Ratio Analysis

Table 11: Real Estate Industry Benchmark of Ratios in 2019

Source: (Investing, 2020)

For the purpose of logical accuracy in analysing DAMAC Properties’ financial ratios, the author will take into account the real estate industry’s benchmark for financial ratios disclosed in table 11 above when evaluating the company’s results of financial ratios.

Liquidity Ratios

Table 12 exhibits the liquidity ratios of DAMAC Properties for the fiscal period of 2015 to 2019. The current ratio interprets that the company has sufficient financial means to pay-off its short-term liabilities as the results are all greater than 1 from 1.44 in 2015 to 2.33 in 2019;

therefore, remaining solvent is not a dilemma for the company in the meantime. However, this

2015 2016 2017 2018 2019

Revenue 100,00% 100,00% 100,00% 100,00% 100,00%

Cost of Sales 40,64% 44,15% 51,25% 65,41% 70,66%

Gross Profit 59,36% 55,85% 48,75% 34,59% 29,34%

Other Operating Income 5,90% 8,30% 3,90% 1,54% 3,10%

General, Administrative and Selling Expenses 11,89% 12,01% 14,27% 16,41% 22,18%

Depreciation 0,15% 0,21% 0,35% 0,46% 0,71%

Provision for Impairment on Development Properties N/A N/A N/A 0,88% 2,83%

Amortisation of Right-of-Use Assets N/A N/A N/A N/A 0,75%

Provision/Reversal of Impairment on Trade Receivables N/A N/A N/A 1,76% 0,94%

Operating Profit 53,23% 51,93% 38,03% 20,14% 5,05%

Other Income 0,39% 0,63% 0,76% 1,31% 2,23%

Finance Income 1,06% 1,62% 1,89% 2,65% 3,43%

Finance Costs 1,79% 2,55% 3,66% 5,31% 6,61%

Provision for Value Added Tax N/A N/A N/A N/A 4,92%

Profit for the Year 52,89% 51,63% 37,02% 18,78% -0,84%

Other Comprehensive Income for the Year 0,00% 0,00% 0,00% 0,00% 0,00%

Total Comprehensive Income for the Year 52,89% 51,63% 37,02% 18,78% -0,84%

Liquidity Ratios:

may also indicate that the company is missing out on an abundant of rewarding opportunities.

On the one hand, the quick ratio was used to measure the company’s capacity to liquidise its assets conservatively. According to the table, it shows the opposite result from the current ratio, inferring that the company may struggle paying off its short-term debts, as the results are mostly less than 1 with the lowest at 0.48 in 2016 and the highest being 1.00 in 2018. The reason for this is that the inventory of the company is development properties which is a non-current asset. In context of the real estate industry, it should be noted the industry has an average current ratio of 2.25 in 2019. Although the company had a slightly higher ratio in comparison with its peer companies the excessive amount of current assets kept by the company, indicates that the company was not using its current assets as efficient as the others.

On the contrary, the average quick ratio in the industry was 2.24 in 2019. This indicates that the company falls short against its peer companies with a result of 0.69 which may imply that the company should sell more of its inventory.

Table 12: Liquidity Ratios of DAMAC Properties in 2015 - 2019

2015 2016 2017 2018 2019

Current Ratio 1,44 1,73 2,24 2,51 2,33

Quick Ratio 0,50 0,48 0,81 1,00 0,69

Source: (DAMAC Properties)

Activity Ratios

Table 13: Activity Ratios of DAMAC Properties in 2015 - 2019

2015 2016 2017 2018 2019

Total Asset Turnover Ratio 0,36 0,29 0,29 0,24 0,18 Receivables Turnover Ratio 2,24 1,49 1,13 0,76 0,55

Source: (DAMAC Properties)

Table 13 exhibits the activity ratios of DAMAC Properties for the fiscal period of 2015 to 2019.

