Union Cement Company Financial Analysis Report

Director report

Discuss about the Accounting Financial Analysis Report.

Union Cement Company is the foremost producer of cement that had established in the United Arab Emirates in the year 1972. The company is PSC, a publicly quoted firm that has been engaged in manufacturing and marketing of different varieties of Portland cement. It distributes and sells across the world by way of direct selling[1]. The company is engaged in the process of manufacturing, marketing and distribution for different oil-well cement products and kinds of Portland across the UAE. The production plan of the company is situated at Khor chair located at Ras Al Khaimah Emirate. Stocks of corporate entity are listed on Abu Dhabi securities exchange.

The report herein presents the financial positioning of the company for the year 2015 in comparison to the year 2014. On the basis of ratios ascertained a detailed analysis of director’s report has been made further highlighting the financial status of the company. Moreover, the quality of earning of company and evaluation of statement of cash flow is done to assess the credentials of the company. The professional comparison is made with critical arguments by undertaking a group as a benchmark and lastly through the evaluation of assessment recommendation is to be served.

Director’s report is a document, which enlists details about the company state and its compliances with a brief on the financial, accounting, and corporate social responsibility standards followed by the company.

The board of directors of Union has sanctioned and reviewed the performance of Union Cement Company (PSC) by undergoing through its consolidated statements as of 30^th June 2015, reflecting the financial position of the company and its subsidiaries (together signifying the ‘Group’). The abridged consolidated statements for six months period are issued comprising of its overall as well as comprehensive income, variations in equity and cash flows. As per the reports, there is a clear declaration that the financial information stated and prepared considering all material concerns and in accordance with the International Financial Reporting Standards (IFRS) complying with the “Interim Financial Reporting”[2]. The director’s report does not serve full financial statement details but rather presents the results ascertained from them. Thus, presenting fair and all material statements. The contrast between financial statements of the year 2015 with the year 2014 is made.

The company records as per director's report showcase consolidated sale revenue of AED 640.472 million through the year 2015 in comparison to AED 548.322 million for the same period in the year 2014. The results are clearly indicating a rise in the cost of sales by a ratio of 14.94%; further Gross profit is realised by AED 160.205 then to AED 130.486 million. Moreover, the Operating profits recorded in the year 2015 are AED 95.121 M compared to AED 71.307 M for the year ended 2014. The ratios ascertained vividly provides positive rise showcasing enhancement in their overall level of performance.

Quality of Earnings and Earning Sustainability

Net consolidated profits that are realised during the period 2015 amounts to AED 103.671 M than AED 84.842 M meanwhile the net profit is attributable towards the shareholder of the company in the year 2015 amounted to AED 95.410 M than the AED 76.098 for a similar time period of the year 2014. Thus, increasing the EPS (Earning per share) from 0.11 AED in 2014 to 0.14 AED for the same period in the year 2015.

Further, the shareholders are paid dividend amounting to 10% of the paid-up capital which amounted to AED 66.944 million for the year 2014. Thus, it can be seen from the director’s report that the state of the company is progressive and it is keeping up the pace to satisfy its stakeholders with positive increment in the overall profits of the company. It serves to provide maximum benefit to its shareholders by giving an increasing dividend per year and the rise in overall earning per share of the shareholders in accordance to the directors report. Thus it further puts through the operating and financial review of company setting out the information of the potential areas of market and structural capacity of company to expand as well as exploit the new opportunities.

The director’s report states the long-term interest of shareholders, employees, community etc. Company surpass the needs of stakeholder by meeting its interest implying that it upkeeps to satisfy them by passing on the benefit of good performance. It assures to put through good statics of company through support from the company stakeholders. Effective director’s report enhances interest and perspective of stakeholders towards the company. The positive balance in director’s report and further sharing of profits amongst the shareholder's repose confidence in them towards the company. Moreover, stakeholders perceive the consistent company growth through such positive profit ratios and facilitate them to make a constructive investment in them.

Information provided in the director’s report of the company is viable to the financial statement as its summaries entire financial aspects in an effective manner. By considering the provided information, stakeholders will be able to have a brief overview of financial performance along with considering their future prospects in order to make rational decisions related to business. Lastly it is imperative for company to maintain its business reputations and this indeed is done through director’s report, which helps in promoting the success of the company.

