Introduction to Financial Gearing Analysis
Financial decision is a process which takes the help of various tools to reach over a conclusion about the performance of the company. It is a financial tools which lead to the financial department of the business to a conclusion about the changes and the strategically performance of the business. The main focus of this process is on the financial statement of a company to identify the current financial position and make the new financial strategies of the business. the process of financial decision not only helps the businesses to identify the performance and make decisions but it also helps the individuals, financial analyst, investors and other stakeholders of the business to identify the position of the company in terms of management of the financial factor and the investment level of the company (Madhura, 2014).
In the report, financial decision making process has been applied on SAUDI TELECOM CO and its competitors which are ETIHAD ETISALAT CO and MOBILE TELECOMMUNICATIONS Company. The financial statement of the company has been evaluated and it has been compared with the competitors to reach over a conclusion about the performance of the company. Corporate governance of the company has also been studied along with the analysis on the financial ratios of the business.
Company description:
SAUDI TELECOM CO (STC) is a Saudi Arabian company which operates its business under the telecommunication industry. It mainly offers the landline, internet services, and mobile and computer network to the customers. The company and monopoly on mobile phone service before the entry of ETIHAD ETISALAT CO. the company is running from last 20 years in the industry. Headquarter of the company is in Riyadh, Saudi Arabia. The subscribe services of mobile is around 81% in the Saudi Arabia market who are almost contributing 73% in the total revenue of the company (Home, 2018). The current turnover of the company is describing about the improved changes in the overall position of the business.
The main competitors of the company are ETIHAD ETISALAT CO and MOBILE TELECOMMUNICATIONS Company which are also operating their business under the telecommunication industry.
The financial performance of STC has been measured and compared with the competitor companies to identify the overall performance of the business. Ratio analysis study has been conducted on all the three companies. Ratio analysis is a quantitative tool of information which briefs the financial statement of the business (Moles, Parrino and Kidwekk, 2011). It is used to evaluate the numerous factors of the financial and operating performance of the business. In the ratio analysis, profitability, liquidity, efficiency and solvency position of the business is identified, the ratio analysis study of all the three companies are as follows:
Financial Gearing Analysis of STC and Competitor Companies
Profitability analysis:
Profitability analysis is one of the essentials ratios of a business which describe about the capability of a business to generate profits after deducting all the expenses against the available resources of the business (Madhura, 2014).
Return on capital employed:
Return on capital employed ratio brief great increment in the profitability level of STC. It has been improved from 17.86% to 27.28% in 2018. However, the ROCE of Etihad has been reduced at great level as well as the Zain ROCE level is also lower than the STC. It explains that the profitability level of STC is way better in the industry.
Figure 1: Return on capital employed
(Morningstar, 2018)
Gross profit margin ratio briefs 58.1% of gross profit of STC. The gross profit level of the company been reduced from 60.1% in 2013. On the other hand, the gross profit margin of Etihad has been improved at great level as well as the Zain’s gross profit level has also been improved than the STC. It explains that the profitability level of STC is lower in the industry because of higher cost of goods sold.
Figure 2: Gross profit margin
(Morningstar, 2018)
Operating profit margin:
Operating profit margin ratio briefs 58.11% of operating profit of STC. The operating profit level of the company been reduced from 26.52% in 2013. On the other hand, the operating profit margin of Etihad has been lowered at great level as well as the Zain’s operating profit level is also lower in the industry. It explains that the profitability level of STC is better in the industry.
Figure 3: Operating profit margin
(Morningstar, 2018)
Efficiency analysis:
Efficiency analysis describe about the capability of a business to manage the cash conversion cycle of the business through administrating the credit policies of the business (Lumby and Jones, 2007).
Trade payable payment period ratio briefs 11.12 credit days of STC. The Trade payable payment period of the company has been reduced from 55.41 days in 2015. On the other hand, the credit days of Etihad has been improved at great level as well as the Zain’s credit level has also been improved than the STC. It explains that the efficiency position of STC is worst in the industry (Gapenski, 2008).
