Financial Ratio Analysis And Industry Averages Finance Essay

Financial Ratio Analysis And Industry Averages Finance Essay The price earning P/E ratio shows how attractive a firms stock is for investment. The P/E of Etisalat has increased from previous year 2009 which shows that in 2010 Etisalat has become more attractive for investments. Profitability Ratios Return on Common Equity (ROCE or ROE) ROE = Earnings after Tax à · Equity Shareholders fund x 100 This ratio shows the rate of return of the risk takers also referred to as the stockholders (Sinha, 2009). The ratio shows the stockholders or investors the rate of return of their investments in stocks of Etisalat. The following table shows the ROE ratio for Etisalat: Financial Ratios 2010 2009 Profitability ROE 20.41 22.17 The above table clearly shows that the rate of return for the shareholders of Etisalat has reduced from 22.17% in 2009 to 20.41% in 2010. Therefore the risk of investment in stocks of Etisalat has increased in 2010 comparing with the ratio of 2009. ROA (Return on Total Assets) Return on Total Assets (ROA) = (Net Income à · Total Assets) x 100 Higher ROA indicates the higher return on Assets, this ratio must be above the industry average to show greater returns on Assets (Brigham Houston, 2009). Note: another reason for a low ROA could also indicate the intentional use of debt for financing activities of a firm. The following table shows the ROA calculated for Etisalat. Financial Ratios 2010 2009 Profitability ROA 9.74 12.40 The ROA for Etisalat has reduced in 2010 to 9.74% from 12.40% in 2009, which shows the reduced rate of return on assets, indicating the poor performance of Etisalat also showing the use of debt by the firm. Liquidity Ratios: Current ratio Current Ratio = Current Assets à · Current Liabilities The ratio shows the weak or stronger liquidity position of a firm, higher the current liabilities lower the current ratio and vice versa. The calculated ratios of Etisalat are shown in the following table: Financial Ratios 2010 2009 Liquidity Current Ratio 0.79 0.83 The liquidity position of Etisalat has reduce negatively when comparing current ratio of 0.79x in 2010 with 0.83x in 2009, consequently the ability of Etisalat to convert its assets into cash has reduced. Quick Ratio Quick, or acid test, ratio = (Current assets Inventories) à · Current Liabilities Quick Ratio also depicts the liquidity position of the firm to pay off short-term liabilities without relying on sales (inventories). The following table shows the calculated Quick Ratio for Etisalat. Financial Ratios 2010 2009 Liquidity Quick Ratio 0.78 0.82 Acid test of Etisalat revealed that the liquidity of the firm to pay shot-term liabilities has reduced from 0.82x in 2009 to 0.78x in 2010. Asset Management Ratios Inventory Turnover Ratio Inventory Turnover Ratio = Sales à · Inventories This ratio shows the number of times inventories are turned over into sales, and higher value shows that the inventories are being held for longer times. The Inventory turnover ratio of Etisalat is shown by the following table. Financial Ratios 2010 2009 Asset Management Inventory Turnover Ratio 100.96 115.03 The ratios in the table clearly show the ability of Etisalat to convert inventories into sales has increased shown by declining Inventory Turnover Ratio of 100.96x in 2010 from 115.03x in 2009. Debt Management Ratios Total Debt to Total Assets Debt ratio = Total Debt à · Total Assets This ratio shows in percentage the risk level faced by the firm, the debt ratio of Etisalat is shown with the help of following table: Financial Ratios 2010 2009 Debt Management Total Debt to Total Assets Ratio 6.34 4.52 The values in the table above show that the risk of investing in Etisalat has increased from 4.52% in 2009 to 6.34% in 2010. Financial Profile Emirates Integrated Telecommunications Company PJSC and its Subsidiary The financial profile of Emirates Telecommunication is presented by the data retrieved from financial statements of the firm. Financial Ratio Analysis Emirates Integrated Telecommunications Company PJSC and its Subsidiary 2010 and 2009 Data retrieved from the Financial Statements 2010 2009 AED000 AED000 Current Assets 4,671,779 2,224,887 Total Assets 12,519,678 9,531,905 Current Liabilities 6,441,462 3,676,842 Total Liabilities 7,423,911 6,740,365 Inventories 47,300 38,931 Sales Revenue 7,074,097 5,338,699 Interest 102,199 12,998 EPS AED 0.31 AED 0.06 N.I. 1,310,431 264,124 Market Value Per Share AED 2.72 AED 