Managing Finance - Research Paper Example

Managing Finance Executive Summary Managing finance is one of the important aspects of every business as it helps the companies to manage their resources proactively and also assist in planning the financing needs. The purpose of this paper is to show the financial position of Zain Telecom and Ooredoo Telecom for the year 2013 by doing the ratio analysis of both the companies. It reflects that the profitability position of Zain Telecom is better than Ooredoo Telecom because both the profitability ratios of the former one are greater in respect to the another one for both the years. The liquidity position of Ooredoo is better because the current ratio and the acid test ratio are 1.21 and 1.18 as compared to other one which is 1.03 and 1.01. The debtor collection period of Ooredoo is lower than its peer which signifies the early payment by debtors thereby indicating increasing efficiency of the company. The earnings per share of Zain Telecom are higher whereas, the price to earnings ratio is lower than Ooredoo which indicates that Zain Telecom is undervalued. Both the cash flow ratios of Zain Telecom are higher in comparison to another company. The Z-Score of Zain Telecom is also more than Ooredoo which means that there is no chance of bankruptcy for the former. The analysis reflects the current financial position of both the companies. However, highlights are given on the performance of both companies for the year 2012 also in the analysis section. The important issue is that both the companies are exposed to some kinds of risks so; they should adopt some risk mitigation framework in order to reduce the risks. Table of Contents Table of Contents 3 1.1 Introduction 5 2.1 Methodology 5 2.1.1 Ratio Analysis 5 2.1.2 Numerical Investigation 5 3.1 Limitations of ratio Analysis 6 4.1 Findings 6 4.1.1 Analysis and Interpretation of Results 6 Profitability Ratios 6 Liquidity Ratios 7 Efficiency Ratios 8 Investment Ratios 8 Financial Ratios 9 Cash Flow Ratios 10 Z-Score 10 5.1 Obstacles to meet Organizational Objectives 11 6.1 Conclusion and Recommendation 11 7.1 Use of Communication and Information Technologies 12 8.1 Reflection 12 9.1 Reference List 14 Appendix 2 18 Appendix 3 19 Appendix 4 20 Appendix 5 21 21 Appendix 6 22 Appendix 7 23 23 1.1 Introduction Management of finance is very significant for any company as it is connected to the resources of the company. By effectual management of finances the managers can protect their company from unstable mis-management of funds (Svtuition, 2010). Zain Telecom is a leading operator of mobile as well as data services with a viable footprint in the eight African and Middle Eastern countries along with more than 6000 employees. They started their operation in Kuwait and were the 1st mobile operator of that region in 1983 (Zain, 2014). Ooredoo Telecom having it’s headquartered in Kuwait and Qatar; is one of the largest global telecommunication companies of the world. It offers a wide range of mobile, digital, fibre and broadband services to over 2.5 million business customers and individuals. Ooredoo Telecom is investing in new areas of growth which signifies that they will invest in emerging innovations and in new businesses that offers growth opportunities (Ooredoo, 2014). Zain and Ooredoo telecom companies are chosen for the analysis and are also considered as a good basis for comparison because both are the largest global telecommunication companies of the world and both provides the mobile services to a large group of customers. The main objective of this report is to carry out the ratio analysis of both the companies to show their performance in the telecom sector. It also aims to show the risks to which both the companies are exposed while meeting their objectives. 