Simple Ratio analysis on Food Industries

1.0 INTRODUCTION
1.1 Company Profile
1.1.1 Hup Seng Industries Berhad (Hup Seng Industries Berhad, n.d.)
Hup Seng Industries Berhad is an investment holding company in Malaysia. The company is engaged in manufacture and sales of biscuit and coffee mix, dealers in biscuit, and other food market. There are three sub-companies under Hup Seng Industries Berhad, which are Hup Seng Perusahaan Makanan (M) Sdn Bhd, Hup Seng Hoon Yong Brothers (M) Sdn Bhd, and In-comix Food Industries Sdn Bhd. Hup Seng’s product-line included cream crackers, crackers, maria biscuits, sandwich / cookies, biscuits, assorted biscuits, and others.

Logo 1.1: Hup Seng Industries Berhad’s Logo
1.1.2 Hwa Tai Industries Berhad (Company History and Business, n.d.)
Hwa Tai Industries Berhad was established in 1962 and became one of the longest established biscuit manufacturers in Malaysia, as well as Hup Seng Industries Berhad. Along the years, Hwa Tai market had grown drastically in the country along with theirs fine and good quality products. Hwa Tai had successfully established a strong presence in Malaysia and has build up a wide international market through their distribution network. Currently, the well know brand or trademark for Hwa Tai Industries Berhad is “Hwa Tai” and “Luxury”. It had a large product line, which included craker, cookies, cakes, luxury, cream sandwich, and assorted biscuits.

Logo 1.2: Hwa Tai Industries Berhad’s Logo
1.2 Company Financial Position and Income Statement
1.2.1 Hup Seng Industries Berhad

2012

(RM)
ASSETS

Non-current assets

Property, plant and equipment
66,889,803
Investment properties
218,255
Goodwill on consolidation
–
Deferred tax assets
37,000

67,145,058
Current assets

Inventories
20,586,831
Trade and other receivables
36,275,153
Prepayments
727,961
Tax recoverable
796,908
Cash and bank balances
79,415,667

137,802,520
TOTAL ASSETS
204,947,578

EQUITY AND LIABILITIES

Equity attributable to owners of the Company

Share capital
60,000,000
Share premium
14,333,133
Retained earning
78,908,923
Total Equity
153,242,056

Non-current liabilities

Deferred tax liabilities
7,957,511

Current Liabilities

Trade and other payables
39,346,211
Income tax payable
4,401,800
Dividends payable
–

43,748,011
Total liabilities
51,705,522
TOTAL EQUITY AND LIABILITIES
204,947,578

Table 1.1: Hup Seng Industries Berhad’s Financial Position

2012

(RM)
Revenue
247,818,145
Cost of sales
-159,924,152
Gross Profit
87,893,993

Interest income
2,364,565
Other income
895,537
Selling and distribution expenses
-29,367,686
Administrative expenses
-17,435,317
Finance costs
-7
Profit before taxtation
44,351,085
Taxtation
-11,810,399
Total comprehensive income for the financial year
32,540,686

Profit attributable to:

Owner of the company
32,540,686

Earning per share (sen)
27.12

Table 1.2: Hup Seng Industries Berhad’s Income Statement

1.2.2 Hwa Tai Industries Berhad

2012

(RM)
ASSETS

Non-current assets

Property, plant and equipment
16,924,076
Prepaid land lease payment
1,200,547
Investment in an associate company
1,756,406

19,881,029
Current assets

Inventories
5,172,887
Trade and other receivables
25,679,086
Prepayments
278,949
Tax recoverable
186,601
Cash and bank balances
3,255,291

34,572,814
TOTAL ASSETS
54,453,843

EQUITY AND LIABILITIES

Equity attributable to owners of the Company

Share capital
40,042,400
Capital reserve
–
Accumulated losses
-25,366,940

14,675,460
Non-controlling interests
–
Total Equity
14,675,460

Non-current liabilities

Loans and borrowings
1,108,652
Deferred tax liabilities
–

Current Liabilities

Trade and other payables
18,546,046
Loans and borrowings
19,967,621
Tax Payable
156,064
Total liabilities
39,778,383
TOTAL EQUITY AND LIABILITIES
54,453,843

Table 1.3: Hwa Tai Industries Berhad’s Financial Position

2012

(RM)
Revenue
66,446,623
Cost of sales
-49,501,691
Gross Profit
16,944,932

Other income
660,339
Selling and distribution expenses
-9,653,922
Administrative expenses
-6,876,388
Other expenses
-387,990
Share of results of associate company
45,030
Finance costs
-1,207,955
Loss before taxtation
-475,954
Taxtation
-98,735
Total comprehensive loss for the financial year
-574,689

Total comprehensive loss attributable to:

