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Topic: Accounting and Financial Management for two companies: Emirates Airline and Etihad Airline

Description

***I Attached Paper Details, also attached a sample project.***

***I need to do this project for there two companies: Emirates Airline and Etihad Airline***

Overview
This report analyzes the financial statements of Company A while using Company B as a benchmark to determine profitability, liquidity, management effectiveness and debt management indicators of the company. Horizontal analysis, vertical analysis, trend analysis and calculated ratios will be used to provide insight into the mentioned four characteristics of Company A. This will enable analysts to arrive at conclusions and to make recommendations in a professional manner and to provide the various stakeholders the information they need in making decisions related to the company.

Company A is a development company in the U.A.E., headquartered in Dubai. It was established in 1980. The company went public with an initial public offering and began trading under the name Company A in 1997. Throughout its history, it has gone on to open some of the top Projects in Dubai namely the ABC, DEFG and HIJ. (Reference, Year).

Company A primarily engages in the management and maintenance of development projects as well as construction activities and one of the largest and oldest pioneers in the development sector in the United Arab Emirates. Over the last twenty-eight years, thecompany has expanded vastlyand established its own place in the economic arena in the UAE.

Company A has a number of subsidiary companies through which is provides many forms of services needed in the management and maintenance of its development properties as well as for construction purposes. The subsidiaries provide the following services: project management, mechanical, electrical plumbing, security, energymanagement, interior, air-conditioning, firefighting equipment assembling and others. (Reference, Year).

Economic and Market Overview

According to data provided by Jones Lank La Salled IP Incorporated (JLL) the economic growth of the UAE slowed down significantly in 2015 due to a fall in oil prices which has resulted in a loss of revenue to both the government and private sector. The slowdown of economic grown led to a fall in real GDP from 4.6% in 2014 to 2.7% for 2015 with a similar level of growth forecast for 2016. Based on forecasts, it is expected that oil prices will remain between $50 and $60 per barrel until 2020. (Jones Lang LaSalle IP, 2016)

To deal with the loss of revenue from oil prices, the UAE government is adjusting its budget to ensure fiscal sustainability and avoiding long-term deficits by reducing spending and increasing government revenue through taxes. This is expected to happen in the next 5 years with implications for the real estate sector. Althoughthereport by JLL has apositiveoutlook inthelongtermfor theUAE developmentmarket, it also anticipates that the rebalancing of the fiscal position of the UAE will result in headwinds and challenges all over the next 12 months. Despite expected continuous spending on development and infrastructure, it is expected that this level of spendingwill be reduced over the medium term. A reduction in spending is necessary to realign with the reality of lower oil revenues. (Jones Lang LaSalle IP, 2016)

In 2011 a combination of factors, internal and externalled to a fall in rental rates as well as very affordable home prices. This was in response to the effects of the 2008 global financial crisis. Some of these factors according to experts include a change in visa regulations which allowed owners of properties over DHS 1 millionto havea 3-yearresidencyvisa, continuouslow mortgage rates as banks were more liquid, buoyant oil prices which supported the local economy and the announcement of some aviation companies to expand and increase growth figures for tourism. On the external front, the Arab spring in some of the Arab states shone a light on UAE as one of the safe havens for investment. In addition, the US budget

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crisis, the European debt crisis, a slowing down of the BRICS economies and a threat of another recession, a fall in the Indian rupee and Iranian Riyal also led to a fall in property prices. (Kapur, 2012)

The real estate industry in the UAE can categorized into 4 main categories namely office, residential, retail and hotel.

The number residential units completed across the UAE in 2015 remained lower than in recent year with just 7,800 residential units out of the forecasted 25,000 units in Dubai. Materialization rates have been set to around 30%-50% in Dubai which is an indication that not all the proposed future supply for 2016 (26,000units)will be delivered onschedule. A similar trendwas observed inAbuDhabi. (Jones LangLaSalle IP, 2016) The expected supply of residential units have been pushed to late 2016 and 2017 which have been linked to lower sales levels, reduced government spending and the need amongst developers to phase out supply Aly in line with demand to avoid an over supplied market. (Jones Lang LaSalle IP, 2016).

