2. 13-2
Name of reporting entity Saudi Telecom Co.
Company symbol code| ISIN code 7010 | SA0007879543
Sector| Industry group Telecommunication Services
Period covered by financial statements Annual
Reporting period start date 2017-01-01
Reporting period end date 2017-12-31
Description of presentation currency Saudi Arabia, Riyals
Level of rounding used in financial statements Thousands
Method of presentation of statement of
financial position Current, non-current
Company and Report Information
3. 13-3
Start Date 2017-01-01 2016-01-01
End Date 2017-12-31 2016-12-31
Statement of income [abstract]
Profit (loss) [abstract]
Continuing operations [abstract]
Operating profit (loss) [abstract]
Operating income [abstract]
Gross profit (loss) [abstract]
Revenue 50,746,675 52,673,659
Cost of sales 21,255,477 23,985,878
Gross profit (loss) 29,491,198 28,687,781
Total operating income 29,491,198 28,687,781
Operating expenses [abstract]
Selling and distribution expenses 5,726,280 6,327,144
General and administrative expenses 4,471,573 4,331,428
Other operating expenses 8,208,360 8,078,118
Total operating expenses 18,406,213 18,736,690
Operating profit (loss) 11,084,985 9,951,091
Finance costs 354,199 379,062
Finance income 584,681 722,732
Share of profit (loss) of joint ventures and associates 308,384 116,246
Other income (expenses), net -533,016 -534,378
Profit (loss) before zakat and income tax from continuing operations 11,090,835 9,876,629
Zakat expenses on continuing operations for period 720,700 750,797
Profit (loss) for period from continuing operations 10,370,135 9,125,832
Profit (loss) for period 10,370,135 9,125,832
Profit (loss), attributable to [abstract]
Profit (loss), attributable to equity holders of parent company 10,133,224 8,898,857
Profit (loss), attributable to non-controlling interests 236,911 226,975
Earnings per share [abstract]
Basic earnings (loss) per share [abstract]
Basic earnings (loss) per share from continuing operations 5.07 4.45
Total basic earnings (loss) per share 5.07 4.45
Weighted average number of equity shares outstanding 2000000 2000000
Share closing price at the last trading day of financial year (in numbers) 68.6 72.55
Statement of income
4. 13-4
Start Date 2017-01-01 2016-01-01
End Date 2017-12-31 2016-12-31
Revenue 100.0% 100.0%
Cost of sales 41.9% 45.5%
Gross profit (loss) 58.1% 54.5%
Total operating income 58.1% 54.5%
Operating expenses [abstract]
Selling and distribution expenses 11.3% 12.0%
General and administrative expenses 8.8% 8.2%
Other operating expenses 16.2% 15.3%
Total operating expenses 36.3% 35.6%
Operating profit (loss) 21.8% 18.9%
Finance costs 0.7% 0.7%
Finance income 1.2% 1.4%
Share of profit (loss) of joint ventures and associates 0.6% 0.2%
Other income (expenses), net -1.1% -1.0%
Profit (loss) before zakat and income tax from continuing operations 21.9% 18.8%
Zakat expenses on continuing operations for period 1.4% 1.4%
Profit (loss) for period from continuing operations 20.4% 17.3%
Profit (loss) for period 20.4% 17.3%
Profit (loss), attributable to [abstract]
Profit (loss), attributable to equity holders of parent company 20.0% 16.9%
Profit (loss), attributable to non-controlling interests 0.5% 0.4%
Earnings per share [abstract]
Basic earnings (loss) per share [abstract]
Basic earnings (loss) per share from continuing operations 0.0% 0.0%
Total basic earnings (loss) per share 0.0% 0.0%
Weighted average number of equity shares outstanding 3.9% 3.8%
Share closing price at the last trading day of financial year (in numbers) 0.0% 0.0%
Income Stat. component percentages (Vertical):
5. 13-5
Analysis:
âą Net income (profit)in 2017 increased about 13 % (800M) from
2016, although revenues of 2017 decreased 3.5% from 2016.