But on the contrary it can be seen that the director’s reports doesn’t relocate or describe the principle risk and uncertainties that are being faced by the company. Additional matter for concerns should be included in director’s report that holds more of strategic importance to the organization. While it is of significant importance that the business covers up within its report the areas of opportunity and investments it seeks to exploit in near future. It can be seen that a comprehensive balance sheet analysis of company performance has not been expressed in full.  The content and quality is dependent on how does the directors report effectively communicates with shareholders about the promotion as well as success of the company. The report is focused towards past information only and no future prospects are being communicated. According to, it is of paramount importance to deliver the strategic aims and objectives KPI (key performance indicators) that shall be helpful in communicating deals to is stakeholders to measure progress against the current achievement with future accomplishments. The director report should include a brief discussion of future developments and its impact on the current performance and strategy of company. 

Revenue and Profitability analysis

Table 1: Revenue and profitability analysis of past three years

	2015		2014		2013
Revenue	640,472,000	100%	640,472,000	100	640,472,000	100
Gross profit	160,205,000	25%	130,486,000	23.8%	103,414,000	19.58%
Profit for the year	103,671,000	16.2%	84,842,000	15.5%	50,868,000	9.63%
Sales Growth	25%		24%		20%
Return on Sales	16%		15%		10%
Return on Assets	8%		6%		4%

 

Figure 1: Revenue and profitability of past three years

 

Figure 2: Revenue and profitability analysis of past three years

In reference to the financial data served by the company, a clear comparison and revenue analysis of company can be drawn. The Gross profit indicates about the company revenue it earns after deducting the expenses associated with such revenue. As per the trend is shown in the above table, it can be seen that the revenue is consistent and gross profit calculated on such revenue is progressive[3]. Similarly looking at the profit for the year is also increasing with every consecutive year. The sales growth is rising, and so is the return on such sales. In tune with all the rising ratios signifying progressive growth, the Return on Assets is also mounting depicting the uprising state of the company.

Union Cement Company is one of the largest cement production company across the entire gulf region. They serve diversified cement production capabilities such as Oil Well Cement, Sulphate Resistant cement, Moderated Sulphate Resistant Cement and Ordinary Portland Cement. To meet the customer demands it also serves blended cement as its plants are well equipped with the own art of technology for enhanced production process.

The company has erected and commission technology and project designing from international IHI, Japan and CMEC China. The plan installed in the Middle East has an over the capacity of 10000 TPD and hold competence to produce up to 12000 TPD. The factory makes use of the latest Japanese Process technology for the most effective and modernised process[4].  Company to serve the best possible quantity with quality to the consumers installs the best of Equipment. Such equipment is large and ensure optimum utilisation of resources serving utility products. Customer enrichment is also one of the key factors that are looked upon by the company serving as per convenience blend of cement products with the 100% quality assurance. 

Since 1980, the production and manufacturing process is done keeping in mind the customer requirements and quality. The company mission is to attain complete customer satisfaction by serving best in class product and services that meet up their expectations and requirements.  UCC has obtained ISO 9000 certification as being the first cement manufacturer in the Middle East[5]. Company for at par quality excellence and world-class competencies also obtains API (American Petroleum Institute) Q1 certification.  This Q1 system certification is provided for organisation Quality Management System. Moreover, the ISO 9000 certification is also obtained by the organisation in 2000 towards its dedication for environmental management system. The organisation key focus is on enabling and enriching the client by overall improvement in organisation performance to gain the best market positioning

With the increasing competition in the market, organisation are striving to attain greater innovation in their product and services. UCC has effectively realised the significance of Product Innovation that can help in sustaining its growth. Based on the facts of the company it seeks to make both social and technical quality management along with innovation[6]. The product innovation has helped it in providing the customer's specialised product and services with efficacy. The technical improvements made by the company are to an extent to which its plant products are framed to reduce complication in manufacturing.

Moreover, to also reduce its impact on ecological footprints UCC has involved into renewable energy and efficiency solutions. Cement plant of the Union Cement Company, in Ras Al Khaimah, UAE has CDM project which involves installation of a system through waste heat recovery can be made by generation 82 MWH of zero emission electricity each year. Thus it has been both social and technically innovative company.

