The financial comparison herein involves two UAE based telecommunication companies. These are the Emirates Integrated Telecommunications Company (EITC) and Etisalat (Emirates Telecommunications Corporation). The companies have been selected because of their diverse financial outcomes experienced in the same financial environment.
- Emirates Integrated Telecommunications Company (EITC)
EITC is a telecommunications company based in the UAE. In 2006, the company was rebranded to Du but retained its legal name as Emirates Integrated Telecommunications Company (EITC). It commenced business in 2006 by providing mobile and fixed telephony, IPTV services, and broadband connectivity to businesses, homes, and individuals. By the end of 2011 the company estimated its customer base to comprise of over 40,000 businesses and over 5 million people.
- Etisalat (Emirates Telecommunications Corporation)
Etisalat is a telecommunications company based in the UAE. It is the largest telecommunications dealer in the UAE with its headquarters based in the Abu Dhabi. The company has outlets in 18 countries across Middle East, Asia, and Africa. Its customer base exceeds 140 million customers across the globe. The company customers include; mobile operators, ISPs, content providers, businesses, and other telecommunication companies. Etisalat has been in the telecommunications business since 1976. Its current market value is estimated to exceed AED 80 billion.
This paper compares the financial performance of the two companies (Etisalat and Du) for three years (2009, 2010, and 2011). At the end there is a conclusion recommending the best company to invest in based on the financial ratios calculated. The key components used in calculating financial ratios for the financial analysis include; sales, net income (Income after tax), Share price, outstanding shares, Earning per share, total liabilities, and total shareholder’s equity.
- Ratio Analysis
- Profit Margin
Profit margin is used to calculate the profitability of a company. It is obtained by dividing the net income by the net sales. A high profit margin in the industry is an indicator of a company ability to reduce its costs of production more than the competitor.
Profit Margin = Net Income/Sales
Both Etisalat and Du are experiencing diminishing profit margins from the year 2009 to 2011. This trend show that the cost of production is increasingly rising at a higher rate than the sales revenue for both companies. Both companies need a strategy that will reduce unit production cost so as to improve their profit margins. For the years 2010 and 2011, Etisalat experienced a relatively higher profit margin than Du indicating that the Etisalat had a better control over its costs. For every AED of sale in 2011, Etisalat made a profit of AED 0.14 while Du made only AED 0.12.
- Earnings per Share
Earnings per Share (EPS) indicate the company’s profitability relative to the outstanding shares. It is calculated by dividing net income less dividend on preferred stock by average outstanding shares. The EPS is also used to calculate the price-earnings ratio.
EPS= (Net Income-Preferred Stock)/average Outstanding Shares
Comparison of the EPS of Etisalat and Du show opposite trends; Etisalat has a diminishing EPS while Du has rising EPS for the three year period. The respective implication is a diminishing net income of Etisalat with respect to the number outstanding shares. Du experiences an opposite of this. We cannot entirely base our argument (about the performance of the companies) on EPS because this ratio ignores capital. However based on trend observed, Etisalat profitability in long-term will be low and eventually turn to loss if the situation is not monitored.
- Debt-to-capital and debt-equity ratios
Debt-to-capital and debt-equity ratios both are used to measure the long-term solvency status of a company. A debt-to-capital ratio is a key determinant of the companies’ financial standing. It represents the proportion of the debt in the company’s capital. It is calculated by dividing debt by capital. An increasing debt-to-capital ratio is an indicator that the company is increasingly seeking credit rather than own financing to fund operations
Debt-to capital ratio= Debt/ (Equity + Debt)
Debt-equity ratio= total debt/total equity
There were no significant changes of Debt-to capital ratios of Etisalat Company for the three years. The company Debt-to capital ratio was 0.43, 0.44, and 0.43 for the years 2009, 2010, and 2011 respectively. Debt-to-capital ratio of 0.43 in 2010 indicates that 43% of Etisalat comprised debt. Etisalat is more unlikely to be insolvent and if it is liquidated, the equity shareholders will still remain with something to take home after all the creditors have been paid.
Du on the other hand has a very high debt-to-equity ratio indicating the main contributor to capital is debt. The debt-to-equity ratios for years 2009, 2010, and 2011 were 0.7, 0.59, and 0.48 respectively. The ratio 0.59 in 2010 indicate that Du capital comprise of 59% debt. High leverage is not good for a company’s financial health. Du is in a critical situation because it will be unable to clear all debt even when all the assets are sold. The good news is that Du is registering a declining trend of the debt-equity ratio and debt-to-capital ratio. Eventually the company will have a low D/E ratio which is good for the company’s financial health.
It is not sufficient for an investor to entirely rely on one ratio to base his/her decision. Different ratios have particular weaknesses and do not entirely represent the company as an entity. Analysis of three or more ratios is essential for an investor to determine holistic strength of the company and determine whether it is the best for long-term or short-term investment (depending on the investor’s objective).
Du is still a young and vibrant company with promising prospects. The company financial trends for the three years (2009, 2010, and 2011) indicate an attractive trend that will undoubtedly be attractive to any investor with long-term objectives. Unlike Etisalat declining EPS, Du is registering an increasing trend for the three consecutive years. We cannot entirely base our argument on EPS because this ratio ignores capital; Du has a promising higher income in respect to the outstanding shares compared to its competitor Etisalat.
Etisalat has a relatively stronger D/E ratio but we can attribute this to its longer years in business. The company’s low D/E is more relevant to financial institutions (creditors) who are always risk averse. Etisalat is more likely to be able to acquire a bank loan more easily than Du. But to the eyes of a long-term investor, Du is more desirable because the D/E is declining and may eventually become lower than that of Etisalat in the next three years (that is if relevant economic factors remain unchanged). Du is undoubtedly a company to invest in.
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