Business owners must understand the financial performances of their organizations. Thus, understanding financial measures for business performance is a vital part of running an organization, specifically in large firms that are prone to adverse effects of both internal and external environments. Most businesses fail due to ineffective financial management and strategies.
The success of the business relies on creating and executing a sound financial management system. A regular review of the financial position of the company is necessary to determine the financial health of an organization. A financial performance measure is an effective means of tracking the progress of a business. Such measures should provide reliable information concerning organizational performance for specific periods and allow executives to use them for setting targets and growth strategies. A review of your financial performance can help you reassess your business goals and plan effectively for improving the business. Organizations must measure and understand their profitability. In most cases, firms tend to focus on maximizing profitability to ensure value for their shareholders. Hence, executives must understand how profitability ratios such as gross profit margin, operating margin, and net profit margin among others work. In addition, there are also other accounting ratios, which demonstrate business performance. They include liquidity ratio, efficiency ratio, and others. These ratios are particularly important for investors and creditors who may wish to understand the financial position of a company while firms may use them for forecasting and growth purposes. This research paper measures the financial performance of Etisalat between the fiscal year 2003 and 2004.
Emirates Telecommunications Corporation (Etisalat) is a multinational communication company headquartered in the United Arab Emirates (UAE). Currently, the company can be found in 15 countries across Africa, the Middle East, and Asia. By 2014, the company was ranked 17th among the largest mobile network service providers. It boasts 150 million customers, and the company is now among the most powerful firms in the UAE.
Objectives of the Research
- To enhance understanding and application of financial techniques in a real company
- To apply financial concepts and techniques in actual practice
Summary of the Articles
Financial statements consist of reports that show managerial performance, reflecting the success or failure of business strategies. Analysis of these statements provides vital signs on the financial position and health of the company relative to its peers. In case of any impending financial difficulties, managers can act appropriately to divert such difficulties. Thus, analysts must consider financial ratios in their analyses because they provide quick methods to understand a firm’s financial performance for a given fiscal year. Specifically, ratio analysis techniques for financial analysis are the most commonly deployed. The major statements of interest for analysts include the balance sheet, the statement of cash flow, income statements, and statements of shareholders’ equity. These financial ratios are computed based on a single indicator divided by another indicator to reflect the ratio. In addition, a percentage of the ratio may also be derived if necessary.
Most financial analyses do not account for financial performance but rather focus on operational performance. For instance, one study had established that airline firms concentrated on operational performance, but paid minimal attention to financial performance, which had direct impacts on their survival (Feng and Wang 133). Specifically, the researchers noted that “current ratio and debt ratio, used to measure a company’s short-term liquidation and long-term solvency, and return on assets, used to evaluate the productivity of assets, are crucial and fundamental for general business assessment, but seldom appear in the airline assessment process” (Feng and Wang 134). The researchers noted that the absence of financial ratios in financial performance analyses automatically led to bias in evaluation results.
Many others have evaluated and performed financial ratio analyses on several companies, specifically on financial institutions. For instance,
Ibrahim shows that some authors analyzed the financial position and performance of some banks using the camel model (Ibrahim 26). Various financial ratios have been adopted to perform such analyses. Such results have shown that the performances of organizations differ based on financial ratios based on the camel model. Such studies also reveal that thought ranking of ratios is differ across banks. Nevertheless, there are no statistically significant variations among financial institutions based on the camel ratios. Thus, the performances of organizations in an industry should be close, if not the same.
Other studies have assessed performances in financial institutions in South Africa. Such researchers have relied on financial ratios to assess the profitability, liquidity, and credit quality performance of major South African (Ibrahim 27). The outcomes demonstrated a growth in the bank performance in terms of profitability, liquidity, and credit quality for the fiscal year under analysis (Ibrahim 28).
