Value of Information to the Shareholder - Case Study Example

Executive Summary

Making a decision to invest in a company’s shares should be guided by the financial objectives and performance. As a shareholder in the Qatar Islamic Bank, it is important to consider the most important source of information pertaining the company’s performance – financial statements. An assessment of the company’s financial statements between 2012 and 2015 provides key insights into the financial position, which facilitates the development of an informed investment decision as it helps avoid the possibility of investing in a risky venture or one that does not give acceptable returns. The financial assessment in this report mainly involved the identification of the company’s financial objectives, ratio analysis, and determination of the QIB’s financial structure. The results of the analysis guide in recommending a buy of additional shares as the company has the potential to give gradually increasing returns besides presenting a low financial risk. In addition, the company’s financial objectives are in alignment with my long-term investment goals.

Introduction

Over the years, Qatar Islamic Bank (QIB) has offered a good investment opportunity through its broad portfolio of financial services. QIB was founded in 1982 as the first Sharia compliant financial services provider in Qatar and coordinates its global operations from the headquarters in Doha. The bank is currently the largest Sharia compliant lender in the State besides being the third largest bank by the value of assets after Qatar National Bank and Commercial Bank of Qatar. As an investor, it is always to watch out for annual statements as they provide a detailed look into the financial position of the company based on the operations for the fiscal year. An assessment of the financial statements can also give crucial information pertaining the direction of the firm, which is key in making decisions on investment in QIB’s equity.

Value of Information to the Shareholder

QIB annual financial statements for 2012, 2013, 2014, and 2015 are a rich source of information for current and potential shareholders. QIB financial statements are relatively easy to go by considering that the structure has not undergone significant changes during the assessment period and, as a result, making comparisons or identifying trends is not distressing. Notably, the company has been working with the same auditing firm, Earnest & Young, over the assessment period, which is a gesture that there has been no misconduct on the side of the management. Although companies may change auditors for justifiable reasons such a growth beyond the capacity of the initial auditor, conflict over the rules of accounting and lack of trust between the management and the audit form are common causes, which often result in lack of investor confidence (Fontaine, Letaifa, & Herda, 2013, A9).

Consolidated Statement of Financial Position is the first section of financial statements and provides a summary of the crucial financials for each fiscal year. The section works like the executive summary for the financial statements and are a key area of the statements that, as a shareholder, I focus on. Some of the fundamental financials include assets, liabilities, equity, income, expenditure, profit, earnings per share, cash flows, investments, balances, and dividends. The section provides a platform for the comparison of the financials for the current and previous year and, therefore, can give insights on the future and direction of the company. In this case, the financials indicate a positive trend in a majority of the financials. For instance, there has been a consistent growth in the value of assets throughout the assessment period; the total value rose from QAR 73,192,062,000 to 127,030,504,000 between 2012 and 2015, which represents a reasonable growth. On the other hand, the basic earnings per share grew from QAR 5.25 to QAR 8.27 over the same period that is also an acceptable growth. While the investor-incentive financials are indicative of a flourishing company, it is also important to note that there have been considerable increments in other financials such as expenditure and liabilities. To acquire a deeper understanding of the financials, analysis using ratios will be crucial. Nonetheless, the decision to position the critical financials at the beginning of the financial statements is presumably guided by the knowledge that quicker and easier access to information is likely to hasten investment decisions. In addition, the value of the information in the section prompts further review of the financial statements.

The information contained in the consolidated statements is viewed in detail in the Notes to the Consolidated Financial Statements section. The section is particularly important in understanding the nature of the auditing process, financial statements, and the bank. For instance, Reporting Entity provides information about QIB and the type of business that the company partakes. Also, the sections provides information concerning the size of the company, especially with regard to the subsidiaries whose operations are included in the financial statements. The number of subsidiaries in this section has not been static over the assessment period, which can be illustrative of a change in the financial objectives of the company or a change in the means of reaching the corporate goals. Information on acquisitions is also available in the section, which can help me to assess the financial direction of the company as illustrated in the subsequent section. The Basis of Preparation and Significant Accounting Policies are other crucial elements of the section that provide further detail concerning the auditing process. For instance, information concerning compliance to Financial Accounting Standards (FAS), Qatar Central Bank, International Financial Reporting Standards, and the Auditing Organization for Islamic Financial Institutions, is imperative in affirming the credibility of the financial statements.

