Financial Performance Management Project Harvard Case Solution & Analysis

Financial Performance Management Project Case Study Solution

Common SizingDamac Income Statement

The common sizing of Damac’s income statement show that the company COGS is 57% which has been increase in comparison of last 2 years. The net earnings of the company is low, due to small increase in sales of the company with increase in its operational expenses. If company succeed in reducing them, they will record massive increase in its net earnings.

Common BaseDamac Income Statement

The income statement of both the companies have shown totally different results in 2017. The Arabtec Holding’s net income increases in the year 2017, whereas the Damac Properties Dubai Co PJSC net income show downfall in the same year. The reason behind in different results of both the companies is increased in the revenues of the Arabtec Holding whereas the Damac Properties Dubai Co PJSC have shown massive change in the CGOS of the company in 2017. The massive increase in the COGS in 2017 of Damac Properties Dubai Co PJSC results in the low net income of the company.

Comparative Analysis Common Sizing and Common Base Income Statement

Common Sizing

A common sized income statement is used for to express each line of item in percentage of the value of revenues or sales. It is also known as vertical analysis of financial statement. In vertical analysis for common base analysis we measure each line of item of financial statement to represent the percentages of a base figure within the statements.

The Arabtec Holding has record a massive increase in its sales of around 10% in year 2017. They also control their COGS which have positive impact on net earnings of the company. But the revenues of Arabtec Holdings has increased but the net income has been decreased. The reason is increase in its COGS. The common base working shows that the Arabtec Holding’s COGS is 95%, whereas the Damac properties COGS is 51% only. But still the Arabtec Holdings have more net earnings in 2017 in comparison of Damac properties.

Common base

Common base analysis is used in the review of a company's financial statements over multiple periods. It is usually depicted as a percentage growth over the same line item in the base year Common base analysis allows financial statement users to easily spot trends and growth patterns. It can be manipulated to make the current period look better if specific historical periods of poor performance are chosen as a comparison. (Tuovila, 2019)

The Arabtec Holdings have recorded positive change in the revenues of the company. Around 7% of increase in the revenues of the company in 2016. Whereas, the Damac properties have totally different results. They have recorded huge decline in the company’s revenue of around 77%. This decline negatively affect the company’s net earnings for the year 2016.  But, the Arabtec Holding improves their net earnings in 2016 of around 26%.  Both the companies record increase in its COGS. But still the Arabtec have more control over its COGS in comparison of Damac properties. They have record 75% increase in COGS in just one year. Whereas, the Arabtec records 4% increase in its COGS of 2016.(Tuovila, Common Size Balance Sheet Defined, 2019)

Ratio Analysis

Table-5: Ratio Analysis

Liquidity Ratio

Current Ratio

Current ratio measures that whether the company’s current assets are able to meet its current debt or not. The Arabtec Holding PJSC. Current ratio is 0.98, which represents for 98% of the debts will be met by current assets. Whereas, Damac Properties Dubai Co current ratio is 2.13 it means that this company has excess of cash in their reserves to pay off their debts in a shorter span of time from current assets.

Quick Ratio

Quick ratio is also known as acid liquid ratios. It helps to measure the company’s ability to meet its short-term debt, with its most liquid asset. The Arabtec Holding PJSC. Quick ratio is 0.97, which represents for 97% of the debts will be met by current assets. On the other hand Damac Properties Dubai Co Quick ratio is 2.13 which tells that this company will meet their debts by its current assets so quickly.

Leverage Ratios

Debt to Asset Ratio

It is an indicator for the company’s financial leverage. It depicts who much of the company’s assets have been financed by the creditors.

The debt to asset ratio of Arabtec Holding PJSC is 1.03 shows that company has more liabilities than the assets company possess. Whereas, Damac Properties Dubai Co ratio is 0.19 it means company has less liabilities in comparison of their assets.

