The Annual Analysis of Commercial Bank of Dubai - Case Study Example

Table of Contents Introduction 2 Background of the organization 2 Corporate Vision 3 Global Strategic Objective 3 Financial Statement Analysis 3 Weakness & Core Competency 15 Auditor opinion regarding performance 16 Ways to improve weakness 17 Conclusion 17 References 19 Appendix 21 Introduction The success of an organization is dependent on the manner in which they are able to use its resources and generate profits for its shareholders. Financial statement provides a good idea about the past performance and provides an opportunity through which comparisons can be made. This report looks to provide a financial analysis of the annual report of Commercial Bank of Dubai for three consecutive years. The report will consist of different parts where it will start from proving basic information about the organization, the vision and the strategic objective which the business is looking to achieve. This will be followed by a financial analysis which will look at carrying out different ratios. The paper will then provide the different weakness, competencies, mechanism to improve and provide recommendations based on which the overall performance can be improved. This will thereby help investors to take useful decisions associated with investing and would help them to analyze the risk and return associated with the business. Background of the organization Commercial Bank of Dubai as the name suggests works in the banking and financial service sector and has it’s headquarter in Dubai. The business was started in 1969 and is listed in the Dubai Financial Market index. The bank consists of 80% holdings being held by UAE nationals and the remaining 20% are held by Investment Corporation of Dubai (CBD, 2016). The bank provides different banking service sector products and employs more than 1100 employees in the organization. Being in the service sector the main focus of the banking sector is towards quality service so that customer satisfaction can be enhanced. Since, the bank has been operational for a long period of time it has opened branches all over the country and focuses towards customer satisfaction through the different products which are being offered to them. Corporate Vision The organization has identified a vision for its employees, partners, suppliers and customers which they look to achieve through the working environment. The vision which has been identified by Commercial Bank of Dubai is “Building Sustainable Prosperity through extraordinary banking experience” (Vision, 2016). This is thereby aimed towards improving services so that banking experience can be improved. Global Strategic Objective The global strategic objective which Commercial Bank of Dubai has identified for the organization is as To increase their business avenues by looking towards working in different regions of the world so that their presence improves Improving the quality of service by looking towards multiplying the experience of customers by enhancing the different services which the banking sector provides Ensuring quality service which helps to ensure better service standards and ensures that overall business works towards maximizing the business potential. Financial Statement Analysis Analyzing the financial statement is very important for business as it facilitates in the process of planning, budgeting, monitoring, forecasting and taking important business and financial decisions through which performance can be improved. The process helps to understand the financial health of the business and helps to take useful business decisions through which overall performance can be improved. The calculation of ratios for Commercial bank of Dubai is as Liquidity Ratios This ratio is particularly important as it helps to analyze the ability of the business to meet its short term obligations out of short term assets. This thereby helps to understand the financial liquidity of the business in a short period of time and ensures that steps are taken so that business doesn’t fall under a liquidity trap. The different liquidity ratios are as Current Ratio This ratio helps investors, suppliers, customers and investors to understand the short term liquidity position of the organization (Gandy, 2011). The ratio helps to measure the short term liquidity position of the organization by looking into the manner in which the organization is able to meet its short term obligations out of short term assets and is calculated as current assets / current liabilities. The ratio for Commercial Bank of Dubai is as   2009 2008 2007 Commercial Bank of Dubai 1.22 1.2 1.18 The graphical representation of the same is as The overall analysis shows that Commercial Bank of Dubai has enough liquidity which will enable them to meet their short term obligations easily. Since, the ratio is above 1 for all the 3 years it shows better management of assets and liabilities over a short period of time. Still, the business needs to look towards improving it slightly as banking sector normally has a high liquidity ratio which would require that strategic decisions are taken through which liquidity position of the firm can be further improved. Cash Flow Ratio This ratio looks at analyzing the ability of the business to meet its short term obligations out of its operating activities and is calculated as cash flow from operating activities / current liabilities (Deloof, 2003). This ratio has its importance as it shows the ability of the business to cover its short term expenses from daily routine activities and helps investors to understand the manner in which the business is actually performing. The ratios for Commercial Bank of Dubai is as   2009 2008 2007 Commercial Bank of Dubai 0.12 0.078 0.234 The graphical representation