Module Name: Financial Accounting

Open University Malaysia

Faculty of Business and Management

BBAW 2103

Financial Accounting

Name: Adam Khaleel

Lecturer: Mohamed Shafeeq

Learning Centre: Villa College 

Trimester:  Two, May 2011

Introduction

Analyze of financial statements helps us to recognize a company’s strengths and weaknesses, which lead to good investment strategies and good financial planning. A large number of stakeholders will use and analyze financial statement information, particularly bankers, other lenders, suppliers, investors, and even some of the firm’s customers. For successful analysis and planning of financial statement require an understanding of a company’s external and internal environments. In this assignment includes the analysis of financial statements of State Trading Organization Plc and Bank of Maldives Plc which are two listed companies in different industries in Maldives. This analysis is based on both financial and non-financial information for the past two years from the company’s latest annual reports. In addition to this I will provide detailed profile of these companies, detailed explanation on the categories of ratios, description of these ratios, evaluation and interpretation of ratios by selecting better Performing Company and a conclusion.

1. State Trading Organization Plc

STO group, with its subsidiaries, JVs and associates, is a national leader in business. It has significant and focused interests in petroleum, cooking gas, construction materials (including cement and roofing material), medical supplies and pharmaceuticals, home appliances, electronic items, supermarket products and insurance. The company is geographically diverse with operations and developments throughout Maldives and operations in Singapore.

This has been achieved by direct procurement and distribution as well as forming joint ventures to effectively trade in areas where it presents greater opportunity. STO maintains strong government ties, making it their trading partner of choice.

STO has diversified in to other sectors of business, competitively trading in construction materials, consumer electronics, home appliances, medical supplies and pharmaceuticals, and a range of high quality supermarket products.

Vision: Be a recognized trading leader in the region, creating enduring value for all stakeholders, positively influencing the lives of the communities we serve and be a catalyst of economic growth supporting economically and environmentally sustainable development.

Mission

1. Work towards achieving profitability not losing sight of the company’s original founding purpose of ensuring supplies and stable prices of necessities and essentials.
2. Offer a wide range of quality products and services targeted to the specific needs of consumers and businesses that cater to the changing demands of the market and maximize access to all corners of the country through an effective distribution network.
3. Seek opportunities for investment abroad and engineer growth through expansion and diversification of our businesses, adapting to changing local and global business conditions.
4. Contribute to the national economy through investing in local manufacturing, creating Opportunities to help the development of local businesses by offering retail opportunities and strategic partnerships.
5. Contribute to society through the development of and participation in social programs that directly contribute to the community.
6. Ensuring good governance through strict compliance with the highest standards of Corporate.
7. Create a cooperative learning work environment and develop human resources of the company.



Core Values

Nation first - National interest is number one priority

Customer focus - Delight each and every customer

Employee well-being - Pleasant workplace, learning and growth

Leadership - Excel with reliability, integrity, honesty and transparency

Social Responsibility - Care for the society and the environment. State Trading Organization Plc. (2010).

2. Maldives Transport and Contracting Company Plc

Maldives Transport and Contracting Company Plc (MTCC Plc) is the longest serving public company in Maldives, holding a little more than 50% shares by The Government of Maldives, and the rest by other companies within the Maldives and by the general public. MTCC Plc was established on 18th December 1980. Since its inception, MTCC Plc has expanded its businesses into contracting works, marine transportation, ferry services, selling and distribution of engines, spare parts, lubricants and paint.

Mission: To contribute fully, to the development of the economy and the country.

Vision: We want to lead in our respective business through organic growth and collaborative innovation and creativity in this fast changing socio economic environment where we foster continuous staff development and be known as the company to be trusted to deliver what the customer wants.

Core Values

• Collaborative innovation and creativity - continuous improvement as a work ethic.
• Changing the work environment for employees - people growth and development.
• Honesty and integrity - respect the fellow individual.
• Social Responsibility - community contribution and responsibility.
• Profit, but profit from work that benefits the economy - profitable growth. Maldives Transport and Contracting Company Plc. (2010).

Description of Categories of ratios

A ratio is simply a numerator divided by a denominator. The answer could be in percentage, times and number of days for certain activities to be completed. Ratio analysis refers to methods of calculating and interpreting financial ratios to assess a firm’s performance. It provides details for financial planning, puts details into perspective and manages expectations of creditors and investors. Financial information can be compared using three bases of within the company, between companies and industry average. There are three techniques of analysis of horizontal, vertical and ratio analysis. Horizontal analysis is the comparison in within the company. Vertical analysis is the comparison of within the company and between companies. Ratio analysis is done within the company, between the companies and an industry average. Financial ratios are classified in to four areas; liquidity, efficiency, profitability and debt management.

Liquidity Ratios

It measures the business capability to pay its short-term financial obligation. These ratios are:

1. Working capital=Current assets-current liabilities

It is used to measure the business capability to fulfill its short-term debts. The result is stated in amount and the higher its value, the better.