2.79 Total Shareholder Equity 5,095,767 2,791,540 Total Debt 904,735 3,000,000 The ratio analysis is conducted on the basis of data retrieved in the table bove. Ratio Analysis of Emirates Integrated Telecommunications Company PJSC and its Subsidiary: Market Value Ratios: P/E Ratio (P/E) Price/Earnings Ratio = Market Price Per Common Share à · Earnings Per Share The share price of Emirates Integrated Telecommunications for the year ended 31 December, 2009 was AED 2.786 and 31 December, 2010 AED 2.72 (Bloomberg, 2013). The following table shows the calculated P/E for Etisalat. Financial Ratios 2010 2009 Market Value P/E 8.77 46.43 The price earning P/E ratio shows how attractive a firms stock is for investment. The P/E of Emirates Telecommunication has reduced drastically from previous year 46.43x in 2009 to 8.77x in 2010 which shows that in 2010 Emirates Telecommunication has become less attractive for investments. Profitability Ratios Return on Common Equity (ROCE or ROE) ROE = Earnings after Tax à · Equity Shareholders fund x 100 This ratio shows the stockholders or investors the rate of return of their investments in stocks of Emirates Telecommunication. The following table shows the ROE ratio for Emirates Telecommunication: Financial Ratios 2010 2009 Profitability ROE 25.72 9.46 The above table clearly shows that the rate of return for the shareholders of Emirates Telecommunication has increased from 9.46% in 2009 to 25.72% in 2010. Therefore the risk of investment in stocks of Emirates has reduced in 2010 comparing with the ratio of 2009. ROA (Return on Total Assets) Return on Total Assets (ROA) = (Net Income à · Total Assets) x 100 The following table shows the ROA calculated for Emirates Telecommunication. Financial Ratios 2010 2009 Profitability ROA 10.47 2.77 The ROA for Emirates Telecommunication has increased in 2010 to 10.47% from 2.77% in 2009, which shows the increased rate of return on assets. Liquidity Ratios: Current ratio Current Ratio = Current Assets à · Current Liabilities The calculated current ratio for Emirates Telecommunication are shown in the following table: Financial Ratios 2010 2009 Liquidity Current Ratio 0.73 0.61 The liquidity position of Emirates Telecommunication has reduce negatively when comparing current ratio of 0.73x in 2010 with 0.61x in 2009, consequently the ability of Emirates Telecommunication to convert its assets into cash has reduced. Quick Ratio Quick, or acid test, ratio = (Current assets Inventories) à · Current Liabilities The following table shows the calculated Quick Ratio for Emirates Telecommunication. Financial Ratios 2010 2009 Liquidity Quick Ratio 0.72 0.59 Acid test of Emirates Telecommunication revealed that the liquidity position of the firm to pay shot-term liabilities has increased from 0.59x in 2009 to 0.72x in 2010, which shows that Emirates Telecommunication is more liquid in 2010. Asset Management Ratios Inventory Turnover Ratio Inventory Turnover Ratio = Sales à · Inventories The Inventory turnover ratio of Emirates Telecommunication is shown by the following table. Financial Ratios 2010 2009 Asset Management Inventory Turnover Ratio 149.56 137.13 The ratios in the table clearly show the ability of Emirates Telecommunication to convert inventories into sales has decreased shown by increasing Inventory Turnover Ratio of 149.56x in 2010 from 137.13x in 2009. Debt Management Ratios Total Debt to Total Assets Debt ratio = Total Debt à · Total Assets The debt ratio of Emirates Telecommunication is shown with the help of following table: Financial Ratios 2010 2009 Debt Management Total Debt to Total Assets Ratio 0.07 0.31 The values in the table above show that the risk of investing in Emirates Telecommunication has reduced from 0.31% in 2009 to 0.07% in 2010. Industry Averages in Telecommunication Industry UAE The industry averages of the telecommunication for P/E, ROE, ROA, Debt Ratio and Current Ratio are: P/E P/E Industry Average Telecommunication Industry UAE 2009 2010 P/E Etisalat 9.69 10.31 P/E Emirates 46.43 8.77 2009 2010 P/E Industry Average 28.06 9.54 ROE ROE 2009 2010 Etisalat 22.17 20.41 Emirates 9.46 25.72 2009 2010 ROE Industry Average 15.815 23.065 ROA ROA 2009 2010 Etisalat 12.4 9.74 Emirates 2.77 10.47 2009 2010 ROA Industry Average 7.585 10.105 Debt Ratio Debt Ratio 2009 2010 Etisalat 4.52 6.34 Emirates 0.31 0.07 2009 2010 Industry Average 2.415 3.205 Current Ratio Current Ratio 2009 2010 Etisalat 0.83 0.79 Emirates 0.61 0.73 2009 2010 Industry Average 0.72 0.76