SWOT Analysis

Strengths Weaknesses
Company A is perceived to be an experienced and qualitative developer as a result of well executed projects in the Dubai.

Company A owns a sizeable investment property portfolio spread over various locations in Dubai.

Company A does not only make money from its real estate properties but also through its subsidiaries which are into different value-added services and businesses.

Company A enjoys the backing of strong government-owned financial institutions. There are no evident plans to embark on projects outside Dubai into sectors and markets which seem to have recorded favorable demand characteristics relative to planned supply.

A part of investment property portfolio owned by Company A is located in Bur Dubai which is one of the oldest parts of Dubai and requires refurbishment in order to attract a certain group of potential residents.
Opportunities Threats
Communities which are branded allow for the capitalization on brands in regional markets and home markets of the UAE expatriate community.

High demand for contracting services as the UAE and regional countries are experience a construction explosion.

Upcoming Expo 2020 which is expected to lead to an increase in demand for home, office and hotel space for visitors Considering the UAE government is planning to cut down on spending in the next 5 years coupled with a seemingly correction and stabilization of property prices in the market, this could potentially hinder the appetite for new developments.

Low oil prices in the region which implies that a shortage of revenue for infrastructure and real-estate development could hinder expansion and further developments

Regional instability linked with terrorism can be seen another major threatto companiesoperating in theregion.

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Financial Analysis

1- Horizontal Analysis (Please add your tables and analysis/comments)

2- Vertical Analysis (Please add your tables and analysis/comments)

3- Trend analysis

Chart No. 1: Financial position

Company A 16
14 12 10 8 6 4 2
0
2010 2011 2012 2013 2014

Total Assets Total Owner’s Equity Total Liabilities

Company B 8
7 6 5 4 3 2 1
0
2010 2011 2012 2013 2014

Total Assets Total Owner’s Equity Total Liabilities

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From 2010 to 2014, Company A’s assets and liabilities has shrunk by half its initial size while maintaining then doubling its owner’s equity in two years after 2012. It seems that they have been liquidating their assets to meet their current liabilities without significant impact on the shareholders. In comparison with COMPANY B, decrease in assets is far less and owner’s equity has been almost stagnant but they also managed to cut their liabilities in half for the same time frame.

Chart No. 2: Cash flows

COMPANY A 3,000
2,000 1,000 0
-1,000 -2,000 -3,000 -4,000
-5,000
2010 2011 2012 2013 2014

Operating Cash Flows Investing Cash Flows Financing Cash Flows

COMPANY B 800
600 400 200 0
-200 -400 -600
-800
2010 2011 2012 2013 2014

Operating Cash Flows Investing Cash Flows Financing Cash Flows

COMPANY A has strategically put their cash inflows from operations and investments to finance activities in 2011 while being conservative for even years 2010, 2012 and 2014. Although, their operations cash flow in 2013 was minimum so only investments cash flow was put into finance activities. On the other hand, COMPANY B has very limited cash inflow so it was only after 2013 that have spent 600M possibly coming from their operating cash

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flow. It is noticeable for both COMPANY A and COMPANY B that 2012 was not a good year for the real estate business.

Chart No. 3: Operating cash flow and net profit; earnings (losses)

COMPANY A

2,500 2,000 1,500 1,000 500
0 -500
-1,000 -1,500
-2,000
2010 2011

Operating Cash Flows

2012 2013 2014

Operating Profit

COMPANY B

1,000 500
0 -500
-1,000 -1,500 -2,000 -2,500 -3,000
-3,500
2010 2011

Operating Cash Flows

2012 2013 2014

Operating Profit

After 2010, COMPANY A is still trying to recover from the losses of the 2008 real estate collapse by controlling its losses probably from operating cash flows since it is only after 2011 that profits started to rise. In 2013, they started to have positive earnings attributed to the linear increase in profit from 2011 to 2013, when it peaked. Although, the operations proves to incur more spending that income after 2012. In a direr situation, COMPANY B is still struggling to manage its accumulated loses which is made harder by very low cash flow from operating activities.