Figure 4: Trade payable payment period ratio
(Morningstar, 2018)
Inventory turnover ratio:
Further, the inventory turnover period ratio briefs 725.45 days of turning the inventory. The inventory period of the company has been improved from 71.03 days in 2013. On the other hand, the inventory days of Etihad has been reduced as well as the Zain’s inventory days have also been improved. It explains that the efficiency position of STC is better in the industry.
Ratio Analysis Study of STC and its Competitor Companies
Figure 5: Inventory turnover ratio
(Morningstar, 2018)
Receivable turnover ratio:
Lastly, the receivable turnover period ratio briefs 0 days of turning the receivable into cash. The receivable period of the company has been reduced from 61.47 days in 2013. On the other hand, the receivable days of Etihad has been reduced as well as the Zain’s inventory days have also been reduced to 66.36 days (Lord, 2007). It explains that the efficiency position of STC is average in the industry.
Figure 6: Receivable turnover ratio
(Morningstar, 2018)
Liquidity analysis:
Liquidity analysis is one of the essentials ratios of a business which describe about the capability of a business to manage the current liabilities and debt against the available short term resources of the business.
Current ratio:
The current liquidity ratio briefs 1.34 current assets against the current liabilities of the business. The current liquidity ratio of the company has been reduced in current year in order to manage the working capital of the company. On the other hand, the current liquidity ratio of Etihad is quite lower as well as the Zain’s current liquidity ratio has also been reduced. It explains that the current liquidity ratio of STC is better in the industry.
Figure 7: Current ratio
(Morningstar, 2018)
Quick ratio:
The quick liquidity ratio briefs 1.34 quick assets against the current liabilities of the business. The quick liquidity ratio of the company has been reduced in quick year in order to manage the working capital of the company. On the other hand, the quick liquidity ratio of Etihad is quite lower as well as the Zain’s quick liquidity ratio has also been reduced. It explains that the quick liquidity ratio of STC is better in the industry (Barlow, 2006).
Figure 8: Quick Ratio
(Morningstar, 2018)
Capital gearing analysis:
Capital gearing analysis ratio of a business describe about the various source of funds and their management level of the business along with the associated risk and return of the business (Kruth, 2013).
Gearing ratio:
The gearing ratio briefs 11.14% of long term liabilities against the capital employed of the business. The gearing ratio of the company has been reduced in current year in order to manage the risk level of the company. On the other hand, the gearing ratio of Etihad is quite higher as well as the Zain’s gearing ratio has also been reduced. It explains that the gearing ratio of STC is lower in the industry.
Profitability Analysis
Figure 9: Gearing ratio
(Morningstar, 2018)
Interest coverage ratio:
The interest coverage ratio briefs that the operating profit of the company are enough to pay the interest amount. Further, the level of Zain and Mabaily are also positive but it is lower than STC. It explains better position of the company.
Figure 10: Interest coverage ratio
(Morningstar, 2018)
Investment analysis:
Investment analysis describe about the capability of a business to maintain the funds of the debt holders and the shareholders of the business and identify the return from the company to the shareholders (Krnatz, 2016).
Earnings per share:
The Earnings per share ratio briefs 5.54 net incomes against the weighted average share of the business. The earnings per share ratio of the company have been improved in current year in order to maintain the investment level of the business. On the other hand, the earnings per share ratio of Etihad is quite lower as well as the Zain’s earnings per share has also been reduced. It explains that the EPS ratio of STC is better in the industry.
Figure 11: Earnings per share
(Morningstar, 2018)
Dividend coverage ratio:
The dividend coverage ratio briefs 1.09 net income against the dividend paid to the shareholders. The dividend coverage ratio of the company has been lowered in current year due to the changes into the net income level of the business. On the other hand, the dividend coverage ratio of Etihad is quite lower as well as the Zain’s dividend coverage has also been reduced. It explains that the dividend coverage ratio of STC is better in the industry.