Conclusion and Earning Sustainability

The progressive trend in the profit ratios showed above it can be seen that company is moving forward and not stagnant or downward graph scale. Thus, if the trend would have been irregular then there would have been uncertainties in earning sustainability but since it is clear from the above ratios that the growth is consistent and unwavering ensuring positive earnings in future[7]. The product innovation has also further seen to provide competitive edge across the entire Middle East.

Since, the investors are keen towards ascertaining the valuation ratios and comparing them across the companies it is important that company should look on to maintaining the sustainability of company earnings. It can be seen that currently the Union Cement Company is having positive earnings, which are not uncertain rather it is growing across the consecutive year. This increases the possibility of company to maintain this growth in future as well. The continual increment in earning should be maintained and must be competitive to achieve a positive earning sustainability of company.

It can be seen that the ratios stated has helped investors in assessing the extent to which the firms reported earning are free from any errors or maneuverings reflecting the quality of firm’s earnings.

Cash flow from operating activities.

While analysing the cash flow statements many ratios provide indicators to measure the company's quality of investment[8]. Investors often track these performance indicators to detect the ability of the company to convert sales into cash.

Thus it is a good sign that the company’s cash flow from operating activities has been increasing annually. The Cash flows from operations of a company mainly measures the cash-generating abilities from operating or current assets[9]. The net cash from operations reflects the amount of money that flowed into the business during the year less depreciation, and other non-cash charges.

Table 2: Statement showing Cash flow from operating activities

Particular	Formula for the calculations	2013	2014	2015
Net sales to Operating Ratio	Net Operating cash flow/ Net sales	4%	4.5%	1.57%
Free Cash Flow	Net operating cash flows – capital expenditures	(907278)	(862970)	(817470)
Free cash flow coverage	Free cash flow/ operating cash flow	(6.99)	(7.16)	(5.80)

It can be observed that in the year 2015 the net sale to operating ratio was significantly low as compared to the previous two years. However, the cash flow from operational activities and the profit was the highest in 2015. Thus it is good sign that the company’s cash flow from operating activities has been increasing annually[10]. Thus a low net sale to operating ratio is to a worrisome indicator for the company.

Union cement has a consistent negative free cash flow which indicates that the company is not capable of generating sufficient cash to support the business.

Particular	2013	2014	2015
Cash flow from operating.	129634	120476	140832
Net cash flow from investing activities	(3,340)	(13,955)	16664
Net cash flow from Financing Activities	(87186)	(100930)	(81232)

The cash flows from the operating activities were the highest in the year 2015.Union Cement has constantly negative cash flows from the investing activities in the year 2013 and 2014. The reason behind these negative cash flows might be that the company is reinvesting its capital by at least the rate of depreciation[11]. Thus, it is not always bad to have a negative cash flow from investing activities. Nevertheless it may need further evaluations in detail before the final conclusion is drawn from the company's investing activities.

However, in the year 2015, the company had inflow of cash from the investing activities. The reason behind such cash flow can be the proceeds from the disposal of fixed assets, investment instruments sale, and the proceeds from the collection of loans and insurance. The cash flow from financing activities was much higher in 2015 at 161034. The cash flows from the year 2013 and 2014 were 81553 and 87144, respectively.

Figure 1: Cash Flow from Operating Activities for the Year 2013, 2014 and 2015

Figure 2: Cash Flow from investing and Financial Activities for the year 2015, 2014 and 2013.

Before investing into debt security of company, investors always determine the entity’s capability to meet its financial obligations. Independent and objective assessments of companies help investors to decide the risk of a particular security. For the purpose of judging the investment quality of a bond or mutual fund, credit quality is considered to be the primary criteria [12]. This aspect reports the investors the credit worthiness of the company and risk of default[13]. Thus gaining insight into investment environments is very important to understand the risks and advantages associated with the investment. For this purpose essential tools known as credit ratings aids in making investment decisions

