Investigating the Suitability of TAQA for Investment - Case Study Example

Analyses of TAQA’s Reports: Investigating the Suitability of TAQA for Investment TAQA is Abu Dhabi National Energy Company established in 2005 with the intention of making a global player in the energy industry. This objective has been somehow achieved as TAQA operates in many nations including Abu Dhabi, Canada, United Kingdom and India. A great majority of the employees of TAQA come from many nationalities with offices in about 13 markets. Primary, TAQA’s operations include but not limited to power generation, heat and water services, pipeline services, upstream oil and gas services, and organized finance business. The government of Abu Dhabi owns 51% stake in the entire TAQA’s shares (TAQA 2010). TAQA is operating in a multi-billion-dollar global market oil and energy market. As a result of this, the financial performance of TAQA is determined by the trend in the global market. Lately, the price of oil has been erratic, and this has also affected the economic standing of many oil companies worldwide, TAQA inclusive. Some of the major competitors of TAQA are Shell, Chevron, British Petroleum, and Exxon Mobil. These financial analyses will unravel the suitability of TAQA for investment as it reveals the level of profitability, durability and the benefits any future investors could gain by putting their hand-earned money on the company. 2 The analyses span a period of three years, from 2007 to 2009. The financial ratios reveal the financial performance of the company within the last three years: Financial Ratios for year 2007 Short Term Solvency, Liquidity Measures Current Ratio Current assets 11776019   1.377206336 Current liabilities 8550657     Quick Ratio Current assets - Inventory 11776019 - 1494808 10281211 1.202388425 Current liabilities 8550657 8550657   Cash Ratio Cash 7601093   0.888948416 Current liabilities 8550657     Net Working Capital to Total Assets Net working capital (CA - CL) 11776019 - 8550657 3225362 0.04754063 Total assets 67844326 67844326   Interval Measure Current assets 11776019 11776019 879.6082254 Average daily operating costs (COGS/365) =4886558/365 =13387.8 13387.8 Long Term Solvency Measures Total Debt Ratio Total assets - Total equity 67844326 - 8129065 59715261 0.880180621 Total assets 67844326 67844326   Debt-Equity Ratio Total debt 1-Total debt ratio =1-0.880180621 0.880180621 7.345895377 Total equity 0.119819379   Equity Multiplier 1+ Debt -equity Ratio 1+ 7.345895377   8.345895377     Long-Term Debt Ratio Long-term debt 51164604 51164604 0.862901636 Long-term debt + Total equity 51164604+8129065 59293669   Time Interest Earned Ratio EBIT 3450229   1.364372932 Interest 2528802     Cash Coverage Ratio EBIT + Depreciation 3450229 +1427632 4877861 1.928921679 Interest 2528802 2528802 Asset Management Inventory Turnover Cost of goods sold 4886558   3.269020503 Inventory 1494808     Days' Sales in Inventory 365 days 365   111.6542401 Inventory turnover 3.269020503     Receivables Turnover Sales 8336787   5.464208748 Accounts receivable 1525708     Days' Sales in Receivables 365 days 365   66.7983265 Receivables turnover 5.464208748   Payables Turnover NWC Turnover Sales 8336787 8336787 2.584760098 NWC 11776019- 8550657 3225362   Fixed Asset Turnover Sales 8336787   0.148689829 Net fixed assets 56068307     Total Asset Turnover Sales 8336787   0.122881123 Total assets 67844326   Profitability Measures Profit Margin Net income 1034599   0.124100448 Sales 8336787     Return on Assets Net income 1034599   0.015249602 Total Assets 67844326     Return on Equity Net income 1034599   0.127271587 Total equity 8129065   Market Value Measures Earning per share (EPS) Net income 1034599   0.25 Shares outstanding  4138396     Price-Earnings Ratio (PE) Price per share     3.46 Earning per share     13.9   Price-sales Ratio Price per share 3.46   1.73 Sales per share  2.0     Market-to-Book Ratio Market value per share  3.46   2.1 Book value per share  1.6   Du Pont Identity Du Pont Identity (ROE) Profit margin * Total asset turnover * Equity multiplier 0.127271587 Financial Ratios for year 2008 Short Term Solvency, Liquidity Measures Current Ratio Current Assets 9639   1.460012118 Current Liabilities 6602     Quick Ratio Current assets - Inventory 9639 - 1732 7907 1.197667374 Current liabilities 6602 6602   Cash Ratio Cash 4191   0.634807634 Current liabilities 6602     Net Working Capital to Total Assets Net working capital (CA - CL) 9639 - 6602 3037 0.035688685 Total assets 85097 85097   Interval Measure Current assets 9639 9639 347.2399843 Average daily operating costs (COGS/365) =10132/365 =27.7589 27.7589 Long Term Solvency Measures Total Debt Ratio Total assets - Total equity 85097-7747 77350 0.908962713 