I. INTRODUCTION
This group report is an overall analysis of the position of Sime Engineering Services Bhd during the years of 2005-2006, that is to see whether its performance has improved or declined by using accounting ratios.
Sime Engineering Services Bhd is a wholly-owned subsidiary of Sime Darby Berhad [Group], Malaysia’s leading multinational company and one of Southeast Asia’s biggest multi-industry companies which handles the Group’s Oil and Gas division. The Company’s core businesses are situated in Malaysia, Singapore and Indonesia. Sime Engineering Services Bhd financial years begin on July 1 – June 30 every fiscal year. During the financial years of 2005 – 2006 some important company decisions, various corporate changes, and business transactions, obtained from the company’s operations report, must be taken into account in order to better understand the analysis of the company’s financial statements in the following section.
II. Operation Report Overview:
Oil and Gas Division/Engineering services:
Increase of annual fabrication capacity from 35,000 MT to approximately 45,000 MT. Thus construction of additional workshops, wharfs, material storage areas and other such associated facilities are expected to be constructed by year’s end, December 2006. Undergoing expansion of new yard facilities in East Malaysia, located near Sime Engineering Services Bhd’s clients petrochemical complexes, which allows them to better service its clients. In addition, Sime Engineering Services Bhd undertaking of new engineering projects, notably expansion projects for “Petronas Gas”.
System Integration, Trading and Services:
Mecomb Malaysia and Mecomb Singapore, entities under Sime Engineering Services Bhd, are specialists in system integration and sales of wide ranges of engineering products, especially heavy duty industrial products-such as industrial ventilation fans and carpark management systems. By increasing emphasis and development of regional markets for its products, this led to a great success for sales for the year. In addition, Mecomb Singapore has obtained the contract to supply the carpark management system for the new and prestigious VivoCity Mall. While not forgetting to mention, Mecomb has also been engaged by the owner of a major shopping mall in the Middle East as a Consultant for its carpark management system. Mecomb Malaysia has also seen success during 2006, in particular its biotech department. It has secured the development of Universiti Putra Malaysia (UPM) biotech laboratory furniture system. Completion of sewage and water treatment plant in Bakun, weather radar systems for Alor Star and Kluang and a satellite tracking antenna system for Jabatan Kajicuaca and National Space Agency in order to help monitor the environment.
Security Products and Services & Calibration and Measurement Services:
In the year of 2006, Sime Engineering Services Bhd managed to increase their sales of large integrated security systems two fold. A resultant much from the increased demands from the export market; in particular from the Middle East.
During the year, SST Integrated Technologies Sdn Bhd-Sime Engineering Services Bhd division which deals with Calibration and Measurement Services, changed its name to Sime-SIRIM Technologies Shd Bhd. This led to an increase in visibility and marketability. Thus overall company performance was increaed compared to previous year with high increases in sales to oil and gas, defense and telecommunications sectors.
III. OVERALL FINANCIAL STATEMENTS ANALYSIS:
By looking at the Income Statement of the company alone is enough to suggest that Sime Darby Engineering Shd is in a much stronger and able position for business by recovering from its 2005 net loss of RM1.6 million by profitting RM10.5million during its business year of 2006. Despite having sold more in 2005 (RM27.9million) as compared to 2006, RM19.6million, as a result of having cut high operating expenses in half in 2006-most likely due to the completion of many of Sime Engineering Services Bhd System Engineering Projects and an increase in returns from investments (“Other Income” & “Investments and interest income”); this led to the company’s net profit for the year. Thus increasing the company’s Equity and overall balance, refer to Balance Sheet and Equity Statements in Appendix #2. The increase of cash and cash equivalents for the year has also improved; 2005: RM6.1million and 2006: RM7.1million, further goes to show that Sime Engineering Services Bhd Cash Flow is RM1million healthier. Suggesting that the company’s cash investments have paid off handsomely during their 2006 fiscal year.
IV. FINANCIAL POSITION ANALYSIS
The accounting ratios which are being used to deterimine Sime Engineering Services Bhd financial standing in this section of the analysis of are: Earnings Per Share, Return on Equity and Dividend Cover.
Firstly, by using the accounting ratios of Earnings Per Share and Return On Equity, we discovered due to the negative profit in the year 2005 (RM-1.60million), company earnings and returns are RM-0.01 and RM-0.54 respectively. However due to the net profit of year 2006 (RM10.50million), based on the workings on Appendix #1 and figures from Sime Engineering’s financial statements (see Appendix #2), Earnings Per Share became RM0.04 and Return on Equity RM0.03. This shows that Sime Engineering Services Bhd has managed to improve their financial position from 2005. This improvement was probably due to the massive decrease in expenses brought about by the completion of most of Sime Engineering’s construction projects, and increased returns from company investments. Therefore from being totally unprofitable, the company has managed to turn their situation around.