2.1 Methodology 2.1.1 Ratio Analysis Ratio analysis is the significant tool for investigating the financial performance of the company. It helps in analysing the financial statements and the accounting ratios assist in knowing the company’s financial position. The ratios are also essential for evaluating the efficiency of the company in relation to its management and operations. On the basis of the ratio analysis, companies formulate their future plans. By doing the analysis of different ratios, companies come to know how well they are performing as compared to previous years as well as to its competitors (Khan and Jain, 2007). The profitability ratios signify whether the business assets are being utilized effectively in order to generate reasonable revenue. The liquidity ratios assist in determining whether the organization is capable to fulfil the financial requirements in short term. The efficiency ratios signify the level to which the assets have been capable in creating sales. Financial leverage ratios scrutinize the financial construction of the company. Investment ratios assist the investors to make their critical decisions (Flynn and Koornhof, 2005). 2.1.2 Numerical Investigation Numerical investigation is carried out by calculating different ratios such as profitability, liquidity, efficiency, investment, financial, and cash flow ratios as well as on the Z-Score to recognize the performance of both the companies for the year 2012 and 2013. The numerical investigation shows that Ooredoo Telecom is considered as more liquid company while the profitability ratios of Zain Telecom are higher. Both the financial ratios of Ooredoo Telecom are higher which indicates that it may be a risky company. The price to earnings ratio of Zain Telecom is lower than Ooredoo whereas the EPS is much higher (See Appendix 1). The analysis and interpretation of different ratios will be discussed in later section. 3.1 Limitations of ratio Analysis Ratio analysis gives useful information relating to the financial condition and operations of the company but it encompasses some limitations also that necessitate judgement and care. Some probable problems are discussed here: Many firms operate several divisions in dissimilar industries, and for those firms it is not easy to develop an important set of the industry averages. Thus, the industry average is more significant for small companies rather than large ones. To set objectives for the performance of high-level, it is better to set standard on the ratios of industry leaders rather than the ratios of industry average. Seasonal factors could also distort the ratio analysis (Ehrhardt and Brigham, 2013). 4.1 Findings 4.1.1 Analysis and Interpretation of Results Profitability Ratios Net profit ratio: This ratio is used to assess the profitability of the organization. It estimates how much of each dollar is transferred into profits (Prasad and Sinha, 1990). The net profit ratio of Zain Telecom is 19.67% for the year 2013 and 21.86% for 2012; and that of Ooredoo Telecom is 9.73% for the year 2013 and 13.90 for 2012. The ratio of both the companies has decreased as compared to previous year but the ratio of Zain Telecom for both the year is much higher than Ooredoo Telecom which signifies a high margin of safety for Zain Telecom and low for Ooredoo Telecom. It also indicates higher risk for Ooredoo Telecom. Profit before interest and tax (PBIT) ratio: It indicates the total amount of cash the company can be able to utilize to pay off its creditors. The PBIT ratio of Zain Telecom is 27.68% for 2013 and 29.46% for 2012; and that of Ooredoo Telecom is 11.51% for the year 2013 and 17.36% for 2012. This ratio of both the companies has also decreased as compared to previous year but the ratio of Ooredoo Telecom is less than Zain Telecom which signifies that the profitability position is not up to the mark. Net Profit Ratio Comparison PBIT Ratio Comparison Liquidity Ratios Current ratio: It is also known as working capital ratio. It signifies the altitude of cover that the organization has from its current asset to compensate its current liabilities (Weil, Schipper and Francis, 2012; Colombo and Stanca, 2006). The current ratio of Zain Telecom is 1.03 for 2013 and 0.79 for 2012; and that of Ooredoo Telecom is 1.21 for the year 2013 and 1.05 for 2012. Overall, Zain Telecom is having lower ratio than Ooredoo Telecom which indicates that Zain Telecom will face difficulties