Financial Analysis of Arabtec Company - Case Study Example

Financial Analysis of Arabtec Company College: Name: Students ID: Date: Course Name: Unit Code: Time: Instructor: Executive Summary This report captures the analysis of Arabtec Company’s financial statements. It entails the analysis of the company’s income statement, balance sheet and the cash flow statement pertaining the 2011 reporting period. Arabtec is the leading construction company in the United Arab Emirates. The company was launched in 1975 to make the most of the prospects presented by the UAE’s rising economy. Since then the company has completed various projects cutting across the real estate and infrastructural development sectors. This includes the involvement in the construction the tallest building in the world. Arabtec reported total revenues of slightly over AED 5 billion in 2011. It generated a gross profit of roughly AED 630 million and a net profit of just about AED 340.3 million. Arabtec Company controlled close to AED 8.8 billion in total assets as at 31 December 2011. It had a share capital of AED 1.495 billion. Arabtec generated a net cash of close to AED 492 million from operating activities. The company spent a net cash use of about AED 114 million on investing activities and AED 282.5 million in financing activities. However, Arabtec realised an increase of AED 95.759 million in cash and cash equivalents. The closing cash for the year ending 31 December 2011 was about AED 684 million. The company had an average liquidity and profitability level and the turnover was upbeat. It had a balanced capital structure. Introduction Financial statement analysis is crucial to each and every one financial manager. It eases the process of financial managerial decision making that in turn has an effect on the overall strategy of an organisation (Smith, 2007). This report captures the analysis of Arabtec Company’s financial statements. It entails the analysis of the company’s income statement, balance sheet and the cash flow statement pertaining the 2011 reporting period. Arabtec is the leading construction company in the United Arab Emirates. At the end of the report is a conclusion followed by a list of the referenced material. Company Operations Arabtec Company traces its roots back to the 1970’s when the United Arab Emirates (UAE) experienced a construction boom. The company kicked off its operations in 1975 to make the most of the prospects presented by the UAE’s rising economy. Arabtec is the biggest construction company in the United Arab Emirates. From the time when was launched, Arabtec has carried out various projects cutting across the real estate and infrastructural development sectors. These include: Hotels and Hotel Interiors, Stadiums, Commercial and Industrial Projects, Key Airport Developments, Infrastructure and Drainage works, Offshore Oil and Gas Installations, as well as Apartment and Office Blocks such as The Emirates Hills, The Arabian Ranches and The Silicon Oasis. Indeed the company engages a key role in redefining the skyline of Dubai. One key achievement of the company is its partnership with Samsung and Six Construct to put up the tallest building in the world (Burj Khalifa - which is 828 metres tall) (Arabtec, 2013a; Arabtec, 2013b). Today, Arabtec covers a huge collection of plant and high-tech paraphernalia along with a transnational squad of over 40,000 competent employees. The company controls numerous subsidiaries specialising in the entire construction sector. The company at present operates in Abu Dhabi, Russia, Dubai, Qatar, Jordan, Saudi Arabia and Syria. The company intends to spread out globally into other markets such as Libya, Algeria and Egypt in the near future (Arabtec, 2013b). 2011 Income Statement Analysis The income statement details in summary a company’s revenues, expenses, and profits/loss for a given accounting period. The income statement helps to identify whether a business is profitable or not. It can as well be used for comparison across different accounting periods to monitor the businesses performance. The income statement is based on the formula: Revenue – Expenses = Profit (Drury, 2004). Arabtec reported total revenues of slightly over AED 5 billion in 2011. The company incurred approximately AED 4.4 billion in direct costs. The difference between the revenue and the direct expenses indicate that Arabtec generated roughly AED 630 million in gross profits. The following are other items reported in the income statement. Other operating income generated by the company was close to AED 36.55 million, general and administrative expenses incurred in 2011 totalled to about AED 348 million. Arabtec gained approximately AED 19.7 million on derecognition of financial assets plus some additional income of slightly over AED 33 million. The company experienced an unfavourable change of non-current retentions and trade receivables to the tune of approximately AED 11.5 million. Income generated from investment activities (investment income) was slightly over AED 16 million. Arabtec incurred a finance expenses in the region of AED 33 million (Arabtec, 2013c). After adjusting for the above items, Arabtec Company generated a total of AED 342.5 million in profit before tax. After that, the tax expense of around AED 2.2 million is deducted leaving the profit after tax, which is also the profit of the year, of just about AED 340.3 million (Arabtec, 2013c). Profit after tax is depends on the revenues earned, expenses incurred including the finance costs and tax. Tax is levied at a percentage of the profits and therefore depends on the profit level (Edmonds et al, 2006). 2011 Balance Sheet Analysis A balance sheet symbolizes an orderly technique of recording the value of an entity’s assets, liabilities as well as owner’s equity as at a definite date. The balance sheet enables a business to track changes in its assets, liabilities as well as net worth over time. It also comes in handy when computing ratios that help to give investors an idea about the business’s performance. The balance sheet follows a simple accounting formula of Assets = Liabilities + Owner’s equity (Deegan, 2009). Assets are divided up into two categories; current assets and non-current assets. Current assets are those items that can be converted into cash easily whereas non-current assets are those items that are held because of their long-term value to the company. Non-current assets are influenced by the company’s investment or disposal of assets as well as the year’s activities. The current assets are influenced by the company’s level of activity during the year. Current assets plus non-current assets give the company’s total assets (Edmonds et al, 2006). Non-current assets