Financial Analysis and Comparison between
AMWAY MALAYSIA BERHAD & COSWAY CORPORATION BERHAD
Amway (Malaysia) Holdings Berhad is principally engaged in the distribution of
consumer products principally under the Amway trademark. Beginning with just five employees,
in a small office and warehouse facility in Jalan Ipoh in 1976, Amway Malaysia was one of the
pioneers in the direct selling industry at that time. Today, Amway Malaysia is the leading direct
selling company in Malaysia with a core distributor force of 195,000 from all corners of the
nation, making Amway a household name in Malaysia.
Amway offers Malaysians a unique entrepreneurial opportunity rooted in its 200
meaningfully differentiated products under five core lines bearing the Amway trademark. To
support its distributors' retailing efforts, the company has embarked on branding campaigns
during its last 3 fiscal years for its two key power brands, Nutrilite health food supplements and
Artistry skin care and cosmetics. Amway's core distributor force stands at 176,800 distributors
as at December 31st, 2006.
Amway Malaysia is a founder member of the Direct Selling Association of Malaysia (DSAM).
Amway Malaysia representatives are actively involved in various industry committees. DSAM,
founded in 1978, has 59 members who are both multinational and local direct selling
companies. Its subsidiaries include Amway (Malaysia) Sdn. Bhd. and Amway (B) Sdn. Bhd.
Both subsidiaries markets a wide range of premium products under the AMWAY trademark,
categorized under five core product lines:
Nutrition & Wellness (including food supplements and beverages under the
NUTRILITETM brand name - a global vitamin and mineral brand, which grows, harvests
and processes plants on their own certified organic farms).
Skin Care & Cosmetics (ARTISTRYTM skin care and cosmetic products)
Personal Care (including GLISTERTM oral care, toiletries and SATINIQUETM hair care
Home Care (including laundry, car care products and household cleaners)
Home Tech (including ATMOSPHERETM air treatment system, eSpringTM water
treatment system is an in-home system to combine ultraviolet light technology with a
multi-stage carbon-block filter to provide drinking water and iCOOKTM cookware offers a
range of Cookware products)
COSWAY Corporation Berhad is a subsidiary of Berjaya Group, a multinational
conglomerate known for diversified interests. COSWAY Corporation Berhad began its
operations in December 1979. It is a Malaysian-based and leading multi-level network
marketing company in Malaysia, distributing a wide range of superb quality consumer products
through an extensive network of members and sales centers throughout Malaysia. COSWAY
distributes a wide range of exclusive, quality products from established manufacturers all over
the world. The products including home care, personal care, food, auto care, healthcare and
fashion. These products are readily in demand as they fulfill the everyday needs of consumers.
Headquartered in Wisma COSWAY, a 26-storey building located in the middle of Kuala
Lumpur premier Golden Triangle, it has a paid up capital of RM155 million. Furthermore,
COSWAY started expanding its operation in the international arena in 1995 and has since
spread its wings to Brunei, Indonesia, The Philippines, Thailand, Brazil, and Mexico.
On the other hand, Cosway Corporation was incorporated to acquire the entire issued share
capital of Singer (Malaysia) Sdn Bhd ("Singer Malaysia"). The Company was listed on the Bursa
Malaysia Securities Berhad in October 1990.
Berjaya's participation in Singer Malaysia commenced in March 1985 with a 48%
shareholding. In 1989, Berjaya made a take over bid for Singer Sewing Machine Company
("SSMC") Inc on the New York Stock Exchange, the holding company of SSMC. The bid
subsequently resulted in Berjaya acquiring a majority stake and management control of Singer
Through the acquisitions of the Unza Group of Companies, Cosway (M) Sdn Bhd and other
consumer related businesses, Cosway Corporation then established itself as a leading marketer
of a broad range of consumer products.
Cosway Corporation further diversified into manufacturing when it acquired Dunham-Bush
(Malaysia) Bhd (“Dunham- Bush”), an acknowledged key player in the Global Commercial and
Industrial Heating, Ventilating, Air-conditioning and Refrigeration business.
On 11 September 1998, Cosway Corporation adopted its present name to reflect the
Company's long term focus in the direct selling business through its subsidiary, Cosway (M) Sdn
Bhd. On 15 January 2004, Cosway Corporation completed the divestment of the entire
shareholdings of Unza Holdings Berhad for a total cash consideration of RM186.37 million.