Other studies have shown that investments continue to rise in various sectors, including financial institutions. Various factors account for growth in different institutions. For instance, the interest-free system has attracted significant investments in the Islamic banking sector. According to some studies, the nature of Islamic Banking differs from “traditional (conventional) banking but Islamic banks have a moderate impact on the Business sector because Islamic banks follow the systems that resemble traditional system and governed by State Bank” (Irfan, Majeed and Zaman 225). Nevertheless, like conventional banks, Islamic institutions also face similar challenges, specifically internal and external issues.
The internal issue is attributed to clients who are using conventional banking products while external issues are to meet the international transaction requirements and standards based on strict regulatory requirements (Irfan et al. 225).
To break through in the global market and enhance local potential customers local knowledge and training are needed to drive product sales. The use of Shariah principles and the implication of products in different countries could help the company to grow in specific markets globally.
Financial ratios have provided the best approaches to gauge the financial performances of companies. For instance, profitability, liquidity, efficiency, and solvency ratios can be used to evaluate the performance of firms across various industries, including telecom and finance (Ally 133). Such studies show that the profitability of banks, for instance, increases because of revenues from short-term ventures financing.
Some researchers tend to analyze financial performances for specific periods. For example, analysis of organizational financial performance during wars or volatile economic situations could provide critical insights into the resilience of the industry and the company (Ally 133). Performances differ across industries but could be almost similar among organizations in the same industry. However, performances differ based on specific companies’ terms and conditions of operations.
The financial analysis must evaluate balance sheets, income statements, and other relevant documents to determine the financial status of a company.
The risk status of some organizations could affect their performances. For instance, “Islamic banks are more profitable, less risky and more efficient than conventional banks” (Ally 133). Such growths and profitability result from certain principles adopted by an organization.
Financial performance refers to the performance of financial activities and determining the achievements of an organization. That is, financial performance should reflect the role played by financial arrangements and investments made by companies while keeping in view from returns. Within this context, performance reflects the progress of the companies financially. Thus, performance shows endeavors to attain targets “efficiently and effectively, the achievement of targets involves the integrated use of human, financial and natural resources” (Ally 134).
Specifically, financial performance should determine the outcomes of a firm’s policies and operations about monetary values. The results are normally presented in terms of profitability, liquidity, and efficiency among others. Decision-makers often rely on financial performance, which is evaluated to present the actual financial position of the company. At the same time, they can be used to judge “the results of business strategies and activities in objective monetary terms” (Ally 135).
Usually, ratios are used to assess the financial performance of a company. A well-formulated and executed financial management is required for positive improvements and value creation for the company.
Ultimate the aim of profitability of an organization may be attained through effective use of available resources. The financial performance of a given organization must strive to enhance shareholders’ returns. Traditionally, organizational financial performance evaluation is based on “the analysis of financial ratios such return on equity (ROE), return on assets (ROA), net interest margin (NIM), capital asset ratio, the growth rate of total revenue, cost/income ratio” (Ally 134).
Nevertheless, irrespective of how many ratios are applied in the analysis, a perfect analytical model that can account for all variables and meet the unique needs of a given company has not yet been developed. For this reason, the analysis of financial ratios is supported with diverse forms of assessments, including variables related to management equity structure, quality, and competitive abilities of an organization in an industry.
Efficiency in a given system is considered important in any sector (Masruki et al. 67). Services and products offered by the service sectors are intangible. Thus, it is not simple to evaluate the efficiency and competitiveness of such firms (Masruki et al. 67). Nevertheless, studies have strived to evaluate the efficiency and productivity of organizations by applying various outputs, efficiency, costs, and performance.
Performances are used to offer the best indicators for investors and other stakeholders about investment decisions whether to invest or not or withdraw funds in case of banking services.
Regulators are also interested in organizational performances while managers are interested in daily operations for purposes of assessing strategic objectives and goals.
The major issue has been how to measure the financial performance of organizations. Other researchers have preferred financial ratios while others have opted for technical approaches such as Data Envelopment Analysis (DEA) and Stochastic Frontier Approach (SFA).