Total assets 85097 85097   Debt-Equity Ratio Total debt 1-Total debt ratio =1-0.908962 0.908962713 9.984510133 Total equity 0.091037287   Equity Multiplier 1+ Debt - equity Ratio 1+ 9.984510   10.98451013     Long-Term Debt Ratio Long-term debt 70748 70809 0.902082935 Long-term debt + Total equity 70748+7747 78495   Time Interest Earned Ratio EBIT 6674   1.774056353 Interest 3762     Cash Coverage Ratio EBIT + Depreciation 6674+3535 10209 2.713716108 Interest 3762 3762 Asset Management Inventory Turnover Cost of goods sold 10132   5.849884527 Inventory 1732     Days' Sales in Inventory 365 days 365   62.394394 Inventory turnover 5.849884527     Receivables Turnover Sales 16806   4.868482039 Accounts receivable 3452     Days' Sales in Receivables 365 days 365   74.9720338 Receivables turnover 4.868482039   Payables Turnover NWC Turnover Sales 16806 16855 5.549884755 NWC 9639-6602 3037   Fixed Asset Turnover Sales 16806   Net fixed assets 75458     Total Asset Turnover Sales 16806   Total assets 85097   Profitability Measures Profit Margin Net income 1825   Sales 16806     Return on Assets Net income 1825   Total Assets 85097     Return on Equity Net income 1825   Total equity 7747   Market Value Measures Earning Per Share (EPS) Net income 1825  0.10 Shares outstanding  18250     Price-Earnings Ratio (PE) Price per share  3.28  8.6 Earning per share  0.38     Price-Sales Ratio Price per share  3.28  32.8 Sales per share  0.10     Market-to-Book Ratio Market value per share  3.28  2.2 Book value per share  1.49   Du Pont Identity Du Pont Identity (ROE) Profit margin * Total asset turnover * Equity multiplier Financial Ratios for year 2009 Short Term Solvency, Liquidity Measures Current Ratio Current assets 10319   1.196267099 Current liabilities 8626     Quick Ratio Current assets - Inventory 10319 - 1773 8546 0.990725713 Current liabilities 8626 8626   Cash Ratio Cash 4374   Current liabilities 8626     Net Working Capital to Total Assets Net working capital (CA - CL) 10319 - 8626 1693 Total assets 91845 91845   Interval Measure Current assets 10319 10319 Average daily operating costs (COGS/365) =12672/365 =34.71781 34.71781 Long Term Solvency Measures Total Debt Ratio Total assets - Total equity 91845 - 12410 79435 Total assets 91845 91845   Debt-Equity Ratio Total debt 1-Total debt ratio =1-0.864881 0.86488105 6.400886382 Total equity 0.13511895   Equity Multiplier 1+ Debt-equity Ratio 1+ 6.40088   7.400886382     Long-Term Debt Ratio Long-term debt 70809 70809 Long-term debt + Total equity 70809 +12410 83219   Time Interest Earned Ratio EBIT 4183   Interest 3732     Cash Coverage Ratio EBIT + Depreciation 4183+3974 8157 Interest 3732 3732 Asset Management Inventory Turnover Cost of goods sold 12672   Inventory 1773     Days' Sales in Inventory 365 days 365   Inventory turnover 7.147208122     Receivables Turnover Sales 16855   Accounts receivable 3875     Days' Sales in Receivables 365 days 365   Receivables turnover 4.349677419   Payables Turnover NWC Turnover Sales 16855 16855 NWC 10319-8626 1693   Fixed Asset Turnover Sales 16855   0.206743861 Net fixed assets 81526     Total Asset Turnover Sales 16855   0.183515706 Total assets 91845   Profitability Measures Profit Margin Net income 182   0.010797983 Sales 16855     Return on Assets Net income 182   0.001981599 Total Assets 91845     Return on Equity Net income 182   0.014665592 Total equity 12410   Market Value Measures Earning Per Share (EPS) Net income 182   0.31 Shares outstanding  587     Price-Earnings Ratio (PE) Price per share  1.99   3.2 Earning per share  0.62     Price-Sales Ratio Price per share  1.99   5.1 Sales per share  0.39     Market-to-Book Ratio Market value per share  1.99   0.8 Book value per share  2.5   Du Pont Identity Du Pont Identity (ROE) Profit margin * Total asset turnover * Equity multiplier 0.014665592 Financial Analysis of TAQA’s economic performance: The financial Analyses above reveal some interesting information about Abu Dhabi National Energy Company. The main issues these analyses explain are highlighted as follows: (I) Level of Profitability: From the fiscal year 2007 to 2009, Abu Dhabi National Energy Company demonstrates a healthy level of profitability. This observation can be supported with the following data: In 2007, TAQA’s average profit margin was 0.12, and its returns on equity was approximately 0.12. These are encouraging figures because 2007 was a terrible year in the energy market. It was the period the oil price shot up to the sky and made energy business almost seemed unprofitable. However, TAQA was able to have an appreciable return on assets that worth 0.015. The following year (in 2008), TAQA’s profit margin increased considerably to 0.19, and its returns on equity did a lot better