FINANCIAL MANAGEMENT 2 / BBPW3203

FACULTY OF BUSINESS & MANAGEMENT

January 2016

BBPW3203
FINANCIAL MANAGEMENT 2

MATRICULATION NO.

331205270 001

IDENTITY CARD NO.

331205270

TELEPHONE NO.

012 2773614

E-MAIL

[email protected]

LEARNING CENTRE

PETALING JAYA

FINANCIAL MANAGEMENT 2 / BBPW3203

FINANCIAL MANAGEMENT 2 / BBPW3203

TABLE OF CONTENT
1. Introduction.....................................................................................................................2
2. Liquidity and liquidity ratios..........................................................................................2
3. Introduction of the selected company.............................................................................5
4. Computation and analysis of liquidity ratios for years 2010 to 2014.............................7
5. Summary and conclusion................................................................................................8
References...........................................................................................................................9

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1. Introduction
The ability to meet short-term financial commitments of a company is evaluated for five
consecutive years from 2010 to 2014. This evaluation is carried out based on liquidity ratios
derived from data stated in the company's published financial statements for the respective
years.
The chosen company is Dutch Lady Milk Industries Berhad (here abbreviated DLMIB).
DLMIB is listed at Bursa Malaysia, categorized within the consumer products sector, as
DLMIB is in the food and beverages (F&B) business, with products solely around milk and
dairy products.
Data to compute the liquidity ratios and further related information were gathered from
DLMIB's published Annual Reports for the years 2010 to 2014, particularly from the
statements of financial position and of cash flows.

2. Liquidity and liquidity ratios

3.1. Liquidity
Liquidity is a measure of how easy it will be for a business to raise enough cash within a
short term, i.e. within a year or less, to meet short-term financial commitments as they
become due.
Though liquidity tells how much cash can be raised within a short term, it does not only
depend on cash in hand. In the short term, a business can also convert some of its assets other
than cash into cash. Often, cash can relatively easy be generated in a short term from current
assets such as accounts receivable, marketable securities and inventories. Thus, such assets go
into the liquidity considerations for a business.

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Accounting principles such as GAAP (Generally Accepted Accounting Principles) require
companies to list separately the current and the long-term assets and liabilities in the balance
sheet.
For liquidity assessments, the current assets and the current liabilities are looked at.

3.2. Liquidity ratios

Liquidity ratio figures serve to describe and evaluate a company's ability to pay off short-term
debt obligations using its current assets, i.e. without having to sell off longer term assets.
The current asset category includes cash and cash equivalents, accounts receivable,
marketable securities, inventories, and prepaid expenses.
The current liabilities include accounts payable, notes payable, and short-term provisions.
The liquidity ratio figures are calculated based on figures from the statement of financial
position and the statement of cash flows. Here are the most commonly used liquidity ratios
and their formulae:
Current ratio = Current assets / Current liabilities
Quick ratio = [ Cash & equivalents + Accounts receivable + Marketable securities ] /
Current liabilities
Cash asset ratio = [ Cash & equivalents + Marketable securities ] / Current liabilities
Operation cash flow ratio = Cash flow from operations / Current liabilities

3.3. Evaluating liquidity ratio figures

The calculated liquidity ratio figures give an indication whether a business will run into
trouble to cover its short-term financial obligations: Generally, the higher the liquidity ratio
figure, the more easily a business will be able to make current debt payments.
However, liquidity ratio figures can also indicate whether a business is not making good use
of its available short-term financing.

If liquidity ratios < 1 or even << 1: danger of inability to pay short-term obligations

If liquidity ratios >> 1: possibility of insufficient usage of available financing means

