Ways Of Transferring Capital From Savers To Borrowers Finance Essay

Ways Of Transferring Capital From Savers To Borrowers Finance EssayFind the most late pecuniary logical arguments for two companies of same industry which are listed in KLSE (Kuala Lumpur Stock Exchange). Evaluate the pecuniary position and performance for each of these two companies using explanation symmetry analysis. You are required to compute and compare the accounting proportionalitys between these 2 companies, and conclude the results of your findings. The limitations or problems of using accounting balances for performance analysis should be included in your conclusion.Identify and discuss three different ways of transferring pileus or fund from savers to borrowers in the pecuniary market.1.0 IntroductionWhat is accounting ratios? invoice ratios are the ratios which used in calculation and indicate the relationship between figures from the financial statements of a lodge. The financial statements are the statements that summarized a fellowships activities eith er quarterly or annually. It consists of a net returns and loss account and a balance sheet. In accounting, accounting ratios are often used in interpreting and evaluating a attach tos boilersuit financial condition and crinkle performance. Accounting ratios are classified into 5 categories for measuring 5 different aspects of calling performance. The 5 aspects are shown as winProfitability of company liquidity of companyAsset vigilance of companyDebts management and capital gearing of company market economic apprize of investiture to cut-and-dried servingholders / plebeian stockholders1.1 Profitability of company utter(a) pull ahead markupGross winnings markup (%) = Gross Profit x carbonCost of goods soldGross attain marginGross profit margin (%) = Gross profit x 100 authorize gross revenue comfort in operation(p) profit margin on salesOperating profit margin (%) = Operating profit before interest and before taxation x 100Net sales valueProfit margin on salesProfi t margin on sales (%) = Net income available to usual stockholders x 100Net sales valueBasic earning personnel (BEP)Basic earning power (BEP) = Operating profit before interest and before taxation x 100Total pluss father on total pluss (ROA)Return on total assets (ROA) = Net income available to common stockholders x 100Total assetsReturn on total fairness (ROE)Return on total equity (ROE) = Net income available to common stockholders x 100Common equity1.2 Liquidity of companyCurrent ratio / Working capital ratioCurrent ratio / Working capital ratio = Current assetsCurrent liabilitiesLiquid ratio / quick ratio / venereal disease-test ratioLiquid ratio / quick ratio / acid-test ratio = Liquid assetsCurrent liabilities1.3 Asset management of companyInventory perturbation or stock turnoverInventory turnover or stock turnover = Cost of salesAverage stock valueFixed asset turnoverFixed asset turnover = Net salesFixed assets net script valueTotal assets turnoverTotal assets turnover = Net salesTotal assets debitor ratioDebtor ratio = DebtorCredit salesDebtor recompense periodDebtor payment period = Debtor x 365 days/ 52 weeks / 12 monthsCredit sales solar days sales outstanding (DSO)Days sales outstanding (DSO) = Debtor x 365 daysCredit sales1.4 Debts management and capital gearing of companyDebts ratioDebts ratio = Total debtsTotal assetsCapital gearing ratioCapital gearing ratio = antecedent charge debts capitalTotal capitalDebts equity ratioDebts equity ratio = Total debtsCommon Equitymultiplication interest earnedTimes interest earned = Profit before interest and before taxationInterest chargesCreditor ratioCreditor ratio = CreditorCredit purchaseCreditor payment periodCreditor payment period = Creditor x 365 days / 52 weeks / 12 monthsCredit purchase1.5 Market value of investment to run-of-the-mine shareholders/ common stockholders winnings per share gain per share = Net income available to common stockholdersNumber of fair shares in issue impairment / Earnings ratioPrice / Earnings ratio = Market value per median(a) shareEarnings per shareDividend coverDividend cover = Earnings per shareNet ordinary dividend per shareEarning yieldEarning yield = Gross earnings per share x 100Market price per ordinary shareDividend yieldDividend yield = Gross ordinary dividend per share x 100Market price per ordinary sharePrice / cash flow ratioPrice / cash flow ratio = Market price per ordinary shareNet cash inflow per ordinary shareMarket price / book value ratioMarket price / book value ratio = Market price per ordinary shareNet book value per ordinary