Executive Summary
This report evaluates the cash flow statement, balance sheet and income statement of
Jeema Mineral Water Company. The years taken for the company’s financial presentation
are 2006, 2007, 2008 and 2009.
The concentration of the report is to reveal a clear picture about the business appearance
of Jeema evaluate with the industry .The topics taken into account are the company’s
geographical market place , SWOT analysis, product and companies in the same industry.
In addition an important evaluation of the financial appearance of the company is carried
out using modes of analysing the financial situation of the company including trend
analysis, ratio analysis, horizontal analysis, DFL and DOL
This report is completed as a part of the curriculum section TBS 980 “International
Financial Management .This assignment has assisted me to get better knowledge of
financial account analysis.
1
INTRODUCTION
Jeema Mineral Water Company is a UAE based company, established in 1980 by His
Highness Sheikh Rashid Al Maktoum and late Sultan Al Owais. Jeema Mineral Water
Company is mainly engaged in manufacturing plant for production of mineral water and
delivering them .Since 25 years, the company seeks to be in its top position in the mineral
water industry. By using latest techniques in advertising and innovative packaging
technology, they try to overcome international competition.
The headquarters of Jeema is located in Dubai and their major water plant is
constructed near Jeema Wadi and Hatta, the natural springs which were discovered by
Katadyn of France and Evian .The bottles used for packaging are eco friendly and easy to
use. They manufacture around 375,000 bottles of mineral water every day. Jeema has
made up long term relationship with U.S Navy, Emirates airlines and also with lots of
hotels mainly five star hotels and seven star hotels and resorts for marketing their brand
name through the supply of bottles. In 2004 Jeema was the most profitable mineral water
producing company in UAE and over AED 25 million was their annual turnover. With
the strong dedication to quality and excellent business practice, the company had been
honoured by the certifications, ISO and HACCP.
Jeema Mineral Water Company’s vision is to give Middle East and UAE with good
quality mineral water in a suitable and cost effective way. The company’s mission is to
encourage the UAE’s water availability as the most clean and good quality mineral water
in the world.
To examine the financial performance of Jeema Mineral Water Company, we compared
the company with industry average by using ratio analysis. They are Asset Utilization
Ratios, Profitability Ratio, Liquidity Ratio and Debt Utilisation Ratio
2
Ratio analysis
1 Profitability ratio
Profitability ratio is used to identify how efficiently or well the company’s
operation are. Profitability ratio gives an idea about a firm’s ability to use its resources to
produce a good income .To calculate the profitability ratio, net income is divided by sales
,then multiplied with 100 to transfer it into a percentage form .To calculate profitability
ratio ,net income divided by sales ,and then multiplied with 100 to transfer it in to a
percentage form .This is based on the company pricing policies and its ability to control
its costs .This ratio is important for investors and stockholders as this gives an indication
whether the company is performing well financially and has good control over
costs .Higher the profit margin better is the company’s financial position .Jeema Mineral
Water company profit margin for the years from 2006-2009 is shown in the table below
Profit margin = [net income /sales]*100
Profit Margin 2006 2007 2008 2009
Jeema 16.67% 8.64% 5.22% 7.14%
Industry Average 7.29% 5.38% 8.81% 9.23%
According to what we have calculated from the year 2006 – 2009, Jeema’s profit margin
has been decreasing from 2006 – 2008. Profit Margin for 2006 was 16.67% and it
decreased to 5.22% in 2008 which shows us that the company’s ability to pay long term
interest has decreased and then the company’s long term payment ability increased to
7.14% in 2009. The average of the FMCG industry is also fluctuating during the year
2006 – 2009 from 7.29% in 2006 – 9.23% in 2009.
3
If we compare the company, Jeema Mineral Water’s profit margin with the industry
average from 2006- 2009 we can see that the profit margin for the company is higher than
the industry average during the year 2006-2008. This shows us that the cost or goods sold
was high and the cost of revenue and expenses is less for the company.
