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Transcript of Finance Morocco
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Table of ContentsIntroduction .................................................................................................................................................. 2
Why the financials of the company are important for investors ................................................................. 2
Role of investors and shareholders in a company ........................................................................................ 3
Ratio and Ratio Analysis ................................................................................................................................ 3
Profitability Ratios ..................................................................................................................................... 3
Operating Profit Ratio ............................................................................................................................... 3
Net Profit Ratio ......................................................................................................................................... 4
Liquidity Ratio ........................................................................................................................................... 5
Current Ratio ............................................................................................................................................. 5
Acid test ratio/ Quick ratio........................................................................................................................ 5
Solvency Ratios ......................................................................................................................................... 6
Debt to Equity Ratio .................................................................................................................................. 6
Debt to Asset Ratio ................................................................................................................................... 6
Efficiency Ratio .......................................................................................................................................... 7
Return on Equity ....................................................................................................................................... 7
EBITDAR Margin ........................................................................................................................................ 7
Accounts Receivable Turnover ................................................................................................................. 8
Asset Turnover Ratio ................................................................................................................................. 8
Non-financial information ......................................................................................................................... 9
LO2: Critically analyze the role and function of financial information in the management of a business . 10
LO3 Critically analyze the issues and debates concerning the financing and investment decisions of firms
.................................................................................................................................................................... 13
References .................................................................................................................................................. 19
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Introduction
In this report we will perform the analysis of the financials of a company from the investor pointof view. In order to study the financials we have considered the emirates group. The group is
based in Dubai and is an international aviation holding company. The company is also having its
headquarters in Dubai. The group comprises Dnata which provides ground handling facilities at
major airports and Emirates Airlines which is the largest airline of United Arab Emirates. The
company is wholly owned by the Government of Dubai. The company serves around 61
countries.
The group was founded in the year 1959 by Sheikh Ahmed Bin Saeed Al Maktoum.
Emirates vision is to build and maintain the market leadership. The leadership of the company is
strived to implement innovative ideas. The company continues to maintain high level of ethics
while dealing with its customers. It also takes responsibility for serving the society and
environment. The company has built its brand name and reputation over a long period of
consistent by following good policies and excellent results.
The mission of Emirates is to maintain a steady growth rate in the years to come. This growth
rate needs to be maintained in spite of all the adverse situations that are affecting this industry.
Emirates are the most successful airlines in the Middle East and are being growing consistently
for the past 25 years. This growth period had been characterized by various hurdles that the
company has overcome in this long journey.
Why the financials of the company are important for investors
In this report, the main purpose is to study the financials which are considered by the investors.
This is because the financials depict the position of the business in comparison to the other
players in the industry as well as in the diversified market. As the investors are mostly interested
in fetching good returns for their investment thus they are required to analyze the financials of a
company before investing in the company. This is the reason why the shareholders are
considered the most important stakeholders.
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Role of investors and shareholders in a company
The organization derives its capital from the contributions of the shareholders. The shareholders
are the holders of equity capital of the company. This gives them the voting power which affectsthe operations of the organization. Thus they are being considered as the primary stakeholders as
they are the finance providers to the organization and the organization requires capital at regular
intervals in order to ensure smooth functioning. Thus the organization needs to perform its best
so as to generate returns for the shareholders (Groppelli and Ehsan, 2000).
So, the perspective of the shareholders is instrumental in nature as they provide finance in order
to reap good returns from the organization.
Ratio and Ratio Analysis
The ratio analysis is being done to find out the relationship between the various figures of a
financial statement. The ratios are used to identify the trends for a company over time or to
compare the financial statements between different companies.
Here in this section we will discuss the various ratios that are important from the point of view of
the investors.
Profitability Ratios
Profitability ratios are meant for calculating the operating efficiency of the company. Two ratios
under Profitability are Operating profit ratio and net profit ratio. The profitability ratios are being
considered one of the important ratios which affect the decision making of the investors. No
investor would prefer investing in a firm which is incurring losses; hence the first performance
metric is the profitability ratio (Houston et al., 2009). The profitability ratios for emirates are
discussed under:
Operating Profit Ratio
The Operating profit ratio is being calculated as a percentage of the sales.
Operating profit ratio for 5 years
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Year Operating Profit Net sales Operating profit ratio
2012-13 2839 71159 = 2839/71159 *100 =
3.98%
2011-12 1813 61508 = 1813/61508*100 =
2.94%
Net Profit Ratio
The Net profit ratio is being calculated as a percentage of the sales.