Debt to Equity Ratio

It is an indicator for the company’s financial leverage. It tells how much of the company’s operations have been financed by equity in comparison of debt. The debt to equity ratio of Arabtec Holding PJSC is 7.91 it means that company’s liabilities are 79% of shareholder’s Equity.

Damac Properties Dubai Co ratio is 0.83 which means 83% of company’s liabilities are from owner’s equity.

Efficiency Ratios

Total Asset Turnover

It is the summary of all asset management ratio, which concludes the impact of increase or decrease in all of the ratios. It shows how efficiently the company’s assets have been used for generating revenue. The Arabtec Holding PJSCtotal asset turnover is 0.77. It shows that company is using its assets more efficiently to increase its sales. But, Damac Properties Dubai Co total asset turnover ratio is 0.29. So, the performance of Arabtec Holdings is well in comparison of Damac Properties.

Fixed Asset Ratio

It shows how efficiently the company is utilizing its fixed assets, in order to generate revenues. Currently, the fixed asset turnover ratio of Arabtec Holdings is 24%, whereas, the Damac Properties have 43%. Currently Damac Properties are performing well in utilizing their fixed asset in order to generate revenues.

Inventory Turnover

It shows how efficiently the inventory is managed in comparison to COGS, with average inventory period. Currently, the Arabtec Holdings inventory turnover is -73.23. Due to the unavailability of data, we are not able to conduct a comparative analysis of both the companies. But the inventory turnover of the Arabtec Holdings is not that much impressive.

Account Receivable Turnover

Receivable turnover ratio is an efficiency ratio, which is used to measure that how efficiently the company is collecting money. The receivable turnover ratio of Arabtec Holdings is 1.7. Due to the unavailability of data, we are not able to conduct a comparative analysis of both the companies.

Average Collection Period

It tells that how many days the company takes to collect from its creditors. The average collection period of Arabtec Holdings is 211.2, whereas, the Damac properties have 323.5. The performance of Arabtec Holdings is better than Damac properties.

Profitability Ratios

Return on Sales

Return on sales is the ratio being used to measure the efficiency of the company. It helps in measuring the how much profit is produced on per dollar sale. The return on sales of Arabtec Holdings is 1.9%, whereas, the Damac properties have 38.1%. The performance of Damac properties is better than Arabtec.

Return on Assets (ROA)

Return on Asset tells the company’s return on its total assets. . The return on assets of Arabtec Holdings is 0.81%, whereas, the Damac properties have 10.91%. The performance of Damac properties is better than Arabtec.

Return on Equity (ROE)

Return on Equity tells the company’s return on its total assets. The return on equity of Arabtec Holdings is 7.23%, whereas, the Damac properties have 19.94%. The performance of Damac properties is better than Arabtec.

Capital Structure

The capital structure of both the companies are different. The Arabtec Holdings invest more in current assets, whereas, the Damac properties focus to have high investment in fixed asset. The Arabtec is working for short-run, whereas, the Damac properties for long-run.

The financing strategy of both the companies is also different from each other’s. One is focusing to finance its operation through liabilities and another one is focusing to finance its operation through equity. The Damac properties focus to finance its operation through equity and the Arabtec Holdings through liability.

At the time of liquidation, the Arabtec will be left with low amount because of its financing strategy, whereas, the Damac will be left with the excessive amount.

Even the Arabtec will face difficulty in financing its operation through borrowing, whereas, the Damac will avail different offers of financial institutions.

Conclusion

At the end, the Damac properties has shown downfall in the last 2 years, but still it is performing well in comparison to Arabtec holding, in terms of profit. The company just needs to improve its sales growth in order to earn more and increase its market share. Through common base, we have noticed that in just 1 year; the revenues of the Damac properties fell to 77% in 2016. But in 2017, they improved little bit, but they still haven’t filled the gap that did rise in 2016. The Arabtec Holding has shown massive increase in its revenues, but still earns less than Damac properties because of its high operational cost. If Arabtec Holding overcomes it, it will start earn ignore than Damac properties................................

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