âą Company working in reducing cost of sales and operating
expenses, as they are the highest factors affecting the net
income ( clear comparing 2016 and 2017 )
6. 13-6
Income Stat. component percentages (Horizontal):
Start Date 2017-01-01 2016-01-01
End Date 2017-12-31 2016-12-31
Statement of income [abstract]
Profit (loss) [abstract]
Continuing operations [abstract]
Operating profit (loss) [abstract]
Operating income [abstract]
Gross profit (loss) [abstract]
Revenue 50,746,675 52,673,659 96.34%
Cost of sales 21,255,477 23,985,878 88.62%
Gross profit (loss) 29,491,198 28,687,781 102.80%
Total operating income 29,491,198 28,687,781 102.80%
Operating expenses [abstract]
Selling and distribution expenses 5,726,280 6,327,144 90.50%
General and administrative expenses 4,471,573 4,331,428 103.24%
Other operating expenses 8,208,360 8,078,118 101.61%
Total operating expenses 18,406,213 18,736,690 98.24%
Operating profit (loss) 11,084,985 9,951,091 111.39%
Finance costs 354,199 379,062 93.44%
Finance income 584,681 722,732 80.90%
Share of profit (loss) of joint ventures and associates 308,384 116,246 265.29%
Other income (expenses), net -533,016 -534,378 99.75%
Profit (loss) before zakat and income tax from continuing operations 11,090,835 9,876,629 112.29%
Zakat expenses on continuing operations for period 720,700 750,797 95.99%
Profit (loss) for period from continuing operations 10,370,135 9,125,832 113.63%
Profit (loss) for period 10,370,135 9,125,832 113.63%
Profit (loss), attributable to [abstract]
Profit (loss), attributable to equity holders of parent company 10,133,224 8,898,857 113.87%
Profit (loss), attributable to non-controlling interests 236,911 226,975 104.38%
Earnings per share [abstract]
Basic earnings (loss) per share [abstract]
Basic earnings (loss) per share from continuing operations 5.07 4.45 113.93%
Total basic earnings (loss) per share 5.07 4.45 113.93%
Weighted average number of equity shares outstanding 2000000 2000000 100.00%
Share closing price at the last trading day of financial year (in numbers) 68.6 72.55 94.56%
7. 13-7
Analysis:
âą Cost of sales decreased 12% from 2016
âą Selling and distribution expenses decreased by 10 % from 2016
âą Zakat expenses decreased 5% from 2016 (30 M)
âą As per company financial annual report, profit increase due to:
1- decreasing cost of sale accompanied with decreasing revenue
2- decreasing operating expenses ( major reduction in Selling
and distribution expenses)
3- decreasing Zakat expenses
8. 13-8
Financial Position Statement
Start Date 2017-01-01 2016-01-01
End Date 2017-12-31 2016-12-31
Statement of financial position [abstract]
Assets [abstract]
Current assets [abstract]
Bank balances and cash 2,567,044 3,631,202
Short-term deposits 14,465,364 15,004,490
Trade accounts receivable 25,549,424 19,768,149
Inventories 460,431 466,766
Other current assets 1,770,961 1,693,448
Total 44,813,224 40,564,055
Total current assets 44,813,224 40,564,055
Non-current assets [abstract]
Property, plant and equipment 39,940,616 39,418,554
Goodwill 75,612 75,612
Intangible assets other than goodwill, net 7,698,227 7,764,831
Investments in associates and joint ventures 6,927,303 6,301,641
Other non-current assets 8,657,822 7,652,195
Total non-current assets 63,299,580 61,212,833
Total assets 108,112,804 101,776,888
9. 13-9
Financial Position Statement (Cont.)