of the same is as The ratio is a worrying factor for Commercial Bank of Dubai as it is very low in all the 3 years highlighting that the business is in no position to pay its short term debts from operating activities. To understand the impact it might have on the performance it is imperative to look it for the entire sector as banking sector generally have a low cash flow ratio. Still the management has to look at improving it so that the ability of the business improves and better short term liquidity position can be depicted. Capital Structure Ratio This ratio holds its importance for debtors, creditors and suppliers as it helps to understand the long term capital position of the organization. The ratio throws light on the capital of the organization and helps to understand the amount of capital which is raised through equity and debt financing. This thereby provides information regarding the different avenues which can be used to raise finance in the future. The different capital structure ratios are as Debt Ratio This ratio provides information about the long term debt that the organization in comparison to the total assets base. This ratio is of prime importance to lenders and investors as it provides information regarding the financial soundness of the business with regard to capital holding and is calculated as total liabilities / total assets (Wiley, 2009). The calculation of ratios for Commercial Bank of Dubai is as   2009 2008 2007 Commercial Bank of Dubai 0.85 0.86 0.84 The graphical representation of the same is as The ratio highlights that the debt component for Commercial Bank of Dubai is very high which is a worrying factor as it increases the pressure associated with timely payment of interest and actual borrowed money. Having such a high ratio also increases the risk as raising further debt would become difficult as investors might perceive the investment to be risky and they might not adequate returns for the risk undertaken by them by investing in the organization. This requires that the business undertakes urgent steps to control the debt component so that efficiency can be improved and the business will have more avenues to raise finance in the future. Debt to Equity Ratio This ratio provides information about the long term debt component with regard to the equity and is calculated as long term debt / equity holding. This ratio holds importance for lenders and investors as it helps them to analyze the risk and return for the investment they made in the organization (Penman, 2007). The calculation of ratios for Commercial Bank of Dubai is as   2009 2008 2007 Commercial Bank of Dubai 5.87 5.78 4.44 The graphical representation of the same is as The debt component of Commercial Bank of Dubai is very high which has resulted in a very small equity base. The ratio is continuously increasing one year after the other and is primarily due to increase in long term borrowings. This is a worrying sign as it increases the risk for investors and the investors as a result would demand more returns for the risk undertaken in investment. This also reduces the chances of raising money through long term debt in the future as investors will refrain from investing considering the risk associated with the investment. Urgent steps have to be taken to improve it so that overall performance is improved and better ratios can be achieved. Profitability Ratios This ratio is of prime importance as it throws light on the manner in which the organization has performed and helps the user to understand the manner in which bottom line was improved (Padachi, 2006). This ratio throws light on the manner different assets were used to generate revenues and the manner in which overall performance of the business is shaped. The different profitability ratios are as Net Profit Margin This ratio helps to understand the final profit which is attributable to the shareholders and is calculated after deducting all the expenses which the business has incurred but before interest and tax (Sons, 2002). The profits is ascertained based on sales and thereby helps to find out the percentage of earning which an individual product or service actually provides. The ratio for Commercial Bank of Dubai is as   2009 2008 2007 Commercial Bank of Dubai 3.67% 2.46% 8.29% The graphical representation of the same is as It is quite visible that the net profit margin has decreased drastically in 2008 but has improved in 2009 but is far below the level of 2007. This is a worrying situation as the business will have to look at finding out ways to improve profits which can be achieved by reducing cost. This will help to improve the performance and provides better avenues for development in the future. Return on Assets This ratio helps to understand the manner in which the assets were used to generate profits for the business and helps to take useful decisions pertaining to acquiring or selling of assets (Saleem, & Rehman, 2011). The ratio is calculated as earnings before interest and taxes / total assets X 100 and is as   2009 2008 2007 Commercial Bank of Dubai 3.58% 3.19% 2.83% The graphical representation of the same is as The overall return on assets is improving showing that the business has appropriate assets which is neither more nor less. It also shows consistency and brings forward the fact that different business decisions which were taken have helped business to manage both assets and profitability which would help them over a longer period of time. Return on Equity This ratio helps to understand the manner in which the equity were used to generate profits for the business and helps the shareholders to understand the manner in which their investments are being used in the daily activities of the business (Eljelly, 2004). The ratio is calculated