2 Return on assets
Return on Assets denotes how efficient a firm is when we take into consideration the
total assets. Return on assets indicates how well a firm uses its asset to generate a high
income. A higher return on assets shows the company’s efficiency in using its total assets
to generate profit .Return on Assets is calculated by dividing Net profit by Total Assets
Return on assets =Net income /total assets
According to Du Pont system of Analysis this ratio can also be calculated by
Return on Assets= Profit Margin l Asset Turnover
= [Net profit /sales]*[sales /Total Asset]
4
Return on Assets 2006 2007 2008 2009
Jeema 5.24% 2.77% 3.11% 3.55%
Industry Average 4.12% 4.37% 6.8% 12.14%
The Return on Assets of Jeema Mineral Water is fluctuating from 2006-2009. If we
compare the Return on assets of the company with the industrial average during the year
2007-2009 we can find out that the industrial average has higher return on assets which
means that the industrial average is making use of its total assets very efficiently and is
generating increased sales per dollar of assets. The Return on Assets is high on 2009 for
the industry average indicates that the industrial average is making a lot of money using
less investment.
iii) Return on Equity
Return on Equity is an important ratio that shareholders and investors should look at
before investing. Return on Equity shows percentage changes in the income of
shareholder equity which means the profit that are available for sharing with the equity
holders of the company. It specifies the profit the firm makes with the shareholder’s
investment in the industry.
5
Return on Equity = [Net Profit /Shareholders Equity]*100
According to Du Pont system of analysis this ratio can also be calculated by
Return on Equity=Return on Assets / [1-Debt/Asset]
Return on Equity 2006 2007 2008 2009
Jeema 5.72% 3.01% 4.03% 5.45%
Industry Average 5.86% 7.22% 18.33% 21.07%
The Return on Equity for Jeema keeps on fluctuating from 2006-2009. When we compare
the company with the Industry average, the industry average has higher Return on Equity
than Jeema Mineral water because of high return of assets.
6
Total Asset Turnover 2006 2007 2008 2009
Jeema
0.31
times
0.32
times
0.60
times
0.49
times
Industry Average
0.92
times
1.01
times
1.49
times
1.24
times
The Total Asset Turnover has increased for Jeema Mineral Water from 2006-2008
and is less in 2009 compared to the Industry Average.
Debt to Total Asset 2006 2007 2008 2009
Jeema 8.44% 7.97% 22.91% 34.73%
Industry Average 28.34% 29.06% 37.28% 33.36%
7
The debt to total assets is high in 2009 and from 2008-2009 for the company. This shows
us that there is a high usage of debt which in turn increased the return of equity
increasing the return on assets. In 2007 the company has less Return on Equity because of
low asset turnover
Looking at the debt to total assets during 2006 – 2009, return on equity for the industry
average has increased which indicates high debt usage hence increasing the return on
equity which increased the return on assets. Jeema Mineral Water had a poor Return on
Equity in 2007 because of poor asset turnover ratio. When we compare the company with
the industry average we can see that the Debt to Total Asset is increasing during 2006-
2008 for the company and the industry average. This shows that there is a high risk in the
operations which leads to less borrowing capacity of funds and decreases the financial
elasticity.
8
B. Asset Utilisation Ratio
Asset Utilisation ratio, helps us calculate the speed at which a firm turns over its account
receivables, inventory and long term assets. Asset utilisation ratio helps us to know the
efficiency of the firm in using its assets to generate sales, inventory management and the
credit policy of the company. Asset utilisation is calculated by using the below equations.
The ratios predict the company’s ability in utilizing its assets.
