Financial Management at Arbetic Limited and Tow Emmar Limited - Coursework Example

Name: Lecturer: Course name: Course code: Date Table of content Introduction Arbetic limited financial Analysis Tow Emmar Company analysis Report on worth of company’s shares Conclusion and recommendation Appendix Reference list Introduction Arbetic limited and Tow Emmar limited are companies in the same industry of construction and development thus it is an ideal situation in making an analysis between the two companies and concluding on which company to invest in based on the financial situation of the business as well as the ability of the company’s investment to generate a positive returns from investment within a shortest time period or within the relevant range of investment. An analysis is made between the two companies and conclusion settled on. An ideal method of valuing the company’s share is relevant since the information generated by the model will be used in making decision of whether to invest in a company security or not. An ideal method is one that considers both the internal and external factors as well as considering the future performance of the company at present years. This will aid in avoiding future risk of business investment by ascertaining the business situation of the future at present years, a potentials investor will have considered both the systematic and unsystematic risk affecting the business and making a final conclusion of whether to invest in a company security or not. The following are detail analysis of Arbetic limited and Tow Emmar limited on the basis of their financial as well as the business situation of the companies. Arbetic limited Introduction Arbetic limited is a leading construction corporation in united Arab emirates, the company’s key commitment is to build on experience as well as expand with the aid of company’s capabilities and expertise in constructing high rise buildings, hotels, residential apartment and many more construction developed globally. Arbetic limited is corporation that trades on the Dubai financials statement under the representation ARTC. In the first quarter of 2013, The Company reported net profits of $377.8 million which is quite higher as compared to the previous years reported net profit. Revenue growth analysis It can be depicted that the Arabtec Company is having an increase in revenue growth from the year 2011 to 2013 but quite below those of Emaar properties limited. This implies therefore that the gross profit margin as well as the net profit margin will be high implying that the working capital of the business is enhanced and thus the company is not going to have a strong liquidity problem in financing its daily operation alongside the long-term investment. Discounted dividend model The dividend discount model is a technique of valuing a company's stock price based on the hypothesis that its stock is significant to the sum of the entire of its prospect dividend expenditure, discounted back to their present value. The model consequently is used to ascertain the worth of the stocks based on the net present value of the prospect dividends Po= {Do/ke-g} Where Po is the intrinsic value, Do is the dividend last paid, Ke is the cost of equity and G is the growth rate This model would be appropriate in ascertaining the real worth of the company if the company paid a dividend and a growth of the same dividend is eminent. In this case, the company has been making profits for the last four years implying that dividend to shareholders was paid. Ratio analysis of the company The return on capital as well as return on equity for Arabtec limited is quite as compared to those of Tow emaar limited. It therefore implies that the liquidity position of tow emaar is enhanced. The Tow Emaar Company is having a strong current ratio unlike the arabtec limited hence implying that the liquidity ratio of the company is enhanced. This is due to the fact that the business is having enhanced working capital management. In this regard, the operation cost and the current liability of the company can easily be financed using the working capital. The reserve will be used to fiancé long-term capital investment for the business. This is strong indication that the financial position of Tow Emaar Company is enhanced unlike those of Arabtec limited. Discounted free cash flow model Discounted cash flow valuations are one pricing approach that potential investors with expertise skills use to appraise the worth of stocks. Proponents of this appraisal technique argue that you can get a precise image of a firm's accurate worth only if you approximate its present and future cash flow. Other proponents argue that this valuation technique has numerous drawbacks that include the fact that the approximation are based on protrusion and forecast rather than concrete data. FCF= (operating cash flow-capital expenditure} Or FCF= {EBIT (1-Tax Rate) + Depreciation & Amortization - Change in Net Working Capital - Capital Expenditure} Arabtec limited FCF= (75.4-2307.2) =$-2225.8 Negative free cash flow in itself is not bad since it implies that the business is having a huge capital investment that will a high returns in the near future. The tow emaar company is having a high value of free cash flow, implying that the business is sufficient in terms of finance and thus the reserves will be used to finance future investment projects and thus the business is a going concern. Residual Income model The residual income model tries to change a firm's prospect earnings approximation, to recompense for the equity cost and place an extra precise worth to a firm. even though the return to equity holders is not an official prerequisite like the return to bondholders, in order to draw investors firms ought to recompense them for the investment threat exposure. In scheming a firm's residual income the major calculation is to conclude its equity charge. Equity charge is merely a firm's total equity capital grow by the required rate of return of that equity, The model can be ascertained as well using the capital asset pricing model {CAPM model} .The formula below depicts the equity charge equation. Equity charge= {Equity capital*cost of capital} Equity charge= {5764*10%) =57.64% Residual income= (equity charge-Net income) Arabtec limited Residual income (5764-377.8) =$5386.2 Million Tow Emaar Residual income (34,733-30.777.5) =$3955.5 It can be concluded therefore that, the residual income valuation method is a practical and progressively more accepted technique of valuation and can be put into practice with no trouble by even apprentice investors. Residual income valuation can give a comprehensible approximation of what the true intrinsic value of a firm may be. The growth in asset is positive as depicted from the above graph. In this regards, the return on asset and current ratio is positive. The company is having a strong financial position as depicted by its size of asset and market capitalization. In this regard, the business is viable for investment since it depicts ands increase in asset capital as well the revenue. Tow Emaar limited Introduction This is a company y registered and with it’s headquartering in United Arab Emirates. The company deals in Real Estate Develpemtn.The Company are public company listed in Dubai financial market. The company is rated as one of first company in expensing the