2. Current ratio=Current assets ÷ Current liabilities

It is used measure the adequacy of current assets to settle its current liabilities. The result is in the form of X: 1 and the higher the value X, the better.

3. Quick ratio=Quick assets÷ Current liabilities

It is used measure the capability of the business to pay immediate short-term debts. The result is in the form of X: 1 and the higher the value X, the better.

Efficiency ratios

It is used measure the level of efficiency and capability of the management to operate its business especially in the usage of assets to generate sales. The efficiency ratios are:  

1. Account receivable turnover=Credit sales (net) ÷ Average AR (net)

Average AR = (AR last year + AR current year) ÷ 2

It is used to measure the capability to collect debts from customers. The result is in number of times and the higher the AR turnover, the better.

2. Average collection period = AR × 365 ÷ credit sales (net)

It is used to measure the average number of days taken to collect the amount receivable. The result is in number of days. If the result is less, the better

3. Inventory turnover = cost of goods sold ÷ Average inventory

Average inventory = (inventory last year + inventory current year) ÷ 2

It is used to measure the adequacy and management of the business’s inventory. The result is in times and the higher the inventory turnover, the better.

4. Assets turnover = net sales ÷ average total assets

Average total assets = (total asset last year + total asset current year) ÷ 2

It is used to measure the capability of the business in using the asset to generate sales. The result is in times and the ratio is higher, the better.

Profitability ratio:

It measures the ability of the business to generate profit within a specified period. It is used as an indicator to analyze the efficiency and effectiveness level of the business in achieving its profit objective. The profitability ratios are:

1. Gross Profit Margin =gross profit ÷ net sales × 100

It is used to measure the profit of sales that can be used to pay for the sales and administrative expenses. The result is in percentage and the higher this percentage is better.



2. Net profit margin = net profit ÷ net sales × 100

It is used to measure the capability of the company to generate gross profit from every Rufiyaa of sales. The result is in percentage and the higher this percentage is better.

3. Return on asset = net profit ÷ average total assets × 100

Average total assets = (total asset last year + total asset current year) ÷ 2

It is used to measure the management’s efficiency in using the asset to generate profit. The result is in percentage and the higher this percentage is better.

4. Return of owner’s equity = net profit  ÷ average owners equity × 100

Average owners equity = (total owners equity last year + total owners equity current year) ÷ 2

It is used to measure the success of a business in generating profit for its owner or share holder. The result is in percentage and the higher this percentage is better.

5. Return on owners equity’s ordinary shares = net profit – dividend for preference share ÷ average owners equity’s ordinary shares × 100

Average owners equity’s ordinary shares = (total ordinary shares last year + total ordinary shares current year) ÷ 2

It is used to measure the effectiveness of the business to generate profit for the ordinary shareholders. The result is in percentage and the higher this percentage is better.

6. Earnings per share = net profit – dividend for preference share ÷ average ordinary shares issued (unit)

Average ordinary shares issued (unit) = (ordinary share opening balance + ordinary share closing balance) ÷ 2

It is used to measure the net profit generated from each ordinary share. The result is in amount and the higher the value, the better.

7. Price earnings ratio = market value of ordinary shares per unit  ÷ earning per share

It is used to measure the amount paid by investor for every Rufiyaa earned. The result is in number of times and the higher the number, the better.

8. Dividend yield = dividend of ordinary shares per unit ÷ market value of ordinary shares per unit

It is used to measure the percentage of returns obtained by ordinary shareholders for every Rufiyaa invested. The result is in percentage and the higher this percentage is better.

9. Dividend payout ratio = cash dividend ÷ net profit

It is used to measure the percentage of profit distributed in the form of cash dividend to ordinary shareholders. The result is in percentage and the higher this percentage is better.

Debt Management Ratio:

It measures the ability of the business to continue its operation. The ratios are:

1. Interest cover ratio = (net profit + taxation + interest expenses) ÷ interest expenses

It is used to measure the capability of business to pay interest of the current year from the profit of current year. The result is in times and the higher the ratio, the better.

2. Debt ratio = total liability ÷ total asset × 100

It is used to measure the percentage of total asset financed by creditors. The result is in percentage and the higher the debt ratio, the lower the equity ratio.

3. Equity ratio = total owner equity ÷ total asset × 100

It is used to measure the percentage of total asset financed by owner. The result is in percentage and the higher the percentage, the better for creditors.