1. Receivables Turnover
Receivables Turnover = Sales/ Accounts Receivables
Receivable Turnover indicates how good the company is in managing its receivables. It
also tells us about the credit policy of the company to collect its receivable .This ratio
shows how efficient the company is in collecting its payments. Higher the value better
the company’s ability in collecting payments
Receivables Turnover 2006 2007 2008 2009
Jeema
3.54
times
3.79
times
3.39
times
4.40
times
Industry Average
4.35
times
4.33
times
6.90
times
8.11
times
9
The Receivables Turnover of Jeema Mineral Water from 2006 – 2008 decreased due to
the decrease in the collection of the receivables. Jeema Mineral Water‘s Receivables
Turnover are less when we compare it with the Industry Average which indicates that the
company had difficulty in collecting back the money from the market, while for the
industry’s credit policies were really strong and didn’t find it difficult to collect back the
money from the customers.
ii) Average Collection Period
Average Collection Period shows the period or time a company takes to collect its
receivables from the customer. Due to the huge transaction, companies used to do the
credit transaction with the customer, the main problem in this credit transaction is the
time of repayment. Less average collection period is the best as the company does not
take much time to collect its receivables. This ratio indicates the average time the
company takes in receiving payments. A low average collection period is always good for
the company
Average Collection Period =365 / Receivable turnover
10
Average Collection Period 2006 2007 2008 2009
Jeema
103.19
days
96.33
days
107.82
days
82.86
days
Industry Average
88.86
days
86.14
days
61.45
days
50.56
days
The Average Collection Period of Jeema Mineral Water is fluctuating from 2006-2009.
When we compare it to the industry average, the average collection days is less for the
industry than for the company during the years 2006-2009, since the industry has a
decrease in the accounts receivable and was efficient and fast in collecting back the
accounts receivable. The average collection period was highest for the company in 2008
which indicates to us that the company was slow in collecting back the receivables from
the clients.
In order for the company to be successful the company has to reduce the receivables by
finding ways to increase the speed of receivables collection.
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iii) Inventory Turnover
Inventory turnover shows how good a company is in generating sale by using its
inventory. A low inventory turnover shows poor sales which leads to an increase in the
excess inventory being unsold this ratio gives the ability of the company to turn over the
inventory to sales. A low value indicates poor inventory turnover and the company will
be having dead stock in the form of inventory. Alternatively a high inventory turnover
shows the stability of the company in utilizing its inventory.
(http://www.answers.com/topic/inventory-turnover)
Inventory Turnover is calculated by
Inventory Turnover = Sales/ Inventory
Inventory Turnover 2006 2007 2008 2009
Jeema
8.60
times
5.50
times
4.71
times
5.94
times
Industry Average
6.58
times
6.97
times
8.21
times
8.03
times
12
The inventory turnover for the industry average is increasing from 2006-2009 compared
to the company. This means that industry during the period was having strong sales and
was efficient in controlling the cost of production. The industry average sold many goods
and was good in managing the inventory.
The inventory turnover has decreased from 2006-2008 for the company. This shows that
the sales were less over this period and that the company was finding it difficult to
control the cost of production. The company’s inventory turnover also reduced during
this period, hence the number of goods sold were less.
iv) Fixed Asset Turnover
Fixed Asset Turnover tells us how good a company is in using its fixed assets (property,
plant and machinery] to generate sales. Low fixed asset turnover shows the firms
inefficiency in using the fixed assets for the operations this indicates the efficiency and
capability of the company to utilize its fixed assets like machinery; property to create
more revenue in the form of sales. A high fixed asset turnover is always a good sign for
the company and indicates its operational stability.
(http://www.answers.com/topic/fixed-asset-turnover)
13
It can be calculated by
Fixed Asset Turnover = Sales/ Fixed Assets
Fixed Asset Turnover 2006 2007 2008 2009
Jeema
0.42
times
0.41
times
0.98
times
0.68
times
Industry Average 2 times
2.62
times
3.92
times
3.1
times
Jeema’s fixed asset turnover was less when we compare it to the industry average which
means that the company isn’t efficient in controlling its fixed asset so as to gain efficient
revenue. For both the industry average and for the company we will be able to notice that
the fixed asset turnover is increasing hence denoting fixed asset usage efficiency.
v) Total Asset Turnover
This indicates the efficiency and capability of the company to utilize its total assets to
create more revenue in the form of sales. A high total asset turnover is always a good sign
for the company and indicates its operational stability.
