Financial Ratios of Al Wathba National Insurance Company - Case Study Example

Table of Contents Introduction 2 Purpose of the report 2 Financial Analysis 3 Liquidity ratios 3 Efficiency Ratios 5 Recommendations 12 References 13 Appendix 14 Introduction Financial analysis holds an important aspect for every business and comparing the performances between different companies helps to find the areas that needs to be worked upon. The report looks into the financial analysis of Abu Dhabi National Insurance Company and Al Wathba National Insurance Company. Abu Dhabi National Insurance Company is an insurance company that has been for more than 30 years. The company is one of the pioneers in the insurance industry and provides different type of polices for each group of customers (ADNIC, 2011) Al Wathba National Insurance Company is an insurance company which has been operating in the Emirates. The insurance company provides insurance for various things and ensures that the people are provided safety of their belongings and personal life. The company has been able to develop new products based on customer needs thereby gaining popularity (AWNIC, 2011). Purpose of the report To conduct a financial analysis of the annual report of Abu Dhabi National Insurance Company and Al Wathba National Insurance Company and finds the areas where both the company needs to work on. The analysis will also help to find the past performance and help the third parties in gathering important information regarding the insurance companies. Financial Analysis Financial analysis is an important component and helps in the planning process. A proper analysis of the financial statement helps to understand the past performance and gives a direction based on which the future actions can be determined. Financial analysis helps all parties who have relation to the organization and helps to understand the manner in which the company is performing (Micro Strategy, 2010). Below in the financial analysis of Abu Dhabi National Insurance Company and Al Wathba National Insurance Company Liquidity Ratios Current Ratio: Liquidity ratio helps to find the ability of the business to meet its immediate obligations. Current ratio and quick ratio are the two major ratios that are computed to find the short term liquidity (Financial Modelling Guide, 2010). Current ratio measures the firm ability based on current liabilities. The current ratio is as   2010 2009 Abu Dhabi National Insurance Company PSC 6.1 7.75 Al Wathba National Insurance Company (PJSC) 2.64 7.43 The graph for the same looks as Figure 1: Current Ratio The current ratio for Abu Dhabi National Insurance Company is 6.10 in 2010 and 7.75 in 2009 which is very high signifying the fact that the company is very liquid. The current ratio for Al Wathba National Insurance Company is 2.46 in 2010 and 7.43 in 2009. There has been a huge dip in the value of current ratio showing that the company has decreased their liquidity in 2010 as compared to 2009. Quick Ratio: Quick ratio measures the firm ability to pay its short term debts after removing the inventories. The ratio varies from industry to industry. A ratio of 1:1 is acceptable in case of quick ratio (Financial Modelling Guide, 2010). Even the quick ratio is low and needs to be looked into. Still, it would be unwise to state the company as risky because companies in the insurance sector have inventories in their assets which make the ratio to be low. The ratio is as   2010 2009 Abu Dhabi National Insurance Company PSC 4.51 5.4 Al Wathba National Insurance Company (PJSC) 1.21 2.92 The graph looks as Figure 2: Quick Ratio The ratio for Abu Dhabi National Insurance Company is 4.51 in 2010 and 5.40 in 2009 which is very high signifying the fact that the company is very liquid. The quick ratio for Al Wathba National Insurance Company is 1.21 in 2010 and 2.92 in 2009. There has been a huge dip in the value of quick ratio showing that the company has decreased their liquidity in 2010 as compared to 2009. The liquidity is thus better for Abu Dhabi National Insurance Company signifying less risk for the investors Efficiency Ratios Receivable Turnover Ratio: Efficiency ratio helps to identify the manner in which the firm is able to revolve its assets. A look the receivable ratio helps to find out the manner in which it deals with its debtors (Kennon, 2010). The ratio for the same is as follows   2010 2009 Abu Dhabi National Insurance Company PSC 2.59 2.93 Al Wathba National Insurance Company (PJSC) 2.83 2.76 The graph for the same looks as follows Figure 3: Average Receivable Turnover Ratio The ratio for Abu Dhabi National Insurance Company is 2.59 in 2010 as compared to 2.93 in 2009. The ratio for Al Wathba National Insurance Company is 2.83 in 2010 and 2.76 in 2009. It shows that both the companies are very similar and they revolve their debtors nearly equally in a financial year. The ratio also suggest that Al Wathba National Insurance Company