Evaluation of Financial Performance

Question: Discuss about the Evaluation of Financial Performance . Answer: Introduction Evaluation of financial performance of a business organization is an important aspect of any business. The evaluation of financial performance refers to the process of analyzing and evaluation the various factors of financial performance of an organization. Evaluation of financial performance is a strategic tool that helps the managers of the organizations to develop strategies for the smooth running of the business. The process of evaluation of the financial performance of the organizations helps to identify the strong and weak areas of the businesses; and this process helps in the development and implementation of effective business strategies. There are various components to evaluate the financial performance of the organizations. First, directors report of the companies in the annual report is an important source of information about the organization. The consolidated financial statements of the organizations include all the necessary information that is needed to evaluate the fi nancial performance of the organizations. The consolidated financial statements of the organizations include balance sheet, statement of income, statement of cash flows, statement of change of equity, information about the shares of the company and others. It is important to evaluate all the aspects of financial statements to get a fair and true financial picture of the organizations. Gulf Cement Company is the largest producer of cement in the United Arab Emirates. In addition, Gulf Cement Company is the leading cement exporter of United Arab Emirates. The production capacity of the company is 2.7 million tons of cement and 3.8 million tons of clinker. More than 500 employees are employed in the organization. The production and distribution of cement for Gulf Cement Company takes place on bags and in bulks. The main aim of the report is to analyze and evaluate the financial performance of Gulf Cement Company. For this purpose, the various financial statements of the company are evaluated to ascertain the true and fair financial position of Gulf Cement Company. Evaluation of Directors Report As per the above discussion, it can be observed that Gulf Cement Company is the largest cement company in United Arab Emirates and is the leading exporter of cement in the same region. Hence, it can be understood that Gulf Cement Company has a large amount of financial transactions. Being the largest cement company in UAE, Gulf Cement Company uses to publish the annual report of the company in a yearly basis. Apart from that, Gulf Cement Company uses to publish quarterly financial report on a regular basis. The annual report of the company includes the directors report of Gulf Cement Company. The directors report of Gulf Cement Company is the overview of the financial position of the company. The users of this financial report can get an idea about the financial position of the company by observing the directors report as this report shows the important financial figures throughout the year. On the other hand, the directors report expresses the financial point of view of the director s towards the company. Hence, it can be said that there is a lot of importance of the directors report to measure the financial performance of the companies. The Managing Director of Gulf Cement Company is considered as the main director of the company. Hence, the directors report of Gulf Cement Company is consists of the report of the Managing Director of Gulf Cement Company. As per the directors report of Gulf Cement Company, there are five sections in this report. The first section shows the gross profit, net profit, earning per share and gross profit ratio of Gulf Cement Company. The second section shows the details about the gross profit of the company. The third section contains the details about the investments of the company. The fourth section shows some information about the financial assets of the company. The last part includes the major financial ratios of Gulf Cement Company. These are the main areas of the business that helps to evaluate and analyze the financial health of any business organization. As per the directors report, the major financial ratios of the company are Gross Profit Ratio, Current Ratio and Quick Ratio. The financial details in the directors report is provided on the basis of two years; they are 2015 and 2016. As per the above discussion, the first part of the directors report is about the gross profit, net profit and information about the shares of the organization. As per the directors report of the company, the amount of review in 30.9.2015 was 487,244,587 that is more that of 423,636,484 on 30.9.2016. It has been seen that revenue is changed by 13 percent over a year. On the other hand, cost of sales has decreased in the year 2016 than 2015 by 