fma assignment - mohamed boraei mactavish dubai) 100207 final

Master of Business Administration International

FINANCIAL & MANAGEMENT

ACCOUNTING

ASSIGNMENT (October 2009 – September 2010)

Presented to:

Richard Grey

Shankar Subramani

Prepared by: Mohamed Boraei

MacTavish (Dubai)

Registration No. 200990325

Total word count: 7244

University of Strathclyde – Strathclyde Business School

Financial and Management Accounting _________________________________________________________________________________________________________________________________________________

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Prepared by: Mohamed Boraei – MacTavish 200990325 2

A Closer Outlook on QTEL (Qatar) and ETISALAT (UAE) Financial Position

(2006 – 2008)



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TABLE of CONTENTS

Page

Introduction 5

i.a. Performance ratios calculation 6

i.a.1. Return on capital employed (ROCE) 6

i.a.2. Return on shareholders’ fund/equity (ROE) 7

i.a.3. Gross profit percentage 8

i.a.4. Net profit percentage 9

i.b Performance comparison 10

ii.a. Liquidity and management of working capital ratios calculations 11

ii.a.1 Current ratio 11

ii.a.2. Quick Ratio (Acid Test) 12

ii.a.3. Stock Turnover (days) 13

ii.a.4. Asset Turnover Ratio (Times) 14

ii.a.5. Debtor Payment Period (days) 15

ii.a.6. Creditors Payment Period (days) 16

ii.b. Causes and Effects of Liquidity ratios Changes 17

iii.a. Gearing Ratios Calculations 19

iii.a.1. Gearing 19

iii.a.2. Interest Cover Ratio (times) 20

iii.b. Capital Structure 21



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TABLE of CONTENTS – continue

Page

iv.a. Investment Ratios Calculations 22

iv.a.1. Dividend Yield Ratio 23

iv.a.2. Earnings per Share (EPS) 23

iv.a.3. Price/Earnings Ratio (P/E Ratio) 24

iv.b. Implications of the Investment Ratios 25

iv. Problems in assessing the performance and financial position of a public company 26

v. References 27



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Introduction

Telecommunication Industry is one of fast growing sectors in the Gulf and Middle East. It’s also playing an important part in any economy. It’s also thought that financial crises didn’t affect much the Telecommunication industry as majority of Telecommunication companies and industry experts announced last year. This was encouraging to select two of the biggest telecommunication companies in the Gulf to analyze and assess their financial performance.

EMIRATES TELECOMMUNICATIONS CORPORATION (ETISALAT)

The Emirates Telecommunications Corporation (ETISALAT) was incorporated in 1976 in United Arab Emirates, to provide telecommunications services, media and related equipment including contracting and consultancy services to other international telecommunications companies.

ETISALAT has a more than 20 different local, regional and international subsidiaries that are mainly working in telecommunications field, and ranked 140th in the FT Top 500 Corporations in the world in terms of market capitalization. ETISALAT also stand 6

th largest company in the Middle East in

terms of capitalization and revenues, by The Middle East magazine.

QATAR TELECOM (QTEL) Q.S.C

Qatar Public Telecommunication Company was formed on 1987 to provide domestic and international telecommunications services within the State of Qatar. The corporation was transformed into a Qatari shareholding company under the name of Qatar Telecom (QTEL) Q.S.C on 1998.

QTEL has the right to own, operate, maintain, and develop telecommunications network in Qatar, and is not subject to taxations on its earnings for a period of ten years commencing 1 Jan 1999.

QTEL has more than 40 domestic and international subsidiaries that provide domestic and international telecommunications services in Qatar, Asia, and MENA Region. QTEL number of subscribers reached 57 millions worldwide.



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i.a. Performance Ratios Calculations

i.a.1. Return on Capital Employed (ROCE)

The following ratio measures the relationship between the total amount invested in each business and the generated return for shareholders.

Profit before Interest and Tax x 100 Return on Capital Employed (ROCE) =

Shareholders' Fund + Long term Debt

QTEL ETISALAT

2006 2007 2008 2006 2007 2008

Return on Capital Employed (ROCE) 28% 7% 9% 19% 21% 22%

QTEL ROCE has sharply declined from 28% in 2006 down to 7% in 2007. This was due to a clear jump in minority interests (acquisitions), and long term borrowings and loans interests during from QAR 655 millions in 2006 to QAR 21,735 millions in 2007. The Profit before taxes didn’t grow as much as other factors have grown.

In 2008, the ROCE gained minor increase from 7% in ’07 to 9% in ’08. This because of the growth in shareholders’ equity that came out of continuous increase of minority interests in 2008.

ETISALAT ROCE has grown from 2006 to 2008 steadily in almost the same rate, moving from 19% in 2006, to 21% in ’07, and reached 22% in ’08. Increase of ROCE came due to gradual increase of profit before taxes along with the growth in shareholders’ fund, while achieving similar decrease in non-current liabilities. Increase of shareholders’ fund was due to additional shares issuing and bonus shares, along with an increase of minority interests and reserves. The decrease of non-current liabilities was due to the decrease of borrowings and loans.



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i.a.2. Return on Shareholders' Fund/Equity (ROE)

This is another ratio that measures profitability but more focusing on the investments made by shareholders against the Profit after taxes.

