On average bonia corporation berhad takes 42 days to

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On average, Bonia Corporation Berhad takes 42 days to collect its receivables in year 2014. Padini Holdings Berhad Creditors’ perspective In creditors’ perspective, liquidity (current and quick ratios) and financial leverage ratios (debt, debt to equity and times interest earned ratio) are of the utmost importance. Using time series analysis, the current ratio of Padini has decreased, indicating Padini’s ability to cover its short term expenses using its short term assets has deteriorated which may be due to the significant increase in trade and other payables (current liabilities). This can be explained by the increase in cost of sales and revenue from 2014 to 2015 as more quantity of direct materials were purchased and sold during that accounting period which might be caused by an increased demand for Padini’s products causing Padini to purchase more goods on credit. As a result, credit purchases increases, contributing to the increase in current liabilities which consequently causes the liquidity of the company to decrease. However, Padini’s quick ratio has shown improvement, indicating that Padini has better overall liquidity and better at financing its short term current liabilities with easily 13
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convertible into cash assets in 2015 because the amount of inventory held (less liquid) has decreased which means that its inventories were not built up, rather, they are sold, converting them into quick assets such as accounts receivables and cash when they are sold. Therefore, the creditors should not doubt Padini’s ability in meeting its short term obligations since it has more than enough readily convertible assets to cover its existing short term debts. Besides, the increase of Padini’s reliance on the debt component to raise funds to finance its assets and to generate profits has caused the increase in its debt and debt to equity ratio over the years, thus, implying an increase in its degree of indebtedness. Nonetheless, increased debt comes with greater risk as well as higher potential return. The increase in debt and debt to equity ratio indicates that Padini is taking advantage of financial leverage to increase profits. However, it also indicates that Padini might face difficulties to generate enough cash to satisfy its debt obligations (principal + interest charges). This problem is reflected in its times interest earned ratio which has decreased by 17.59 times as interest charges increases with its debt amount, causing the deterioration in Padini’s ability to fulfill its interest obligations. Nevertheless, Padini still has a large margin of safety as it would still be able to pay the interest it owes (RM2,857,000) even if its operating revenue shrinks at much as 97.5% [(40.14 – 1.0) /40.14]. Investors’ perspective Despite the increase in revenue, Padini’s gross profit margin has decreased as the percentage increase in cost of sales (19.18%) [(555,688- 466,244) / 466,244] exceeds the percentage increase in revenue (12.89%) [(977,904 – 866,258) / 866,258] from 2014 to 2015, indicating that Padini generates lesser gross profit per every ringgit of sales. The surge in the
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  • Summer '17
  • ms lau
  • Financial Ratio, Generally Accepted Accounting Principles, Padini Holdings Berhad, Padini, Bonia Corporation Berhad

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