Avoiding Financial Distress in Intensive Care Unit

The provided content includes various research papers and books on topics such as financial analysis, data mining, risk management, financial statement analysis, cost accounting, and project management. The papers cover themes like avoiding server saturation, evaluating the effectiveness of data mining, quantitative risk management, plant growth analysis, bank branch efficiency, and more. The assignment aims to summarize these diverse research studies in a concise manner.

Running Head: FINANCIAL STATEMENT ANALYSIS
Financial Statement Analysis
Name of the Student:
Name of the University:
Authors Note:

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Table of Contents
Answer to part 1:.............................................................................................................................3
Answer to part 2:...........................................................................................................................12
Answer to part 3:...........................................................................................................................18
References:....................................................................................................................................24

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Answer to part 1:
Introduction:
Established in the year 2002, DAMAC Properties is an integral part of DAMAC Group which
was formed by Hussain Sajwani in the year 1992. Over the last 15 years since its formation
DAMAC properties have become an essential part of DAMAC Group with increase amount of
contribution to the overall market capitalization of the Group. The success and expansion of
DAMAC Properties, here in after to be referred to only as Damac in this document, can be
assessed from the fact that in the month of January of 2015 it became one of the very first real
estate companies in the United Arab and Emirates to list on the Dubai Financial Market
(Stawicki 2017). Even more impressive fact was the listing of Damac in the London Stock
Exchange as it became the first real estate company from the Middle East to list on London
Stock Exchange in December, 2013.
Overview of the business:
Across Dubai and in other parts of UAE, Damac has completed several projects, commercial,
residential and mixed use projects. Apart from Dubai the company has fair share of market
presence in Abu Dhabi, Qatar, and Kingdom of Saudi Arabia. Apart from these cities and regions
where the company has progressed fair bit regions such as Jordan, Lebanon and United Kingdom
are also on the radar of company and the company has started making headways in these areas
too (Badea, R.A. and Borcoci 2014).
Financial statement analysis:

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Financial statement analysis is a major weapon in the hands of the stakeholders of an
organization to assess the financial position and condition of an organization and the
performance of it in a particular year. Due to the sheer importance of analyzing financial
statements properly a whole new subject has come into financial reporting concept known as
Financial Statement Analysis, FSA in short. The techniques and methods of analyzing financial
statements have undergone numerous changes over the years to make it more effective and
efficient. The better the analysis of financial statements the better would be the chances of
stakeholders taking correct decisions that affects their interests in an organization. An
organization generally requires to prepare a statement of financial position which shall include
all the assets and liabilities of such organization; a statement of profit and loss showing incomes
and expenditures of such an organization in a particular period, a statement of showing cash
flows, a statement showing changes in equity and notes forming part of accounts (Taleb and
Mohamed 2015). All these statements are to be prepared by an organization in according with
the relevant guidelines provided in domestic and international accounting standards
(International Financial Reporting Standards are the main international accounting standards).
Adhering to these accounting standards and following the financial reporting quality
enhancement guidance in preparation and presentation of financial statements will enhance the
ability of an organization to show its true and fair financial position and performance for a
particular period through its financial statements (Martellini et al. 2015).
Importance of ratio analysis:
Apart from normal assessment and verification of items of profit and loss to assess the
operating performance of an organization from the statement of financial position ratio analysis
such as gross profit margin over the last few years, operating profit ratios in the last few years,

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return on capital employed and comparison of these ratios with the corresponding ratios of the
previous years would help us to identify the progress or lack of it. Also this will help us to
identify certain abnormal fluctuations in case such fluctuations occur. For example suppose an
organization was earning a gross profit margin of 25% on sales in the last five years suddenly
experienced a huge dip in the gross profit margin as the current year gross profit margin fell to
10 or 15% of the revenue. This will indicate us that either there has been a mistake in keeping
accounting records of the organization or the management has miserably failed to use resources
of the organization properly. Similarly items of balance sheet from normal reading might only
tell us about the total liabilities and total assets of an organization. However, calculations of
current ratio, acid test ratio, capital gearing or debt to equity ratio from these items of balance
sheet would help us to assess the financial, liquidity and solvency strengths of such organization
(Grant 2016).
Assessment of profitability and financial health of the company:
In case of Damac, the annual reports of 2015 and 2016 have helped us to analyze the
financial position and operating results of organization. Using the information provided in the
profit and loss statement and balance sheet some profitability, liquidity and solvency ratios have
been calculated to assess the financial position and condition of the company better (Beadle
2014).
Profitability ratios:
Profitability ratios include gross profit margin, operating margin, net profit margin, return on
capital employed, return on equity etc. These ratios will help us to understand how the company
has been able to use its resources to earn profit from its business operations. Comparative

