Earning Sustainability - Comparison between 5 Companies - Assignment Example

Earning Sustainability - Comparison between 5 companies Task Introduction This paper presents the following: first, discussions about earnings sustainability in light of the five companies provided (Emaar, Al Mazaya, Arabtec, Deyaar, and DSI). Second, the average for each of the following ratios: current ratio, quick ratio, receivables turnover, asset turnover, return on assets, earnings per share and debt to total asset ratio for the five companies mentioned above. Third, based on the business performance as measured by the above ratios, a professional approach to ranking the companies will be available. Fourth, both the vertical and horizontal analysis of the liquidity ratios of the companies. In addition, a horizontal analysis on account related to the liquidity ratios concerning Emaar, Arabtec and Deyaar will be available. Fifth, conclusion about earning sustainability of the five companies. Last, recommendations to improve performance to companies exhibiting below average performance. Task 1: Earnings Sustainability Earning of the company is an important factor that investors consider prior to making any investment decisions. A business that generates high income has a greater chance of strengthening the liquidity position. A strong liquid position signifies the capability of the organization to meet both short and the long-term obligations. In addition, the company is highly flexible since it will be capable of funding project undertakings. A company that invests in viable projects has a high-income generation potential in the future. Such companies can create value and maximize the shareholder’s value. However, investors should take of the fact that the level of earnings fluctuates due to the variation in both external and internal environmental factors (Ahrens, 2009). Companies rely on a broad range of activities for income generation. The activities are broadly classified into two groups. That is, the primary and the secondary activities. They are activities are the core business activities of the enterprise, whereas, the secondary business activities are complimentary activities. Corporations often report abnormal profitability figures due to a rise in the income generated by the complimentary activities, which occurs in the short-run. On that note, it is advisable to measure the profitability of businesses based on the income produced by the core commercial activities. Seemingly, it is the core business that generate sustainable revenues. Therefore, earning sustainability involves measuring the level of income generated by the core business. Therefore, concerning the five companies named above, the higher the level of revenue generated by the core commercial activities, the stronger the Earnings sustainability (Ahrens, 2009). Task 2: the average for each ratio Ratios Emaar Al Mazaya Arabtec Deyaar DSI Total Average Liquidity Ratio Current Ratio 0.656 1.242 1.505 3.123 1.276 7.802 1.5604 Acid-Test (Quick) Ratio 0.572 0.261 1.312 0.433 1.196 3.774 0.7548 Receivables Turnover 13.57 3.552 1.543 3.293 0.448 22.406 4.4812 Profitability Ratio  Assets Turnover 0.167 0.111 0.726 0.11 0.757 1.871 0.3742 Return on Assets 0.041 0.029 0.046 0.024 0.028 0.168 0.0336 EPS 0.42 0.102 0.16 0.026 0.073 0.781 0.1562 Solvency Ratio  Total Debt to Total Assets Ratio 0.465 0.574 0.549 0.354 0.585 2.527 0.5054 Task 3 & 4: Professional ranking Current ratio- this ratio measures the ability of the business to meet its current obligations using the current assets. It is advisable for the ratio of current assets to current liability to be 2: 1. Concerning Emaar, Al Mazaya, Arabtec, Deyaar and DSI, the current ratio for the year 2013 are 0.656 times, 1.242 times, 1.505 times, 3.123 times, and 1.276 times respectively. Based the ratio for Deyaar, the company had $ 3.123 of current assets to cover every dollar of the current liabilities. A similar argument applies to the other companies. Based on the ratios, Emaar is the only company with the current ratio of less than 1. However, Deyaar has the highest current ratio of 3.123 times (above the industry benchmark). Comparatively, the liquidity position of Deyaar is the strongest. A cross-sectional analysis reveals that Deyaar has the least amount of current liabilities, which is the reason for the above benchmark performance (Palmer, 1983). That is; the company is more capable of meeting its current obligations using the current assets more than all other companies. Conversely, Emaar has the weakest liquidity position (below the benchmark). The ranking of the companies based on the liquidity position from the strongest to the weakest is as follows: Deyaar, Arabtec, DSI, Al Mazaya and Emaar. The ratios for all the companies are below the industry average (Palmer, 1983). Quick Ratio or Acid Test – the ratio is concerned with immediate liquidity, therefore, ignores the inventory. It measures the company’s ability to meet the short-term obligations using highly liquid assets. An extremely liquid asset is that which is readily converted into cash. A business is considered financially healthy if this ratio is 1. Concerning Emaar, Al Mazaya, Arabtec, Deyaar and DSI, the quick ratios for the year 2013 are 0.572 times, 0.261 times, 1.312 times, 0.433 times and 1.196 times respectively. Based on the ratio for Arabtec, the company had AED 1.312 of the most liquid assets to meet every AED of the current liabilities. A similar argument applies to the other companies. Based on the ratios, Arabtec and DSI are the only companies with a quick ratio above the industry benchmark. Arabtec Company has the highest quick ratio of 1.312 times. A cross-sectional investigation reveals that Arabtec has a fairly high marketable securities and current liabilities, which is the reason for above industry benchmark performance. Other companies have extremely high or low of either the numerator or denominator. That is; the company is more capable of meeting its current obligations using the most liquid assets more than all other companies. Conversely, Al Mazaya has the weakest liquidity position (below the benchmark). The ranking of the companies based on the liquidity position- as measured by a quick ratio- from strong to weak is as follows: Arabtec, DSI, Emaar, Deyaar and Al Mazaya (Palmer, 1983). Accounts receivable turnover – this ratio shows the