Understanding Financial Management - Assignment Example

Running Head: Financial management Financial management Name: Institution: Tutor: Course Table contents Financial analysis………………………………………..…………………...…..3 Ratio analysis……………………………………………………………….…..….4 . Trend analysis……………………………………….............................................6 Comparative analysis…………………………………………………….……...6 Overall analysis………………………………………………………..….…….6 Conclusion……………………………………………………………………….7 References………………………………………………………………….……8 Appendixes……………………………………………………………………….9 Financial statement analysis The tables below show a summary of the financial statement analysis for Emaar and Dubai development company (DDC) from years 2005 to 2007: EMAAR       Financial statement analysis         2007 2006 2005   AED Billion AED Billion AED Billion Income Statement       Revenue 17.566 14.006 8.361 Gross profit 6.926 6.966 4.776 net operating profits 6.575 6.371 4.731 EBIT 6.308 6.129 4.403 Balance sheet       Total assets 54.791 41.69 32.205 cash & bank balances 4.727 2.329 10.368 interest on loans and borrowing 7.704 3.992 0.239 Total liabilities 17.603 11.145 6.509 minority interest 0.652 0.566 0.135 shareholders equity 36.536 29.979 25.561 In the year 2006, The Company experienced a significant growth in the revenues from AED 8.361 Billion to AED 14.006 Billion an increase of 60% compared to the previous year. In 2007, the revenues grew slightly from AED 14.006 Billion to AED 17.566 Billion a 25% compared to the prior year. The net operating profits increased from AED 4.731 Billion to AED 6.371 billion in 2006 a 34% increase compared to the prior year. When the revenue of the firm increases, it is because of more marketing strategies being put in place and as a result of customer satisfaction. It also means that the debtors pay on time. In 2007, the group reported a net profit of AED 6,575 billion (2006: AED 6.371 billion) a 3% increase over the prior year. In 2006, the net profit increased by 34% from AED 4.776 billion to AED 6.371 billion. The company’s total assets have grown by 144%, 29% and 31% in years 2005, 2006 and 2007 respectively. Emaar not only concentrated all the resources on the financial measures but also on the non-financial measures, such as corporate governance and social responsibility. These two aspects are widely touched in the annual reports since nowadays it is a legal requirement by the financial reporting bodies for all companies to report on them (Boland, 2010) DDC       Financial statement analysis         2008 2007 2006   AED Billion AED Billion AED Billion Income Statement       Revenue 0.622 0.932 0.895 net operating profits 0.375 0.459 0.428 Balance sheet       accounts receivable   0.034 0.056 Total assets 18.103 17.599 17.01 current assets   17.599 17.01 current liabilities 0.589 0.452 total liabilities 0.958 0.829 0.7 shareholders equity 17.145 16.770 16.311 long-term debt   0.240 0.248 The graphs below financial statement analysis for the two companies: DDC EMAAR The company’s total assets slightly increased by 3% in the year ending 2007 compared to 2006. In year 2008, the total assets also increased slightly by 3% compared to 2007. In 2007, the total liabilities increased by 18% while in 2008 they increased by 16% compared to the prior years. The total revenue slightly rose up by 4% in 2007 and highly dropped by 33% in year 2008. This is because of the economic downturn that was caused by the global financial crisis. In 2007 and 2008, the shareholders equity increased slightly by 3% for both years (Boland, 2010). Ratio analysis In this analysis, we are to consider the profitability, liquidity, financial leverage and the asset turnover ratios (Gibson, 2009). Financial ratios are used to compare the performance of a company over a certain period of time (Gibson 2008). The tables below show the calculated ratios for Emaar and Dubai development company (DCC) from 2005 to 2007: Ratio Analysis for Emaar         2007 2006 2005 profitability       gross profit margin=% of G.P/revenue 39% 50% 57% net profit margin=% of N.P/revenue 37% 45% 57% EBIT margin=% of EBIT/revenue 36% 44% 53% return on equity (ROE)=% of net income/total equity 20% 23% 28% return on Assets(ROA)=% of net income/total assets 14% 17% 21% growth in assets 31% 29% 144%         liquidity ratios       current ratio= current assets/current liabilities 2.60 1.87 3.14         financial leverage ratios       debt/ equity ratio 21% 13% 1%         other measures       Basic EPS 1.08 1.05 0.85 share price at year end 15.1 12.05 23.15 The profitability ratios of Emaar