Specific fiscal years are used to evaluate the financial performance of organizations to determine whether there are notable performance improvements. Other approaches may include time-series analysis based on a comparison of various institutions in a given industry.
The most important issue in financial analysis is to determine the financial stability of an organization. Financial stability is the “condition where the financial intermediation process operates smoothly and there is confidence in the operation of key financial institutions and markets within the economy” (Rahim, Hassan and Zakaria 840).
After the recent global financial crisis, many organizations have taken a keen interest in assessing their financial positions to determine resilience in hard economic situations. In this regard, the stability of an organization can be evaluated by comparing past and present performances or using peer firms’ performances. In this approach, it is vital to determine how other firms have created competitive advantages to improve outcomes and reduce risks. Some organizations, for instance, Islamic banks use leverage to avert a crisis, but other risks make them prone to possible economic downturns.
It is noted that one can effectively determine the risk of failure for an organization using elements of risk and assets. Thus, stability and risk can be confirmed through the analysis of financial ratios.
- Gross Profit Margin
= Gross Profit / Net Sales = ____
2801.01/9225.75 = 0.304 = 30.4%
3297.36 / 10433.78 = 0.316 = 31.6%
The gross profit margin for Etisalat increased between the fiscal year 2003 and 2004 from 30.4% to 31.6%. The growth shows that the company has effective ways of managing its costs of inventory, improving sales, and controlling other related costs to realize increased profit margins.
- Net Profit Margin
= Net Income/Net Sales = _____
2872.61 / 9225.75 = 0.311 = 31.1%
3417.64 / 10433.78 = 0.32756 = 32.8 %
Etisalat realizes profits from its investments after all its expenses deduction. The margin ranges from 31.1% to 32.8 %. The company’s profitability fluctuates because of several factors attributed to variable costs. Variable costs largely influence the net profit margin for Etisalat. These are costs associated with labor, taxes, raw materials, and changes in foreign exchange markets. At the same time, fixed costs of running the business also affect the company’s net profit margins. While these costs may not change, they have significant impacts on the net profit margin of Etisalat.
- Operating margins
Operating Margin = Operating Earnings / Revenue
4863.86 /9225.75 = 0.5272 = 52.7 %
4537.31 / 10433.78 = 0.4349 = 43.49 %
Higher operating margins indicate that Etisalat is a highly profitable and efficient company that can generate profits across all the countries in which it operates. However, between the two fiscal years analyzed, the operating margin declined by 8.8 percent because of several factors. For instance, Etisalat pricing strategies, tariffs, exchange rates, and labor costs have perhaps increased significantly. Hence, the company has been striving to find the right balance through price adjustments to fight competition and attract many more subscribers.
These high percentages indicate that Etisalat has a highly flexible and competent management team across different countries that can manage rough economic times and downturns in different regions to deliver amazing results.
Labor costs, service costs, and other costs related to regulatory requirements are particularly critical considerations for the company in this context. Etisalat must therefore assess these margins against its competitors in the industry to determine its position in the global market.
- The Return on Assets Ratio
Net Income/Total Assets = _____
2872.61 / 17867.69 = 0.161 = 16.1%
3417.64 / 20383.66 = 0.168 = 16.8%
The ROA shows the profitability of Etisalat relative to its assets. From the ratios, investors can conclude that the company can effectively use its assets to generate revenues and profits.
At the same time, Etisalat can leverage its assets to control debts to maximize returns for its shareholders. Notably, Etisalat recorded marginal growth in the return on assets ratio. The increment in ROA between the two fiscal years depicts growing profitability for the company. Nevertheless, Etisalat should focus on sustained growth of its ROA by increasing net incomes by limiting expensive new assets and investments. Alternatively, Etisalat can improve efficiency by using its current assets. It is imperative to recognize that the company has focused on income generation and asset acquisition at the same time. Thus, ROA can be sustained.
