Financial Statement Analysis - Research Paper Example

? Financial ment Analysis Executive summary Emirates integrated telecommunication is a company which was formed in the year 2007.The company started operation under telecommunication industry where there already existed Etisalat government Telecommunication Company. Being a government financed company, it was able to compete very strongly with du, since the telecom company used infrastructure which had been installed for a more than a decade .DU, however, under a powerful management has been able to overcome its competitor such that by the year 2011 du no longer felt the effect of the competitor due to its overwhelming growth. By the year 2011 the company was able to control more than 46% of the mobile industry. The following paper examines changes in the company performance through a financial analysis. The paper will analyze by a trend analysis from the year 2010 to the year 2011.From the analysis there are some major findings that have been gathered such as the company was able to increase its revenue by 25%- one of the largest growth in the MENA region. There was also very high market share of more than 46% by year 2011 (du, 2012). The liquidity and solvency ratios had gone up from the year 2010 to 2011; this showed that the companies’ potential to pay short term debts had increased hence was able to run the business more smoothly. Other important findings shows an increase in companies net profit margin, gearing ratios and furthermore the company had been ranked the best in the social corporate responsibility, which is an evidence of companies improved performance. The following research is therefore very crucial to all investor who are willing to invest in profitable business. It is also beneficial to the company in order to understand areas of weakness, which need much attention in the coming years. Detailed information is based on the financial analysis covered in the paper. Introduction Emirates integrated telecommunication is a company in the telecommunication industry, which was formed and undertakes its operation in Dubai. The company, through its exclusive performance, became listed in the Dubai financial markets and was therefore authorized to trade under the name DU. The Company has become popular due to provision of the best product and services in the mobile industry such as the blackberry service and the low off peak rates for the international calls. The following report is intended to analyze the major aspects which has made du company grow in such a high rate, it will be based on the strength of the company and also the financial statement will be analyzed in order to predict the future performance of the business. The analysis can therefore be helpful to potential investors since all the important aspects will be covered. To date du company has shown a continuous growth and increase in value give that by the year 2011 they were able to serve d more than 46% of the UAE mobile market this is in accordance to the Telecommunications Regulatory Authority such performance can only be achieved by companies which have proper management and strategies and this is one of the strength of du company. The paper has been undertaken under several topic which will make it more elaborate and informative and these will include company profile, market position, company ownership, economic environment, financial position, financial analysis with reference to the industrial requirement, SWOT analysis and there after the conclusion. Company profile Emirates integrated Telecommunication Company, which is based in the EUA region was formed in the year 2007. The company was formed with the aim of providing telecommunication services. DU provided internet services and pay TV service on that particular year and in addition went further to provide the nationwide fixed telephone services by July 2007. By the fourth quarter of the year 2011 the company had acquired a total of 5.2 million mobile customers. The company is known for being the first introducers of the “wow” which is a service that the customers have an option service of choosing more credit more time and so far the international recharge option service and even the additional credit on international calls. This is just one of the other historic services which have been provided by the company, the others included the pay by the second bill service, mobile TV and the mobile payment. Market position Du Company distributes it services through retail shops and currently, the company has approximately 30 shops, more than 3000 du e shops. The shops are located in very strategic locations within the region and this helps them to provide the highly demanded servicers throughout the region Ownership Being a publicly listed company there are a different groups which have invested in this telecommunication company. Emirates Investment Authority has the highest investment in this company as it owns up to 39.5%,Mubadala development company and the emirates communication and technology have an equal ownership of 19.5%.the remaining part is held by the public shareholders(Young, 2007) . Industry environment and Industry risks The company specializes is in the telecommunication industry and is a new service provider in this which operates under three special segments namely; consumer segment, business segment, and carriers segment. The entire three segments make up an environment where the firm undertakes its operations. There are a variety of risks associated with the telecommunication industry. These risks always crop up due to factors such as versatility of technology and the contribution from contending companies. Some of these risks include; the loss of customer ownership whereby companies lose most of their clients due to high costs. Clients end up changing to other market options in order to escape such costs. In mitigation, companies are forced to respond by cutting down these costs but this ends up in provision of poor services, making the issue worse (Foster, 2008). Secondly the other risk in this industry is the lack of innovation and creativity. Innovation is one of the major asset in this industry but most firms lack the talent to produce new services which can be of great value this leads to a clog in the industry where all the company provide the same services and through this they end up sharing the sales leading to less profits (Fridson & Alvarez, 2010). Third but not least companies systems have