Damac Properties Dubai Co.’s Financial Statement Analysis

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About the company

Damac Properties Dubai Co. PJSC (DAMAC) was established in 2002 as a private company. The company was set up as a residential, leisure, and commercial developer of properties. The key activity of the company is investing in real estate development companies. When the company was formed, it operated in the Middle East and Dubai. The operations of the entity have expanded tremendously to other regions such as Saudi Arabia, Qatar, North Africa, Jordan, Qatar, Lebanon, and the United Kingdom. The company has grown tremendously over the years. At the moment, it is one of the major leading luxury real estate developers. Further, it has delivered more than 15,500 units since it was formed. Besides, there are more than 40,000 units that are still under construction.

Also, the company has more than 13,000 hotel rooms, serviced hotel apartments, and serviced villas. In January 2015, the company was listed on the Dubai Financial Market. This was another major achievement for the company. Another significant achievement of the company was that it was the first company from the Middle East to be listed on the London Stock Exchange. At the moment, the entity employs more than 1000 people. The paper seeks to carry out a financial analysis of DAMAC. The analysis will focus on calculating and interpreting various categories of order.

Ratio analysis

The success of a business requires proper financial management. This can be achieved by having a proper understanding of the financial performance of the company. However, the reported financial statements of DAMAC do not give an in-depth analysis of the financial results of the entity. Therefore, the financial strengths and weaknesses of the company cannot be known by looking at the statements. This makes it necessary to carry out a comprehensive financial analysis of the statements using various tools such as ratio analysis. Ratio analysis breaks down the values reported into various components for a better understanding of the results.

Besides, it allows the stakeholder to monitor the trend of performance of the company over some time. Further, the financial ratios of DAMAC can be compared with those of the other companies in the industry. This will help in knowing whether the company is performing better or not as compared to its peers in the industry. Thus, the outcome of ratio analysis helps users to make informed decisions about the company. Therefore, this section of the paper will focus on calculating and interpreting the various categories of ratios. The table presented below shows a summary of the calculation of all the ratios.

Discussion

Liquidity ratios

In the table above, two ratios are calculated to measure the liquidity position of the company. The two ratios are current and quick ratio. These ratios give information on the capability of DAMAC to maintain positive cash flow while satisfying short term obligations (McLaney and Atrill 191). It is worth mentioning that the liquidity level of a company high depends on the industry in which a business operates in and the nature of commodities that are sold by the business.

Formula 2015 2014
Current ratio Current assets / current liabilities 13,451,197 / 4,285,472
0.99
9,359,767 / 3,589,017
0.69
Quick ratio (Current assets – inventory) / current liabilities (13,451,197 – 0) / 4,285,472
0.99
(9,359,767 – 0) / 3,589,017

0.69

(Source of data – Damac Properties Dubai Co. PJSC 1).

In the case of DAMAC, the value of current and quick ratios grew from 0.69:1 in 2014 to 0.99: 1 in 2013. The values of current and quick ratios were equal. This can be explained by the fact that the company does not have inventory in the books of account. It does not deal with the production and sales of stock. The growth shows that the ability of the company to settle immediate obligations using current assets declined. This implies that the liquidity position and the financial health of the company improved. Also, it can be interpreted that the effectiveness in management of working capital improved. Another important observation is that the values of the liquidity ratios were less than one. This implies that the current assets cannot cover the current liabilities. Thus, the company has negative working capital. This may hinder the ability of the company to attract new short term debt.

Asset management ratios

Asset management ratios give information on the efficiency of the company. It shows the effectiveness in the use of various resources to create sales and profit. The table above shows the four turnover ratios that are used to measure the efficiency of DAMAC.

Formula 2015 2014
Receivables turnover Sales / accounts receivables 8,536,067 / 23,447,497 3,803,432
2.24
3,740,034 / 18,826,196 2,729,027
1.37
Payables turnover Cost of goods sold / accounts payable 3,469,006 / 4,285,472
0.81
1,510,727 / 3,548,672
0.43
Inventory turnover Cost of goods sold / ending inventory 3,469,006 /0
0.00
1,510,727 /0
0.00
Total asset turnover Sales / total assets 8,536,067 /
0.36
3,740,034 /
0.20

(Source of data – Damac Properties Dubai Co. PJSC 1).

