Financial Statement Analysis Emirates Telecommunications Corporation

Question: Discuss about theFinancial Statement Analysisfor Emirates Telecommunications Corporation. Answer: Introduction The present report aims to develop an in-depth understanding of the financial position of Etisalat, a multinational company in the UAE operating in the telecommunication market. The report provides a proper understanding of the history of the company and analyses its liquidity, profitability, activity and debt position. History of the Company Etisalat is a branded trade name for Emirates Telecommunications Corporation that is a recognised multinational company of the UAE providing telecommunications services. The company operates across 17 countries including Asia, the Middle East and Africa. It is attributed to be about 13th largest mobile network operator and provides its services to approximately 167 million customers across the world. The company was established in the year 1976 as a joint stock corporation between International Aeradio Limited and local partners. The company transformed its ownership structure in the year 1983 with government of the UAE occupying about 60% share and 40% are publically traded (Company Profile, 2016). The company is currently aiming to meet the needs and expectations of the customers through providing higher speeds and larger coverage through innovative service offerings. The company has developed its business model specifically to meet the customers changing needs and demands through providing best possible customer services. The company has invested in fibre-to-the-home (FTTH) and LTE for providing 85% network coverage to the population of the country. Etisalat has achieved leadership in terms of technology and innovation through continually providing best customer services. The main focus of the company is to deploy higher technology solutions for developing products and services for the customers in order to meet their changing expectations. The increasing capital expenditure of the company is to provide wider coverage and high speeds to the customers though deploying latest technologies (Etisalat: Annual Report, 2015). Exploring Financial Statements-Matching the Business Model and Reading and Interpreting Derivatives in Accounting The derivates in accounting are used for hedging the financial risk and gaining protection against change in interest rates, commodity prices and equity values. As explored from the financial statements of Etisalat, the company does not involve the usage of derivatives. However, it is recommended to the company to implement the use of derivatives for safeguarding itself from unnecessary financial risk. The company must adopt a proper hedging policy through the use of derivates to protect from fluctuations in its financial performance (Kroll, 2005). Analyzing Liquidity and Profitability Liquidity Ratio Liquidity ratios examines and evaluates the current and long-term liabilities of the company. The most prominent liquidity ratios used to examine the ability of a company to meet its short and long-term obligations are current ratio and quick ratio (Mumba, 2013). Current Ratio: It examines the current assets of a company in relation to the current liabilities. The current ratio as calculated for Etisalat for the financial year 2014: Current Ratio: Current assets/Current Liabilities= 37,583,244/ 39,867,123=0.94 (Etisalat: Annual Report, 2014). The current ratio as calculated for Etisalat for the financial year 2015 is as follows: Current ratio= 41,680,494/ 42,344,526=0.98 (Etisalat: Annual Report, 2015). Quick Ratio: It evaluates the effectiveness of a company to meet its short-term obligations and is calculated as follows Quick Ratio= (Cash + Marketable Securities + Accounts Receivable) / Current Liabilities Quick ratio for Etisalat for the financial year 2014 is as follows=Current assets-Inventories/Current Liabilities=37,583,244-624,652/39,867,123=0.93 (Etisalat: Annual Report, 2014). Quick ratio for Etisalat for the financial year 2015 is as follows=41,680,494-774,089/42,344,526=0.97 (Etisalat: Annual Report, 2015). (All figures in AED000) Profitability Ratio Profitability ratio measures the ability of a company to generate profit after deduction of all costs and expenditure (Mumba, 2013). Operating profit and assets turnover ratio can be used to examine the profitability performance of a company. Operating Profit ratio: It depicts the relationship between operating profit and total net sales and is calculated as follows: Operating Profit ratio for Etisalat for the financial year 2014 is as follows: Operating Profit Ratio=Operating Profit/Total sales=9,925,894/48,508,398=0.204 (Etisalat: Annual Report, 2014). Operating Profit ratio for Etisalat for the financial year 2015 is as follows: Operating Profit Ratio= Operating Profit/Total sales= 11,321,938/ 51,737,018=0.22 (Etisalat: Annual Report, 2015). Assets Turnover ratio: It examines the efficiency of a company to generate sales revenue and is calculated as follows: Assets Turnover ratio for Etisalat for the financial year 2014 is as follows: Assets Turnover=Net Sales/Average