Liabilities and equity [abstract]
Liabilities [abstract]
Current liabilities [abstract]
Short term borrowings 647,763 1,867,220
Trade accounts payables 13,827,806 13,885,561
Zakat payable 1,623,423 1,460,129
Deferred revenue, current 2,872,083 2,816,841
Provisions, current 7,633,984 5,682,808
Other current liabilities 7,222,892 4,096,138
Total 33,827,951 29,808,697
Total current liabilities 33,827,951 29,808,697
Non-current liabilities [abstract]
Debt securities, term loans, borrowings and sukuks in issue 4,005,980 4,017,231
Employees' terminal benefits 3,922,769 3,775,668
Provisions, non-current 1,202,448 1,158,654
Deferred revenue, non-current 1,763,440 1,445,777
Other non-current liabilities 145,543 292,530
Total non-current liabilities 11,040,180 10,689,860
Total liabilities 44,868,131 40,498,557
Equity [abstract]
Shareholder's equity [abstract]
Share capital 20,000,000 20,000,000
Statutory Reserve 10,000,000 10,000,000
Retained earnings (accumulated losses) 34,010,412 31,877,188
Other reserves [abstract]
Miscellaneous other reserves -1,769,028 -1,935,833
Total other reserves -1,769,028 -1,935,833
Equity attributable to owners of parent 62,241,384 59,941,355
Non-controlling interests 1,003,289 1,336,976
Total equity 63,244,673 61,278,331
Total liabilities and equity 108,112,804 101,776,888
10. 13-10
Financial Position Vertical Percentages:
Start Date 2017-01-01 2016-01-01
End Date 2017-12-31 2016-12-31
Statement of financial position [abstract]
Assets [abstract]
Current assets [abstract]
Bank balances and cash
2.4% 3.6%
Short-term deposits
13.4% 14.7%
Trade accounts receivable
23.6% 19.4%
Inventories
0.4% 0.5%
Other current assets
1.6% 1.7%
Total
41.5% 39.9%
Total current assets
41.5% 39.9%
Non-current assets [abstract]
Property, plant and equipment
36.9% 38.7%
Goodwill
0.1% 0.1%
Intangible assets other than goodwill, net
7.1% 7.6%
Investments in associates and joint ventures
6.4% 6.2%
Other non-current assets
8.0% 7.5%
Total non-current assets
58.5% 60.1%
Total assets
100.0% 100.0%
11. 13-11
Financial Position Vertical Percentages (Cont.):
Liabilities and equity [abstract]
Liabilities [abstract]
Current liabilities [abstract]
Short term borrowings 0.6% 1.8%
Trade accounts payables 12.8% 13.6%
Zakat payable 1.5% 1.4%
Deferred revenue, current 2.7% 2.8%
Provisions, current 7.1% 5.6%
Other current liabilities 6.7% 4.0%
Total 31.3% 29.3%
Total current liabilities 31.3% 29.3%
Non-current liabilities [abstract]
Debt securities, term loans, borrowings and sukuks in issue 3.7% 3.9%
Employees' terminal benefits 3.6% 3.7%
Provisions, non-current 1.1% 1.1%
Deferred revenue, non-current 1.6% 1.4%
Other non-current liabilities 0.1% 0.3%
Total non-current liabilities 10.2% 10.5%
Total liabilities 41.5% 39.8%
Equity [abstract]
Shareholder's equity [abstract]
Share capital 18.5% 19.7%
Statutory Reserve 9.2% 9.8%
Retained earnings (accumulated losses) 31.5% 31.3%
Other reserves [abstract]
Miscellaneous other reserves -1.6% -1.9%
Total other reserves -1.6% -1.9%
Equity attributable to owners of parent 57.6% 58.9%
Non-controlling interests 0.9% 1.3%
Total equity 58.5% 60.2%
Total liabilities and equity 100.0% 100.0%
12. 13-12
Analysis:
âą STC is in better financial position in 2017 with positive trend
âą It is clear that company should work to reduce the account
receivables with better collection (from government and
government related entities).
âIn Report : credit risk is limited due to the fact that the customer
base is large and unrelatedâ
âą Liabilities increase related to increase in provisions and
government charges
13. 13-13
Financial Position Horizontal Percentages:
Start Date 2017-01-01 2016-01-01
End Date 2017-12-31 2016-12-31
Statement of financial position [abstract]
Assets [abstract]
Current assets [abstract]
Bank balances and cash 2,567,044 3,631,202 70.69%
Short-term deposits 14,465,364 15,004,490 96.41%
Trade accounts receivable 25,549,424 19,768,149 129.25%
Inventories 460,431 466,766 98.64%
Other current assets 1,770,961 1,693,448 104.58%
Total 44,813,224 40,564,055 110.48%
Total current assets 44,813,224 40,564,055 110.48%
Non-current assets [abstract]
Property, plant and equipment 39,940,616 39,418,554 101.32%
Goodwill 75,612 75,612 100.00%
Intangible assets other than goodwill, net 7,698,227 7,764,831 99.14%
Investments in associates and joint ventures 6,927,303 6,301,641 109.93%
Other non-current assets 8,657,822 7,652,195 113.14%
Total non-current assets 63,299,580 61,212,833 103.41%
Total assets 108,112,804 101,776,888 106.23%
14. 13-14
Financial Position Horizontal Percentages (Cont.):
Liabilities and equity [abstract]
Liabilities [abstract]
Current liabilities [abstract]