- The Return on Equity Ratio
= Net Income/Stockholder’s Equity = _____
2872.61 /12267.63 = 0.234 = 23.4 %
3417.64 / 14110.28 = 0.242 = 24.2 %
Between the fiscal period 2003 and 2004, Etisalat had a favorable ROE of up to 24.2 % and thus, good returns for shareholders. The company increased its ROE by 1.2%. Although there was an increment in total shareholders’ equity, the net income also grew significantly. This outcome has led to increased earnings for shareholders.
For investors, it is recommended to invest in companies with good sustained ROE over several fiscal years. The fiscal periods of 2003 and 2004 state of Etisalat were, therefore, good for potential investors. This demonstrated that the company had managed to maintain its profitability and rarely relied on shareholders’ equity for its growth.
- Cash Return on Assets
= Cash flow from operating activities/Total Assets = _____
4863.86 / 17867.69 = 0.272 = 27.2 %
4537.31 / 20383.66 = 0.223 = 22.3 %
Cash Return on Assets Ratio is significant in evaluating how Etisalat has focused on its investments to generate income from its assets. From the figures of the two years analyzed, one can note that the company’s performance had declined notably by 4.9 percent. However, Etisalat had impressively higher Cash Return on Assets Ratios.
This calculation is critically necessary for assessing the company’s massive investments in networks and other assets, such as service centers. Therefore, Etisalat needs to enhance its investments, as new networking infrastructures and other assets to support daily operations are vital investments and, therefore, such large purchases have big enough effects on financial statement results.
- Shareholder Equity Ratio
= Total Shareholder Equity/Total Assets
12267.63 / 17867.69 = 0.687 = 68.7 %
14110.28 / 20383.66 = 0.692 = 69.2%
Between the years 2003 and 2004, shareholders’ equity increased marginally as the company depended on shareholders’ contributions to fund its operations. Therefore, in the case of a company-wide liquidation, investors would get good returns from their investments. These are high percentages, which suggest that the company operates with investments from shareholders. Further, Etisalat has excessively continued to rely on external sources of funds to drive its investment activities.
This ratio shows how much money investors have put in the company, and the money they would get if all Etisalat assets were liquidated. The ratio is used to ascertain the portion of Etisalat’s assets that are owned by investors.
= current assets/current liabilities
17867.69 / 5600.06 = 3.2
20383.66 / 6273.38 = 3.25
Low liquidity ratios (less than one) demonstrate that the company may not easily meet its short-term obligations. Etisalat has high liquidity ratios, which have continued to increase between the two fiscal years and, thus, it can meet its near-term obligations. Etisalat can meet these obligations by relying on its current assets (current ratio) or its available total cash. This is important because Etisalat can change its short-term assets into cash to clear its debt easily. Hence, it may not face bankruptcy. Etisalat reflected a case of a strong company as a going concern.
Efficiency Ratio = Expenses / Revenue * 100
6424.74 / 9225.75*100 = 0.696 = 69.6 %
7135.92 / 10433.78 = 0.684 = 68.4 %
The efficiency ratios show how fast Etisalat can generate revenues from its resources. Low ratios are good for the company. Most accountants have considered 50% as the best ratio for efficiency. However, efficiency ratios for Etisalat are considerably higher and, therefore, the company may not be efficiently managing its expenses and generating more revenues.
These ratios fluctuate due to changes in operating costs and net sales. Thus, Etisalat was able to reduce its efficiency ratio by a mere 1.2 percent.
It is, therefore, necessary for the company to further reduce its operating expenses and increase revenue generation to operate at an optimal level (less than 50 percent).
- Capital Structure Ratio
Equity to total debt ratio is used to determine this ratio
Stockholder’s equity/total liabilities
12267.63 / 5600.06 = 2.191
14110.28 / 6273.38 = 2.249
These ratios show that Etisalat does not heavily rely on debts to fund its operations. A good company should not exceed 50% of the capital structure because it may exceed its borrowing limit (normally set at 65%).