Table 3: Comparison of Union Cement Company with its competitors and Industry

	Union cement	Gulf	National cement	RAK	Industry average
Revenue	640,472,000	612,26,174	261,541	335,174,306	46,24,03,370
Gross profit	160,205,000	97,493,467	39,800	51,404,871	8,72,25,834
Profit for the year	103,671,000	71,439,530	93,530	15,536,581	7,10,44,277
Sales Growth	25%	-22%	14.56%	-17.61%
Return on Sales	16%	8.57%	2.8%	21.57%	15.36%
Return on Assets	8%	4.94%	5.55%	1.36%	4.68%
Operating cash flow	140,832	122,562,13	(39,981)	23,561,059
Financing cash flow	(83,606)	(84,071,65)	(117,327)	(81,028,238)
Investing cash flow	16,664	63,177,638	108,794	47,937,862

Table 4: Ranking of company in accordance with their performance

	Union cement	Gulf	National cement	RAK
Revenue	I	II	IV	III
Gross profit	I	II	IV	III
Profit for the year	I	II	IV	III
Sales Growth	I	IV	II	III
Return on Sales	II	III	IV	I
Return on Assets	I	III	II	IV
Operating cash flow	III	II	IV	I
Financing cash flow	IV	II	III	I
Investing cash flow	IV	I	III	II

Return on sales

Return on sales is also termed as operating margin. This financial ratio evaluates the efficiency with which a company generate profits from its revenue. It evaluates the performance of the company by calculating what percentage of total earnings is converted into profit[14]. The same is used for comparing the performance of the company with its competitors and industry as well; so that appropriate measures can be taken for improvement.

  In accordance with the analysis of data of average industry return on sales is 15.36% but the return on sales for Union Cement Company is 16% which is higher in comparison with industry, but still, it is not the highest among four companies. RAK has been provided with the first rank as it is having the highest return on sales 21.57 %[15]. Thus, it can be concluded that even after having highest revenue the company is not able to maximum profit. Efforts should be made to improve the percentage by using more financial leverage, maximising profit margins, distributing idle cash at available investing opportunities, etc.

Return on Assets

Average Industry rate for return on asset is 4.68%, but the present return of asset rate of Union Cement Company is 8.68%. It is just double of the existing industry ratio, which means that the company is efficiently utilising the available resources[16]. Return on asset ratio is a profitability ratio which evaluates the net income produced from total assets during a period[17]. The same is done by comparing net profit to total average assets. The objective to this ratio is to ascertain the efficiency of the company regarding the management of assets for producing a profit during a period.

Union Cement Company is holding having the highest percentage of return on assets in comparison to its competitors as well as the industry average[18]. The same depicts the efficiency of the company in converting its assets into profits. Investors look out in this ratio to ascertain the return in case company invests in its own capital assets[19].

Cash flows:

Cash flow statement represents the position of total cash which comes in and goes out of the company. It is different from income statement as it record transaction when they occur rather than when they accrue. It assesses the cash generated by the company during the period and provides information regarding the manner in which it is expended.

 Operating Cash flows:

The section of operating activities represents the cash which is received by the company through sale of its products and services reduced by the cash required for making those goods sale. As per above analysis it can be observed that Union Cement Co. is holding third rank which means that it requires more cash in comparison to its competitors regarding making its goods sold. Thus, it requires improving its performance under this section.

Cash flow from Investing Activities: 

This section of cash flow reflects the amount that is expended on capital expenditure such as purchasing new equipment or any other investment. In case the company does not utilize its available funds in appropriate manner than large amount of cash inflow is available and the same is not sustainable. It can be observed from analysis it can be concluded that the company is holding lowest ratio.

By considering performance analysis of company with competitors and industry it can be noticed that Union Cement Company is performing better  but they  are required to work on the strategies of cash management in order to attain better liquidity position.

Conclusion

In accordance with the current company financial analysis, it can be concluded that the company is performing well and has outshone an increasing trend over the course of the year. The industry has been further seen to keep pace with the competitors and attain good market standing across the entire Middle East. The financial performance has indeed assisted the company in providing maximum benefit to their shareholders. The ratios ascertained to determine the revenues and profitability status of company showcase a consistent and uprising growth of the company.

The quality assurance is also for company prime importance. Furthermore, Union Cement Company has focused on delivering the product and services, which is best in class to meet the client expectations. It has certified by ISO 9000 and API Q1, which showcase its expertise in meeting the quality standards. Lastly, the company being listed on Abu Dhabi stock exchange has made all attempts to outperform its competitor’s by adopted the latest technologies and serving all class of products. It has a credibility, which makes it a prospective venture for investors to invest in the company.

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