Net profit ratio for 5 years
Year Net Profit Net sales Net profit ratio
2012-13 2408 71159 = 2408/71159 *100 =
3.38%
2011-12 1620 61508 = 1620/61508*100 =
2.63%
The operating profit ratio of the company for the two year period has varied between 2 -4%. This
profit has been earned by the company after paying for the variable costs. A good margin is
required to pay for its fixed costs. This gives an idea of the earnings of the company before any
interest or tax is being paid. Though the company is not having very high operating margin but it
is sufficient enough to pay the fixed costs.
The net profit ratio of the company for the five year period varied between 2-4%. This is quite in
line with the operating profit of the company; hence it can be said that the rise in sales is
resulting in the rise in net profits but the cost of the company is certainly high which is resulting
in low operating and net profit and which can only be increased by increasing the prices of the
services (Bodie et al., 2004).
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Liquidity Ratio
Liquidity ratios are meant to measure the liquidity of the company to judge its capacity to pay off
its short term obligations.
Current RatioThe current ratio is calculated by dividing the current assets by the current liabilities. It is used to
measure the liquidity of the company.
Current Ratio for 2 years
Year Current Assets Current Liabilities Current Ratio
2012-13 34947 31319 = 34947/31319 = 1.12
2011-12 25190 25765 =25190/25765 = 0.97
Acid test ratio/ Quick ratio
This ratio is used to measure liquidity for very short term. Thus the ratio is calculated by dividing
the quick assets by the current liabilities. The quick assets include cash, marketable securities
and accounts receivable.
Quick ratio for 2 Years
Year Quick assets Current Liabilities Quick Ratio
2012-13 = 6524+18048+8744
= 33316
31319 = 33316/ 31319 =
1.06
2011-12 = 7532+8055+8126 =
23713
25765 = 23713/25765 = 0.92
The current ratio for the two year period has ranged from 0.9 to 1.2 which is below the average
level which is 2:1. The current ratio should be adequate enough for the company to meet its short
term obligations. Thus it can be said that the company is low on liquidity. At times the low
liquidity of the company also stresses the financials of the company which can produce adverse
results.
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The quick ratio ranges between 0.9 to 1.1 which is quite good for the company and shows that
the company is having good stock of highly liquid assets. The current ratio is lower as it involves
inventory which takes time to be readily converted into cash. Thus from the above position it can
be said that the company is not having sufficient inventory to be considered for the liquidity
needs(Groppelli and Ehsan, 2000).
Solvency Ratios
Solvency ratios are being calculated to judge the ability of the company to pay its debt and other
obligations.
Debt to Equity Ratio
The debt to equity ratio depicts the degree of leverage of the firm. It is calculated by dividing the
debt with the equity of the firm.
Debt equity ratio for 2 years
Year Debt Equity Debt to equity
2012-13 35483 23032 = 35483/23032 = 1.54
2011-12 26843 21466 =26843/21466 = 1.25
Debt to Asset Ratio
This ratio is being used to measure the percentage of assets that are being financed by Debt. It is
calculated by dividing the total debt by the total assets.
Debt to Asset ratio for 2 years
Year Debt Assets Debt to Assets
2012-13 35483 94803 = 35483/94803 *100
= 37.42%
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2011-12 26843 77086 =26843/77086*100 =
34.82%
The debt to equity ratio for the company is between 1.0 to 2.0 which is quite good as it denotes
low leverage for the company. High leverage results in risk for the company as it involves fixed
payments and thus the chances of high returns for the investors is also reduced.
The debt to asset ratio has increased from 34% in 2012 to 38% in 2013 for the company. The
ratio has increased which is a good sign that more of assets are being financed through debt but it
should not be more than 50% as debt has to be paid back after the tenure is over. This is because
the debt has a fixed maturity after which needs to be paid off.
Efficiency Ratio
The efficiency ratios are used to manage the efficiency of the company in using the production
and resources. There are various ratios considered by investors like Return on Equity, Asset
turnover, EBIDTAR margin etc.
Return on EquityThe return on equity is calculated by dividing the net income by the total equity. This is an
important factor for the investors as it is concerned with the return that the investors will be
getting on the investments made in Emirates.