is slightly better in revolving its customers compared to Abu Dhabi National Insurance Company which will be seen in the next ratio. Average Collection Period: This ratio helps to find out the time required by the organization to gather its dues from the market. Companies prefer to ensure that they revolve the customers quickly so that the amount of investment is controlled (Joseph, 2010). The ratio for both the companies is as follows   2010 2009 Abu Dhabi National Insurance Company PSC 140.77 124.55 Al Wathba National Insurance Company (PJSC) 128 131 The graph for the same looks as follows Figure 4: Average Collection Period It shows that Abu Dhabi National Insurance Company receives is dues from the market in 140.77 days in 2010 as compared to 124.55 days in 2009. It signifies that that it is able to ensure a smooth process from the debtors though the period of collection from debtor is slightly long. The ratio for Al Wathba National Insurance Company is 128 days in 2010 as compared to 131 days in 2009. The comparison of the ratio shows that both the companies collect from the debtors in similar time interval though Al Wathba National Insurance Company has a slightly better ratio signifying better credit policies. Inventory Turnover Ratio: This ratio helps to find out the manner in which the organization is able to revolve its inventory. Organizations prefer this ratio to be high so that the investment in inventories decreases and the liquidity position improves (Joseph, 2010). The ratio is as follows   2010 2009 Abu Dhabi National Insurance Company PSC 0.13 0.12 Al Wathba National Insurance Company (PJSC) 0.43 0.34 The graph for the same looks as Figure 5: Inventory Turnover Ratio It shows that Abu Dhabi National Insurance Company revolves its inventory 0.13 times in 2010 as compared to 0.12 times in 2009. It shows that the company is very slow in revolving its inventory highlighting urgent steps to ensure that the inventory position improves. The ratio for Al Wathba National Insurance Company is 0.43 times in 2010 as compared to 0.34 times in 2009. The comparison of the ratio shows that Al Wathba National Insurance Company has a slightly better ratio highlighting better management of inventory in comparison to Abu Dhabi National Insurance Company but requires more corrective actions to improve the inventory situation. Fixed Asset Turnover Ratio: This ratio helps to find out the manner in which the company is able to use its fixed assets. Companies want to make optimum use of their resources so that the investments required in fixed properties and machineries can be curtailed (Joseph, 2010). The ratio for both the companies is as   2010 2009 Abu Dhabi National Insurance Company PSC 1.71 1.58 Al Wathba National Insurance Company (PJSC) 0.61 0.62 The graph looks as Figure 6: Fixed Asset Turnover Ratio It shows that Abu Dhabi National Insurance Company revolves its fixed assets 1.71 times in 2010 as compared to 1.58 times in 2009. It shows efficiency in the performance of the company as they have improved the use of fixed assets. Abu Dhabi National Insurance Company needs to look towards improving the ratio similarly so that the investment in fixed assets reduces. The ratio for Al Wathba National Insurance Company is 0.61 times in 2010 as compared to 0.62 times in 2009. The comparison of the ratio shows that Abu Dhabi National Insurance Company has a better ratio highlighting better use of fixed assets. This makes it imperative that Al Wathba National Insurance Company improves their ratio so that they are able to withstand competition. Total Asset Turnover Ratio: This ratio helps to find out the manner in which the company is able to use its assets. Companies want to make optimum use of their resources so that the investments required in fixed properties and machineries can be curtailed (Joseph, 2010). The ratio for both the companies is as   2010 2009 Abu Dhabi National Insurance Company PSC 0.49 0.44 Al Wathba National Insurance Company (PJSC) 0.29 0.28 The graph looks as Figure 7: Total Asset Turnover Ratio It shows that Abu Dhabi National Insurance Company revolves its assets 0.49 times in 2010 as compared to 0.44 times in 2009. It shows efficiency in the performance of the company as they have improved the use of total assets. Abu Dhabi National Insurance Company needs to look towards improving the ratio similarly so that the investment in assets reduces. The ratio for Al Wathba National Insurance Company is 0.29 times in 2010 as compared to 0.28 times in 2009. The comparison of the ratio shows that Abu Dhabi National Insurance Company has a better ratio highlighting better use of assets. This makes it imperative that Al Wathba National Insurance Company improves their ratio so that they are able to withstand competition. Debt to Total Asset Ratio: This ratio helps to find out the financing pattern of debt financing in respect to the total assets. This helps the third parties to understand