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Ratio Analysis

a. Profitability analysis

The analysis of profitability seeks to measure how good the company was at maximizing the return it gets from assets invested in the business. This is the primary goal of any business.

Table No. 1: Profitability ratios

No. Indicators 2013 2014
1. Return on Assets %21.20 %10.18
2. Return on Equity %38.17 %17.31
3. Earnings Per Share AED 1.1 AED 0.73

Return on assets (ROA) seeks to measure how efficient the company has been in using assets to generate earnings. The ROA calculated presented a drop from 21.20% in 2013 to 10.18% in 2014. A fall in ROA was also followed by a fall in return on equity (ROE) from 38.17% in 2013 to 17.31% in 2014. ROE which measures how many Dirhams of net income thecompany earnedfrom everyDirhaminvestedby theshareholders.Inthe previousyears, the ROE value saw an improvement which was in losses and recorded positive values. This drop in ROA and ROE could be attributed to COMPANY A’s position to repay a large chunk of debt owed to its creditors which led to a reduction of cash flows and profits for the year 2014. Although ROA and ROE values were low, retained earnings for 2014 were up at the same time, equity and assets were up by about 20% and 15% respectively.

b. Liquidity analysis
Liquidity determines the organization’s capacity to satisfy the payment of immediate, current, and short-term obligations. Having sufficient cash and delivering payment on time, financial institutions and vendor providers prefer and trust to do business, increase volume, and provide discount to such companies.

Table No. 2: Liquidity ratios

No. Indicators 2013 2014
1. Net Working Capital AED 4,138,486 AED 4,998,480
2. Current Ratio 2.25: 1 2.43: 1

Net working capitalis short-term assets less current liabilities. While, current ratio is current assets divided by short-term liabilities. In 2014, there is a minor increase in the current ratio where every dirham of current liabilities, COMPANY A has 2.43 AED of short-term assets which is a dirham lower than the industry benchmark ratio of 3.53 AED. But they are still comparatively liquid and have sufficient short-term assets accordingly to their short-term liabilities.

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c. Debt management analysis
Debt management is another factor that makes a company desirable for credit banks and equity owners since it shows the long-term survival of the company in paying dues as they mature in 10-20 years, for example.

Table No. 3: Debt management ratios

No. Indicators 2013 2014
1. Debt Ratio in Percent %44.46 %41.19
2. Coverage Ratio in Times 17.71 Times 13.85 Times

Debt ratio is the percentage of total liabilities divided by total assets. Creditors use this to measure the company’s resilience in accumulating losses but still being able to repay them. In terms of meeting the due interest payments, coverage ratio is another indicator referred by banks. It is computed by dividing the net profit before interest and tax by interest charges.

The debt ratio of Company A has seen a decline from 44.46% in 2010 to 41.19% in 2014. This is a healthy sign of improvements to reduce its risks of not being able to meet its maturing obligations. This is evident in the decision to pay off loans from creditors over the years. Despite the fact that low debt ratio is a good sign (low risk), it must be looked at in comparison to the company’s earnings. Consistent and permanent earnings with high debt ratio is typical while companies with fluctuating earnings must aim to post low debt ratios.

Taking into account their ability to satisfy the interest payments, 2014 has 4 times less ability of covering the dues than in 2013 but with 13.85 coverage ratio, the company can still meet the interest charges in time without any issues. Hence, this makes the company sought after by lenders. For the last three years, Company A posted profits and in the last year showed signs of investing into properties by increasing assets and reducing liabilities, the company can be described to be in a good debt position.

d. Activity analysis

Activity ratios measures the company’s ability to turn its assets into cash, it shows how management utilizes their assets to generate revenues.