Short term borrowings 647,763 1,867,220 34.69%
Trade accounts payables 13,827,806 13,885,561 99.58%
Zakat payable 1,623,423 1,460,129 111.18%
Deferred revenue, current 2,872,083 2,816,841 101.96%
Provisions, current 7,633,984 5,682,808 134.33%
Other current liabilities 7,222,892 4,096,138 176.33%
Total 33,827,951 29,808,697 113.48%
Total current liabilities 33,827,951 29,808,697 113.48%
Non-current liabilities [abstract]
Debt securities, term loans, borrowings and sukuks in issue 4,005,980 4,017,231 99.72%
Employees' terminal benefits 3,922,769 3,775,668 103.90%
Provisions, non-current 1,202,448 1,158,654 103.78%
Deferred revenue, non-current 1,763,440 1,445,777 121.97%
Other non-current liabilities 145,543 292,530 49.75%
Total non-current liabilities 11,040,180 10,689,860 103.28%
Total liabilities 44,868,131 40,498,557 110.79%
Equity [abstract]
Shareholder's equity [abstract]
Share capital 20,000,000 20,000,000 100.00%
Statutory Reserve 10,000,000 10,000,000 100.00%
Retained earnings (accumulated losses) 34,010,412 31,877,188 106.69%
Other reserves [abstract]
Miscellaneous other reserves -1,769,028 -1,935,833 91.38%
Total other reserves -1,769,028 -1,935,833 91.38%
Equity attributable to owners of parent 62,241,384 59,941,355 103.84%
Non-controlling interests 1,003,289 1,336,976 75.04%
Total equity 63,244,673 61,278,331 103.21%
Total liabilities and equity 108,112,804 101,776,888 106.23%
15. 13-15
Analysis:
âą STC receives certain items of property, plant and equipment
free of cost from vendors, that is why no major change in
properties.
âą As total assets increased 6%, total liabilities also increased
10%, total equity increased by 3 %
16. 13-16
Test of Profitability â Return on Equity
Return on Equity = 16.7%
Net Income
Average Stockholdersâ EquityReturn on Equity =
This measure indicates how much income was
earned for every dollar invested by the owners.
This measure indicates how much income was
earned for every dollar invested by the owners.
Industry Average = 10.53%
Conclusion: It is aligned with the increase of 13% in new profit,
Real gains!
17. 13-17
Test of Profitability â Return on Assets
Return on
Assets
Net Income + Interest Expense (net of tax)
Average Total Assets=
Return on
Assets
= 10.57%
Overall measure of a companyâs profitability.Overall measure of a companyâs profitability.
Industry Average = 7.29%
Conclusion: It is aligned with the increase of 13% in new profit,
Real gains!
18. 13-18
Test of Profitability â Financial Leverage
Percentage
Financial
Leverage
Return on Equity â Return on Assets=
The advantage or disadvantage that occurs as the result of
earning a return on equity that is different from the return
on assets.
The advantage or disadvantage that occurs as the result of
earning a return on equity that is different from the return
on assets.
Financial
Leverage
6.13%=
Industry Average = 3.24%
Conclusion: means high interest payments, as this increase
indication for high liabilities/debt, which negatively affect the
company's bottom-line earnings per share.
This is clarified by the provisions/government charges increase.
19. 13-19
Test of Profitability â Earnings per Share
(EPS)
EPS = 5.19 SAR
Earnings per share is probably the single
most widely watched financial ratio.
Earnings per share is probably the single
most widely watched financial ratio.
Net Income
Average Number of Shares
Outstanding for the Period
EPS =
Industry Average = 3.58 SAR
Conclusion: significant dividend for investors or no dividend
at all, since it prefers to plow the cash back into the business
to fund additional growth.
Monitor for several years, will help in stock decisions
20. 13-20
Test of Profitability â Profit Margin
= 20.44%Profit
Margin
The percentage of each sales dollar
that is income.
The percentage of each sales dollar
that is income.
Profit
Margin
Net Income
Net Sales=
Industry Average = 13.94%
Conclusion: profitability increased even with the decrease of
the revenue, which explained earlier.
21. 13-21
Tests of Liquidity â Cash Ratio
Cash
Ratio
Cash + Cash Equivalents
Current Liabilities
=
= 0.08
Cash
Ratio
This ratio measures the
adequacy of available cash.
This ratio measures the
adequacy of available cash.
Industry Average = 0.06
Conclusion: Cash liquidity within good margin comparing to
industry average.
22. 13-22
Tests of Liquidity â Current Ratio
Current
Ratio
Current Assets
Current Liabilities
=
Current
Ratio
= 1.32
This ratio measures the ability
of the company to pay current
debts as they become due.
This ratio measures the ability
of the company to pay current
debts as they become due.
Industry Average = 1.6
Conclusion: Company able to repay short term debts.