Figure 12: Dividend coverage ratio
(Morningstar, 2018)
On the basis of the overall evaluation on the financial performance of the business through conducting the study of ratio analysis, it has been found that the performance of STC is quite better in the industry. In terms of profitability analysis, the performance of STC is average. As well, the analysis on liquidity position brief company has managed a better level in order to manage the working capital. The efficiency position, investment level and capital structure position of the business is also better.
The STC is the leading company in the telecommunication industry. It has remained the top company in the industry. Over 20 years, various changes have taken place into the performance of the business. Although, various negative changes have also taken place into the company along with the positive changes. The company has been attacked because of entry of new companies in the industry (Jiashu, 2009). Earlier, a monopoly has been set by the company.
Efficiency Analysis
The financial statement of the business of last 5 years has been studied and various relevant changes have been checked into the company. the income statement of the business described that the net income level of the company has been improved due to which the net profit margin % has also been improved and lead to the business towards better performance. The changes have taken place because of new strategies and policies of the business (kinsky, 2011). Further, the operating expenses have also been controlled by the company which lead to the business towards higher net profit level.
The statement of financial performance of the business has been studied further and it has been recognized that the financial performance of the business has been improved along with the huge resources and the funds of the company. The changes have taken place because of new policies and projects of the business (Morningstar, 2018). Further, the equity level has also been improved by the business to manage the performance in the industry.
Lastly, the statement of cash position of the business has been studied and it has been recognized that the cash level of the business has been improved along with the changes into various operations of the company. The changes have taken place because of changes into the cash conversion cycle of the business. Further, the free cash flow level has also been improved by the business to manage the performance in the industry.
Just like any other companies, the corporate governance code has also been set by STC. The firm claims in the annual report of the company to have deep understanding about the corporate governance and the duty of the business towards the shareholders and other stakeholders of the business (Kaplan and Atkinson, 2015). The annual report (2017) of the company explains that the executives of the company held less than 5% stocks of the company. They have managed limit in the ownership of the business in order to manage the performance of the company in the industry.
The main subsidiary of the company is Arabian Internet and Communications Services Co. Ltd. (STC Solutions) – Kingdom of Saudi Arabia which is owned by the company 100%. Company has also managed and associated with various companies in order to accomplish the projects and the investment proposals of the business (Hillier, Grinblatt and Titman, 2011). Through identifying the performance and corporate governance of the business, it has been identified that the position of the company leads towards better position of the company.
Liquidity Analysis
Lastly, the share price of the business has been evaluated. The below graph describe about the share price of the company of last 5 years. On the basis of the evaluation, the share price of the company has been improved in current year from last 5 years. The stock price of the company is continuously improving. The return from the company is higher in the industry and it leads to the conclusion that the investors are enough attractive towards the company and due to which the performance and the position of the company is leading towards the better performance in the industry (Higgins, 2012).
The below chart also shows that the fluctuations are lower in the stock price of the business which leads to the conclusion that the investment into the company would offer great return to the stockholders of the company.
Figure 13: Stock price evaluation
(Horngren, 2009)
Conclusion:
Through identifying the performance of the company in the industry, ratio analysis, stock price evaluation, critical analysis on the financial statements and corporate governance of the business has been studied in order to identify the investment level of the business. And it has been found that the performance of STC is quite better in the industry. In terms of profitability analysis, the performance of STC is average. As well, the analysis on liquidity position brief company has managed a better level in order to manage the working capital. The efficiency position, investment level and capital structure position of the business is also better.
Further, the stock price evaluation briefs great growth in the stock price of the company. It leads to the conclusion that the investment level of the business is higher. The financial statement evaluation also explains that the changes into the overall performance of the company in last 5 years are quite impressive. Lastly, better policies have been maintained by the company in order to manage the corporate governance. It leads to the conclusion that the investment level of the business is higher. Investment into the company would lead to the business towards better performance. The future position of the industry is quite better. The increment rate of the industry is higher as well as the performance of the companies are also leading.
References:
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