16 percent. Cost of sales for the year 2015 was 411,488,424 and for the year 2016 were 347,506,526. It can be said that it is good to have lower cost of sales; but the decrease in revenue over the year is a concern for Gulf Cement Company. The Gross profit for the year 2016 was 76,129,958 that is more than 75,756,163 for the year 2015. The gross profit i9s increased by 0.50 percent. Despite being a little rise in the gross profit, it can be said that it is good sign to increase the margin of gross profit. This process leads to the increase in gro ss profit ratio for the company. The Gross profit ratio is Gulf Cement Company for the tear 2015 was 16 percent that is less than 18 percent of the year 2016. The gross profit ratio of the company is increased by 13 percent that is a good indicator for the organization. The increase in gross profit ratio indicates that Gulf Cement Company has managed its direct expenses in an effective way. Other operating income of the company for the year 2015 was 5,899,967 that are more than 5,685,710 for the year 2016. Other operating income of the company was decreased by 4 percent over the year. Decrease in the operating income is not healthy for the organization. The directors report shows that the selling and administrative expense of the company has decrease by 0.50 percent. The selling and administrative expenses for Gulf Cement Company for 2015 and 2016 were 35,931,131 and 35,759,467 respectively. The investment income for the organization was heavily decreased by 523 percent. The investment income for the year 2015 was 3,094,521. This same income for the year 2016 was (13,089,874). Other income of the company was also decreased by 64 percent in the year 2016 compared to 2015. One of the positive points is that finance cost of Gulf Cement Company for the year 2016 was decreased by 11 percent. As per the Directors report of Gulf Cement Company, it can be seen that the net prof it of the organization for 2016 was 46,922,013 that is more than 30,943,621 for the year 2016. It is a negative point as the decrease in net profit is not good for the financial health of the organization. The net profit of Gulf Cement Company has decreased by 34 percent in the year 2016 compared to the year 2015. The decrease in the net profit of Gulf Cement Company has created an adverse effect on the earning per share and book value per share of the company. Earnings per share for the year 2015 were 0.06 that is more than that of 0.04 in 2016. On the other hand, the book value per share decreased to 1.426 from 1.464. It can be seen that both earning per share and book value per share has been decreased in 2016. As per the major ratios of Gulf Cement Company, the current ratio for the year 2016 was 3.85 that is less than 3.92 for the year 2015. The same has happened for the quick ratio. The quick ratio for the year 2016 was 2.54 that is also less than 2.67 for the year 2015. This situation implies that the liquidity position of the company has decreased over the year[1]. From the above discussion, it can be seen that the Directors report of the company only includes some of the selected financial items of the company. As per the company rules and regulations, this is not an effective report of the directors. One of the most important requirements of the directors report is that it must include the principle activities of the company. However, the directors report of Gulf Cement Company has not included any principle activities of the organization. In addition, there must be a business review in the directors report. The directors report of the company does not include the any kind of business review of the business of Gulf Cement Company. On the other hand, all the necessary financial information of the company is not included in the directors report. This is one of the major requirements of a directors report that it must include all the financial information of the company. For all these reasons, the directors report of the company has become a mat ter of criticize. The directors have made a mistake by not analyzing the financial information that is included in the report. Hence, it can be said that the Directors Report of Gulf Cement Company is not an effective one. Quality of earning and earning sustainability: Gulf cement company is leader in producing cement in the emerging markets. Primary contributor towards their success is their ability to provide unique services to their customers as compared to their competitors. Annual report of the company includes information regarding their income and expenses and the accounting policies, based on which their earning quality and sustainability can be evaluated. Their operating income and expenses outcomes are as follows: They generated income from revenue amounted to $624,560,691 for 2013, $708,420,988 for 2014 that shown an increase of 13.40% as compared to 2013 and $612,426,174 for 2015 that shown a decrease of 13.60% as compared to 2014. Out of total revenue they incurred cost for sales amounted to $577,956,407, $598,313,377 and $514,932,707 for the year 2013, 2014 and 2015 respectively that shown increase of 3.5% as compared to 2013 and 13.9 decrease as compared to 2015. The company generated gross profit amounted to $46,604,284, $110,107,611 and $97,493,467 respectively 2013, 2014 and 2015 that shown a huge increase of 136.3% as compared to 2013 and an decrease of 11.5% as compared to 2014.