The policies applied in accounting differ from one organization to the other although there seem to be a general set of accepted practices that is not necessarily enforced by any particular body. In QIB financial reports, the policies are contained in the Significant Accounting Policies section whose significance to the shareholder ranges from understanding the criteria of consolidation to the conversion of foreign currencies and classification of assets and liabilities. As an investor, I can use the information contained to clear any doubts or make clarifications about particular issues surrounding accounting policies applied. For instance, I can be sure that QIB applies the standard approach to convert reports of foreign operations, which entails the use of the currency conversion rate at the reporting date. The rest of the financial statements serve a similar purpose in informing the shareholder about different aspects of accounting besides giving details on crucial financials including risk management, assets, and liabilities among others. Ideally, the provide information as required in making investment decisions as they deliver a broad range of financials and the considerations in the preparation of the statements. The following section applies the section in the identification of QIB financial objectives as illustrated by the financial statements and reports. The firm’s financial objectives are critical in the development of closer relationships with the investor, especially when they are similar or compatible with those of the long-term investor.

Financial Objectives

Increasing the Value of Shareholder’s Wealth

For-profit organizations mainly exist for the primary objective of increasing the wealth of the shareholder by giving acceptable returns on investment. QIB is not an exemption as investment decisions are based on the perceived value of the shareholder’s wealth. Ideally, the duty to increase the value of the shareholder’s wealth should always be the first consideration for the management before engaging in any venture. Beyond the financial statements, the company mission acknowledge the duty to the shareholder: “To maximize returns for our shareholders and partners.” The rights and responsibilities of the shareholders are also ardently mentioned in the financial reports, which demonstrates the company’s value for the shareholder. It is also clear that the management is considerate of the shareholder’s view (mainly through voting) before adoption of decisions. For instance, the decision to obtain control over Durat Al Doha Real Estate Investment Development W.L.L, a former associate company, in 2013 was based on an agreement with shareholders. Similarly, the management acknowledges that the QIB “does not have control over Asian Finance Bank (AFB) … due to the shareholder’s agreement. From the illustrations, it is evident that investment decisions are for the purpose of increasing the value of the shareholder’s wealth, which is also done with the consent of the shareholder. As an investor, my primary financial objective is acquiring the highest possible returns on investment besides needing inclusion in investment decisions. In this regard, the financial objectives of QIB have been significantly similar to my long-term investment goals and would, therefore, be a worthy partner.

Market Differentiation

Differentiation is part of every company’s financial objectives as it determines how well it do in the competitive market. Since its inception, QIB has operated as an Islamic banking services provider, which works as its market differentiation strategy in the highly competitive finance industry. The strategy gives the company an upper hand ahead of the peers, which is verified by the leadership position among Qatari banking service providers besides being one of the leading Islamic banks in the world. Differentiation is one of the principal strengths applied by the bank that has facilitated the growth of its customer base, especially in the Arab-dominated Middle East. As an Islamic banking institution, QIB is attached to a growing market besides being representative of the flourishing Arab economy and culture. At this juncture, it is important to note that the economies in the Arab sphere, particularly the Middle East and Northern Africa, have seen tremendous growth over the recent years and, as a result, there is optimism in the future capacity of the bank.

