Financial Management - Etisalat Company - Essay Example

FINANCIAL MANAGEMENT: Name: Instructor: Course: Date: Financial ratio: The following are the financial rations: ETISALAT COMPANY DU UAE CO. 1999 2010 1999 2010 Gross profit margin 21.64% 21.75% 27.58% 27.98% Net profit margin 6.16% 6.46% 26.58% 31.24% Return on equity 41.19% 40.45% 10.65% 11.03% Assets turn over 3.51% 3.82% 0.39 times 0.36 times Return on assets 21.69% 24.71% 10.47% 11.34% Inventory turn over 65days 57days 91 days 98 days Debtors turn over 1.8 days 1.34days 261 days 282 days Creditors turn over 49days 44days 250 days 248 days Current ratio 1.31 1.25 1.11 1.62 Quick ratio 0.31 0.33 0.99 1.43 Debt asset ratio 65.30% 58.90% 43.67% 41.70% Debt equity ratio 1.88 1.43 0.775 0.717 Times interest earned 17.9times 25.38 times 11.03 times 12.48 times PART VI Profitability Profitability is the ability of sustaining growth and earning income in long-term and short-term. The degree of a company’s profitability depends on income statements, which gives report of the firm’s operational results. Profitability ratios compares variables of income to sales, they provide us with an idea in regards to what income of a company comprise. Gross profit margin-this is the ratio of profit or gross income to sales Basing on the gross profit margin, Etisalat Company has a slight increase of gross profit from 2009 to 2010 an increase of 0.11%, which is an improvement, while DU Holding Ltd. Gross profit increased from 27.58% in 2009 to27.98percentage in 2010. However, there is a difference of about 6% of gross profit margin between the two companies. The gross profit margin has increased because, the companies have increased the prices of their products, or the companies have found ways to reduce their production costs, or even the two. DU Company most likely has reduced its manufacturing costs compared to Etisalat Company, or DU Company is selling its products at a higher price compared to Etisalat Company or both. Also DU Company may be taking advantage of its previous higher gross profit margins by doing a lot of marketing of its products. Etisalat. Net profit margin has increased in 2010 to 6.46% from 6.16% in 2009. An increase of 0.30%, while, DU ltd. Net profit margin has increased from 26.58% in 2009 to 31.24% in2010 an increase of 5.34%.Overall Etisalat Ltd. Net profit margin is too small in comparison with DU Ltd. a difference of more than 20%. The profit margins for the companies have increased possibly due to; reduced costs of production, booming prices, increased efficiencies, of products of the companies. Harvey Norman Company is better than Etisalat. Possibly, because the latter has poor management or DU Company has a bigger market share. In 2009 Etisalat company had a return on equity margin of 41.19% which dropped slightly in 2010 to 40.45%, while DU return on equity increased 10.65% to 11.03%.Though DU Returns on Equity increased from the previous year its returns on equity are almost a quarter of Etisalat Ltd. Returns on Equity. Returns on equity of Etisalat possibly have reduced due to inflation, poor management, customers are unwilling to pay above average for company products, new competitors making the company spend much on sales and advertisements, while those of DU have increased due to economic growth, business may be booming. Etisalat have stayed in business for long therefore has many customers willing to purchase the products and it controls the market share. In 2009 Etisalat Asset Turn Over was 3.51 times, in 2010 the turn over increased to 3.82. That of DU ltd. Reduced from 0.39 times in 2009 to 0.36 times in 2010.for Etisalat company assets turn over may have increased due to increased sales while for DU company assets turn over have reduced do poor management. Returns on Assets. This ratio makes the company know if to take a project or not. The purpose of the ratio is for a company to begin a project it expect return from the project. Acceptance criteria: ROA greater than rate at time of borrowing, accept the project, ROA less than rate at time of borrowing, reject the project. In 2009 Etisalat ltd ROA was 21.69% and 24.71% in 2010 which was an increase of about 3%, while ROA for DU was10.47% in 2009 and11.34% in 2010 an increase of1%, in comparison, The two companies are earning on the assets they invested in, however, Etisalat company is in a better position compared to DU company. It means even the share holders of the two companies will earn on their shares. Efficiency Ratios. This ratio gives information concerning ability of management to monitor expenses and control them while earning a return from the resources employed in the business. Inventory turn over (days) in 2009 Etisalat company had an inventory turn over of 65 days and 57 days in 2010. DU Company on the other hand had 91 days and 98 days in 2009 and 2010 respectively. Inventory turn over for DU was more than that of Etisalat Company. This means that DU Company’s stock takes longer selling in comparison with Etisalat Company. Debtors turn over (days) in 2009, Etisalat company had a debtor turn