failed to provide enough security and privacy in this industry. This has made customers to lose trust hence looking for better means of communication. This is very risky since firms are making losses due to lack of enough customers. The other risk involved in this industry include, Inability to manage investor expectations, inability to contain and reduce costs, failure to maximize customer value and rising regulatory pressures (Young, 2007). Companies’ economic environment and its effect The company operates in a vibrant economic environment which is backed up back by business activities. Such economies require a lot of communication in order to undertake business smoothly. The location of Du Company in this environment has great value since telecommunication servicers are highly needed in that region; an environment which promises profitability for such businesses due to large sales (Foster, 2008). Analysis of the company’s financial position The company has had a stable financial performance given that it has been able to increase earnings before tax by 44.6% from the past year. There is also an increase in net profit by 47%.the company has also had a stable capital intensity hence showing that the company has a good financial position(Robinson, 2008). The following analysis will be used to understand the company’s position better. The comparison between the year 2010 and 2011 financial performance and the illustration to the changes there on by use of ratio analysis Financial Year Formula 2011 2010 Liquidity Ratios Quick Ratio cash + account receivable, Current liabilities 237637+881600 3653734 0.8:I 0.6:1 Cash Ratio Cash +cash equivalents Cash liabilities 2,376,371 3653734 0.6:1 0.4:1 Solvency Ratios Current Ratio Ratio current asset s Current liabilities 3978,674 3678,674 1.08:1 4671779 6441462 0.7:1 Gearing Ratio Long term liabilities Capital employed 2182502 6218936 35% 982,449 5095764 19% Debt Ratio Total Debt Total asset 2182502+3653734 6218936 0.93:1 982,4496441462 5095764 1.45:1 Equity Multiplier Total assets Total stockholders equity 6218936 4571.429+393504 1.25 5095764 4571.429+393504 1.02 Working capital Ratios Total Assets Turnover Sales Avg total assets 8854683 6218936 1.4 7074097 5095767 1.3 Capital Intensity Total assets Sales revenue 6218936 8854683 0.7 57074097 095767 0.7 Profitability Ratios Net Profit Margin NPTA * 100 Net sales 1812146 8854683 20% 1226098 7074097 17% Return on Assets NPTA *100 Total asset 1812146 6218936 .29% 1226098 5095764 24% Return on Equity NPTA *100 Total Equity 1812146 4571429+393504 36% 5095764 4571429+393504 24% Investors ratios Price earning ratio Mps Eps 13.49 Nill Divided pay out ratio Cash divided Net income 685,714 1812146 0.38 Nil 1226098 Nill Quick ratio The quick ratio can also be referred to as the acid test or the liquid test ratio the ratio the ratio considers the most liquid sources of finance in the firm such as cash and cash equivalents and the current liabilities (Lev, 2008). When the liquid ratio is not more than 1.0 it then implies that the firm depends mostly on inventory and other current assets in order to settle short term loan (Woelfel, 2003). Du company indicates a quick ratio of 0.6 in 2010 and it increases to 0.8 in 2011.this indicate that the company has an increasing potential in settling short term debts since the ratio shows an increasing trend from the past years. Current Ratio This ratio compares the current assets to the current liabilities of a firm. It measures the companies’ solvency in the short run; it helps to understand how the company can be able to immediately pay its liabilities as they came due. Creditors of any business can use this ratio to check on the capability of payment of the short term debts. The current ratio of du company has increased from the year 2010 attaining the ratio of 1.08:1 in 2011.this shows an improved performance and hence the company can easily settle its short term debts as they come due. The companies’ day to day operations are not affected by short term debt and such smooth operation indicates increasing revenue over time (Woelfel, 2003). Net Profit Margin This is the ratio that measure year’s profitability over sales. This margin dictates the performance of the company both in the short run and in the long run. A higher profit margin shows better performance and therefore the business is able to attain it objective of growth (Sinha, 2009). It is very important for any investor to check on the profit margin of any firm in order to know whether the company can be able to attain the shareholders objective of wealth creation. DU Company has an admirable improvement in the profit margin as it increases from17%in 2010 to 20% in 2011.this is clear that the company has been able to work under condition of no losses in any business unit during the year. Return on Assets (ROA) Ratio The ratio indicates the company’s return on asset’s normally a higher percentage indicates that the company is well run hence gaining more return on the asset used. When a company is able to get a higher return on it asset this it means there is a profit engagement in the business (Sinha, 2009).the company was able to increase it Return on assets from 24% in 2010 to 29% in 2011 this clearly indicates that there company had made profit during that year. Hence the investors in such asset gained from the operations of the business. Gearing ratio Gearing ratio provides information on how the company uses debts to finance business activities. Debt is one of the major factors that increase the firm value; companies using debts are more likely to make higher net profits than companies which do not use debt financing. This comes about since the government of any country disallows interest charged on loans through a tax shield and this leads to higher profits for such companies. DU company has increased its borrowing and is currently having a gearing ratio of 35% from 19%.investors should take advantage of such management since the firm will eventually increase in value hence increase shareholders wealth in the future. (Sinha, 2009). Debt ratio A company depends on debts in order to finance its projects. The debt ratio indicates the company’s reliance on debts that ,a low percentage of debt equity ratios will indicate that the company is less dependent on debt it has less money that it borrows or it owes to other people. Du Company has a high debt ratio especially in the year 2011 and this means that it was more engaged in