MBA5604 Financial And Management Accounting For Decision Making

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MBA5604 Financial And Management Accounting For Decision Making

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MBA5604 Financial And Management Accounting For Decision Making

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Course Code: MBA5604
University: Monash University

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Country: Australia

Question:

This assessment requires students to demonstrate an understanding of how the financial ratios are calculated.
Students are required interpret the key financial ratios for investment decision-making. The assessment utilises a pre-populated Excel spreadsheet downloaded from EMIS database that contains summarised financial statements and ratios for Engtex Group Berhad for 5 years and students are required to incorporate the figures and calculate the ratios for the most recent two financial statements (2015 and 2016). This assessment is designed to ensure that students fully understand the inter-relationships that exist between the in financial statements based on the principles of double entry accounting. Secondly, this assignment isdesigned to ensure that students are able to interpret the ratios derived from financial statements in a meaningful way.
Requirements for Assessment 1
Students are to submit their individual case study exercise on Engtex Group Berhad and the Malaysian infrastructure and construction supplies industry. As Engtex has ventured into manufacturing, propertydevelopment, etc., there is a need to perform segmental analysis in order to size up the performance of its principal business as the leading distributor of pipes, valves, fittings, infrastructure and construction materials and other business segments.
(a) Students are required to collect and insert the year ending 31 December 2015 and 2016 data and compute the key ratios for 2015 and 2016 (highlighted in yellow) based on the Annual Report 2015 and 2016 of Engtex which was given out to each and every student in the MBA class, courtesy from Engtex Group Berhad (and the softcopy is downloadable at: www.bursamalaysia.com or at the investors relation section  of www.engtex.com.my) so that students can perform analysis of financial performance and ratios for the latest 7 years.
(b) Download the assignment spreadsheet from the Moodle and rename the spreadsheet by insert your given name in front of the existing file name followed by a parentheses. Once students have obtained year 2015 and 2016 figures and the calculation of ratios for 2015 and 2016, you are required to prepare a report that incorporates to the following:

Your understanding of the context of the business of Engtex and the industry dynamics.
Identification and explanation of key aspects of financial performance as contained in your final spreadsheet (both in figures and ratios). Then, based on what you have learned in MBA5604 thus far, report on various types of ratios (profitability, liquidity, gearing (leverage), efficiency and shareholderreturns) in order to gain a more in-depth understanding of the financials of Engtex. Also identify the deficiencies or differences in the business report and how you overcome the deficiencies/differences.
Explains your proposed financial strategy going forward for Engtex Group Berhad, based on the last seven years performance and the key decisions Engtex can make to move forward based on the 7-year financial results and ratios that you have calculated.
It was stated in the Annual Report that as at 31 December 2016, 132,835,358 (2015: 143,965,800) Warrants (2007/2017) remained unexercised. How much is the exercise  price per warrant and when is the last day to exercise the warrants? What is the warrant traded price on the last day of the year 2016. Determine whether the warrants are “in the money” or “out of the money” as at 31 December 2016. Discuss the effect of the conversion and non-conversion of the warrant on the due date?
Discuss the significant mergers and acquisition (M&A) and equity capital markets (ECM) deals or events during the financial year and the financial implications to Engtex Group. (60% weightage)Instructions:

You shall submit the following:

The completed spreadsheet for the year 2010 to 2016 (in softcopy) that incorporates your percentages and ratios computation and its formula based on what you have learned in class. Show all your workings in the spreadsheet.
A report that report that incorporates your response to item (b)(i) to (b)(v) above, i.e. your interpretation of the 7-year performance of Engtex, explain your financial strategy going forward for Engtex Group Berhadand the key business decisions Engtex can make to move forward based on the 7-year financial results and ratios that you have calculated in the spreadsheet.

Answer:

Introduction:
Company background:
Engtex Group Berhad has initiated its journey as a hardware retail shop in Kuala Lampur, Malaysia in 1983. The considerable growth in Malaysia has helped the organisation to diversify its business in distribution and wholesale centre having own distribution network and warehouses (Engtex.com.my, 2017). In addition, the organisation has made upward integration in its manufacturing sector, which includes cement-lined pipes and fittings, bitumen products, pillar hydrants and others.
Company status:
Engtex Group Berhad is a public listed organisation, which is listed on Bursa Main Board- industrial product. Its status is operational and it is incorporated in the year 2001. The EMISid number is 1661056 and the ISIN number of the organisation is MYL5056OO006 (Engtex.com.my, 2017). 
Business segments:
The business segments of Engtex Group Berhad comprise of the following:

Manufacturing segment, which comprises of mild steel concrete-lined fittings and pipes
Wholesale and distribution segment, which includes valves, pipes, fittings, construction materials and steel products
Hospitality and property development segments (Taipaleenmäki & Ikäheimo, 2013)

Financial highlight:
It has been observed that the net profit of the organisation has declined in 2014 by -14.82% and the decline is observed further 2015 by -7.50%. However, it has increased significantly in 2016 by 46.66%, which depicts that Engtex has decreased its overall cost of sales significantly. Thus, in terms of profit, the organisation has managed to improve its financial performance in the Malaysian market (Lafond, McAleer & Wentzel, 2016).
Return on investment and earnings per share:
According to the above figure, the return on investment has increased from 9.87% in 2014 to 8.34% in 2015. However, it has increased to 10.78% in 2016, which denotes that the organisation has earned adequate returns on investments due to increase in net income. Hence, it could be stated that Engtex has maximised its return on investments in 2016.
From the above figure, it has been observed that earnings per share of the organisation have remained same in 2014 and 2015 as 0.14. However, it has increased to 0.19 in 2016, which denotes the ability of the organisation to distribute greater profits to its shareholders (Balachandran, Marra & Rangan, 2014).
Dividend yield:
The above figure denotes that the dividend yield of the organisation has been falling from 3.5 in 2014 to 2 in 2015. In addition, it has declined further to 1.5 in 2016, which denotes that the shareholders would not receive maximum returns on their investments (Bodie, 2013). This is because Engtex has focused on maximising their retained earnings, which reduce its dividend payout to the shareholders.
The above figure denotes that the revenue trend of the organisation, which has fallen from 8.07% in 2014 to -1.48% in 2015. Moreover, it has fallen to -7.45% in 2016, which states that the organisation is struggling to generate sufficient revenues due to rising competition in the Malaysian market.
Cost trends:
According to the above figure, it could be stated that the cost of sales of the organisation has increased from 998,943 in 2014 to 975,651 in 2015. It has decreased further to 855,530 in 2016, which denotes that the organisation has been able to reduce its overall cost largely in 2016.
Profitability ratios:
Return on assets:
From the above figure, it has been found that the return on assets for Engtex has been 3.94% in 2014 to 3.52% in 2015. However, it has increased significantly to 4.74% in 2016, which denotes that the organisation has utilised its assets effectively to generate sufficient cash for carrying out its business activities (Drury, 2013). 
Gross profit ratio:
According to the above table, it could be stated that the gross margin of Engtex has increased from 15.22% in 2014 to 15.95% in 2015 and it has increased further to 20.37% in 2016. This denotes that the organisation has minimised its cost of sales effectively in relation to the overall revenues generated.
Operating profit ratio:
The above figure clearly denotes that the operating margin of the organisation has increased to 7.18% in 2015 from 6.86% in 2014, which has increased further to 10.11% in 2016. This denotes that the organisation has managed to minimise its operating expenses over the years to retain higher profits.
Return on capital employed:
The above diagram illustrates that the operating margin of Engtex has declined from 4.68% in 2014 to 4.13% in 2015; however, the increase is inherent in 2016, as the ratio has increased to 5.51% in 2016. Hence, the organisation has managed to generate sufficient returns on capital, which has increased its overall profitability.
Balance sheet and financial positions:
The above diagram denotes that the total assets of Engtex have declined from 18.38% in 2014 to 3.60% in 2015. However, the overall assets have increased to 8.94% in 2016, which denote that the organisation has increased its asset base slightly through purchase of new equipment and property for increasing its profit margin.
Cash and equivalent changes over time:
The above chart denotes that the cash and cash equivalent of the organisation has increased to 54,590 in 2014 to 39,161 in 2015. However, it has increased to 49,144 in 2016, which denotes that the organisation has reduced its receivables period for retaining greater cash in hand (Weygandt, Kimmel & Kieso, 2015).
Long-term debts:
According to the above table, the long-term debt of the organisation has increased significantly to 165,947 in 2016 from 136,480. However, the debt level has fallen marginally in 2016 to 157,468. This denotes that the organisation has been clearing off its debts by collecting amount from the debtors within shorter timeframe.
Liquidity ratios:
According to the above figure, the debt ratio of the organisation has decreased to 44.20% in 2014 to 42.97% in 2015 and it has decreased further to 41.98% in 2016. This denotes that the organisation has relied on equity financing for maintaining optimality in its capital structure (Feng et al., 2014).
Current ratio/ working capital ratio:
From the above table, it is inherent that the current ratio of the organisation has increased from 1.53 in 2014 to 1.54 in 2015, which has increased further to 1.56 in 2016. This denotes that the organisation has been improving its liquidity position, as existing asset base has been improving to meet off its current liabilities. However, Fullerton, Kennedy & Widener (2014) argued that the ideal current ratio is 2. In this case, it is below the ideal standard, which denotes the company still needs to increase its existing asset base to settle its existing liabilities.
Acid test ratio:
From the above figure, it is inherent that the acid test ratio of Engtex has increased from 0.74 in 2014 to 0.76 in 2015; however, it has fallen slightly in 2016 to 0.73. An ideal acid test ratio is considered as 1 (Kaplan & Atkinson, 2015). This denotes that the existing asset base of the organisation has not been sufficient in meeting its current obligations.
Debt-to-equity ratio:
From the above table, it is evident that Engtex has managed to reduce its debt burden largely from 110.69% in 2014 to 95.53% in 2016. However, an ideal debt-to-equity ratio is considered as 50% (Melnyk et al., 2014). In this case, the ratio is well above the ideal standard, which denotes that the organisation is relying too much on debt financing, which has increased its overall risk exposure.
Interest cover:
The above diagram demonstrates that the interest coverage ratio of the organisation has fallen to 3.63 in 2015 from 4.35 in 2014; however, it has increased rapidly to 4.71 in 2016. A ratio above 1 is considered effective for an organisation to meet off its interest expense (Nuhu, Baird & Appuhami, 2016). In this case, it is well above the ideal standard, which denotes that Engtex could meet its interest expense effectively with its operating income.
Activity/ efficiency ratios:Asset turnover:
From the above figure, it is inherent that the asset turnover of the organisation has fallen from 1.06 in 2014 to 0.86 in 2016. This denotes that Engtex has kept some of its assets idle with excessive inventory. As a result, this has lead to lower realisation from assets (Wagenhofer, 2016).
Inventory turnover:
According to the above figure, the inventory turnover of the organisation has been minimised from 2.38 times in 2014 to 1.89 times in 2016, although it has experienced a slight increase to 2.53 times in 2015. This denotes that the organisation has experienced a fall in market demand due to rising competition from the rivals and availability of substitute products in the market (Otley & Emmanuel, 2013). 
Warrant price, mergers and acquisitions:
Warrant-related issues:
As observed from the annual report of Engtex Group Berhad, the exercise price per warrant is obtained as RM 0.50 and the last day of exercising the warrant is 25th October 2017. The warrants were traded at a price of RM 0.83 per warrant on 31st December 2016.
It has been observed from the annual report of the organisation that the effect of exercise related to warrants has resulted in positive value as RM 4,229 in 2016, which was RM 214 in 2015. With the help of such warrant trade, the earnings per share could increase in line as well (Soin & Collier, 2013). The situation is identical in case of Engtex, in which the earnings per share of the organisation have increased from 13.61 sen in 2015 to 19.43 sen in 2016.
In and out of the money:
According to Quattrone (2016), in the money denotes the strike price of an option, which the existing stock price has already exceeded. On the contrary, out of the money indicates an option having a strike price, which a security has not reached and it would fetch only marginal returns, if any (Sharma, 2016). In this case, it has been observed that the warrants are traded at RM 0.83 per warrant, while the exercise price was RM 0.50 in the beginning of the year 2016. This satisfies the criteria of in the money, as the warrant price has gone beyond the initial strike price of RM 0.50.
Significant mergers and acquisition:
In accordance with “Note 25 to the Financial Statements” of the organisation, it has been found that the organisation has acquired 1,200,000 ordinary shares costing RM 1.00 each by taking the leftover 40% equity interest in Englen Metals Sdn Berhad. In addition, it has acquired 1,600,000 ordinary shares costing RM 1.00 each by taking the leftover 40% equity interest in Englen Metals Sdn Berhad. The cash considerations for the first and the second acquisitions have been RM 1,582,606 and RM 1,067,394 respectively. This has helped in owning two new subsidiaries, which have resulted in increased profit margin for the organisation (Strumickas & Valanciene, 2015).
Conclusion:
Overall comments:
From the above evaluation, it has been found that the organisation has performed well in the Malaysian market by increasing its profit margin. However, there has been a significant fall in demand due to availability of close substitutes and rising competition in the market leading to fall in inventory turnover rate. However, the significant acquisitions and operating in “in the market” have helped Engtex to cope up with such issues.
Comparison with market benchmark:
The EMIS benchmark score, which has been obtained as 74.6%, denotes that Engtex has performed better in contrast to 74.6% of the nine total companies in the industry. Since its performance has been effective, it could be stated that the organisation has significantly lower business. However, it needs to concentrate on its capital structure, as it relies highly on debt financing that might lead to indebtedness in future. On the other hand, effective sales growth and high net margin in 2016 imply that the organisation could expect to prosper further in the Malaysian market.
Future prospect and expectation:
As the strike price of the warrants is higher than the current market price, it is expected that Engtex would be able to pay higher dividends to its shareholders in future. In addition, the fall in operating expenses, rise in profit level and increasing return on investment and capital would help the organisation to sustain competitive advantage in the Malaysian market. However, the fall in market demand and excessive dependence on debt financing might increase the overall risk exposure. As a result, the net long-term payables of the organisation might increase in future.
Areas of improvement:
The following are the most significant areas, which Engtex needs to concentrate on for improving its overall financial performance:

Reducing the rate of inventory by making relevant adjustments with the market demand
Utilising fixed assets by subletting the unused property to small business for generation of additional revenue in the form of rent income
Fall in overall debt level is needed, which could be achieved by issuing additional equity shares, for maintaining the optimality of capital structure

References:
Balachandran, K. R., Marra, A., & Rangan, S. (2014). Research Challenges in Accounting and Finance in a Globalized Economy Fair value measurements, Valuation models, and Management practices. Journal of Accounting, Auditing & Finance, 29(1), 88-89.
Bodie, Z. (2013). Investments. McGraw-Hill.
Drury, C. M. (2013). Management and cost accounting. Springer.
Engtex.com.my. (2017).  Retrieved 16 May 2017, from https://www.engtex.com.my/
Feng, M., Li, C., McVay, S. E., & Skaife, H. (2014). Does ineffective internal control over financial reporting affect a firm’s operations? Evidence from firms’ inventory management. The Accounting Review, 90(2), 529-557.
Fullerton, R. R., Kennedy, F. A., & Widener, S. K. (2014). Lean manufacturing and firm performance: The incremental contribution of lean management accounting practices. Journal of Operations Management, 32(7), 414-428.
Kaplan, R. S., & Atkinson, A. A. (2015). Advanced management accounting. PHI Learning.
Lafond, C. A., McAleer, A. C., & Wentzel, K. (2016). Enhancing the Link between Technology and Accounting in Introductory Courses: Evidence From Students. Journal of the Academy of Business Education, 17.
Melnyk, S. A., Bititci, U., Platts, K., Tobias, J., & Andersen, B. (2014). Is performance measurement and management fit for the future?. Management Accounting Research, 25(2), 173-186.
Nuhu, N. A., Baird, K., & Appuhami, R. (2016). The Association between the Use of Management Accounting Practices with Organizational Change and Organizational Performance. In Advances in Management Accounting (pp. 67-98). Emerald Group Publishing Limited.
Otley, D., & Emmanuel, K. M. C. (2013). Readings in accounting for management control. Springer.
Quattrone, P. (2016). Management accounting goes digital: Will the move make it wiser?. Management Accounting Research, 31, 118-122.
Sharma, G. (2016). Practices of Financial and Management Accounting: Evidence from Small and Medium-Sized Enterprises of Nepal. Journal of Nepalese Business Studies, 9(1), 77-86.
Soin, K., & Collier, P. (2013). Risk and risk management in management accounting and control.
Strumickas, M., & Valanciene, L. (2015). Research of management accounting changes in Lithuanian business organizations. Engineering Economics, 63(4).
Taipaleenmäki, J., & Ikäheimo, S. (2013). On the convergence of management accounting and financial accounting–the role of information technology in accounting change. International Journal of Accounting Information Systems, 14(4), 321-348.
Wagenhofer, A. (2016). Exploiting regulatory changes for research in management accounting. Management Accounting Research, 31, 112-117.
Weygandt, J. J., Kimmel, P. D., & Kieso, D. E. (2015). Financial & Managerial Accounting. John Wiley & Sons.

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