4. Debt to equity ratio = total liability ÷ total owner equity × 100

It is used to measure the percentage of liability covered by equity. The result is in percentage and the lower this ratio, the better. (Noor et al., 2010, p. 190-199)

Horizontal Analysis

MALDIVES TRANSPORT AND CONTRACTING COMPANY PLC
Comparative Income Statement
for the year ended 31 December 2009 and 2010
	2010 (MRF)	2009 (MRF)	Increase / Decrease
			Amount (MRF)	Percentage (%)
Revenue	428,231,046	474,340,631	-46,109,585	-9.7
Cost of good sold	-349,263,930	-365,352,276	16,088,346	-4.4
Gross profit	78,967,116	108,988,355	-30,021,239	-27.5
Other income	4,268,547	3,871,310	397,237	10.3
Selling and distribution expenses	-10,154,730	-31,600,959	21,446,229	-67.9
Administrative expenses	-52,251,808	-63,842,665	11,590,857	-18.2
Other expenses	-6,133,959	-7,021,364	887,405	-12.6
Operating profit	14,695,166	10,394,677	4,300,489	41.4
Finance costs	-20,216,792	-22,750,016	2,533,224	-11.1
Profit for the year	-5,521,626	-12,355,339	6,833,713	-55.3
Earnings per share	-22.09	-49.42	27	-55.3

Maldives Transport and Contracting Company Plc. (2010, 2009).

MALDIVES TRANSPORT AND CONTRACTING COMPANY PLC
Comparison Balance Sheet
as at 31 December 2009 and 2010
	2010 (MRF)	2009 (MRF)	Increase / Decrease
			Amount (MRF)	Percentage(%)
Assets
Non-current assets
Property, plant and equipment	201,690,888	222,609,795	-20,918,907	-9.4
Capital work-in-progress	1,899,089	12,873,127	-10,974,038	-85.2
Investment properties		33,273,838	-33,273,838	-100.0
Intangible assets	1,454,510	2,245,055	-790,545	-35.2
Assets held for sale	9,376,330	552,800	8,823,530	1,596.2
Financial investments	53,070,728	48,031,520	5,039,208	10.5
Trade and other receivables	4,408,158	3,271,748	1,136,410	34.7
Total non-current assets	271,899,702	322,857,883	-50,958,181	-15.8
Current assets
Inventories	113,416,738	135,911,034	-22,494,296	-16.6
Goods in transit	3,499,141	3,057,062	442,079	14.5
Trade and other receivables	154,747,714	192,159,494	-37,411,780	-19.5
Cash and cash equivalents	107,434,095	7,780,920	99,653,175	1,280.7
Total current assets	379,097,690	338,908,509	40,189,181	11.9
TOTAL ASSETS	650,997,391	661,766,392	-10,769,001	-1.6
Equity and Liabilities
Equity
Share capital	12,500,000	12,500,000	0	0.0
General reserve	149,539,082	152,039,082	-2,500,000	-1.6
Fair value reserve	28,941,426	23,902,218	5,039,208	21.1
Retained earnings	110,147,546	115,669,172	-5,521,626	-4.8
Total equity	301,128,054	304,110,472	-2,982,418	-1.0
Liabilities
Non-current liabilities
Borrowings	28,773,434	45,656,637	-16,883,203	-37.0
Trade payables	34,119,315	4,434,479	29,684,836	669.4
Total non-current liabilities	62,892,749	50,091,116	12,801,633	25.6
Current liabilities
Borrowings	133,387,552	169,270,946	-35,883,394	-21.2
Trade and other payables	153,589,036	138,293,858	15,295,178	11.1
Total current liabilities	286,976,588	307,564,804	-20,588,216	-6.7
Total liabilities	349869337	357,655,920	-7,786,583	-2.2
TOTAL EQUITY AND LIABILITIES	650,997,391	661,766,392	-10,769,001	-1.6

Maldives Transport and Contracting Company Plc. (2010, 2009).



STATE TRADING ORGANAISATION PLC
Comparative Income Statement
for the year ended 31 December 2009 and 2010
	2010 (MRF)	2009 (MRF)	Increase / Decrease
			Amount(MRF)	Percentage (%)
Sales	4,015,107,365	3,844,618,705	170,488,660	4.4
Cost of sales	-3,539,797,179	-3,423,060,306	-116,736,873	3.4
Gross profit	475,310,186	421,558,399	53,751,787	12.8
Other operating income	36,675,312	40,803,248	-4,127,936	-10.1
	511,985,498	462,361,647	49,623,851	10.7
Selling and marketing costs	-180,059,988	-149,625,843	-30,434,145	20.3
Administrative expenses	-158,878,995	-129,463,577	-29,415,418	22.7
Other operating cost	-3,087,998	-2,990,017	-97,981	3.3
Operating profit	169,958,517	180,282,210	-10,323,693	-5.7
Financial income	42,033,091	45,628,882	-3,595,791	-7.9
Financial cost	-88,197,326	-83,704,629	-4,492,697	5.4
Finance cost - net	-46,164,235	-38,075,747	-8,088,488	21.2
Share of profit / (loss) of associates	0	0	0	0.0
Profit before zakat	123,794,282	142,206,463	-18,412,181	-12.9
Zakat	-4,890,084	-2,182,183	-2,707,901	124.1
Profit after zakat	118,904,198	140,024,280	-21,120,082	-15.1
Attributable to:
Equity holders of the Company	118,904,198	140,024,280	-21,120,082	-15.1
Minority interest	0	0	0	0.0
	118,904,198	140,024,280	-21,120,082	-15.1
Earnings per share for profit attributable to the
equity holders of the Company during the year
(expressed in Rf per - basic share)	106	124	-18	-14.5

