Financial Ratio: Detailed Analysis For Hup Seng Industries

Company Background

Hup Seng Industries Bhd. (“HSIB”) and its subsidiaries (“the Group”) is one of the biscuits manufacturers that dominant and enacted in Malaysia. The Group’s principal activities are the manufacture and sales of biscuits, beverages and confectionery food items. In year 1958, Hup Seng biscuits factory was established and it is based in Batu Pahat and Senai, Johor. Hup Seng has three main categories of products which are biscuits, beverages and other agent products. “Cap Ping Pong Crackers” is one of the famous products.

Current Market Conditions and Challenges

The overall current market conditions that Hup Seng operates in has a reducing growth but Hup Seng experienced growth for about 3% during the year. In Hup Seng’s market industries, there is a rise in prices of raw materials such as wheat and oil, but the selling prices of fellow biscuits manufacturer has been fairly consistent. The current market environment is highly competitive but Hup Seng Industries will counter this issue by having more promotions and campaign along the future.

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The current challenges Hup Seng Industries faced is the SinoUS trade war which affect the whole economy of export business. Moreover, with the intense competition by China, Hup Seng Industries faced tough competition to thrive in the global market.

Future Prospect

For future operating environment, a weak domestic growth is expected due to the discreet investment in expansion of business and unpredictability international demand. By facing this uncertainty, consumers will be more careful with their spending which will results a pessimism condition.

In this case, Hup Seng is prepared to face the difficulties by lowering costs, keeping and enhancing the quality of products, creative in product portfolio and expanding the distributor network to continuing fulfill consumer needs while securing revenue. Apart from that, the operating environment is predicted to continue highly competitive. Hence, Hup Seng is planned to have more promotion in the future in order to maintain quality.

In addition, Hup Seng notices that the demand for naturally healthy products, especially foods and beverages is increasing. Thus, to fix with future market trend, it tends to develop and widen new products which having healthier ingredients by strengthen further in-house research and development. For sustainability and volume expansion, Hup Seng knowing the essential of continuously investing to build their brands hence will keep emphasize on quality contribution and focus on its established brand.

Revenue Contribution to Different Segment

There are three different segments for Hup Seng Industries which are biscuit manufacturing division, beverage manufacturing division and trading division. For the year 2018, revenue for biscuit manufacturing, trading and beverage manufacturing division were RM 226,593,893, RM 219,238,733 and RM 9,196,213 respectively. Biscuit manufacturing division reported the highest revenue followed by the trading division and finally the beverage manufacturing division. In this case, revenue for biscuit manufacturing and trading division was increased from year 2017 to year 2018 while revenue for beverage manufacturing division had dropped. This shows that biscuit manufacturing division in Hup Seng Industries is the well-known segments that customers looking for.

Financial Trends and Analysis

Cash Flow

For operating cash flow, inventories and prepayments are increased while trade and other receivables and payables are decreased. Thus, there are inventories purchased to meet its increasing demand and receivables had speed up their payments. This brings a positive impact to operating cash flow.Investing activities bring a negative cash flow as there is increased in purchasing of fixed assets which used in Hup Seng daily operation to generate future profits.Dividend paid on ordinary shares is the only financing activity for Hup Seng and it brings a same cash outflow for both year 2017 and 2018.In year 2018, although cash and cash equivalent of the Group is dropped but overall, it remains a positive balance.

Profitability Ratio Analysis

In order to measure the performance of Hup Seng Industries to indicate whether it is a good choice to invest in the company, the use of Profitability Ratio Analysis can enable investors measure the overall performance in terms of profitability.

Return on capital employed (ROCE) (%)

The return on capital employed ratio is able to measure whether there is an optimum utilization of company’s resources. If the return on capital employed is high, it indicates that the company is efficient in managing its capital employed to generate profit.ROCE can use as a benchmark to measure performance against other competitors in the market or as a benchmark to see if the company itself has any improvement than prior year.

The 2017 ROCE of Hup Seng Industries is 34.96%, while in 2018, it has risen to 35.19%. This can indicate that the efficiency of Hup Seng Industries had improved compared to prior year. This is a good sign as this shows Hup Seng can manage its resources provided by shareholders to make the best profit. Even though the profit before tax in the year 2018 is lower than 2017, Hup Seng still has a better ROCE because of its efficiency in managing its assets and generate profit with a lower capital employed.