Table No. 4: Activity ratios

No. Indicators 2013 2014
1. Total Asset Turnover AED 62.59 AED 24.33
2. Inventory Turnover 37 Days 32 Days
3. Receivable Turnover 17 days 0.99

Total Asset Turnover Ratio – The ratio shows the efficiency of the company in terms of maximizing revenue generated from utilizing their assets. Table 4 clearly shows that the total asset turnover dropped from AED 62.59 in 2013 to AED 24.33 in 2014.

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Inventory TurnoverRatio -The inventoryturnoverratiospecifies the number of daysittakes the company to sell the inventory. COMPANY A has successfully managed to sell its inventory every 37 days in 2013, yet 2014 inventory turnover results decreased to 32 days.

Receivables Turnover – This ratio is used to measure the company’s effectiveness in extending credits to its customers and the ability to collect the debts owed on the credit. From the receivable turnover ratios, Company A was able to collect debts owed to it within 17 days in 2013 and about 12 days in 2014 which was an improvement.

Conclusions (Must cover Profitability, Liquidity, activity and debt coverage).

Profitability of Company A was in decline from the ratio values as well as trends and charts. This was mainly due to the company reducing its debt and increasing its assets and equity. Although profits may be in decline between 2013 and 2014 in the long run the company has the potential to be profitable.

In comparison with the industry, COMPANY A has a lower liquidity ratio but they are still within the safe range that banks are happy since they are meeting to pay the short term payments. Having a strategy of balancing their cash inflows to investing activities, they are moving in the positive quadrant in terms of earnings but are still very volatile depending on market factors.

Without overlooking its long term commitments, Company A is balancing its recent positive earnings by not paying out no dividends in the meantime to ensure future payments are met as they mature. This in effect keeps their debt ratio and coverage ratio in check to maintain their solvency.

Activity ratio is a vital tool to the company’s operations, from the above analysis, it looks like Company A was facing a cash flow issues and lack of supplyto the market, consequently they had to invest more in new projects and new assets and close all the payable accounts to assure that venders are willing to continue the cooperation with the company in their new investments. On the other hand, the offered assets did not attract the customers, or even meet their expectations which resulted in few sales and idle stock.

Recommendations
Intimes whensales ofreal estate is slumming dueto increase incompletedbuildings supply, alternative cash generating units should be looked into such as property management that caters to maintenance and cleaning; house moving logistics that caters to transporting furniture and belongings; interior design that caters to individual improvements and renovations of rooms; realty insurance that caters to giving the home owners a peace of mind; and even engaging with commercial establishments such as restaurants in each building property.

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Even today, market volatility is riskier as ever due to declining oil prices and customers becoming more selective in real estate properties with so much competition. Having long term investment in government bonds can serve as a safety net in the long run. Putting a sustainable corporate governance policy with emphasis on social responsibility can also provide long term benefits in terms of customer loyalty, retention, and testimonials. People are getting more concerned how the building laborers are treated, whether the building materials are environment friendly, and what charity the company is supporting.

Activity ratio is a vital tool to the company’s operations, from the above analysis, it looks that COMPANY A was facing cash flow issues and lack of supply to the market. Consequently they have to invest more in new projects and new assets and close all the payable accounts to assure that venders are willing to continue the cooperation with the company in their new investments. It is also vital that COMPANY A sets up a contingency payableplansothey holdtheircashforlonger periods of timeand investinother supportive services such as quick wins in order to generate cash to finance its activities.

With the upcoming Expo 2020 a continuous increase in assets is also important for COMPANY A to cash in on the potential revenues that will be generated. Competitive offers in prime locations, providing competitive space in apartments, flexible payment plans will be essential to its customer base and will provide some leverage in order to attract customers.

Despite the dwindling oil prices, the UAE government’s quest to diversify its economy will ensure continuous investments in infrastructure, housing, services and trading. This provides a good outlook for the real estate company to expect growth in the region. Though the growth ratio is showing a reduction, this could be attributed to dwindling market prices and the company’s quest to reduce its debt. Once it is able to reduce the amount of debt owed in the coming years in combination with potential gains in the market and increase in assets all other things being equal, Company A is likely to compete aggressively in the real estate market.