The first ratio is receivables turnover. The receivables turnover ratio gives information on how the company manages debtors. The value of the ratio grew from 1.37 times in 2014 to 2.24 times in 2015. This implies that the company is able to collect amounts that are due from debtors at a faster rate. This can also be interpreted that the period between the issuance and collection of debt reduced. This implies that the efficiency in management of accounts receivables to improve. This translates to improved working capital and overall financial health. The second ratio is the payables turnover. The ratio gives information on the number of times that the company makes payment to the creditors. The ratio grew from 0.43 times in 2014 to 0.81 times in 2015. This shows that the frequency of making payments to the suppliers improved. That is, the company pays the suppliers more frequently in a year.

This also implies that the period between the purchase of commodities and payment of suppliers shortened. The payables turnover depends on the credit terms. Thus, favorable credit terms may allow a company to take long number of days before they pay creditors. A reduction in the payables turnover period improves the relationship between the company and the suppliers (Mayes and Shank 231). However, it may reduce the working capital of the company. Therefore, it is important to critically evaluate how a reduction in the payable period can affect the cash flow of the business.

Finally, the total asset turnover ratio gives information on the amount of sales that is generated per unit of total asset. The value of total asset turnover grew 0.20 times in 2014 to 0.36 times in 2015. The calculations show that the company generates less than a unit of sales from a unit of total assets. The value is quite low and it can be attributed to the nature of the business activities of the company. An increase in the value of the ratio shows that the efficiency in use of assets improved. An evaluation of the asset management ratios shows that the overall efficiency of DAMAC improved in 2015. Improvement in efficiency leads to growth in the profit of the company.

Debt ratios

The debt ratios give information on the gearing level of the company. That is, the amount of debt in the capital structure of the company. Potential investors are often interested in the debt ratio because it gives information on exposure of equity financing (Weygandt, Kieso and Kimmel 161).

Formula 2015 2014
Debt ratio Total liabilities / total equity 13,616,584 / 9,830,913
1.39
13,557,786 / 5,268,410
2.57
Debt to equity ratio Total debt / total equity 1,024,905 / 9,830,913
10.42%
276,735 / 5,268,410
5.25%
Times interest earned ratio Earnings before interest and taxes / interest expense 0.10 0.05

(Source of data – Damac Properties Dubai Co. PJSC 1).

The value of the debt ratio dropped from 2.57 in 2014 to 1.39 in 2015. The ratio is arrived at through the division of total liabilities and equity. The decline shows that the proportion of total liabilities to equity dropped. This can be attributed to the increase in total equity. This shows that the leverage position improved. The vale off debt to equity ratio grew from 5% in 2014 to 10% in 2015.

The ratio is obtained through the division of bank borrowing and total equity. A review of the financial statements shows that the value of bank borrowing grew at a higher rate than the growth in equity. This explains why the value of debt to equity ratio doubled in 2015. Based on this measure, it can be deduced that the leverage position deteriorated. However, the value is quite low and it shows that the company has a potential of borrowing more money for future expansion and growth. The results of these two ratios show one of the major weaknesses of ratio analysis. Ratios in one category may give conflicting results.

This makes it difficult to draw a conclusion on whether the attribute that is analyzed improved or deteriorated. The interest coverage ratio decreased from 51.45 in 2014 to 29.77 in 2015. The decline can be explained by the significant increase in finance cost. The ratio gives information on the ability of the company to make interest payments using income before interest and taxes. Despite the decline, the values of the ratios are high and it shows the company is able to generate adequate cash flow that can pay interest expense.

Profitability ratios

This category of ratios shows the earning capacity of the company. The ratios show the efficiency in the use in the use of resources to generate profit.

Formula 2015 2014
Gross profit margin Gross profit / sales 5,067,061 / 8,536,067
59.36%
2,229,307 / 3,740,034
59.61%
Operating margin Operating income / sales 4,543,780 / 8,536,067
53.23%
3,492,189 / 3,740,034
93.37%
Net margin Net income / sales 4,514,830 / 8,536,067
52.89%
3,483,284 / 3,740,034
93.14%
Return on assets Net income / total assets 4,514,830 / 23,447,497
19.26%
3,483,284 / 18,826,196
18.50%
Return on equity Net income / equity 4,514,830 / 9,830,913
45.92%
3,483,284 / 5,268,410
66.12%

(Source of data – Damac Properties Dubai Co. PJSC 1).