owned by Arabtec as at 31 December 2011 are; property, plant and equipment (AED 1.18 billion), intangible assets (AED 94 million), investments in associates (0), goodwill (AED 249 million), trade and other receivables – non-current portion (AED 798 million), other financial assets (AED 207 million), and other non-current assets (AED 10 million) in that order. Arabtec owned close to AED 2.54 in total non-current assets as at 31 December 2011. Items listed as current assets in the company’s balance sheet are; trade and other receivables (AED 3.9 billion), other financial assets (AED 151 million), inventories (AED 319 million), other current assets (AED 138 million), due from related parties (AED 1.06 billion), cash and cash equivalents (AED 684 million), and deferred tax (AED 331 thousand) in that order. The total current assets owned by Arabtec Company as at 31 December 2011 were approximately AED 6.26 billion. Arabtec Company controlled close to AED 8.8 billion in total assets as at 31 December 2011 (Arabtec, 2013c). Next is the company’s equity which entails the capital and reserves. Equity details the shareholders investments which are influenced by the company’s performance in terms of profits earned and dividends paid. These are; share capital (AED 1.495 billion), statutory reserve (AED 294 million), fair value adjustment reserve (lost AED 12.55 million), foreign currency translation reserve (lost AED 264 thousand) and retained earnings (AED 1.18 billion). To find total equity, non-controlling interests (AED 415 million) is added to the equity attributable to shareholders of the parent computed using the figures above. This gives the company’s total equity of (AED 3.37 billion) (Arabtec, 2013c). Lastly, in balance sheet are Arabtec’s liabilities that are classified into current liabilities and non-current liabilities. Non-current liabilities are financial obligations that are payable for one over year whereas current liabilities are payable up to a period of one year. Current liabilities and non-current liabilities add up to total liabilities. Liabilities are in general impacted by the company’s borrowing level (Martin & Fernando, 2002). The company’s non-current liabilities include bank borrowings (AED 55.65 million), provision for employee’s end of service indemnity (AED 158 million), and retentions payable – non-current portion (AED 91.76 million). The total non-current liabilities are AED 305.22 million. Arabtec’s current liabilities include bank borrowings (AED 468.3 million), trade and other payables (AED 3.83 billion), due to related parties (AED 821 million), and income tax payable (AED 1.585 million). Total current liabilities equal to (AED 5.123 billion). The company’s total liabilities are approximately (AED 5.428 billion). The sum of the company’s equity and liabilities equals to approximately AED 8.8 billion, which is the same as company’s total assets (Arabtec, 2013c). 2011 Cash Flow Statement Analysis A cash flow statement indicates adjustments in each position from one period to another. It lets users of financial information to see how cash was obtained and used up between two balance sheet periods. The term cash stands for cash in hand and at bank. A projected cash flow statement will assist the management to determine the amount of cash required to meet up obligations to trade creditors, to pay bank loans and to pay dividend to shareholders (Drury, 2004). A suitable cash management will allow the management to have cash each time it is required and put it to some profitable or productive use in case there is excess cash available. The change in the cash position from one period to another is computed by talking into account sources and application of cash. A cash flow statement has three key sections; cash from operating activities, cash from investing activities and cash from financing activities. In making the cash adjustments one starts with the profit before tax (Deegan, 2009). Arabtec generated a net cash of close to AED 492 million from operating activities. The company spent around AED 195.3 million on the purchase of property, plant and equipment resulting to a net cash use of about AED 114 million on investing activities. In financing its activities, Arabtec repaid a net of about AED 213 million on their borrowings resulting to a net use of about AED 282.5 million in financing activities. However, in 2011, Arabtec realised an increase of AED 95.759 million in cash and cash equivalents. The closing cash for the year ending 31 December 2011 was about AED 684 million (Arabtec, 2013c). Ratio Analysis Financial ratios form the toolbox used to perform financial analysis of companies. Ratios are easy to understand and interpret to potential investors considering that the final statements of accounts are not easy to interpret (Steven, 2006). Below are the key rations indicating the company’s performance in 2011. Ratio Formula Working Result Liquidity Ratios Current ratio 1.22 Quick ratio 1.19 Turnover Ratios Inventory turnover 1.36 Total asset turnover 0.57 Capital Structure Ratios Leverage 5.96% Interest cover 11.36 Debt/equity 15.56% Profitability Ratios Gross profit margin 12.58% Net profit margin 6.8% Return on Assets 3.87% Conclusion Financial statement analysis is important in financial managerial decision making process. Arabtec generated both good gross profit and net profit for the year ending 31 December 2011 resulting to basic earnings per share of AED 0.17. The company’s posted an average profitability level. Arabtec had a strong balance sheet, even though, debtors and creditors constituted large portions of the balance sheet. Also, Arabtec generated positive income from its operations. Although it spent more on investing and financing activities, it generated an increase in cash and cash equivalents. The company’s liquidity was okay based on the quick ratio. It also posted positive turnover on investments. The capital structure ratios were within acceptable margins. References Arabtec, 2013a, Company History, retrieved 18 February 2013, Arabtec, 2013b, Company Overview, retrieved 18 February 2013, Arabtec, 2013c, 2011 Annual Results, retrieved 18 February 2013, Deegan, C, 2009, Financial accounting theory, 3rd edn, McGraw-Hill, North Ryde Drury, C, 2004, Management and Cost Accounting, London, Thompsons Learning Edmonds, C, Edmonds, T, Olds, P, and Schneider, N, 2006, Fundamental Managerial Accounting Concepts, New York, McGraw-Hill Irwin Martin, S.F and Fernando, A 2002, Financial Statement Analysis:  A Practitioner's Guide, 3 edn, John Wiley & Sons Smith, J, 2007, Handbook of Management Accounting, Amsterdam, Boston Cima Publishing Steven, M.B, 2006, Financial Analysis: A Controller's Guide, 2nd edn, Wiley Read More