Financial Performance Comparison Of Gulf Cement Company And RAK White Cement And Construction Materials

Liquidity Analysis

Discuss about the Change In Ratios of Gulf Cement Company.

Gulf Cement Company P.S.C is a UAE based manufacturing firm that is engaged in the production and marketing of all types of cements. It makes ordinary Portland cement, sulphate resisting Portland cement and many more. The company made revenue of AED 583.20 million in year 2017 (Reuters.com. 2018). 

Ras Al Khaimah Co. For White Cement & Construction Materials also operates in the same industry and deals with the production and distribution of white cements, lime and concrete blocks. It is also situated in UAE and had made revenue worth AED 307 million in year 2016 (Rakwhitecement.ae. 2018).

It can be said that the current and quick ratio of Gulf Co. has reduced in 2016 by 14% and 11% respectively. Along with this, a reduction in the cash ratio and net working capital to total asset ratio was also noticed by 22% and 17% in 2016, respectively.  This is because Gulf’s annual report recorded a decrease in its current assets and current liabilities. A reverse trend was observed in RAK’s current and quick ratios, as both of them increased by 10% and 23% in 2016 as compare to 2015. A major change was there in RAK’s cash ratio as it increases by 594% in 2016, whereas the same figure reduces by 35% in 2015. Reason being, a huge increase was there in the amount of cash in 2016. Its NWC/TA ratio has also rises by 22% due to an increase in the total assets of the company. 

Talking about the leverage ratios, Gulf Co. had less financial risk as a continuous decrease is noticed in the ratios over the three years. Its total debt ratio, D/E ratio, Long term debt ratio and equity multiplier reduces by 11%, 13%, 36% and 2% respectively. This is due to the consistent fall in the total liabilities of the company. The ICR and Cash coverage ratio of Gulf co. was same as there was no depreciation expense reported in firm’s income statement. However, both these ratios show an upsurge of 21% in 2016. In contrast to it, RAK’s debt has been increased in the past years which boosted up its ratios in 2016. The debt ratio and D/E ratio rise by 19% and 27% along with an increase of 51% in Long term debt ratio. This is because of the increased bank borrowings of the company in 2016. (Lee & Lee, 2016)

Efficiency Analysis

Gulf’s Co. efficiency has reduced during the years, apart from its Inventory turnover ratio which shows a slightest increase in 2016 by 16%. Also its days Sales in inventory has reduced by 14% in 2016. But apart from this, its DTR, TATR and FATR, all reduces by 22%, 4% and 14% respectively. The reason behind this is the downfall in the overall turnover of company. Looking at RAK’s efficiency ratios, the same trend follows. It’s ITR and DTR both reduce by 10% and 8% as well as an increase of 12% and 9% was observed in its days’ sales in inventory and receivables. The TATR, FATR and NWCTR also reported a downfall in year 2016. Reason was the reduction in amount of total assets and total revenue over the years.

As far as profitability is concerned, the net profit margin of Gulf Co. has reduced by 23% in 2016 as compare to 2015. As a result of which, it’s ROA and ROE has decreased by 28% and 27% in year 2016, respectively. This is due to the decline in the net income earned by the firm. While, RAK shows an increasing trend in all of its profitability ratios because of the huge increase in its net profit in 2016 as compare to 2015. The net profit margin was increased to a great extent of 197% in 2016 while the same figure reduces by 41% in 2015. Similarly, its ROA and ROE also reported a huge upsurge of 173% and 155% in 2016.

The P/E ratio of Gulf has increased by 47% in 2016 along with an increase of 7% in it price to sales ratio. However its PEG ratio reported a huge downfall of 188% in 2016 and 140% in 2015. This is because of the negative growth in its earnings. No change was notice in its Market to book ratio due the same number of shares issued. On other hand, reverse trend was observed in RAK’s market ratios. Its P/E ratio, PEG ratio, Price to sales and Market to book ratio, all reduces by 69%, 109%, 10%, and 17% respectively. Reason being the reduced market price of the share and the number of shares issued.

In order to compare the financial performance of both the companies, ratio analysis is done. Referring to Appendix 2, it is observed that the liquidity position of RAK Company is much better than Gulf Cement Co. This is due to increase in its current and quick ratio. This implies that company has enough cash and current assets to meet its current liabilities. Unlike liquidity, RAK involves a huge financial risk as compare to Gulf Co. because of the increased debt ratios. The total debt Ratio of RAK was 31% whereas the same reported by Gulf was only 14%. RAK’s debt to equity was 44% in 2016 which is more than double of Gulf’s D/E ratio. This implies that most of the assets of RAK are financed through debt and thus the company has greater risk.

Leverage Analysis

Talking about the efficiency, Gulf is much more efficient in utilizing its assets than RAK for the purpose of generating revenue. The total asset and fixed assets turnover, DTR, ITR of Gulf is slightly more than RAK’s ratio. Also the company takes less time to collect its debtors and convert its inventory into cash. Thus it can be said that Gulf Cement Co. is more efficient than RAK. The profitability position of RAK is better because of the 8% increase in its net profits. This upsurge boosted up its profit margin and the company made more returns on its assets and equity in year 2016. As far as, share price is concerned, RAK’ shares has a high market price as compared to Gulf Co. However, its market value ratios have reduced to the low number of shares issued and reduction in the market price (Tracy, 2012). 

When comparing with the industry averages, the liquidity position of RAK is better because Gulf’s current and quick ratios are way higher than its industry average. The turnover ratios of both the companies are less than their industry ratios which means they are not efficient enough to generate more sales from their assets, debtors and inventories. The same trend follows in the leverage ratios also. Comparing with the industry averages, RAK has high financial risk has compare to Gulf Cement Co. However, the trend got reversed when profitability ratios of the companies are measured against the industry averages. Apart from ROE, both the companies has high profit margin and ROA, as compare to industry. This means they have a good profitability position in the market.

Gulf Cement Co.

RAK White Cement co.

The return on equity of RAK is more than Gulf co. due to the high profits and high multiplier. According to DuPont analysis, it can be observed that RAK is able to generate more profits from its sales and also most of its assets are finance through equity. The weakness of the company is that it is not efficient enough to make more revenue from its total assets. On the other hand, the analysis shows that the weakness of Gulf Co. is that it is not able to make more earnings from its sales and also it has less equity financing. The strength of the firm is that it can generate high revenue by utilizing its total assets effectively and efficiently.

Referring to Appendix 3, the intrinsic value for both the company is in negative. Gulf Cement Co. IV is AED -0.57 whereas its current stock price is AED 1.06. On the other hand, RAK’s IV is AED -0.75 and it current market price of the stock is AED 0.94. This implies that investors should not buy the shares of both the companies as they are been overvalued. So, it can be said that it will be better not to invest in these firms

References

Lee, J. C., & Lee, C. F. (2016). Financial Analysis, Planning & Forecasting: Theory and Application Third. 3^rd ed. Singapore: World Scientific Publishing Company.

Rakwhitecement.ae. (2018). About Us. Retrieved from https://www.rakwhitecement.ae/company-profile/

Reuters.com. (2018). Gulf Cement Co PSC (GCEM.KW). Retrieved from https://www.reuters.com/finance/stocks/overview/GCEM.KW

Tracy, A. (2012). Ratio analysis fundamentals: how 17 financial ratios can allow you to analyse any business on the planet. RatioAnalysis. net.

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