Gross Profit Margin

Gross Profit Margin is a way to measure whether Hup Seng Industries has the ability to trade effectively in its day-to-day operations. It is another indicator of Hup Seng’s profitability by measuring the actual gross profit earned per one sale.

A higher Gross Profit Margin is generally considered better among the industries. As for Hup Seng Industries, its GPM had dropped from 37.78% to 35.71% during the year 2017 and 2018. After analysis, the drop in GPM is caused by the increase in cost of sales which is accompanied by an increase in sales. The increase in cost of sales may be caused by higher carriage inwards costs, discount received from suppliers reduced, or production cost rise due to higher material, factory and labor costs.

Net Profit Margin

Net Profit Margin can measure the net income generated by RM 1 of sales. This calculate the sales revenue that remains as a profit after deducting expenses. If the company has a high net profit margin, this indicates the company is effective in turning its income into actual profit.

The profit margin for the year 2018 is 18.80% while 2017 is 19.82%. Even though the sales during 2018 is higher than 2017, the profit before interest and tax is still lower than 2017. This may be caused by higher expenses, weaker handling of expenses or launching of new products during 2018. Since the drop in Net Profit Margin had been accompanied by a drop in Gross Profit Margin, this may not be caused by high expenses incurred but it is the result of higher cost of sales during 2018. The higher cost of sales incurred during the year is reasonable as it is accompanied by higher sales in 2018.

Assets turnover

Assets turnover is able to help investors measure Hup Seng Industries’ ability to efficiently utilise its capital employed or assets to generate sales. The higher the assets turnover times, the better the ability to manage capital employed to generate sales.

Between the year 2017 and 2018, Hup Seng Industries’s Asset Turnover had increased from 1.76 times to 1.87 times. This is a good sign but it may also indicate the possibility of overtrading by expanding sales but not utilizing long term capital and only relied on short-term finance. The symptoms of overtrading are increase of trade payables, receivables and inventories while its cash and liquid assets are reducing.For Hup Seng Industries, its trade payables, receivables and cash are decreasing while inventories are increasing so this shows that Hup Seng Industries is still operating at optimum level and not overtrading. Moreover, it shows that Hup Seng Industries had efficiently employed its assets to generate maximum sales.

Management Efficiency

Inventory Turnover

Inventory turnover for Hup Seng is 7.86 times in year 2018 and 7.83 times in year 2017. This shows a slight increase compared to previous year. Since Hup Seng has higher sales in the year, this indicates that it needs more inventories in order to fulfill the market demand and customer needs. Therefore, increase in inventory had prevented Hup Seng for having the risk of out of stock while meets the market need. One little point to concern about inventory is that holding too much stock will face cash flow and liquidity problem as cash is tied up in inventory and it takes time to convert into cash. In this case, Hup Seng inventory turnover shows that its inventories are still within a good control.

Receivable Collection Period

There is a credit risk to be exposure to The Group’s which arises mainly from trade and other receivables. Hup Seng has therefore put its effort in minimizing it by only trading with those creditworthy and high credit rating third parties. Hup Seng emphasizes on credit verification procedures for all customers who want to trade on credit terms. Without any approval from Head of Credit Control, Hup Seng will not offer credit terms. By having all these strict policies, receivable collection period has been improved. In year 2018, receivable collection period for Hup Seng is 41 days. As compare to year 2017, it is dropped by 7 days. Since the collection period become shorter, this show that Hup Seng credit control on receivables is strong and effective. Other than that, bad debts that exposure to Hup Seng is immaterial due to the continuing oversee in its receivable balances.

Payable Payment Period

In the year 2018, there is a rise in cost of sales and decrease in trade payable which lead to a payable payment period of 49 days. The payment period is dropped by 8 days compared to year 2017. Reduction in payment period signifies that Hup Seng has enough funds to meet and settle its financial debts which in turn avoided the Group from exposure to liquidity risk. Furthermore, early settlement of debt shows that Hup Seng is able to meet its working capital condition by holding sufficient level of cash and cash convertible investments. By paying early, interest for late payment charged is avoided by Hup Seng. Beyond the financial analysis, maintaining overall debt position helped Hup Seng maintains its reputation with suppliers.