2012 2013
ROE 7.2% 21.4%
EBITDAR Margin
This is the net of expenses over the revenues but also takes into consideration the restructuring or
rent costs so that the net amount going to the shareholders or investors could be determined
2012 2013
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EBITDAR 17.2% 19%
Accounts Receivable Turnover
This ratio is being used to measure the efficiency of the company in extending credits to theparties and for collection of debts. As we have only data relating to the sales thus we are
assuming all are credit sales.
Accounts Receivable turnover for 2 years
Year Net sales Accounts Receivable Accounts receivable
turnover
2012-13 71159 8744 =71159/8744 = 8.13
2011-12 61508 8126 = 61508/ 8126 = 7.56
Asset Turnover Ratio
The Asset turnover ratio is being used to measure the efficiency of the company in managing its
assets.
Assets turnover ratio for 2 years
Year Sales Assets Asset turnover ratio
2012-13 71159 94803 =71159/94803 *100 =
75.05%
2011-12 61508 77086 =61508/77086 *100 =
79.79%
The return on equity for the investors of Emirates has increased 3 times from 2012 to 2013
which makes it an attractive company for the investors.
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The EBITDAR margin is quite good as the investors are fetching good returns even after
meeting all possible expenses (Houston et al., 2009).
The accounts receivable turnover ratio for the company has ranged from 6 times to 8 times which
is not quite high. However as the ratio is low there is a risk that the payments will not becollected. Thus a company needs to re-assess its credit policy.
The asset turnover for the company has reduced from 80% in 2012 to 75 % in 2013 which shows
the company is not efficiently managing its assets to generate revenues.
Thus the above were the financial ratios affecting the investors.
But there are certain Non-financial information also which affects the investorsdecisions.
Non-financial information
The important information covered under non-financial is:
Brand Image: Emirates is having a god brand image owing to the excellent service that is being
provided by the company. Hence this also affects the decisions of the investors (Bodie et al.,
2004).
Customer-relation: The Company maintains good relations with its customers by keeping them
satisfied. Hence this also affects the customers making investment decisions.
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LO2: Critically analyze the role and function of financial
information in the management of a business
The main aims of each and every business are maintaining profitability and solvency.
Profitability defines the capability of a given business to generate profit. Solvency on the other hand
defines the ability of a given business entity to pay offits debts as they mature (Hermanson et al, 1992,
p.824). Achievement of such objectives necessitatesefficient resources management. This is achievable
through careful planning and presentation of resources available to the business, an endeavor that is
achieved with the help of financial statements available in accounting. According to the American
Accounting Association, accounting is defined as the process of identification, measurement, and
communication of economic information which facilitate decision making processes within the business
(Okezie, 2002, p. 1). Income statement and balance are critically important financial statements to every
business. While the income statement indicates the businesses profitability and operational results of the
entity, the balance sheet presents the business solvency and hence financial position of the business entity.
This is however not fully visible from the appearance of the balance sheet.
Different formats are often used in preparation of financial statements. However, the choice of
format does not alter the ultimate results (Helfert, 2001, p. 40). Businesses choose methods of
representing financial statements based on its function or nature. However, preparations of such
statements are guided by various global accounting standards e.g. IFRS, and GAAP. Different business
types have different requirements and as such choose different formats. An income statement is among
the three major financial statements that enterprises prepare. It makes available a record of an entities
revenues and expenses for a given duration and hence its serves as a basic measure of profitability (Carl,
2008). As a matter of fact, it often is referred to as a profit-and-loss statement. In general, an income
statement can be defined as a scorecard that provides a summary of revenues and expenses incurred by a
business enterprise for a specified duration. It is therefore an important tool that managers can use to aid
their daily operations within a firm.
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Managers look beyond the companys earnings as displayed in the income statement. The
document provides insightful information for effective business management including: expenses control,
the amount of interest income and expenses received/paid by the entity as well as taxation levels (Erich,
2001). By calculating the financial ratios, managers are able to establish the rate of return an enterprise is
earning as well as how well the assets are managed. Additionally, the ratios allow managers to compare
their entities performance to that of others within the industry. Such ratios include: gross profit margin,
net profit margin and operating profits margin among others (Carl, 2008, p. 121).
Understanding financial statements is crucial to both current and future positions of the business.
It acts as a basis for evaluation of the current position of the business. The income statement can be used
as a tool for review of financial information and hence ensure that the business generates adequate capital
to pay for its expenses and at the same time remunerate the owner with profit (Erich, 2001, p. 84).