seem top be declining over the years a poor indicator that the firm has not been generating profits as with success. On the other hand, the liquidity ratio has been increasing across the periods a good indicator that the firm is in a position to meet all the short-term obligations without difficulty. The financial leverage ratio is on the increase across the years a poor indicator that the firm is not in a position to meet its long-term obligations (Boland, 2010). Therefore, the firms’ solvency position seems to be at a risk. Solvency is a state said to occur when the total assets of the firm are more than its long-term liabilities or debt. If the liabilities are more than the assets then the firm is said to be insolvent as it is not in a position to meet its obligations (Boland, 2010). Ratio Analysis DDC         2008 2007 2006 profitability       net profit margin=% of N.P/revenue 60% 49.0% 47.0% return on equity (ROE) )=% of net income/total equity 2.2% 2.7% 2.6% return on Assets(ROA) )=% of net income/total assets 2.1% 2.6% 2.5%         liquidity ratios       current ratio   30.00 38.00         financial leverage ratios       debt/ equity ratio   0.01 0.02 equity/debt ratio   70.00 66.00 asset turnover ratios       receivables turnover       other measures   27 16 Share prices  2.24  2.24  2.24 P/E 59.7 48.8 52.4 Price to book value (PBV) 1.3 1.3 1.4 EPS 0.04 0.05 0.04 The graphs below show the ratio analysis for both companies: DDC Emaar Looking at the profitability ratios, especially the ROE and ROA there is a decrease in 2008 by 20% and 21% respectively. A 4% increase for both ratios in 2007 was felt, a good indicator that the firm was doing well. It seems the 2008 profitability went down slightly because of the global financial crunch that affected all the markets across the globe (www.emaar.com). Trend analysis Looking at the share prices of Emaar at the end of each year, we see a decline of 48% in 2006 from 23.15 to 12.05. In 2007, though the group experiences a slight increase of 25% in its shares, from 12.05 to 15.1. The basic EPS for the group seems to be growing slightly across the years from 0.85 to 1.05 and then 1.08 in 2007. This is an indicator that the company has the potential to grow in the future. On the other hand, the share prices of Dubai development company (DDC) seem to be stagnant at the same price level of 2.24 over the three years. The earnings per share (EPS) of the company rose in 2007 from 0.04 to 0.05 and then fell slightly to 0.04. The price-earning ratio (P/E) Seems to be on the rise tough especially in 2008 from 48.8 to 59.7 (www.emaar.com). Comparative analysis Let us take a comparison between the two companies, Emaar and Dubai development company (DDC). Emaar seems to be more profitable than DDC and also looking into the size Emaar is a bigger company than DDC. This is by the look of the company asset size and other items in the financial statements such as revenue, liabilities and equity. Using the trend analysis above, the company, which has potential growth in future, is Emaar compared to DDC. This is because the share prices are influenced by the volume of shares traded in the stock exchange and the investor’s confidence in the company. The charts below show a comparative analysis for the two companies using the share prices. Emaar Annualized reports Date Profit AED EPS AED EPS AED2 PRICE PE PBV ROE ROS 2008 FY 12-Feb-09 3.06bn 0.5 0.5 2 4 0.3 8.50% 19.10% 2007 FY 16-Jan-08 6.58bn 1.08 1.08 14.6 13.5 2.4 18.00% 37.40% 2006 FY 29-Jan-07 6.37bn 1.05 1.05 13.35 12.7 2.7 21.30% 45.50% 2005 FY 29-Jan-07 4.73bn 0.82 0.82 21.8 26.6 4.9 18.50% 56.60% DDC Annualized reports Date Profit AED EPS AED EPS AED2 PRICE PE PBV ROE ROS 2008 FY 18-Feb-09 375K 0.04 0.04 2.24 59.7 1.3 2.20% 2008 Q3 18-Feb-09 182K 0.01 0.01 2.24 62.5 1.3 -0.40% 2008 Q2 12-Nov-08 90K 1.05 1.05 2.24 12.7 1.3 2.80% 2008 Q1 30-Jul-08 (16K) 0.82 0.82 2.24 26.6 1.3 2.70% 2007 FY 25-Feb-08 119K 0.01 0.05 2.24 48.8 1.3 4.20% Overall analysis The fact that the profitability ratios of Emaar seem to be on the decline does not mean that the company’s performance is poor; it is still a better company than DDC. The company is also bigger in size compared to Dubai development company (DDC) (www.sharewadi.com). Conclusion From our analysis, we have dealt with two companies, which belong, in the same industry. Analyzing the financial results, financial ratios and the trend analysis, Emaar reflects better performance than Dubai Development Company (www.sharewadi.com). The companies are not of the same size though from the look of the