Despite the inconsistency in oil prices, the economies have diversified to include manufacturing, processing, education, tourism, and technology industries, which reduces over-reliance on oil-based business financing services. In addition, the Islamic culture is significantly dominant in regard to susceptibility to changes, especially in the social and religious domain; the attachment of individuals at the social and religious levels is key in determining business relationships (Askary, Pounder, & Yazdifar, 2008, 145). Indeed, the level of Guanxi (use of personal and social connections) between Muslims is very high, which further pushes customer loyalty in its markets (Joseph, Kesselman, & Krieger, 2010, 95). Finally, Pew Research Center (2013) shows that Islam is the single largest growing religion globally in consideration of the conversion rates; it translates into a growing market for the company. To ensure that it acquires a large share of the growing market, QIB has remained compliant to the Sharia Law, which guides the interaction between Muslims as indicated by the financial statements. The differentiation strategy of the bank presents a financial objective that I would want to be attached with in the long-term as every investor would like to associate with a strategic market approach such as QIB’s.

Broad Product Portfolio

Small and medium sized enterprises (SMEs) provide an ideal market for banking institutions in the modern economy. As a result, QIB has ventured into the growing SME market through the provision of a mixed set of financial services. Focus on SMEs has been key in the general improvement of the economy besides showing support for the achievement of the State’s Vision 2030. QIB has also ventured into corporate and retail banking as well as the provision of mortgages and real estate solutions. Each of the sectors come has its strengths and limitations where the strengths of one sector tend to compensate for the limitations of the other. For instance, the credit risks associated with SMEs can be compensated with the confidence in corporate and retail banking. As markets in the Middle East continue to open up for changes, the four banking sectors continue to grow at different margins and, as a result, the reliance on a single sector is reduced.

A brand that focuses on multiple segments within the same is highly likely to perform remarkably compared to one that narrows down to one segment. However, the financial statements show that corporate and retail banking receive much attention from the management, which may be guided by the strengths of the two in promoting the company’s image and reducing financial risks. QIB mainly ventures into the real estate market through business associates whose ownership has changed depending on the contextual needs of the firm. For instance, the number of associates in Qatari real estate market increased from 2 to 4 between 2012 and 2014 with some changing from associates to subsidiaries. The company’s product offering strategy is quite dynamic and appropriate in surviving tough economic times besides promising some consistency and improvement in returns for shareholders. My objective as a long-term investor is to partner with a firm that identifies and ventures in the most promising market gaps besides playing a direct role in economic growth, as illustrated by QIB’s focus on SMEs. In this regard, my financial objectives align with those of the company.

Growth and Globalization

After dominating the domestic Islamic banking market, QIB is striving to make the firm a global leader by exploring new markets. The company’s management is cognizant of the fact that there are economic benefits associated with the size of the firm, such as the growth in the customer base and subsequent increases in the revenue and other key financials. The entry of the firm in other markets can also be seen as a move to avoid fixation with the Qatari economy, which can save the firm from economic hardships in case economic growth slowed. QIB has gradually identified the most suitable investment opportunities beyond Qatar to ensure that the company continues to become competitive and an attractive investment platform. The company’s global network includes QIB United Kingdom (2008), QIB Sudan (2008), Arab Finance House in Lebanon (2004), and Asian Finance Bank in Malaysia (2007). The company also has subsidiaries in Mauritius, and Luxembourg. Cayman Islands has the largest number of subsidiaries including Q Business Services, Q Liquidity Limited QEthika, and QNGPVI among others.

Notably, the number and percentage owned by QIB has grown through the assessment period. Inclusive of the subsidiaries in Qatar, the number has grown from 17 to over 30 between 2012 and 2015. As at 31st December 2012, QIB had acquired around 46.96% of the largest number of shareholders, which had increased to 50.13% in most cases. The largest acquisitions during the period included the Arab Finance House whose ownership had increased from 37% in 2012 to 99.9% in 2013, and the Arab Finance Bank where QIB’s share increased from 41.67% in 2012 to 60% in 2015. With respect to expansion and globalization of operations, QIB has performed remarkably although much will be desired for the company to have a global face. Nonetheless, the financial objectives guiding the growth and expansion of the company’s operations aligns with my personal long-term investment goal – that of a growing investment.