in paying its obligations. However, the ratio of Ooredoo Telecom is also not up to the level as it is required to maintain a current ratio of 2:1 for the better functioning of business. Acid test ratio: It is a good measure of indicating that how well the organizations can meet their short-term monetary liabilities (Mayo, 2007). The acid test ratio of both the companies is more than 1.0 which shows that both the companies can meet their liabilities of short term. The ratio of Zain Telecom is 1.01 for 2013 and 0.79 for 2012 and that of Ooredoo Telecom is 1.18 for 2013 and 1.03 for 2012. The ratio of both the companies has increased as compared to previous year. However, the overall ratio of Zain Telecom is less than another one which indicates that it is paying its bills too hastily or collecting its receivables too gradually. Current Ratio Comparison Acid Test Ratio Comparison Efficiency Ratios Asset turnover ratio: This ratio signifies that how well the company is making use of its assets in order to produce revenue (Gallagher and Andrew, 2007). The asset turnover ratio of Zain Telecom is 0.40 for 2013 and 0.44 for 2012, and that of Ooredoo Telecom is 0.35 for the year 2013 and 0.36 for 2012. There has been seen a slight difference in the ratios of both the companies for both the years. The ratio of Zain Telecom for both the years is higher than that of Ooredoo which shows that it can create more sales even with smaller quantity of assets. The ratio is Ooredoo is lower than Zain which means that it is not utilizing its assets in the best possible way. Debtor turnover ratio: The Company which are having a higher rate of turnover are actually doing more efficient management of their debtors (Svtuition, 2011). The debtor turnover ratio of Zain Telecom is 3.70 and Ooredoo Telecom is 5.11 for 2013 as well as 3.83 and 5.06 for the year 2012. Ooredoo is having higher ratio than Zain for both the years. The lower ratio of Zain Telecom indicates that they are not efficiently managing their debtors. Debtor days: It shows the average time taken to gather trade debts (Chandra, 2008). The debtor collection period of Zain Telecom is 103.11 days for 2013 and 90.86 days for 2012; and that of Ooredoo Telecom is 77.03 days for 2013 and 66.46 for 2012. The collection period of both the companies has increased in comparison to previous year. However, the debtor days of Ooredoo are less than Zain Telecom. It signifies the early payment by debtors of Ooredoo thereby indicating increasing efficiency of the company. It will help Ooredoo to calculate the real collection period. Asset Turnover Ratio Comparison Debtor Turnover Ratio Comparison Investment Ratios Earnings per Share (EPS): It is the main element used to compute the price-to-earnings ratio. EPS indicates how profitable the firm is on the basis of its shareholder. It verifies how many dollars of net profits is earned by every common stock shares (Khan and Jain, 2011). It is a measure of whole profitability position of the company. The EPS of Zain Telecom is 56 for 2013 and 65 for 2012; and that of Ooredoo Telecom is 8.05 for 2013 and 9.89 for 2012; which are much less than Zain Telecom. It is a signal of lower earnings of Ooredoo Telecom. However, the Earnings per Share of both the companies have decreased as compared to previous year. Price to Earnings ratio: This ratio assists the investors to make their decision whether to buy shares of a particular company or not (Wilson, 2012). The price to earnings ratio of Zain Telecom is 0.01 for both the years and Ooredoo Telecom is 13.94 for 2013 and 11.34 for 2012. Zain Telecom’s ratio is much less than Ooredoo which indicates that Zain Telecom is undervalued whereas high ratio of Ooredoo indicates that its shares are overpriced. Earnings per Share Comparison Profit to Earnings Ratio Comparison Financial Ratios Gearing Ratio: Zain Telecom’s ratio for the year 2013 is 0.25 and 0.56 for 2012; whereas that of Ooredoo Telecom is 0.56 for 2013 and 0.50 for 2012. Both the companies have shown a slight increase in their ratios as compared to previous year. The ratio of Ooredoo is higher as