14
It is calculated by
Total Asset Turnover = Sales/ Total Asset Turnover
Total Asset Turnover 2006 2007 2008 2009
Jeema
0.31
times
0.32
times
0.60
times
0.49
times
Industry Average
0.92
times
1.01
times
1.49
times
1.24
times
The total assets turnover is increasing during the period 2006-2009, which means that the
company has high total assets efficiency resulting in high revenue from sales because of
high resource efficiency, The industry average was increasing from 2006-2008 and then
started decreasing in 2009.
C. Liquidity Ratio
15
Liquidity Ratio shows the company’s ability to pay off its short term obligations in case
of liquidation .High liquidity ratio means the company is in safe position to liquidate and
company can pay off its all short term debts. These are important ratios for investors as
this shows the current position of the company to pay of its immediate debts.
(http://www.answers.com/topic/liquidity-ratio)
i) Current Ratio
It’s calculated using the formula given below. A higher current ratio is good as indicates
the ability of the company to pay offs its current liabilities.
Current Ratio = Current Asset/ Current Liabilities
Current Ratio 2006 2007 2008 2009
Jeema 3.30 3.06 1.81 1.24
Industry Average 2.20 2.18 1.63 1.79
16
The current ratio of Jeema Mineral Water has decreased from the year 2006-2009, which
indicates to us that company can’t liquidate its assets resulting in the company becoming
risky. The industry average has also decreased from 2006-2008 and then increased in the
year 2009 which indicates that the industry is becoming less risky.
ii) Quick Ratio
It is calculated using the below formula. It is important for investors as this gives the
current ability of the company to manage its liabilities. Higher the ratio better for the
company. This is called the acid test ratio as it shows the company ability to pay back
short term obligations .Inventory is excluded in this, because some companies will find
hard to liquidate the inventories
Quick Ratio = (Current Assets – Inventories)/ Current Liabilities
Quick Ratio 2006 2007 2008 2009
Jeema 2.82 2.25 1.22 0.86
Industry Average 1.52 1.41 1.06 1.11
17
The quick ratio for Jeema Mineral Water has decreased from 2006-2009, hence
indicating the difficulty for the company to liquidate but for industry average in the year
2009 liquidating is easy. If we compare the company with the industrial average we can
see that the industrial average’s quick ratio is much less than the company. The ideal
quick ratio should be 1. If the quick ratio is high it means that the organization can
liquidate fast its short term assets.
D. Debt Utilisation Ratio
The Debt Utilisation Ratio gives the overall debt position of the firm in terms of assets,
which means the ability of the firm to meet its financial leverage. Debt Utilisation ratio
helps to measure the exact risk of debt of a company based on assets. This ratio is used to
identify the potential risk for the company based on the debts of the company.
i) Debt to Total Assets
This ratio gives an indication of the company’s debt compared to the total assets. Low
ratio shows a stable operation compared to higher value. A high value means the
company is risky.
18
Debt to Total Assets 2006 2007 2008 2009
Jeema 8.44% 7.97% 22.91% 34.73%
Industry Average 28.34% 29.06% 37.28% 33.36%
The debt total assets for both the industry average and the company are increasing from
the year 2006- 2008, which indicates to us that both of them rising debt structure
depending on the company’s debt and is less risky.
If we look at the diagram and the table we can find out that the industry average has
higher debt to total assets in 2008 which means higher risk with the operations resulting
due to the small borrowing funds capacity. Higher debt total assets ratio lowers the
financial elasticity of the organization. The investors wouldn’t be attracted to the
company because of less debt to total assets ratio.
ii) Times Interest Earned
Times Interest Earned is the company’s ability to pay off its debt payments. Higher the
value better is the company’s ability to pay its debts.
(http://www.investopedia.com/terms/t/tie.asp)
19
It is calculated by
Times Interest earned = Earnings before Interest and Tax (EBIT)/ Interest
Times Interest Earned 2006 2007 2008 2009
Jeema68.82 times
43.41 times
14.73 times
59.21 times
Industry Average
21.36 times
15.73 times
9.74 times
37.39 times
The number of times interest earned for Jeema Mineral Water and the industry average
decreases from 2006-2008 which indicates that there is a decrease in the ability to pay off
its debt payments. In the year 2009 we can see that the number of times interest earned
has increased.
