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 ÷ Equity Shareholder’s 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 ÷ 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 ÷ 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) ÷ 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 ÷ 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 ÷ 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
AED’000
AED’000
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 ÷ 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 ÷ Equity Shareholder’s 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 ÷ 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 ÷ 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) ÷ 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 ÷ 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 ÷ 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
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