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analysis of these ratios with corresponding ratios of previous year would be further helpful in
determining whether the company has performed better or worse in than previous years (McNeil
et al. 2015).
Gross profit ratio has been calculated by using the formula provided below:
Gross profit earned in the year x 100/ Revenue in the year.
Operating profit margin has been calculated by using the following formula:
Operating profit earned in the year x 100 / Revenue in the year.
Net profit margin calculated by using the formula given below:
Net profit for the year x 100/ Revenue in the year (Gitman et al. 2015).
Return on Capital Employed has been calculated by using the following formula:
Net profit after tax attributable to the shareholders and investors x 100/ Capital employed.
Profitability ratios
Particulars 2015-12 2016-12
Revenue AED Mil 8,536.00 7,156.0
0
Direct operating costs 3,465.62 3,155.8
0
Gross Profit 5,070.38 4,000.2
0

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Gross Margin % 59.40 55.9
0
Operating Income AED Mil 4,544.00 3,717.0
0
Operating Margin % 53.23 51.9
4
Net Income AED Mil 4,515.00 3,695.0
0
Net Income Margin 52.89 51.6
3
Earnings Per Share AED 0.75 0.6
1
Book Value Per Share * AED 1.49 1.9
4
Price Earnings ratio 1.99 3.1
8
Return on Invested Capital % 43.50 23.6
7
(Gitman et al. 2015)
The gross profit margin of the company in the year 2016 has reduced to 55.90% of revenue
whereas it was almost 60% of revenue in the previous year. The concerning factor is not only
that the gross profit margin has reduced in the current year but the fact that the overall revenue
and gross profit both have declined substantially. The revenue in the year 2016 at AED Mil of

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7156 has reduced by AED Mil 1380 from the year 2015. The gross profit margin generally
reduces as the revenue increases and in such situations the slight decrease is accepted and taken
as a positive to a business. However, here it is not the case the revenue in the year has reduced
substantially by almost 17% from the year 2015 and to make the matter further worst the
company has suffered significant reduction in gross profit margin as already mentioned. New
competitors have entered the market with huge capital has taken certain bit of market share is a
reason that the company has suffered loss of revenue in the year 2016 compare to the revenue it
generated in the year 2015 (Palepu et al. 2013).
Operating income as well as operating income margin in the year 2016 both have reduced
significantly, as it took a downward turn from 53.23% of revenue in the year 2015 to 51.63% in
the year 2016. Compare the figure of 51.63% of 2016 with 86.50% of 2014 would further make
the matter worst as it would bring to a light ever increasing problem of the company to reduce its
operating expenses in running the business operations of the company. Arrival of fair bit of
competition and inability of the management to deal with the competition properly are the main
two reasons behind sudden drop in revenue as well as gross, operating and net profit margins of
the company (Robinson et al. 2015).
In short the management needs to take some measures to ensure that the decline in revenue and
profitability rates are only a passing phase and does not hand at the head of the company in the
future. Innovative and modern ideas such as new designs of multi-level buildings, new and
attractive office and home designs would help the company to attract new customers and
subsequently the revenue of the company. Efficient and effective use of resources of the
company would help the management to increase the profits and subsequently the profitability
ratios would also improve (Entwistle 2015).