as earnings before interest and taxes / total equity X 100 and is as   2009 2008 2007 Commercial Bank of Dubai 24.62% 24.32% 18.31% The graphical representation of the same is as The return on equity is high which shows that the shareholders are compensated properly for the risk undertaken by them by investing in the organization. It also pertains that the business cares for the shareholders and have aimed towards maximizing the returns for them which will help them to raise easy finance easily and would thereby enable to carry business more productively. Efficiency Ratios This ratio helps to understand the efficiency with which the assets of the business were used to generate sales. This ratio provides useful inputs regarding the holding of asset base and helps to take important decisions whether assets need to be purchased or sold (Paul & James, 2006). This thereby helps in useful business planning as based on it finance can be managed for future asset needs. The different asset efficiency ratio is as Asset Turnover Ratio This ratio aims to identify the manner in which the assets were used to generate sales and helps the business to take decisions whether they have more assets or less assets. The ratio also helps to identify the different assets which are more useful and based on it provides an opportunity to plan accordingly (Lyroudi, & Lazaridis, 2000). The ratio for Commercial Bank of Dubai is as   2009 2008 2007 Commercial Bank of Dubai 0.036 0.035 0.044 The graphical representation of the same is as It is seen that the ratio is very small highlighting huge asset base which is a worrying sign but since the organization is performing in the banking sector which has huge asset base so the risk reduces. Overall consistency is witnessed in managing the ratio which shows that the business has looked towards managing the assets base as required by the working culture. The organization has to perform similarly so that better asset management becomes possible. Market Performance Ratios This ratio helps to understand the confidence that the shareholders, customers, suppliers and other parties associated with the business have on the organization. A sound market performance ratio gets reflected in the share prices as positive sentiments are being reflected which thereby helps the business to ensure better accessibility to different assets in the future. This ratio also helps to attract investors and provides an opportunity through which business performance can be further improved. The different market performance ratios are as Earnings per Share This ratio helps to determine the profits which is finally attributed to the shareholders and is calculated as net profits available for the shareholders / average number of equity shares (Kramer & Johnson, 2009). This ratio helps to understand the final return which shareholders get for taking the risk investing the money in the organization. The calculation of ratio for Commercial Bank of Dubai is as   2009 2008 2007 Commercial Bank of Dubai 0.46 0.55 0.67 The graphical representation of the same is as It is evident that the earnings per share is continuously decreasing which is a worrying sign as the profits finally attributable to the shareholders is decreasing. It could be because of decrease in profits, increase in equity shares or ploughing back of profits for future projects. It is an aspect which needs to be looked at and appropriate decisions have to be taken so that overall performance can be improved and better returns can be provided to the shareholders. Equity Multiplier This ratio helps to understand the assets which is financed through equity and provides useful directives regarding the manner in which the equity shareholders will be paid in case of dissolution (Filbeck & Krueger, 2005). It is calculated as total assets / total equity and is as   2009 2008 2007 Commercial Bank of Dubai 6.87 7.55 6.39 The graphical representation of the same is as The ratio is very sound which signifies that the business has sufficient asset base to pay its equity shareholders in case of dissolution. It also highlights that the money collected from equity shareholders were used in the right direction and has been used by the business to purchase different asset base. This is a good sign and shows effectiveness in managing the different resources so that better productivity can be achieved. Weakness & Core Competency Commercial Bank of Dubai has certain weaknesses which has been identified from the financial analysis and is as Commercial Bank of Dubai needs to look towards improving their bottom line which will required looking towards cutting down the indirect expenses so that better returns can be expected The asset base which Commercial Bank of Dubai is very high which has resulted in underutilization of assets and needs to be looked at. This will require looking toward reducing the asset base so that productivity improves The debt component for Commercial Bank of Dubai is very high and would require working towards reducing the debt so that they can improve their chances to raise finance through debt in the future. The financial result has also highlighted the different areas which shows competency of the business and is as The organization has cared for the shareholders and look towards compensating them fairly which has ensured that shareholders are happy and willing to invest in the organization for the risk which they undertake The business has been efficient in maintaining the required liquidity which will enable them to meet the short term obligations. This has ensured better performance and use of resources in a better way The performance of past year shows improvement as the overall business potential has improved and brings forward the manner in which different dimensions