[2] After spending towards operating cost, the company was able to generate net profit amounted to $68,517,011 for 2013, $60,572,549 for 2014 and $71,439,530 for the year 2015 that shown 11.6% decrease as compared to 2013 and 17.9% increase as compared to 2015. The company was able to generate comprehensive loss amounted to $18,440,532 for 2013, income of $23,671,591 for 2014 and $101,385,394 for 2015[3]. Performance table: Years Sales Net income Comprehensive income 2013 $624,560,691.00 $ 68,517,011.00 $ (18,440,532.00) 2014 $708,420,988.00 $ 60,572,549.00 $ 23,671,591.00 2015 $612,426,174.00 $ 71,439,530.00 $ 101,385,394.00 Table 1: Performance analysis Trend analysis: Figure 1: Trend analysis From the above table, it can be seen that the revenue of the company has increased by 13.40% from 2013 to 2014 and fell again by 13.60% in 2015. However the company was able to increase their gross profit by 136.3% over the year 3013 to 2014. The reason behind this huge increase is the revenue for 2014 was more as compared to 2013 and 2015. However, despite of experiencing huge increase in gross profit for the year 2014, the company could not convert this to net profit and experienced a fall of 11.6% as compared to 2014. The reason behind this was that for the year 2014, the income from investment was very low as compared to other years and finance cost for 2014 was $29,16,126 as compared nil charger for 2013 (Sabnis, G.M 2015). Further, the comprehensive income shown a huge fall by 50.4% in the year 2014 as compared to 2013 and again by 288.7% in the year 2015. Other key factors related to the Gulf cement company that may have impact on their earning are as follows: Apart from supplying in UAE market, the company deliver their products in more than 11 countries Their plant is depended on multi system of fuel like gas, coal and heavy fuel oil which in turn enable them to utilize the resources in effective way The companys raw material source for plant proximity assures regular supply for raw materials with minimization of cost. Finally, the economic slowdown in the international market will have least impact on the company, therefore the profitability of the company in turn will be least affected. Therefore, the earning sustainability of the company as seen from the above assessment is quite viable and the book value per share for the company was stable and moving around $1.40 per share. Evaluation of cash flow statement: Cash flow statement: Particulars 2015 2014 2013 Net cash from operating activities $ 122,562,130.00 $ 156,756,212.00 $ 86,760,353.00 Net cash from investing activities $ 63,177,638.00 $ (50,830,170.00) $ (223,531,434.00) Net cash from financing activities $ (84,071,065.00) $ (55,570,340.00) $ 80,220,151.00 Net increase or decrease in cash $ 101,668,703.00 $ 50,355,702.00 $ (56,550,930.00) Table 2: Cash flow analysis Trend analysis: Figure 2: Trend analysis It is noticed from the above table that the cash generation from the operation has been increased by huge amount over the year 2013 and 2014 that amounted to $86,760,353 to $156,756,212 respectively. This resulted due to decreasing of loss from the investment disposal at FVTPL that amounted to $15,51,859 in 2014 from $14,051,277 in 2013. However, in 2015 it decreased to $122,562,130. The reason behind this decrease was increase in provision for employees service end indemnity and unrealized loss generated from FVTPL investment. Huge amount was used for purchasing fixed asset that amounted to $252,516,895 in 2013. However, the amount decreased to $42,238,139 in 2014 the amount further decreased to $35,215,315 in 2015, which enabled the company to generate positive cash from investment activities amounted to $63,177,638 that were negative for both the year 2013 and 2014. Net cash generation from financing activities were turn into negative amount of $55,570,340 in 2014 from the positiv e amount of $80,220,151 and created further decrease to $84,071,056 in 2015. The main contributor towards this negative cash generation were the board remuneration that the company start paying in 2014 and continued to pay in 2015 also. Payment of dividend also increased from $37,874,348 to $40,524,194 and finally to $55,252,639 over the year from 2013 to 2015 consecutively. Finally the net increase or decrease resulted from all the activities were negative $56,550,930 to positive $50,355,702 and further