Finance and Accounting Research - Essay Example

? Finance and Accounting Project Research Contents Contents 2 Executive Summary 4 Introduction 5 Ratio Analysis 5 Profitability Ratio 6 Return On equity 6 Gross Profit Margin 7 Net Profit Margin 7 Liquidity Ratio 8 Current Ratio 9 Quick Ratio 9 Asset Management Ratio 10 Debtors Turnover Ratio 11 Creditors Turnover Ratio 11 Total Asset Turnover Ratio 11 Net Working Capital Turnover Ratio 12 Debt Management Ratio 12 Debt Ratio 13 Debt equity ratio 13 Equity multiplier 13 Conclusion 14 Works Cited 15 Appendices 16 Executive Summary Emirates Insurance Company was established in the year 1982 in Abu Dhabi, UAE. It has total assets of more than AED 1.5 billion and its gross written premium for 2012 was AED 650 million. The company operates over 20 locations in UAE. Emirates Insurance Company offers a wide range of insurance related products and services to serve its various customers like corporate, business organization, other financial institution and individuals. Here we will analyze respective ratios like Profitability ratio, asset management ratio, Debt management ratio and Leverage ratio to understand the financial position and performance of the company. Profitability Ratio can be defined as financial a tool which is used to justify a company’s ability to generate revenue. Profitability of Emirates Insurance Company has decreased over the years as the ROE, gross profit margin and net profit margin of the company has declined in 2012 as compared to 2011. Liquidity ratio measures the firm’s ability to fulfill its short term requirements which defines the firm’s capacity to pay off the current liabilities as and when needed. The company does not have enough liquid cash ready in its hand and it needs to improve its liquidity position. Asset management ratio can be defined as the relationship between sales and assets. The company is efficient in managing its assets except its payables turnover ratio. Debt management ratio measures the ability of the company to reduce the risk of financial problems in long run. The financial leverage of the company is higher on 2012. Thus it can be concluded that the company is having average position in the market and it should improve its sales to generate more profitability in future. Introduction Emirates Insurance Company was established in the year 1982 in Abu Dhabi, UAE. It has total assets of more than AED 1.5 billion and its gross written premium for 2012 was AED 650 million. The company operates over 20 locations in UAE. Emirates Insurance Company offers a wide range of insurance related products and services to serve its various customers like corporate, business organization, other financial institution and individuals. The company provides different insurance benefits like Hotel Block Insurance, Jeweler’s Block Insurance, and office comprehensive insurance. Under corporate insurance it provides General Third Party Liability Insurance, Workmen’s Compensation Insurance, Fidelity Guarantee Insurance and loss of money insurance. The company also has a policy of covering money loss if it occurs during the money is in locker or money loss in the company premises during business hours or in transit between bank and office premises. Oil and Energy team of Emirates insurance Company offers various services to its clients in the world and it focuses on the risk related to oil and gas. It has a wide range of insurance products like Motor Insurance, Marine Hull Insurance, Medical Insurance, Third party general insurance, Aviation insurance, Banker’s Blanket Bond Insurance, Cargo Insurance, fidelity Guarantee Insurance and Life Insurance. Here we will analyze respective ratios like Profitability ratio, asset management ratio, Debt management ratio and Leverage ratio to understand the financial position and performance of the company. Ratio Analysis Ratio analysis states the systematic analysis of the financial statement of a company to understand and interpret its performance and financial positions for a particular period of time. Ratio analysis can be compared with the same ratios of previous period or with another company in the same industry. Here I have calculated the ratios which are suitable to analyze the company’s financial position. Profitability Ratio Profitability Ratio can be defined as financial a tool which is used to justify a company’s ability to generate revenue which is compared to the business’s expenses and other operational costs which are incurred during a specific time period and are compared to the same ratio of previous period. Ratios which are coming under profitability ratio can be judged by its higher value as compared to a competitor’s ratio or same ratio for previous period of time. If the ratios are higher then it indicates that the company is doing well (Thukaram, Pg no. 99). Profitability 2012 2011 ROE 0.13 0.14 Gross Profit Margin 0.36 0.39 Net Profit Margin 0.34 0.37 Return On equity Return on equity shows that amount of net income over the amount of equity share holders. It shows the profit that a company has earned with compare to total equity on balance sheet. Higher the ratio is better for the company. It should be between 10-12%. From the above table we can see that ROE of the company has declined in 2012 as compared to 2011. It is reduced due to a decrease in net income of the company in 2012. It indicates that the company has earned less profit on its total equity in 2012 as compared to the year 2011. Gross Profit Margin Gross profit margin is derived from the ratio of gross profit to sales or revenue. Gross profit margin shows the percentage by which gross profit has exceeded cost of production. It measures that how well a business can control its costs. Investors also use this ratio and compare with different companies in same industry and in different industry to decide which one is most profitable to invest. Higher gross profit means that the company is more efficient than its competitors. But from the above table we can see that gross profit margin of the company has decreased over the years from 39% to 36% which indicates that the company’s efficiency has decreased in controlling its costs than its competitors. Net Profit Margin This ratio indicates