Accounting Statement Analysis and Importance of Budgeting for Business Operations

This document provides an in-depth financial analysis of Almarai, a food and beverage distributor based in Saudi Arabia, and explains the importance of budgeting for business operations. It includes different ratios such as operating profit margin ratio, price earnings ratio, gearing ratio, asset turnover ratio, return on capital employed, and interest coverage ratio. The document also discusses the pros and cons of budgeting and how innovation and technological growth have changed the way business organizations operate.

Running head: ACCOUNTING STATEMENT ANALYSIS
Accounting Statement Analysis
Name of the Student:
Name of the University:
Authors Note:

1
ACCOUNTING STATEMENT ANALYSIS
Contents
Task 1:.............................................................................................................................................2
Task 2:...........................................................................................................................................10
Conclusion:....................................................................................................................................13
References:....................................................................................................................................14

2
ACCOUNTING STATEMENT ANALYSIS
Task 1:
In order to conduct an in-depth financial analysis of the company over the last five years firstly,
it is necessary to have the complete set of financial reports of Almarai, a food and beverage
distributor based in Saudi Arabia, in front of us for the said period. The income statement of the
company over the last five years is reproduced below after accumulating the data from the
annual reports of the company over the last five years.
All amounts are in SAR millions 2016-12 2017-12
Revenue 14,699.
00
13,936.
00
Less: Direct cost of revenue 8,865.
00
8,352.
00
(A): Gross profit 5,834.
00
5,584.
00
Less: Operating expenses
Administration and sales
expenditures
1,117.
00
705.
00
Other operating expenses 2,174.
00
2,084.
00
(B): Total operating expenses 3,292. 2,789.

3
ACCOUNTING STATEMENT ANALYSIS
00 00
Earnings before interest and tax
(A - B)
2,542.
00
2,794.
00
Less: Interest Expense 351
.00
402.
00
Other income (expense) (33.
00)
(190.
00)
Earnings before taxation 2,157.
00
2,202.
00
Less: Provision for income tax 74
.00
42.
00
Earnings after tax 2,083.
00
2,160.
00
Other (2.
00)
22.
00
Net income 2,080.
00
2,182.
00
Preferred dividend 65
.00
71.
00

4
ACCOUNTING STATEMENT ANALYSIS
Earnings available to equity
shareholders
2,015.
00
2,111.
00
Earnings per share
Basic 2
.03
2.
13
Using the above information different ratios have been calculated to explain the current financial
state of the company.
Operating profit margin ratio:
2016-12 2017-12
(A): Operating profit 2,542.
00
2,794.
00
(B): Gross revenue 14,699.
00
13,936.
00
Operating profit margin ratio (A x 100/B) 17.
29
20.
05
Operating profit margin ratio calculated by using the amount of operating profit and the gross
revenue shows the profitability of an organization, i.e. its ability to earn operating profit from its

5
ACCOUNTING STATEMENT ANALYSIS
business operations. The higher the operating profit ratio the better it is for an organization. In
this case, it is clear that from 2016, the company has managed to improve its operating profit
ratio in 2017. In 2017 the operating profit ratio of 20.05% has increased from 17.29% in 2016
(Velez-Pareja, 2017).
Price earnings ratio:
Price earnings ratio 2016-12 2017-12
(A): Share price (Book value
taken)
12
.89
14
.05
(B): Earnings per share 2
.03
2
.13
Price earnings ratio (A/B) 6
.35
6
.60
Price earnings ratio shows the share price of an organization in relation to its earnings per share.
In simple terms the times of multiplication of EPS to ascertain the share price of an organization
is shown in price earnings ratio. Again it is clear that the price earnings ratio of the company has
improved significantly. The ability to improve the operating profit as well as net profit
attributable to the common shareholders have improved the overall profile of the company to
enhance the share price of it. This is reflected in the continuous growth in PE ratio of the
company during the last four years. In 2017 the PE ratio of the company was 6.60 which has