financial statements. Therefore, it will not be justifiable to conclude that one company is better than the other using the financial ratios. The best way to make our judgment is by looking at other measures such as customer satisfaction and quality of services. Even though the financial ratios are reliable and relevant for decision-making, they may be limited by the different accounting methods that the different companies’ use. Therefore, our judgment in determining the best performing company will also be limited. For investors who want to make investments, it would be recommendable for them to consider Emaar Company. This is because the company has potential growth in future therefore their returns may also be higher. I would also recommend that DDC review its strategies on how to be a bigger company. For instance, it can consider going global to tap the untapped markets and enjoy the economies of scale. It might be doing well in Dubai but needs to expand its services. The fact that Emaar seems to be performing well does not imply that, the management should satisfied. It should look into other potential areas of growth (www.sharewadi.com). The benchmark we have used to compare the two companies is also important to each company. Each company can use the above information to see where it lies in the industry. The information can be used by each firm to make long-term strategies thus it is highly recommendable for the two companies to take it seriously. Reference 1. Birt, Gregory Boland (2010). Accounting: Business Reporting for Decision Making. Wiley and Sons Australia. 2. Charles H. Gibson, (2009). Financial reporting and analysis. Cengage Learning. Eugene F. Brigham, Joel F. Houston, (2007). Fundamentals of financial management. Cengage Learning. 3. Dubai Development Company (DDC) website. http://www.sharewadi.com/result-details.php?result_ID=1759 and http://www.sharewadi.com/result-details.php?result_ID=601 4. Emaar website. http://www.emaar.com/Emaar.Upload/EMR-SINGAPORE-EN-US/CMS/annual_report.pdf 5. Richard Bull, (2008). Financial ratios: how to use financial ratios to maximize value and success for your business. Elsevier Science & Technology. Appendixes Appendix 1 Dubai Development Company (DDC) 2008 FY annual report DDC (listed on DFM) Auditor: Sajjad Haider & Co. DDC accounts in UAE dirhams Date of results and share price AED 2.24 on 18 Feb 2009 Current share price AED 2.24 on 15 Apr 2009 Chairman CEO Balance Sheet (AED) 31 Dec 2007 31 Dec 2008 %Δ Total Assets 17,598,862 18,103,000 3% Total Liabilities (828,983) (958,000) 16% Shareholders Equity 16,769,879 17,145,000 2% Income Statement (AED) 2007 FY 2008 FY Revenue (Sales) 0 0 Cost of Revenues (COGS) (0) (0) Gross Profit 0 0 Other Income 932,167 622,000 -33% Other Expenses (472,892) (247,000) -48% Net Profit 459,275 375,000 -18% Minority Interests 0 0 Net Profit due to shareholders 459,275 375,000 -18% Earnings Per Share stated 0.05 0.04 -18% Ratio Calculations As on 18 Feb 2009 Number of shares outstanding 10,000,000 EPS calculated 0.05 0.04 -18% Price to Earnings ratio (PE) 48.8 59.7 Calculated EPS used Price to Book Value (PBV) 1.3 1.3 -2% Return on Assets (ROA) 2.6% 2.1% -21% Return on Equity (ROE) 2.7% 2.2% -20% Return on Sales (ROS) or Profit Margin Dividends Cash Dividend Dividend Yield (cash) Share Dividend Appendix 2 Dubai Development Company (DDC) 2007 FY annual report DDC (listed on DFM) Auditor: Sajjad Haider & Co DDC accounts in UAE dirhams Date of results and share price AED 2.24 on 25 Feb 2008 Current share price AED 2.24 on 15 Apr 2009 Chairman Humaid Bin Nasser Al Owais CEO Yousef M Almulla (Director) Balance Sheet (AED) 31 Dec 2006 31 Dec 2007 %Δ Total Assets 17,010,626 17,598,862 3% Total Liabilities (700,022) (828,983) 18% Shareholders Equity 16,310,604 16,769,879 3% Income Statement (AED) 2006 FY 2007 FY Revenue (Sales) 0 0 Cost of Revenues (COGS) (0) (0) No ongoing operations Gross Profit 0 0 No ongoing operations Other Income 894,953 932,167 -4% Other Expenses (467,227) (472,892) 1% Net Profit 427,726 459,275 7% Minority Interests 0 0 Net Profit due to shareholders 427,726 459,275 7% Earnings Per Share stated - Ratio Calculations As on 25 Feb 2008 Number of shares outstanding 10,000,000 EPS calculated 0.04 0.05 7% Price to Earnings ratio (PE) 52.4 48.8 Calculated EPS used Price to Book Value (PBV) 1.4 1.3 -3% Return on Assets (ROA) 2.5% 2.6% 4% Return on Equity (ROE) 2.6% 2.7% 4% Return on Sales (ROS) or Profit Margin Dividends Cash Dividend Dividend Yield (cash) Share Dividend Important Dates Record Date AGM Date 25 Mar 2008 Read More