On 28 April 2006, Cosway Corporation completed its capital distribution of 51,665,054
Dunham-Bush shares to its shareholders on the basis of three (3) Dunham-Bush shares for
every twenty (20) existing shares held in Cosway Corporation. As a result, Dunham-Bush
ceased to be a subsidiary of Cosway Corporation.
On 4 June 2007, Cosway Corporation was de-listed from the official list of Bursa Malaysia
Securities Berhad (Bursa Securities) pursuant to Paragraph 16.04 of the Listing Requirements
of Bursa Securities.
With total employee strength of over 1,700, the Group is currently engaged in the following
a) Marketing of household, beauty, health care and other consumer products through a
multi-level direct selling network and an online shopping portal known as eCosway.com
b) Marketing and selling of consumer durables under the brand name "SINGER" on cash or
installment payment terms
c) Retailing of multi-brand consumer durables on cash or equal payment terms
d) Distribution, sale and rental of audio/visual home entertainment products and distribution
of children's education learning aids' products.
Based on the companies’ 3-year financial statements, calculate the yearly values of the
following financial ratios:
i) debt ratio;
ii) debt-equity ratio;
iii) net profit margin;
iv) return on equity; and
v) dividend-payout ratio
AMWAY Year 2007 Year 2006 Year 2005
i) Debt ratio Total liabilities/total = 434 000 = 433 000 = 445 000
assets 171 853 000 90 480 000 89 551 000
= 0.00252541 = 0.00478559 = 0.00496924
ii) Debt-equity Debt(liabilities)/equity = 434 000 = 433 000 = 445 000
ratio 171 419 000 176 682 000 175 753 000
= 0.00253181 = 0.00245073 = 0.00253196
iii) Net profit Net Income / Sales = 70 354 000 = 60 108 000 = 61 065 000
margin 90 345 000 81 648 000 83 423 000
= 0.77872599 = 0.7361846 = 0.73199238
= 77.87% = 73.61% = 73.2%
iv) Return on Net Income / = 70 354 000 = 60 108 000 = 61 065 000
equity Shareholder's Equity 171 419 000 176 682 000 175 753 000
= 0.41042125 = 0.34020444 = 0.34744784
v) Dividend- Dividends per Share / = 7.5 = 7.5 = 7.5
payout ratio Earnings per Share 49 31.6 32.6
= 0.15306122 = 0.23734177 = 0.23006135
= 15.3% = 23.73% = 23%
COSWAY Year 2007 Year 2006 Year 2005
i) Debt ratio Total liabilities/Total = 275 543 000 = 297 633 000 = 289 456 000
assets 239 069 000 344 254 000 336 262 000
= 1.15256683 = 0.86457383 = 0.86080497
ii) Debt-equity Debt(liabilities)/Equity = 275 543 000 = 297 633 000 = 289 456 000
ratio 477 993 000 588 163 000 573 179 000
= 0.57645823 = 0.50603829 = 0.50500106
iii) Net profit Net Income / Sales = 56 821 000 = 14 984 000 = 10 413 000
margin 25 880 000 9 530 000 15 645 000
= 2.1955641 = 1.57229801 = 0.66558006
= 219.56% = 157.23% = 66.56%
iv) Return on Net Income / = 56 821 000 = 14 984 000 = 10 413 000
equity Shareholder's Equity 477 993 000 588 163 000 573 179 000
= 0.11887413 = 0.0247593 = 0.0181671
v) Dividend- Dividends per Share / = 3.6 = none = none
payout ratio Earnings per Share 28.51
Analyze the trend of the ratios for the 3-year period and compare their performances based on
your answer in (2) above. Discuss your views on the companies’ policies and performance in
relation to the following:
i) financing policy (aggressive and/(or) conservative approach);
ii) capital structure;
iii) dividend policy; and
iv) operating performance.
From the answer in (2) above, we can see the situation of each company’s base on the
ratios that have been computed. Firstly, from the debt ratio, it shows how much the business is
in debt. Amway has between RM0.0025 to RM0.005 in debt for every Ringgit of assets. So for
this business, the total debt ratio tells us that this business is in good health. Meanwhile, the
debt ratio for Cosway is between RM0.86 to RM1.15 in debt for every Ringgit of assets.