Total Assets= 0.45 Assets Turnover ratio for Etisalat for the financial year 2015 is as follows: Assets Turnover=Net Sales/Average Total Assets= 0.40 (Emirates Telecommunications Group Co PJSC, 2016). It can be said from the liquidity and profitability analysis that Etisalat has improved its liquidity and profitability position from the financial year 2014 to the financial year 2015. Impact of Competition on Etisalat Companys Financial Performance On the basis of the financial ratio analysis conducted, it can be said that Etisalat has enhanced its financial performance. The liquidity and profitability position of the company has increased significantly in the financial year 2015 as compared to the financial year 2014. The liquidity ratio analysis depicts that the ability of the company to meet its short-term and long-term liabilities has enhanced from the year 2014 as compared to the year 2015. Also, the profitability ratio analysis depicts that efficiency of the company to generate sales has enhanced significantly in recent times. This is due to the continuous investment of the company into the latest technologies for effectively meeting the increasing competition in the market. Etisalat operates in highly competitive telecommunication market and thus has to implement latest technology solutions for effectively meeting the customer needs and demands. The use of innovative service offerings through adopting latest technology s olutions has improved its financial performance as can be seen from the above financial analysis. Debt Paying Ability and Risk Debt paying ability ratios examines the efficiency of a company to effectively meet its interest coverage (Houston and Brigham, 2009). The debt/equity ratio and debt ratio can analyse and examine the debt paying ability of Etisalat. Debt/Equity ratio for Etisalat for the financial year 2014 is calculated as follows=Debt/Equity=0.44 Debt/Equity ratio for Etisalat for the financial year 2015 is calculated as follows=Debt/Equity=0.41(Emirates Telecommunications Group Co PJSC, 2016). Financial Leverage ratio for Etisalat for the financial year 2014 is calculated as follows =Total Assets/Total Liabilities=3.07 Financial Leverage ratio for Etisalat for the financial year 2015 is calculated as follows =Total Assets/Total Liabilities=2.95 (Emirates Telecommunications Group Co PJSC, 2016). Activity Analysis: It is used to examine the ability of a company to transform its asset, liability and capital into cash or sales revenue (Bull, 2007). Accounts receivable turnover and inventory turnover can analyse the activity ratios of the company. Accounts Receivable turnover for Etisalat for the financial year 2014 is calculated as follows: Net Credit Sales/Average Accounts Receivable=3.35 Accounts Receivable turnover for Etisalat for the financial year 2015 is calculated as follows: Net Credit Sales/Average Accounts Receivable=2.83 (Emirates Telecommunications Group Co PJSC, 2016). Inventory turnover for Etisalat for the financial year 2014 is calculated as follows =Net Sales/Average Inventory= 23.63 Inventory turnover for Etisalat for the financial year 2015 is calculated as follows= Net Sales/Average Inventory=18.95 (Emirates Telecommunications Group Co PJSC, 2016). The debt paying ability and activity analysis of the company depicts that company is presently using less amount of debt in its capital structure. Thus, Etisalat involves the use of less financial leverage in its capital structure. However, the company need to improve its ability to transform its assets into cash as depicted from its activity analysis. The accounts receivable turnover and inventory turnover ratio of the company has decreased from the financial year 2014 to the year 2015. Therefore, the company must adopt strong measures for enhancing its ability to transform its asset, liability and capital into cash or sales revenue. Conclusion Thus, it can be said from the financial analysis conducted for Etisalat that the company has improved its financial performance in the year 2015 as compared to the previous financial year of 2014. References Bull, R. 2007. Financial Ratios: How to use financial ratios to maximise value and success for your business'. UK: Elsevier. Company Profile. 2016. Retrieved October 10, 2016, from https://www.etisalat.com/en/about/profile/company-profile.jsp Emirates Telecommunications Group Co PJSC. 2016. Retrieved October 10, 2016, from https://financials.morningstar.com/ratios/r.html?t=ETISALAT#tab-financial Etisalat: Annual Report. 2014. Retrieved October 10, 2016, from [https://etisalat.com/en/system/docs/12-4-2013/Etisalat-AnnualReport2015-English.pdf Etisalat: Annual Report. 2015. Retrieved October 10, 2016, from https://www.etisalat.com/en/system/docs/12-4-2013/Etisalat-AnnualReport2014-English.pdf Houston, J.F. and Brigham, E.F. 2009. Fundamentals of Financial Management. Cengage Learning. Kroll, K. 2005. How To Minimize Risks With Derivatives. Retrieved October 10, 2016, from https://businessfinancemag.com/tax-amp-accounting/how-minimize-risks-derivatives Mumba, C. 2013. Understanding Accounting and Finance: Theory and Practice. USA: Trafford Publishing.