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Top Glove Corporation Berhad from Malaysia, performance interpretation Essays

Top Glove Corporation Berhad was founded in 1991 by Tan Sri Lim Wee Chai. It has been growing rapidly since then and has become the world’s largest rubber glove manufacturer (“Corporate profile”, n.d.). Due to the increasing demand in market, Top Glove Corporation Berhad decided to undergo expansion on its output and to increase its number of branches at the beginning of 2000s. In 2012, the company withholds the following data within its current operating system. (Data extracted from Top Glove Corporation Berhad)
The company has been practicing 4 fundamental rules which ultimately assisted to earn the title of being the top of rubber glove industry. They are, “Do not waste our shareholder’s money”, “Do not lose our health”, “Do not lose our temper” and finally, “Do not lose our customer”, as mentioned by the chairman of Top Glove Corporation Berhad, Tan Sri Lam Wee Chai (“Mission & Vision”, n.d.). In order to maintain their customer’s loyalty and shareholder’s faith, Top Glove has and will continue to put in lots of hard work and effort in investing in their researches to bring a product that is worth the money paid. As stated in their company profile, the final objective of Top Glove is to pursue for an extensive and complete range of high-quality, high value-added and cost-effective rubber gloves (“Corporate profile”, n.d.).
Subsequently, we aim to evaluate the company with ratios of profitability, liquidity, efficiency and some other ratios, and to analyze the outcome to provide Mr. Alex for constructive advice whether it is appropriate to invest his capital in Top Glove.
Firstly, the profitability ratios are used to evaluate the Top Glove Corporation Berhad. There are 3 ratios involved and they are gross profit margin, net profit margin and return of capital employed (ROCE). Gross Profit Margin, in others word it calls gross profit as a percentage of sale. This represents the gross profit before deducting any expenses, for every sale earned. A higher ratio shows a better financial performance. Gross profit margin of Top Glove Corporation Berhad for the year 2010-2011 has decreased from 21.11% to 11.4%. There are few factors to influence gross profit margin. For the year 2010-2011, there is a decrease in gross profit
margin for Top Glove Corporation Berhad which due to discounts for bulk purchase by customers. Besides that, decrease in selling price in order to sell the old or slow moving inventory may cause a lower gross profit margin for the company. However, the gross profit margin of Top Glove Corporation Berhad for the year 2011-2012 has increased from 11.4% to 16.6%. During the period there has been an increase in gross profit margin for Top Glove Corporation Berhad which was due to increase in selling price due to superior products. Besides that, decrease in cost of sales due to better cost control may also raise up the gross profit margin. Net profit margin is also known as net profit as percentage of sales. This represents the net profit after deducting expenses, for every sale earned. A higher ratio shows a better financial performance. The main concept of this indicator is much similar to the gross profit margin. Likely to the gross profit margin, during year 2010-2011 net profit margin of Top Glove Corporation Berhad has decreased from 14.67% to 7.08%. Due to high interest payment and increase in borrowings the company’s net profit margin may decreased. Moreover, a bad control of expenses can cause the drop during the year. Lastly, high depreciation charge due to purchase of additional fixed assets also will lower the net profit margin. On the other hand, net profit margin of Top Glove Corporation Berhad has increased from 7.08% to 10.4% during the year 2011-2012. This may happen because the profit is relatively increased due to increase in selling price and lower cost. Besides that, Top Glove Corporation Berhad had an efficient management in controlling the operating expenses (good control expenses). Lastly, a higher net profit margin may be due to lower interest expense due to borrowings. As those ratios show decrease during year 2010 and 2011, but during year 2012, Top Glove Corporation Berhad has improved its management and achieved a higher profit margin. This also suggests that the company has a potential to get a better level of performance in future. The third profitability ratio is return on capital employed (ROCE). It measures how efficiently the capital has been used by the business to generate income. ROCE of Top Glove Corporation Berhad for the year 2010-2011 has fallen from 26.5% to 12.2%. However, it has risen up from 12.2% to 18.19% during the year 2011-2012. Results of year 2010-2011 may be frustrating because decrease in ROCE may indicate the company is not efficient in utilization of its capital to generate profit.