STATE TRADING ORGANAISATION PLC
Comparison Balance Sheet
as at 31 December 2009 and 2010
	2010 (MRF)	2009 (MRF)	Increase / Decrease
			Amount (MRF)	Percentage (%)
ASSETS
Non-current assets
Property, plant and equipment	507,962,614	294,917,633	213,044,981	72.2
Intangible asset	40,397,482	0	40,397,482	Not defined
Investments in subsidiaries	116,249,935	116,249,935	0	0.0
Investments in associates	10,567,267	10,567,267	0	0.0
Investment in joint venture	4,700,000	4,700,000	0	0.0
Available for sale investment	32,684,938	48,056,800	-15,371,862	-32.0
Trade and other receivables	0	997,330	-997,330	-100.0
	712,562,236	475,488,965	237,073,271	49.9
Current assets
inventories	275,539,022	392,125,037	-116,586,015	-29.7
Trade and other receivables	769,651,685	989,526,133	-219,874,448	-22.2
Reinsurance contracts	0	0	0	0.0
Investment held to maturity	0	0	0	0.0
Cash and cash equivalents	466,035,754	385,440,399	80,595,355	20.9
	1,511,226,461	1,767,091,569	-255,865,108	-14.5
Total assets	2,223,788,697	2,242,580,534	-18,791,837	-0.8
EQUITY
Capital and reserves for equity holders
Share capital	56,345,500	56,345,500	0	0.0
Share premium	27,814,500	27,814,500	0	0.0
Currency translation reserve	0	0	0	0.0
Claim equalization reserve	0	0	0	0.0
General reserves	313,115,325	289,334,485	23,780,840	8.2
Fair value reserves	28,941,426	23,684,408	5,257,018	22.2
Retained earnings	523,283,358	504,789,879	18,493,479	3.7
	949,500,109	901,968,772	47,531,337	5.3
Minority interest	0	0	0	0.0
Total equity	949,500,109	901,968,772	47,531,337	5.3
LIABILITIES
Non- current liabilities
Borrowings	0	7,967,000	-7,967,000	-100.0
Deferred revenue	0	0	0	0.0
Current liabilities
Trade and other payables	565,271,285	526,640,394	38,630,891	7.3
Insurance contracts	0	0	0	0.0
Borrowings	709,017,304	806,004,368	-96,987,064	-12.0
Total liabilities	1,274,288,589	1,340,611,762	-66,323,173	-4.9
Total equity and liabilities	2,223,788,697	2,242,580,534	-18,791,837	-0.8

State Trading Organization Plc. (2010, 2009).

Vertical Analysis

MALDIVES TRANSPORT AND CONTRACTING COMPANY PLC
Comparative Income statement
For the year ended 31 December 2009 and 2010
	2010		2009
	Amount (MRF)	Percentage (%)	Amount (MRF)	Percentage (%)
Revenue	428,231,046	100.0	474,340,631	100.0
Cost of goods sold	349,263,930	81.6	365,352,276	77.0
Gross profit	78,967,116	18.4	108,988,355	23.0
Other income	4,268,547	1.0	3,871,310	0.8
Selling and distribution expenses	10,154,730	2.4	31,600,959	6.7
Administrative expenses	52,251,808	12.2	63,842,665	13.5
Other expenses	6,133,959	1.4	7,021,364	1.5
Operating profit	14,695,166	3.4	10,394,677	2.2
Finance costs	20,216,792	4.7	22,750,016	4.8
Loss for the year	-5,521,626	-1.3	-12,335,339	-2.6
Earnings per share	-22.09	0.0	-49.42	0.0

