8.1 Financial ratios of P.T Krakatau steel (KRAS)

In general, the company’s performance can be assessed by it’s financial ratios which are classified into four categories including the ratio of profitability, liquidity, solvency and market valuation. Profitability is the assessment of the ability of a company to earn profits based on operations or sales, equity of shareholders or balance sheet assets. In this discussion, we choose the Gross Profit Margin (GPM) ratio as one of the most widely used profitability ratios. GPM is the difference between revenues and cost of production over the revenues or simply net income divided by revenues (Hayes, 2021a). Liquidity ratios are the measure of the ability of a company to pay debt liabilities including the safety margin in their perspective through the metrics including operating cash flow ratio, quick ratio and current ratio. In this discussion, we choose the current ratio as one of the most widely used liquidity ratios. The current ratio is the measure of the ability of a company to pay short term obligations such as one year obligations. The ratio is simply  the total current assets divided by the total current liabilities (Hayes, 2021b). Solvency ratios are the used metric for measurement of the ability of an enterprise to solve the long term liabilities often used by prospective profit oriented organizations. This discussion chose the debt to equity ratio as one of the most commonly used solvency ratios. It is actually the total liabilities divided by the total shareholder’s equity (Hayes, 2021c). The last assessment tool is the market valuation ratios which are those ratios used for evaluation of the price of the current share for the stock of a publicly-held company. Those ratios are utilized by the potential and current investors to determine if the shares of a company are under or over priced (Bragg, 2021). This discussion chose the trailing P/E (price to earning) ratio as one of the most commonly used market valuation ratios. Price to earning is simply the per share market price over that of reported earnings (Bragg, 2021). The trailing P/E is the ratio of a share price of a company in the market with respect to the per share earnings of the past years (Chen, 2021).   

Resume of the trailing price to earning (P/E) as one of market valuation ratios are separated in table 1 due to the difficulty to find data for exact calculations of every year and Resumes of GPM, current and debt to equity ratios as one of the subsequent profitability, liquidity, and solvency ratios can be analyzed in the table 2, 

Table 1. Recent market valuation measures of PT. Krakatau Steel (Yahoo, 2021)

In IDR	2020	2019	2018	2017	2016
Net Income	344,275	-7,122,536	-2,384,661	-1,093,895	-2,283,587
Sales/Revenue	19,684,467	20,088,160	24,798,294	19,390,485	17,885,257
GPM ratio	1.75%	-35.46%	-9.62%	-5.64%	-12.77%
Total Current Assets	11,736,555	9,587,366	13,820,215	13,861,874	13,436,448
Total Current Liabilities	11,626,319	34,623,510	25,640,417	18,477,646	16,497,090
Current Ratio	1.0094815	0.27690335	0.53900117	0.75019696	0.81447382
Total Liabilities	42,678,645	40,825,614	39,666,065	30,683,946	28,387,703
Total Liabilities / Total Assets	87.13%	89.44%	77.03%	54.97%	53.39%
Total Equity	6,304,558	4,820,559	11,831,418	25,137,986	24,785,048
D to E Ratio	6.7694904	8.4690621	3.3526044	1.2206206	1.1453559

Table 2. GPM, Current and D to E ratios based on selected financial statement data of krakatau steel for the past five years (Journal, 2020)

Table 1 shows the recent trailing P/E value is 13.99 with the current price per share at close of October 25 is Rp. 545, increasing from the previous time. The standard value of P/E ratios historically range from 13 to 15 (Murphy, 2021). These values are based on S&P 500 which is the indices of 500 best companies in different kinds of sectors registered in the united state stock markets.  Compared to the available standard, the trailing P/E ratio of Krakatau steel with the above value of >13 means that Krakatau steel performance is considered to be the same as that of the S&P 500 making Krakatau steel a well globally competitive company. Trailing P/E ratio means the stock of krakatau steel is trading 13.99 times its trailing 12 month earnings in 2020. Therefore, with the stock price of Rp. 545 the earning per share for that year period can be determined by EPS = price / (trailing p/e) = Rp.545 / 13. 99 =  Rp. 38.96

Table 2 reported data processing of net income and sales of income statements, total current assets, total current liabilities, total liabilities and total equity of balance sheet for the recorded five years financial data of PT. Krakatau Steel from 2016-2020. Based on the available standardized ratios, the evaluations and meanings of the above data can be explained by the following table ,

 

	2020	2019	2018	2017	2016
GPM ratio	1.75%	-35.46%	-9.62%	-5.64%	-12.77%
evaluation	< 5%	< 5%	< 5%	< 5%	< 5%
meanings	low ratio	low ratio	low ratio	low ratio	low ratio
Current Ratio	1.0094815	0.27690335	0.53900117	0.75019696	0.81447382
evaluation	1.2 to 2 (good Current ratio), < 1 is not a good ratio
meanings	best ratio	worst ratio
D to E Ratio	6.7694904	8.4690621	3.3526044	1.2206206	1.1453559
evaluation	> 1 is not ideal; < 1 is ideal
meanings		the most unideal ratio			the most ideal ratio

 

the best question if we were to invest in the company is that when will the company get the best ideal ratios for around five years period so that we can get good return.

 

 

References

Hayes, A. (2021a, October 22). The importance of profitability ratios. Investopedia. Retrieved October 25, 2021, from https://www.investopedia.com/terms/p/profitabilityratios.asp. 

Hayes, A. (2021b, October 22). What are liquidity ratios? Investopedia. Retrieved October 25, 2021, from https://www.investopedia.com/terms/l/liquidityratios.asp. 

Hayes, A. (2021c, October 22). What is a solvency ratio? Investopedia. Retrieved October 25, 2021, from https://www.investopedia.com/terms/s/solvencyratio.asp. 