Profit after Tax x 100 Return on Shareholders' Fund (ROE) =

Shareholders' Fund

QTEL ETISALAT

2006 2007 2008 2006 2007 2008

Return on Shareholders' Fund (ROE) 33% 11% 10% 27% 26% 24%

QTEL ROE has dropped down from 33% in ’06, to 11% on ’07, then 10% in 2008. This was due to the sharp increase in Shareholders’ fund over the last 3 years from QAR 5 to 28 billion. The main increase came in minority interests from QAR 60 millions in 2006 to QAR 9,605 millions in 2007, and became QAR 15,677 millions in 2008. Also, the legal reserve increased from QAR 888 millions in 2006 to QAR 6,494 millions in 2008.

The profit after taxes during the same period didn’t have similar growth rate which caused the decline in ROE for QTEL.

QTEL ROE

2006 2007 2008

Shareholders' Fund

Prof it af ter Tax

ETISALAT ROE has also seen a declining ratio during the last 3 years (’06-’08), but it was minimal and didn’t have any sudden activities. Both the shareholders’ fund and profit after tax have grown during the period, but the shareholders’ fund growth rate was little higher which caused ETISALAT ROE to decline

ETISALAT ROE

2006 2007 2008

Shareholders' Fund

Prof it af ter Tax



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i.a.3. Gross Profit Percentage

This ratio measures the profitability in buying and selling the company’s product (goods), by representing the difference between sales and cost of sales. This should be done before any other expenses are calculated.

Gross Profit x 100

Gross Profit Percentage = Revenue

QTEL ETISALAT

2006 2007 2008 2006 2007 2008

Gross Profit Percentage 83% 72% 73% 34% 65% 58%

QTEL enjoyed high Gross Profit Percentage during the last 3 years. Although that it went down from 83% in ’06 to 72% in ’07, but it slightly improved in 2008 and reached 73%. By looking into the trends of both Gross Profit and Revenue, we notice that the Gross Profit didn’t increase at the same rate of Revenue increase on ’07 and ’08. This was the main reason behind the declining of Gross Profit Percentage.

ETISALAT Gross Profit Percentage has increased from 34% in ’06 to 65% in ’07. This was due to the high Gross Profit that was achieved in 2007.

In 2008, the percentage declined to 58% although both the Gross Profit and Revenue have increased, but the Revenue growth rate was relatively higher than the Gross Profit’s which caused the decline in the overall percentage.



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i.a.4. NET Profit Percentage

This percentage explains the relation between Revenue (sales) and all types of costs, expenses, and taxes.

Profit after Tax x 100

Net Profit Percentage = Revenue

QTEL ETISALAT

2006 2007 2008 2006 2007 2008

Net Profit Percentage 37% 18% 14% 36% 31% 31%

QTEL Net Profit Percentage dropped sharply from 37% in ’06 to 18% (almost half) in ’07, and continued falling down to 14% in 2008. The main reason behind this drop was the jump in revenues that happened due to heavy investments in international entities/subsidiaries. The Profit after Taxes has also increased over the 3 years but not at the same growth rate of Revenues.

ETISALAT Net Profit Percentage has declined from 36% in 2006 to 31% in 2007, but it remained at the same level in 2008. Both Profit after Taxes and Revenues have increased during both 2007 and 2008, but the growth in revenues was almost double the increase in profit after tax, which caused the Net Profit Percentage to decline in 2007. In 2008, both revenue and profit after tax continued to increase, but at the same level (about 22%). This helped to maintain the Net Profit Percentage at 31% in 2008.



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i.b. Performance Comparison

(QAR 1 = AED 1) QTEL ETISALAT

2006 2007 2008 2006 2007 2008

Return on Capital Employed (ROCE) 28% 7% 9% 19% 21% 22%

Return on Shareholders' Fund (ROE) 33% 11% 10% 27% 26% 24%

Gross Profit Percentage 83% 72% 73% 34% 65% 58%

Net Profit Percentage 37% 18% 14% 36% 31% 31%

ROCE: During the last 2 years, the ROCE ratios are showing that ETISALAT shareholders are enjoying higher and stable returns on their investments than their counterparts in QTEL. QTEL ROCE can be improved by trying to reduce the interest bearing loans and borrowings, and trying to increase revenue/sales.

ROE: The ROE figures also showing that ETISALAT enjoys better ROE than QTEL, especially during 2007 and 2008, although that the ROE for both of them had a declining trend during the last 3 years. Not only ETISALAT shareholders’ fund exceeded QTEL’s, but the profit after tax was significantly higher (more than 3 times during 2007 and 2008). These advantages gave the lead to ETISALAT. QTEL can increase its ROE by trying to increase its sales/revenue and/or reducing operating cost.

Gross Profit Percentage: QTEL Gross Profit Percentage was higher than ETISALAT’s during the last 3 years. In addition to that, QTEL percentage increased between ’07 and ’08 due to the higher increase in gross profit comparing to the increase in revenue, while ETISALAT had a declining trend during the same period due to the lower increase in gross profit comparing to revenue. ETISALAT can improve the Gross Profit Percentage by trying to reduce the cost of sales as less as possible to maximize Gross Profit. QTEL Gross Profit reached QAR 14,890 millions in 2008, while ETISALAT Gross Profit was AED 15,212 millions during the same period.

