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The Financial Statement Analysis

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Question :

Discuss about the Financial Statement Analysis ?

Answer :


Financial Statement Analysis is the process of  identifying  performance, risks and health of a company by analyzing and evaluating financial statement of the company in order to take economic decisions. Analysis of financial statement, based on the past performance, helps the management to improve performance in present and future. In this report, discuss financial statements of two telecom communications company in Kuwait, which are Ooredooo and Hits Telecom, will be discussed by evaluating  trend analysis,cash flow and Z score of both companies. Ooredoo Company is one of famous companies in Kuwait, which operates in the telecommunications sector and was established in year 1999. The company provides mobile and internet service. In addition, Oooredoo  has srong brand name in different countries and strives to provide product and service to satisfy all customers. In other side, Hits Telecom is a strong company, which was established in December 1999 and delivers mobile services and internet in order to get profit and provide customer satisfaction.Moreover, it has listed in Kuwait Stock exchange in the year 2004.

he objective: The report will evaluate the financial performances of Ooredoo and Hits Telecom from the year 2012 to 2015.


Trend Analysis:

The average revenue  of Hits Telecom is Kuwaiti dinar(KD)107,467,905, which is  better than that of Ooredoo, which amounts to KWD 735,138, due to increase in sales by opening new branches. The provision of special services is expected to increase sales in the fixed-line by 12%, increase in broadcasting by 14%, in mobile browsing and free SIM cards for new customers and discount (CEO report and Analysis, page 4, year 2015). The average gross profit of Hits Telecom is KD 7,494,937 and the average gross profit of Ooredoo is KD 519,033.75, which means that Hits Telecome is better than Ooredoo, because, Hits Telecom incurs lower cost of good sold than Ooredoo. Moreover, Hits Telecom has increased its selling price without any increase in the cost  of good sold, which has led the company to increase in the total sales volume and, in return, increase the gross profit. In terms of EBIT,Ooredoo  is better, because the average EBIT of the company is KD 93036, whereas, Hits Telecom incurs average loss before interest and taxes of KD-6,316,147. So, Ooredoo has reduced both the cost of goods sold and operation expenses to increase EBIT. It has also increased revenue from  available equipment. The average profit for year of Ooredoo is around KD 73,606.75 and average net loss of Hits Telecom is around - KD5,998,290. Hence, Ooredoo is better because, the company has account payables of around KD 3.5 million and accounts receivables of around KD 4.5 million and Hits has incured net loss, because the accounts payable of the company is amounted to 5.5 million and accounts receivable worths around KD 1.9 million. Moreover, Hits Telecom take a long term loan of 3.6 million to make a payment for suppliers, which has caused loss for the company. Moreover, the average earning per share of Ooredoo has generated positive earnings per share, whereas, Hits has provided negative earnings per share. Hence, Ooredoo is better and can generate more profit and attract more investors. On the other hand, Hits Telecom owns higher average non current assets of 66876465.75 million, comparing to the average non-current assets of Ooredoo, which amounts to around KD 1197107 millions. It has been occurred as Hits Telecom has acquired Qanawat Telecom company in Saudia Arabia for KD 142731478 million and also investment in Zain Telecom in UAE in the year 2015 (note 10).