the safety of their funds and the manner in which it has been used by the company. The graph for both the companies is as follows   2010 2009 Abu Dhabi National Insurance Company PSC 0.11 0.41 Al Wathba National Insurance Company (PJSC) 0.53 0.51 The graph looks as Figure 8: Debt to Total Assets Ratio It shows that Abu Dhabi National Insurance Company has the ratio as 0.11 in 2010 as compared to 0.41 times in 2009. It shows efficiency in the performance of the company as they have improved decreased the total percentage of debt in comparison to total assets. This highlights that the shareholders have a good percentage holding in the organization signifying sound management and a scope to raise easy money in the future. The ratio for Al Wathba National Insurance Company is 0.53 times in 2010 as compared to 0.51 times in 2009. The comparison of the ratio shows that Abu Dhabi National Insurance Company has a better ratio highlighting that the company has a lower debt component. Al Wathba National Insurance Company needs to look towards using a similar strategy so that the performance improves. Recommendations Analyzing both the companies from the different approach helps to provide important findings in different directions which help to understand the areas the companies need to work on. The financial analysis shows that Abu Dhabi National Insurance Company needs to ensure that it collects money due from the market quickly so that it is able to mobilize it and pay its creditors through it. Al Wathba National Insurance Company on the other hand needs to look towards improving the efficiency and liquidity ratio as it is presenting a bleak picture of the company. Along with it Al Wathba National Insurance Company needs to look towards improving its financial stability by reducing the debt component so that it can raise money in the future. References ADNIC. 2011. Abu Dhabi National Insurance Company. Retrieved on June 11, 2011 from http://www.adnic.ae/en/index.aspx AWNIC. 2011. Al Wathba National Insurance Company. Retrieved on June 11, 2011 from http://www.awnic.com/awnic/en/index.aspx Financial Modelling Guide. 2010. Liquidity ratios. Retrieved on June 11, 2011 from http://www.financialmodelingguide.com/financial-ratios/liquidity-ratios/ Joseph, K. 2010. Analyzing an income statement: Inventory Turnover. about.com guide, The New York Times Company Joseph, k. 2010. Analyzing an income statement: Average Collection Period. about.com guide. The New York Times Company Joseph, k. 2010. Analyzing an income statement: Fixd asset Turnover ratio. about.com guide. The New York Times Company Joseph, k. 2010. Analyzing an income statement: Total asset Turnover Ratio. about.com guide. The New York Times Company Kennon, J. 2010. Analyzing an income statement: Receivable Turnover. about.com guide, The New York Times Company Micro Strategy. 2010. Financial Analysis. Retrieved on June 11, 2011 from http://www.microstrategy.com/financial-analysis/ Appendix Calculation of ratio for Abu Dhabi National Insurance Company RATIOS FORMULAS 2010 2009 Current Ratio Current Assets / Current Liabilities 2,564,177 / 419,698 = 6.10 2,523,316 / 325,657 = 7.75 Quick Ratio (Current Assets – Inventories) / Current Liabilities (2,564,177 -669,482 ) / 419,698 = 4.51 (2,523,316 -762,931 )/ 325,657 = 5.40 A/R turnover ratio Net Sales / Account Receivable 1,770,197/ 682,719 = 2.59 1,551,541 / 529,445 = 2.93 Average Collection Period Accounts Receivable / Net Sales * 365 682719 / 1,770,197 * 365 = 140.77 529,445 / 1,551,541 * 365 = 124.55 Inventory turnover ratio Cost of Goods Sold / Average Inventory 92,153 / 669,482 = 0.13 93,947 / 762,931 = 0.12 Fixed Assets turnover ratio Net Sales / Fixed Assets 1,770,197 / 1,032,070 = 1.71 1,551,541 / 980,471 = 1.58 total asset turnover ratio Net Sales / Total Assets 1,770,197/ 3,596,247 = 0.49 1,551,541 / 3,503,787 = 0.44 Debt to total assets ratio Total Liabilities / Total Assets 419,698 / 3,596,247 = 0.11 1,470,931 / 3,503,787 = 0.41 Calculation of ratio for Al Wathba National Insurance Company RATIOS FORMULAS 2010 2009 Current Ratio Current Assets / Current Liabilities 506,402 / 191,131 = 2.64 543170/73,046 = 7.43 Quick Ratio (Current Assets – Inventories) / Current Liabilities (506,402 - 273,914) / 191,131 = 1.21 (543170 -329231 )/73,046 = 2.92 A/R turnover ratio Net Sales / Account Receivable 279,840 / 98,675 = 2.83 278,849 / 100,747 = 2.76 Average Collection Period Accounts Receivable / Net Sales * 365 98,675 / 279,840 * 365 = 128 100,747 / 278,849 * 365 = 131 Inventory turnover ratio Cost of Goods Sold / Average Inventory 118,338 / 273,914 = 0.43 111,660 / 329231 = 0.34 Fixed Assets turnover ratio Net Sales / Fixed Assets 279,840 / 451,791 = 0.61 278,849 / 446,942= 0.62 total asset turnover ratio Net Sales / Total Assets 279,840 / 958,193 = 0.29 278,849 / 990,112 = 0.28 Debt to total assets ratio Total Liabilities / Total Assets 515,919 / 958,193 = 0.53 513,465 / 990,112 = 0.51 Read More