However, for the year 2011-2012, Top Glove Corporation Berhad has successfully managed performance by indicating better utilization of company’s capital to generate profit and made an increase in ROCE. This shows a positive potential for a secure investment as well.
Liquidity ratios such as current ratio and quick ratios are used to evaluate the Top Glove Corporation Berhad on the next step. The current ratio is an indication of the business ability to pay its debts. Current ratio of Top Glove Corporation Berhad for the year 2010-2011 has a decrease from 3.41 times to 3.12 times. During 2011-2012 it again decreased up to 2.95 times. There is few factor cause the current ratio of Top Glove Corporation Berhad to meet a fall in year 2010- 2012. A lower current ratio may be due to decrease in current assets as result of weaker financial performance e.g. sales, profit. Besides that, Top Glove Corporation Berhad has an increase in tax payable, dividend payable so that they met a fallen in current ratio. The current ratios of the Top Glove Corporation Berhad show positive figures. A ratio lesser than 1 means the business is having liquidity problems. The ideal current ratio is 2:1. Although the ratios have been decreasing from 2010, the amount of asset has increased more than those in previous years. Furthermore, the ratio is 2.95 showing that it is still able to pay debts efficiently. Quick ratios also called liquid or acid test ratio. The quick ratio shows the ability of the business to pay its current debts with current assets that are easily convertible into cash. Quick ratio of Top Glove Corporation Berhad for the year 2010 – 2011 has met a fallen from 2.64 times to 2.35 times, and it again decreased to 2.30 times. As likely as current ratio, the quick ratio has been decreasing from 2011 to 2012. However, we can assume that the company can still pay its debts and even asset has increased more than previous period. This shows that the company is still financially secure. Lastly we assessed to efficiency ratios of the Top Glove Corporation Berhad. The first efficiency ratio is inventory turnover ratio which provides the number of times a company can sell off its inventory in a year. Inventory turnover period in days is an alternative way to calculate the efficiency ratio of Top Glove. Through calculating the inventory turnover period in days, we can measure the number of days Top Glove holds the goods on average. The inventory turnover ratio
of Top Glove Company is 10.5 in year 2010, 10.6 in 2011, and 10.87 in 2012. These figures signal that Top Glove Company is constantly growing in selling off inventory at a faster pace. In addition, the inventory turnover period is 35.22 in year 2010, 34.42 in 2011, and 33.57 in 2012. These figures indicate that Top Glove Company held their inventory for 35 days in year 2010, 34 days in 2011 and 33 to 34 days before selling it off in respective year. The decrease in figures proves the goods are held for a shorter period while allowing the company to save up some costs. In comparison, the inventory turnover ratio of year 2012 has increased rather than 2011 and 2010. This increase indicates that the goods are sold at a faster rate; in other words, the company is able to sell more goods compared to the previous years. Subsequently, the inventory turnover period shows a sign of decrease which proves that the company did not hold their goods for long before selling it out. In a