MALDIVES TRANSPORT AND CONTRACTING COMPANY PLC
Comparison Balance Sheet
as at 31 December 2009 and 2010
	2010		2009
	Amount (MRF)	Percentage (%)	Amount (MRF)	Percentage (%)
Assets
Non-current assets
Property, plant and equipment	201,690,888	31.0	222,609,795	33.6
Capital work-in-progress	1,899,089	0.3	12,873,127	1.9
Investment properties		0.0	33,273,838	5.0
Intangible assets	1,454,510	0.2	2,245,055	0.3
Assets held for sale	9,376,330	1.4	552,800	0.1
Financial investments	53,070,728	8.2	48,031,520	7.3
Trade and other receivables	4,408,158	0.7	3,271,748	0.5
Total non-current assets	271,899,702	41.8	322,857,883	48.8
Current assets
Inventories	113,416,738	17.4	135,911,034	20.5
Goods in transit	3,499,141	0.5	3,057,062	0.5
Trade and other receivables	154,747,714	23.8	192,159,494	29.0
Cash and cash equivalents	107,434,095	16.5	7,780,920	1.2
Total current assets	379,097,690	58.2	338,908,509	51.2
TOTAL ASSETS	650,997,391	100.0	661,766,392	100.0
Equity and Liabilities
Equity
Share capital	12,500,000	1.9	12,500,000	1.9
General reserve	149,539,082	23.0	152,039,082	23.0
Fair value reserve	28,941,426	4.4	23,902,218	3.6
Retained earnings	110,147,546	16.9	115,669,172	17.5
Total equity	301,128,054	46.3	304,110,472	46.0
Liabilities
Non-current liabilities
Borrowings	28,773,434	4.4	45,656,637	6.9
Trade payables	34,119,315	5.2	4,434,479	0.7
Total non-current liabilities	62,892,749	9.7	50,091,116	7.6
Current liabilities
Borrowings	133,387,552	20.5	169,270,946	25.6
Trade and other payables	153,589,036	23.6	138,293,858	20.9
Total current liabilities	286,976,588	44.1	307,564,804	46.5
Total liabilities	349,869,337	53.7	357,655,920	54.0
TOTAL EQUITY AND LIABILITIES	650,997,391	100.0	661,766,392	100.0



STATE TRADING ORGANAISATION PLC
comparative Income statement
For the year ended 31 December 2009 and 2010
	2010		2009
	Amount (MRF)	Percentage (%)	Amount (MRF)	Percentage (%)
Sales	4,015,107,365	100.0	3,844,618,705	100.0
Cost of sales	3,539,797,179	88.2	3,423,060,306	89.0
Gross profit	475,310,186	11.8	421,558,399	11.0
Other operating income	36,675,312	0.9	40,803,248	1.1
	511,985,498	12.8	462,361,647	12.0
Selling and marketing costs	180,059,988	4.5	149,625,843	3.9
Administrative expenses	158,878,995	4.0	129,463,577	3.4
Other operating cost	3,087,998	0.1	2,990,017	0.1
Operating profit	169,958,517	4.2	180,282,210	4.7
Financial income	42,033,091	1.0	45,628,882	1.2
Financial cost	88,197,326	2.2	83,704,629	2.2
Finance cost - net	46,164,235	1.1	38,075,747	1.0
Share of profit / (loss) of associates	0	0.0	0	0.0
Profit before zakat	123,794,282	3.1	142,206,463	3.7
Zakat	4,890,084	0.1	2,182,183	0.1
Profit after zakat	118,904,198	3.0	140,024,280	3.6
Attributable to:
Equity holders of the Company	118,904,198	3.0	140,024,280	3.6
Minority interest	0	0.0	0	0.0
	118,904,198	3.0	140,024,280	3.6
Earnings per share for profit attributable to the
equity holders of the Company during the year
(expressed in Rf per - basic share)	106	0.0	124	0.0

STATE TRADING ORGANAISATION PLC
Final statement balance sheet
For the year ended 31 December 2009 and 2010
	2010		2009
	Amount (MRF)	Percentage (%)	Amount (MRF)	Percentage (%)
ASSETS
Non-current assets
Property, plant and equipment	507,962,614	22.8	294,917,633	13.2
Intangible asset	40,397,482	1.8	0	0.0
Investments in subsidiaries	116,249,935	5.2	116,249,935	5.2
Investments in associates	10,567,267	0.5	10,567,267	0.5
Investment in joint venture	4,700,000	0.2	4,700,000	0.2
Available for sale investment	32,684,938	1.5	48,056,800	2.1
Trade and other receivables	0	0.0	997,330	0.0
	712,562,236	32.0	475,488,965	21.2
Current assets
Inventories	275,539,022	12.4	392,125,037	17.5
Trade and other receivables	769,651,685	34.6	989,526,133	44.1
Reinsurance contracts	0	0.0	0	0.0
Investment held to maturity	0	0.0	0	0.0
Cash and cash equivalents	466,035,754	21.0	385,440,399	17.2
	1,511,226,461	68.0	1,767,091,569	78.8
Total assets	2,223,788,697	100.0	2,242,580,534	100.0
EQUITY
Capital and reserves attributable to equity holders of the Company
Share capital	56,345,500	2.5	56,345,500	2.5
Share premium	27,814,500	1.3	27,814,500	1.2
Currency translation reserve	0	0.0	0	0.0
Claim equalization reserve	0	0.0	0	0.0
General reserves	313,115,325	14.1	289,334,485	12.9
Fair value reserves	28,941,426	1.3	23,684,408	1.1
Retained earnings	523,283,358	23.5	504,789,879	22.5
	949,500,109	42.7	901,968,772	40.2
Minority interest	0	0.0	0	0.0
Total equity	949,500,109	42.7	901,968,772	40.2
LIABILITIES
Non- current liabilities
Borrowings	0	0.0	7,967,000	0.4
Deferred revenue	0	0.0	0	0.0
Current liabilities
Trade and other payables	565,271,285	25.4	526,640,394	23.5
Insurance contracts	0	0.0	0	0.0
Borrowings	709,017,304	31.9	806,004,368	35.9
Total liabilities	1,274,288,589	57.3	1,340,611,762	59.8
Total equity and liabilities	2,223,788,697	100.0	2,242,580,534	100.0

State Trading Organization Plc. (2010, 2009). Maldives Transport and Contracting Company Plc. (2010, 2009).