largest part of money of whichever development on exploring as well as progress as of the 2014 Tow Emmar Company also depicts a positive trend in revenue. This is a positive indication about the company operation but concern is on the level expense to be paid since the company is having a huge value of operating expense that is unproportion to the level of the sales. In ascertaining the value of Tow Emmar, Thus residual model will not be relevant since there is no dividend that were paid due to the fact that the company reported a decline in profit and thus in the current year ,the company made a loss of $151 Million Ratio Analysis of the company Discounted free cash flow model Discounted cash flow valuations are one pricing approach that potential investors with expertise skills use to appraise the worth of stocks. Proponents of this appraisal technique argue that you can get a precise image of a firm's accurate worth only if you approximate its present and future cash flow. Other proponents argue that this valuation technique has numerous drawbacks that include the fact that the approximation are based on protrusion and forecast rather than concrete data. FCF= (operating cash flow-capital expenditure} Or FCF= {EBIT (1-Tax Rate) + Depreciation & Amortization - Change in Net Working Capital - Capital Expenditure} Tow Emaar FCF= {6581.3+1016.1=$7,597.4 The company is having a free cash flow of $7,597.4 which is higher as compared to that of Arabtec limited. In this regards, it implies that Tow Emmar is having little reserve for capital project or expansion and the business will require external financial requirement in the future when the need for capital expenditure is required. Residual Income model The residual income model tries to change a firm's prospect earnings approximation, to recompense for the equity cost and place an extra precise worth to a firm (McMenamin 2002). even though the return to equity holders is not an official prerequisite like the return to bondholders, in order to draw investors firms ought to recompense them for the investment threat exposure. In scheming a firm's residual income the major calculation is to conclude its equity charge. Equity charge is merely a firm's total equity capital grow by the required rate of return of that equity, The model can be ascertained as well using the capital asset pricing model {CAPM model} .The formula below depicts the equity charge equation. Equity charge= {Equity capital*cost of capital} Equity charge= {347333*10%) =347.33% Residual income= {Net income-equity charge} Residual income= {-148.7-49.15) =-197.85 million Report on worth of the company’s share Arbetic limited The company is a having a huge investment on capital in order to earn a high returns in the future. This is envisaged by free cash flow analysis where the analysis depicts free cash flow high together with the residual income. It therefore implies that the business return will cater for investors return and will thus put investors into a safety by way of dividends from investment as well as opportunity for future capital investment. In this case a detail analysis on the company’s performance should be analyzed before making intent to invest in this company (Jerald E. Pinto 2010). The problem a rises when the business is reporting both a negative analysis in terms of the free cash flow and the residual income this in general depicts the difficulties the business will be facing in terms of financing the capital expenditure as well as considering the need for shareholders returns inform of dividend. In for potential shareholders to realize investment in this company He/she will be forced to wait for a considerable time since the company is having a huge capital investment that can be realized in the near future. Tow Emmar limited The company is having a positive discounted free cash flow as much as the company spends heavily in capital investment. In this case it implies that the business is having a strong capital, base and the availability of free cash flow will aid the business in manufacturing more products as well as having a diversified portfolio of asset in order to minimize risk (Gabehart 2002). This good news to potential investors since the financial situation of the business general depicts positive trends implying that investing in this company will earn a positive return within a shortest period of time. The residual income to the business depicts a negative value. This implies that the business is assuring low dividends due to the fact the business currently is placing more expense on capital investment for future returns to investors as well as the manufacture of the standard buildings that meets the technology at present. The investors will therefore waits for return from investment in the future in order to receive dividend. The shareholders of the business are certain about the financial position of the company due to the fact that the company is having a strong value of free cash flow. The financial position of the company is stable and thus potential investors are assured of their returns from investment. Conclusion Arabtec limited and Tow Emmar limited are companies in the same industry of car manufacture and thus it is an ideal situation in making an analysis between the two companies and concluding on which company to invest based on financial situation of the business as well as the ability of the company’s investment to generate a positive returns from investment within a shortest time period or within the relevant range of investment (Cahill 2003) (Cahill 2003). An analysis is made between the two companies and concluded settled on Tow Emmar due to favorable business situation depicted by the residual income model and the discounted cash flow approach. A detail analysis on Arbetic Limited Potential investors therefore should consider investing in Arbetic Company since the business situation of the company is favorable in terms of capital base and funds available for investment. In ascertaining the financial situation of the company using the free cash flow method, per share of 0.65 is envisaged (CFA 2010). This implies therefore that for every one share of potential investors, there is discounted free cash flow of $0.65.this is a good indication that the business does not have any financial difficulties despite the fact that the business is spending heavily on research and manufacture of their product. This is a strong indication that the business is a going concern and will thus continue into unforeseeable future due to strong financial position depicted by growth in asset as well increase in net cash flow and the growth in profit margin. An investor should therefore consider investing in shares on Arbetic limited since they will be assured of positive returns in the near future from their investment in the company. Appendices Arabtec limited Tow Emmar Ration Analysis Bibliography Cahill, M. (2003). Investor's Guide to Analyzing Companies and Valuing .. CFA, H. (2010). Security Valuation and Risk Analysis: Assessing Value in. Gabehart, S. (2002). The Business Valuation . Jerald E. Pinto, ‎. H. (2010). Equity Asset Valuation . KEVIN, S. (2008). SECURITY ANALYSIS AND PORTFOLIO MANAGEMENT. McMenamin, J. (2002). Financial Management: An Introduction -. Nick Antill, ‎. L. (2005). Company Valuation Under IFRS: Interpreting and Forecastin. Read More