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Acceptable values as well as limits to "danger zone" for liquidity ratio figures vary with the
company's industry, the payment periods of current liabilities, the periods to collect account
receivables, the inventory turnover cycle, etc. In other words: A very high liquidity ratio is
not necessarily good, and a low liquidity ratio is not necessarily bad.
Current ratio, also known as working capital ratio, comprises the complete range of current
assets held by the business. It measures the firm's ability to pay off its short-term liabilities,
due within the next year, by considering all the current assets.
Conceptually, the current ratio evaluation is based on liquidating all of a company's current
assets, to cover all of its current liabilities. In reality, this is unlikely to occur. Hence, usage of
current ratio alone might be too simplistic.
If banks are asked to provide (further) loan, they often give their approval only in case of
current ratio of at least 1, or higher, so that all the current liabilities can be covered by the
current assets.
Quick ratio, also known as acid test ratio, is a liquidity indicator that refines the current ratio
comparison, by measuring the amount of the most liquid current assets which are available to
cover current liabilities.
Quick ratio tells how well a business can quickly turn assets into cash. Therefore, quick ratio
includes only "quick assets": assets that are deemed as relatively easy to liquidate, i.e. within
90 days or less.
Cash and cash equivalents, accounts receivable, and short-term marketable securities are
deemed quick assets. In particular, this ratio does NOT include inventories and pre-payments.
Hence, the quick ratio is more conservative than the current ratio, because it excludes current
assets which are more difficult to turn into cash.
Cash asset ratio measurement further refines both the current ratio and the quick ratio by
measuring "only" the amount of cash, cash equivalents and tradeable securities, which are
included in the current assets, to cover current liabilities.
The cash asset ratio is the most stringent and conservative of the three short-term liquidity
ratios (current, quick and cash). It only looks at the most liquid short-term assets of the
company, which are those that can be most easily used to pay off current obligations: Cash
asset ratio includes only cash (and equivalents) and marketable securities (i.e. securities able
to be traded).
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Cash asset ratio ignores inventory and receivables, as there are no assurances that these two
accounts can be converted to cash in a timely matter.
However, the usefulness of this ratio is limited as it is not realistic for a business to
purposefully maintain high levels of cash assets. Holding large amounts of cash could
indicate rather poor asset utilization as this money could be used to generate higher returns or
else returned to shareholders.
Operation cash flow ratio refers to the cash flow from business operations, which are used
to pay off its short-term liabilities.
Input data for liquidity ratios as retrieved from financial reports:
Financial year

2010
RM'000

2011
RM'000

2012
RM'000

2013
RM'000

2014
RM'000

Cash & equivalents

85,657
75,176

204,84
4
16,176

Inventories

72,722

93,448

86,781

Derivative financial assets

Prepaid expenses & taxes
Assets for sale

689
234,24
4

1,161
324,46
6

709
308,51
0

187,64
1
35,482
113,20
8
185
583
629
337,72
8

124,269

Trade & other receivables

193,14
3
36,714

99,638

146,53
8
15,080
168

206,78
5
15,702
173

176,496

6,275
348

121,83
2
13,102
375

106,26
1
123,39
1

135,30
9
188,28
6

161,78
6
224,09
1

108
222,76
8
207,80
8

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Current assets (CA)

Total CA
Current liabilities (CL)
Trade & other payables
Current tax payable
Provisions (accruals)
Derivative financial
liabilities
Total CL
Cash flow from operations
(gross)

37,346
92,545
5,548
1,229
260,937

5,020
229
181,764
138,258

Sources: Annual Reports 2010 to 2014 from Dutch Lady Milk Industries Berhad.

3. Introduction of the selected company

The liquidity ability of Dutch Lady Milk Industries Berhad (DLMIB) is evaluated.

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3.1. Dutch Lady Milk Industries Berhad

DLMIB has a long tradition in Malaysia, where it is established since decades processing and
selling its products.
DLMIB is a subsidiary of Royal FrieslandCampina N.V. of Netherlands, which is major
shareholder with approx. 51% equity share.
FrieslandCampina also provides guidance and support in governance as well as
manufacturing and product standards.
DLMIB was incorporated in 1963 as Pacific Milk Industries (Malaya) Sdn Bhd, starting with
one single product (sweetened condensed milk); it changed names in 1975 and again in 2000
to today's name.
DLMIB was first in Malaysia to use ultra-high temperature (UHT) processing and packaging
of milk (Ng, 2012).
DLMIB's business interest in Malaysia is in the domestic market only.
DLMIB operates in one major business segment: dairy products; these include liquid milk,
powdered milk and condensed milk.
In Malaysia, DLMIB is market leader in infant toddler nutrition, and strong in the ambient
ready-to-drink category.
Looking at the 5-year financial summary from 2010 to 2014, DLMIB's business exhibits
steady increase of revenue (growth rate of approx. 8%), and accordingly of profits, except in
2014 when latter dropped; and just as the profits increased in the years 2010 through 2013,
and dropped in 2014, so did the total assets and the earnings per share.
DLMIB has achieved RM1bil sales for the first time in 2014, and reported net profits of over
RM100mio for the past 4 years.
In their analysis of the 2014 company performance, DLMIB attributed their financial
performance to increasing prices of dairy raw materials (as DLMIB makes substantial
purchases in US Dollar), the public's weaker demand for dairy, and increasing competitive
pressure.
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DLMIB sees their business affected by the continued trend of declining national birth rates,
and recurring major floods.

