Discuss about the Financial Analysis And Management.
The report will focus on analysing the financial performance of Celcom telecommunication as against the performance of Maxis for the past 5 years. The report will concentrate on measuring various financial ratios for both the companies to analyse their performance and position. It will further evaluate the strategic and operational issues of Celcom.
Celcom started its operation as the STM Cellular Communication in the year 1988 along with Telekom Malaysia and Fleet Group. The company is the subsidiary of Axiata Group Berhad. It was incorporated as private company on 12th June 1992 in Malaysia (Celcom.com.my 2018).
On the other hand the competitor of Celcom that is Maxis Berhad is the investment holding company that is based in Malaysia and is engaged in managing its operation in telecommunication industry. Principally the company is engaged in telecommunication provision, selling of devices and providing digital services. Major business activities of the company include includes supply of post-paid and prepaid mobile services, providing network facilities, fixed line services and various other digital, converged and related services. Advanced Wireless Technologies Sdn. Bhd is the main subsidiary of Maxis Berhad that operates the national network for public switched and provides applications and internet services (Maxis 2018).
It delivers telecommunication services that include network services for fiber and cellular optic transmission, data and voice transmission services through fixed and cellular systems and the paging services. It also provides the training services regarding dealing under marketable securities (Amba 2014). Further it provides unified messaging services that enable the users to see fax message through Air Cash services and Web that allows instant access to the money through the mobile phones of client
The company has made good progress with regard to revamp of digital customer’s experience. Further, the retail outlet will give the customers new experience and they will be connected in better way (Brigham et al. 2016). In near future the company is also planning to relocate few of its existing stores to more attractive commercial locations that will make more convenient access for the customers.
Telecommunication companies in Malaysia are increasing day by day and the telecommunication market is dominated by major companies like Tune Talk and Umobile. The market in telecommunication sector is becoming oligopoly due to higher level of competition. To maintain the position under the telecommunication market the companies like Celcom and Maxis are required to analyse the possible reaction of competitors to set their strategies regarding advertising, output and pricing decisions (Arokiasamy and Abdullah 2013).
If the industry position of Celcom is compared with Maxis it can be observed that with regard to market share Maxis is the leader and is followed by Celcom. In last 5 years Malaysia’s telecommunication industry is led by companies like Celcom and Maxis. Their services helped the people significantly to make their lives simple and easier (Hossain and Suchy 2013).
Financial statement is the formal record of financial data of any business. All major information of the business is recorded through financial statements. Main objective of financial statement is to provide information regarding financial performance, position and variation in financial position of the company. It helps the users of financial statement to gain reasonable knowledge regarding the economic activities and position of the business (Delen, Kuzey and Uyar 2013). Financial performance can be analysed through performing various ratios like liquidity ratio, efficiency ratio, profitability ratio and gearing ratio. Ratio is the mathematical expression regarding the relationship of one item with another. It helps in understanding the financial performance of the company and at the same time it can be compared with other companies in the same industry as well as with the past performance of the company (Babalola and Abiola 2013). Further, the creditors and potential investors are able to evaluate the company’s financial position and performance through using the ratios.
Celcom and Maxis are leading companies among top 3 telecommunication companies in Malaysia. Celcom is fastest growing telecommunication company that provides fiber and cellular optic transmission, data and voice transmission services through fixed and cellular systems and the paging services. On the other hand, Maxis is the leader in telecommunication industry in Malaysia and can be used as a competitor for Celcom.
Profitability ratios are used to analyse the ability of the company to generate earnings compared to the expenses and various other costs related to income generation during the particular period of time. It represents the company’s final result that is how profitable the company is. Various profitability ratios considered for comparing the performance of Celcom against Maxis are gross profit margin and net profit margin.
Gross profit margin is a profitability metrics used for measuring the profitability position of the company after paying off the cost of selling the good used for generated for generating revenue. From the computation table for last 5 years it can be identified that gross profit margin for Celcom are ranging between 79% and 82%. Till 2015 it was in reducing trend. However, it improved in 2016. On the other hand, the gross profit margins for Maxis for the last 5 years are ranging between 66% and 69%. Till the year 2016 it was is increasing trend. However, it reduced in the year 2017. Therefore, if the gross profit of both the companies are compared it can be stated that the profitability position of Celcom is better as compared to Maxis.
Net profit margin is the percentage of revenue remains with the company after paying all the expenses including operating, financing and tax expenses of the company. It is used to measure the company’s profitability position as compared to other in the same industry or as compared to the previous performance of the company (Vogel 2014). It can be identified that the net profit margin of Celcom is in reducing trend and fell from 13.88% to 3.73% over the years from 2013 to 2017. On the contrary, the net profit margin of Maxis for the last 5 years was in increasing trend and it increased from 19.43% to 25.21% over the years from 2013 to 2017. Therefore, though the gross profit position of Celcom is better, net profit position of Maxis is significantly better as compared to Celcom.
Liquidity ratio indicates the ability of the company to meet the debt obligation as and when it becomes payable. To be more specific, this ratio states how quickly the company is able to convert its short term assets into cash which in turn will enable it to meet the obligations on timely manner (Ehiedu 2014). Various liquidity ratios considered for comparing the performance of Celcom against Maxis are current ratio and quick ratio.
