Comprehensive Financial Analysis of Almarai Company (2016-2017)

This report presents a detailed financial analysis of Almarai, a Saudi Arabian food and beverage company, examining its performance from 2016 to 2017. The analysis includes the calculation and interpretation of key financial ratios such as operating profit margin, price earnings ratio, gearing ratio, asset turnover ratio, return on capital employed, and interest coverage ratio, providing insights into the company's profitability, efficiency, and solvency. The report also explores the sources of finance for Almarai and the importance of budgeting for business operations, discussing the pros and cons of budgeting and the impact of technological advancements on financial management practices. The analysis highlights trends in Almarai's financial performance, including improvements in operating profit and price earnings ratios, while also noting areas of concern such as declining asset turnover and interest coverage ratios, and the impact of debt on financial leverage.

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:

10
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.