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Let us now talk about the balance sheet items to compute liquidity and solvency related ratios of
Damac to assess its financial health in addition to its financial position as on 31 December, 2016.
Financial health ratios: Financial health ratios can mainly be segregated into two primary
categories, these are liquidity ratios and solvency ratios. Liquidity ratios include current ratio,
acid-test ratio; current ratio shows the proportion of current assets to current liabilities of an
organization as on a particular date whereas the acid test ratio helps us to find to ability to pay
quick liabilities from quick assets (Dalnial et al. 2014).
Balance Sheet Items (in %) 2015-12 2016-12
Cash & Short-Term Investments 40.52 33.7
7
Accounts Receivable
Inventory
Other Current Assets 16.22 19.5
1
Total Current Assets 56.74 53.2
8
Net PP&E 0.27 0.2
4
Intangibles
Other Long-Term Assets 42.99 46.4
8
Total Assets 100.00 100.0

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0
Accounts Payable
Short-Term Debt 4.8
5
Taxes Payable
Accrued Liabilities
Other Short-Term Liabilities 18.28 33.2
6
Total Current Liabilities 18.28 38.1
1
Long-Term Debt 16.06 10.6
5
Other Long-Term Liabilities 23.74
Total Liabilities 58.07 48.7
6
Total Stockholders' Equity 41.93 51.2
4
Total Liabilities & Equity 100.00 100.0
0
On the basis of the above balance sheet items the following ratios have been calculated to assess
the financial health of the company (Magalhães 2014).
Liquidity/Financial Health 2015- 2016-

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12 12
Current Ratio 3.
10
1.
40
Acid test ratio 3.
10
1.
40
Financial Leverage 2.
39
1.
95
Gearing ratio 0.
38
0.
21
Current ratio of the company has declined significantly in the year 2016; compare to 3.10 current
ratio in the year 2015 it declined to as low as 1.40 in the year 2016. This clearly shows that the
company has done very badly in terms of managing its liquidity position in the current year. This
is due to the excessive use of current assets such as bank balances and accounts receivables in
repayment of debts and loans, i.e. non -current liabilities. Also the fact that the company has
suffered a significant drop in its revenue as well as profit have also played their part in
deteriorating the current ratio and working capital position of the company in the year 2016.
Acid test ratio and the current ratio in case of Damac is same thus, there is no need to further
explain the significance of deterioration of acid test ratio (DRURY 2013).
The reduction in debt is clear from the debt to equity ratio, also known as gearing ratio,
as is clear from the decrease in gearing ratio. From a debt to equity ratio of 0.38 in 2015 to 0.21
in the year 2016 shows that the company has made substantial amount of repayment of debt
without replacing the same with additional borrowings. Thus, this is another reason for the lack

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of revenue, as it shows that the company has not made any significant investment in new projects
thus, the sudden drop in revenue.
Answer to part 2:
A company has the option to use numerous sources from which the funds can be arranged to
finance different expansion projects. Unlike other forms of organization a company is at a huge
advantage as it can get access to both equity market as well as debt market with ease to collect
funds necessary to finance different expansion projects. DAMAC Properties has also decided to
start a huge expansion project at the start of 2018 and accordingly has made plan to move
towards that goal by arranging necessary funds to finance the expansion. According to the
management expectation the company will need additional 15% of net assets employed by it at
present in the business, i.e. net asset of the company as on 31 December, 2016 to swiftly run the
expansion operations. In this part of the document a detailed discussion shall be made on the
various sources that the company can use to arrange the necessary funds required for expansion
keeping in mind the current capital structure of the company and its suitability. Thus, the first
priority of us is to calculate the net current asset of the company as on December 31, 2016 and
then to find out the amount of additional capital required by Damac to fiancé its expansion
project at the beginning of 2018 (Schoenebeck and Holtzman 2013).
Let us have the brief Balance sheet of Damac in front of us to ascertain the net capital asset
employed by the company in the business as on 31st December, 2016.
Assets 2015-12 2015-12 2016-12 2016-12
Real estate properties 163.00 172.0
0

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Accumulated depreciation (99.00) (113.0
0)
Real estate properties, net 64.0
0
59.0
0
Cash and cash equivalents 9,501.0
0
8,316.0
0
Other assets 13,883.0
0
16,251.0
0
Total assets 23,448.0
0
24,626.0
0
Liabilities and stockholders' equity
Liabilities
Short-term borrowing 1,194.0
0
Long-term debt 3,765.00 2,622.0
0
Other liabilities 9,852.00 8,192.0
0
Total liabilities 13,617.0
0
12,008.0
0
Stockholders' equity
Retained earnings 8,160.00 5,934.0
0