4. Computation and analysis of liquidity ratios for years

2010 to 2014
4.1. Computation of liquidity ratios for 2010 to 2014
Liquidity ratio figures as calculated from data ex financial reports 2010 to 2014:
Financial year

2010

2011

2012

2013

2014

Current ratio

2.20

2.40

1.91

1.52

1.44

Quick ratio

1.51

1.70

1.37

1.00

0.89

Cash asset ratio

Operation cash flow ratio
(gross)

0.81

1.43

1.27

0.84

0.68

1.16

1.39

1.39

0.93

0.76

Liquidity ratio numbers

4.2. Analysis
Comparison of DLMIBs liquidity ratios in the five consecutive years from 2010 to 2014:
Liquidity peaked in 2011, however, it declines from then and is lowest in 2014. The 2014
liquidity ratio figures are roughly at half the 2011 values.
In the whole 5-year period looked at, current ratio stays well above 1 each year, an indication
of sufficient assets to meet short-term payment requirements. But the liquidity ratios other
than current ratio drop well below 1 in 2014, indicating a rather tight payment ability in the
short term. In this situation, the contribution of the inventories has relatively increased.
Further drop might raise concern for DLMIB's ability to raise financing from banks.

FINANCIAL MANAGEMENT 2 / BBPW3203

5. Summary and conclusion

The short-term financial performance of Dutch Lady Milk Industries Berhad (DLMIB) for
the years 2010 to 2014 is evaluated, based on liquidity ratios derived from data stated in their
published financial statements for this period.
DLMIB is a company listed at Bursa Malaysia in the consumer products sector, and active in
the food and beverages business, solely around milk and dairy products.
After seeing steady sales growth, DLMIB has achieved RM1bil sales for the first time in
2014. However, after years of rising profitability figures, DLMIB's financial performance has
seen a decline after 2011, being lowest in 2014.
This is accordingly reflected in the company's liquidity metrics which peaked in 2011 but
dropped to lowest values in 2014, with both quick ratio (0.89) as well as cash asset ratio
(0.68) well below 1, and only current ratio (1.44) still well above 1.
The 2014 liquidity ratio figures are roughly at half the respective 2011 values (2.40, 1.70 and
1.43 respectively).
In the whole 5-year period looked at, current ratio stays well above 1 each year, an indication
of sufficient assets to meet short-term payment requirements. But the liquidity ratios other
than current ratio have significantly dropped below 1 in 2014, indicating a rather tight
payment ability in the short term. Further drop might give concern for DLMIB's future ability
to raise financing from banks.

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References
Dutch Lady Milk Industries Bhd (2015, April 24). Annual Report 2014. Retrieved from
http://www.bursamalaysia.com/market/listed-companies/company-announcements/#/?
category=AR&company=3026
Dutch Lady Milk Industries Bhd (2013). Annual Report 2012. Retrieved from
http://www.bursamalaysia.com/market/listed-companies/company-announcements/#/?
category=AR&company=3026
Dutch Lady Milk Industries Bhd (2011). Annual Report 2010. Retrieved from
http://www.bursamalaysia.com/market/listed-companies/company-announcements/#/?
category=AR&company=3026
Investopedia. Liquidity ratios. Retrieved 15 March 2016 from
http://www.investopedia.com/terms/l/liquidityratios.asp?layout=infini&v=4B&adtest=4B
Loth, R. Liquidity measurement ratios: Introduction. Investopedia. Retrieved 15 March 2016
from http://www.investopedia.com/university/ratios/liquidity-measurement/#ixzz433Jw3yGw
Ng, T. M. (2012, January 9). UHT milk in a box. The Star Online. Retrieved from
www.thestar.com.my/story/?file=%2F2012%2F1%2F9%2Flifefocus%2F10154583

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Attachment 1:
Dutch Lady Milk Industries Berhad: "Annual Report 2014", pages 48 & 51, with figures for
2013 and 2014

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Attachment 2:
Dutch Lady Milk Industries Berhad: "Annual Report 2012", pages 35 & 38, with figures for
2011 and 2012

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Attachment 3:
Dutch Lady Milk Industries Berhad: "Annual Report 2010", pages 30 & 33

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