Financial Accounting of Emaar - Assignment Example

Running header: accounting Student’s name: Instructor’s name: Subject code: Date of submission: Emaar Properties limited 1. How the money owed by Emaar’s customers changed over the two years -2010 and 2011; Emaar’s trade receivables 2011 AED776, 485,000 Emaar’s trade receivables 2010 AED902, 022,000 Reduction in trade receivables AED125, 537,000 % Decrease = AED125, 537,000/ AED902, 022,000×100% =13.92% There was an AED 125,537,000 decline in the money owed by customers over the two years .This was an equivalent of 13.92% decline over the two years. 2. How the amount Emaar owes to suppliers has changed over the two years Emaar’s trade payables 2011 AED8, 313,847,000 Emaar’s trade payables 2010 AED8, 938,956,000 Reduction in trade payables AED 625,109,000 % Decline in trade payables = AED 625,109,000/ AED8, 938,956,000 =6.99% The amount Emaar owes to its suppliers declined by AED 625,109,000 over the two years. This was a 6.99% decline over the two years. 3. How the total of the bank account has changed over the two years Bank balances and cash 2011 less cash in hand AED2, 865,272,000- 7,907,000= AED 2,857,365,000 Bank balances and cash 2010 less cash in hand AED 5,041,701,000- 6,958,000 =AED 5,034,743,000 Decline in bank account totals = AED2, 177,378,000 % Decline in bank balance totals = AED2, 177,378,000/AED 5,034,743,000 = 43.25% The bank balance totals declined by AED 2,177,378,000 over the two years 2010 and 2011. This was an equivalent of $43.25% decline. 4. How the amount invested in fixed assets changed in 2010 Fixed asset type Beginning balance Ending balance Increase/decline Development properties AED31,075,718,000 AED26,492,486,000 AED (4,583,232,000) Investment in securities AED936,661,000 AED694,183,000 AED(242,478,000) Loans to associates and joint ventures AED2,005,146,000 AED2,231,724,000 AED226,578,000 Investments in associates and joint ventures AED7,860,604,000 $7,592,088,000 AED(268,516,000) Property plant and equipment AED6,821,705,000 AED8,539,290,000 AED1,717,585,000 Investment properties AED8,546,087,000 AED8,110,081,000 AED (436,006,000) Goodwill AED439,391,000 AED46,066,000 AED(393,325,000) Total AED,49,726,524,000 AED53,705,918,000 AED(3,979,394,000) % Decline in investment in fixed assets in 2010 =3,979,394,000/ AED53, 705,918,000 =7.41% The company’s investment in fixed assets declined by AED 3,979,394,000 during 2010. This was an equivalent of 7.41% over the year 2010. 5. How the company’s debt to equity ratio has changed over the two years Year Formula DEBT/EQUITY RATIO 2011 Total debt/total equity =28,465,199/31,588,90777= 90.11% 2010 Total debt/total equity =31,204,297,000/31,300,031,000=99.64% The company’s total debt to equity ratio declined from 99.64% in 2010 to 90.11% in 2011 which was a considerable improvement. 6. How the current working capital ratio has changed over the two years Year Formula Working capital ratio 2011 Current assets-current liabilities 6,399,753,000-16,458,989,000 =(AED10,059,236,000) 2010 Current assets-current liabilities 8,798,410,000-18,828,350,000 =(AED10,029,940,000 There was a slight decline in the company’s working capital from AED 10,029,940,000 deficit in 2010 to a deficit of $AED 10,029,940,000 in 2011. 7. How the company’s net profit has changed over the two years 2011 net profit = AED 1,917,941,000 2010 Net profit = AED 2,477,011,000 Decline in net profit = AED559, 070,000 % decline in net profit = AED559, 070,000/ AED 2,477,011,000 =22.57% The company’s net profit declined by AED 559,070,000 over the two years of 2010 and 2011. This was an equivalent of 22.57% decline in the company’s profit over the two years. 8. How the company’s net profit margin has changed over the two years Year Formula Net profit margin 2011 Net profit/sales revenue =1,917,941,000/8,112,232,000= 23.64% 2010 Net profit/sales revenue =2,477,011,000/12,150,274,000 =20.39% The company’s net profit margin slightly improved from 20.39% in 2010 to 23.64% in 2011 which was a sign of improved performance. 9. How the total expenses to sales percentage has changed over the two years Year Formula Expenses to sales percentage 2011 Total expenses/sales =6920449/8,112,232,000 =85.31% 2010 Total expenses /sales =10896526/12,150,274,000 =89.68% The company’s total expenses to sales percentage declined from 89.68% in 2010 to 85.31% in 2011. 10. Emaar properties business strategy Based on the company’s website, the company aims at being among the most valuable companies globally through adoption of a business segmentation strategy of creating different business clusters that which function as different growth engines for the company. This business segmentation strategy is the company’s business strategy for the company even now in my opinion. This is clear from the kind of activities that the company was engaged in generating revenue. During the year 2011, the company’s revenue was generated from a number of sources including property investment, shopping malls and retail, hospitality, property management and utility services and investment in providers of financial services. This is in line with its segmentation business strategy since it offers the company income from diversified sources and the company can expect to generate income from multiple sources even when some of its segments are not performing very well. This is also in line with the company’s aim of increasing the share of revenues from global operations while enhancing the proportion of profits that the company generates from recurring streams that include shopping malls and retails and hospitality and leisure. The company has also identified key markets which include Egypt, Saudi Arabia and Lebanon as a geographical diversification strategy. In other words, the company’s business strategy is that of achieving growth through market segmentation and hence diversification thus ensuring that it maximizes returns from the various market segments as well as from various geographical markets. This way, the company would be able to achieve its goal of becoming a global leader in business and its industry. 