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Accumulated other comprehensive
income
1,671.00 6,684.0
0
Total stockholders' equity 9,831.0
0
12,618.0
0
Total liabilities and stockholders'
equity
23,448.0
0
24,626.0
0
On the basis of the above the net assets of the company as on 2015 and 2016 have been
calculated below:
Net Asset :
Year 2015-12 2016-12
Total Assets 23,448.00 24,626.00
Less: Outside liabilities 13,617.00 12,008.00
Net Assets 9,831.00 12,618.00
The company will require additional 15% of the current net asset employed in the business as on
31 December, 2016. As can be seen in the above that the net asset of the company in the business
as on December 31, 2016 is AED Mil 12,618 thus, the additional requirement of funds for
expansion of the business of the company will be;
= AED Mil (12,618 x 15%)
= AED Mil 1,892.70

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Thus, approximately the company will need an additional capital of AED Mil 1,893 to finance
the expansion of the business at the start of 2018.
Let us also have an idea about the current capital structure of the company from the figures in the
Balance sheet to find out the suitable source / mixture of sources to be used in arranging the
additional funds required for the expansion (Needles et al. 2013).
Liabilities and stockholders' equity 2016-12 (%)
Total liabilities 12,008.00 48.
76
Total stockholders' equity 12,618.00 51.
24
Total 24,626.00 100.00
It is clear that the company has always tried to maintain a balance between debt and equity funds
in its capital structure as the overall capital of the company as on 31 December, 2016 is divided
in debt and equity funds in the ratio of 48.76% and 51.24% respectively. Thus, the additional
funds required by the company, i.e. AED Mil 1,893 shall ideally be arranged by the company
from debt and equity funds in the ratio of 48.76% and 51.24% respectively as is the current
proportion in the capital structure of the company. Though it must be understood that it is rarely
possible to achieve exactly the same proportion to arrange additional capital for expansion of
business hence, the company would be happy to use equal amount of borrowed and equity funds
to arrange the additional capital required for expansion.
DAMAC Properties is a well-known entity in UAE with fair share of presence at the sky scrapers
in Dubai, Qatar and other famous cities of the country. The company is also a listed entity in
Dubai stock exchange and also has the distinction of being the first ever Middle East real estate

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company to be listed in the London Stock Exchange. Thus, arranging funds from either issuing
equity shares in the market or from taking loans from banks and financial institutions or for that
matter a perfect mixture of these two sources will not be a problem for the company. Let us
explain the different sources that the company can use to arrange the funds required for financing
the expansion strategy of the company.
Equity share capital:
Issuing additional shares in the market at the current market price will help the company
to increase its capital base and further strengthen its solvency and debt to equity ratio. The
process of issuing ordinary shares in the market generally takes significant amount of time
however, since the company has already gone through the process earlier it would not take the
management huge amount of time or effort to issue additional shares in the market to raise the
capital required for financing the expansion. Making right issue to the existing shareholders of
the company is also an option to raise the required amount of capital as this would give the
existing shareholders an opportunity and a right but not any obligation to buy additional shares in
proportion to their existing holding in the company. This will not even alter the existing
ownership pattern of the business thus, is a suitable option for the company to arrange necessary
funds for the expansion.
Retained earnings:
The company has accumulated significant amount of earnings over the last few years
from its business operations and thus, making use of idle funds in the form of retained earnings
will be one of the easiest ways to finance the expansion strategy of the company as this would
involve much less of documentation and other works which will be essential in case of issue of

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additional shares or for that matter taking additional loans from banks. The cost of using retained
earnings is generally the lowest amongst all the other sources to finance a project thus, the
management should consider the use of retained earnings to finance the expansion project.
Borrowings:
Borrowing funds is one of the easiest and least costly methods of financing. Not only
companies but also other forms of organizations which do not have the right to issue shares to
the public to raise funds for financing their business operations can take loans and borrow funds
from banks and financial institutions to finance different projects. The advantage of borrowing is
that interest costs for such borrowings are allowed as deduction in computation of taxable
income thus, Damac will be able to use the tax shield to reduce its taxable profit and resultant tax
from business operations.
As already mentioned that the company will look to continue with its current capital structure
even after implementation of expansion strategy with the use of AED Mil 1,893. Thus,
considering the company should use issue right shares to the existing shareholders to arrange one
part of the required funds and shall borrow the balance required for financing the expansion
strategy from the banks and public financial institutions. As on December 31, 2016 the
proportion of total capital of the company was in the ratio of 51.24% and 48.76% in Equity and
Debt funds respectively. Accordingly, the required amount of funds shall be financed in the
following proportion from right issue of share and loan from banks.
Financing Amount
in AED
Mil

