marks)

4. Based on the provided industry average information, discuss the firms profitability position. As part of this investigation of firm profitability, include a DuPont analysis. Discuss specific areas in which the firm compares positively and negatively with the overall industry.

(12 marks)

5. Based on the provided industry average information, how is the firm viewed in the marketplace? Discuss specific areas in which the firm compares positively and negatively with the overall industry.

(4 marks)

6. Overall, what are the firms strong and weak points? What would be your final recommendation knowing that your boss will approve new loans only to

companies in a better-than-average financial position (approval or denial of loan)?

Cemerlang Bhd. Balance Sheet (in 000s) As of December 31, 2021 Cash RM 5,000 Accounts receivable 20,000 Inventory 40,000 Total current assets RM 65,000 135,000 Net fixed assets Total assets RM200,000 Cemerlang Bhd. Income Statement (in 000s) For the Year Ended December 31, 2021 Net sales (all credit) Less cost of goods sold Earnings before interest and taxes Less interest Earnings before taxes Less taxes (40%) Net income Accounts payable RM 15,000 Notes payable 20,000 Total current liabilities RM 35,000 Long-term debt 100,000 Stockholders' equity 65,000 Total liabilities and equityRM200,000 RM300,000 _250,000 RM 50,000 40,000 RM 10,000 4,000 RM 6,000 Industry Averages for Key Ratios (Cemerlang Net profit margin Average collection period (365 days) Debt ratio P/E ratio Inventory turnover ratio ROE Average payment period (365 days) Times interest earned ratio Total asset turnover Current ratio Assets-to-equity ratio ROA Quick ratio Fixed asset turnover ratio Bhd.) Year 2021: 6.4% 30 days 50% 23 12.0 18% 20 days 8.5 1.4 1.5 2.0 9% 1.25 1.8 Cemerlang Bhd. Balance Sheet (in 000s) As of December 31, 2021 Cash RM 5,000 Accounts receivable 20,000 Inventory 40,000 Total current assets RM 65,000 135,000 Net fixed assets Total assets RM200,000 Cemerlang Bhd. Income Statement (in 000s) For the Year Ended December 31, 2021 Net sales (all credit) Less cost of goods sold Earnings before interest and taxes Less interest Earnings before taxes Less taxes (40%) Net income Accounts payable RM 15,000 Notes payable 20,000 Total current liabilities RM 35,000 Long-term debt 100,000 Stockholders' equity 65,000 Total liabilities and equityRM200,000 RM300,000 _250,000 RM 50,000 40,000 RM 10,000 4,000 RM 6,000 Industry Averages for Key Ratios (Cemerlang Net profit margin Average collection period (365 days) Debt ratio P/E ratio Inventory turnover ratio ROE Average payment period (365 days) Times interest earned ratio Total asset turnover Current ratio Assets-to-equity ratio ROA Quick ratio Fixed asset turnover ratio Bhd.) Year 2021: 6.4% 30 days 50% 23 12.0 18% 20 days 8.5 1.4 1.5 2.0 9% 1.25 1.8