Comparing to cash ratio, it is lower, as âProperty, plant and
equipmentâ with high percentage of assets, so will be good if
possible to reduce to convert to current assets
23. 13-23
Tests of Liquidity â Quick Ratio
(Acid Test)
Quick Assets
Current Liabilities=
Quick
Ratio
= 1.26
Quick
Ratio
This ratio is like the current
ratio but measures the companyâs
immediate ability to pay debts.
This ratio is like the current
ratio but measures the companyâs
immediate ability to pay debts.
Industry Average = 0.38
Conclusion: Company should work to reduce accounts
receivables to have a better use of these assets.
24. 13-24
Tests of Liquidity â Receivable Turnover
Net Credit Sales
Average Net Receivables
Receivable
Turnover
=
Receivable
Turnover
= 2.2 Times
This ratio measures how quickly a company collects its
accounts receivable.
This ratio measures how quickly a company collects its
accounts receivable.
Industry Average = 4.5
Conclusion: as mentioned earlier, company has issue with
collection, Therefore, reevaluate the companyâs credit policies
to ensure timely receivable collections from its customers.
25. 13-25
Tests of Liquidity â Inventory Turnover
Cost of Goods Sold
Average Inventory
Inventory
Turnover
=
Inventory
Turnover
= 45.82 Times
This ratio measures how quickly the company sells
its inventory.
This ratio measures how quickly the company sells
its inventory.
Industry Average = 16.7
Conclusion: Company is efficient with moving its inventory
out of its warehouse and stores to its customers ( telecom field
usually donât have big inventory to move )
Hinweis der Redaktion
Clearly, net income is important, but cash flow is also critical to a companyâs success. Cash flow permits a company to expand operations, replace worn assets, take advantage of new investment opportunities, and pay dividends to its owners. Some Wall Street analysts go so far as to say âcash flow is king.â Both managers and analysts need to understand the various sources and uses of cash that are associated with business activity. The statement of cash flows focuses attention on a firmâs ability to generate cash internally, its management of current assets and current liabilities, and the details of its investments and its external financing.
The statement of cash flows focuses attention on a firmâs ability to generate cash internally, its management of current assets and current liabilities, and the details of its investments and its external financing. Positive cash flows permit a company to take advantage of market opportunities, pay dividends to owners, expand its operations, and replace needed assets. Wall Street analysts consider cash flow an important indicator of a companyâs financial health.
Clearly, net income is important, but cash flow is also critical to a companyâs success. Cash flow permits a company to expand operations, replace worn assets, take advantage of new investment opportunities, and pay dividends to its owners. Some Wall Street analysts go so far as to say âcash flow is king.â Both managers and analysts need to understand the various sources and uses of cash that are associated with business activity. The statement of cash flows focuses attention on a firmâs ability to generate cash internally, its management of current assets and current liabilities, and the details of its investments and its external financing.
The statement of cash flows focuses attention on a firmâs ability to generate cash internally, its management of current assets and current liabilities, and the details of its investments and its external financing. Positive cash flows permit a company to take advantage of market opportunities, pay dividends to owners, expand its operations, and replace needed assets. Wall Street analysts consider cash flow an important indicator of a companyâs financial health.
Clearly, net income is important, but cash flow is also critical to a companyâs success. Cash flow permits a company to expand operations, replace worn assets, take advantage of new investment opportunities, and pay dividends to its owners. Some Wall Street analysts go so far as to say âcash flow is king.â Both managers and analysts need to understand the various sources and uses of cash that are associated with business activity. The statement of cash flows focuses attention on a firmâs ability to generate cash internally, its management of current assets and current liabilities, and the details of its investments and its external financing.
The statement of cash flows focuses attention on a firmâs ability to generate cash internally, its management of current assets and current liabilities, and the details of its investments and its external financing. Positive cash flows permit a company to take advantage of market opportunities, pay dividends to owners, expand its operations, and replace needed assets. Wall Street analysts consider cash flow an important indicator of a companyâs financial health.
Clearly, net income is important, but cash flow is also critical to a companyâs success. Cash flow permits a company to expand operations, replace worn assets, take advantage of new investment opportunities, and pay dividends to its owners. Some Wall Street analysts go so far as to say âcash flow is king.â Both managers and analysts need to understand the various sources and uses of cash that are associated with business activity. The statement of cash flows focuses attention on a firmâs ability to generate cash internally, its management of current assets and current liabilities, and the details of its investments and its external financing.