nutshell, both outcomes serve as a desirable result to Mr. Alex since it is indicating that the company has more available funds compared to previous years. The second indicator to evaluate is the trade receivable collection period or also known as account receivable collection period. This method assesses the number of days a company has taken to collect debts from the debtors after sales. The trade receivable collection period is 43.4 in year 2010, 46.58 in 2011, and 46.34 in 2012. These results reveal that Top Glove Company took on average 43 days in year 2010, 47 days in 2011, and 46 days in 2012 after sales to receive their payment. Despite the fact that Top Glove Company had the shortest collection period in 2010, it is able to cope up back to the track in 2012. This shortened collection period proves that Top Glove company has a good credit control and it serves as an advantage from the perspective point of view of a potential shareholder. The decrease in collection period signals that the company provides higher cash discount to encourage early payment. The final part of efficiency ratio of Top Glove Company is the trade payable period. It has many similarities as compare to trade receivable collection period; the only difference is that the method focuses on measuring the number of days a company takes to pay off their suppliers. Top Glove Company has a trade payable period of 22.72 days in year 2010, 38.88 days in 2011, and 43.71 days in 2012. Regard to the figures above, it hints that Top Glove Company took at least 22 to 23 days on average to pay off its suppliers in 2010. In
year 2011, a trade payable period of 38.88 days is account to Top Glove Company. The trade payable period of 38.88 days signals that Top Glove Company took an average of 38 to 39 days to pay off their debts. Lastly, in year 2012, the company took even more than before, which is an estimation of 43 to 44 days to pay their debt. To roundup, Top Glove Company has a longer payment period in the recent year. This may indicate that the purchasing department is good at negotiating the credit terms with the suppliers whilst allowing them to better use the funds to invest in other financial activities that in return can increase their revenue. With those ratios above, we found it necessary to study on other ratios such as gearing ratio and earnings per share. For the gearing ratio, the top glove company has shown the increase in from 0% in 2010 to 4.19% in 2011 and to 5.12% in 2012. Although the gearing ratio increased, it did not exceed 50%. This indicates that the company did not have any difficulty in getting the loan from the bank and the level of risk is very low which means it is secure to invest. The company has had increasing interest cover from 478.25 times in 2010 to 602 time in 2011 and 2131 times in 2012. This suggests that the company has a strong financial position in paying off interest expenses. It is also clear that the company has been growing and performing in a better way for last 2 years. On the other hand, there has been decrease in earnings per share from RM39.83 in 2010 to RM18.29 in 2011. This may due to issuance of additional shares during the years. Company can reduce the price of share to attract more investors, however the share that have been issued during the year have increased to RM 32.77. This also indicates that the company is getting higher profit. The ratios above show the positive performance and potential of Top Glove Corporation Berhad. Obviously it is difficult to predict the long term benefits with the figures of last three years; however, those figures indicate the financial security of the company. Therefore, we would like to propose Mr. Alex to invest capital in the Top Glove Corporation Berhad.