The gross profit margin dropped by 0.25 points. This ratio shows the amount of profit without taking into account the indirect costs of the business. The decline shows that the effectiveness in managing selling price of the products and the direct costs dropped. Further, the operating margin and net margin dropped by 40.14 points and 40.24 points respectively. The decline in the three margins can be explained by some earnings that the company had in 2014 but not in 2015. When these items are eliminated, it can be observed that the profit level of the company in 2015 was higher than profits in 2014 (Fridson and Alvarez 110).

Return on total assets increased from 18.50% in 2014 to 19.26% in 2015. This shows that the efficiency in the use of assets to generate profit improved during the period. Finally, the return on equity dropped. This can be explained by the increase in the number of shares in 2015. Investors are often interested in this ratio because it shows the amount of profit that the company can generate to compensate for the risks that are associated with investing in the company. Despite the decline, it can be noted that the profitability ratios were quite high. Besides, the dropped were caused by irregular gains that were reported in 2014.

Market value ratios

This category of ratios gives information on the valuation of the company.

Investment ratios Formula 2015 2014
Earnings per share Earnings attributed to equity shareholders / weighted average number of shares
NB – the EPS is provided in the financial statements
0.75 0.62
Price/earnings Market value per share / earnings per shares 2 / 0.75
3.09
1.94 / 0.62
3.13

(Source of data – Damac Properties Dubai Co. PJSC 1).

The earnings per share grew from 0.62 in 2014 to 0.75 in 2015. The ratio shows the amount of earnings per common share. The value of earnings per share improved despite the increase in the number of shares. This shows that the company is efficient in using resources to generate profit. The price to earnings ratio dropped from 3.13 in 2014 to 3.09 in 2015. The ratio gives information on the amount that will be paid per unit of earnings. The values of price earnings ratios are low. This can be an indication that the market perceives the company as a high risk. Thus, the earnings of the company are considered volatile. Thus, the calculations show that the company has a low value.

How the ratios relate to one another

The analysis above shows that the ratios are interrelated. This implies that one ratio may give an indication on the performance of another ratio. For instance, growth in liquidity ratios can be caused by the growth in receivables turnover ratio (Deegan 138). Further, the increase in debt to equity ratio causes the times interest earned ratio to decline. Further, an improvement in the asset management ratio leads to overall growth in the earnings of the company.

A decline in price to earnings ratio can be explained by a reduction in return on shareholders’ equity. In summary, the liquidity and efficiency of the company improved during the period. The decline in profitability can be explained by the irregular items. Further, there was an increase in the amount of debt in the capital structure. The discussion shows that overall financial position of DAMAC is volatile.

Works Cited

Damac Properties Dubai Co. PJSC. About DAMAC. 2016. Web.

Deegan, Craig. Financial Accounting Theory, London: McGraw-Hill, 2009. Print.

Fridson, Martin, and Fernando Alvarez. Financial Statement Analysis: A Practitioner’s Guide, New York: John Wiley & Sons, 2011. Print.

Mayes, Timothy, and Todd Shank. Financial Analysis with Excel, Boston, Cengage Learning, 2012. Print.

McLaney, Evans, and Peter Atrill. Financial Accounting for Decision Makers, London: Financial Times/Prentice Hall, 2008. Print.

Weygandt, Jerry, Donald Kieso, and Paul Kimmel. Financial Accounting, London: John Wiley & Sons Ltd, 2009. Print.

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BusinessEssay. (2022, November 23). Damac Properties Dubai Co.'s Financial Statement Analysis. Retrieved from https://business-essay.com/damac-properties-dubai-co-s-financial-statement-analysis/

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BusinessEssay. 2022. "Damac Properties Dubai Co.'s Financial Statement Analysis." November 23, 2022. https://business-essay.com/damac-properties-dubai-co-s-financial-statement-analysis/.

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BusinessEssay. "Damac Properties Dubai Co.'s Financial Statement Analysis." November 23, 2022. https://business-essay.com/damac-properties-dubai-co-s-financial-statement-analysis/.