Ratio Analysis

Ratio analysis are critical in the determination of a company’s performance for a given period besides being key indicators of the future financial position. Different ratios yield different indicators that can guide in investment decisions in consideration of the company’s performance in the past or in comparison with other investment opportunities and competitors. Analysis for QIB will consider liquidity ratios, profitability ratios, investment ratios, and efficiency ratios while leverage ratios will be used in determining the capital structure.

Liquidity Ratios

Liquidity ratios provide a measure of a company’s capacity to meet the short-term liabilities when they are due. The ratios mainly show the proportion of current assets to current liabilities. A high liquidity ratio implies that the company is more liquid while a lower liquidity ratio shows that the company is less liquid – it does not have sufficient current assets. Low liquidity can result in the inability of a firm to settle its current liabilities primarily because it cannot convert its assets into liquid that can service the obligations and, as a result, it is likely to become bankrupt. The current ratio is the only applicable liquidity ratio in the QIB case as the company does not have inventories for the assessment period, which implies that it is not possible to calculate the acid test ratio. The current ratio can be calculated as:

Current ratio = Current assets / current liabilities

Year

2012

2013

2014

2015

Current ratio

12,401,698/9,081,880 =1.37

9,340,904/12,469,703

=0.75

13,864,492/15,124,873

=0.98

14,579,884/14,193,927

=1.03

QIB current ratio was highest in 2012 followed by a deep in 2013 and subsequent increase and through 2014 to 2015. As of 31st December 2015, the company had sufficient current assets to service current liabilities. However, the management should focus on increasing the value of current assets for a higher current ratio.

Profitability Ratios

Profitability ratios measures the efficiency of a business venture in generating profits and can also be used in the determination of the capacity or degree at which the management has controlled expenditure. A higher profitability ratio indicates that the company is highly efficient in making profits while a lower one represents inefficiency. Some commonly used investment ratios include return on investment (ROI) that shows the efficiency of a company in using assets to generate profits. On the other hand, net profit margin shows the capacity of a firm to control operational costs while the return on equity (ROE) represents the company’s efficiency in using the shareholder’s equity to generate return. The three ratios can be calculated as follows:

Return on investment = net profit after tax / total assets

Net profit margin = net profit after tax / sales

Return on equity = net profit after tax / total equity

Year

2012

2013

2014

2015

Return on investment

1,125,691/73,192,062

= 1.54%

1,325,603/77,354,244

= 1.71%

1,668,549/96,106,464

= 1.73%

2,030,340/127,030,504

= 1.60%

Net profit margin

1,125,691/2,666,483

= 42.21%

1,325,603/2,804,080

= 47.27%

1,668,549/3,093,079

= 53.94%

2,030,340/3,892,519

= 52.16%

Return on equity

1,125,691/13,051,005

= 8.63%

1,325,603/13,672,660

= 9.70%

1,668,549/14,171,666

= 11.18%

2,030,340/17,174,764

= 11.82%

All profitability ratios increased gradually from 2012 through 2013 to 2014. However, only the return on equity saw a consistent increase to 2015 while the ROI and net profit margin declined slightly. The decline in the net profit margin can be indicative of an increase in operational expenditure. The bank’s ROI is quite low as indicated by the analysis, which means that investment is not highly effective.

Investment Ratios

Investment ratios provide information pertaining the returns that shareholders get from the investment in a company’s shares. One of the commonly used ratios include the earnings per share (EPS) that represents the earnings for every share that the investor has in the company. On the other hand, the divided retention ratio determines the profits that the company invests back into the business and can be calculated as follows:

Earnings per share (EPS) = earnings attributable to ordinary shareholders / number of ordinary shares outstanding

Dividend retention ratio = retained earnings / earnings attributable to equity shareholders

The EPS will be extracted directly from the financial statements.