number of times the accounts receivables are converted into cash during a financial period. Concerning Emaar, Al Mazaya, Arabtec, Deyaar and DSI, the ratio for 2013 are 13.57 times, 3.552 times, 1.543 times, 3.293 times, and 0.448 times respectively. Based on the ratio for Emaar Ltd, the account receivable was converted into cash 13.57 times in the financial year 2013. A similar argument applies to the other companies. Based on the ratios, Emaar Ltd has the highest receivable turnover, which is the only ratio above the industry benchmark. A further cross-sectional investigation reveals that Emaar has the least amount of average net receivables, which is the reason for above baseline performance. Conversely, DSI has the lowest receivable turnover (below the benchmark). The ranking of the companies based on the receivable turnover from the strongest to the weakest is as follows: Emaar, Al Mazaya, Deyaar, Arabtec, and DSI (Palmer, 1983). Asset turnover- this ratio indicates the efficiency with which the net assets are utilized to generate revenue. Concerning Emaar, Al Mazaya, Arabtec, Deyaar and DSI, the ratio for 2013 are AED 0.167, AED 0.111, AED 0.726, AED 0.11 and AED 0.757 respectively. Based on the ratio of DSI for the year 2013, AED 1 invested in the assets were utilized to generate AED 0.757 in the year 2013. A similar argument applies to the other companies. Based on the ratios, DSI and Arabtec exhibit the highest asset utilization rates, which are the only rates above the industry benchmark. Conversely, Al Mazaya and Deyaar presents the weakest level of asset utilization. The ranking of the companies based on the asset utilization rate from the strongest to the weakest is as follows: DSI, Arabtec, Emaar, Al Mazaya and Deyaar (Palmer, 1983). Earnings per share – Concerning Emaar, Al Mazaya, Arabtec, Deyaar and DSI, the ratio for 2013 are AED 0.42, AED 0.102, AED 0.16, AED 0.026 and AED 0.073 respectively. The ratio shows the amount of earnings to every share held. Therefore, EPS is another criterion for measuring a company’s profitability. That is, the higher the ratio, the greater the firm’s profitability. Based on the ratio of Emaar for the year 2013, AED 0.42 of the profits was attributed to every share. A similar argument applies to the other companies. Based on the ratios, Emaar has the highest EPS, which is the only ratio above the industry benchmark whereas, Deyaar has the lowest EPS (below the benchmark). The ranking of the companies based on the EPS from the highest to the lowest is as follows: Emaar, Arabtec, Al Mazaya, DSI and Deyaar (Palmer, 1983). Return on Assets- this ratio measures the return on profit from investments made in the company’s assets. Concerning Emaar, Al Mazaya, Arabtec, Deyaar and DSI, the ratio for 2013 are 4.1%, 2.9%, 4.6%, 2.4%, and 2.8% respectively. Based on the ratio of Arabtec for the year 2013, 4.6% of the profits were generated by assets. A similar argument applies to the other companies. Based on the ratios, Arabtec and Emaar exhibit the ratio that is above the industry benchmark, whereas, Deyaar shows the lowest return on assets (below the benchmark). The ranking of the companies based on the level of return on assets from the highest to the lowest is as follows: Arabtec, Emaar, Al Mazaya, DSI, and Deyaar (Palmer, 1983). Debt to total assets – this ratio measures the proportion of the total assets that is funded by fixed charge capital (debt). In other words, it shows the company’s reliance on debt finance to fund the total assets. Concerning Emaar, Al Mazaya, Arabtec, Deyaar and DSI, the ratio for 2013 are 46.5%, 57.4%, 54.9%, 35.4% and 58.5% respectively. Based on the ratio of DSI for the year 2013, the company’s rate of reliance on debt to fund assets was 58.5%, while 41.5% of the assets received funds from other sources other than debt. A similar argument applies to the other companies. Based on the ratios, DSI, Al Mazaya and Arabtec exhibits the heaviest reliance on debt to fund the assets, which is above the industry benchmark. Conversely, Deyaar shows the least reliance on debt (below the benchmark). The ranking of the companies based on the reliance on debt for asset finance from the heaviest to the least is as follows: DSI, Al Mazaya, Arabtec, Emaar, and Deyaar (Palmer, 1983). Task 5 Since the companies’ net profits are inclusive of the income generated from both the core activities and supplementary activities, the benefits do not reflect the actual earnings (sustainable earnings). Therefore, the revenues should mirror the sustainable earnings of the companies since it is exclusive of other gains and losses. Based on the argument, the company with the highest revenue is more sustainable than that with the lowest income. For that reason, the most sustainable business is Al Mazaya Holdings (Ahrens, 2009). Task 6 Concerning the current ratio, all the companies with an exception of Deyaar should increase the level of cash, inventories alongside increasing the investment in marketable securities. The strategy will increase the standard of the current liabilities thus, improve the liquidity level above the industrial average. Concerning the quick ratio, companies below the industrial average should increase their investments in cash and marketable securities. The strategy will increase their ratios above the industrial average. Concerning the accounts receivable turnover, firms below the industrial average should reduce the debtor’s collection period in order to increase the level of receivable turnover above the industrial average. Concerning asset turnover and the return on assets, company’s whose performance are below the industrial average should improve on the utilization rate of the assets (engage the assets in more income generating activities). Concerning the EPS, if all other proposed strategies regarding the accounts receivables, the asset turnover and the return on assets are implemented, the revenue will increase. Consequently, the profitability level will increase, thus, the EPS. Last, the companies’ whose reliance on debt is above the industrial average should settle the debt obligations and seek for other sources of funds other than the debt. List of References Ahrens, B. (2009). Capital market implications of earnings quality. Lohmar: Eul. Palmer, J. E. (1983). Financial ratio analysis. New York, N.Y: American Institute of Certified Public Accountants. Read More