As Hermanson et al. (1992, p. 824) states, analysis of financial statements involves application of
various accounting analysis tools and techniques which help in establishment of important relationship
between various financial statement elements.
Financial reporting is often considered from two perspectives, decision-usefulness and
stewardship roles. Recent revisions in IASBConceptualFramework make important to deeply
consider decision usefulnessandstewardshipwith respect to how accounting information are
used. Put more succinctly, decision usefulness primarily focuses on use of information to
create decisions relating to investments and valuations. As a result, it conventional requires
future-oriented information. This is what is referred to as ex anterole ofinformation. In contrast,
stewardship focuses on use of information in monitoring managements capital use after it has
been invested. This constitutes ex postrole. In many instances, this role of information places
emphasis of past actions and in many instances, it implicates major financial statement
information including earnings/share and leverage ratios, among others, unequivocally in
agreements between lenders, investors and managers.
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Despite the term stewardship being widely used, both academicians and benchmark
setters express some discomfort in relation to the terms usage (Lambert, 2010). As a result,
there are instances where contractingor accountability rolesare used as alternatives. In a
similar manner, financial decisionmaking roleis in some instances referred toasvaluationor
decision usefulnessaccounting information role.
Kotharietal.(2010) studied theoryofstandard setting and emphasized that stewardship and
performance measurementare the main aim offinancialstatements; a view that was challenged
by Lambert (2010). Nonetheless, there is clearconsensus thatwhilstinformation fordecision
makingis in many instances usefulfor purposes of stewardship,thesetwo roles arenotoftenaligned (Lambert,2010).
The information used in achieving these roles is however inter-related. According to
Erich (2011) a financial statement reveals information critical to a firms operations as well as
profitability. Essentially, it is a financial tool that managers can use to evaluate how successful
their business operations are towards fulfillment of its prime objective, which most often than
not, is to make profit (Carl, 2008). A variety of management decisions are made on basis of this
statement. Managers can constantly review product pricing on basis of profitability and growth
recorded. It basically allows managers to evaluate how effective the adopted pricing strategy
has helped the company attain its objectives (Erich, 2011). Other than face value analysis,
managers can obtain various financial ratios from the income statement and use the same to
justify decisions made during a trading period.
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LO3 Critically analyze the issues and debates concerning the
financing and investment decisions of firms
Starting a business comes with various challenges. People often rush to open businesses
without proper planning and knowledge on how to run them. It is not a surprise that most
businesses always go under after a short period of operation (Harry et al., 2004, pp. 34). This is
attributed to extreme optimism that often accompany new business establishment. People get
into businesses with a lot of expectations and fail to plan for any pitfalls they may encounter
along the way. Many business article authors stress the importance of critically analyzing
financial implications associated with any new business venture (Harry et al., 2004, pp. 39). In
any business it is important not only identify sources of financing available to the business but
also assess the implications of using each individual source. To successfully choose the best
financial direction to take in starting a business, one must understand the financial implications
of his/her chosen financing method (Angelico, 2000, pp. 76). Other than comparing financing
options available, decisions on the investment approach should be based on appropriate and
relevant financial information. This paper extensively evaluates funding options, investment
decisions and financial decision making. This process is aided by the case study provided.
There are a number of financial sources of financing a business, not all are applicable to
every business. Each comes with a basket of goodies and likewise constraints. For one to
operate a business with minimum possible constraints, its important to choose a financing
option that best suites his/her business interests. Personal savings is often the most convenient
financing for a business. It comes with minimal constraints needles to mention that in case a
business fails, one is not left with plenty of debts to pay. As such the only source of internal
funding available to Mrs. S. Kotta is personal savings.
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Other than the aforementioned internal finance sources, a business may opt to outsource
finance. This involves obtaining finance from sources outside the business. As
Internal Sources of Funding
Personal
savings
Own savings
Sale of fixed
assets
Fixed assetsinclude thoseassets which arenot consumedduring productionprocess.
Working capital
The differencebetween thecurrents assetsand the currentliabilities
Retained
earnings
Profits that areretained withinthe business afterdividend payouts
Figure 1: Sources of Internal financing
External Sources of Fundin
Ordinar shares
Non-ownership Ownership
Preference shares
Debentures
Bank overdrafts
Loans
Hire Purchase
Leases
Franchising
Venture ca ital
Figure 2: External sources of business financing
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Different sources of financing impact differently on the business (Kleiman, 2010, pp.