Net Profit Percentage: Although the Net Profit Percentages of both QTEL and ETISALAT were almost at the same level in 2006 (37% and 36%, respectively), but each of them took different trend in the following 2 years. We can notice a gap that happened in both ’07 and ’08 between the 2 companies due to (mainly) the limited Profit after Taxes of QTEL against ETISALAT. ETISALAT profitability is higher than QTEL especially during the last 2 years. QTEL needs to improve its Profit after Taxes at a faster rate than its revenues growth, and try to control its expenses at a reasonable level comparing to revenue. QTEL profit after tax was QAR 2,842 millions in 2008, while ETISALAT’s was AED 8,166 millions during the same period.

CONCLUSION: ETISALAT profitability is better than QTEL’s during the last 2 years, due to higher ROCE, higher return on ROE, and higher Net Profit Percentage. QTEL can have a better profitability performance by trying to maximize revenue and sales, while controlling its operating cost and other expenses.



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ii.a. Liquidity and Management of Working Capital Ratios Calculations

ii.a.1. Current Ratio

This ratio measures the organization ability to cover its short-term obligations by its liquid assets. The organization profitability is not an indicative that the organization can cover its short term obligations mainly because lack of liquid assets.

Current Assets

Current Ratio = Current Liabilities

QTEL ETISALAT

2006 2007 2008 2006 2007 2008

Current Ratio 1.22 0.61 0.58 1.00 0.73 0.73

QTEL Current Ratio declined from 1.22 times in 2006 to 0.61 in ’07 and slightly declined in ’08. The ratio dropped to half because of high increase of Current Liabilities (Accounts Payables and Accruals increased from QAR 1,263 millions in 2006 to QAR 7,381 millions in 2007). The current assets have also increased during the same period but at a lower scale, due to increase in Inventories, Receivables, and Cash. In 2008, the current liabilities almost doubled because of the main increase in interests bearing loans and borrowings, from QAR 721 millions in 2007 to QAR 7,820 millions in 2008.

QTEL needs to control its short term interests bearing loans and borrowings and trade payables, while increasing inventories and sales (cash/trade receivables). This will reduce the risk of meeting short terms obligations.

QTEL

2006 2007 2008

Current Assets

Current Liabilities

ETISALAT Current Ratio has also declined from 1.0 in 2006 to 0.73 times in 2007 and remained almost the same in 2008. The decline was due to growth of current liabilities came-out of the increase in borrowings, payables related to acquisitions, and creditors. Current Assets declined in 2007 because of decrease of cash before it recovers’ again in 2008, but the overall liquidity ratio didn’t change.

Same as in QTEL case, ETISALAT needs to control its current liability and/or maximize the current assets. This will reduce the risk of meeting short terms obligations.

ETISALAT

2006 2007 2008

Current Assets

Current Liabilities



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ii.a.2. Quick Ratio (Acid Test)

The quick ratio is another measure to organization’s liquidity (similar to current ratio) but excludes the inventory which is often can’t be turned into cash easily to pay the creditors when needed. It’s thought that an ideal quick ratio is 1:1, but this is - of course - may vary according to type of business.

Current Assets - Inventory

Quick Ratio (Acid Test) = Current Liabilities

QTEL ETISALAT

2006 2007 2008 2006 2007 2008

Quick Ratio (Acid Test) 1.21 0.60 0.56 0.99 0.72 0.73

QTEL Quick Ratio had a declining trend from 1.21 in 2006 to 0.6 in 2007 reaching 0.56 in 2008. As we see, The ratio was high in 2006 because the current liabilities (QAR 1.9 billion) didn’t have interest bearing loans or borrowing. The trade payable was also limited (i.e. QAR 525 million) comparing to current assets. The inventory level in 2006 was minimal and didn’t have big effect since it was almost 1% of current assets (Inventory is QAR 27 million and Current Assets is QAR 2.4 billion). This situation changed drastically in the following 2 years to huge investments and trading that QTEL went through. For example, in 2008 QTEL current liabilities jumped to QAR 20 billion (including more than QAR 17 billion of Accounts payable and loans interests/borrowings). The current assets (QAR 12 billion) didn’t grow as much as the current liabilities in 2008, and the inventory level (QAR 270 million) formulated only 2% of current assets. All this caused the Quick Ratio to drop to 0.56 times which might look low (risky) to cover QTEL short terms liabilities.

QTEL

2006 2007 2008

Current AssetsInventory (Stores)Current Liabilities

ETISALAT Quick Ratio didn’t have sharp changes during the same period. It went down from 0.99 in 2006 to 0.72 in 2007 reaching 0.73 in 2008. In 2006, both the current liabilities and current assets were almost at the same level of AED 13.5 billion, and the inventory of AED 65 million formulated about 0.5% of current assets. The current assets less inventory in 2007 declined due to the decline in debtors, prepayments, and retentions, while the current liabilities increased from AED 13 to 17 billion due to the increase in creditors and accruals, mainly.

In 2008, all the quick ratio factors have increased together, and the current assets less inventory increased slightly more (about 30% increase) than the increase of current liabilities (about 29% increase), which caused a limited increase in the quick ratio from 0.72 to 0.73

Assuming an ideal ratio of 1:1, we can say that ETISALAT faced some risk in covering its short term liabilities in 2007 and 2008

ETISALAT

2006 2007 2008

Current AssetsInventory (Stores)Current Liabilities



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ii.a.3. Stock Turnover (days)

The stock or inventory turnover reflects the efficiency of organization’s management of the working capital. It can also be defined as how long the inventory is kept before it’s sold. This is represented in days, and the lower the turnover the higher the efficiency of managing the capital.