Owner of the company
-574,689

Loss per share (sen)
-1.44

Table 1.4: Hwa Tai’s Industries Berhad Income Statement

2.0 RATIO ANALYSIS
2.1 Liquidity Ratios
2.1.1 Current Ratio
Current Ratio = Current Assets / Current Liabilities

Hup Seng Industries Berhad
Hwa Tai Industries Berhad
Current Ratio
RM137,802,520 / RM43,748,011
= 3.15
RM34,572,814 / RM38,669,731
= 0.89

Current ratio is used to determines the degree of liquidity. A high current ratio suggests a strong liquidity position and an ability to meet current obligations. Current ratio for Hup Seng Industries Berhad is 3.15, higher than 0.89 of Hwa Tai Industries Berhad. As for biscuit manufacturer market, a high current ratio is preferable because they are dealing with sudden and unexpected shifts in demand for its products. Hup Seng Industries is performing much better than Hwa Tai Industries Berhad.

2.1.2 Quick (Acid-Test) Ratio
Current Ratio = Current Assets – Inventory / Current Liabilities

Hup Seng Industries Berhad
Hwa Tai Industries Berhad
Quick Ratio
RM137,802,520 – RM20,586,831 / RM43,748,011
= 2.68
RM34,572,814 – RM5,172,887 / RM38,669,731
= 0.76

Quick (acid-test) ratio is similar to current ratio where both are used to determine the degree of liquidity, except that it excludes inventory, which is generally the least liquid current assets. The quick ratio provides better measurement of overall liquidity when it is hard to convert inventory into cash. Quick ratio for Hup Seng Industries Berhad is 2.68, higher than 0.76 of Hwa Tai Industries Berhad. Again, Hup Seng Industries is performing much better than Hwa Tai Industries Berhad in liquidity.

2.2 Activity Ratios

2.2.1 Inventory Turnover
Inventory Turnover = Cost of Good Sold / Inventory

Hup Seng Industries Berhad
Hwa Tai Industries Berhad
Inventory
Turnover
RM159,924,152 / RM20,586,831
= 7.77 times per year
RM49,501,691 / RM5,172,887
= 9.57 times per year

Inventory turnover is used to measures the activity or liquidity of a firm’s inventory. Inventory turnover for Hup Seng Industries Berhad is 7.77 times per year, lower than 9.57 times per year of Hwa Tai Industries Berhad. As for biscuit manufacturer market, higher inventory turnover is preferable because the products are quite perishable and must be sold quickly. Thus, Hup Seng Industries might perform much worse than Hwa Tai Industries Berhad.

2.2.2 Average Collection Period
Average Collection Period = Account Receivable / Average Sales per Day

Hup Seng Industries Berhad
Hwa Tai Industries Berhad
Average Collection Period
RM36,275,153 /
(RM247,818,145 / 365)
= 53.43 days
RM25,679,086 / (RM66,446,623 / 365)
= 141.06 days

Average collection period is used to evaluates credit and collecting policies. Generally, it is better if a firm is able to collect its receivables in a short period. Average collecting period for Hup Seng Industries Berhad is 53.43 days, much shorter than 141.06 days of Hwa Tai Industries Berhad. Perhaps Hup Seng Industries Berhad’s collecting policies indicate a shorter period under comparison. Thus, Hup Seng Industries is performing much better than Hwa Tai Industries Berhad in collecting account receivable.

2.2.3 Total Assets Turnover
Total Assets Turnover = Sales / Total Assets

Hup Seng Industries Berhad
Hwa Tai Industries Berhad
Total Assets Turnover
RM247,818,145 / RM204,947,578
= 12.09 times
RM66,446,623 / RM54,453,843
= 1.22 times

Total assets turnover indicates the efficiency on a firm generates sales uses its assets. The higher the total assets turnover, the more efficiently its assets have been used, especially in generates sales. Total assets turnover for Hup Seng Industries Berhad is 12 times, way higher than 1.22 times of Hwa Tai Industries Berhad. Hup Seng Industries is performing way better than Hwa Tai Industries Berhad in efficiently in generating sales from its assets.

2.3 Debt Ratios
2.3.1 Debt Ratio
Debt Ratio = Total Liabilities / Total Assets

Hup Seng Industries Berhad
Hwa Tai Industries Berhad
Debt Ratio
RM51,705,522 / RM204,947,578
= 0.2523 @ 25.23%
RM39,778,383 / RM54,453,843
= 0.7305 @ 73.05%

Debt ratio is used measures the proportion of total assets financed by the firm’s creditors. The higher the ratio, the greater the amount of other people’s money being used to generate profits. Debt ratio for Hup Seng Industries Berhad is 25.23%, much lower than 73.05% of Hwa Tai Industries Berhad. Hwa Tai Industries is having a great degree of indebtedness and more leverage, it is a good sign and it can be bad as well, when it’s high amount liabilities doesn’t generate sales effectively. In surface, Hup Seng Industries is performing much worse than Hwa Tai Industries Berhad.