                                                               Figure 1: Revenue and Net Profir of  Ooredoo and Hits Telecom company

In the financial statement,the average current assets of Hits Telecom is around KD 30186003.25 and of Ooredoo is around KD 321610.5. It implies that Hits Telecom has higher current assets due to higher accounts receivables and others debits balances in the form of acquired commissions of KD 321610.5 thousands and acquired income of KD 1619969 thousand. In addition, Hits Telecom has huge inventory of KD 5213858 million in the current year, which increases the current assets, causing a negative effect. Moreover, the average total assets of Hits Telecom is also higher than Ooredoo because of the acquisition of Qanawat telecom and Zain Company in UAE by Hits Telecom, that has increased the value of total assets (Management Discussion Analysis Page 2, year 2013). Beside this, average total equitys of two company denotes that Hits has higher equity compared to Ooredoo, which means that the company has higher equity to finance its assets and also has an extraordinary General assembly of shareholder, which has increased the share capital from KD 70235124 to KD 87234161 in year 2015 (Note 15,year 2015). In addition, according to the parent company article association the company has transferred 10% of the net profit to general reserve (note 19,year 2013). On the other hand,  non current liability of Ooredoo is less than Hits because Hits telecom had obtained long term loans of KD 1000000 in year 2012 and KD 15000000 in 2014 from Kuwait Bank in order to purchase huge equipment for the company (Note 15,year 2014). Moreover, Ooredoo company has better liquidity to pay the


current liabilities. Fuethermore, the average of current liabilities of Hits Telecom is higher than Ooredoo because Hits Telecom has taken short term loans of KD100686285 to pay the suppliers from Kwuiat banks (Note 16,year 2012). The total liability of Hits Telecom, comparing to Ooredoo, can be considered very high as result of short and long loan taken (Management Discussion Analysis Page 3,year 2014). Finally, Hits Telecom  is better when comparing the average of current assets with average of current liability because Hits Telecom has higher current asset than current liabilities. In addition, the averages of total assets and total liability of both companies, indicate that Hits Telecome is more sufficient to meet their obligations because it has higher amount of assets more than the liabilities and can easily convert the assets to cash for paying off liabilities. Moreover, Ooredoo has negative working capital and Hits telecom has positive working capital, which means that Hits Telecom has current assets more than current liabilities and inventory is also higher, which lead to increase the current assets of Hits Telecom. Futhermore, from the comparison of average current asset and current liabilities of Oordeoo and  average current assets and current liabilities of Hits Telecom, it is clear both companies have higher current liabilities than current assets, which has caused a negative effect. It denotes that the account payables are more than account receivables and the companies use to held lower cash balance to pay off creditors.

                                                          Figure 2: Average Current Assets and Current Liabilities of  Ooredoo and Hits Telecom

Cash Flow analysis:

In terms of Cash flow from operating activities: Ooredoo has able to reduce the period of receivables, which has a positive effect on cash and led to pay off suppliers and creditors timely. Whereas, the period of receivebales of Hits Telecom company has increased, which has resulted in non payment of customers or slow payment, delay in issuing invoice and disputed invoices. It has forced the company to take loans for paying off their obligations. In terms of the payables, Ooredoo company has decreased payables due to high working capital and higher receivables. Whereas, Hits Telecom has increased payables due to purchase of network equipments on credit (Management Discussion and Analysis Page 5,year 2014).

Cashflow  from investment activities: Ooredoo has stable investment from 2012-2015, because, it had invested in local companies and dealt with the government by making long term agreements. Whereas, the investments of  Hits Telecom company have increased through investing  in various companies in Africa and Saudi Arabia for long term basis and also in fixed assets & equipments in order to increase the profitability. However, such huge investments of Hits has reduced the current assets, which has a negative effect.


In terms of cash flow financing activities: The cash flow from financing activities has increased for Hits Telecom for the short term loan from the  Kuwait Bank  with an amount of  1.9 million and the interest by  1.8% per year. Financial expenses of the company have decreased from KD109000 thousand in 2012 to KD 86000 thousands in the year 2015. Whereas, the cash flow from financing activities has decreased for Ooredoo due to long term loan around KD6 million with high interest rate by 3.1 % per year and increase in dividend payment  by 6.4 million in year 2015. Finance costs has increased by  KD 600 thousands in 2015. Futhermore, the cash equivalents for Oorredoo has decreased from KD 3.3 million in 2012 to KD999 thousands in 2015 because of shortage in cash fundings. Whereas, Hits company faces a small variation from year 2010 to 2015 in this section (Cash flow statement  Page 6, year 2015).

