Ratio Analysis of Properties PJSC - Case Study Example

Task: Ratio Analysis of Properties PJSC Introduction Ratio analysis is a technique used by individuals to analyze the information in a company’s financial statements (Gallagher and Joseph 150). The ratios are calculated and compared with the previous years to aid in the analysis of the performance of the company. These ratios include the liquidity ratios, the management ratios, profitability ratios and other ratios. The financial statements such as the balance sheets, cash flows, income statements, and other financial statements are used. Abstract Emaar Properties PJSC is a business entity involved in the provision of the hotel services in the Middle East. It is based in Dubai, and it owns a wide range of hotel facilities and resorts all over the world. The firm has grown tremendously over the years into a looming revenue entity. The financial statements dated as at 31 December 2012 depicts that the company has experienced a flat growth rate. Their revenues have not improved tremendously, but the company continues to enjoy profits. This ratio analysis of the company performance in the fiscal year 2012 is depicted below. The values are given in terms of thousands of United Arab Emirates Dirham. This propagates to the share values indicated as 0.35 AED per share. These ratios are essential for the company in determining the profitability of the firm and allow for proper financial planning (Gallagher and Joseph 268). The company can also use this information in determining solvency and carry out a better financial analysis. Performance analysis is also done completely in terms of the financial transactions undertaken. These financial statements and ratios help in the prediction of various trends in the production of the factors of the production. Liquidity Ratios These are the ratios, which show the possibility of turning assets into cash. This is important in determining the solvency of the firm. They include current ratio, quick ratio, and working capital. They are necessary in the endeavor to satisfy the day-to-day running of the business and other short term running of the firm (Gallagher and Joseph 479). Current ratio This is the ratio of the current assets to the current liabilities. Current ratio = total current assets/ total current liabilities Current ratio shows the financial liquidity and the market capability of meeting their current requirements; their assets are able to cover for their liabilities (Gallagher and Joseph 561). The firms are able to meet their debt repayment by using the value of the available current assets because the ratio is greater than 1:1. The ratio for Emaar Company is about 5:1. Therefore, the company can easily pay for their liabilities using the current assets. Quick ratio or acid test ratio This is the difference between current assets and inventories divided by the liabilities, which are current. Emaar holdings enjoy a higher customer’s liquidity in the payment of the debt. It provides the answer to the possibility of paying current liabilities without selling the inventories. Therefore, they can easily pay their current liabilities without the need to sell the inventories. Quick Ratio or acid test ratio = (current assets – inventories)/ current liability Working capital According to Gallagher and Joseph, this is a measure of the cash flow of the firm rather than being a ratio. It is the difference between the total current assets and the total current liabilities. It is the measure of the liquidity that indicates the equity in the working capital, and it is positive hence a formidable business. A negative value indicates that the liabilities exceed the cash that the firm possesses. The Emaar company has a high working capital; therefore, they can easily pay their current assets using the current assets. Working Capital = Total Current Assets - Total Current Liabilities Leverage Ratios These are ratios, which show the extent to which the business expresses their reliance on the creditors for their whole processing. Therefore, it is an indication of the amount of debt that is used to support the operations and resources of the company. Debt Ratio = Total Liabilities / Equity (net) Worth It shows the extent the firm is in a debt by comparing the firm’s net worth to their debts. Debt to assets ratio This is the ratio of the total assets to liabilities. It is necessary for unlimited companies since the sale of the assets can get used in the payment of the debts Debt ratio = total liabilities/ total assets Debt to equity ratio This is the ratio of the total liabilities to the total equities. This is necessary in showing the possibilities of the payment using the equities. It is the measure of the leverages that are substantiated by the owners and the lenders (Gallagher and Joseph 322). The ratio for Emaar Company is very low indicating that the stockholders equities can get used in the payment of the long-term liabilities. Debt to equity ratio = long term liability/ stockholder’s equity Times covered ratio This is the ratio of the net income to the annual interest expense of the company. It measures the ability of Emaar Company to meet its fixed interest payments. Times covered ratio = income before taxation and interest/ annual interest expense Inventory turnover This is a resource, which offsets for the considerable management attention in the firm in general. In is the ratio of the annual sales to the inventories. The shorter the time the goods spend in an inventory, then the better the company returns in terms of the revenue. The turnover indicates the annual sales per unit inventory. The higher the value, the more the return expected for the company. Inventory turnover = annual sales / inventory Total assets turnover This is the ratio of the annual sales to the total assets. It depicts the efficiency of the use of assets in the support of the sales of the company. It indicates the turnover of each unit of asset invested. A higher value suggests the effective utilisation of resources such as assets in the realisation of higher sales. Total asset turnover = annual sales / total assets Income Statement Ratios These are the measures of the revenue of the company in relation to the sales, equities or assets. This is essential in the comparison of the firm function over a gives substantial fiscal period. They include the net profit margin, gross profit margin, return on equities, and return on assets. Gross margin ratio It is the ratio of the gross profit (net sales – cost of the goods sold) to the net sales. A higher gross margin is indicative of more extra sales that are available for the payment of the overhead expenses of the company. It also shows the firm’s utilisation of the factors of production. Gross Margin Ratio = Gross Profit / Net Sales Net profit margin ratio This is the average sales percentage left on subtraction of the expenses except the income tax from the sales. It is necessary in comparing the company’s performance with other similar companies in the industry. It is obtained after taxation due to the difference in tax liabilities and tax rates of the different companies, which later affects the operations of the company. Net Profit Margin Ratio = Net Profit after Taxation / Net Sales Return on stakeholder’s equity This is the ratio of the net income to the average shareholder equity. It shows the effect of the shareholder’s contribution to the firm. It portrays the success of the firm in the management of the capital, operations, and assets contributed by the stakeholders to enhance productivity of the firm. ROE = net income / average shareholder equity Management Ratios Return on assets ratio It indicates how efficient the profits get generated from the business assets. A high ratio is indicative of the efficient utilisation of the assets of the business. A low rate depicts inefficiency in the asset utilisation. It reveals the management’s effectiveness in profit generation from its assets. Return on Assets = Net Profit after Taxation / Total Assets Return on investment It is indicative of the returns percentage on the capital that is invested in the business undertaking. This allows the owner to assess the productivity of the firm in general. It allows them to make decisions concerning the next steps the business should undertake in their production feasibility (Gallagher and Joseph 154). Return on Investment = Net Profit prior to Tax / Net Worth Stock Ratios These ratios show the stocks of the companies per unit share. They measure the comparative valuation of the company in the market. They are very essential in the stock valuation. They are necessary for potential investors in making decisions about a potential investment opportunity. They include earnings per share, price earnings ratio, dividends per share, book value per share, payout ratio, annual sales per share, and price to sales ratio. Earnings per share This is the outcome of the whole business process in terms of the revenues to the shareholders. It shows the revenues per share invested in the company. The company projected earnings of 0.35 AED per share. Earnings per share = (net profit after taxation – preferred dividends) / outstanding shares Price earnings ratio This is the comparison of the earnings per share to the market price of the common stock. The data could be used in analysing the stock listings over a range of fiscal periods. This data will show the trends in the earnings per share. This value can be calculated owing to the trending market price of the common stock Price earnings ratio = market price of common stock/ earnings per share Price to sales ratio This is a ratio used to analyse the overpricing of shares or stocks that require to be avoided. The lower the ratio, the lower the tendency or possibility of overpricing. These values can only be obtained on consideration of the market price of the common stock, which keeps on fluctuating. Price to sales ratio = market price of the common stock / annual sales per share The Emaar Properties Financial Ratios As At 31 December 2012 Current ratio = total current assets / total current liabilities =18113121 / 322625= 5.1:1 Quick Ratio or acid test ratio = (current assets – inventories)/ current liabilities = (18113121 – 173839)/322625 =4.4:1 Working Capital = Total Current Assets - Total Current Liabilities = 18113121 - 13921588 = 4191533 Debt Ratio = Total Liabilities / Equity (net) Worth = 28331861/ (61151191 – 28331861) = 0.86:1 Gross Margin Ratio = Gross Profit / Net Sales = 4178877/8239928 = 0.5:1 Net Profit Margin Ratio = Net Profit after Taxation / Net Sales = 2106924/ 8239928 = 0.26:1 Return on Assets = Net Profit after Taxation / Total Assets = 2106924/61151191 =0.034:1 Return on Investment = Net Profit after Tax / Net Worth = 2106924/ (61151191 – 28331861) = 0.06:1 Debt ratio = total liabilities/ total assets = 28331861/ 61151191 = 0.46:1 Debt to equity ratio = long term liability/ stockholder’s equity = 14410273/32819330 = 0.44:1 Times covered ratio = income before taxation and interest/ annual interest expense = 2111161 / 12200 =173:1 Inventory turnover = annual sales / inventory = 8239928 / 173839 = 47.4:1 Total asset turnover = annual sales / total assets = 8239928 / 61151191 = 0.13:1 Return on stakeholders equity = net income / average shareholder equity = 2106924/ 32819330 =0.064:1 Earnings per share = (net profit after taxation – preferred dividends) / outstanding shares = (1834829 – 32367)/6503010 = 0.35 AED Price earnings ratio = market price of common stock/ earnings per share = market price of common stock/ 0.35 AED Summary The financial statements show that there is a high turnover from the business practises of the company. The firm has maintained the earnings per share compared to the previous year. This shows that the company has been instrumental in maintaining these earnings. The change in the earnings per share between 2011 and 2012 financial years depicts a rise by a small margin. Therefore, the company is financially stable in relation to its undertakings. Work cited Gallagher, Timothy J, and Joseph D. Andrew. Financial Management: Principles and Practice. Upper Saddle River, N.J: Prentice Hall, 2003. Print. Read More