increase to $101,688,703 which was more than double as compared to 2014. Therefore, it can be seen that the company was able to generate cash positively after meeting the operating, investing and financing expenses. The cash flow position of the company is quite sustainable and the company can be regarded as viable over the long run. The cash and cash equivalents of the company included demand deposits, cash on hand and any other liquid investment over the short term period that cou ld be converted to cash and under the considerable risk of value changes. Financial assets under FVTPL are calculated at fair value at the end of each year with consideration of any losses or gains generated from the on recalculation are measured in profit and loss account. Dividend income from the investment of FVTPL is identified in profit and loss statement only after the right of receiving dividend established as per the IAS 18 on revenue. Financial Credit Quality Credit quality analysis is one of the major processes to evaluate the financial health of an organization. There is a great significance of credit analysis for an organization. The main objective of credit analysis is to calculate the credit worthiness of that particular organization. In other words, credit quality analysis is done to know the financial power of the company to meet the financial obligation of the company. This analysis is done at the time of issuance of bonds. In the process of credit analysis, credit quality is a mandatory process that allows the investors to know about the creditworthiness of the particular organizations. Credit quality is analyzed to measure the credit worthiness of a particular bond or an investment or a long-term loan. Based on the credit quality, the credit rating agencies provide scored to those business organizations. This is the process of assessing the credit quality of a business organization. In the process of credit quality analysis, the ability of debtors to relay the debts to the organization is taken into consideration as the debt repayment ability of the debtors affect the credit worthiness of the business organization. There is not any exception of the credit quality analysis in case of Gulf Cement Company. The credit quality of Gulf Cement Company can be analyzed by evaluating the debtors and noncurrent liabilities of the organization. As per the financial report of Gulf Cement Company, the amount of financial lease liability for the year 2015 was 75,686,619 that is less than that of 104,489,917 for the year 2014. It can be seen that there is a decrease in this long-term liability. The amount of non-current liabilities for the year 2015 was 87,453,816 that is less than that of 115,664,145 for the year 2014. From the above information, it can be observed that a large amount of non-current liabilities has been repaid in the year 2015. This situation implies that the credit worthiness position of Gulf Cement Company is good as the company is able to repay its loan on a regular basis. On the other hand, this situation help to evaluate that the credit worthiness of the debtors of Gulf Cement Company is effective and they are good at meeting the obligation of the company. The above discussion is helpful to judge the credit quality of Gulf Cement Company. it can be seen that the company has a large amount of noncurrent liabilities. However, Gulf Cement Company has been able to repay those non-current liabilities. This process implies that Gulf Cement Company has an effective creditworthiness and the credit worthiness of the debtors is good. Professional comparison and ranking: Performance table: Name of the company Revenue Net profit Basic earnings per share Gulf cement company $ 612,426,174.00 $ 71,439,530.00 $ 0.09 National cement $ 261,541.00 $ 93,530.00 $ 0.26 RAK cement $ 335,174,306.00 $ 15,536,581.00 $ 0.03 Union cement $ 640,472.00 $ 103,671.00 $ 0.14 Table 3: Professional comparison Trend analysis: Figure 3: Trend analysis Earnings per share for the company National cement and Union cement are 0.26 and 0.14 respectively and that for Gulf cement company and RAK cement is quite low as 0.09 and 0.03 respectively. Therefore, the company should take appropriate measures to minimize their expenses which in turn can increase their earning per share[4]. Return on sales calculation Name of the company Return on sales (%) Gulf cement company 11.67 National cement 35.76 RAK cement 4.64 Union cement 16.19 Table 4: Return on sales analysis Return on sales has been calculated as = Net profit/Revenue*100 [5] Earning sustainability: Gross profit: Name of the company Revenue Gross profit Gulf cement company $ 612,426,174.00 $ 97,493,467.00 National cement $ 261,541.00 $ 39,800.00 RAK cement $ 335,174,306.00 $ 51,404,871.00 Union cement $ 640,472.00 $ 160,205.00 Table 5: Gross profit analysis Gross profit ratio calculation Name of the company Gross profit ratio (%) Gulf