Inventory x 365

Stock Turnover (days) = Cost of Sales

QTEL ETISALAT

2006 2007 2008 2006 2007 2008

Stock Turnover (days) 14 16 18 2 9 7

QTEL Stock Turnover was 14 days in 2006 which mean that each unit of stock took 14 days before it’s sold. The stock turnover increased to 16 days in 2007 because the increase in cost of sales was less than the increase in the inventory. The cost of sales increased from QAR 732 millions in 2006 to QAR 2,927 millions in 2007, while the inventory had a big increase moving from QAR 27 millions in 2006 to QAR 127 millions in 2007.

In 2008, the stock turnover continued the same behavior and increased to 18 days. This was due to the same reasons of 2007, since both the inventory and cost of sales have increased but the increase in cost of sales was less than the increase in the inventory.

ETISALAT Stock Turnover was 2 days in 2006, increased to 9 days in 2007, before it declines to 7 days in 2008. The main reason behind reporting relatively low stock turnover is the high cost of goods sold. Cost of sales in 2006 exceeded AED 10 billions, and declined to AED 7 billions in 2007, before it increases again in 2008 to AED 10 billions. The inventory levels during the same period had an increasing trend, since it was about AED 65 millions in 2006, increased more than 250% to AED 175 millions in 2007, and continued its increase in 2008 and exceeded AED 200 millions.

Although it’s desirable for the stock inventory to be as short/fast as possible, so it can be sold faster to make cash necessary for operations, but we see in ETISALAT case that the stock turnover is too short due to low inventory levels comparing to cost of sales. This strategy/policy might affect - negatively – the flow of business since there might be a situation when it’s out-of-stock and may lead of inability of meeting customer’s expectation in a telecom industry. ETISALAT need to review its inventory policy and consider the possibility of increasing its inventory level to maintain a reasonable stock turnover period.



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ii.a.4. Asset Turnover Ratio (Times)

Measuring the effectiveness of business assets in generating sales revenue is another key measurement. Higher asset turnover indicates that assets are more usable in revenue generation.

Revenue

Asset Turnover = Non-current Assets

QTEL ETISALAT

2006 2007 2008 2006 2007 2008

Asset Turnover (Times) 0.82 0.25 0.33 0.50 0.54 0.58

QTEL Asset Turnover declined from 0.82 times in 2006 to 0.25 in 2007, before it increases again to 0.33 times in 2008.

In 2006, QTEL revenue and non-current assets figures were close to match each others. Every QAR 1 of non-current assets value contributed to generate QAR 0.82 of sales revenues. In 2007, the non-current assets jumped to QAR 41 billions (from QAR 5 billions in 2006), due to acquisitions and investments, while the revenue increase but not at the same level. This caused the asset turnover to fall down. In 2008, both the revenue and non-current assets continued increasing, but the revenues increase about 100% from QAR 10 to 20 billions, while the non-current assets increased about 50% reaching QAR 60 billions. This helped the Asset Turnover to increase in 2008 to reach 0.33 times, meaning that each QAR 1 of non-current assets contributed to QAR 0.33 in sales revenue.

QTEL

2006 2007 2008

RevenueNon-current Assets

ETISALAT Asset Turnover had a positive upward trend from 2006 to 2008, went from 0.50 in 2006 to 0.54 in 2007, before it reach 0.58 in 2008.

Looking at the revenue and non-current assets figures over the last 3 years, we can notice the increase of revenue from AED 16 to 21 billions (30% increase) from 2006 to 2007, continued by another increase to AED 26 billions in 2008 (22% from 2007’s). In the meantime, the non-current assets increased by 22 % from 2006 to 2007, and then increased by 15% from 2007 to 2008. As we can see the growth rate in revenue was higher than the same in non-current assets which made the Asset Turnover to have an increasing trend. Each AED 1 of non-current assets contributed to generate AED 0.58 in revenue in 2008.

ETISALAT

2006 2007 2008

RevenueNon-current Assets



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ii.a.5. Debtor Payment Period (days)

This indicator shows how long usually - in average - customer take (in days) to settle their dues to the organization. Since there is no ideal turnover for this measure, but organizations need to put some control on keep this period as low as possible to assist in generating cash necessary for operations.

Trade Receivables (Debtors) x 365

Debtor Payment Period (days) = Revenue

QTEL ETISALAT

2006 2007 2008 2006 2007 2008

Debtor Payment Period (days) 39 34 26 14 28 31

QTEL Debtor Payment Period had a positive decline from 39 days in 2006, to 34 days in 2007, before it reach 26 days in 2008. The main reason behind this positive behavior was the sharp increase in revenues over the last 3 years from QAR 4 billions in 2006 to QAR 10 billions in 2007, and then QAR 20 billions in 2008. QTEL was able to control a reasonable increase of Trade Receivables during the same period. Although the trade receivables have grown but not at the same growth rate of revenue. This helped QTEL to reduce the average debtor payment period.