compared to Zain Telecom for both the years which mean that Ooredoo is a risky company and is more disposed towards the downturns. Debt to equity ratio: This ratio shows the proportion of financing of the company that comes from investors and creditors (Prasad and Sinha, 1990). The debt to equity ratio of Ooredoo Telecom is 1.28 for 2013 and 1.01 for 2012 and that of Zain Telecom is 0.34 for 2013 and 0.24 for 2012. Again both the companies have shown a slight increase but Zain Telecom’s ratios are less as compared to Ooredoo Telecom. It indicates the greater security or protection to the money of Zain Telecom. Gearing Ratio Comparison Debt to Equity Ratio Comparison Cash Flow Ratios Cash flow indicator (CFI) ratio: It gives the investors a thought about the ability of the company to turn its sales into the cash. The cash flow indicator ratio of Ooredoo Telecom is 34% for 2013 and 35% for 2012; whereas that of Zain Telecom is 38% for both the years which is higher than Ooredoo Telecom. It means that Zain Telecom can turn its sales into the cash and is also a more liquid company. Operating cash flow (OCF) ratio: It is a determination of how well the current liabilities were being covered by the operating cash flows. The operating cash flow ratio of Zain Telecom is 0.63 for 2013 and 0.61 for 2012 and that of Ooredoo is 0.49 for 2013 and 0.58 for 2012. Ooredoo’s ratio for both the years are less as compared to Zain Telecom which means that Ooredoo has produced less cash than it actually required in order to pay off its liabilities of short term at the end of the year. This indicates that it requires raising funds or it need more capital to meet its liabilities. Cash Flow Indicator Ratio Comparison Operating Cash Flow Ratio Comparison Z-Score It is preferred to maintain a Z-Score of 1.8 because lower than that indicates that the company is making its way towards the bankruptcy situation (Gravetter and Wallnau, 2013). It encompasses calculation of five different ratios. First is working capital divided by total assets, and it is regarded as a good analysis for company distress. Second is retained earnings divided by total assets. This ratio evaluates the sum of the reinvested earnings which shows the level of the firm’s leverage. Third is EBIT divided by total assets. It is an effective means of assessing the company’s capacity to squeeze the earnings from the assets. Fourth is market value of equity to its total liabilities. This ratio indicates that if the company were to turn into bankruptcy then how much the market value of the company would turn down before liabilities surpasses assets. Fifth is revenue divided by total assets. This ratio shows that how well the companies handle competition as well as how efficiently they use assets in order to make sales (Mendenhal, R. Beaver and B. Beaver, 2012). After calculating all the five ratios for both the companies it is analysed that Z-Score of Zain Telecom for both the years are higher than that of Ooredoo Telecom. Zain Telecom is having the Z-Score of 1.78 for 2013 and 2.67 for 2012 as compared to score of Ooredoo which is 0.96 for 2013 and 1.08 for 2012; and also the score of Zain Telecom is almost 1.8 for 2013 and more than 1.8 for 2012 which means that it is in the safe side and as of now there is no chance of bankruptcy. 5.1 Obstacles to meet Organizational Objectives The objective of Zain Telecom is to offer an exceptional service to their users wherever they are. While meeting their organizational objectives they are exposed to different types of risks. The environmental risks incorporate the costs related with energy use and waste management. They also face risks when host government raise the requirements of tax, inflict new penalties and change the agreements of management (Zain, 2011). The problems which are faced by Ooredoo Telecom while facing its objectives are the issues of government taxation. The issue is particularly critical as the cost of constructing infrastructure for the data is dissimilar from constructing infrastructure for the voice (Ooredoo, 2013). 