The statement of cash flows focuses attention on a firmâs ability to generate cash internally, its management of current assets and current liabilities, and the details of its investments and its external financing. Positive cash flows permit a company to take advantage of market opportunities, pay dividends to owners, expand its operations, and replace needed assets. Wall Street analysts consider cash flow an important indicator of a companyâs financial health.
Clearly, net income is important, but cash flow is also critical to a companyâs success. Cash flow permits a company to expand operations, replace worn assets, take advantage of new investment opportunities, and pay dividends to its owners. Some Wall Street analysts go so far as to say âcash flow is king.â Both managers and analysts need to understand the various sources and uses of cash that are associated with business activity. The statement of cash flows focuses attention on a firmâs ability to generate cash internally, its management of current assets and current liabilities, and the details of its investments and its external financing.
The statement of cash flows focuses attention on a firmâs ability to generate cash internally, its management of current assets and current liabilities, and the details of its investments and its external financing. Positive cash flows permit a company to take advantage of market opportunities, pay dividends to owners, expand its operations, and replace needed assets. Wall Street analysts consider cash flow an important indicator of a companyâs financial health.
Clearly, net income is important, but cash flow is also critical to a companyâs success. Cash flow permits a company to expand operations, replace worn assets, take advantage of new investment opportunities, and pay dividends to its owners. Some Wall Street analysts go so far as to say âcash flow is king.â Both managers and analysts need to understand the various sources and uses of cash that are associated with business activity. The statement of cash flows focuses attention on a firmâs ability to generate cash internally, its management of current assets and current liabilities, and the details of its investments and its external financing.
The statement of cash flows focuses attention on a firmâs ability to generate cash internally, its management of current assets and current liabilities, and the details of its investments and its external financing. Positive cash flows permit a company to take advantage of market opportunities, pay dividends to owners, expand its operations, and replace needed assets. Wall Street analysts consider cash flow an important indicator of a companyâs financial health.
Clearly, net income is important, but cash flow is also critical to a companyâs success. Cash flow permits a company to expand operations, replace worn assets, take advantage of new investment opportunities, and pay dividends to its owners. Some Wall Street analysts go so far as to say âcash flow is king.â Both managers and analysts need to understand the various sources and uses of cash that are associated with business activity. The statement of cash flows focuses attention on a firmâs ability to generate cash internally, its management of current assets and current liabilities, and the details of its investments and its external financing.
The statement of cash flows focuses attention on a firmâs ability to generate cash internally, its management of current assets and current liabilities, and the details of its investments and its external financing. Positive cash flows permit a company to take advantage of market opportunities, pay dividends to owners, expand its operations, and replace needed assets. Wall Street analysts consider cash flow an important indicator of a companyâs financial health.
Clearly, net income is important, but cash flow is also critical to a companyâs success. Cash flow permits a company to expand operations, replace worn assets, take advantage of new investment opportunities, and pay dividends to its owners. Some Wall Street analysts go so far as to say âcash flow is king.â Both managers and analysts need to understand the various sources and uses of cash that are associated with business activity. The statement of cash flows focuses attention on a firmâs ability to generate cash internally, its management of current assets and current liabilities, and the details of its investments and its external financing.
The statement of cash flows focuses attention on a firmâs ability to generate cash internally, its management of current assets and current liabilities, and the details of its investments and its external financing. Positive cash flows permit a company to take advantage of market opportunities, pay dividends to owners, expand its operations, and replace needed assets. Wall Street analysts consider cash flow an important indicator of a companyâs financial health.
Clearly, net income is important, but cash flow is also critical to a companyâs success. Cash flow permits a company to expand operations, replace worn assets, take advantage of new investment opportunities, and pay dividends to its owners. Some Wall Street analysts go so far as to say âcash flow is king.â Both managers and analysts need to understand the various sources and uses of cash that are associated with business activity. The statement of cash flows focuses attention on a firmâs ability to generate cash internally, its management of current assets and current liabilities, and the details of its investments and its external financing.
The statement of cash flows focuses attention on a firmâs ability to generate cash internally, its management of current assets and current liabilities, and the details of its investments and its external financing. Positive cash flows permit a company to take advantage of market opportunities, pay dividends to owners, expand its operations, and replace needed assets. Wall Street analysts consider cash flow an important indicator of a companyâs financial health.
Clearly, net income is important, but cash flow is also critical to a companyâs success. Cash flow permits a company to expand operations, replace worn assets, take advantage of new investment opportunities, and pay dividends to its owners. Some Wall Street analysts go so far as to say âcash flow is king.â Both managers and analysts need to understand the various sources and uses of cash that are associated with business activity. The statement of cash flows focuses attention on a firmâs ability to generate cash internally, its management of current assets and current liabilities, and the details of its investments and its external financing.