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Appendix
Table no. 5: Horizontal Analysis

Parameters 2014 2013 Increase (Decrease)
AED’000 AED’000 AED’000 %
Income Statement
Income
Property management and sales revenue 99,995 1,155,548 (1,055,553) (91.35)
Contracting and other operating activities 647,458 1,127,642 (480,184) (42.58)
Gain/(loss) on sale of investment properties 115,675 26,777 88,898 331.99
Share in profit of joint ventures 29,935 76,645 (46,710) (60.94)
Gain/(loss) on valuation of properties 1,044,370 2,104,724 (1,060,354) (50.38)
Finance income 14,383 3,441 10,942 317.99
Other income 116,251 169,346 (53,095) (31.35)
Total Income / Sales / Revenue (Sub-Total) 2,068,067 4,664,123 (2,596,056) (55.66)
Expenses
Direct costs (1,017,434) (2,049,027) 1,031,593 (50.35)
Administrative and general expenses (120,787) (104,599) (16,188) 15.48
Finance expense or cost (64,852) (930,842) 865,990 (93.03)
Total Expenses (Sub-Total) (1,203,073) (3,084,468) 1,881,395 (61.00)
Income and Expenses
Profit for the year attributable to shareholders 864,994 1,579,655 (714,661) (45.24)

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Balance Sheet or Financial Position
ASSETS
Non-current assets
Property, plant and equipment 103,178 114,945 (11,767) (10.24)
Investment properties 5,907,879 5,092,655 815,224 16.01
Development properties 49,423 80,926 (31,503) (38.93)
Investment in joint ventures 561,699 530,798 30,901 5.82
Non-current receivables 170,344 100,650 69,694 69.24
Non-current assets (Sub-Total) 6,792,818 590,269 6,202,549 1,050.80
Current assets
Other investments 237,878 190,987 46,891 24.55
Inventories 31,013 31,244 (231) (0.74)
Contract work-in-progress 481,777 366,503 115,274 31.45
Trade and other receivables 562,948 603,262 (40,314) (6.68)
Due from relates parties 7,465 10,092 (2,627) (26.03)
Cash in hand and at bank 385,245 329,456 55,789 16.93
Current assets (Sub-Total) 1,706,326 1,531,544 174,782 11.41
Non-current and Current assets
Non-current and Current assets (Grand Total) 8,499,144 7,451,813 1,047,331 14.05
EQUITY AND LIABILITIES
Capital and reserves
Share capital / Dividends Paid? 3,535,199 3,366,857 168,342 5.00
Statutory reserve 262,044 175,545 86,499 49.27
Retained earnings/(accumulated losses) 892,538 287,385 605,153 210.57
Total equity attributable to shareholders 4,998,480 4,138,486 859,994 20.78
Non-current liabilities
Long-term bank loans 1,436,060 1,078,154 357,906 33.20
Advances from sale of properties 84,127 108,293 (24,166) (22.32)
Non-current payables 5,200 5,564 (364) (6.54)
Provision for staff terminal benefits 70,972 80,579 (9,607) (11.92)
Non-current liabilities (Part-Sub-Total) 1,596,359 1,272,590 323,769 25.44
Current liabilities
Trade and other payables 1,445,721 1,374,488 71,233 5.18
Advances and deposits 222,990 173,230 49,760 28.72
Due to related parties 16,239 1,966 14,273 725.99
Short-term bank borrowings 197,755 131,053 66,702 50.90
Current portion of long-term bank loans 21,600 360 (338,400) (94.00)
Current liabilities (Part-Sub-Total) 1,904,305 2,040,737 (136,432) (6.69)
Non-current and Current liabilities
Non-current and current liabilities (Sub-Total) 3,500,664 3,313,327 187,337 5.65
Capital and reserves, Non-current and Current liabilities
Equity and liabilities (Grand Total) 8,499,144 7,451,813 1,047,331 14.05