2.3.2 Times Interest Earned Ratio
Times Interest Earned Ratio = Earning before Interest and Taxes / Taxes

Hup Seng Industries Berhad
Hwa Tai Industries Berhad
Times Interest Earned Ratio
RM44,351,085 / RM11,810,399
= 3.76
-RM475,954 / -RM98,735
= 4.82 (Times Interest Losses)

Times interest earned ratio is used to measures the firm’s ability to make contractual interest payment. The higher the value, the better able the firm is to fulfill its interest obligations. Times interest earned ratio for Hup Seng Industries Berhad is 3.76, much higher than 4.82 (times interest losses) of Hwa Tai Industries Berhad. Hup Seng Industries is performing much better than Hwa Tai Industries Berhad.

2.4 Profitability Ratios
2.4.1 Gross Profit Margin
Gross Profit Margin = Gross Profit / Sales

Hup Seng Industries Berhad
Hwa Tai Industries Berhad
Gross Profit Margin
RM87,893,993 / RM247,818,145
= 0.3547 @ 35.47%
RM16,944,932 / RM66,446,623
= 0.2550 @ 25.50%

Gross Profit Margin is used to measures the percentage of each sales dollar remaining after the firm has paid for its goods. A higher gross profit margin is preferable. Gross profit margin for Hup Seng Industries Berhad is 35.47%, higher than 25.50% of Hwa Tai Industries Berhad. This can be happen if Hup Seng setting a higher markup price for its products. Thus, Hup Seng Industries is performing much better than Hwa Tai Industries Berhad.

2.4.2 Operating Profit Margin
Operating Profit Margin = Operating Profits / Sales

Hup Seng Industries Berhad
Hwa Tai Industries Berhad
Operating Profit Margin
RM44,351,085 / RM247,818,145
= 0.1790 @ 17.90%
-RM475,954 / RM66,446,623
= -0.0072 @ -0.72%

Operating profit margin is used to measures the percentage of each sales dollar remaining after all costs and expenses, other than interest, taxes, and preferred stock dividends are deducted. It shows a better measurement than gross profit margin. Operating profit margin for Hup Seng Industries Berhad is 17.90%, much higher than -0.72% of Hwa Tai Industries Berhad. Hwa Tai cost of good sold and other costs and expenses is causing negative value in its operating profit. Hence, Hup Seng Industries is performing much better than Hwa Tai Industries Berhad. 2.4.3 Net Profit Margin

Net Profit Margin = Earnings Available for Common Stockholders / Sales

Hup Seng Industries Berhad
Hwa Tai Industries Berhad
Net Profit Margin
RM32,540,686 / RM247,818,145
= 0.1313 @ 13.13%
-RM574,689 / RM66,446,623
= -0.0086 @ -0.86%

Net profit margin is used to measures the percentage of each sales dollar remaining after all costs and expenses, including interest, taxes, and preferred stock dividends, have been deducted. It is even a better measurement than operating profit margin. Net profit margin for Hup Seng Industries Berhad is 13.13%, much higher than -0.86% of Hwa Tai Industries Berhad. Hwa Tai cost of good sold, other costs and expenses, and taxes is causing negative value in its operating profit. Thus, Hup Seng Industries is performing much better than Hwa Tai Industries Berhad.

2.4.4 Return on Total Assets (ROA)
ROA = Earnings Available for Common Stockholders / Total Assets

Hup Seng Industries Berhad
Hwa Tai Industries Berhad
Return on Total Assets
RM32,540,686 / RM204,947,578
= 0.1588 @ 15.88%
-RM574,689 / RM54,453,843
= -0.0106 @ -1.06%

Return on total assets is used to measures the overall effectiveness of management in generating profits with its available assets. The higher the firm’s return on total assets the better. Return on total assets for Hup Seng Industries Berhad is 15.88%, much higher than -1.06% of Hwa Tai Industries Berhad. Negative income means that Hwa Tai is unable to generate any profit uses its assets, even causing losses to the company. Thus, Hup Seng Industries is performing much better than Hwa Tai Industries Berhad.

3.0 CONCLUSION
From all the ratio analysis, it can be concluded that almost every ratio shows that Hup Seng Indutries Berhad is doing a good job in managing it assets, generating profits, collecting receivables, and so on. On the other hand, Hwa Tai Industries Berhad is not being effective and efficient in most of the aspect. Although Hwa Tai does give competition to Hup Seng, but from the analysis, we know that Hup Seng Industries Berhad can still having a lot of competitive advantages compared to Hwa Tai Industries Berhad. This might happen due to better internal management in Hup Seng, higher markup price on its product, media advertising, and great brand loyalty.

4.0 REFERENCES

Company History and Business (n.d.). Hwa Tai Industries Berhad. Retreived on 25 March 2014 from http://www.hwatai.com/ourcompany/live/about.html

Hup Seng Industries Berhad (n.d.). Market Data.Retreived on 25 March 2014 from http://markets.ft.com/research/Markets/Tearsheets/Business-profile?s=HUPSENG:KLS