Financial statement analysis and ratios

Section 1 of Module 7 can supply up to 60% of the paper, and ratio analysis is where most of its calculation marks sit. Expect a short extract of RM figures followed by one question: a margin, a liquidity or efficiency ratio, gearing, interest cover, EPS, P/E, yields or NTA per share. Examiners build wrong options from predictable slips: the wrong profit line, the wrong denominator, an inverted ratio, or a sign error in the cash conversion cycle. The rest of the topic tests why ratios mislead: accounting policy choices under MFRS, revaluation, leases, one-off items and window dressing.

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SIDC Module 7 Study Outline for July to December 2026 examinations (Topic 3); ACCA technical article 'Ratio analysis' (accaglobal.com); CFA Institute, 'A look at the cash conversion cycle'; MFRS 102 Inventories paras 23, 25; MFRS 116 paras 31, 39; MFRS 16 Leases (effective 1 January 2019) paras 22, 47-50; MFRS 133 Earnings per Share paras 19-21, 26, 28, 64; MFRS 138 para 57. MFRS standards are identical to the corresponding IFRS. Checked as at October 2026. Independent prep, not endorsed by SIDC or the SC.

Must-know for the exam

Horizontal analysis compares each item with the base year; vertical (common-size) analysis divides each item by revenue or total assets of the same period.
ROCE = PBIT ÷ (equity + non-current liabilities); ROE = profit after tax ÷ equity. Margins are always divided by revenue, never by cost of sales.
Current ratio = current assets ÷ current liabilities; quick ratio excludes inventory; cash ratio uses only cash and cash equivalents.
Receivable days use revenue; inventory and payable days use cost of sales (or credit purchases). Cash conversion cycle = inventory days + receivable days − payable days.
Interest cover = PBIT ÷ finance costs. Gearing is debt ÷ equity or debt ÷ (debt + equity): use the definition the question gives.
Basic EPS uses the weighted average shares (MFRS 133). Cash issues are time-weighted; bonus issues count from the start and restate comparatives.
P/E = price ÷ EPS; earnings yield = EPS ÷ price; dividend yield = DPS ÷ price; dividend cover = EPS ÷ DPS; payout = DPS ÷ EPS.
NTA per share = (equity − intangible assets) ÷ shares. Do not deduct borrowings again: equity is already net of liabilities.
DuPont: ROE = net margin × asset turnover × equity multiplier (total assets ÷ equity). The first two terms give ROA.
MFRS 102 allows FIFO or weighted average (LIFO banned); MFRS 116 revaluation surplus goes to equity via OCI; MFRS 16 puts leases on balance sheet.

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Traps that cost marks

Mixing the two gearing formulas. Debt ÷ (debt + equity) and debt ÷ equity give different numbers for the same balance sheet.
Dividing by a wider capital base. ROE uses shareholders' equity only, with the profit left for shareholders after interest and tax.
Including receivables. The cash ratio counts only cash and cash equivalents against current liabilities.
Using a per-share figure other than after-tax EPS, or inverting the ratio into earnings yield.
Using EPS instead of DPS. Dividend yield is cash paid per share over the price paid for the share.
Confusing payout with retention or with dividend cover. Payout plus retention equals 100%; payout × cover equals 1.
Accepting a margin built on the wrong profit line. Net margin is profit after tax over revenue.
Expecting EBITDA and operating cash flow to fall. Both usually improve under MFRS 16 even though nothing changes economically.

Techniques: horizontal, vertical and ratio analysis

The SIDC syllabus (Module 7 Topic 3.2) lists three techniques. Horizontal analysis tracks each line across years against a base year, as a percentage change or an index (base year = 100). Vertical or common-size analysis expresses each line as a percentage of one base in the same period: revenue for the income statement, total assets for the statement of financial position. Ratio analysis divides one item by a related item.

Technique	Calculation	Example (Beta Bhd: revenue RM450m to RM540m)
Horizontal	(current − base) ÷ base	(540 − 450) ÷ 450 = 20.0%
Trend index	current ÷ base × 100	540 ÷ 450 × 100 = 120
Vertical	item ÷ revenue (same year)	Gross profit 162 ÷ 540 = 30.0%

Trap: dividing a change by the later year (16.7% instead of 20.0%), or quoting the index of 120 as 120% growth.

Takeaway: Horizontal runs across years against a fixed base; vertical runs down one year against revenue or total assets.

Profitability and DuPont

Match the profit to the capital. PBIT belongs to lenders and shareholders, so it goes over capital employed (equity + non-current liabilities). Profit after tax belongs to shareholders, so it goes over equity. The ACCA ratio article uses these definitions; when a question defines a ratio differently, follow the question.

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