Year

2012

2013

2014

2015

Earnings per share

5.25

5.65

6.78

8.27

Dividend retention

Ratio

665,603/1,241,445

= 0.54

758,113/1,335,400

= 0.57

1,008,760/1,954,324

= 0.52

1,236,137/1,601432

= 0.77

Shareholders have been enjoying increasing earnings per share since 2012, which may continue into the future. It is important to note that the company’s dividend retention ratio is quite low, although it has increased since 2012 (except for the 2014 deep). This can imply that the company utilizes much of the returns in awarding shareholders although the jump between 2014 and 2015 may indicate a change in the narrative.

Efficiency/Activity Ratios

Efficiency ratios give details on the manner at which the company successfully converts the utility of company assets into revenue. Ratios in this classification also represent the activity of the firm for a certain period. The efficiency ratios include accounts receivable turnover and fixed asset turnover where the former indicates the number of times that the debtors service their obligations annually while the latter represents the revenue acquired using fixed assets. The ratios can be calculated as follows:

Fixed asset turnover = sales revenue / total fixed assets

Accounts receivable turnover = sales revenue / accounts receivable

Year

2012

2013

2014

2015

Fixed asset turnover

2,666,483/377,366

=7.07

2,804,080/436,181

= 6.43

3,093,079/508,684

= 6.08

3,892,519/575,402

= 6.76

Accounts receivable turnover

2,666,483/249,819

=10.67

2,804,080/318,819

= 8.80

3,093,079/306,589

= 10.08

3,892,519/410,610

= 9.68

Both the fixed asset turnover and accounts receivable turnover for QIB were highest at the beginning of the assessment period and have undergone slight changes over the years. The trend implies that the bank has been quite consistent in its use of fixed assets to derive revenue. On the other hand, the company has also been consistent in the servicing its obligations over the assessment period and, as a result, it is less likely that the company falls into a debt crisis arising from bad debt.

Capital Structure

In financial assessment, the capital structure is a key feature as it guides in the evaluation of a company’s resilience to economic meltdown. Besides being a primary of a firm’s capital health, it is also a determinant of the ability to run the day-to-day activities and operations. Lessons from previous global crisis, where large multinational corporations ran bankrupt while others required large government bail-outs, should be applied to ensure that the shareholder’s equity has consistent returns and is not under high risk. Leverage ratios are highly utilized in the determination of a company’s capital structure as they indicate the approach to funding that a company applies. Leverage ratios can also measure the company’s financial risk and the ability to settle debts. Over reliance in the use of debts to finance operations places a company at a high financial risk. The debt/equity ratio and debt ratio are some of the most effective ratios to this end. The two rations can be tabulated as follows:

Debt ratio = total liabilities / total assets

Debt equity ratio = total liabilities / total equity

Year

2012

2013

2014

2015

Debt ratio

26,075,575/73,192,062

= 35.63%

25,788,375/77,354,244

= 33.34%

30,454,809/96,106,464

= 44.07%

32,529,153/127,030,504

= 25.61%

Debt equity ratio

26,075,575/13,051,005

= 2.00

25,788,375/13,672,660

= 1.89

30,454,809/14,171,666

= 2.15

32,529,153/17,174,764

= 1.89

The table indicates that QIB is not a highly leveraged company considering that its debt ratio is lower than 50% while the debt/equity ratio is less than 5. As an implication, the company is not at a high financial risk as it does not largely rely on debt to finance its operations. Indeed, the equity ratio has declined from 2012 to 2015, which is the same case with the debt/equity ratio. Although the company’s debt has increased from 2012 to 2015, the company has not applied it as the primary source of funding besides undergoing significant expansions during the assessment period. The leverage rations shows that the company would likely continue to generate acceptable returns for the shareholders despite slow growth of the market or even in case of a financial meltdown. On the other hand, the company does not pose a high risk to lenders and, as a result, it is unlikely that they try to control the operations of the company in the future. Although there are limitations surrounding the use and interpretation of leverage ratios, the use of two ratios can be provide more reliable findings. In this case, the ratios yield consistent results, which implies that they can be relied in making wise investment decisions. In this regard, investing in QIB does not pose a threat in the future, especially in consideration of the company’s performance in the dynamic finance industry and overall economy.