Since the ratio in 2007 has become more than 1, the total debt ratio tells us that this
business is not in good health and may become really ill for that year because the total debt
ratio should be 1 or less to maintain good company performance. Moreover, the lower the debt
ratio, the less total debt the business has in comparison to its asset base. On the other hand,
businesses with high total debt ratios are in danger of becoming insolvent or going bankrupt.
As for Amway, the financing policy that has been utilized by the company is more
towards on conservative policy. This is because, the debt ratio is low. Therefore, conservative
policy uses higher cost capital but postpones the principal repayment of debt, or avoids it
entirely by using equity.
The total current liability to total asset ratio is used to measure the degree of aggressive
financing policy, with a high ratio being relatively more aggressive. In contrast, Cosway most
probably develops an aggressive approach in 2007, since the debt ratio is slightly higher than in
2005 and 2006. Aggressive financing policies utilize higher levels of normally lower cost short-
term debt and less long-term capital. By lowering capital costs can increases the risk of a short-
term liquidity problem.
Capital structure always refers to the way a corporation finances its assets through some
combination of equity, debt, or hybrid securities. A firm's capital structure is then the
composition or 'structure' of its liabilities. In this case, the debt-equity ratio (D/E) can be used to
measure the capital structure of both companies. The debt-equity ratio is a financial ratio
indicating the relative proportion of equity and debt used to finance a company's assets. This
ratio is also known as risk, gearing or leverage.
The debt-equity ratio of Amway and Cosway both are been maintained for 3 year period.
Amway maintained the ratio of 0.25%. Meanwhile Cosway maintained the debt-equity ratio at
50% to 57% for the 3 year period. As D/E increases, management has an increased incentive to
undertake risky (even negative NPV) projects. This is because if the project is successful, share
holders get all the upside, whereas if it is unsuccessful, debt holders get all the downside. If the
projects are undertaken, there is a chance of firm value decreasing and a wealth transfer from
debt holders to share holders.
As seen here, Amway has paid its shareholders 7.5 cent per share in the form of annual
dividends in 2007. Its earning per share was 49 cent. So its dividend payout ratio will be 15.3%.
in the previous year, the dividend payout ratio is about 23%. This shows that Amway paid low
dividend for its shareholders.
In addition, Cosway manages to have its payout ratio only in 2007 which is 12.63%. It is
also a low dividend paying. A low dividend paying or the absence of such may be explained by
the fact that the company has decided to grow and as a result it needs money to fund its growth.
These funds can come from dividends and the company may decide to retain some. On the
other hand, 1companies that pay high dividends to their shareholders may do this since they
have reached their maturity and there is no room for growth. As a result, the most efficient and
effective use of the profits will be to return them to the company's shareholders.
Next, net profit margin will show how much net profit the business’s sales are producing.
The profit margin is an extremely useful measure of how your business is performing over time.
So, for Amway, this business is generating more than 70 cents net profit for every Ringgit in
sales in 3-year period. On the other hand, Cosway generates 66.56%, 157.23% and 219.56% in
3-year period respectively. Generally, 2the higher the profit margins the better off the business.
At a glance, we can see that the business’s net profit has increased for Cosway over the 3-year
period. It shows that the company has a good control over her expenses.
Based on your evaluation of the companies, assess the relationships between measures of
performance and the following:
i) financing policy;
The policy a company uses to decide how much it will pay out to shareholders in dividends.
Is Your Business Sick? Give Your Business a Health Checkup with These Three Ratios, Susan Ward
ii) capital structure; and
iii) dividend policy.
You are required to apply the relevant financial theories to support your answer.
Financing decisions is one of the important areas in financial management to increase
shareholder’s wealth. To determine how managers achieve this object, it can say performance
measurement of company. Much of the theory in corporate sector is based on the assumption
that the goal of firm should be to maximize the wealth of its current shareholders.
One of the major cornerstones of determining this goal is financial ratio. Financial ratios
are commonly used to measure firm performance. It provides the basis for answering some very
important questions concerning the financial well being of the firm. The financial ratios include
liquidity ratio (debt ratio), return on investment (return on equity) and leverage ratios or gearing
(debt-equity ratio). In this case, we have calculated the financial ratio for both companies to see
the financial position of each company. For example, ROE for Amway is calculated by taking the
net result over shareholders’ equity for each specified year. It resulted with a slightly high rate
around 34% to 41% for the three years period. On the other hand, the ROE for Cosway is 12%
in 2007. These depicts that Amway is more capable than Cosway of generating cash internally.