the amount of sales is remaining after paying all expenses. It states the relationship between sales and net profit of an organization. It also indicates the efficiency of management of the company in distributing and selling of its products. It is very necessary to while comparing with other companies. Higher net profit indicates that a company is more competent than other companies at converting sales into profit. From the above table we can see that net profit of the company is 34% in 2012 and in 2011 it was 37%. Thus we can see that net profit margin of the company has decreased over the years and it indicates that the company is not as competent as it was in 2011 with compare to other companies in converting sales into actual profit. The efficiency of the company’s management has also declined in selling its product. The company should boost its sales of insurance products and services to improve the sales revenue. From the above profitability position of the company it can be seen that profitability of Emirates Insurance Company has decreased over the years as the ROE, gross profit margin and net profit margin of the company has declined in 2012 as compared to 2011. It indicates that the company has lower profit on its total equity share and cost control mechanism of the company did not work properly. As the ratios have declined, it shows that the company is not doing well. Thus the company should improve its product distribution mechanisms to boost its sales and profitability in future. Liquidity Ratio Liquidity ratio measures the firm’s ability to fulfill its short term requirements which defines the firm’s capacity to pay off the current liabilities as and when needed. Thus short term solvency position of the company can be determined by liquidity ratio. It is important because it measures the liquidity position of the company. A company must be sure of that it has sufficient liquidity to fulfill any urgent liquidity crunch. Because if the company cannot fulfill its liquidity needs in time then it will act on the credit rating of the company and creditors will lose confidence on the company and they may even take legal step against the company. But on the other hand excessive high degree of liquidity is also not good for the company as it signifies that the funds are kept idle and opportunity cost is increasing. Thus there should be a balance between liquidity and crunch for it. Liquidity 2012 2011 Current Ratio 1.46 1.43 Quick ratio 1.46 1.43 Current Ratio It can also be called as working capital ratio. It can be determined by current assets over current liabilities. It shows the financial performance of company’s liquidity and it also measures short term requirements of the firm. The ideal ratio is 2:1. But for most of the companies 1.5 can be accepted. In current ratio, current assets comprises the cash and bank balances of the company, inventory, trade debtors, provisions excluding for bad debt and doubtful debt, all prepaid expenses, marketable securities, bills receivables. While on the other way, current liabilities include trade creditors, bills payables, liability of income tax, payable dividends, expenses which are yet to be paid. From the above table we can see that current ratio for the company is 1.46 in 2012 and it has increased from 2011. In 2011 it was 1.43. But if we compare it with the industry average of 1.5 then it can be said that current ratio is not up to the level as it required. It indicates that the company does not have sufficient liquidity in its hand to pay off sudden requirements of liquidity crunch and the performance of the company’s liquidity is not at expected level. Quick Ratio Quick ratio is an important index to measure the liquidity position of the company and it is used as a corresponding ratio to current ratio. It defines the relationship between the quick assets and the current liabilities of a company. It can be calculated by quick assets over total current liabilities. Now quick assets can defined as the current assets which can be liquidated into cash immediately or within a very short period of time without losing its value in converting. It means those assets which can be used to convert into cash when there is an urgent requirement of liquidity in the company. Quick assets include total current assets minus the amount of inventory in the balance sheet. But as there is no inventory in the balance sheet of Emirates Insurance Company, thus its quick ratio is equal to the current ratio of the company. From the above liquidity position of the company, we can say that the company does not have enough liquid cash ready in its hand and this may lead the company towards severe liquidity crisis. Thus the company needs to increase its current assets which can be easily liquidated over its current payables. Asset Management Ratio Asset management ratio can be defined as the relationship between sales and assets. It indicates the success of the firm in utilizing its assets to generate revenues. This ratio provides an insight view of the company’s success and its inventory management system. It is also known as the turnover or activity ratios. Asset management ratio states the efficiency of the management in using its available resources to generate sales. Higher asset turnover ratio is better for the company as it describes the efficiency of the management in using its resources. But different industries may have their different requirement of asset turnover ratio. While on the other side lower asset turnover ratio indicates the improper utilization of available assets. But it has been observed that the companies which are having higher profit margins may have lower asset management ratio. Asset Management 2012 2011 Debtors turnover ratio 136.38 98.43 creditors turnover ratio 15.25 17.52 Total asset turnover ratio 5.45 5.20 net working capital turnover ratio 1.26 1.05 Debtors Turnover Ratio Debtors turnover ratio is also known as the receivable turnover ratio which states the number of time the company is collecting its receivables. It also describes the company’s efficiency in collecting outstanding cash from its debtors in an accounting period. Although there is no general limit of debtors turnover ratio and it is totally