Bibliography
Corporate Profile. (n.d.). Retrieved January 1, 2013, from Top Glove: http://www.topglove.com.my/about.htm Mission & Vision. (n.d.). Retrieved January 1, 2012, from Top Glove: http://www.topglove.com.my/about_mission.htm
Appendix: Calculation
a) Profitability Ratios
1. Gross Profit Margin
2010
GROSS PROFIT MARGIN = GROSS PROFIT / NET SALES * 100 %
= RM 438,882,000 / RM 2,079,432,000 * 100
= 21.11 %
2011
GROSS PROFIT MARGIN = GROSS PROFIT / NET SALES * 100 %
= RM 235,149,000 / RM 2,053,916,000 * 100
= 11.4 %
2012
GROSS PROFIT MARGIN = GROSS PROFIT / NET SALES * 100 %
= RM 385,042,000/ RM 2,314,454,000* 100% =16.6%
2. Net Profit Margin
2010
NET PROFIT MARGIN = PROFIT BEFORE TAX / NET SALES * 100%
= RM 304,961,000/ RM 2,079,432,000 * 100
= 14.67 %
2011
NET PROFIT MARGIN = PROFIT BEFORE TAX / NET SALES * 100%
= RM 145,470,000/ RM 2,053,916,000 * 100
= 7.08 %
2012
NET PROFIT MARGIN = PROFIT BEFORE TAX / NET SALES * 100%
= RM 240,702,000/ RM 2,314,454,000 * 100% = 10.4%
3. Return on capital employed ( ROCE)
2010
RETURN ON CAPITAL EMPLOYED ( ROCE)
= profit before interest and tax / ** capital employed * 100% = (RM 304,961,000 + RM 639,000) / RM 1,153,751,000 * 100 = 26.5 %
** Capital employed = Equity + Non – current liability = RM 1,116,366,000 + RM 37,385,000 = RM 1,153,751,000
2011
RETURN ON CAPITAL EMPLOYED ( ROCE)
= profit before interest and tax / ** capital employed * 100% = (RM 145,470,000 + RM 242,000) / RM 1,193,617,000 * 100 = 12.2%
** Capital employed = Equity + Non – current liability = RM 1,146,373,000 + RM 47,244,000 = RM 1,193,617,000
2012
RETURN ON CAPITAL EMPLOYED ( ROCE)
= profit before interest and tax / ** capital employed * 100% = ( RM 240,702,000 + RM 113,000) / RM 1,323,696,000 * 100%
=18.19%
** Capital employed = Equity + Non – current liability = RM 43,843,000 + RM 1,279,853,000 =RM 1,323,696,000

b) Liquidity Ratios
1. Current Ratio
2010
CURRENT RATIO = CURRENT ASSETS / CURRENT LIABILITIES
= RM 744,088,000 / RM 218,259,000
= 3.41 TIMES or 3.41 : 1
2011
CURRENT RATIO = CURRENT ASSETS / CURRENT LIABILITIES
= RM 715,431,000 / RM 229,412,000
= 3.12 TIMES or 3.12 : 1
2012
CURRENT RATIO = CURRENT ASSETS / CURRENT LIABILITIES
= RM 810,538,000/ RM 274,356,000
= 2.95 TIMES or 2.95 :1
2. Quick Ratio
2010
QUICK RATIO = CURRENT ASSETS – INVENTORY / CURRENT LIABILITIES = (RM 744,088,000 – RM 167,511,000) / RM 218,259,000 = 2.64 TIMES or 2.64 : 1
2011
QUICK RATIO = CURRENT ASSETS – INVENTORY / CURRENT LIABILITIES = (RM 715,431,000 – RM 175,532,000) / RM 229,421,000 = 2.35 TIMES or 2.35 : 1
2012
QUICK RATIO = CURRENT ASSETS – INVENTORY / CURRENT LIABILITIES = (RM 810,538,000 – RM 179,440,000) / RM 274,356,000 = 2.30 TIMES or 2.30 : 1
c) Efficiency Ratios
1. Inventory Turnover Ratio
2010
INVENTORY TURNOVER RATIO (IN TIMES)= COST OF SALES / ** AVERAGE INVENTORY = RM 1,640,550,000 / RM 158,282,000
= 10.5 TIMES
INVENTORY TURNOVER PERIOD (IN DAYS)
= ** AVERAGE INVENTORY / COST OF SALES * 365 DAYS
= RM 158,282,000/ RM 1,640,550,000 * 365 DAYS
= 35.22 DAYS or 35 DAYS
** AVERAGE INVENTORY = OPENING INVENTORY + CLOSING INVENTORY/2 = (RM 119,053,000 + RM 167,511,000) / 2
= RM 158,282,000