11. Whether the most important goal for the company in the following year is to increase sales, profit margin or decrease debt/loans; In my opinion, the most important goal for the company in the following year is to increase profit margins as opposed to either increase sales or reduce its loans books. This is because with it goal being that of increasing its profit margin, the company will put in place different strategies that will not only lead to increased sales but which will also see its various costs come down hence enabling the company to generate more income. With more income, the company can be able to pay the loans and hence bring them down. Furthermore, given the company’s growth strategy, it may not want to bring down its loan books as yet since there are still a lot of investments that it could do with the money as opposed to repaying the loans. In fact, it may even decide to go for more loans or issue more shares as a strategy of raising the much needed funds for development. While the debt equity ratio is of much concern, this could be addressed though issuance of more shares. Furthermore, once growth has been achieved through improved profitability, the company will be able to bring down its loan or debt portfolio. 12. What has happened to sales during the year 2010? Year 2009 revenue AED 8,413,262,000 Year 2010 revenue AED 12,150,274,000 Increase in sales AED3, 737,012,000 The company’s sales increased by AED 737,012,000 in 2010 in comparison to 2009. 13. What the balance sheet tells me about the company’s future prospects Year Formula Current ratio 2010 Current assets /Current Liabilities =8,798,410,000/18,828,350,000 =0.47 2011 Current assets /Current Liabilities =6,399,753,000/16,458,989,000=0.39 Debt: Equity ratio 2011 Total debt/total equity =28,465,199/31,588,90777= 90.11% 2010 Total debt/total equity =31,204,297,000/31,300,031,000=99.64% The company’s future prospects do not look bright from observing the balance sheet. This is because the company seems to have solvency problems owing to its very low levels of current ratio meaning it may land into short term liquidity problems if it fails to pay the current debts. In addition, the company’s debt to equity ratio is relatively low implying that should the company fail to meet its long-term financial obligations; the company faces the threat of takeover from the creditors. Another sigh of the company’s declining performance includes a decline in its levels of assets in 2011 which is not a good sign of the company’s financial health. As such, the company needs to come up with strategies of reducing its debts while improving its equity position. 14. What provision for end of service benefits is and why it is a liability; This is part of employee benefits and is a form of gratuity or gift usually in the form of money that is given to the employee in return for the services offered to the employer. In other words, end of service benefits refer to the amount the employer is obliged to pay to his employees for their hard work or work or service performed whether physical or technical when the employees leave employment after they have successfully completed their stipulated years of service. The reason why provision for end of service benefits is treated as a liability in the balance sheet is because the company is obliged to pay it to the employees once their term of service expire. As such, it is almost like a debt that has to be paid and hence the reason why it is treated as a liability. In the case of Emaar, the company had a provision for employee’s end of service benefits of AED 70,482,000 which was an increase from the 2010 figures of AED 58,500,000. 15. What subsidiaries are and the subsidiaries Emaar has This is an enterprise that is controlled by another enterprise. It is a company with more that 50% of its voting rights being held/ controlled by another company which is commonly known as the parent company or holding company. It is a company which is fully or wholly owned by another company with controlling interests in the subsidiary. For instance, all the companies that Emaar controls are its subsidiaries. These subsidiaries include Subsidiary Place of incorporation Principle activities Percentage of beneficial interest Emaar malls group LLC UAE Retail development, management of shopping center, and leisure and entertainment activities 100% Emaar hospitality group LLC UAE Providing hospitality services 100% Emaar properties Gayrimenkul Gelistirme Anonim Sirketi Republic of Turkey Property investment and development 100% Emaar Libadaye Gayrimenkul Gelistirme AS Republic of Turkey Property investment and development 100% Emaar misr for development SAE Arab republic of Egypt Property investment and development 100% Hamptons international Dubai LLC UAE Property management services 100% Manarat Al Manzil Kingdom of Saudi Arabia Property investment and development 92.20% Emaar middle east LLC Kingdom of Saudi Arabia Property investment and development 61% Emaar IGO SA Syrian Arab Republic Property investment and development 60% 16. what is more important measure for management to work on? Cost of sales or total expense Gross margin 2011 =AED 4,235,551/8,112,232 =52.2% Net margin 2011 =23.64% Based on the above ratios, the most important measure for management to work on is total expenses. This is because the cost of goods sold is relatively low given the gross profit margin of 52.2%. This implies that the business may not obtain cheaper goods if quality is to be maintained. However, reducing the amount of total expenses is key to improving the company’s net profit margin and hence overall company profitability. As such, the company should come up with strategies that will help it reduce total expenses in order to increase its profitability and achieve its growth plans. 