6
ACCOUNTING STATEMENT ANALYSIS
improved from 6.35 times of 2016. A clear indication of increase in share price as the EPS has
continuously increased during the period (Velez-Pareja, 2018).
Gearing ratio:
Gearing ratio (Debt
to equity)
2016-12 2017-12
(A): Debt 10,135.
00
10,543.
00
(B): Equity 13,036.
00
14,484.
00
Debt to equity ratio
(A/B)
0.
78
0.
73
Financial leverage of an entity is measured by calculating the gearing ratio of the entity. The
proportion of interest bearing liabilities in the overall capital structure of an entity is evaluated
using this ratio. Thus, the ratio is extremely useful to assess the ability of an organization to
continue in the long run as high debt to equity ratio will indicate that the entity is heavily
dependent on the borrowed capital. In such case the risk of insolvency is also high thus, the
ability of an organization to continue in the long run is relatively less as compared to the
organizations with lower gearing ratio.

7
ACCOUNTING STATEMENT ANALYSIS
In case of Almarai, though the gearing ratio has continuously increased with each passing year
since 2014 but the gearing ratio of the company is well within the limits. In 2017 the gearing
ratio of the company is 0.73 is significantly low as compared to the standard gearing ratio of 1
for the industry thus, despite the continuous increase in the gearing ratio of the company over the
last five years there is no risk of insolvency to the company. It is important to mention that the
gearing ratio of the company was merely 0.71 in 2014 as against 0.74 and 0.73 in 2016 and 2017
respectively. Asset turnover ratio:
Asset turnover ratio 2016-12 2017-12
(A): Gross revenue 14,699.
00
13,936.
00
(B): Total average
assets
31,954.
00
32,409.
00
Asset turnover ratio
(A/B)
0.
46
0.
43
Dividing the amount of gross revenue with the amount of average total assets as on the last of the
accounting period gives us asset turnover ratio. Efficiency of an entity in using its resources to
generate revenue is evaluated using this ratio. An entity always aspire to improve its asset
turnover ratio to make optimum use of its resources to generate revenue. In this case the asset
turnover ratio of the company has shown a downward trend as with each passing year the ratio
has declined. In 2016 the company’s asset turnover ratio was 0.46 however, it has declined to

8
ACCOUNTING STATEMENT ANALYSIS
0.43 by the end of 2017. This indicates the company has struggled to improve in making
optimum use of its resources during the last 12 months. Thus, efficiency of the company in
making use of its resources has declined during the last 12 months (Suthan, 2015).
Return on capital employed:
2016-12 2017-12
(A): Earnings available to common
shareholders
2,015.
00
2,111.
00
(B): Capital employed 13,036.
00
14,484.
00
Return on capital employed (A x
100/B)
15.
46
14.
57
The rate of return earned by an entity on the amount of capital employed in the business is
calculated by using return on capital employed (ROC) ratio. Unlike most of the operating ratios
the ROC has constantly fluctuated. In 2016 the company earned a 15.46% ROC which has
decreased to 14.57% in 2017 (Sridevi, 2018).
Interest coverage ratio:
2016-12 2017-12
Net income 2,080. 2,182.

9
ACCOUNTING STATEMENT ANALYSIS
00 00
Add: interest expenses 351
.00
402
.00
(A): Income before
interest
2,431.
00
2,584.
00
(B): Interest expenses 351
.00
402
.00
Interest coverage ratio
(A/B)
6
.93
6
.43
Interest coverage ratio is calculated to assess the ability of an organization to pay the fixed
interest liabilities on borrowed capital from its profit. Though a 6.43 times of interest coverage
ratio is quite good as is the case for Amarai in 2017 however, the deterioration in interest
coverage ratio is clear from the above calculations. In 2016 the company had an interest
coverage ratio of 6.93 which was once 9.33 in 2015 however, since then the ability of the
company to pay its fixed interest from profit has deteriorated constantly. This is a cause of
concern for the entity and must be addressed by the management to improve the interest
coverage ratio in the future (Omar et al., 2017).
Sources of finance:

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ACCOUNTING STATEMENT ANALYSIS
Typical sources of finance for an organization, in this case Almarai can be primarily classified
into internal and external sources. Internal sources include use of accumulated profit and other
reserves generated and maintained by the company. External sources on the other hand include
issue of ordinary shares to the public, borrowing from banks and financial institutions etc.
Task 2:
Creation of a realistic plan to spend money on business operations to earn expected
revenue is the process called budgeting. The importance of budgeting is immense for an
organization that is looking to conduct its business operations in a systematic way to achieve its
objectives. Thus, irrespective of the time the importance of budgeting stands undiminished.
Whether business organizations operating in modern business environment, i.e. present day and
age or operating earlier the benefits and utility of budgeting to an organization is huge
(Nwabueze, 2018).
The planning and controlling of resources within an organization will be significantly better with
the use of budgeting than without budgeting. Budgeting helps in controlling resources as the
workers and employees will be given a roadmap to be followed while conducting the day to day
affairs of an organization. This will improve the ability of the organization to make optimum use
of the resources as against an organization that does not provide any roadmap to the workers and
employees in day to day business operations (The Benefits of Long‐Range Capital Planning—
The Virginia Experience, 2019). In addition an entity that involves the workers and employees in
the budgeting process will be able to understand different constraints that the workers and
employees had to face and accordingly, the budgets can be prepared to ensure smooth business
operations. Thus, the importance of budgeting is immense provided it is prepared properly and
use correctly. Preparation of unrealistic budget without involving the workers and employees in

11
ACCOUNTING STATEMENT ANALYSIS
the budgeting process will end up creating ruckus within an organization instead of helping the
workers and employees to conduct the business operations smoothly (Kopel and Riegler, 2017).
Thus, whether it is modern day and age or a decade earlier the utility and benefit of budgeting is
huge for any organization provided the process is used correctly. Hence, budgeting process is
definitely still fit for the purpose of modern environment of business for controlling and planning
resources to make optimum use of resources (Iatridis, 2017).
Pros and cons of budgeting:
There are number of advantages of budgeting provided the technique used is correct and
the budget is prepared keeping in mind the practical situation and conditions. However, in
case unrealistic assumptions and use of inappropriate technique then budgeting could end
up creating lots of issues for an organization. A brief outline of the pros and cons of
budgeting is given below.
Pros:
I. Budgeting helps to optimize the utilization of resources.
II. Minimization of operating cost is possible with the help of appropriate budgets.
III. Effective budgeting technique helps in allocating resources of an organization properly to
achieve the organizational objectives.
IV. Budgeting provides a road map to employees and workers of an organization.
V. Minimizing the risk of uncertainty in the future is possible with the help of proper budgets.
VI. It is possible to be prepared for future uncertainties with the help of budgeting.
Cons:
I. Unrealistic assumptions will create lots of problems for an organization as the budgets in
such case would target achieving unrealistic goals.
II. Creating pressure on employees and workers will be a direct result of a budget that has set
unrealistic goals.

12
ACCOUNTING STATEMENT ANALYSIS
III. Budgeting sometimes create rigidity in the way an organization operates. Thus, lack of
flexibility is a problem for the organizations that depend too much on the process of
budgeting.
Innovation and technological growth has changed the way business organizations used to
operate in the past. Earlier most of the business operations used to start and complete with
human intervention however, with passage of time the technology has made the life of
entrepreneurs much easy. Extensive use of computers and modern day technology have
improved the operating efficiency of business organizations. Cloud computing, big data analytics
and use of accounting and other software have enhanced the reliability of business operations
significantly. Cloud computing has made it possible for business organizations to expand the
scale of data computing and storage of data significantly without any complexity. As a result the
expansion of business operations has become much easier and les complex as compared to
earlier. Cloud computing provides unlimited storage facility which was unthinkable even a
decade ago. As a result it has become possible to make optimum use of organizational resources
without concerning about the computing facilities within an organization. Cloud computing
facility is provided by third parties at relatively low costs to allow business organization to
expand the business operations by simply hiring the third party service providers for cloud
computing services and other such services (Green, 2018).
Number of software have been developed to improve the operational efficiency of different
departments within an organization. These software include accounting software such as Tally,
SAP, Oracle, Java and other such software for accounting departments to improve the quality of
accounting and financial reporting of business organizations. New inventory management
software have been developed to improve the inventory management processes of business
organizations. An organization will be able to manage its inventory effectively with the use of