The total asset turnover ratio indicates that the company was inefficient in generating sales using its assets as all the results came out poorly with less than 1 ranging from 0.18 to 0.36 and at a decreasing trend. On the contrary, the receivables turnover ratio has started with a high turnover of 2.24 in 2015, which means that the company was efficient in the collection of accounts receivable and/or its customers are able to settle their accounts quickly. However, it can be seen that it is on a decreasing trend as well with its lowest turnover of 0.55 in 2019, but this may be due to low sale of properties. In context of the real estate industry, the average total asset turnover ratio in 2019 was 0.15 which is almost just in line with the company’s result of 0.18. Likewise, the average receivables turnover ratio in the same year was at 1.67 which is extremely high compared to the company’s result from its most recent years. This suggests that the company is less efficient against its peer companies. Overall, the activity ratios infer that the company is not managing its liquid assets adequately.

Solvency Ratios

Table 14: Solvency Ratios of DAMAC Properties in 2015 - 2019

2015 2016 2017 2018 2019

Equity Ratio 0,42 0,51 0,55 0,56 0,59

Debt-to-Equity Ratio 1,39 0,95 0,83 0,78 0,69

Debt-to-Assets Ratio 0,58 0,49 0,45 0,44 0,41

Source: (DAMAC Properties)

Table 14 exhibits the solvency ratios of DAMAC Properties for the fiscal period of 2015 to 2019. The equity ratio interprets that the company turned into a conservative company from a leveraged one, as it used more of its equity and less of debt in its funding over time because the results show that there was an occurrence of an uptrend from 0.42 in 2015 to 0.59 in 2019.

Hence, it may seem that the company is taking lesser risk than before. The debt-to-equity ratio also infers that the company used to aggressively fund its growth with debt in 2015 with a result of 1.39 but has cooled down as time passed by and had 0.69 in 2019. Likewise, the debt-to-assets ratio also interprets the same findings as the two previously discussed solvency ratios, indicating that the assets of the company were financed mostly by equity as results suggests that if the ratio is greater than 1, it indicates that the company is funding its assets more by debts. In context of the real estate industry, the average debt-to-equity ratio in 2019 was 0.91 which infers that the company is much more considered as a conservative company in financing its growth in comparison to its peer companies.

Profitability Ratios

Table 15: Profitability Ratios of DAMAC Properties in 2015 - 2019

2015 2016 2017 2018 2019

Return on Assets 19,26% 15,00% 10,89% 4,58% -0,15%

Return on Equity 45,92% 29,28% 19,90% 8,16% -0,26%

Return on Capital Employed 33,13% 22,48% 14,82% 7,18% -0,20%

Source: (DAMAC Properties)

Table 15 exhibits the profitability ratios of DAMAC Properties for the fiscal period of 2015 to 2019. The return on assets interprets that the company had effectively converted its assets into net profit, since the result of 19.26% in 2015 up to 10.89% in 2017 generally indicates that it is doing well in that aspect. However, it can be seen from the most recent years that it has underperformed with 4.58% in 2018 and -0.15% in 2019. In context of the real estate industry, the average return on assets in 2019 was 1.54%, which is significantly higher to the company’s results in the most recent years of the analysed period. Similarly, the return on equity from 2015 up to 2017 can be considered good as it ranges between 45.92% to 19.90% even though it is on a decreasing trend because the average return on equity in 2019 was 2.94%. However, in the following years, 2018 and 2019, it can be observed that it noticeably lower than the industry’s average by scoring 8.16% in 2018 and -0.15% in 2019. This implicates that the

company is inefficiently using its equity capital compared to its peer companies. Lastly, the return on capital employed shows that the company’s ability to generate profit was weakening as it shows a downtrend starting from 33.13% in 2015 to -0.20% in 2019. Altogether, it is noticeably that all of the three profitability ratios are on a decreasing trend.

Valuation Ratios

Table 16: Valuation Ratios of DAMAC Properties in 2015 - 2019

2015 2016 2017 2018 2019

Market-to-Book Ratio 1,43 1,21 1,44 0,65 0,32

Source: (DAMAC Properties)

Table 16 exhibits the valuation ratios of DAMAC Properties for the fiscal period of 2015 to 2019. The market-to-book ratio interprets that the company was either performing well or its stock price was being overvalued in 2015 with 1.43 up to 2017 with 1.44. On the other hand, the succeeding years reckon otherwise as the results show lower than 1; 0.65 in 2018 and 0.32 in 2019.