Finance

Posted: August 12th, 2013

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Finance

Abstract

ALDAR is among the leading property development countries in Abu Dhabi, one of the fastest growing cities in the world. It has engaged in many property development and other operations. This has lead to it having a huge asset to operate with, which is largely financed by loans. This paper analyzes the financial statements of 2011 and provides detailed ratio analysis with interpretation of the financial status of the country. One thing is clear that, ALDAR is in a position to pay up its current debts and make profits. However, the fact that majority of its assets are financed by debts puts the company in some greater risks as it would be if majority of finance came from shareholders. Additionally, the company holds a lot of inventories, which make it hard to achieve optimal efficiency. More so, the Profitability ratios show that the company has many expenses including costs of sales that are contributing to the low profit margins.


Table of contents

  1. 1.      liquidity ratios ………………………………………………     2

1.1.   Current ratio ……………………………………………………………   3

1.2.   Quick ratio ……………………………………………………………..    3

1.3.   Net working capital ratio ………………………………………….    3

  1. 2.      Asset management ratios ………………………………………………    4         

2.1.   Inventory turnover ratio ……………………………………………   4

2.2.   Receivable turnover ratio ………………………………………….    5

2.3.   Fixed asset turnover ratio ………………………………………….  5

2.4.   Total asset turnover ratio ………………………………………….    6

  1. 3.      Profitability ratios v ………………………………………..     6

3.1.   Gross profit margin………………………………………………….     6

3.2.   Operating profit margin …………………………………………..     7

  1. 4.      Debt management ratio ……………………………………………….     7

4.1.   Debt to asset ratio……………………………………………………     7

4.2.   Debt to equity ratio …………………………………………………    8

  1. 5.      Returns ratios …………………………………………………………….      8

5.1.   Return on assets …………………………………………………….      8

5.2.   Return on equity ……………………………………………………      8

Liquidity ratios

Liquidity ratios are quite important for any business since they indicate the ability of the firm to meet its most current liabilities using its current assets in case of liquidation. It also indicates to the suppliers that the company will be in a position to pay its debt in the near future.

Current ratio

The current ratio = current assets

Current liabilities

= 21,252,632 / 18,311,503 = 1.5

The current ratio of ALDAR is 1.5, which means that the company is in a position to pay up its current liabilities one and a half times using its liquid assets. This shows that the company has enough liquefiable assets within one year to pay for its debts that are due in one year. For such an industry, a current ratio of 1.5 is acceptable.

Quick ratio

Quick ratio =   quick assets

Current liabilities

Quick assets = current assets – inventories which is = 21,252,632 – 4,719,722 = 16,532,910

= 16,532,910 / 18,311,503 = 0.9

At 0.9, the quick or acid test ratio indicates that the company’s most liquid assets, excluding inventories or those that cannot be turned into cash immediately, are not in a position to cover the short-term liabilities. This could indicate that the company has a lot of inventory held within the company for long. However, this may not indicate the real situation considering that a company could be having little cash in the bank while some money may be received soon.

Net working capital ratio

Working capital = current assets – current liabilities

= 21,252,632 – 18,311,503 = 2,941,129

This indicates that the company is in a position to pay up for its short-term liabilities, which is similar to the current ratio. A positive working capital could as well mean that the company is in a position to expand its business operations internally without having to take up huge loans from the banks. To the suppliers, this indicates that ALDAR is in a position to pay it payables, which increases its credit worth. This will confirm to the suppliers that they can continue doing business with the company.

The liquidity ratios indicate that the company is capable of paying up for its short-term debts without straining. Liquidity ratios show the ability of the company to meets its short-term liabilities. With a positive net working capital and a 1.5 current ratio, the company is in a position to cover the debts without needing to take up any loan. Although the quick acid test shows the company may not be in a position to pay up its current liabilities with the most liquid assets, it can be taken into consideration that some of the company could be receiving more cash from creditors. The acid test ratio cannot be considered as independently to show the financial position of the company.

Asset management ratios

ALDAR holds a lot of assets that are worth huge amounts of money. Therefore, it is essential to analyze the efficiency of these assets in terms of generating revenues and profit for the company. Some of the asset management ratios that will be used include inventory turnover ratio, receivable turnover ratio, fixed asset turnover and asset turnover ratios.