Therefore, any investor can use these to understand the financial health of the company. Investors can make wise decisions during investments. In addition, loan officers also rely on these risks to assess the creditworthiness of a company. Company executives use financial ratios to enhance their productivity and profitability.
A focus on the ratios
The financial ratios of Etisalat show that the company could realize good future returns. In addition, the company has embarked on aggressive business risk management and investment in networking and support services to control costs and introduce innovative products and services to its customers. The company also focuses on rapid expansion through opening new retail outlets globally. These strategies aim to position Etisalat for future competition in the global telecom sector, drive net sales and improve its profitability.
The company has overcome several challenges particularly related to political instability.
Today, Etisalat appears to be performing well financially and this reflects the company’s ability to maintain upward trends and growth. It can be predicted that revenues and expenses will continue to rise for the company.
Etisalat has adequate financial strength. The company also uses its cash to buy other companies, which have technologies and products that can augment its products and services. For instance, the company can buy other technology companies to change its line of products. This strategy of acquisition can be a critical point of development for many telecom companies.
For the fiscal year 2005, the company expected the growth margin to increase within the first quarter. The forward-looking revenues could differ from the actual gross margins. Etisalat has acknowledged that its future net sales and gross margins could be influenced by several risks and other favorable factors.
Generally, Etisalat has noted that its gross margins and net sales on specific individual products will continue to experience pressure and thus these margins could remain in downward trends because of several reasons. First, continued pressures on the global pricing strategies of the company. Second, it will experience continued assault from other cheaper alternative service providers. Third, electronic products have compressed life cycles accompanied by shift product transitions, which affect investment decisions. Fourth, there is a potential increment in the prices of software and hardware components, which will impact operational margins. Fifth, the US dollar could strengthen against other currencies and influence the margins for foreign markets, which will influence Etisalat earnings in the future. Finally, there is a possible rise in costs beyond product services and marketing activities while consumers may consider low-priced service options.
Etisalat should react to these issues in several ways. For instance, for competitive assaults, the company intends to continue reducing its prices, which could have negative impacts on the gross margins but will increase the customer base and eventually result in profit margins. The company’s ability to control its quality of service will attract more subscribers. In addition, the increasing demands for specific products may also result in higher margins relative to previous years. That is, Etisalat may collaborate with phone manufacturers to distribute phones, modems, and others products for additional incomes. Moreover, telecom firms have become innovative in terms of service provision. For instance, they can collect fees and utility incomes for related companies for fees to increase their incomes.
Analysis of Etisalat’s two fiscal periods reflected in the financial ratios has shown that the company is financially stable, but requires sustained improvement. Etisalat continues to realize increased net sales year-over-year. On the other hand, its gross and operating margins have continued to increase, and the company has attributed such declines to several factors, including competition and increased costs of operations and labor. Overall, the company is creditworthy and suitable for investment.
Etisalat, however, continues to face critical risk factors, which have abilities to affect its product and service sales adversely and ultimately profitability. These are mainly external factors, which the company may not be able to control. As a result, Etisalat has continued to seek beneficial partnerships to meet its production and distribution needs.
The liquidity ratio shows that the company can meet its obligations through its current assets. Hence, it may not face bankruptcy and will be able to continue as a going concern. It also has good cash flows. However, over the years, shareholders’ equity has continued to rise steadily as the company borrows to fund its operations. This indicates that the company has not managed to maintain its profitability and re-invest the profits. It shows that Etisalat relies on shareholders’ equity for its growth.
- The company should reduce dependency on shareholders to fund its operations
- Etisalat should focus on revenue generation for improved shareholders’ return and financial health of the company
- Etisalat must control asset and debt
- The company efficiency ratios show that they are beyond the recommended levels. It is, therefore, necessary for the company to further reduce its operating expenses and increase revenue generation to operate at an optimal level (less than 50 percent)
- Shareholders may continue to invest in the company because it is profitable and shows greater potential with the growing revenues from various regions
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