17. The company’s EPS and PE ratio for 2010 and 2011; Year Formula EPS 2010 Net income/total number of shares =AED 2,477,011,000/1,000,000 =AED 2477.011/Share 2011 Net income/total number of shares =AED1,917,941,000/1000000 =AED 1977.941/Share PE Ratio 2010 Market vale per share/EPS 5/2477.011 =0.002019 2011 Market vale per share/EPS 4/1977.941 =0.002022 The company’s earnings per share declined from AED2477.011 per share in 2010 to AED 1977.941 per share in 2011. However, its price earning ratio slightly improved in 2011 from AED 0.002019 in 2010 to AED 0.002022 in 2011. This implies that the company’s shares have been undervalued by the market. Their earnings per share is too high yet the market price is only AED 5 in 2010 and 4 in 2011. The improvement in P/E ratio in 2011 despite the decreased earnings is an indication that the market has undervalued the company’s shares in 2010 in comparison to 2011. 18. How I would sum up the financial results for Emaar and what I would tell the shareholders , prospective investors and staff if I was the company’s managing director; Liquidity ratio Ratio Formula 2011 2010 Current ratio Current assets/current liabilities =6,399,753,000/16,458,989,000=0.39 =8,798,410,000/18,828,350,000 =0.47 The company’s liquidity slightly declined from 0.47 in 2010 to 0.39 in 2011. However, the company’s liquidity is very low and this heightens the risk of the company not being able to meet its short term financial obligations. As such, the company should come up with strategies to improve its liquidity. Leverage ratios Ratio Formula 2011 2010 Debt/Equity (Short-term +Long-term debt)/Total equity =28,465,199/31,588,90777= 90.11% =31,204,297,000/31,300,031,000=99.64% Interest coverage ratio operating income /Interest expense =1,917,941,000/562,255,000 =3.41 times =2,478,450000/355,006000 =6.98 times The company’s debt/equity ratio slightly improved from 99.64% in 2010 to 90.11% in 2011. However, this is not a healthy state for the company as it shows that the company’s assets are almost entirely financed through debt. The company’s interest coverage ratio on the other hand declined from 6.98 times in 2011 to 3.41 times in 2011. This is not healthy for the company as its ability to meet its interest obligations is declining. a) Asset utilization ratios Ratio Formula 2011 2010 Assets turnover Assets turnover = Sales/ Total assets =8,112,232,000/60,054,106,000=13.51% =12,150,274,000/62,504,328,000 =19.44% The company’s assets turnover declined from 19.44% in 20101to 13.51% in 2011. This declining performance is not healthy for the company as it implies the company’s ability to use its assets in generating profits is declining. a) Profitability Ratios Ratio Formula 2011 2010 Net profit margin Net profit / Sales =1,917,941,000/8,112,232,000= 23.64% =2,477,011,000/12,150,274,000 =20.39% Return on assets (Net income + After tax interest expense)/Average total assets =(1,917,941,000+562,255,000)/ 60,054,106,000 =4.13% = (2,477,011,000+355,006,000)/ 62,504,328,000 =4.53% Return on Equity Net income /Average shareholders equity =1,917,941,000/31,588,907,000 =6.07% =2,477,011,000/31,300031000 =7.9% The company’s level of profitability improved from 20.39% in 2010 to 23.64% in 2011. The company’s return on assets however slightly declined from 4.53% in 2010 to 4.13% in 2011. Similarly, the company’s return on equity declined from 7.9% in 2011 to 6.07% in 2013. This shows declining performance as far as profitability is concerned as is not healthy for the company. What I would tell the shareholders, prospective investors and staff: Based on the above analysis, it is clear that the company is not performing well financially despite its profit margins having improved in 2011. As such, there would be need to assure shareholders and prospective investors of better performance in future. In addition, I would need to reassure the staff that their job security would depend on the company’s performance and hence the need to work hard. To the shareholders, I would seek to make them understand that the company’s liquidity, leverage and profitability are not healthy and hence the need to ensure that the company raises funds though other means other than debt financing in a bid to avert the threat of take over. On the other hand, I would seek to reassure them of the cost cutting measures that the company has taken as well as other strategies undertaken to improve the company’s performance in future. To the investors, I would seek to reassure them that despite the declining performance witnessed in 2011, the company remains profitable and that the strategies and measures that the company has put in place should ensure the company’s performance improves in future. This would seek to assure them that it would be a wise decision to invest in our company. To the members of staff, I would seek to make them understand of the important role they play in ensuring the company’s financial health. As such, I would assure them that their jobs are dependent on the company’s performance and hence the need to work harder in a bid to bring the company back to its former financial health. References: Charles, G2012, Financial reporting and analysis: Using financial accounting information, Sydney, Cengage Learning. Joseph, M2010, Financial accounting simplified, London, Rutledge. Simon, K2011, Introduction to financial accounting, Oxford, Oxford University Press. Read More