PMV Financial Analysis: Profitability, Liquidity, Solvency, And Risk Identification

Increase in PMV's Gross Margin and Net Profit Ratio

It Shows an increase in PMV’s gross margin from 60.98% in 2020 to 64.30% in 2021 due to stable growth in sales revenue. It indicates PMV’s efficiency in rendering services using direct labour and materials. A healthy increase can also be seen in its net profit ratio as it increases to 18.84% from 11.33%, demonstrating an improved ability of PMV to translate its sales into a profit. A significant increase in its return on assets from 6.94% to 12.13% demonstrates that the company uses its assets effectively to generate profit (Miransyah and Dempo 2021). Overall, PMV has an effective profitability position.

The current ratio of PMV increased to 1.4822 in 2021 from 1.2543 in 2020. It is a positive aspect, demonstrating that the company has adequate current assets to pay off its current business obligations. The quick ratio significantly improved from 0.9504 in 2020 to 1.0745 in 2021. A quick ratio of more than 1 indicates that the company has adequate quick assets to pay off its creditors when they fall due (Kurniani 2021). Overall, the company has a strong liquidity position.

It shows a slight decline in PMV’s Inventory Turnover Ratio from 2.8960 in 2020 to 2.8207 in 2021, indicating an unnecessary build-up of stock or obsolete inventory. The debtor turnover ratio increased to 72.5031 from 45.6138. It is an indicator that an efficient credit collection policy is employed in the company leading to the speedy collection of the dues. An increase in PMV’s asset turnover ratio from 0.6126 to 0.6437 indicates an enhanced efficiency of the company in generating sales by using its assets (Kurniani 2021). All these imply that the company has an overall effective activity position.

A decrease in PMV’s debt to equity ratio from 0.6346 in 2020 to 0.4882 in 2021 demonstrates less dependency of PMV on the borrowed capital, which makes it suitable for investment. An increase in the equity ratio from 0.6118 in 2020 to 0.6720 in 2021 implies that PMV has used more owners’ investments to finance its assets than the borrowed capital (Brindescu–Olariu 2016). Overall, the company has a strong solvency position.

The ratio analysis provided in Part A may assist the auditor in identifying the areas of PMV’s financial statements which are at the risk of material misstatement. As a result, audit procedures' timing, nature, and extent would have to be changed accordingly to assess those high-risk areas. It may require performing more substantive audit procedures.

The following discussion identifies and justifies three potential accounts that might be misstated:

Sales Revenue – Sales revenue increased to $1,443,174,000 in 2021 from $1,215,316,000 in 2020. This account might be overstated because an increase in the gross profit ratio indicates overstated sales through fictitious sales without corresponding cost of goods sold entry (Nguyen, Ngo and Le 2020). 

Interest-Bearing Liabilities – Non-current interest-bearing liabilities decreased to $77,834,000 from $146,659,000, and current interest-bearing liabilities increased from nil to $69,000,000. This account may be understated by deliberately classifying non-current interest-bearing borrowings as current interest-bearing borrowings in order to improve the solvency position (Dritsas and Petrakos 2018).  

Equity – Total equity increased to $1,532,905,000 in 2021 from $1,347,448 in 2020. This account may be overstated because an increase in total equity would improve PMV’s debt to equity and equity ratio, and thus the solvency position would be improved.

As per ASA 570 Going Concern (ASA 570), three types of factors would be considered when evaluating whether PMV will be able to continue as a going concern. They are financial, operating, and other factors (ASA 570, 2022).

Financial Factors – These factors include net liability of high gearing position, negative operating cash flows, adverse key financial ratios, significant operating losses, major deterioration in the assets’ value which are used for generating cash flows, discontinuance or arrears of dividends, inability to pay the creditors on time, inability to adhere to the loan covenants, and others (ASA 570, 2022).

Operating Factors – These factors include the intention of management to cease operations or liquidate the business, loss of major management employees without replacement, loss of major market, shortage of key suppliers and appearance of highly successful competitors (ASA 570, 2022).

Other Factors – These factors include nonconformity with the statutory or capital requirements, legal proceedings against PMV that may lead to judgments that PMV could not meet or restricts the opportunities to trade, unfavourable changes in government policy or legislation, and underinsured or uninsured disasters (ASA 570, 2022).  

References

Auasb.gov.au. 2022. ASA 570. [online] Available at: <https://auasb.gov.au/media/jbwpiyr5/asa_570_12_21.pdf> [Accessed 23 April 2022].

Brindescu–Olariu, D., 2016. Solvency ratio as a tool for bankruptcy prediction. Ecoforum Journal, 5(2).

Dritsas, S. and Petrakos, G., 2018. Risk of Material Misstatement in Fluctuated Economic Environments: The Case of Greece. International Business Research, 11(6), pp.243-248.

Kurniani, N.T., 2021. The effect of liquidity ratio, activity ratio, and profitability ratio on accounting profit with firm size as a mediation. Journal of Economics and Business Letters, 1(3), pp.18-26.

Miransyah, G.G. and Dempo, S.R.S., 2021. Profitability Ratio Analysis at PT. Medikaloka Hermina, TBK. BINA BANGSA INTERNATIONAL JOURNAL OF BUSINESS AND MANAGEMENT, 1(1), pp.60-67.

NGUYEN, H., NGO, T.K.T. and LE, T.T., 2020. Risk of material misstatement in the stage of audit planning: Empirical evidence from Vietnamese listed enterprises. The Journal of Asian Finance, Economics and Business, 7(3), pp.137-148.