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Amount from right issue of shares to existing shareholders 969.9
7
Amount to be borrowed from banks 923.0
3
1,893.0
0
The reason not to use the retained earnings to partly finance the expansion of the company is that
the company don’t want to reduce its capital contribution in the overall capital structure of the
company thus, decided to issue right shares to the existing shareholders instead of using retained
earnings to partly finance the expansion of the company.
Answer to part 3:
The importance of budgeting, whether it is a modern organization or a traditional
organization in existence for decades now, is immense. Budgeting is a technique which
combines the forecasting ability of a manager or a management with the ability to efficiently
manage the operations of an organization with optimum utilization of resources. Since the
establishment of business organizations and the development of the concept of management the
use of budgeting techniques have been made, may be in a different name altogether but the
existence of budgeting cannot be denied (van der Voort et al. 2013).
An organization, whether it is a company or a different form of organization with no
separate legal identity, has to work under an uncertain future and conditions which are not
wholly within the control of the management or manager of such an organization. In order to

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work efficiently an organization must have a plan in place to deal with the various uncertainties
that the future will throw in-front of it. Only by proper planning and subsequent preparation
according to such planning that it would be possible for an organization to deal with various
challenges and difficulties in the future (Bhattacharya 2014). Without a proper plan it would be
almost impossible to overcome various challenges that the uncertain future will throw at the
organization. The question now is how an organization prepare for the future which is
completely unknown and uncertain. Here lies the importance of budgeting. Budgeting is one of
the many techniques and methods that the managers generally use to forecast the possible future
and plan accordingly. Budgeting technique involves forecasting the possible scenario of the
future and how the conditions and situation in the future will unfold and be ready accordingly for
such situation and circumstances (Quattrone 2016).
Different types of budgets are generally prepared by an organization, from cash budget to
revenue budget, from operating budget to marketing budget etc. The importance of a budget is
that it tries to help an organization in its endeavor to achieve its desired objectives in the future.
Another important characteristics of budgeting that it motivates an organization to achieve
excellence in different areas relevant to different budgets. Let us explain the importance of
different types of budget to different departments of an organization to understand whether it is
still useful to prepare budgets for a modern day organization which has the availability of cutting
edge modern day technology to use in business operations (Hu et al. 2014).
A standard manufacturing organization will generally prepare the following budgets;
Production budget: Manufacturing or production department in a manufacturing organization is
primarily responsible to produce certain pre decided quantity of products to help an organization
in its objective of maximizing profit for sales and business operations. Production budget is

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exactly the document which is used by the managers in the production department to ensure that
the production department is progressing in accordance with the expectation of the management
as envisaged in the production budget. Production budget includes the expected amount of
production that the management forecasts will be required to satisfy the demands and needs of
the customers of the company. In case the production department fails to produce the required
quantity of production then it could have huge financial ramification to the organization as a
whole (Burns and Walker 2015). As in such situation the organization will not be able to meet
the requirements of its customers and this could lead the customers to go away from the
organization and move to its competitors in the market.
A production budget can be further segregated into materials, labor, and overhead
budgets. These budgets will guide the managers in the production department to keep track of the
expenses and expenditures incurred in the production process. Thus, in case of any overshot of
the expenses the production department manager can immediately understand it and take
necessary action to ensure such expenditures remain in check (Chenhall and Moers 2015).
Revenue budget: Revenue budget is the forecast of the management to earn revenue from the
business operations of an organization. It can also be termed as a target revenue statement as
often organizations use revenue budget as a mechanism to fix target for itself to achieve certain
amount of revenue in a particular year (Nicholas and Steyn 2017). The managers based on the
past performance of an organization along with the study of the market which includes research
on the demand and supply trend in the particular market, ability of the competitors in the market
to satisfy the demand of the customers, ability of the organization to supply the required quality
of products at affordable prices to customers, prepare a statement to forecast the possible revenue
that the organization is going to generate in coming year, in case of yearly budget. The