share1.6 Companys backgroundGamuda was incorporated on 6 October 1976. It was listed on the main board of the Kuala Lumpur Stock Exchange (KLSE) on 10 August 1992. In Malaysia, Gamuda is a leading infrastructure group. It has a wide range of business activities all over the world. Its core competencies are engineering and construction, infrastructure concessions, and also township developmen t. Besides, they lease mega projects such as internationally acclaimed SMART (Stormwater Management and avenue Tunnel), intra-urban elevatedways, Kaohsiung Mass Rapid Transit System in Kaohsiung, Taiwan, and so on.On the other hand, WCT was incorporated on 14 January 1981 as WCT Earthworks Building Contractors Sdn Bhd. Then, it went public on 1 April 1994 and listed on the Kuala Lumpur Stock Exchange (KLSE) on 16 February 1995. The business nature of WCT Berhad contains engineering and construction, property development, and also assets management. The business coverage of WCT is in Malaysia and abroad. Its projects and function include F1 international racing circuit, international airport, hydroelectric dam, township planning development and so on.Then, the next step is applying the accounting ratios to calculate the 2 companiess business performance. The companies are Gamuda Berhad and WCT Berhad. In order to compare these 2 companies, the selection is inter- soaked which is comparing based on the industry average. It is because they have the same business nature. Before doing comparison, a person must obtain the financial statements of a company. In general, the financial statements are released in annually basis, but some of the companies are quarterly basis. financial statements are the vital resource for a researcher used to calculate and compare the companies business performance. The financial statements adopted from Gamuda Berhads annual report 2010, whereas WCT Berhad is 2009. Figures inside the income statement and balance sheet are used in apply to the accounting ratio in calculating purposes. later on done the calculation, there is a regulation weigh available in each accounting ratio to interpret the data. Each answer generated is referring to the weigh in comparison and generate a comment. These 2 annual reports of Gamuda and WCT are adopted from their official website in the column of the investor relations. The website address of Ga muda is http//www.gamuda.com.my, whereas website address of WCT is www.wct.com.my.1.7 Calculation worksheetTypes of ratioCalculation of Gamuda BerhadCalculation of WCT BerhadProfitabilityGross profit markup (%)= Gross profit x 100Cost of goods sold= RM 422976000 x 100RM 2032167000= 20.81 %= RM 354659000 x 100RM 4311943000= 8.23 %Gross profit margin (%)= Gross profit x 100Net sales value= RM 422976000 x 100RM 2455143000= 17.23 %= RM 354659000 x 100RM 4666602000= 7.60%Operating profit margin on sales (%)Operating profit before= interest before taxation x100Net sales value= RM 259852000 x 100RM 2455143000= 10.58%= RM 244145000 x 100RM 4666602000= 5.23 %Profit margin on sales (%)= Net income availableto common stockholders x 100Net sales value= RM 280693000 x 100RM 2455143000= 11.43 %= RM 147098000 x 100RM 4666602000= 3.15 %Basic earning power (BEP)= Operating profit beforeInterest andbefore taxation x100Total assets= RM 259852000 x 100RM 6550910000=3.97%= RM 244145000 x 100RM447848400 0= 5.45 %Return on total assets (ROA)= Net income available tocommon stockholders x100Total assets= RM 280693000 x 100RM 6550910000= 4.28%= RM 147098000 x 100RM 4478484000= 3.28 %Return on total equity (ROE)= Net income available tocommon stockholders x 100Common equity= RM 280693000 x 100RM 325752500= 8.62 %= RM 147098000 x 100RM 1250246000= 11.77 %LiquidityCurrent ratio= Current assetsCurrent liabilities= RM 4203173000RM 1930241000= 2.18 1= RM 2553187000RM 1807550000= 1.41 1Acid-test ratio= Liquid assetsCurrent liabilities= RM4123435000RM1930241000= 2.14 1= RM 2439478000RM 1807550000= 1.35 1Asset ManagementInventory turnover= Cost of salesAverage stock value= RM 2032167000RM 79738000= 25.49 clock= RM 4311943000RM 113709000= 37.92 timesTotal assets turnover= Net salesTotal assets= RM 2455143000RM 6550910000= 0.37 times= RM 4666602000RM 4478484000= 1.04 timesDebtor ratio= DebtorCredit sales= RM 1607772000RM 2455143000= 0.65 1= RM 1472655000RM 4666602000= 0.32 1Day sales outst anding (DSO)= Debtor x 365 daysCredit sales= 0.65 x 365 days= 237.52 days= 0.32 x 365 days= 116.8 daysDebts management and capital gearing of companyDebts ratio= Total debtsTotal assets= RM 3243187000RM 6550910000= 0.50 1= RM 2991508000RM 