20
iii) Fixed Charge Coverage
This indicates the ability of the company to meet all its fixed obligations other than
interest payments .It indicates the times the company has earned interest before tax .It
also helps in finding out how many times the company’s cash flow covers fixed charges.
It is calculated by
Fixed Charge Coverage = Income before fixed charges and taxes / Fixed charges
Fixed Charge Coverage 2006 2007 2008 2009
Jeema1.98
times3.17
times-5.31 times
12. 34 times
Industry Average3.55 times
4.24 times
0.68 times
11.82 times
The Jeema Mineral Water’s and the industry average’s fixed coverage has increased from
2006 -2007 and then it drooped in 2008 which indicates that the interest earned before tax
21
was less. In the year 2009 fixed charge coverage started increasing again for both the
industry average and the company
OVERALL RATIO ANALYSIS
2006
Jeema Mineral Water Industry Average Comments
Profitability Ratio
Profit Margin 16.67% 7.29% Good
Return on Assets 5.24% 4.12% Average
Return on Equity 5.72% 5.86%Below
Average
Asset Utilization Ratios
Receivables Turnover 3.54times 4.35 times Average
Average Collection Period 103.19days 88.86 daysBelow
Average
Inventory Turnover 8.60 times 6.58 times Average
Fixed Asset Turnover 0.42 times 2 timesBelow
Average
Total Assets Turnover 0.31 times 0.92 timesBelow
Average
Liquidity Ratios
Current Ratio 3.30 2.20 Average
Quick Ratio 2.82 1.52 Average
Debt Utilization Ratio
Debt To Total Assets 8.44% 28.34%Below
Average
Times Interest Earned 68.82 times 21.36 times Good
Fixed Charge Coverage 1.98 times 3.55 timesBelow
Average
22
2007
Jeema Mineral
WaterIndustry Average Comments
Profitability Ratio
Profit Margin 8.64% 5.38% Average
Return on Assets 2.77% 4.37% Below Average
Return on Equity 3.01% 7.22% Below AverageAsset Utilization
Ratios
Receivables Turnover 3.79 times 4.33 times Below AverageAverage Collection
Period 96.33 days 86.14 days Below Average
Inventory Turnover 5.50 times 6.97 times Below Average
Fixed Asset Turnover 0.41 times 2.62 times Below Average
Total Assets Turnover 0.32 times 1.01 times Below Average
Liquidity Ratios
Current Ratio 3.06 2.18 Average
Quick Ratio 2.25 1.41 Average
Debt Utilization Ratio
Debt To Total Assets 7.97% 29.06% Below Average
Times Interest Earned 43.41 times 15.73 times Good
Fixed Charge Coverage 3.17 times 4.24 times Below Average
23
2008
Jeema Mineral Water
Industry
Average Comments
Profitability Ratio
Profit Margin 5.22% 8.81% Below Average
Return on Assets 3.11% 6.8% Below Average
Return on Equity 4.03% 18.33% Below Average
Asset Utilization Ratios
Receivables Turnover 3.39 times 6.90 times Below Average
Average Collection Period 107.82 days 61.45days Below Average
Inventory Turnover 4.71 times 8.21 times Below Average
Fixed Asset Turnover 0.98 times 3.92 times Below Average
Total Assets Turnover 0.60times 1.49 times Below Average
Liquidity Ratios
Current Ratio 1.81 1.63 Average
Quick Ratio 1.22 1.06 Average
Debt Utilization Ratio
Debt To Total Assets 22.91% 37.28% Below Average
Times Interest Earned 14.73 times 9.74 times Good
Fixed charge coverage -5.31 times 0.68 times Below Average
24
2009
Jeema Mineral Water Industry Average Comments
Profitability Ratio
Profit Margin 7.14% 9.23%
Below
Average
Return on Assets 3.55% 12.14%
Below
Average
Return on Equity 5.45% 21.07%
Below
Average
Asset Utilization Ratios
Receivables Turnover 4.40times 8.11 times
Below
Average
Average Collection Period 82.86 days 50.56 days
Below
Average
Inventory Turnover 5.94 times 8.03 times
Below
Average
Fixed Asset Turnover 0.68 times 3.1 times
Below
Average
Total Assets Turnover 0.49 times 1.24 times
Below
Average
Liquidity Ratios
Current Ratio 1.24 1.79
Below
Average
Quick Ratio 0.86 1.11
Below
Average
Debt Utilization Ratio
Debt To Total Assets 34.73% 33.36% Average
Times Interest Earned 59.21 times 37.39 times Good
Fixed Charge Coverage 12.39 times 11.82 times Average
25
Horizontal Analysis
Horizontal analysis is a straightforward method for analysing financial statements and is
used to evaluate the trends in the accounts over the years.