QTEL

2006 2007 2008

RevenueTrade Receivables

ETISALAT Debtor Payment Period had an increasing trend during the last 3 years. It went up from 14 days in 2006, doubled to 28 days in 2007, before it reach 31 days in 2008. The increase in ETISALAT revenues was about 31% moving from AED 16 to 21 billions (from 2006 to 2007), and continued increasing by 22% and reached AED 26 billions. Looking at the Trade receivables, we can notice that the increase from 2006 to 2007 was about 150% (from AED 630 to 1,600 millions), and continued increasing in 2008 by 36% reaching AED 2,200 millions.

As we notice, the increase in revenue was lower than the increase in trade receivables which caused the debtor payment period to go up. ETISALAT need to review it policy to consider controlling this ratio and try to reduce the trade receivables level.

ETISALAT

2006 2007 2008

RevenueTrade Receivables



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ii.a.6. Creditors Payment Period (days)

This indicator shows how long the organization takes – in average – to pay its trade creditors. The organization need to control this ratio at a reasonable level and try to negotiate late payments to its suppliers while maintaining reasonable finance cost and cash flow.

Trade Payables (Creditors) x 365

Creditor Payment Period (days) = Purchase or Cost of Sales

QTEL ETISALAT

2006 2007 2008 2006 2007 2008

Creditor Payment Period (days) 262 179 272 92 291 257

QTEL Creditors Payment Period fluctuated from 262 days in 2006, declined to 179 days in 2007, before it increased again to 272 days in 2008.

In 2007, both the cost of sales and trade payables have increased comparing to 2007’s, but it’s noticed that the increase in cost of sales (about 300%) was higher than the increase in trade payables (about 170%), from 2006 to 2007. This resulted in reducing the creditors’ payment period from 262 to 179 days.

In 2008, we had an opposite scenario since the increase in cost of sales (about 85%) was lower than the increase in trade payables (about 180%). This has resulted in the increase of creditors’ payment period.

QTEL need to consider more control on the cost of sales, as well as trying to negotiate longer payment terms with its suppliers.

QTEL

2006 2007 2008

CreditorsCost of Sales

ETISALAT Creditors Payment Period had a different fluctuating ratio, from 92 days in 2006, jumping to 291 days in 2007, before it decline to 257 days in 2008.

In 2007, we notice a decline of 30% in cost of sales from AED 10 to 7 billions, while the trade payables increased by more than 100% from AED 2 to 5 billions, comparing to 2006 figures. This made the creditors payment period to increase (improve) from 92 to 291 days.

In 2008, both of the cost of sales and trade payables have increased, but the increase in cost of sales (45%) exceeded the increase in trade payables (30%) comparing to 2007 figures. This allowed the creditors payment period to go down again from 291 to 257 days.

To improve the creditors’ payment period for ETISALAT, it needs do more control on the growth of cost of sales comparing to the increase in trade payables.

ETISALAT

2006 2007 2008

CreditorsCost of Sales



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ii.b. Causes and Effects of Liquidity ratios Changes

There is no ideal liquidity ratio, but it’s thought that liquid assets shouldn’t be less than current liabilities. High current ratio also thought to be preferable than a low one. Liquid (short term) assets are important to be sufficient to secure covering short term liabilities and obligations. It’s not enough for an organization to be profitable but this is not a guarantee that the same organization has the ability to settle its short term dues.

QTEL ETISALAT

2006 2007 2008 2006 2007 2008

Current Ratio 1.22 0.61 0.58 1.00 0.73 0.73

Quick Ratio (Acid Test) 1.21 0.60 0.56 0.99 0.72 0.73

QTEL

QTEL relied on borrowings to finance its investments during 2007 and 2008. The current liabilities jumped from QAR 1.9 to 20.7 billion over from ’06 to ’08. In the meantime, the current assets only increased from QAR 2.4 billions to QAR 11.9 billions during the same period. Both trade payables and loans interests/borrowing was the main reason of current liabilities increase.

The above analysis gives an idea about the QTEL liquidity risk of not being able to meet its short term liabilities and obligations. This may affect QTEL’s reputation in the telecom industry and discourage investors from investing in QTEL stocks/shares, in addition of forcing QTEL itself to liquidate some of its assets if the market conditions became more stressful.

QTEL need to focus on balancing between funding and the use of its own reserves, minimize going through any additional current liabilities (investments, etc.), or to negotiate longer credit terms with lenders. Parallel to that, QTEL has to increase its cash by minimizing its credit sales, and minimizing its inventory levels.

Current Ratio

0.1

1.0

10.0

2006 2007 2008

QTELETISALAT



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ETISALAT

ETISALAT both current and quick ratios were almost the same, and had the same declining trend especially from 2006 to 2007. Both ratios were around 1:1 in 2006. Both the current assets and current liabilities were almost around AED 13.5 billions. The cash balance was very strong reaching AED 10 billions out of total AED 13.5 billions of current assets in 2006. On the other hand, the inventory level was relatively limited and stayed at about AED 66 millions which represent about 0.5% of total current assets in 2006

Looking at 2007 liquidity ratios, we notice a drop that happened from 1 to 0.72 in average. The main reason behind this drop was an increase of 30% in current liabilities due to - mainly - the increase in Federal royalty from AED 5.2 to 7.2 billions and the increase of creditors and accruals from AED 2.7 to 6 billions. The fall of current assets from AED 13.5 billion on 2006 to AED 12.9 billions in 2007 have also helped in the declining of both liquidity ratios.