                                                                   Figure 3: Cash Flow Average of  Ooredoo and Hits Telecom company

Z score analysis:

The Altman Z Score is used to depict the likelihood that whether an organization will get bankrupted in the next two years. Where Z score is more than 2.99, it means that the business has no possibility to face bankruptcy. The Z Score with less than 1.8 indicates that the business has higher probability of getting bankrupted. However, Z Score within 1.8 – 2.99 denotes the possibility of business will get bankrupted. By comparing the average Z score of two companies, it is cleared that, Ooredoo has got z score of 1.165, which means that the company will get bankrupted in the future. The Z score of Hits Telecom is 1.35 which indicates that, like Ooredoo, it will be bankrupted within the following years too. The reasons for such bankruptcy probability of both companies are the working capital, which are vey low; lower current asssets than cuurent liabilities and lower total asset less than total liabilities, which have compositely caused negative affect on the performances of both companies.

                                                                   Figure 4: Z Score  Average of  Ooredoo and Hits Telecom company


Hits Telecom:

  • Strengths:The company offers low prices for local and international call and incurs lower labor costs.
  • Weakness: Small business units, higher debts and consecutive net losses for the period 2012 to 2015
  • Opportunities: Increasing demand of the product and providing services and products with lowest price and growth
  • Threats: Strong competition from competitors, like Ooredoo & Zain Telecom, rise in the cost of raw materials and changes in regulatory
  • Ooredoo Company:
  • Strength: High market value and strong brand name, which offers 5G for customers. Moreover, it has agreements with 180 countries and provides best internet services.
  • Weaknesses: Lose of customers for fixed line phone service, higher price for services and lower salary of employees.
  • Opportunities: Providing various packages and enhancing customer services to attract new market in other countries and obtain the leadership status in inter services
  • Threats: Growing competition from Hits Telecom & new entrants and changes in tax rates.
  • SWOT Analysis of Telecommunication Sector:
  • Strength: Telecommunication sectors have favorable access to distribution networks and has a good reputation among customers along with motivated
  • Weakness: High cost structure, poor reputation, weak brand name and lack of access to distribution channels.
  • Opportunities: Telecommunication sectors have a lot of opportunities in terms of increase in profit, ad growth, the constant customer reuirements for data and new technology of LTE and Fibre.
  • Threats: There are some threats which may be faced by the telecommunications companies due to change in the customers’ desire about product and services, such as, Whatsapp, Facebook, Twitter, and instagram, as well as, the new entrants and regulation acts


At the end of the report, it can be concluded that Ooredoo Company is performing better in terms of financial income, which has helped to generate higher profit in the four years. On the other hand, Hits Telecom has incurred net loss in all the consecutive four years as the result of a huge debt. However, from the comparison of the financial position it can be stated that Ooredoo and Hits Telecom both have negative working capital, where current assets are less than current liabilities  and total assets are also less than total liabilities, which have caused the negative effect. Furthermore, both companies are suffering from low liquidity, which has affected the payment of liabilities. Moreover, Z score  of both companies is less than 1.81 which means that both companies have possibilities to be bankrupted within next two years. However, it can be stated finally that both the companies are performing well in terms of profitability and expected to survive in long run.


References :

  • Boda, M. and Úradnicek, V., 2016. The portability of altman's Z-score model to predicting corporate financial distress of Slovak companies. Technological and Economic Development of Economy, 22(4), pp. 532-553.
  • DU, N., Stevens, K. and Mcenroe, J., 2015. The effects of comprehensive income on investors' judgments. Accounting Research Journal, 28(3), pp. 284-299.
  • Jeovita, A., 2015. Accounting Information in a Business Decision-Making Process - Evidence from Croatia. Zagreb International Review of Economics & Business, 18(1), pp. 61-79.
  • Muthuvelan, M., 2015. A Stuyoncash flowanalysisinm/s. pantloonretail (india) limited. International Journal of Management Research and Reviews, 5(5), pp. 315-320.
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