2011
INVENTORY TURNOVER RATIO (IN TIMES)= COST OF SALES / ** AVERAGE INVENTORY = RM 1,818,767,000 / RM 171,521,500
= 10.6 TIMES
INVENTORY TURNOVER PERIOD (IN DAYS)
= ** AVERAGE INVENTORY / COST OF SALES * 365 DAYS
= RM 171,521,500 / RM 1,818,767,000 * 365 DAYS = 34.42 DAYS or 34 DAYS
** AVERAGE INVENTORY = OPENING INVENTORY + CLOSING INVENTORY/2 = (RM 175,532,000 + RM 167,511,000) / 2
= RM 171,521,500
2012
INVENTORY TURNOVER RATIO (IN TIMES) = COST OF SALES / ** AVERAGE INVENTORY = RM 1,929,412,000 / RM 177,486,000
= 10.87 TIMES
INVENTORY TURNOVER PERIOD (IN DAYS)
= ** AVERAGE INVENTORY / COST OF SALES * 365 DAYS
= RM 177,486,000 / RM 1,929,412,000 * 365 DAYS
= 33.57 DAYS or 34 DAYS
** AVERAGE INVENTORY = OPENING INVENTORY + CLOSING INVENTORY/2 = ( RM 175,532,000+ RM 179,440,000) / 2 = RM 177,486,000
2. Trade Receivable Collection Period
2010
TRADE RECEIVABLE COLLECTION PERIOD (IN DAYS)
= TRADE RECEIVABLE / CREDIT SALES * 365 DAYS
= RM 247,268,000 / RM 2,079,432,000 * 365 DAYS
= 43.4 DAYS or 43 DAYS
2011
TRADE RECEIVABLE COLLECTION PERIOD (IN DAYS)
= TRADE RECEIVABLE / CREDIT SALES * 365 DAYS
= RM 262,129,000 / RM 2,053,916,000 * 365 DAYS
= 46.58 DAYS or 47 DAYS
2012
TRADE RECEIVABLE COLLECTION PERIOD (IN DAYS)
= TRADE RECEIVABLE / CREDIT SALES * 365 DAYS
= RM 293,863,000/ RM 2,314,454,000* 365 DAYS
= 46.34 DAYS or 46 DAYS
3. Trade Payable Payment Period
2010
TRADE PAYABLE PAYMENT PERIOD (IN DAYS)
= TRADE PAYABLE / ** CREDIT PURCHASE * 365 DAYS
= RM 105,116,000 / RM 1,689,008,000 * 365 DAYS = 22.72 DAYS or 23 DAYS
** CREDIT PURCHASE = COST OF GOOD SOLD + CLOSING INVENTORY
– OPENING INVENTORY = RM 1,640,550,000 + RM 167,511,000 – RM 119,053,000 = RM 1,689,008,000
2011
TRADE PAYABLE PAYMENT PERIOD (IN DAYS)
= TRADE PAYABLE / ** CREDIT PURCHASE * 365 DAYS
= RM 194,611,000 / RM 1,826,788,000 * 365 DAYS = 38.88 DAYS or 39 DAYS
** CREDIT PURCHASE = COST OF GOOD SOLD + CLOSING INVENTORY
– OPENING INVENTORY = RM 1,818,767,000 + RM 175,532,000 – RM 167,511,000 = RM 1,826,788,000
2012
TRADE PAYABLE PAYMENT PERIOD (IN DAYS)
= TRADE PAYABLE / ** CREDIT PURCHASE * 365DAYS
= RM 231,538,000/ RM 1,933,320,000 * 365 DAYS
= 43.71 DAY or 44 DAYS
** CREDIT PURCHASE = COST OF GOOD SOLD + CLOSING INVENTORY
– OPENING INVENTORY = RM 1,929,412,000 + RM 179,440,000 – RM 175,532,000
= RM 1,933,320,000
d) Other Ratios
2010
Gearing ratio = Prior charge capital / Capital employed * 100% = RM 57662/ RM 1032440 * 100% = 0 %
2011
Gearing ratio = Prior charge capital / Capital employed * 100% = RM 48,859/ RM 1,167,474 * 100%
= 4.19%
2012
Gearing ratio = Prior Charge Capital / Capital employed * 100% = RM 67,268 / RM 1,314,007 * 100%
= 5.12%
.
2010
Interest cover = Profit before interest and tax / interest expenses = RM 304,961 + RM 639 / RM 639
= 478.25 times
2011
Interest cover = Profit before interest and tax / interest expenses = RM 145,470 + Rm 242 / RM 242
= 602 times
2012
Interest cover = Profit before interest and tax / interest expenses = RM 240,702 + RM 113 / RM 113
= 2131 times
2010
Earning per shares = Profit after tax and preference dividend / Number of ordinary shares = RM245,231/ 615,626 shares
= RM 39.83
2011
Earning per shares = Profit after tax and preference dividend / Number of ordinary shares = RM 113,091 / 618,373 shares
= RM 18.29
2012
Earning per shares = Profit after tax and preference dividend / Number of ordinary shares = RM 202,726 / 618,609 shares
= RM 32.77

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