In 2008, all the factors have increased together at a similar rate. Total current assets increased about 30%. This include an increase to debtors and prepayments of about 40%, bank and cash balances increased about 20%, etc. Also, the inventory increased about 16% from ’07 to ’08. The total current liabilities have increased by about 30% because of increase in creditors, trade payables, and short term bank borrowings.

Assuming an ideal ratio of 1:1, we can say that ETISALAT had a little liquidity risk in 2007 and 2008 that discouraged investors from investing in its stocks/shares. ETISALAT needs take some measure to increase the liquidity, or at least to stop further declining. This may happen by increasing the current assets and controlling/reducing the current liabilities.

Quick Ratio

0.10

1.00

10.00

2006 2007 2008

QTELETISALAT

CONCLUSION: ETISALAT had relatively better liquidity ratios than QTEL during the last 2 years. This was because of high borrowings that QTEL went through to fund its investments and operations, in addition to the high trade payables/creditors for both of QTEL and ETISALA in general.



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iii.a. Gearing Ratios Calculations

iii.a.1. Gearing

This ratio measures the relation between debt and equity towards financing the organization. The proportion of debt to equity assists in identifying any financial risk. A highly geared organization is the one that relies heavily on lenders and borrowings to finance its operations.

L. Term Loans & Borrowings Gearing =

L. Term Loans & Borrowings + Equity

QTEL ETISALAT

2006 2007 2008 2006 2007 2008

Gearing 11.4% 55.9% 41.0% 24.6% 15.6% 5.7%

QTEL Gearing started with 11.4 % in 2006, jumped to 56% in 2007, and then declined to 41% in 2008. The Gearing increased sharply in 2007 due to the increase of long term borrowing from QAR 648 millions in 2006 to QAR 20,904 millions in 2007. In the meantime, the long term borrowing plus equity increased at a lower scale from about QAR 5,692 millions in 2006 to QAR 37,420 millions in 2007. The long term borrowing plus equity continued increasing in 2008 by 31% while the long term borrowings itself declined by 4% from QAR 20,904 millions to QAR 20,155 millions which affected the gearing ratio to go down to 41% in 2008.

QTEL

2006 2007 2008

L. Term Loans & Borrowings


ETISALAT Gearing had a declining trend during the last 3 years. The gearing declined in 2007 from 24.6% to 15.6% comparing to 2006 due to the decline of long term borrowing from AED 6,980 millions to AED 4,783 billions, while the consolidated long term borrowing plus equity slightly increased from AED 28,375 millions to AED 30, 678 millions. The same continued to happen in 2008, since the gearing declined from 15.6% to 5.7%. This was due to the fall in long term borrowing to AED 2,035 while the long term borrowing added to equity increased AED 35,636 millions. This made the gearing to continue declining in 2008.

ETISALAT need to maintain same level of gearing (if not lower) while flow of business and not less than similar profit level.

ETISALAT

2006 2007 2008

L. Term Loans & Borrowings




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iii.a.2. Interest Cover Ratio (times)

This ratio shows lenders the confidence of covering the due interest payments from the operating profits. A high interest cover ratio gives the indication of availability of cover to pay the interest payments out from the operating profits.

Profit before Interest and Tax

Interest Cover Ratio = Interest Expense

QTEL ETISALAT

2006 2007 2008 2006 2007 2008

Interest Cover Ratio (Times) 84 3 3 23 15 21

QTEL Interest Cover Ratio dropped from 84 times in 2006 to 3 times in 2007, and remained the same in 2008. The ratio drop that happens from 2006 to 2007 was mainly because of the sudden increase in interest expense from QAR 19 millions in 2006 to QAR 900 millions in 2007, due to the needed borrowings for the occurred acquisitions and investments in other subsidiaries. In 2008, the interest cover ratio maintained its position and didn’t change. This was because both of the profits before interest and tax, and the interest expense have increased at the same rate of about 65%. This helped to keep the ratio unchanged.

QTEL lenders may see that there is a risk of not meeting the interest payment if any fall in operating profit happened. QTEL shareholders may also see the risk of the lenders taken any serious action against the organization if the same happened.

QTEL

2006 2007 2008

Prof its bef . Interest and TaxInterest Expense

ETISALAT Interest Cover Ratio changed from 23 times in 2006 to 15 times in 2007 before it reaches 21 times in 2008. The ratio declined in 2007 mainly because of the big increase in interest expense (about 90% increase) from AED 260 millions in 2006 to AED 500 million in 2007 when the increase of profit before interest and tax only increased by 20%. The ratio went up again in 2008 because of the decline in interest expense by -18% while the profit before interest and tax continued growing by almost 19% in 2008 comparing by 2007.

ETISALAT need to continue trying to reduce the interest expense while maintaining the growth of profit before tax. This will help the business to increase its interest cover ratio and gain more confidence from lenders and shareholders.

ETISALAT

2006 2007 2008

Prof its bef . Interest and TaxInterest Expense



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iii.b. Capital Structure

Gearing and Interest Cover interprets how the business is financed, how this finance is secured, and how it would be covered. Lenders and financing institutions usually look at these ratios to estimate the risk of investing or lending money to the business.