Conclusion and Recommendations

An assessment of the financial statements has yielded highly useful information concerning the company, which can be applied in making investment decisions. The identification of the company’s financial objectives has been one of the most-explored aspect of the financial statements. From the analysis, it is clear that QIB has a well-thought market strategy in terms of differentiation and segmentation, and delivery of financing services. As an Islamic bank, the market can be seen to be very promising in the future considering the growth in the economies within the Arab sphere, particularly in the middle-east. The brand loyalty enjoyed from within the Islam community as denoted by Guanxi, as well as the compliance to Sharia law are some of the benefits that the company can leverage in growing its market share. On the other hand, the focus on different sectors of the economy will ensure that the company continues to have a strong and growing market. In addition, the company has gone beyond the confines of Qatari boundaries to exploit different promising markets, even in non-Arab countries such as the United Kingdom. As a result, the company does not rely on one market, which increases the chances of success. The financial objectives and strategies of the company align with my long-term investment goals, especially on the aspect of growth. Therefore, I see the company as a good investment opportunity in the long-term.

Analysis of the financial statements reveal various trends that are generally acceptable in the current economic condition. The liquidity ratios, which are used to assess the capacity of the company to settle its current obligations, align with the leverage ratios that are applied in the evaluation of a company’s capacity to service its liabilities. Both ratios show that the company is in a stable financial condition as it has adequate current assets to settle current liabilities while the level of financial leverage is significantly low; they can be used to mean that the company can operate smoothly in the short and long-term to give consistent returns to shareholders. The profitability and investment ratios also give a similar message pertaining the ability of the company to generate profits and returns on equity respectively. The ratios have been increasing gradually from 2012 to 2015 with exception of a few instances where ratios declined. On the other hand, the efficiency ratios (particularly the fixed asset turnover) indicate that the company has been quite resilient in its efficiency in the utilization of available resources to generate revenue. In addition, the company has been consistent in servicing its liabilities over the assessment period. In a nutshell, the company provides a viable investment opportunity as it continues to give reasonable returns besides the risk of investment being quite low.

In consideration of the QIB’s financial objectives and the results of ratio analysis, it is recommendable to acquire additional shares. The recommendation is guided by the company’s bright market strategy that is likely to result in high returns as the market share continues to grow. Also, the risk involved in QIB’s equity is quite low as indicated by the financial ratios besides the company being compliant to a broad range pf accounting and operational standards, especially the Sharia Law. Finally, the company gives acceptable returns, which implies that more investment would give more returns in the long-term.

Reference List

Askary, S., Pounder, J., & Yazdifar, H. (2008). Influence of culture on accounting uniformity among Arabic nations. Education, Business & Society, 1(2), 145-154. http://dx.doi.org/10.1108/17537980810890329

Fontaine, R., Letaifa, S., & Herda, D. (2013). An Interview Study to Understand the Reasons Clients Change Audit Firms and the Client's Perceived Value of the Audit Service. Current Issues In Auditing, 7(1), A1-A14. http://dx.doi.org/10.2308/ciia-50476

Joseph, W., Kesselman, M., & Krieger, J. (2010). Introduction to politics of the developing world. Boston, Mass.: Wadsworth Cengage Learning.

Pew Research Center,. (2013). The World’s Muslims: Religion, Politics and Society. Pew Research Center's Religion & Public Life Project. Retrieved 3 June 2016, from http://www.pewforum.org/2013/04/30/the-worlds-muslims-religion-politics-society-overview/