Current ratio is used to measure the ability of the company to pay its short-term obligations. It is computed through comparing the current assets of the company with the current liabilities. It can be identified that the current ratio of Celcom is in reducing trend till the year 2016 and fell from 1.15 to 0.53 over the years from 2013 to 2016. However, the company improved its position in 2017 as the current ratio has been increased from 0.53 to 0.65. On the contrary, the current ratio of Maxis for the last 5 years was in increasing trend and it increased from 0.51 to 0.57 over the years from 2013 to 2017. However, if the current ratio of both the companies are compared it can be stated that the liquidity position of Celcom is better as compared to Maxis.
Like current ratio quick ratio is also used to measure the ability of the company to pay its short-term obligations. Difference of quick ratio with current ratio is that unlike current ratio the quick ratio does not consider entire current assets of the company and it does not consider most liquid assets like prepaid expenses and inventories. It is computed through comparing the quick assets of the company with the current liabilities. It can be identified that the quick ratio of Celcom is in reducing trend till 2016 and fell from 1.02 to 0.40 over the years from 2013 to 2016. However, the company improved its position in 2017 as the quick ratio has been increased from 0.40 to 0.54. On the contrary, the current ratio of Maxis for the last 5 years was in increasing trend and it increased from 0.42 to 0.49 over the years from 2013 to 2017. However, if the quick ratio of both the companies are compared it can be stated that the liquidity position of Celcom is better as compared to Maxis.
Efficiency ratio measure the company’s ability to deploy the assets and liabilities for generating sales. Organization those are highly efficient minimizes the net investment in asset and therefore requires lower amount of debt as well as capital for sustaining in the operation. In case of assets the efficiency ratio compares the aggregate set of assets with sales or with the cost of selling the goods (Uechi et al. 2015). On the contrary, in case of liabilities the efficiency ratio compares the payables with total purchases or total payables of the company to the suppliers. Various efficiency ratios considered for comparing the performance of Celcom against Maxis are account receivable ratio and inventory turnover ratio
Account receivable ratio indicates the efficiency of the company regarding collection of receivables. Higher value of ratio indicates that the rate of receivable turnover is favourable and on the contrary low value indicates that the company is not efficient in collecting its receivables. If last 5 years performance is considered, it can be identified that Celcom is taking 14 days to 19 days on an average to collect its debt. On the other hand, it is identified that Maxis takes 9 days to 15 days on an average to collect its debt. Therefore, if the collection period is considered, it can be identified that Maxis is more efficient as compared to Celcom.
Inventory turnover ratio indicates the efficiency of the company regarding replacing its inventories or selling out entire stock of inventories. Higher value of ratio indicates that the rate of inventory turnover is favourable and on the contrary low value indicates that the company is not efficient in replacing its inventories. If last 5 years performance is considered, it can be identified that Celcom is taking 14 days to 20 days on an average to collect its debt (Sarlin 2015). On the other hand, it is identified that Maxis takes 44 days to 588 days on an average to collect its debt. Hence, Maxis is taking significantly long time to replace its inventories. Therefore, if the replacing period for inventories are considered it can be identified that Celcom is more efficient as compared to Maxis.
Solvency ratio is used for analysing the company’s ability to meet its debt related liabilities. It indicates whether the company has adequate balance of cash to meet the long term and short term liabilities. High level of debt or low interest coverage ratio indicates that the company may not be able to meet its obligations (Enekwe, Agu and Eziedo 2014). Various solvency ratios considered for comparing the performance of Celcom against Maxis are debt to equity ratio and interest coverage ratio.
Debt to equity ratio that is computed through dividing total liabilities of the company by the shareholder’s equity is used to measure the financial leverage of the company. It indicates the proportion of debt used by the company to finance its assets as compared to equity. Generally, the high debt equity ratio indicates that the company is aggressive in nature and using debt for its growth. However, high debt level associate the company with high risk as the company may be overburdened with high amount of interest expenses. Further, it may result into volatile earnings owing to additional expenses towards interest (Fathi, Farahmand and Khorasani 2013). It can be identified that the debt to equity ratio of Celcom has been increased from 1.22 to 1.83 over the years from 2013 to 2017. Therefore, it can be stated that the company’s financial risk is increased. On the other hand, the debt to equity ratio of Maxis was in increasing trend till 2016 and it reached to 3.16 from 1.89 over the years from 2013 to 2016. However, the company was able to improve its position in 2017 as the debt to equity ratio has been reduced to 1.73
Interest coverage ratio measures the times the company can pay off the interest obligation out of the operating incomes. This ratios is not concerned regarding the principal payment of debt, rather it is concerned regarding the payment of interest due on debts. It can be identified from the table that interest coverage ratio of Celcom was in reducing trend and it reduced to 4.77 times from 8.26 times over the period from 2013 to 2017. On the contrary, the interest coverage ratio of Maxis was in increasing trend it increased from 12.36 to 24.94 over the years from 2013 to 2017.