Bragg, S. (2021, October 19). Market value ratios. AccountingTools. Retrieved October 26, 2021, from https://www.accountingtools.com/articles/market-value-ratios.html. 

Chen, J. (2021, May 19). Trailing price-to-earnings (trailing P/e) definition. Investopedia. Retrieved October 26, 2021, from https://www.investopedia.com/terms/t/trailingpe.asp. 

Journal, W. S. (2020). Kras.id | Krakatau Steel annual income statement - WSJ. The Wall Street  Journal. Retrieved October 19, 2021, from https://www.wsj.com/marketdata/quotes/ID/XIDX/KRAS/financials/annual/income-statement. 

Yahoo. (2021, October 26). Krakatau Steel (persero) tbk. (KRAS.JK) valuation measures & financial statistics. Yahoo! Finance. Retrieved October 26, 2021, from https://finance.yahoo.com/quote/KRAS.JK/key-statistics/. 

Murphy, C. B. (2021, May 31). Assessing a stock's future with the price-to-earnings ratio and Peg. Investopedia. Retrieved October 27, 2021, from https://www.investopedia.com/investing/use-pe-ratio-and-peg-to-tell-stocks-future/.

 

 

7.3 LC (Learning Consultants)‘s Financial ratios

 

As we discussed in the previous discussion, a service company such as an educational service provider may have different master budgets. In the similar way of thinking hypothetically real financial information, it’s planned or budgeted financial ratios will be different from the manufacturing one. For LC as one of privately funded educational service providers, some of the financial ratios would be applicable  and some would not.

In general, the applicable ratios for LC are the ones not related to the manufactured products such as,

1. Profit margin ratio :

Profit margin ratio :  ( Total Revenue - Total Expenses ) / Total Revenue  (Team, 2021).

Profit Margin = Net income / Revenue (Segal, 2021)

5% profit margin is considered low, 10 % is average and 20 % is high  (Anonimous,2021)

2. Return on asset (ROA)

Net income / Total average assets 

In general, ROA > 5% are considered good and > 20% are excellent (Hargrave, 2021).

3. Current ratio

Current Ratio = Current assets / Current liabilities (Fernando, 2021a). Good current ratio is 1.2 to 2 meaning that the current assets are 1.2 to 2 times the liabilities.

4. Quick ratio

QR = (CE + MS + AR)/CL

Note :

QR = Quick ratio

CE = Cash and equivalence

MS = Marketable securities

AR = Accounts receivable

CL = Current liabilities

(Seth, 2021)

Idealized quick ratio is 1 : 1 meaning that meeting current liabilities is not required in the context of technical solvency purposes. (Vaidya, n.d.).

5. Debt to equity ratio 

Debt/Equity= Total Liabilities / Total Shareholders’ Equity​​
the less the ratio, the better the financial health of the company meaning that the debt is not more than the equity. (Fernando, 2021b)      

Not applicable ratios for LC are the ones closely related to the manufactured products, inventories, credit sales, etc  such as,

1. AR turnover ratio
2. Average collection period
3. Inventory turnover ratios
4. Average sales period

In a more detailed semi hypothetical  calculation, the above applicable planned financial ratios which might be generated are based on the income statement of the previous work with it’s possibly generated balanced sheet. The following tables are the summaries of the calculation, articulation, evaluation and meanings of the results.

Table 1. Net income of LC (Learning Consultants of a certain year)

 

Table 2. Balanced sheet of LC (Learning Consultants) of a certain year

Table 3. Financial Ratios of LC (Learning Consultants) of a year

In this simulation, using the assumed retained earnings or net income + the amount of the previously assumed available amount in the beginning (Rp. 10000), table 3 summaries the profit margin is below average, return on asset is considered good, current ratio and debt to equity ratio is still not ideal. This can be analyzed by the fact that in the first year, LC is growing. Although it has below average profit margin based on enough income and revenues, and it has good ROA (return on asset) based on good income and total asset, LC is still unable to cover it’s liabilities making not ideal the current, quick and debt to equity ratio.    

Of the 5 financial ratios showing the fact that 3 of them are unfavorable and 2 are favorable, we can conclude that LC’s financial health is unfavorable at the year of growth. Hopefully, it’s growth will improve as the increase of sold tickets and improved the amounts of advertising as increasing numbers of subscribers. 

 

 

References

Segal, T. (2021, October 13). Profit margin. Investopedia. Retrieved October 20, 2021, from https://www.investopedia.com/terms/p/profitmargin.asp.

Anonimous. (2021, January 2). Profit margin. Corporate Finance Institute. Retrieved October 21, 2021, from https://corporatefinanceinstitute.com/resources/knowledge/accounting/profit-margin/.   

Team, I. E. (2021, February 23). How to calculate a profit margin ratio. Indeed Career Guide. Retrieved October 20, 2021, from https://www.indeed.com/career-advice/career-development/how-to-calculate-profit-margin-ratio.

 Hargrave, M. (2021, October 18). Return on assets definition. Investopedia. Retrieved October 20, 2021, from https://www.investopedia.com/terms/r/returnonassets.asp.

Fernando, J. (2021a, October 13). What is the current ratio? Investopedia. Retrieved October 20, 2021, from https://www.investopedia.com/terms/c/currentratio.asp.

Seth, S. (2021, October 20). Quick ratio. Investopedia. Retrieved October 20, 2021, from https://www.investopedia.com/terms/q/quickratio.asp.

Fernando, J. (2021b, October 13). Inventory turnover: Formula and calculation. Investopedia. Retrieved October 21, 2021, from https://www.investopedia.com/terms/i/inventoryturnover.asp.

Vaidya, D. (n.d). Quick ratio. Wallstreetmojo. Retrieved October 21, 2021, from https://www.wallstreetmojo.com/quick-ratio/.