Looking at 2008 Gearing ratio for QTEL, we notice that the proportion of long term borrowing to total finance is 41%. The long term interest bearing loans and borrowings reached an amount of QAR 20,155 while the total finance (the sum of long term borrowing plus equity) reached QAR 49,116 millions. In the meantime, the proportion of long term borrowing to equity during the same year (2008) reached 70% since the equity was QAR 28,961.

On the other side, ETISALAT Gearing in 2008 came at only 5.7% of total finance. The long term borrowings in 2008 reached AED 2,035 while the total finance (the sum of long term borrowing plus equity) reached AED 35,636. The proportion of long term borrowing to equity during the same year (2008) came at 6.1% since the equity was AED 33,600 millions

CONCLUSION: From the above analysis, we can say that QTEL’s Gearing is much higher than ETISALAT’s. The capital structure for QTEL relies more on long term borrowings the ETISALAT. Lenders and investors would be more encouraged to invest in or to lend ETISALAT due to its more solid capital structure comparing to QTEL.



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iv.a. Investment Ratios Calculations

iv.a.1. Dividend Yield Ratio

This ratio measure the return from share to shareholder based on share market value. The higher the dividend yield ratio the more satisfied the shareholders.

Dividend per Share x 100

Dividend Yield Ratio = Market Price per Share

QTEL ETISALAT

2006 2007 2008 2006 2007 2008

Dividend Yield Ratio 5% 2% 9% 4% 3% 7%

Note: Shares market price history obtained from Arab Capital Markets Resource Center which is linked to both Abu Dhabi Securities Exchange and Qatar Exchange, where both ETISALAT and QTEL are listed.

QTEL Dividend Yield Ratio has declined from 5% in 2006 to 2% in 2007 before it increased again to 9% in 2008.

Although the share market price has slightly improved from QAR 189 by end of 2006 to QAR 194 by end of 2007, but the dividend per share declined from QAR 10 to 4 during the same period. The ratio recorded an increase to 9% at the end of 2008, taking into consideration that market price per share declined to QAR 109, while the dividend increased to QAR 10 at the same period.

QTEL

2006 2007 2008

Dividend per ShareMarket Price per Share

ETISALAT Dividend Yield Ratio had a similar behavior to QTEL’s. It declined from 4% at the end of 2006 to 3% in 2007 before it increased to 7% at the end of 2008.

While the dividend per share was fixed during the last 3 years at AED 0.60, the main reason behind the changes in the dividend yield was the change in the market price per share. The share price increased from AED 14 at the end of 2006 to AED 19 in 2007. This caused the dividend yield to decline from 4% to 3% during the same period. In the following year, the share market prices declined to AED 8 which caused the dividend yield to increase to 7% in 2008.

ETISALAT

2006 2007 2008

Dividend per ShareMarket Price per Share



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iv.a.2. Earnings per Share (EPS)

This ratio is a fundamental measurement to the potential benefit that a shareholder may gain as a return, regardless of the actual distributed dividends.

QAR 1 = AED 1

Net Profit after Tax and Preference Dividend Earnings per Share (EPS) =

Number of Ordinary Shares in issue

QTEL ETISALAT

2006 2007 2008 2006 2007 2008

Earnings per Share (QAR/AED) 16.92 14.64 17.46 1.17 1.22 1.45

Note: EPS for both companies was taken from their respective Annual Reports.

QTEL reported EPS has declined from QAR 16.92 in 2006 to QAR 14.64 in 2007, but increased again to QAR 17.46 in 2008. This might happen because of the reported Net Earning to Equity Holders which declined from QAR 1,692 millions in 2006 to QAR 1,674 millions in 2007. The same has increased again in 2008 reaching QAR 2,277 millions.

ETISALAT EPS recorded an increase over the last 3 years. First, increased from AED 1.17 in 2006 to AED 1.22 in 2007, and continued increasing to AED 1.45 in 2008. This might happened because of the growth behavior in Net Earnings to Equity Holders. The same has increased from AED 5,859 millions in 2006 to AED 7,296 millions in 2007, and continued increase to AED 8,664 millions in 2008.

Earnings per Share (EPS)

2006 2007 2008

QTELETISALAT



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iv.a.3. Price/Earnings Ratio (P/E Ratio)

P/E Ratio compares the (potential) benefit from owning a share with the price of buying the same share. The higher the P/E ratio, the greater the confidence and expectation of growth in future, and the lower the risk in owning the share.

Market Price per Share

Price/Earnings Ratio (P/E Ratio) = Earnings per Share

QTEL ETISALAT

2006 2007 2008 2006 2007 2008

Price/Earnings Ratio (P/E Ratio) 11.2 13.3 6.3 12.1 16.0 5.7

QTEL P/E Ratio had a fluctuating behavior over the last 3 years, increased from 11.2 times in 2006 to 13.3 times in 2007, and then declined to 6.3 times in 2008.

The P/E ratio declined from 2006 to 2007 because the share market price slightly increased from QAR 189 to QAR 194 while EPS declined from QAR 16.9 to QAR 14.6 during the same period. However, it continued to decline again 2008 but because the share market price declined QAR 109, and the EPS gained an increase to QAR 17.4

QTEL

2006 2007 2008

Market Price per ShareEarnings per Share

ETISALAT P/E Ratio increased from 12.1 times in 2006 to 16 times in 2007. This was due to the increase in the share market price from AED 14 to AED 19.5, and a relatively smaller increase in EPS from AED 1.17 to AED 1.22 during the same period.

