Organizations use financial information for decision making. Multiple techniques are nowadays used by the management depending upon the nature and purpose of information. Ratio analysis has been used for making comparisons of data of multiple periods to check profitability, liquidity and solvency of an entity. NPV method is used for calculation of the net present value of the project for decision making. The time value of money is also applied in long term decisions along with the NPV method. In time value of money future cash flows are discounted to calculate their present values. The cost of capital or the inflation rate is commonly used for discounting cash flows. Payback period and other associated techniques are used to calculate the period in which investment turns into profits. Entities require finance to continue existing or start new projects. Multiple sources of finance are available for the. Financing remains a hot issue for the entities. Which requires the utmost care to be addressed. There are three major types of finance. These are internal, external and Government sources of finance. Internal sources of financing are retained earnings, issuance of ordinary and preference shares, issuance of certificates, bonds, etc. External sources of finance are debentures, stocks, Term finance certificates, Fixed and floating charges, Mortgage etc. The third source of finance under this classification depending upon its availability is Government which include government grants, start-up loans, etc. Financial statements of Du and ETISALAT are downloaded. The statement of financial position and statement of profit or loss is attached at the end of the document. These are two different companies in the telecommunication sector. Both of them are registered in the UAE stock market. We would analyze their performance using ratio analysis and relate their profitability with capital management.
This method is used for the evaluation of financial information. In this technique, the comparison is being made upon multiple basis. The most commonly used basis are industry ratio, previous year and other entity. We would use the basis of different entities. DU and ETISALAT are two different entities. We would compare the performance of both in Profitability, Liquidity and Solvency ratios.
The profitability ratio is a ratio that is used by an entity to make a comparison between components of income with revenue. The net profit ratio of DU is 13.166 %, while for ETISALAT it is 18.91%. This shows that the operating expenses of DU are high. Moreover return on assets and equity for DU are 9.60%and 21.48%, while for ETISALAT is 7.62% and 17.39%. This shows that the management of DU is effectively using its resources. While ETISALAT has a high operating profit margin but effective usage of resources is less then DU.
Liquidity ratio compares the ability of a company to pay its current liabilities with current assets. Generally three types of ratios are discussed in this section. The current ratio compares current assets with current liabilities. While for quick ratio calculation, we should minus inventory from current assets. If the value is greater than 1, it means current assets can pay current liabilities. Generally higher liquidity ratios are maintained to pay current liabilities of the company. The current ratio of DU is 1.09 while for ETISALAT is 1.07. Quick ratio for DU and ETISALAT are 1.07 and 1.06 respectively. These ratios show that DU has more liquidated assets then ETISALAT. WCC days of DU and ETISALAT are -152 and -138 days. This shows that both of these companies use supplier resources to run their operations.
Solvency ratio measures of the ability of the company to meet long term obligations. Multiple ratios are used for solvency checks of organizations. The debt ratio is measures of dependence of a company on debt financing. If the debt ratio is higher than unity it means capital provided by lenders is greater than capital provided by financial institutions. Therefore, Investors consider it risky to invest in a company with a debt ratio higher than unity. DU is more dependent upon external financing then ETISALAT. The interest coverage ratio is a measure of the company's ability to meet its interest payments. DU has a strong interest conversion ratio. This shows that their finance cost is less as compare to ETISALAT. Equity multiplier is a comparison of total assets with total shareholder’s equity. Both entities have the same equity multiplier. Gearing ratio compares company debt relative to different financial metrics such as total equity. DU and ETISALAT have 21% and 26% respectively. ETISALAT has more long term liabilities then DU.
These are the ratio depicting the operating effectiveness of an entity. Different ratios are commonly used by the entities like inventory turnover, conversion period, receivable turnover or conversion period, etc. Inventory turnover is the number of time purchases is converted into sales in one year. Receivable turnover is the number of times businesses collect receivables Payable conversion period mean time period in which businesses pay the payables. Inventory days of DU are more then ETISALAT because of a more receivables period. ETISALAT has more inventory turnovers then DU because of small Inventory days.
These ratios are mostly used by investors to calculate the ability of businesses to give a return on investments. Earnings per share is a one-off method used to calculate investor ratio. EPS is used to calculate how much return the company earns for each share of its stock. Higher EPS attracts the investors to invest in a company. ETISALAT has a strong investor ratio.
Financing mode affects the performance of an entity. Capital Budgeting techniques involving time value of money, discounted payback, IRR, NPV, etc. These techniques involve calculation and analysis of results for investing in projects and products. ETISALAT has a strong profit ratio but it has less return on assets and equity then DU. Management of DU is using its resources more effectively. It has a high royalty fee. DU and ETISALAT both have large payable conversion n period but it has serious effects on the liquidated assets and current liabilities which give rise to debt ratio, current ratio and quick ratio. Consolidated net profit of ETISALAT after Federal Royalty grew by 0.3% to AED 8.4 billion resulting in profit margin of 16%. Net profit was impacted by higher share of losses from associates and higher royalty charges. EPS of ETISALAT is strong which is attracting investors to invest. Growth and development of business has changed the art of earning profits. People use resources with smartness. Organization are not completely dependent upon equity capital. They use equity and debt financing to earn profits. Capital Management is an art of using resources to increase profits. This method uses both type of finance.
Financial leverage is also encountered in this way. Financial leverage is an extent up to which investments are made in fixed instruments and derivatives. Risk and return is also used along with these methods to evaluate the relationship between risk involve in relevant sector and rate of return. Capital expenditure of DU was AED 1.6 billion in 2017, down 10.7% from AED 1.8 billion in 2016, a trend we expect to continue in the future. They have aligned their capital expenditure to business priorities, such as the fiber rollout for 5G readiness, and reduced investment in non-essentials. Total consolidated debt of ETISALAT amounted to AED 24.7 billion as of 31 December 2017, as compared to AED 22.3 billion as at 31 December 2016 an increase of AED 2.4 billion.
DU should use its assets in projects/ products where there is a strong GP ratio. It should less it's WCC days to coupe up with challenges. ETISALAT Management shall use capital budgeting techniques while deciding whether to start or not project. It should put serious efforts to reduce selling and admin overheads. Smart management of resources would be fruitful for its going concern. ETISALAT and DU are using the concept of capital management through different techniques. ETISALAT has made investments in multiple entities in multiple countries at low percentages. DU has made in huge capital investments in few entities in order to earn higher profits. Total revenue of DU grew to AED 13 billion for 2017, up by 2.2 percent from 2016’s AED 12.7 billion. Growth in revenue is attributed to the increase in both mobile and fixed revenue. Fixed revenue grew to AED 2.3 billion in 2017from AED 2.2 billion in 2016.Mobile revenue grew to AED 9.7 billion in 2017from AED 9.6 billion in 2016.EBITDA recorded for 2017 was AED 5.2 billion, a negative growth of 3 percent compared to the previous year’s AED 5.4 billion. Management continue to focus on improving efficiency and cost control measures to maintain EBITDA level. Etisalat Group’s consolidated revenue declined 1% to AED 51.7 billion in 2017 impacted by unfavorable exchange rate movements mainly in Egypt. In constant currencies, year over year revenue growth was 2%..
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