4478484000= 0.67 1Debts equity ratio= Total debtsCommon equity= RM 3243187000RM 3257525000= 1 1= RM 2991508000RM 1250246000= 2.39 1Times interest earned= Profit before interestand before taxationInterest charges= RM 259852000RM 43813000= 5.93 times= RM 24414500RM 50308000= 4.85 timesMarket value of investment to ordinary shareholders / common stockholdersEarnings per share= Net income available tocommon stockholdersNumber of ordinaryshares in issues= RM 2806930002025888000 shares= RM 0.14= RM 147098000777712000 shares= RM 0.19Price earnings ratio= Market price per ordinary shareEarnings per share= RM 3.20 per shareRM 0.14 per share= 22.86 times= RM 2.60 per shareRM 0.19 per share= 13.68 timesEarnings yield= Gross earnings per share x 100Market price per ordinaryshare= (100/75 x RM 0.14) x 100RM 3.20= 5.83 %= (100/75 x RM 0.19) x 100RM 2.60= 9.74 %Market price per book value= Market price per ordinary shareNet book value per ordinaryshare= RM 3.20 per share(RM 325752500 /2025888000 shares)= RM 3.20RM 1.61= 1.99 1= RM 2.60 per share(RM 1250246000 /777712000 shares)= RM 2.60RM 1.61= 1.61 11.8 Ratios comparison between Gamuda and WCT1.81 ProfitabilityGross profit markup and gross profit marginBased on the profitability ratios calculations result generated above, Gamuda Company is generating high profit compared to WCT Company. The both gross profit markup and gross profit margin of Gamuda is high than WCT. High gross profit earned by Gamuda shows that it has effective and efficient manoeuvre in set downing its purchasing cost and production cost. Lower gross profit earned by WCT indicates it does non effective and efficient control in trim backing its purchasing cost and production cost. Besides, both operating profit margin and profit margin on sales of Gamuda is high than WCT. Higher profit margin earned by Gamuda shows it has an effective control in lowering its expenditures and interest cost. Whereas it indicates WCT is ineffective in controlling its expenditures and interest cost.Basic earning power, return on total assets, and return on common equityHowever, in basic earning power and return on common equity, Gamuda is lower than WCT. Return of asset of Gamuda is or so higher(prenominal) 1 % than WCT only, which is 4.28 % and 3.28 % respectively. It shows that WCT is generating higher profit regarding to its effective and efficient in using its assets and capital in the business. In contrast, Gamuda is ineffective and inefficient in employing its assets and capital.1.82 LiquidityCurrent ratioIn liquidity aspect, the current ratio of Gamuda and WCT is 2.18 1 and 1.41 1 respectively. If the current ratio is higher than average of industry, it mean a company has a larger amount of current assets to pay its current liabilities. Besides, it proves that a company has a stable financial condition. In contrast, when current ratio is lower than average of industry, it shows the companys financial condition is unstable. The company has lower amount of current assets to pay its current liabilities.Acid test ratioOn the other hand, acid test ratio of Gamuda is 2.14 1, whereas WCT is 1.35 1. When a companys acid test ratio is higher than average of industry, it shows that it has larger amount of liquid assets to pay its current liabilities. In contrast, lower acid test ratio shows a company has lower amount of liquid assets to pay its current liabilities.1.83 Asset managementInventory turnoverIn asset management aspect, the inventory turnover of Gamuda is 25.49 times and WCT is 37.92 times. Higher inventory turnover shows that a company experiences fast stock turnover, so stocks are not accumulated, and no money to be tied up. WCT has a higher inventory turnover than Gamuda. I t means that WCT has fast turnover, little stocks to be accumulated, and less money to be tied up compared to Gamuda.Total assets turnoverBesides, total assets turnover of Gamuda is 0.37 times, and WCT is 1.04 times. Total assets turnover of WCT is higher than Gamuda. WCT has higher sales generated from its business due to its effective asset usage which increases the production volume.Debtor ratio days sales outstandingDebtor ratio of Gamuda is 0.65 1, and WCT is 0.32 1. Besides, the day sales outstanding of Gamuda are 237.5 days, and WCT is 116.8 days. Higher debitor ratio and day sales outstanding shows that Gamuda gives a longer credit time to its debitors which cause a longer time to collect back the money. Gamuda may accumulate the debts balance and experiences shortage of money which unable to finance its current liabilities. In contrast, WCT has a lower debtor