varies from industry to industry but higher the ratio is considered as better for the company. Higher ratio indicates the efficiency of the management. From the above table we can see that debtors turnover ratio has improved over the years indicating that company can now easily collect its outstanding cash from its debtors. Creditors Turnover Ratio Creditors turnover ratio is also known as the payables turnover ratio which indicates that how fast the company is paying off to its creditors. It also describes the company’s efficiency in paying off it payables. It also enhances the goodwill of the company among creditors. Higher the ratio is better for the company as it indicates that the company is paying very fast to its creditors. But from the above table it can be seen that creditors turnover ratio has decreased to 15.25 in 2012 from 17.52 in 2011. It indicates that the company is bit slow in paying its creditors. Total Asset Turnover Ratio Total asset turnover ratio indicates the ability of the company to produce sales from the financial resources that are related to total assets. Higher the ratio better for the company as it indicates that the firm is more efficient in using its total assets to generate revenue. It also defines the pricing strategy of the company because the companies which have low profit margin tend to have higher asset turnover ratio and vice versa. From the above table we can see that the total asset turnover ratio of the company has improved in 2012 as compared to 2011. It indicates that the company is more efficient now in converting its total assets to sales. Net Working Capital Turnover Ratio Working capital is calculated as Current assets – Current liabilities. It defines the ability of the company to have enough cash balances to pay off its day to day liabilities. Higher the net working capital turnover ratio is better for the company as it indicates the better utilization of company’s available current assets and its working capital. From the above table we can see that net working capital turnover ratio of the company has increased in 2012 than in 2011. It shows that the company has a good management related to its assets. From the above Asset management ratio of Emirates Insurance Company, it can be seen that the company is efficient in managing its assets except its payables turnover ratio as it has decreased in 2012 than in 2011. Thus the company should improve its credibility by paying quickly to its creditors. Debt Management Ratio Debt management ratio is also known as the financial leverage ratio and solvency ratio. It measures the ability of the company to reduce the risk of financial problems in long run. Debt of a company is known as the financial leverage of the company. It increases the return to shareholders in good period and magnifies their losses during downturn period of the company. It shows the extent to which a company uses its borrowed funds to conduct its operations. Company owners and creditors use this ratio as it measures the risk profile of the company. Debt Management Ratio 2012 2011 Debt ratio 0.51 0.48 Debt Equity Ratio 1.02 0.92 Equity Multiplier 2.02 1.92 Debt Ratio Debt ratio indicates that how much the company is borrowing debt capital to do the business as debt capital is cheap compare to equity capital. The company should maintain an optimum level of debt. From the above table we can see that debt ratio has increased to 0.51 in 2012 which indicates that the company is issuing more debt capital. Debt equity ratio Debt equity ratio defines that the ability of the company in paying debt by its equity capital. It also indicates the relationship between long term debt and total equity of a company in its financial position. From the above table we can see that debt equity ratio has increased to 1.02 in 2012 than 0.92 in 2011. Thus it indicates the company is depending more on its debt capital. Equity multiplier Equity multiplier is used to measure the financial leverage of a firm. Higher equity multiplier ratio indicates that the firm is depending more on its debt capital for financing its assets. From the above table we can see that equity multiplier has increased over the years and it signifies that the company has high financial leverage as it uses it debt capital more to fund its assets. From the above Debt management ratios of Emirates Insurance Company, it can be stated that financial leverage of the company is higher on 2012. An optimal level of leverage is essential but too much of leverage indicates more dependency on debt capital. Conclusion From the above analysis of the financial statement of Emirates Insurance Company for the year 2012 and 2011, it can be concluded that the profitability position of the company is very weak in 2012 as its ROE, gross profit margin net profit margin has declined and it shows that the company is not performing well as per the profitability is concerned. From the liquidity ratio analysis it has been determined that the company should have more liquidity to fund its urgent requirements. Otherwise the liquidity crunch can lead the company towards insolvency. From the asset management position it can be seen that the company is managing its assets efficiently. But there is only one exception as the company has become bit slow in paying its creditors in 2012. From the leverage position of the company it can be determined that the company is having slightly high financial leverage which shows that it is depending more on debt capital to finance its assets. Thus it can be concluded that the company is having average position in the market and it should improve its sales to generate more profitability in future. Works Cited Thukaram, Rao. Management Accounting, New Age International. 2007. Print. Appendices Table of Ratios Profitability 2012 2011 ROE 0.13 0.14 Gross Profit Margin 0.36 0.39 Net Profit Margin 0.34 0.37 Liquidity 2012 2011 Current Ratio 1.46 1.43 Quick ratio 1.46 1.43 Asset Management 2012 2011 Debtors turnover ratio 136.38 98.43 creditors turnover ratio 15.25 17.52 Total asset turnover ratio 5.45 5.20 net working capital turnover ratio 1.26 1.05 Debt Management Ratio 2012 2011 Debt ratio 0.51 0.48 Debt Equity Ratio 1.02 0.92 Equity Multiplier 2.02 1.92 Read More