These ratios are used to get an overall picture of organization regarding the return company is able to earn to satisfy the requirement of the shareholders. It is further used as the key metrics to analyse whether the company is able to generate return for its shareholders or not (Yesil and Kaya 2013). Various investors’ analysis ratios considered for comparing the performance of Celcom against Maxis are earning per share and return on invested capital.
An earning per share is the percentage of profit that is distributed for each outstanding share of the common stock. It indicates the profitability of the company it is calculated through dividing the net income of the company by number of shares outstanding during the period (Lundholm and Sloan 2013). It can be identified from the annual report of the company that the earning per share of Celcom was in reducing trend and it reduced to 10.1 Sen from 29.9 Sen over the period from 2013 to 2017. On the contrary, the earning per share of Maxis was in increasing trend it increased from 23.5 Sen to 28.6 Sen over the years from 2013 to 2017.
Return on invested capital or ROIC indicates the percentage the company is earning on each dollar of capital. To be more specific, ROIC is the percentage return on the invested capital (Heikal, Khaddafi and Ummah 2014). It can be identified from the annual report of the company that the ROIC of Celcom was in reducing trend and it reduced to 4.70% from 10.70% over the period from 2013 to 2017. On the contrary, the ROIC of Maxis was in increasing trend it increased from 16.10% to 18.30% over the years from 2013 to 2017.
|
Celcom |
2013 |
2014 |
2015 |
2016 |
2017 |
|
Revenue |
18,371 |
18,712 |
19,885 |
21,565 |
24,402 |
From the above table and graph it can be identified that the revenue of the Celcom for the last 5 years were in increasing trend and it increased from RM 18,371 million to RM 24,402 million over the years from 2013 to 2017. Therefore, it can be stated that the company’s strategy regarding its sales, operation and marketing are in appropriate manner.
Major strategic issue Celcom facing is how to enhance the profit and and how to maintain the competitive advantage in Malaysian telecommunication industry. Further, the company is using the same promotional strategy that is used by its main competitor Maxis.
To maintain the competitive position the company shall concentrate on innovating new products in addition to sales of existing products. Further, it shall establish its key strategies like pricing strategies, marketing strategies and competitive strategies by taking into consideration the strategies of the competitor.
Increasing debt to equity ratio is indicating that the company is raising large proportion of finance through debt (Enekwe, Agu and Eziedo 2014).
Large amount of debt may lead the company to unsustainable position as the company may not be able to pay its debt obligations when they will become due.
As large proportion of finance is raised through borrowing Celcom is suggested to raise the additional fund through equity, if required.
|
Celcom |
2013 |
2014 |
2015 |
2016 |
2017 |
|
Expenses |
15,832 |
16,343 |
17,247 |
20,908 |
23,240 |
The expenses were in increasing trend due to the increasing amount of losses in foreign exchange fluctuation and staff costs. However, further details were not available from the income statement presented in the annual report of the company (Abdullah, Putit and Teo 2014).
The company shall prepare the budgets and shall compare it with the actual expenses. Further, the staff costs shall be controlled through engaging efficient and productive employees.
Company’s efficiency ratios have been deteriorated over the last 5 years period of time. Both its receivable turnover period and inventory turnover ratios have been increased over the period
The company is not efficient is collecting its dues and replacing its inventories
It shall reduce the credit period allowed to debtors and before stocking the inventories market research shall be carried out for analysing the demand.
Though ratio analysis is a useful tool for measuring and comparing the financial performance, it has some inherent limitations. Ratios are computed based on the past years data, however, it does not analyse the future performance of the company. Further, if the data is not presented correctly the calculation and analysis will be wrong (Schmidlin 2014).
Apart from ratio analysis, the company is recommended to perform the variance analysis after preparing the budgets, vertical analysis and horizontal analysis.
References
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Amba, S.M., 2014. Corporate governance and firms’ financial performance. Journal of Academic and Business Ethics, 8(1).
Arokiasamy, A.R.A. and Abdullah, A.G., 2013. Service quality and customer satisfaction in the cellular telecommunication service provider in Malaysia. Researchers World, 4(2), p.1.
Babalola, Y.A. and Abiola, F.R., 2013. Financial ratio analysis of firms: A tool for decision making. International journal of management sciences, 1(4), pp.132-137.
Brigham, E.F., Ehrhardt, M.C., Nason, R.R. and Gessaroli, J., 2016. Financial Managment: Theory And Practice, Canadian Edition. Nelson Education.
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Enekwe, C.I., Agu, C.I. and Eziedo, K.N., 2014. The effect of financial leverage on financial performance: evidence of quoted pharmaceutical companies in Nigeria. IOSR Journal of Economics and Finance, 5(3), pp.17-25.
Fathi, S., Farahmand, S. and Khorasani, M., 2013. Impact of intellectual capital on financial performance. International Journal of Academic Research in Economics and Management Sciences, 2(1), p.6.
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Maxis., 2018. Maxis – Best 4G Network for Smartphones | Maxis. [online] Available at: https://www.maxis.com.my/en/personal/whats-new.html [Accessed 30 Jul. 2018].
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Vogel, H.L., 2014. Entertainment industry economics: A guide for financial analysis. Cambridge University Press.
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