The statement of cash flows focuses attention on a firmâs ability to generate cash internally, its management of current assets and current liabilities, and the details of its investments and its external financing. Positive cash flows permit a company to take advantage of market opportunities, pay dividends to owners, expand its operations, and replace needed assets. Wall Street analysts consider cash flow an important indicator of a companyâs financial health.
Clearly, net income is important, but cash flow is also critical to a companyâs success. Cash flow permits a company to expand operations, replace worn assets, take advantage of new investment opportunities, and pay dividends to its owners. Some Wall Street analysts go so far as to say âcash flow is king.â Both managers and analysts need to understand the various sources and uses of cash that are associated with business activity. The statement of cash flows focuses attention on a firmâs ability to generate cash internally, its management of current assets and current liabilities, and the details of its investments and its external financing.
The statement of cash flows focuses attention on a firmâs ability to generate cash internally, its management of current assets and current liabilities, and the details of its investments and its external financing. Positive cash flows permit a company to take advantage of market opportunities, pay dividends to owners, expand its operations, and replace needed assets. Wall Street analysts consider cash flow an important indicator of a companyâs financial health.
Clearly, net income is important, but cash flow is also critical to a companyâs success. Cash flow permits a company to expand operations, replace worn assets, take advantage of new investment opportunities, and pay dividends to its owners. Some Wall Street analysts go so far as to say âcash flow is king.â Both managers and analysts need to understand the various sources and uses of cash that are associated with business activity. The statement of cash flows focuses attention on a firmâs ability to generate cash internally, its management of current assets and current liabilities, and the details of its investments and its external financing.
The statement of cash flows focuses attention on a firmâs ability to generate cash internally, its management of current assets and current liabilities, and the details of its investments and its external financing. Positive cash flows permit a company to take advantage of market opportunities, pay dividends to owners, expand its operations, and replace needed assets. Wall Street analysts consider cash flow an important indicator of a companyâs financial health.
Clearly, net income is important, but cash flow is also critical to a companyâs success. Cash flow permits a company to expand operations, replace worn assets, take advantage of new investment opportunities, and pay dividends to its owners. Some Wall Street analysts go so far as to say âcash flow is king.â Both managers and analysts need to understand the various sources and uses of cash that are associated with business activity. The statement of cash flows focuses attention on a firmâs ability to generate cash internally, its management of current assets and current liabilities, and the details of its investments and its external financing.
The statement of cash flows focuses attention on a firmâs ability to generate cash internally, its management of current assets and current liabilities, and the details of its investments and its external financing. Positive cash flows permit a company to take advantage of market opportunities, pay dividends to owners, expand its operations, and replace needed assets. Wall Street analysts consider cash flow an important indicator of a companyâs financial health.
Clearly, net income is important, but cash flow is also critical to a companyâs success. Cash flow permits a company to expand operations, replace worn assets, take advantage of new investment opportunities, and pay dividends to its owners. Some Wall Street analysts go so far as to say âcash flow is king.â Both managers and analysts need to understand the various sources and uses of cash that are associated with business activity. The statement of cash flows focuses attention on a firmâs ability to generate cash internally, its management of current assets and current liabilities, and the details of its investments and its external financing.
The statement of cash flows focuses attention on a firmâs ability to generate cash internally, its management of current assets and current liabilities, and the details of its investments and its external financing. Positive cash flows permit a company to take advantage of market opportunities, pay dividends to owners, expand its operations, and replace needed assets. Wall Street analysts consider cash flow an important indicator of a companyâs financial health.
Clearly, net income is important, but cash flow is also critical to a companyâs success. Cash flow permits a company to expand operations, replace worn assets, take advantage of new investment opportunities, and pay dividends to its owners. Some Wall Street analysts go so far as to say âcash flow is king.â Both managers and analysts need to understand the various sources and uses of cash that are associated with business activity. The statement of cash flows focuses attention on a firmâs ability to generate cash internally, its management of current assets and current liabilities, and the details of its investments and its external financing.
The statement of cash flows focuses attention on a firmâs ability to generate cash internally, its management of current assets and current liabilities, and the details of its investments and its external financing. Positive cash flows permit a company to take advantage of market opportunities, pay dividends to owners, expand its operations, and replace needed assets. Wall Street analysts consider cash flow an important indicator of a companyâs financial health.