over of 1.8 days and 1.34 days in 2010. On the other hand, DU Company had a debtor’s turn over of 250 days in2009 and 248 days in 2010. Etisalat Company debtors’ days reduced from 1.8 to 1.34 days. DU debtors’ days increased from 261 to 282. This means that management of Etisalat Company is not efficient which is very dangerous in the long run, while management of DU Company is encouraging investors to invest with the company. (Mwesingwe, 2007) Creditors turn over (days) is the number of days taken by a firm to pay creditors. Etisalat Company took an average of 49 days to pay its creditors in 2009 and 44 days in 2010. DU Company had 250 creditors’ days in 2009 and 248creditors turn over in 2010. This implies that Etisalat Company did not take advantage of credit purchases as DU Company did. Liquidity Ratio Current ratio Etisalat Company had a current ratio of 1.31 in2009 and 1.25 in 2010, which was a decrease. DU Company had a current ratio of 1.11in 2009 and1.62 in 2010 indicating an increase. Basing on the ratio both companies are financially safe in the short term, However management of Etisalat company need to watch out, as a decrease does not sound good financially. (Gibson, 2006) Quick ratio: Etisalat Company had a quick ratio of 0.31 in 2009 and 0.33 in2010, which was a slight increase from the previous year. DU Company’s quick ratio was 0.99 in 2009 and 1.43 in 2010, which is a positive felt increase. With a quick ratio, less than one Etisalat company is in the short term not financially safe, while DU Company is in short-term financially safe with a quick ratio more than one. Debt Asset Ratio: Etisalat Company in 2009 and 2010 had a debt asset ratio of 65.3% and 58.9% respectively. DU company debt to asset ratio was 43.67% in 2009 and 41.7% in 2010. Both companies’ ratios decreased though those of the first company were higher. These high debts are a worry to the companies as creditors and investors are watching. Debt Equity Ratio: Etisalat Company in 2009 had a debt Equity ratio of1.88 and 1.43 in 2010, which was a slight improvement. DU Company had a debt equity ratio of 0.775 in 2009 and 0.717 in 2010, which was an improvement. DU Company had equities, which are more than debts in both years, Etisalat Company debts are more than equities in both years. This means Etisalat Company is in a very risky situation because the debts are more than equities. On the other hand, Etisalat Company equities are more than debts hence is financially stable in the long run Times Interest Earned (times): in 2009 Etisalat Company had earning more than interest 17.86 times and 25.38 times in2010, which was a positive increase, and therefore able to service its debts. On the other hand, DU Company was able to service its debts 11.03 times in 2009 and 12.48 times in 2010. Basing on this ratio DU Company was in a better position to convince its lenders and borrowers. (Steiner, 2009) Basing on all ratios, I would advice a shareholder to invest with DU Company in the long- run because it has a good chance to progress. In the short- term, a shareholder may invest with any of the two companies but preferably DU Ltd, which has a better financial position. Part vii Basing on weakness and weakness of the two companies, Etisalat has a lower net income, meaning the company is not making profits. It seems this company is spending a lot of finances on expenditures, or the company has not so well penetrated the market to make enough sales. However, DU Company on the other hand seems to be good in reducing costs, having good management. Etisalat Company has not been able to collect its debts efficiently unlike DU Company, which has been very effective in debts collection. Basing on current ratio both, companies have been able to maintain current assets more than current liabilities, which has been strength to both companies. DU Company has not been in a position to manage its debts as it has registered more debts compared to equities, which Etisalat Company has managed well. In general, Etisalat Company has been weaker financially in comparison with DU Company. (Edward Jacob, 2000) Part vii To overcome this weaknesses I would recommend the management of the two companies to cut on their companies expenses, invest in projects which at long last have returns reduce on borrowing, market their products and in order to increase on their sales and to have permanent customers. In addition, the companies should collect their debts on time in order to be in a more liquid position. If the companies are to improve their net incomes, they should also invest in assets to have more assets than liabilities. In conclusion, before the management takes the vital and critical financial decisions they should consult financial experts. References: Edward Jacob, (2000).Descriptive finance. New York: McGraw Hill Gibson, J. (2006). Interpretation and financial analysis. New York: Oxford university press Mwesingwe, M. (2007).Finance in action. Investment and entrepreneurship, New Jersey: prentice hall15-23. Steiner, W. (2009) Financial Accounting. Chicago: Adventure works press Read More