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management will be on its toes and will try to take necessary steps to increase its revenue in a
period to ensure that the actual revenue in a year touches if not exceeds the budgeted revenue of
the organization. The manager in charge of an organization will also be responsible to achieve
the revenue target as set in revenue budget of the organization (Rosenberg Hansen and Ferlie
2016).
Operating expenses budget:
In order to control the overall operating expenses of running the business of an
organization the management generally uses operating budget. One of the main motives behind
preparation of operating budget is to make sure that the resources of the organization is used
effectively and efficiently. The operating budget estimates the amount of expenditures that the
organization will have to incur to run the business operations of such organization. Thus,
management can use this as a guiding line as far as incurring expenditures are concerned.
Optimum utilization of resources is one of the most important aspects of running a business
successfully and operating budgets would help an organization in achieving this objective
(Brooks 2015).
However, it can be argued that since the organizations in modern world have so many options
available with the help of advanced technology to keep track of each and every single aspect of
business is it still necessary for business organization to prepare and plan with the help of
budgets. It is true that modern day companies and other forms of business organizations have
numerous tools in their disposals which they can use to manage different aspects of business
however, yet there have been no alternative to the effective management technique known as
budgeting even after number of years after its development. Despite the injunction of advanced
technology and innovation the modern business organizations are still taking advantage

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budgeting process (Collier 2015). Budgeting process not only helps an organization to keep a lid
on expenditures of running the business operations in an organization but at the same time works
as a path director for an organization in an uncertain future. As already mentioned it is better to
be prepared for the future by making substantial plan for it on the basis of forecasts than to be
sitting ducks and waiting for the disaster not to strike. Preparation is a process of getting ready
for the future which is uncertainly with proper planning; budgeting is a technique which exactly
does that for an organization as it helps an organization to plan for an uncertain future and
accordingly, takes steps to deal with different uncertainties of the future (Benes et al. 2015).
Thus, from the above discussion it is amply clear that the process of budgeting is a help
to a company, whether it is a modern day organization or a traditional organization working for
number of years, and not a hinder. An organization looking to improve its operating efficiency
can certainly make best use of budgeting technique by preparing different types budgets and
accordingly, planning the future course of actions of the company. As far as the concern of a
company unable to keep pace with the rapid changes in commercial and economic environment
due to use of budgeting technique is far stretched than actual reality. This is because the
budgeting process has also developed significantly over the years and thus, came flexible budget
which allows organizations to make necessary adjustments to the budgeted figures as the
underlying conditions and assumptions on the basis of which the preliminary budgets were
prepared changes. Flexible budget allows organizations to firstly prepare preliminary budgets on
the basis of available information after making necessary assumptions (Zeff 2016). However, in
case the underlying assumptions change with change in time flexible budget allows business
organizations to make necessary modifications and adjustments to the preliminary budgets to be
relevant under the changed situation and circumstances that have led to change the underlying

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assumptions on the basis of which preliminary budgets were prepared at the beginning. Thus, the
concern of inflexibility and inability to adapt to changed circumstances in modern and rapid fast
business world is also addressed with the help of flexible budgeting process (Sridharan 2015).
However, despite all these it must be understood that an organization works under
uncertain future environment and the process of budgeting only tries to play a small part in
preparing an organization to face the uncertain future. Thus, other factors and elements necessary
to allow an organization to deal with the uncertain business environment in the future also need
to work in a combination with the budgeting process to help an organization in its objective of
achieving desired success in the future. Thus, only budgeting technique is not enough for a
business organization to achieve its mission and objectives rather all the factors have to combine
to help an organization in its endeavor to success (Storey et al. 2016). It is also important to note
that at the end of the day it is the human resource and its ability to manage an organization
properly that will decide the ultimate outcome. Thus, if the management is inefficient and lacks
the ability to correctly forecast the possible future situation then the chances of preparing an
effective budget is close to nil. Hence, the skills and knowledge of the management along with
other human agencies of an organization will play the most crucial role in deciding the fate of an
organization, i.e. by properly using the forecasting ability to prepare and plan effectively with the
help of budgeting process and also in implementation of these plans in actions as at the end of
the day it is about implementation of these ideas in real world that will decide the future outcome
of an organization (Kerzner 2013.).

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