Inventory turnover ratio

= net sales / inventory

=6,742,590 / 4,719,722 = 1.4

This indicates that the company sold 1.4 times of the inventory made that year. This is quite low for inventory turnover, which could indicate inefficiency considering that inventory is supposed to have a zero return. Additionally, it could indicate that the company is not doing well in terms of selling its products. This could also indicate overstocking and poor liquidity. Considering the quick ratio, it is possible the company is overstocking since after subtracting the inventory from current assets to calculate the quick ratio it was below 1. Therefore, the company needs to stop overstocking and increase its sales as well.

Receivable turnover ratio

= credit sales

Average receivables

= (5,241,319 + 5,452,541) / 2 = 5,346,930

= 6,742,590 / 5,346,930 = 1.3

Receivable turnover ratio indicates the average number of times a business managed to collect its receivables within the accounting period. Therefore, this means that ALDAR was only able to collect receivables 1.3 times during the year. A higher receivable turnover ratio is favorable to any business. However, this does vary from across one industry to the other. For ALDAR, this is quite impressive considering the company engages in long-term property developments that require heavy investment. Therefore, customers may require long credit periods in order to pay for the amount.

Fixed asset turnover ratio

Considering ALDAR engages in property development as its main business, it requires a lot of plant and equipments for this purpose. Therefore, it is important for the company to calculate this ratio that indicates the efficiency of the fixed assets in generating sales or revenue.

= net sales / net fixed assets

= 6,742,590 / 4,866,346 = 1.4

A fixed asset turnover ratio of 1.4 indicates that the company is able to generate sales using its fixed assets 1.4 times. A low fixed turnover rate indicates that a company is either not making enough sales, or the investment in the fixed assets is quite high. For ALDAR, I could consider high amounts of fixed assets to be the reason considering they made some disposal in the previous year but still have them in plenty.

Total assets turnover ratio

This is as important for the company as the fixed assets turnover ratio. This ratio will indicate the efficiency of all the assets, both current and non-current assets.

= net sales / total assets

= 6,742,590 / 40,117,914 = 0.168

Expressed as a percentage it is 16.8% meaning that the total assets are only able to generate 16.8% of sales. As the previous ratio indicated, this one as well could indicate a high asset that needs to be reduced or lack of sales from the company.

Profitability ratios

Profitability ratios on the other hand seek to measure the amount of earnings that a company will generate out of its sales or revenue. The owners of the company are much interested in these ratios since they indicate the profitability of the company, which is their main aim of investing. Additionally, a company may make sales but make no profits. Therefore, calculating profitability ratios analyze the ability of the company to make profits out of its revenue as well as indicate the financial health of the company.

Gross profit margin

= (Gross profit / Revenue) × 100

= (1,645,525 / 6,742,590) 100 = 24.4%

Gross profit margin indicates the gross profit as a percentage of the revenue, which further indicates the cost of goods as a percentage to revenue. 24.4% is the percentage amount of revenue left after the cost of goods is subtracted, meaning that the cost of goods is quite high at 75.6%. This means that the cost of manufacturing the goods and selling hem to the customers are quite high. The company should aim at reducing this cost as much as possible.

Operating profit margin

= (EBIT / net sales) 100

= 642,491 / 6,742,590 = 9.5%

The operating profit margin looks at the earning before interest and tax as a percentage of the sales. It indicates the overall operating efficiency of the company, where it includes all the expenses except the interest and tax. Therefore, the expenses of the company are quite high at 90.5%.

Debt management ratios

Debt ratios are a way of looking at how the company utilizes its debts in order to finance its assets.

Debt to asset ratio

= total debt / total assets

=total assets = total assets – owners equity = 40,117,914 – 7,093,575 = 33,024,339

= 33,024,339 / 40,117,914 = 0.82

The debt to asset ratio is 82%, which means that 82% of the assets are purchased using debts. The rest is invested using the owners’ equity. This is quite high from a general point view. However, without industry analysis it would not be possible to comment.

Debt to equity ratio

= total debt / total owners equity

= 33,024,339 / 7,093,575 = 4.65

This means that the debt is 4.65 times the size of the owners’ equity. It shows that the owners’ equity makes up just a small portion of the source of finance.

Returns ratios

Returns ratios include, return on assets and return on equity

Return on asset

= net income / total assets

= 642,491 / 40,117,914 = 0.016 or 1.6%

This means that the profit earned by ALDAR in relative to its investment is 1.6%, which is quite low and needs to be improved.

Return on equity

= net income / equity

=642,491 / 7,093,575 = 0.09 or 9%

This means that equity had a return of 9%, which is higher than the return on assets. However, this can be explained by the high debt to equity ratio where majority of financing is done using debt.

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