cement company 15.92 National cement 15.22 RAK cement[6] 15.34 Union cement 25.01 Table 6: Gross profit ratio analysis Gross profit ratio has been calculated as = Gross profit/Revenue*100 [7] It can be seen from the above table that the gross profit ratio of Gulf cement company is more or less same as compared to its competitors like National cement company and RAK cement company that resulted around 15%. However, the gross profit ratio of Union cement is quite high as compared to others and came to 25% approximately. It can be said that the gross profit ratio of Gulf Cement Company is complied with the industry average. As per the auditors report all the above companies financial report presented in fair manner with respect to all material items and complied with the international financial reporting standards. Cash flow analysis: Particulars Gulf cement company National cement RAK cement Union cement Net cash from operating activities $ 122,562,130.00 $ (39,981.00) $ 23,661,059.00 $ 140,832.00 Net cash from investing activities $ 63,177,638.00 $ 108,794.00 $ 47,937,862.00 $ 16,664.00 Net cash from financing activities $ (84,071,065.00) $ (117,327.00) $ (81,028,238.00) $ (83,606.00) Net increase or decrease in cash $ 101,668,703.00 $ 48,514.00 $ (9,529,317.00) $ 73,890.00 Table 7: Cash flow analysis Trend analysis: Figure 4: Trend analysis Cash flow ratio calculation: Name of the company Cash flow ratio (%) Gulf cement company[8] 0.86 National cement[9] -0.33 RAK cement[10] 0.15 Union cement[11] 1.38 Table 8: Cash flow ratio analysis Cash flow ration has been calculated as = Cash from operation/current liability[12] From the above table it can be seen that except for Union cement, all other companies including the Gulf cement company does not meet the industry average requirement of 1 for cash flow ratio. It indicates that the companies are not able to pay off their current debts out of the generated cash from operation within the same period. The company Gulf cement company received a F grade with respect to integrity and governance rating under the category of Online disclosures and transparency (Shareholder Rights 2017). Conclusion The main aim of the report is to measure the financial performance of Gulf Cement Company and to ascertain the financial position of the same. Based on the above analysis, it can be said that Gulf Cement Company has a mixed financial position. There are some areas where the company is doing well. On the other hand, there are some areas where the company yet to do well. For instance, as per the above discussion, it can be seen that the gross profit of the company has increased, but at the same time, the net profit of the company has creased. The operating and other incomes of the company have also decreased. On the other hand, the expenses of the company have increased. All these aspects have together affected the net profit of the company along with the earning per share and price of the shares. It has been seen that the earning per share and book value per share have decreased compared to the previous year. However, it can also been observed that Gulf Cement Company has an effective credit worthiness. The company has been able to repay a large amount of non-current liabilities and the debtors of the company have effective credit worthiness. Thus, based on the overall analysis, it can be said that the financial position of the company is not as effective as it needs to be. There is a strong need for financial strategies to revive the financial situation of the company. Recommendation: On evaluation of the financial statements and overview of Gulf Cement company it can be recommended that The company failed to disclose the information related to shareholders right and the policies regarding corporate governance, for example, code of ethics, annual report, financial statements, code of corporate governance and information related to executive and board management. Therefore, the company is recommended to mention these limitations to give the indications to stakeholders and shareholders. The company falls under the failing range as per the grading system as rating F implies a clear indication of failure. It shows the unacceptable performance, lack of interest/efforts that calls for great concern. It is strongly recommended that the company must convert its shareholders right and corporate governance related information into English language. After completion, the rated company can inform the details with any implemented changes with regard to improve their ratings. Some of the data related to the companys financial statement are reported in Arabic in their website. It is recommended to disclose the information in English to improve the rating. It is noticed that if the company would have recorded the information in English, their rating would have been D++ instead of F. 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