In 2008, the P/E Ratio declined 5.7 times which was because of the decline in share market price to AED 8.28 and the increase of EPS to AED 11.45

ETISALAT

2006 2007 2008

Market Price per ShareEarnings per Share



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iv.b. Implications of the Investment Ratios

The summary of investment ratios for both QTEL and ETISALAT over the last 3 years period are as follows:

QTEL ETISALAT

2006 2007 2008 2006 2007 2008

Dividend Yield Ratio 5% 2% 9% 4% 3% 7%

Earnings per Share (QAR/AED) 16.92 14.64 17.46 1.17 1.22 1.45

Price/Earnings Ratio (P/E Ratio) 11.18 13.29 6.27 12.09 16.02 5.71

Market Price per Share (QAR/AED) 189.2 194.5 109.5 14.15 19.55 8.28

The current and potential shareholders are usually concerned about 2 points when investing in any business. The first point is the capital gain on the share price which is the increase in the share price since it was bought. The other point is the distributed dividend that is considered as a return on the invested amount in the shares.

QTEL existing shareholders should have been satisfied with the dividends distributed at the end of 2008. Considering the fall in share market price that happened from QAR 194 in 2007 to QAR 109 in 2008, the distributed dividends increased from QAR 4 to QAR 10 during the same period. Looking at the dividend yield ratio for QTEL from 2007 to 2008, we can notice a very good increase on the return on share from 2% in 2007 to 9% in 2008. We can also notice an increasing EPS from QAR 14.64 in 2007 to QAR 17.46 in 2008. However, due to the fall in market price per share, the P/E ratio declined as well to 6.27 times in 2008.

ETISALAT shareholders have also gained reasonable return in 2008. The dividend yield ratio recorded 7% (increased from 3% in 2007). Dividends distribution was fixed at AED 0.60 in 2008 (similar to 2006 and 2007) and was not affected with the fall in market price per share. The EPS has improved as well from AED 1.22 in 2007 to AED 1.45 in 2008, and the P/E ratio declined sharply to 5.71 times which is due to the decline in market price per share from AED 19.55 in 2007 to AED 8.28 in 2008.

CONCLUSION: looking at both the dividend yield ratio and the price/earnings ratio in both QTEL and ETISALAT, we can say that investing in QTEL was more rewarding than it in ETISALAT. This is because of the higher dividend yield and the higher price earning ratio. Potential shareholders would be more encouraged to invest in QTEL than ETISALAT.



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v. Problems in assessing the performance and financial position of a public company

There are too many methods of measuring performance of a company, such: accounting-base performance, residual income, economic value added, and market based performance measures. Some of those measures can be done based on internal and/or external information, and some can be used based only on the published financial reports. The main difficulties measuring the business performance are:

1. Accounting policy

The accounting policy mentioned in the annual report is necessary to give the reader the necessary understanding on the company approach in processing its financial transactions. However, changing the accounting policy from one period to another may affect the quality of financial information. For example, changing depreciation calculation method, change of inventory costing calculations, change of investment evaluation method, etc. These kinds of changes may affect the end result of business. Another issue is the changing in the business process. For example, changing the manufacturing process may lead to increase of productivity and profitability. This change may not be highlighted in the financial statement. Some accounting values are based on historical cost (mainly fixed assets), and not based on current market values. For example, a machine might be in operation and still in production while it’s fully depreciated in financial records. Taking the same scenario with another company with the same machine but new (not fully depreciated), we would have to calculate its depreciation and add it to the cost of product. This might give the feel that the first company has a better performance than the second company.

These difficulties are mainly faced by the accountant and financial analysts.

2. Transfer pricing:

If a group of companies (operating under one holding group) rely on each others’ business, there might be an issue of price transfer. For example: finished goods for company A (in a manufacturing business), can be raw materials for company B while the same company (B) finished goods could be goods available for sale in company C (trading business). Which price they need to sell at to each others? Market value or cost price?

If all the companies are within the same country, this might not be an issue because the consolidation would specify the price transfer for each company in the same country. If the subsidiaries are in different countries, the overall consolidated statement might be affected by different factors like tax, inventory evaluation, foreign exchange, different inflation levels, etc.

Transfer pricing is usually a difficulty that is faced by internal parties inside the business.

If we were able to create new report that can combine the purpose of both Financial Accounting and Management Accounting, we would consider this as an optimal solution that would enable to avoid most of issues by highlighting all changes and details that need to be considered while analyzing and assessing the financial position



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References:

1. Atrill, P. and McLaney, E. (2008) Accounting and Finance for Non-specialists (sixth edition), Harlow: Pearson

2. Ciancanelli, P., Dunn, J., Koch, B. and Stewart, M. (2009) Financial and Management Accounting, University of Strathclyde Business School

3. Qatar Telecom, URL http://www.qtel.qa

4. Etisalat, URL http://www.etisalat.ae

5. Abu Dhabi Securities Exchange, URL http://www.adx.ae/English/Pages/default.aspx

6. Qatar Securities Exchange, URL http://www.dsm.com.qa/dsmsite/

7. Arab Capital Markets Resource Center, URL http://www.btflive.net/index.php

8. AMEinfo, URL http://www.ameinfo.com/

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