borrowing in order to finance its projects. The company should however check on the cost of such capital so that the profits of the company are not affected by such action. Working capital ratio Net working capital ratio This is a ratio shows how capital is engaged in the purchase of assets in the business. Very high ratios indicate that the company has allocated most of its capita in the purchase of business assets. DU company is faced with high instalment cost hence this explains the high ratio, however such ratio will eventually go down in the long run since the assets themselves are able to generate income without further cost being incurred. Investors should therefore not hesitate to invest since this company will make supernormal profits in the future after all the machinery is installed Capital intensity Capita intensity ratio is used to indicate the amount of money that is invested in order to produce one unit of sales. When a firm wants to know the efficiency in usage of assets it therefore relies on this ratio, over the time the company has been able to maintain its efficiency by holding it constant at 0.7.this stability shows that the company is always in control os asset usage hence able to avoid unnecessary expenditure on asset purchase. Total asset turnover The ratio indicates how the assets are used to generate revenue a higher ratio means that assets are capable of producing very high revenue, this will however occur when the assets are perfectly utilized and are also used efficiently to undertake production activities (Woelfel, 1993). The asset turnover ratio has increased from1.3:1 in 2010 to 1.4:1 in 2011, this shows that the company has been able to increase it sales using the available assets and there achieved efficiency in operation. Investor’s ratios Divide payout ratio The ratio shows the amount of money allocated to the shareholders from the company’s total income. a very high ratio will indicate that the company simple gives back most of its return to the shareholders, a lower payout ratio indicate either the firm ploughs back most of its profits to business projects or the company is making very little profits hence giving out very little to the investors. Investors should therefore check on the divided payout ratio and inquirer as to the reason why it’s very little if so is due to low profits or due to ploughing back of the profits. (Young, 2007) Swot analysis The company is undertaking it business in the telecommunication industry and therefore it has several competitors in the same region. The company therefore requires having a strategic method of operation in order to overcome the other companies under the following aspects; Strength Commercially driven management the management of du company proofs to be unbeatable it is highly skilled and able to run the business in presence of very powerful competitor the Etisalat government telecommunication company. Du has also managed to offer the best connection network which is the major need of the consumers in that region hence this out does the competing company in that region. Du has also managed to penetrate the market so fast due to its quality output having attained 5.2 million subscribers in 5 years shows how powerful it is. Weakness The company have had a hard time in lying down strategies since there was no benchmark to which it would rely on in case any challenge it stands alone and therefore have to take much longer time to make decision in order to avoid losses. Opportunity The company has an opportunity since it know well known in the market and the ara of new comer is gone. The company can still expand to other parts of the country or even outside the country and hence make larger profits. Marketing strategy The company undertakes an aggressive brand campaign through a unique method that brings inspiration to the customers. The company has also shown honesty by doing and giving the customer the quality the advertise, Threat The company however lacks a strong foundation and infrastructure this is one of its greatest weakness since the competitor Etisalat has a foundation of resource for more than a decade, it is therefore tricky for them to compete without perfect strategies for attracting existing and new subscribers Conclusion Du Company is currently having a big share in the telecommunication industry; it has specific aspects which are highly demanded by the customer such as 100% connectivity and also the lower calling rates for international calls among others. The company which has operated for only five years has a remarkable performance since it has been able to compete with the telecom company which has been in the industry for more than a decade. The company is of promising nature to its investors since it has several strong aspects such as a growing performance as shown by the ratio analysis which is expected to continue in the same manner in the future due to the best management team, it also has more expansion opportunity which will help them earn higher profits in the future, and also the environment in which the company undertakes its activity is favourable since most of the population in that region are business people who require more of communication facilities in order to pursue there business, investor are therefore adviced to invest in this company since it promise a continuous growth and more dividends and capital gains to shareholders References Foster, G. (2008). Financial statement analysis. New York, NY: Prentice-Hall. Fridson, M.S & Alvarez, F. (2010). Financial Statement Analysis: A Practitioner's Guide. Heboken, NJ: Wiley. Lev, B. (2008). Financial statement analysis: A new approach. New York, NY: Prentice-Hall. Robinson, T. Et al. (2008). Financial Statement Analysis: A Global Perspective. New York, NY: Prentice Hall. Sinha, G. (2009). Financial statement analysis. New Delhi, India : PHI Learning Pvt Ltd. Woelfel, C. J. (2003). Financial Statement Analysis: The Investor's Self-Study Guide to Interpreting & Analyzing Financial Statements. McGraw-Hill Professional. Young, R. C. (2007). Financial Ratios Used by Investors. Houston, CH: Wiley & Sons. Financial statements link http://www.google.co.ke/url?sa=t&rct=j&q=Emirates+integrated+telecommunication+audit+report+2011+&source=web&cd=1&ved=0CDEQFjAA&url=http%3A%2F%2Fphx.corporate-ir.net%2FExternal.File%3Fitem%3DUGFyZW50SUQ9MTI5MjY4fENoaWxkSUQ9LTF8VHlwZT0z%26t%3D1&ei=GmeWT4fVIsirrAfY-I3KDQ&usg=AFQjCNEx7GGsePZ4bpY6T2IiUHWOTHGfFg&cad=rja Read More