6.1 Conclusion and Recommendation This report is about how to manage the finance of the companies. It focuses on the importance of doing ratio analysis along with its limitations. Both the Zain and Ooredoo Telecom are the largest global telecommunication companies of the world but somehow they differ in respect of their financial positions. The profitability ratios of Zain Telecom are higher than Ooredoo Telecom which indicates the high margin of safety for Zain Telecom. In terms of liquidity, Ooredoo Telecom is considered as more liquid company. The EPS of Zain Telecom is much higher than Ooredoo whereas the price to earnings ratio is much lower. Both the financial ratios of Ooredoo Telecom are higher which indicates that it may be a risky company. The cash flow ratios of Zain Telecom are higher which means that it can turn its sales into the cash. The Z-Score of Zain Telecom is also more than Ooredoo Telecom and is also near about 1.8 for 2013 and more than 1.8 for 2012 which indicates that there is no chance of bankruptcy for Zain Telecom and is also considered as a more liquid company. Both the companies are exposed to various types of risks so it is recommended that they should adopt various models of risk mitigation for clear functioning of the business. Network sharing should be well established as well as operators could look for other active forms of infrastructure rationalization. The companies can adopt holistic approach towards the improvements of business intelligence and also could turn their big data in a new income stream. 7.1 Use of Communication and Information Technologies Information technology and communication forms an important part in the management of business. While preparing this assignment, the computer application and information technology helps to retrieve data from various sources which further result in gaining experience and knowledge about the structure of company and also about the benefits of different ratios. By accessing the websites of the company, I came to know the different types of risks both the company faced while meeting their objectives. The annual report of both the companies assists in calculating the different ratios and therefore helped in gaining the knowledge of their financial performance. The sustainability report of Zain Telecom is also used to know the risks to which the company is exposed. The information technology also helped me in doing better communication through email as it is cheaper and faster from other modes of communication. 8.1 Reflection During the course of module and assignment, I gained sufficient knowledge on how to manage the finance of the companies. The importance of the module is that it helps me to understand different elements which come under each ratio as well as their importance in the business operations. There does not arise any obstacle while calculating the ratios as the figures are properly mentioned in the annual reports of both the companies. As an accounting user the annual report of the companies helps me to make good financial decision regarding the profitability, liquidity, and efficiency position of both the companies. It also assists me to do the interpretation of different ratios. For example, the profitability analysis shows the overall performance and efficiency of the company and the analysis of efficiency ratios signify how well the company utilizes their liabilities and assets internally. The analysis of cash flow ratio is more important than the profitability ratio analysis because it shows how viable, liquid and solvent the company is. The calculation is Z-Score is equally important as it indicates whether the company is in bankruptcy situation or not. 9.1 Reference List Chandra, P., 2008. Financial Management. New Delhi: Tata McGraw-Hill. Colombo, E. and Stanca, L., 2006. Financial Markets Imperfections and Corporate Decisions. New York: Springer Science and Business Media. Ehrhardt, M. and Brigham, E., 2013. Corporate Finance: A Focused Approach. United States of America: Cengage Learning. Flynn, D. and Koornhof, C., 2005. Fundamental Accounting. South Africa: Juta & Company Ltd. Gallagher, T.J. and