Ratio Analysis

Ratio Analysis for MTCC PLC and STO PLC
Liquidity Ratios		MTCC PLC		STO PLC
Name of the Ratios	Formulas	2010	2009	2010	2009
Working capital	Current asset-current liability	MRF 92,121,102	MRF 31,343,705	MRF 236,937,872	MRF 434,446,807
Current ratio	Current asset current liability	1.3 : 1	1.1 : 1	1.2 : 1	1.3 : 1
Quick ratio	Quick asset current liability	0.91 : 1	0.65 : 1	1.0 : 1	1.0 : 1
Profitability Ratios
Gross profit margin	Gross profit Sales (net)	18.4%	23.0%	11.8%	11.0%
Net profit margin	Net profit Sales (net)	-1.3%	-2.6%	3.0%	3.6%
Return on assets	Net profit Average total assets	-0.8%	-1.8%	5.3%	7.0%
Return on owners equity	Net profit/Average owners equity	-1.8%	-4.1%	12.8%	16.1%
Earnings per share	(Net profit-Dividend for preference share)/	MRF -22.1	MRF -49.42	MRF 106	MRF 124
	Average ordinary shares issued(unit)
Debt Management Ratios
Debt Ratio	Total liability/Total asset	53.7%	54.0%	57.3%	59.8%
Equity Ratio	Total owner equity/Total asset	46.3%	46.0%	42.7%	40.2%
Debt to equity ratio	Total liability/Total owner equity	116.2%	117.6%	134.2%	148.6%
Efficiency Ratios
Average collection period	AR×365/Net credit sales	118 days	132 days	70 days	94 days
Inventory turnover	Cost of goods sold/Average inventory	2.8 times	2.6 times	10.6 times	9.5 times
Asset turnover	Net sales/Average total asset	0.65 times	0.69 times	1.8 times	1.9 times

Interpretation of Ratios

1. Working capital: If the working capital is higher, the better for the company because it shows the business ability to pay its short-term debts. The calculation shows that the working capital is increased for MTCC but for STO it has decreased from the year 2009 to 2010.

2. Current ratio: The Current ratio should be 2:1. If it is too less or too high, shows that Current ratio for 10Tcc has increased from 1.1 to 1.3 but it is less than 2:1 which indicates that the company does not have enough current assets to pay off the current liabilities where as for STO this ratio has decreased from 1.3 to 1.2 and it indicates they too do not have enough current assets to pay off their current liabilities.

3. Quick ratio: The quick ration should be 1:1. If it is too less or too high, it is not good for the company. The calculation shows that quick ratio for MTCC has increased from 0.65 to 0.91 but it indicates that they do not have enough quick assets to pay off immediate debts where as for STO this ratio was constant at 1:1 for both years. It indicates that have enough quick assets to pay off their immediate debts.

Profitability

1. Gross profit margin: It is the profit on sales. If it is higher, the better for the company. The calculation shows that it has decreased from 23.0% to 18.4% for MTCC. Where as it has increased from 11.0% to     11.8% for STO. This means that for STO has good purchasing management but not for the MTCC.

2. Net profit margin: It is the profit on sales after deducting the overhead expenses. If it is higher, the better. The calculation shows that it has improved from -2.6% to -1.3% for MTCC. Whereas for STO it has decreased from 3.6% to 3.0%. This means that for MTCC the overhead expenses decreased from the year 2009 to 2010 but for the STO the expenses increased from 2009 to 2010.

3. Return on assets: If it is higher the better. The calculation shows that it has improved from -1.8% to -0.8% for MTCC. Where as it has decreased from 7.0% to 5.3% for STO. This means that there is good management of assets to generate profit for MTCC but inefficient management of assets for STO.

4. Return on equity: it is higher the better. The calculation shows that it has improved from -4.1% to -1.8% for MTCC. Where as it has decreased from 16.1% to 12.8% for STO. This means that the business ability of generating profit for owners has improved for MTCC but it has decreased for STO.

5. Earnings per share: It is the profit generated for each ordinary share. If it is higher the better. The calculation shows that it has improved from MRF-49.42 to MRF-22.1 for MTCC. Where as it has decreased from MRF124 to MRF 106 for STO. This means that there is a loss of MRF-22.1 for MTCC’s shareholders and profit of MRF 106 for STO’s ordinary shareholders in 2010.