ratio and day sales outstanding. It has shorter debtor payment period, experience less debts balance, and less money to be tied up from its debtors.1.84 Debts management and capital gearingDebtor ratioIn debts management and capital gearing aspect, WCT has a higher debts ratio compared to Gamuda. The higher debts ratio shows that a company experiences heavy debts and high interest cost. It may cause a company unable to pay back the debts, and forced to sell its assets to pay.Debts equity ratioDebts equity ratio is used to measure the proportion of company debts with its common equity. Both Gamuda and WCT debts equity ratio is higher than 0.51, but WCT is higher than Gamuda which are 2.391 and 11 respectively. It means these 2 companies operate at a high gear with larger proportion of prior charge debts capital. It views as unstable capital structure and bearing the high interest cost financed by larger proportion of profit.Time interest earned / Interest coverBoth companies experience high capital gearing ratio, but WCT is higher than Gamuda. It means WCT experiences low times interest earne d and indicates it is bearing the high interest charges in relation to its profit.1.85 Market value of investment to ordinary shareholders / common stockholdersEarnings per shareLastly, in market value of investment to ordinary shareholders / common stockholders, WCT has a higher earnings per share compared to Gamuda. It shows that WCT has a higher business growth and higher profit earnings. In converse, lower earnings per share shows that a company experiences a low business growth and low profit earnings.Price earnings per shareBesides, WCT has a lower price earnings ratio compared to Gamuda. Lower price earnings ratio shows that Gamudas earnings per share is precise high which influenced the common stockholders have to take shorter period use their profit earning to recover back their share investment amount. If the earnings ratio is high, it shows that a companys earnings per share are very low and the common stockholders spend longer period use their profit earning to recover their share investment amount.Earning yieldThe earning yield of WCT is higher than Gamuda. If the earning yield higher than the average of industry, it shows that a company has high net income and very benignant to the common stockholders. However, when the earning yield is lower than average of industry, it shows that a company has low net income and not attractive to the common stockholders.Market price per book valueBesides, the market price per book value of WCT is lower than Gamuda. If market price per book values is lower than the average of industry, it means the share market price decreases below its real asset value and becomes attractive to common stockholders. In converse, if the market price per book value is higher than the average of industry, it means its share market price increases over its real asset value and become not attractive to the common stockholders.1.9 ConclusionBased on the result of 5 aspects of accounting ratio above, WCT Company has a better overal l business performance than Gamuda Company. Firstly, WCT has higher BEP and ROE which shows WCT is generating higher profit regarding to its effective and efficient in using its assets and capital in the business activities. Secondly, WCT has a higher inventory turnover than Gamuda. It indicates that WCT has fast turnover, more liquid, less stocks to be accumulated, and less money to be tied up compared to Gamuda. Thirdly, total assets turnover of WCT is higher than Gamuda. WCT has higher sales generated from its business due to its effective asset usage which increases the production volume. Fourthly, WCT experiences a lower debtor ratio and day sales outstanding than Gamuda Company. WCT has shorter debtor payment period, experience less debts balance, more liquid and less money to be tied up from its debtors. Fifthly, WCT has higher earnings per share compared to Gamuda. WCT has a higher business growth and higher profit earnings. Sixthly, WCT experiences lower price earning ratio compared to Gamuda. Lower price earnings ratio shows that WCTs earnings per share are very high. It enables the common stockholders have to take shorter period use their profit earning to recover back their share investment amount. Seventhly, the earning yield of WCT is higher than Gamuda. When the earning yield higher than the average of industry, it shows that a company has high net income and very attractive to the common stockholders. Lastly, the market price per book value of WCT is lower than Gamuda. When