Andrew, J.D., 2007. Financial Management: Principles and Practice. United States of America: Freeload Press. Gravetter, F. and Wallnau, L., 2013. Essentials of Statistics for the Behavioural Sciences. United States of America: Cengage Learning. Khan, M.Y. and Jain, P.K., 2007. Financial Management. New Delhi: Tata McGraw-Hill. Khan, M.Y. and Jain, P.K., 2011. Hinancial Management Text problem Cases. New Delhi: Tata McGraw-Hill. Mayo, H., 2007. Investment: An Introduction. United States of America: Cengage Learning. Mendenhall, W., Beaver, R. and Beaver, B., 2012. Introduction to Probability and Statics. United States of America: Cengage Learning. Ooredoo., 2013. Annual Report 2013. [pdf] Available at: [Accessed 12 Dec 2014]. Ooredoo., 2014. Ooredoo. [online] Available at: [Accessed 11 Dec 2014]. Prasad, M. and Sinha, K., 1990. Principles of Management Accounting. New Delhi: Motilal Banarsidass Publication. Svtuition., 2010. Importance of Financial Management. [online] Available at: [Accessed 11 Dec 2014]. Svtuition., 2011. Debtor Turnover Ratio. [online] Available at: [Accessed 12 Dec 2014]. Weil, R., Schipper, K. and Francis, J., 2012. Financial Accounting: An Introduction to concepts, methods and uses. United States of America: Cengage Learning. Wilson, D., 2012. Visual Guide to Financial Markets. New Jersey: John Wiley & Sons. Zain., 2011. Growth for a Wonderful World. [pdf] Available at: < http://www.zain.com/media/social_responsibility/zain-sustainability-report-english_1.pdf> [Accessed 12 Dec 2014]. Zain., 2013. Zain Annual Report 2013. [pdf] Available at: [Accessed 12 Dec 2014]. Zain., 2014. The World of Zain. [online] Available at: [Accessed 11 Dec 2014]. 10.1 Appendices Appendix 1 Numerical Investigation RATIOS Zain Telecom Ooredoo Telecom 2013 2012 2013 2012 Profitability Ratios Net profit ratio = (Net profit/revenue)*100 19.67% 21.86% 9.73% 13.90% PBIT ratio = (PBIT/REVENUE) * 100 27.68% 29.46% 11.51% 17.36%` Liquidity Ratios Current ratio = (Current assets/current liabilities) 1.03 0.79 1.21 1.05 Acid Test Ratio=((Current assets-stocks)/current liabilities) 1.01 0.79 1.18 1.03 Efficiency Ratios Asset turnover ratio = (Sales/total assets) 0.40 0.44 0.35 0.36 Debtor Turnover Ratio=(Sales revenue/Average debtor) 3.70 3.83 5.11 5.06 Debtor days = ((Trade debtor * 365)/sales) 103.11 90.86 77.03 66.46 Ans. In Times Investment Ratios Earnings per Share (EPS)=((Profit after tax-Preference share dividend)/no. of ordinary share) 56 65 8.05 9.89 Price to Earnings Ratio=(current share price/EPS) 0.01 0.01 13.94 11.34 Current Share Price of Zain Telecom = 0.50 Current Share Price of Ooredoo Telecom = 112.2 Financial Ratios Gearing ratio=(Long term debt/(Equity+Long term debt)) 0.25 0.20 0.56 0.50 Debt to equity ratio = (Long term debt/(Equity) 0.34 0.24 1.28 1.01 Cash Flow Ratio Cash flow indicator ratio=(Operating cash flow/net sales) 38% 38% 34% 35% Operating cash flow ratio=(Operating cash flow/current liabilities) 0.63 0.61 0.49 0.58 Z-Score Z-Score = 1.2 A + 1.4 B + 3.3C + 0.6D + 1.0E 1.78 2.67 0.96 1.08 A = (Working capital/Total assets) B = (Retained earnings/Total assets) C = (Earnings before interest and tax/Total assets) D = (Market value of Equity/Total liabilities) E = (Sales/Total assets) 2013 Zain Telecom=(A-0.01, B-0.16, C-0.11, D-1.32 , E-0.40) Z-Score of Zain=1.2*0.01+1.4*0.16+3.3*0.11+0.6*1.32+1.0*0.4=1.78 Ooredoo Telecom=(A-0.05, B-0.09, C-0.04, D-0.49, E-0.35 Z-Score of Ooredoo=1.2*0.05+1.4*0.09+3.3*0.04+0.6*0.49+1.0*0.35=0.96 2012 ZAIN Telecom=(A-0.06, B-0.17, C-0.13, D-1.40, E-0.44 Ooredoo Telecom=(A-0.01, B-0.10, C-0.06, D-0.64, E-0.36 Z-Score of Zain=1.2*0.06+1.4*0.17+3.3*0.13+0.6*1.40+1.0*0.44=2.67 Z-Score of Ooredoo=1.2*0.01+1.4*0.10+3.3*0.06+0.6*0.64+1.0*0.36=1.08 (Refer to Appendix 2, 3, 4, 5, 6, and 7 for the income statement, balance sheet and cash flow statement of both the companies in order to view the amount of above mentioned data.) Appendix 2 (Source: Zain, 2013) Appendix 3 (Source: Zain, 2013) Appendix 4 (Source: Zain, 2013) Appendix 5 (Source: Ooredoo, 2013) Appendix 6 (Source: Ooredoo, 2013) Appendix 7 (Source: Ooredoo, 2013) Read More