Long Term Solvency and Stability

Gearing Ratio

Gearing ratio for Hup Seng in both years 2017 and 2018 are same at 49%. Both total liabilities and total equity are decreased in year 2018. This is due to the reason that the dividend payout and return capital to shareholders may be adjusted by the Group to keep the optimal capital structure. Besides, new shares will also be issued to manage capital structure when necessary. On the going concern basis, capital managing is concerned by Hup Seng in order to provide reasonable returns to its shareholders, benefits other stakeholders and maintains optimal capital structure to reduce cost of capital. Hup Seng is therefore controlled its capital on the basis of gearing ratio. In case of cost of capital, Hup Seng does not have long-term and short-term borrowings which will incur borrowing costs. Hence, it had reduced the expenses due to the saving in interest cost. This means that it relies on equity rather than debt funding. In this case, gearing of Hup Seng can be considered as favorable as the gearing ratio is within 50%.

Current Ratio

In the year 2018, there is a slight decline in the current ratio of Hup Seng because of the decrease in current assets and current liabilities. Although this is the case, in both years 2018 and 2017, current ratio of 2.18 and 2.26 shows a positive impact to Hup Seng as it has adequate liquid assets to meet its short term obligations. Group would consider a high current ratio to prevent solvency problem but in Hup Seng, although part of the current assets, prepayments and trade and other receivables had significant decrease, the other two components of current asset which are cash and bank balances had become lower and inventories had become higher compared to year 2017. This gives risk to the Group as inventories are not sold off to get cash.

Quick ratio

Quick ratio for Hup Seng Industries in 2017 and 2018 were 1.92 times and 1.83 times respectively. As quick ratio for both year is more than 1, this shows that Hup Seng has enough quick assets to pay for its current liabilities.

Besides, the quick ratio in 2018 was lower than 2017 as the inventory was higher in 2018 and inventory will take longer time to convert into cash. Higher in inventory may due to over invest in working capital, excess funds being tied up in the inventory. Therefore, creditors will prefer the companies to have good quick ratios.

Shareholders’ Investment ratio

Earnings per share

The earnings per share for Hup Seng Industries in 2017 was 5.6 sen while decrease to 5.4 sen in 2018. This is because profit in year 2018 is less than year 2017 due to the increase in cost of sales by RM 11,000,000 in 2018. Even though the revenue increase, but the cost of sales increase more that the revenue and this cause the profit to drop. The decrease in the expenses also cannot cover the increase in the cost of sales. The decrease in EPS will have low expectations to the market. The market does not expect the continuing growth of the company and the stock will have low volatility.

P/E ratio

As a company’s earnings per share is drop, its market value per share also drop. The market price for 2017 and 2018 was 109 sen and 95 sen per share respectively. Therefore, the P/E ratio for Hup Seng Industries Berhad drop from 19.46 times to 17.59 times. A company with a drop in P/E ratio often indicate poor current and future performance.

Dividend cover

The dividend cover in Hup Seng Industries Berhad in 2018 is 0.90 times which is slightly lower than 0.93 times in 2017. This shows a low dividend cover and if there is a downward trend in the company's profitability in the future, the company may not be able to maintain the current dividend level. Investors measure the level of risk associated with the dividends on their investment by using the dividend cover ratio .

Conclusion

After detailed analysis for Hup Seng Industries, there are some strengths and weaknesses in the overall performance of the company.

From the perspective of profitability and return, the gross profit and net profit margin of the company has decreased as the cost of sales has been increased significantly. The increase in cost of sales is only accompanied by a small increase in sales. But this may be caused by the higher price of raw material in the current market and the company had chosen to maintain its selling price to retain its customers. Overall the efficiency of capital management is improving as ROCE and assets turnover is increasing which means funds and capital provided by investors will be in good hands and managed to its best use to generate high revenue.

In respect of management efficiency, liquidity risk is immaterial due to the good management in its working capital. Even through cash flow brings a negative amount for the year 2018, this still indicates a good sound of management abilities to its future prospects.Gearing of the Group is within the optimal level of the industry. Besides, moveable assets that use to make repayment is beyond its current obligations. Therefore, other than higher inventory, the performance in long term and short term solvency shows a positive impact to Hup Seng.

For investor ratio, earnings per share is decreased as profit for current year decrease. Moreover, this had caused the decline in price-earnings ratio and dividend cover. Even though profit and earnings per share decreased, but the dividend paid remain unchanged which brings a good signal to the investors and this shows that Hup Seng still have enough profit to pay the dividend.After taking into account the different aspects of Hup Seng Industries, the company’s future prospect is expected to be profitable and stable in the long term aspects, so it is suitable to be invested by potential investors.