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

29

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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2010]

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2010]

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2010]

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2010]

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Wikipedia, 2009, ‘Debt to assets ratio’, Debt to assets ratio. Available:

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[Accessed on 22 February 2010]

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