coming to 0.2, while the returns on asset surprisingly came to 0.02. These results indicate the fact that the profitability of TAQA increases every year. Although, the year 2009 is different because the financial crisis that began in the United States also affected TAQA, bringing its profit margin down to 0.01, its returns on equity plummeted to 0.014 and its returns on assets shrank to 0.001. However, there is every possibility that once the financial crisis is over, TAQA will be able to rebound to its profitability level. (ii) Degree of Solvency: The analyses from 2007 to 2009 clearly demonstrate that TAQA has a high capability of liquidity: the company can easily pay off all its short-term and long-term loans without actually affecting the usual working capital needed to run the day-to-day operations of the company. In 2007, the company-posted quick and current ratios were above 1, meaning that TAQA was financially strong enough to quickly offset its short-term debts; also in 2008 and 2009 respectively, the quick and current ratios released by the company were well above 1, a good sign that TAQA would have any problem paying off its loans to all the lenders within a short period of time. Of utmost interest is the debt ratio, which stood at less than 1 in 2007, 2008, and 2009 respectively. This demonstrates TAQA is far from being heavily indebted; and the company is financially healthy enough to expand its current operations or branch into any other field of production. (iii) Huge Turnovers: TAQA enjoyed huge turnovers for the past three years covered in the company’s financial analyses. In 2007, the total asset turnover stood at 0.12; in 2008, it increased to 0.19 and came to 0.18 in 2009. These figures indicate that the company’s payable turnovers are great when compared with that of other companies in the same field. Of special interest is the NWC Turnover which was 2.6 in 2007, shot up to 5.6 in 2008 and grew considerably to 9.9 in 2009! These figures show that the amount of sales TAQA made in recent years increases from one year to another. This is an encouraging development in the sense that it makes it possible to project future sales and expansion of the company’s products and services in the coming years. (iv) Enviable Asset Management: Looking at the analyses presented above, it is interesting to notice that TAQA’s assets appreciate considerably from 2007 to 2009. This gives the opportunity to forecast how the company’s assets are going to expand in the years ahead. In 2007, the asset inventory turnover of the company stood at 3.2; it suddenly increased to 5.8 in 2008 and peaked at 7.1 in 2009. This reveals that the trend will continue into 2010 and beyond. One important observation here is that TAQA’s management is made up of highly educated and experienced executives who understood the demand of their jobs. (v) Encouraging Market Value: One encouraging thing about TAQA is that its market value improves every year. In 2007, the company’s earning per share stood at 0.25; but in 2009, it surprisingly increased to 0.31. This is a positive development in the sense that the market value of TAQA’s share appreciates gradually each year. The market recognizes TAQA’s share value, and this has been the reason there was a recent surge in the number of investors coming to buy the company’s shares. Conclusion From the above analyses, it is clear that TAQA is one of the fastest growing energy company in the world, with branches in some great cities in Europe, Middle East and the Americas. The company has the potential of higher profitability, higher liquidity, huge turnovers, wonderful asset management and observable great market value. As a result of this, any investors planning to put his/her money into TAQA will never regret doing so as the company has lately expanded its services and market reach to some other cities. The advantage of this expansion is that it will bring more profits, huge assets and high level of liquidity to the company. Works Cited Bloomberg. TAQA:Abu Dhabi Security Market. Available at http://investing.businessweek.com/businessweek/research/stocks/financials/financials.asp?ticker=TAQA:UH&dataset=balanceSheet&period=A¤cy=native Accessed 6 May 2010. Btflive. Abu Dhabi National Energy Co. (TAQA).Available at http://www.btflive.net/exchanges/company.php?op=viewcompany&compid=146 Accessed 6 May 2010. Investopedia. Financial Analysis. Available at http://www.investopedia.com/terms/f/financial-analysis.asp Accessed 7 May 2010. TAQA. TAQA: About Us. Available at http://www.taqa.ae/en/abouttaqa.html. Accessed 6 May 2010. Share Wadi. TAQA-Abu Dhabi National Energy Company. Available at http://www.sharewadi.com/uae-company-details.php?company_ticker=TAQA Accessed 6 May 2010. Read More