have been looked at so that results can further improve in the future. Auditor opinion regarding performance The overall performance shows that a mixed performance as the business has worked better in some areas and need to look towards working on some areas so that performance can be improved. The business has to look at improving the bottom line and control the asset base as it impacting the manner in which different business decisions are taken (Benjamin & Spencer, 2007). The report shows that Commercial Bank of Dubai has to look at areas through which better use of assets becomes possible. The performance also shows that Commercial Bank of Dubai has performed well in some areas but need to concentrate on other areas so that results become better. Ways to improve weakness Commercial Bank of Dubai has to look towards the following to improve their performance which is as Look towards reducing cost so that overall profits are improved and the business is able to provide better returns to the shareholders. This will require working towards controlling the different expenses through which business will be able to work towards different dimensions through which performance is improved (Antony, 2004). Look to reduce the asset base as it is very high and concentrate towards improving the degree of service level so that customer satisfaction is high. This will help to improve the overall productivity as it will look towards ensuring better performance Look at improving the quality of service which will get reflected on the overall performance as it will shape the manner in which the organization has been able to work on different fundamentals Conclusion This report provides a financial analysis of the annual report of Commercial Bank of Dubai for three consecutive years. The report consists of different parts where it starts from proving basic information about the organization, the vision and the strategic objective which the business is looking to achieve. This is followed by a financial analysis which looks at carrying out different ratios. The paper then provides the different weakness, competencies, mechanism to improve and provide recommendations based on which the overall performance can be improved. This thereby help investors to take useful decisions associated with investing and would help them to analyze the risk and return associated with the business. References Antony, T. 2004. Thin Capitalization: Issues on the Gearing Ratio. Journal on Australian Taxation, 7 (1), 39-57 Benjamin & Spencer, 2007, Interpretation of financial statement, Tata McGraw Hill, India CBD. 2016. Commercial bank of Dubai. Retrieved on April 26, 2016 from www.cbd.ae Deloof, M. 2003. Does Working Capital Management Affect Profitability of Belgian Firms? Journal of Business Finance & Accounting, 30(3&4), 573-587. Eljelly, A. 2004. “Liquidity-Profitability Tradeoff: An empirical Investigation in an Emerging Market”, International Journal of Commerce & Management, 14(2), 48 - 61 Filbeck, G., & Krueger, T. M. 2005. An analysis of working capital management results across industries. Mid-American Journal of Business, 20(2), 10-17. Gandy, M. 2011. Is a low current ratio bad? Retrieved on April 27, 2016 from http://www.markgandycfo.com/2011/03/is-a-low-current-ratio-bad/ Kramer & Johnson, 2009, Financial Statement Demystified, Prentice Hall, New Delhi Lyroudi, K., & Lazaridis, Y. 2000. The Cash Conversion Cycle and Liquidity Analysis of the Food Industry in Greece [Electronic Version]. EFMA 2000 Athens Padachi, K. 2006. Trends in working capital management and its impact on firms’ performance: an analysis of Mauritian small manufacturing firms. International Review of Business Research Papers, 2(2), 45-58. Paul & James, 2006, “Financial Reporting, Financial Statement Analysis and Valuation: A Strategy”, 6th Edition, India Penman S. 2007, Financial Statement Analysis and Security Valuation, the McGraw Hill Company Inc Sons, T. 2002, Financial Statement Analysis: A Practitioner Guide, 3rd Edition, Prentice Hall, New Delhi Saleem, Q. & Rehman, R. 2011. Impacts of Liquidity Ratios on Profitability. Interdisciplinary Journal of Research in Business, 1 (7), 95-98 Vision. 2016. Vision of Commercial bank of Dubai. Retrieved on April 26, 2016 from https://cbd.ae/newcbd/Vision-Mission-and-Values.aspx Wong J. 2009, Financial Ratios-Solvency Ratios, Prentice Hall, New Delhi Appendix Ratios Formula 2007 2008 2009 Current Ratio Current Assets / Current Liabilities 29,006,932/24,418,866 = 1.18 33,940,867/28,115,817 = 1.20 35,084,397/28,695,022 = 1.22 Debt to Equity Ratio Long Term Debts / Equity 4,758,898 = 4.44 27,223,848/4,703,183 = 5.78 31,433,092/5,349,960 = 5.87 Net Profit Margin Net Profit / Sales * 100 (935,917/1,342,933)*100 = 66.69 (771,381/1,258,992)*100 = 61.26 (803,345/1,317,535 ) *100 = 60.97 Return on Assets Net Income / Total Assets * 100 (871,367/30,757,301)*100 = 2.83 (1,143,977/35,757,301)*100 = 3.19 (1,317,535/36,783,052)*100 = 3.58 Return on Equity Net Income / Equity * 100 (871,736/4,758,898)*100 = 18.31 (1,143,977/4,703,183)*100 = 24.32 (1,317,535/5,349,960)*100 = 24.62 Asset Turnover Ratio Sales Revenue / Average Total Assets 1,342,933/30,436,017 = 0.044 1,258,992/35,757,301 = 0.035 1,338,642/36,783,052 = 0.036 Cash Ratio Cash / Current Liabilities 5,730,341/24,418,866 = 0.234 2,208,583/28,115,817 = 0.078 3,651,928/28,695,022 = 0.12 Total debt ratio Total asset - total equity / total assets 30,436,017-4,758,898)/30,436,017 = 0.84 (35,757,301-4,730,183)/35,757,301 = 0.86 (36,783,052-5,349,960)/36,783,052 = 0.85 Equity Multiplier Total Asset / Total Equity 30,436,017/4,758,898= 6.39 35,757,301/4,730,183 = 7.55 36,783,052/5,349,960 = 6.87 Earning per Share Net Income / Outstanding shares 0.67 (given) 0.55 (given) 0.46 (given) Read More