It is calculated by
Horizontal Analysis= (Current year amount – Last year amount)/Last year amount
Horizontal Analysis for Income Statement
2006 - 2007 2007-2008 2008-2009
Sales 30.29% 28.03% 14.11%
Cost of Goods Sold 1.84% 15.10% 21.31%
Gross Profit 54.75% 51.94% 4.03%
General Administrative Expense 59.03% 13.39% 55.63%
Operating Profit - 97.61 -563.26% 55.63%
Income from Investment -68.64% -43.99% 105%
Interest Revenue -16.73% -97.73% -3.19%
Other Income 2.87% 17.37% -59.54%
Finance costs 7.95% 139.02% -92.08%
Net Profit 32.49% 22.61% 56.07%
Jeema Mineral Water’s sales have decreased and the cost of goods sold has increased,
resulting in the decrease of gross profit. The operating profit and the general
administrative expense and net profit are fluctuating from 2006 – 2009. In the year 2006-
2008 we can see that the net profit is decreasing which indicates to us that the company
wasn’t having a proper management of the inventory. When we were calculating the net
profit or loss, tax wasn’t taken into consideration as Dubai doesn’t levy tax.
.
26
Horizontal Analysis of Balance sheet
2006 -2007 2007-2008 2008-2009ASSETS
Current Assets
Cash and bank -289.20% -93.29% 17.65%
Accounts and other receivables -32.16% 73.00% 2.82%
Inventories 103.61% 49.66% -9.57%
Total Current Assets 11.95% 23.06% -1.11%
Non Current Assets
Investments available for sale 47.70% -63.22% 20.92%
Property, plant and equipment -1.02% 5.69% 117.75%
Long term payment -4.34%
Total Non Current Assets 33.03% -46.26% 62.86%
Total Assets 27.75% -31.04% 38.04%LIABILITIES
Current Liabilities
Accounts and other payables 7.79% 51.28% 7.24%
Total Current Liabilities 20.84% 108.44% 47.46%
Non Current Liabilities
Employees end of service benefits 19.35% 5.65% 40.61%
Total Non Current Liabilities 19.35% 5.65% 40.61%
Total Liabilities 20.84% 98.04% 119.880%Equity
Legal Reserve 4.27% 3.17% 4.79%
Investment Revaluation Reserve 74.04% -80.84% 54.86%
Retained Earnings -1.41% -5.60% 28.69%
Total Shareholder's Equity 28.41% -42.23% 15.60%
Total Liabilities and Shareholder's Equity 27.75% -31.04% 38.40%
27
The horizontal analysis of balance sheet indicates that the total assets are fluctuating from
the period 2006-2009. Liabilities have increased during this period because of high debt.
Shareholder’s equity is also fluctuating during this period, indicating to us that the
shareholders were getting profit only in the year 2006-2007 due to the mismanagement of
sales and inventory. This problem affected the whole profit of the company.
Trend Analysis
Trend analysis helps us to predict the future based on the past data. Trends are divided
into three types: short term, intermediate and long term. This report looks at the future of
the company based on long term trends.