This idea was confirmed by Monteiro (2006, p. 3) who stated that a business that has a
high return on equity is said to be one that is capable of generating cash internally and perhaps
it is the most important ratio an investor should consider.
Next, with respect to observed link between capital structure and performance, the
conclusion is that company that has high profitability and good performance have less debt.
Between Amway and Cosway, it is clearly confirmed that Amway generates higher profit than
Cosway. Amway manage to attain RM 83 423 000 in 2005, RM 81 648 in 2006 and RM 90 345
000 in 2007. With high profitability of Amway, it will surely have fewer debts to be paid.
Stulz (1990) like Jensen believes that debts payment decreases cash flows available for
managers. But, on the other hand, he states that this decrease will decrease the opportunities of
profitable investing. Thus, companies with less debt have more opportunities for investment and
in comparison with other active firms in industry, have more liquidity. Additional costs of debt
include potential bankruptcy costs, and agency costs associated with the monitoring of
investments by bondholders.
The alternative theory, discussed by Meyers (1984) and Fama and French (2002),
describes a firm’s debt position as the accumulated outcome of past investment and capital
decisions. In this theory, commonly called the “Pecking Order” theory, firms with positive net
present value investments will finance new investments first using internal funds, and in the
absence of internal funds will finance them with safe debt, then risky debt, then with equity, but
only if there is no other alternative. Thus, financing investments using internally generated funds
may be the cheapest source, and the firm’s financial structure is the outcome of past cash flows
and investment opportunities.
Then, it is found that there is a little relationship between measure performance and
dividend policy. Only for small firms there is a significant negative relationship between dividend
payouts and measure performance. In this case, dividend payouts show little sensitivity to
performance. As for Amway and Cosway, both of the companies consume a small percentage
of dividend payout ratios. However, Amway paid higher dividend to its shareholders as
compared to Cosway.
The theoretical principles underlying the dividend policy and its impact on firms can be
described either in terms of dividend irrelevance or dividend relevance theory. Miller and
Modigliani (1961) irrelevance theory forms the foundational bedrock of modern corporate
finance theory. Miller and Modigliani argued that dividend policy is irrelevant for the cost of
capital and the value of the firms in a world without taxes or transaction cost. They showed that
when investors can create any income pattern by selling and buying shares, the expected return
required to induce them to hold firm's shares will be invariant to the way the firm packages its
dividend payments and new issues of shares.
Since the firm's assets, investments opportunities, expected future net cash flows and
cost of capital are not affected by the choices of dividend policy, its market value is unaffected
by any change in the firm's payout pattern. Thus, dividend policy is irrelevant and firm can
choose any payout pattern without affecting their value. MM theory implies that dividend payout
will fluctuate as a by-product of the firm's investments and financing decisions. This will not
exhibit a systematic pattern over time.
Miller and Modigliani (1961) argued that the firm's value is determined only by its basic
earning power and its business risk. The clientele effect also provides an alternative argument
for the irrelevance of dividend policy, at least when it comes to valuation. In summary, if
investors migrate to firms that pay the dividends that most closely match their needs, no firm's
value should be affected by its dividend policy.
Fama, E.F., and French K.R. (2002). Testing Trade-Off and Pecking Order Predictions about
Dividends and Debt. The Review of Financial Studies, Vol. 15, No.1, pp. 1-33.
Meyers, S.C. (1984). The Capital Structure Puzzle. The Journal of Finance, Vol. 39, No. 3, pp.
Miller, M. & Modigliani, F. (1961). Dividend Policy, Growth and the Valuation of Shares, Journal
of Business, Vol. 34, pp. 411-433.
Monteiro, A. (2006). A quick guide to financial ratios, The Citizen, Money Web Business Insert,
6 May, 3.
Stulz, R. (1990). Managerial discretion and optimal financing policies, Journal of Fine
Economics, Vol. 26, pp. 145-158.
“Divided Policy” at http://www.investopedia.com/terms/d/dividendpolicy.asp Retrieved on 19
Susan Ward (26 September 2009) Is Your Business Sick? Give Your Business a Health
Checkup with These Three Ratios.
At http://sbinfocanada.about.com/od/management/a/3ratios.htm?rd=1. Retrieved on 15 October