Thus by using Dividend Cover ratio, we can see since the company was having negative returns in 2005 they choose not to provide dividends to their shareholders-a very prudent decision as they very well can’t cover dividend shares with losses. But since they have made themselves profitable in 2006, they provided an allocation of dividend of RM7.1 million to the shareholders-figure obtained from Note No. 8 in Annual Report. On that account, by using the ratio, we can observe that Sime Engineering’s Dividend Cover for the year is 1.48 times-which is an acceptable figure, taking 1.5~2 times as the norm of any business.
V. PERFORMANCE ANALYSIS
Sime Engineering Services Bhd Current Ratios in both years are below 1.5 times! (2005: 0.12 times and 2006: 0.21 times). As a standard, the Current Ratio coverage should be between 1.5 and 2.5 times a business’s liabilities. Although, the ratio has increased by 0.09 in 2006, it can be considered a negligible amount. These ratios exemplorate the company’s negative working capitals for both years. By having higher current liabilities over current assets for both fiscal years, this shows that Sime Engineering Services Bhd primary form of operation is on credit terms and perhaps the company has invested too much in Non-Current Assets, and evidently the company has noticed this as problem and is slowly increasing and decreasing its Current Assets and Fixed Assets repectively.
Return on capital employed (ROCE): this is a measure of profitability that indicates how efficiently and effectively a company has utilized its assets during a given accounting period. High ROCE is usually in the region of 20% or more. But this company’s ROCE ratios were nowhere near this figure! Which indicated that the company was using its resources inefficiently, even though the figure was lightly increased by 2.98% in 2006.
Profit margin ratio measures the amount earned for every ringgit gained through sales. A higher profit margin indicates a more profitable and better performing company that has better control over its expenditures compared to its competitors. This is shown through Sime Engineering Service Bhd’s financial statements for 2005 and 2006. In 2006, having shown a high profit margin of 77.5% compared to 21.86% in 2005. This further indicates that due to the company’s ability to effectively cut their operating expenses in half, they are able to gain higher profits.
Lastly, the Asset Turnover ratio-useful to determine the productivity of any business by calculating the amount of sales that can be generated from each asset in the business. Companies with low profit margins tend to have high asset turnover rates, and those with high profit margins have low asset turnover rates. Sime Engineering Services Bhd’s asset turnover ratio seemed to be relatively low, meaning that it made a high profit margin on its products: 0.09 of asset turnover and 21.86% of profit margin in 2005 compare with 0.06 of asset turnover and 77.5% of profit margin in 2006.
VI. GEARING AND EFFICIENCY ANALYSIS
The company’s gearing position in the year of 2005 is 15.59% (this percentage shows the amount of company’s funds that are borrowed), and the gearing position for 2006 decreased by approximately 5% (10.36%). Sime Engineering Services Bhd’s overall debt capital (short term credit facilities and long term liabilities) decreased in the year of 2006, since the company paid back it’s debts, probably due to the completion of some of the company’s construction projects. Thus, this may show that the company is becoming more self-reliant, since about 90% of company funds are self obtained. However, due to the company’s undertaking of new construction projects as well as its own expansion projects, these figures also show that the company may not be as prudent as they should be. (Instead of paying off its debts, they could use the credit funds to fund their future projects and not risk using their own funds should their business ventures prove insolvent.)
The efficiency ratios we used; to note how effictive the company is in allocating their resources for their projects were: Operating Margin and Fixed Assets over Operating Profit. (Operating Profit derived from company’s Income Statement under “Operating Profit”). By using Operating Margin, the ratio shows that in the year of 2006 the company has an operating margin of 0.74%, an improvement from 2005, 0.18%. These figures represent the company’s proportion of leftover revenue available to pay for its’ fixed costs, thus suggesting that it was enough to pay for its operating expenses-net profit in the year of 2006 further proves this. In addition, Fixed Assets over Operating Profit shows for 2005 and 2006, repectively, 70.4% and 22.9%. This massive decrease in efficient usage of fixed assets is a huge disadvantage to the company as it didn’t exploit its assets to its potential.
VII. CONCLUSION:
Sime Engineering Services Bhd in the year of 2006 has improved their position from 2005. Having a positive net profit, thus increasing profitability, further shown in the calculated ratios. Furthermore, as the company has managed to reduce their expenses by more than half, within the financial year, suggests high efficiency on the company’s part. However, in order to maintain this profitability and their shareholders trust, the company should be more wary of their liquidity position and improve it within the following year. Overall, should the company maintain this track record, Sime Engineering Services Bhd has a bright, and profitable future.