(http://www.investopedia.com/terms/t/trendanalysis.asp)
It’s calculated by
Trend Percentage = (Current Year Amount/ Base Year Amount)*100
The base year 2006 is used to compare how the company has performed through the
years.
28
Trend Analysis on Ratios
Trend Analysis on Ratios Ratios 2006 2007 2008 2009
Profitability Ratio Profit Margin 100% 51.82% 31.31% 42.83%
Return on Assets 100% 52.86% 59.35% 67.74%Return on Equity 100% 52.62% 70.45% 95.27%
Asset Utilisation Ratios Receivables Turnover 100% 107.06% 95.76% 124.29%
Average Collection Period 100% 93.35% 104.48% 80.29%Inventory Turnover 100% 63.95% 54.76% 69.06%
Fixed Asset Turnover 100% 97.61% 233.33% 161.90%Total Assets Turnover 100% 103.22% 193.54% 158.06%
Liquidity Ratios Current Ratio 100% 92.72% 54.84% 37.57%Quick Ratio 100% 79.78% 43.26% 30.49%
Debt Utilisation Ratio Debt To Total Assets 100% 94.43% 271.44% 411.11%Times Interest Earned 100% 63.07% 21.40% 86.03%
Fixed Charge Coverage 100%` 160.10% -268.18% 625.75%
i) Profit Margin
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From the above table it’s clear the profit margin was the highest for 2006 and from their
there was a decline in 2007 and 2008 which was not a good sign. However the profit
margin shows a recovery in 2009.
ii) Return on Assets
From the above table it’s clear the return on assets was the highest for 2006 and from
their there was a decline in 2007 and 2008 which was not a good sign. However the
return in assets shows a recovery in 2009.
3 Return on equity
30
From the above table it’s clear the return on equity was the highest for 2006 and from
their there was a decline in 2007. However the return on assets showed a good recovery
in 2008 and further increased in 2009 hence indicates the strength of the company to
recover from tough situations.
Assets Utilisation Ratios
i) Receivables Turnover
The receivables turnover is consistent throughout and has increased in 2009.This is a
positive sign for the company since it has no difficulty in getting back the money from
the clients.
31
ii) Average Collection Period
The average collection period was consistent from 2006 till 2008.However it reduced in
2009 which is good sign as the company is now fast in collecting the accounts
receivables and has a stringent credit policy
iii) Inventory Turnover
The inventory turnover was highest in 2006 and since then company inventory turnover
declined in 2007 and 2008.In 2009 although they increased the turnover, still lot of work
has to be done to reach the level achieved in 2006
32
iv) Fixed Asset Turnover
The fixed asset turnover was low in 2006 and 2007.However in 2008 the fixed asset
turnover increased considerably. This may be because the company was efficient in
utilizing the purchased assets in creating more revenue in the form of sales. This is a
good sign as they need to keep this ratio high for the coming years.
v) Total Asset Turnover
33
The total asset turnover was low in 2006 and 2007.However in 2008 the total asset
turnover increased considerably. This may be because the company was efficient in
utilizing the total assets in creating more revenue in the form of sales. This is a good sign
as they need to keep this ratio high for the coming years.
Liquidity Ratio
i) Current Ratio
The current ratio shows a steady decline from 2006, which indicates the company
inability to pay short term dues because of reduced cash flow. The ratio is lowest in
2009.The company needs to improve the current ratio to attract short term investors
ii) Quick ratio
34
The quick ratio shows a steady decline from 2006, which indicates the company inability
to pay short term dues because of less liquidity of investments. The ratio is lowest in
2009.The company needs to improve the quick ratio to attract short term and long term
investors
Debt Utilisation Ratio
1) Debt to total assets
35
The debt to total assets shows a sharp increase in 2008 and 2009 which is a worrying sign
for the company and creditors. This shows the company inability to clear debts. They
need to decrease this ratio in the coming years to win the confidence of creditors
ii) Times Interest Earned
The company times interest earned had declined from 2006 till 2008.However it
increased the times interest earned in 2009 to almost the level achieved in 2006.This
shows the company is recovering from the set back in 2007 and 2008.
