Task 3: CLO1

OBJECTIVE:

To enable learners to utilise financial ratios as a mechanism to evaluate a firm's financial performance and identify areas for making decisions for improvement

REQUIREMENT: Financial Statement Analysis

Question

Refer to the following financial statements of Merdu Sdn. Bhd. for 2020 and 2019:

Merdu Sdn. Bhd. balance Sheets

31 December (in millions)

2020 2019

Assets

Current assets

Cash RM460 RM444

Acount receivable (net) RM 1,188 RM1,190

Inventories RM 1,132 RM 1,056

Other current assets RM 247 RM 225

Total current assets RM3,027 RM2,915

Property (net) RM3,281 RM3,128

Other assets RM5,593 RM5,804

Total assets RM11,901 RM11,847

Liabilities and Stockholders' Equity

Current liabilities RM3,313 RM3,184

Long-term liabilities RM6,826 RM6,509

Stockholders' equity - common RM1,762 RM2,154

Total liabilities and stockholders' RM11,901 RM11,847

equity

Merdu Sdn. Bhd.

Income Statements

For the year ended 31 December (in millions)

2020 2019

Net sales RM13,198 RM12,397

Cost of goods sold 7,750 7,108

Gross profit 5,448 5,289

Selling and administrative 3,472 3,299

expenses

Income from operations 1,976 1,990

Interest expense 233 248

Other (income) expense, net 11 0

Income before income taxes 1,732 1,742

Income tax expense 503 502

Net income 1,229 1,240

Required:

Analyse Merdu's financial statement. Include the following ratios for 2020 and discuss your findings (2019 values are provided for comparison):

(a)Current ratio (year 2019 -0.92:1)

(b)Inventory turnover (year 2019 - 7.2 times)

(c)Debt to assets ratio (year 2019 - 82%)

(d)Return on assets (year 2019 - 10.8%)

(e)Profit margin (year 2019 - 10.0%)

(f)Return on common stockholders' equity (year 2019 - 56%)

(15 marks)