market price per book values is lower than the average of industry, it means the share market price decreases below its real asset value and becomes attractive to common stockholders. Thus, WCT is more attractive than Gamuda.On the other hand, while doing inter-firm comparison, there are several limitations in applying the ratio and trend analysis. The first limitation must select the same industry norms and compare based on the industry average. The second limitation is eac h firm experiences a different financial and business risk profile. It also touched by the analysis differently. The third limitation is accounting policies. Each firm applies different accounting policies. For example, in small firm, it groups its stationery in current assets. However, in large firm, it groups it into expenses. The fourth limitation is the size of the firm would experience different level of risk from its competitors, structure, and returns. The fourth limitation is the area and environment of a firm. Home-based firm and multinational firm operate differently in different countries.2.0 IntroductionWhat is financial market? Financial market is a mechanism where surplus cash are gathered from the people who intended to lend out their money. Furthermore, it acts like a platform where provides the opportunities for the organizations and individuals who are short of money to borrow funds. Financial markets have different categories. Each financial market deals with a d ifferent type of financial instrument of its maturity and the asset backing it. Different financial markets military service different types of customers, and operate in different parts of the country. Financial markets are different from physical asset markets. Physical asset markets also called as distinct asset markets or commodities market which deal with the physical products like gold, crude oil, real estate, and machinery. Whereas the financial markets deal with the financial instruments like shares, bonds, notes, mortgages, and so on. Besides, these 2 markets git operate as the cytologic smear market or future market. Spot markers can be defined as goods are being traded on the spot and delivery within several days. Conversely, the goods that are being traded in future market are for future and delivery on future date. It could be 6 months or a year in future.2.1 Types of financial markets2.11 Primary marketsThere are various financial markets in each country. The first type is primal quill markets. It is the market for corporations to raise capital by issuing new securities or shares. The corporations collect the funds by selling off the new issued stocks in the primary market transaction.2.12 Secondary marketsThe second type is secondary markets. Secondary markets are the markets in which existing and already outstanding securities or other financial assets that are traded among the investors after they have been issued by the corporations.2.13 Initial public offering marketThe third type is initial public offering (IPO) market. It is a market that provides the company or corporations go public by offering new securities or shares to the public for the first time. Once the corporation or company went public, it will be listed on the stock exchange. These companies or corporations are usually newly established and go public to collect capital.2.14 Private marketsThe fourth type is private markets. It is a financial market where the transactions are worked out directly between 2 parties. Private markets are different from the public markets where standardized contracts are traded on organized exchanges, but private market could perform privately without going to public where the transaction may be structured in any mood that appeals to the 2 parties. Bank loans and placement of debts with insurance are the examples of the private market transaction.2.15 Consumer credit marketsThe fifth type is consumer credit markets. Generally, it deals with the loans on autos and appliances, loans for education, vacations, and so on.2.16 Mortgage marketsThe ordinal type is mortgage markets. Mortgage markets deal with the loans for the purposes of residential, commercial, industrial real estate, and also farmland.2.17 capital marketsThe seventh type is capital market. Capital markets deal with the stocks or shares, mean(a) or long-term debts in which funds to be loaned and borrowed for long periods. It usually more offered in one year or more than one year.2.18 cash marketThe eighth type is money market. Money market deals with short-term, highly debt securities in which funds to