Trend Analysis using Income Statement
Particulars Trend Analysis
2009 2008 2007 2006
Sales 100% 52.52% 68.44% 36.23%
Cost of Goods Sold 100% 82.43% 110.32% 84.23%
Gross Profit 100% 96.11% 63.25% 0.71%General Administrative
Expense 100% 85.56% 274.95% 172.88%
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Operating Profit 100% 64.25% 9.68% 406.10%
Income from Investment 100% 48.77% 87.09% 277.79%
Other Income 100% 247.16% 210.58% 72.85%
Net Profit 100% 64.07% 82.79% 122.65%
Degree of Operating Leverage (DOL)
Leverage ratio briefing the outcome of a particular amount of operating leverage has on a
company's earnings before interest and taxes (EBIT). This ratio helps us to determining
the effects that a given level of operating leverage has on the earnings potential of the
firm. Operating leverage uses a huge proportion of fixed costs to variable costs in the
operation of the firm. The higher the value of operating leverage, the more volatile is
the EBIT. It also used to calculate the most suitable level of operating leverage in order to
maximize the company's EBIT. The formula is as follows:
It is calculated by
Degree of Operating Leverage = % change in EBIT/ % change in Sales
Degree of Operating Leverage
2006 2007 2008
Jeema Mineral Water 3.01 -1.05 -0.67
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The earnings before interest and tax decreased from AED 4,907,667 in 2006 to AED
4,010,904. The sales of the company has increased from AED 29,008,528 in 2006 to
AED 55,226,141 in 2009, while the degree of operating leverage has decreased from the
year 2006 to 2009 from 3.01. to -0.67
Degree of Financial Leverage (DFL)
DFL shows the relation ship between financial leverage and company’s earning per share
(EPS). Financial leverage engages in using fixed costs to finance the company, and will
contain higher expenses before interest and taxes (EBIT). The more unstable is the value
in earning per share results a higher degree of financial Leverage. The formula is as
follows:
Degree of Financial Leverage = % change in EPS / % change in EBIT
Degree of Financial Leverage
2006 2007 2008
Jeema Mineral Water 0.72 0.97 1.51
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Earnings per share of the company Jeema Mineral Water has decreased from 0.16 in
2006 to 0.13 in 2009. Earnings before interest and tax had decreased from AED
4,907,667 in 2006 to AED 4,010,904. The degree of financial leverage for 2006 to 2009
has increased from 0.72 in 2006 to 1.51 in 2009.
Who gets affected by the company’s performance?
Creditors
Creditors are the main concerned of the financial status of the company. High debt level
represents low capacity to borrow money, and increased risk level of the company. We
can see that the cost of goods sold has been increased; this is affected in the gross profit
of the company. In future the creditors might have concern to give credit to the company
and this is indicated by the liquidity ratios and inability to pay back short term dues.
Customers
Customers are seems to be more happy with Jeema mineral water company, because
the company is giving good credit policies to customer.
Stockholders
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Stockholders play a significant role in the company, because company is using shock
holders money to run the business. We can see that Jeema Mineral Water Company is
giving returns to the stockholders but the company should plan to give improved returns
for their investments.
RECOMMENDATIONS
Company should
Inventory Management:
The company should improve their inventory management, if they applied just in time
method in their inventory management system they can meet the vendors to arrive at a
just in time supply position. It will reduce the time to release goods by the suppliers
against the order.
Introduce new flavoured products:
Mineral water business is becoming more competitive day by day, so in addition to
mineral water company should think about launching new products like soda water,
flavoured water, juice items, Etc. It will help the company to increase the sales and their
by a good returns to the share holder.
Improve Distribution
No customer would prefer aged products, so if the company improve their distribution
channel according the demand, they can distribute fresh products to their customers. It
will help them to increase the sales volume.
REFERENCES
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Wikipedia, 2009, ‘Debt to assets ratio’, Debt to assets ratio. Available:
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