13
ACCOUNTING STATEMENT ANALYSIS
these software. In addition Artificial Intelligence (AI) have made the job of management
personnel much easier as they are exposed to different useful data which will help them to take
correct business decisions (Dicle and Meyer, 2018).
Thus, from the above it is clear that the resource planning and controlling process have improved
immensely with the use of modern day technology and innovation. On one hand cloud
computing has made it easier for business organizations to scale up its operations without much
complexity and on the other hand business and accounting software including the AI have made
the job of management personnel significantly easier to manage and control the resources of the
organization effectively. Thus, these have played huge role and still playing crucial roles in
strengthening the planning and budgeting processes within an organization to make optimum use
of resources (Allen, Hurcan and Queyranne, 2017).
Conclusion:
It is clear from the financial analysis of Almarai that the company has been performing
extremely well over the last 24 months with continuous growth in the amount of revenue and
profit of the company. Except in few areas such as efficiency in business operations and ability
to pay interest from operating profit the company has improved its financial performance and
position over the last two years.
The importance of budgeting is still there for business entities even during the modern day and
age of present but in addition an organization must be open to the idea of using modern
technology and innovation to improve the operating efficiency and performance continuously.
Benefits of cloud computing and operating software are clear from the above discussion.

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ACCOUNTING STATEMENT ANALYSIS
References:
Allen, R., Hurcan, Y. and Queyranne, M. (2017). The Evolving Functions and Organization of
Finance Ministries. Public Budgeting & Finance, 37(5), pp.3-25.
Dicle, M. and Meyer, J. (2018). Financial Statement and Ratio Analysis: A Classroom
Perspective. SSRN Electronic Journal, 1(1), pp.17-24.
Green, J. (2018). Financial Statement Analysis and Equity Valuation. SSRN Electronic Journal,
2(2A), pp.14-104.
Iatridis, G. (2017). International Financial Reporting Standards and the quality of financial
statement information. International Review of Financial Analysis, 20(4), pp.193-204.
Kopel, M. and Riegler, C. (2017). A New Perspective on the Benefits of Slack Building Under
Participative Budgeting. SSRN Electronic Journal, 1(1), pp.14-24.
Nwabueze, E. (2018). Benefits of Cloud Computing: An Assessment of Its Implications in
Nigerian Industries. International Journal Of Engineering And Computer Science, 2(5), pp.15-
24.
Omar, N., Koya, R., Sanusi, Z. and Shafie, N. (2017). Financial Statement Fraud: A Case
Examination Using Beneish Model and Ratio Analysis. International Journal of Trade,
Economics and Finance, 6(3), pp.184-186.
Sridevi, S. (2018). Benefits of IPV6 in cloud Computing. International Journal of Scientific
Research, 3(7), pp.119-121.

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ACCOUNTING STATEMENT ANALYSIS
Suthan, A. (2015). Fundamental of Financial Statement Analysis. SSRN Electronic Journal,
2(11), pp.21-93.
The Benefits of Long‐Range Capital Planning—The Virginia Experience. (2019). Public
Budgeting & Finance, 39(3), pp.97-97.
Velez-Pareja, I. (2017). Financial Analysis and Control - Financial Ratio Analysis
(Slides). SSRN Electronic Journal, 2(2), pp.123-221.
Velez-Pareja, I. (2018). Financial Analysis and Control - Financial Ratio Analysis (Slides in
Spanish). SSRN Electronic Journal, 2(4), pp.12-324.