be loaned and borrowed for a short period which usually less than one year.2.2 Three ways for transferring capital or fund between savers and borrowers2.21 Direct transfer from savers to borrowersThe first way is direct transfer from savers to borrowers. It usually happens when a corporation (borrower) wants to collect funds by issuing and selling new securities or bonds to the savers (money lender). In this selling process, it does not pass through any financial institution which the corporations directly deliver the securities to the savers who in return pay money to the corporation. Therefore, it is a direct flow where the funds are directly transferred from the savers to the corporations. The following draw can fully explain the process between corporations and savers. expel corporations securities or bonds toCorporations (Borrower s)Savers (Money lenders)Receive capital or fund fromDiagram 2.21.1- Direct transfer from savers to borrowers2.22 validating transfer from the savers to the borrowers through investment banking family unitThe second way is indirect transfer from the savers to the borrowers through investment banking house. It normally happens when an investment bank underwrites the issuance of a corporations securities where the investment bank acts as a middleman to facilitate the issuance of corporations securities. Indeed, investment bank purchases the corporations securities and then resell it to the savers. It means the money paid by the savers in purchasing corporations securities is passed to the investment bank and to be received by the corporation (borrower). Thus, money of savers and securities of company is only passing through the investment banking house. As a result, the fund is indirectly transferred through the investment banking house from the saver (money lender) to the corporatio n (borrower). The below diagram can fully explain the process among the investment banking house, corporation, and saver.Investment Banking House(Middle man)(Corporations(Borrower)Savers(Money lender) Issue corporations Resell corporationssecurities to securities toReceive fund from Receive fund fromDiagram 2.22.1- collateral transfer from the savers to the borrowers through investment banking house2.23 Indirect transfer from the savers to borrowers through a financial intermediaryThe third way is indirect transfer from the savers to borrowers through a financial intermediary. It usually happens when a financial intermediary like bank or a mutual fund collects the funds from the savers by issuing its own securities or certificate of put to the savers. After that, the financial intermediary uses the collected funds from the savers to buy and keeps the other corporations securities as its investments. It means that the money paid by the savers to purchase the securities or certificat e of deposit issued by the financial intermediary. Then, the money passed to the financial intermediary, and then the financial intermediary paid the money for purchasing the other corporations securities. In fact, there are galore(postnominal) people prefer holding the certificate of deposit and the securities issued by the financial intermediary. The reason is they are safer and more liquid than the mortgages and loans. Thus, financial intermediaries are greatly increase the efficiency of money and capital markets. The below diagram can fully explain the process among the financial intermediary, saver, and corporation.Savers(Money lender)Corporations(Borrower)Financial Intermediary (Money lender to corporation) / (Borrower from saver) Issue corporations Issue intermediaryssecurities to owns securities toReceive fund from Receive fund fromDiagram 2.23.1- Indirect transfer from the savers to borrowers through a financial intermediary2.3 Types of financial intermediaries and its rol eInvestment banking house is an organization that underwrites and distributes the new securities issued by the corporations which helps the corporation in obtaining the funds for financing. In Malaysia, examples of investment banking house are CIMB bank, Affin bank, and Maybank. Financial intermediary are the specialized financial organization that facilitate the transfer of funds from the savers to the borrowers. There are several types of financial intermediaries.2.31 Commercial bankThe first type is commercial bank. It is a handed-down departmental store of finance which serves a huge population of savers and borrowers. Besides, commercial banks are the major institutions that handled checking accounts and through which Federal Reserve System increased or decre