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Cash Flows
Finance expense 64,852 930,842 (865,990) (93.03)
Operating activities
Net cash (used in) / generated from (212,570) (409,013) 196,443 (48.03)
Investing activities
Net cash (used in) / generated from 236,881 2,587,078 (2,350,197) (90.84)
Financing activities
Net cash (used in) / generated from (3,358) (2,199,836) 2,196,478 (99.85)

Table no. 6: Vertical Analysis

Parameters 2014
AED’000 %
Income Statement
Income
Property management and sales revenue 99,995 4.84
Contracting and other operating activities 647,458 31.31
Gain/(loss) on sale of investment properties 115,675 5.59
Share in profit of joint ventures 29,935 1.45
Gain/(loss) on valuation of properties 1,044,370 50.50
Finance income 14,383 0.70
Other income 116,251 5.62
Total Income / Sales / Revenue (Sub-Total) 2,068,067 100.00
Expenses
Direct costs (1,017,434) (49.20)
Administrative and general expenses (120,787) (5.84)
Finance expense or cost (64,852) (3.14)
Total Expenses (Sub-Total) (1,203,073) (58.17)
Income and Expenses
Profit for the year attributable to shareholders 864,994 41.83

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Balance Sheet or Financial Position
ASSETS

Non-current assets
Intangible assets
Property, plant and equipment
Investment properties
Development properties
Investment in joint ventures
Non-current receivables
Non-current assets (Sub-Total) 295
103,178
5,907,879
49,423
561,699
170,344
6,792,818 0.00
1.21
69.51
0.58
6.61
2.00
79.92
Current assets
Other investments
Inventories
Contract work-in-progress
Trade and other receivables
Due from relates parties
Cash in hand and at bank
Current assets (Sub-Total) 237,878
31,013
481,777
562,948
7,465
385,245
1,706,326 2.80
0.36
5.67
6.62
0.09
4.53
20.08
Non-current and Current assets
Non-current and Current assets (Grand Total) 8,499,144 100.00
EQUITY AND LIABILITIES
Capital and reserves
Share capital / Dividends Paid?
Treasury shares
Statutory reserve
General reserve
Retained earnings/(accumulated losses)
Total equity attributable to shareholders (Sub-Total) 3,535,199
(4,998)
262,044
313,697
892,538
4,998,480 41.59
(0.06)
3.08
3.69
10.50
58.81
Non-current liabilities
Long-term bank loans
Advances from sale of properties
Non-current payables
Provision for staff terminal benefits
Non-current liabilities (Part-Sub-Total) 1,436,060
84,127
5,200
70,972
1,596,359 16.90
0.99
0.06
0.84
18.78
Current liabilities
Trade and other payables
Advances and deposits
Due to related parties
Short-term bank borrowings
Current portion of long-term bank loans
Current liabilities (Part-Sub-Total) 1,445,721
222,990
16,239
197,755
21,600
1,904,305 17.01
2.62
0.19
2.33
0.25
22.41
Non-current and Current liabilities
Non-current and current liabilities (Sub-Total) 3,500,664 41.19
Capital and reserves, Non-current and Current liabilities
Equity and liabilities (Grand Total) 8,499,144 100.00

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Table no. 7: Trend Analysis Data

COMPANY A COMPANY B
# Year 2010 2011 2012 2013 2014 2010 2011 2012 2013 2014
1 Total Assets
2 Total Owner’s Equity
3 Total Liabilities
4 Return on Assets
5 Return on Equity
6 Operating Cash Flows
7 Investing Cash Flows
8 Financing Cash Flows
9 Earnings Per Share (EPS)
10 Dividends Per Share (DPS)
11 Total Sales (or Total Revenues)
12 Net Operating Profits (Profit for the year)
13 Retained Earnings
14 Debt Ratio (Financial Leverage)
15 Net Working Capital
16 Assets Turnover

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References:

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