Debit management Ratio

1. Debt ratio: It calculates the total assets financed by creditors.  Owners prefer higher debt ratio as funds financed by loans can generate higher returns. The calculation shows that it has decreased from 54.0% to 53.7% for MTCC and it also has decreased from 59.8% to 57.3% for STO. This means the MTCC’s assets of 53.7% are financed by its creditors. Whereas 57.3% of STO’s assets are financed by its creditors in 2010.

2. Equity ratio: It calculates the assets financed by the owner. The creditors prefer higher equity ratio. The calculations show that it has increased from 46.0% to 46.3% for MTCC and it has increased from 40.2% to 42.7% for STO. This means that this is a positive sign for their creditors as they can get credit more easily.

3. Debt to equity ratio: It is the liability covered by equity. The lower this ratio, the better. The calculations show that it has decreased from 117.6% to 116.2% for MTCC and it has also decreased from 148.6% to 134.2% for STO. This means that there are more liabilities in STO compared to MTCC.

Efficiency Ratios

1. Average collection period: It calculates the number of days taken to collect the amount receivable. If it is lower, the better for the business. The calculations show that it has decreased from 132 days to 118 days for MTCC and it also has decreased from 94 days to 70 days for STO. This means that STO is taken less number of days to collect receivables compared to MTCC.

2. Inventory turnover: It measures the number of times the inventory has been sold out in a given period of time. If it is higher, the better. The calculations show that it has increased from 2.6 times to 2.8 times for MTCC and it also has increased from 9.5 times to 10.6 times for STO. This means that the performance of STO is high compared to MTCC. It might not show the true picture because both the companies are from two different industries.

3. Assets turnover: It measures the capability of the business in using the assets to generate sales. If it higher, the better. The calculation show that it has decreased from 0.69 times to 0.65 times for MTCC and it also has decreased from 1.9 times to 1.8 times for STO. This means that the STO is more capable of using its assets to generate sales compared to MTCC.

Maldives Transport and Contracting Company Plc. (2010, 2009). State Trading Organization Plc. (2010, 2009).



Cash flow statement

The cash flow statement shows how an organization raises money and how it spent those funds during a given period of time. It is also an analytical tool which measures an enterprise’s ability to cover its expenses in the near term. Suppose, if a company is consistently bringing in more cash than it spends, it shows that company is considered to be of good value. The cash flow statement includes of three parts; the operations, investing and financing sections.

Operating activities generally reflect cash generated and paid for the firm’s core business functions. Investors prefer companies that produce a net positive cash flow from operating activities.

Investing activities describe the activities of cash associated with outside financing activities. It would normally include long term asset items and sale of non current asset.

Financial activities relates on the amount of cash the company has spent on capital expenditures, such as new equipment or anything else that needed to run the business. It includes acquisitions of other businesses and monetary investments such as money market funds.

It shows that the cash flow statement of MTCC has positive cash flows from operating activities but negative cash flows from financing activities and investing activities, the overall cash flow shows negative for the year 2009 but positive for the year 2010. So their cash flow performance is not good.

The cash flow statement of STO shows positive cash flows from operating activities but negative for the investing activities. It shows positive cash flow of financing activities in the year of 2009 but negative in the year 2010. The overall cash flow is positive for the both years and their cash flow performance is good. (Noor et al., 2010, p. 117-118).

Best company selection

After the analysis of ratios it is understood that STO plc  is able generate more profit than MTCC, since STO’s net profit margin, return on asset, return on owners equity and earnings per share are high comparing to MTCC.

The liquidity ratios show that the liquidity position of STO is better compared to MTCC. The STO has enough quick assets to pay off its immediate debts but MTCC does not have enough liquid assets.

The debt management ratios show that the STO has more liabilities compared to MTCC which is not good for the company because these liabilities are secured against the fixed assets of the business.

The efficiency ratios show that the efficiency of STO is better compared to MTCC since the STO takes less number of days to collect debts and the rate of selling items much faster than MTCC.

It is understood that the STO plc is performing well compared to MTCC plc although their debt management is not well compared to MTCC. So it is advisable to reduce the number of liabilities to be more successful in future.



Conclusion

Although ratio analysis is very important tool to judge the company’s performance there are several problems inherent in attempting to use accounting ratios to assess company performance. Ratios give meaningless figures if the company has generated a loss and there is no absolute definition as to what constitutes a “correct” ratio. They may be calculated almost as one likes, which means that they are capable of manipulation compounding and ratios are often just presented as figures, without any supporting calculations or definitions. Ratio analysis deals only with financial numbers and does not take account of other factors which may affect company performance. If they are calculated over a period of years to provide longitudinal data, then the value of currency in later years will not be the same as that of earlier years, owing to the effect of inflation, etc. It is very difficult to get the better analysis since the both companies are from two different industries which made unable to get industry average.