232). This can best be defined in terms of advantages and disadvantages of the respective
financing options see table below:
Points Advantages Disadvantages
Personal
savingsNo collaterals required
Paper work is not mandatory
Does not necessarily involve interestpayment
Payment duration is not stringent
Not applicable where large sumsare required
In case the owner needs the moneyprematurely, business may facecash flow problems
Retained
profitsNo payback
No interest payable
No debt capital increment
Outsiders are not involved
Opportunity costs involved
Not available for starting businesses
Working
capital
No costs convolved
No repayments
No external influence
No debt capital increment
Opportunity costs involved
Not suitable for long-terminvestments
Large funds cannot be availed
The business fully bears the risk
Affects current ratio of the business
Sale of
assets
No repayments
No interest payments
Can be used to raise large amount of funds
Ideal for replacement assets
Loss of income generation
opportunities
Similar assets may cost more later
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Ordinary
shares
Permanent source of capital
Ability to raises large funds
No collateral
helps reduce gearing ratio
Issuing shares is time consuming.
Incurs issuing costs.
Legal and regulatory issues to
comply
Takeover possibilities
Groups of equity shareholdersholding majority of shares canmanipulate the control andmanagement of the company.
May cause overcapitalization
Shares may not be bought backafter issuePreference
share issue
Management retains control due to non-voting rights
They are paid fixed rates regardless ofperformance
Large amounts of capitals can be raised
Redeemable preference shares can be
redeemed
They have to paid even whenbusiness incurs loses i.e. cumulative
Taxable income not reduced as isthe case for debentures
Debentures No voting rights
Tax benefits
Redeemable when business has surplusfunds
Interests payable regardless ofperformance
Borrowed money has to be paid asscheduled
Bank
overdraft
No security required
Ideal for immediate cash flow problems
Faster
Interest only payable on overdrawing
Since its a short term debt, its notincluded in gearing ratio calculation
Amount limitation
Interest is payable
Cover only short-term needs
Can be recalled by the bank at anytime
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Loans Large amounts can be borrowed
Lender does not influence decision making
Payment rate is not mandatorily fixed
Interest rate lower compared to bankoverdraft
Collateral required
Payment has to on schedule if notearlier
Interest is payable
Affects gearing ratio
Hire
purchase
Gain on asset prior to payment
Affordable installments
It is a taxable expenditure
Ownership is transferred at end of payment
Ownership pending until paymentcompletion
Payment exceeds value
Possible repossession
Lease Use of asset before full payment
Total cost pre-determined hence ease ofbudgeting
Payments only made for usage duration
Ownership is retained by theleasing company.
Venture
capital
Large sums of capital available
Investors bring in experience and expertise
Investors claim equal interest inbusiness and may influencestrategic decision making
Investors may want to exist thebusiness at some stageFranchise Access to brand
Access to capital pool
Loss of control of business
Table 1: Advantages and disadvantages of different sources of finance (Kleiman, 2010, pp.
235).
Financial planning is critical to business success. It influences the general operations and
ability of a business to meet its obligations(Kleiman, 2010, pp. 236).
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With a wide array of financing options, it is vital to critically evaluate a number of
factors before conclusive deciding on the appropriate financing option. Factors necessary to
make appropriate financing option decisions include (Christie, 2009, pp. 231):
Capital requirement
Funds urgency
Costs associated with financing option
The risks versus rewards
Financing duration
Business gearing ratio
Business control
Various tools are available for analysis of investments. The first toll commonly
encountered in investment analysis is the Net Present Value. It illustrates the revenue/savings
that will be gained from the investment, less associated costs. The future values are brought to
the present using a compound interest known as the discounted rate. It is widely used due to its
provision of a sense of direction as to how much the project will generate. Additionally, it
represents a tool for making decisions regarding mutually exclusive projects (Parker, 2011, pp.
260). The internal rate of return is also widely used in investment analysis. It gives the measure
and the ability of the investment to repay invested capital (Parker, 2011, pp. 263). Basically, it
gauges the businesses internal merit. It provides the rate of money generation for the project.
Other than the two, other methods employed include cost benefit analysis and gauging of the
payback period. The MCR is the maximum capitalization risk. The payback period on the other
hand indicates the period it takes to recover an investment from the business. It however does not
fully account for the time value of money.
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