Return on equity measures how well the company employed the ownersâ investments to earn income. This ratio is calculated by dividing net income by average stockholdersâ equity.
Home Depotâs 2009 income is $2,260 million. Ending stockholdersâ equity for 2009 is $17,777 and ending ownersâ equity for 2008 is $17,714. When the income is divided by the average stockholdersâ equity, we see that the return on equity at Home Depot for 2009 is 12.7 percent.
Return on total assets measures how well assets have been employed by the business. To calculate this ratio we divide net income plus interest expense (net of tax) by the average total assets for the period. Because creditors provide financing for a portion of the assets, we add interest expense to income in the numerator of the ratio.
Home Depot earned a return on its total assets of 6.3 percent. Please spend a few minutes going over the calculation of this ratio, especially the interest expense computation.
Financial leverage is the advantage or disadvantage that occurs as the result of earning a return on equity that is different from the return on assets.
Home Depot has positive financial leverage since the return on equity is higher than the return on assets. Positive financial leverage indicates that Home Depot has borrowed money at a low rate of interest and employed the borrowed funds at a higher rate of return.
Earnings per share is equal to net income less preferred stock dividends divided by the weighted-average number of common shares outstanding. The numerator of the equation is sometimes referred to as income available to common shareholders. Earnings per share is one of the most widely quoted financial ratios. It is a measure of the companyâs ability to produce income for each common share outstanding.
Home Depotâs earnings per share for 2009 is $1.34. Home Depot has no preferred stock dividends to subtract from income in the numerator. The average number of shares used in this computation is based on the beginning and ending number of shares for the year rather than the weighted-average number of shares reported in Home Depotâs income statement.
Profit margin tells us how effective the company is at producing bottom line net income. The ratio is determined by dividing net income by net sales.
At Home Depot, after all expenses and taxes have been paid, the company was able to produce a profit margin of 3.2 percent in 2009.
Liquidity refers to a companyâs ability to meet its currently maturing debts. Tests of liquidity focus on the relationship between current assets and current liabilities. The cash ratio is a measure of the adequacy of available cash to pay current liabilities. We compute the cash ratio by dividing the sum of cash and cash equivalents by current liabilities.
At the 2009 balance sheet date, Home Depotâs cash ratio is 0.05, meaning Home Depot has slightly less than 5 cents in cash on hand for each dollar of current liabilities. While this number might seem alarming, Home Depot generates large amounts of cash from operations that will be available before cash payments are due. Managing cash flow is extremely important. Certainly the company must have sufficient cash to meet its obligations, but holding too much cash can lower the return on assets.
Perhaps the most widely used measure of a companyâs ability to pay current obligations is the current ratio. It is computed by dividing current assets by current liabilities.
At Home Depot, the current ratio at the 2009 balance sheet date is 1.20. This means that for every dollar of current liabilities, Home Depot has $1.20 of current assets to pay those obligations. It might be tempting to say that the higher this ratio becomes, the better off the company is. However, maintaining a very high current ratio restricts the amount that can be invested elsewhere in the business. For years the accepted standard for the current ratio was 2.0. But with the ability to efficiently manage cash flows, most companies now maintain a current ratio somewhat less than 2.0.
The quick ratio is a more stringent measure than the current ratio. We calculate this ratio by dividing quick assets by current liabilities. Quick assets include cash and cash equivalents, net receivables, and short-term investments.
As you can see from looking back at Home Depotâs balance sheet, inventories are approximately three-fourths of current assets. Quick assets exclude inventories from the numerator. For that reason, Home Depotâs quick ratio of 0.13 at the 2009 balance sheet date is much lower than the current ratio.
The receivable turnover ratio tells us the number of times per year a company can convert its accounts receivable into cash. For any company, the higher the turnover, the faster the cash collection on accounts receivable. We calculate receivable turnover by dividing net credit sales by average net receivables. This is yet another example of a ratio that contains an income measure in the numerator and a balance sheet measure in the denominator. Remember, in this type of ratio we always use an average amount in the denominator.
At Home Depot, the receivable turnover for 2009 is 63.9 times. This means that, on average, the company collected its receivables 63.9 times per year.
Like the receivable turnover ratio, we can also calculate the inventory turnover. The inventory turnover ratio measures the number of times inventory is sold and replaced during the year. Higher inventory turnover helps protect a company from obsolete inventory items. Inventory turnover is calculated by dividing cost of goods sold for the period by the average inventory.
At Home Depot, the inventory turnover for 2009 is 4.2 times, telling us that Home Depot sells and replaces its inventory about 4.2 times per year.