Appendix 1

Workings of ratio analysis for STO plc
Liquidity Ratios	2010		2009
Working Capital =	1,511,226,461	MRF 236,937,872	1,767,091,569	MRF 434,446,807
	-1,274,288,589		-1,332,644,762
Current Ratio =	1,511,226,461	1.2 : 1	1,767,091,569	1.3 : 1
	1,274,288,589		1,332,644,762
Quick Ratio =	1,235,687,439	1.0 : 1	1,374,966,532	1.0 : 1
	1,274,288,589		1,332,644,762
Profitability Ratios
Gross profit margin =	475,310,186	11.8%	421,558,399	11.0%
	4,015,107,365		3,844,618,705
Net profit margin =	118,904,198	3.0%	140,024,280	3.6%
	4,015,107,365		3,844,618,705
Return on assets =	118,904,198	5.3%	140,024,280	7.0%
	2,233,184,616		2,011,539,929
Return on owners equity =	118,904,198	12.8%	140,024,280	16.1%
	925,734,440.5		872,009,697
Earnings per share =	118,904,198	MRf 106	140,024,280	MRF 124
	1,126,910		1,126,910
Debt Management Ratios
Debt Ratio =	1,274,288,589	57.3%	1,340,611,762	59.8%
	2,223,788,697		2,242,580,534
Equity Ratio =	949,500,109	42.7%	901,968,772	40.2%
	2,223,788,697		2,242,580,534
Debt to equity ratio =	1,274,288,589	134.2%	1,340,611,762	148.6%
	949,500,109		901,968,772
Efficiency Ratios
Average collection period =	769,651,685×365	70 days	989,526,133×365	94 days
	4,015,107,365		3,844,618,705
Inventory turnover =	3,539,797,179	10.6 times	3,423,060,306	9.5 times
	333,832,029.5		358,914,697.5
Asset turnover=	4,015,107,365	1.8 times	3,844,618,705	1.9 times
	2,233,184,616		2,011,539,929

Workings of ratio analysis for MTCC plc
Liquidity Ratios	2010		2009
Working Capital =	379,097,690	MRF 92,121,102	338,908,509	MRF 31,343,705
	-286,976,588		-307,564,804
Current Ratio =	379,097,690	1.3 : 1	338,908,509	1.1 :1
	286,976,588		307,564,804
Quick Ratio =	262,181,809	0.91 : 1	199,940,414	0.65 : 1
	286,976,588		307,564,804
Profitability Ratios
Gross profit margin =	78,967,116	18.4%	108,988,355	23.0%
	428,231,046		474,340,631
Net profit margin =	-5,521,626	-1.3%	-12,355,339	-2.6%
	428,231,046		474,340,631
Return on assests =	-5,521,626	-0.8%	-12,355,339	-1.8%
	656,381,892		689,690,947
Return on owners equity =	-5,521,626	-1.8%	-12,355,339	-4.1%
	301,128,054.0		304,110,472
Earning per share =	-5,521,626	MRf -22.09	-12,355,339	MRF -49.42
	250,000		250,000
Debt Management Ratios
Debt Ratio =	349,869,337	53.7%	357,655,920	54.0%
	650,997,391		661,766,392
Equity Ratio =	301,128,054	46.3%	304,110,472	46.0%
	650,997,391		661,766,392
Debt to equity ratio =	349,869,337	116.2%	357,655,920	117.6%
	301,128,054		304,110,472
Efficiency Ratios
Average collection period =	138,392,236×365	days 118	172,137,376×365	132 days
	428,231,046		474,340,631
Inventory turnover =	349,263,930	2.8 times	365,352,276	2.6 times
	124,663,886		138,047,912
Asset turnover=	428,231,046	0.65 times	474,340,631	0.69 times
	656,381,891.5		689,690,947



References

Dr. Jane, F. H., Mike, S., Jo, P. (n.d). Inherent limitations in using financial ratio analysis to assess small and medium sized company performance. Retrieved July 02, 2011, from http://docs.google.com/viewer?a=v&q=cache:RxcAPtIXq4QJ:www.sheffield.ac.uk/content/1/c6/06/89/64/2007-01.pdf+limitation+of+ratio+analysis&hl=en&gl=mv&pid=bl&srcid=ADGEESgzzLen1LEdvtdhyV-quz1ZWLzs41A2Hb78Mgofh_9WuwKu7I0pid9mBnkbEJO3oHFy-qqLLlCjOqd_JL-JhVQk6G_93qEcLWxCe7uBS3-_BvMoBKW8dmuiZlxaq2QG1m4D0lD6&sig=AHIEtbQ2pKti6Ugc9g8QNiqib20Y_Nho7A

Noor, A. J., Nor, A. L., Junaidah, H. A., Azlan, Z. A., Amin, A., Norazita, M. A. A., (2010). Financial Accounting. Meteor Doc.Sdn.Bhd: Malaysia.

Maldives Transport and Contracting Company Plc. (2009). Annual Report.

Maldives Transport and Contracting Company Plc. (2010). Annual Report.

State Trading Organization Plc. (2009). Annual Report.

State Trading Organization Plc. (2010). Annual Report.