Salhia Real Estate Company KSC - Ratio Analysis

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Contents
Salhia Real Estate Company KSC .................................................................................................. 3 1. Introduction ................................................................................................................................. 3 2. Ratio Analysis ............................................................................................................................. 3 List of Ratios used for analysis ................................................................................................... 4 3. Financial Analysis Snapshot of ratios ...................................................................................... 6 Profit and Loss statement ............................................................................................................ 6 Balance Sheet .............................................................................................................................. 7 Snapshot of ratios ........................................................................................................................ 8 4. Analysis of various Financial Ratios .......................................................................................... 9 Short Term Liquidity Ratios ....................................................................................................... 9 Long Term Solvency Ratios ..................................................................................................... 12 Profitability Ratios .................................................................................................................... 14 Market price & dividend ratios ................................................................................................. 18 5. Conclusion: ............................................................................................................................... 20 6. References ................................................................................................................................. 20

Salhia Real Estate Company KSC

1. Introduction

Salhia Real Estate Company KSC is involved in creation, ownership and management of fine commercial real estate1. It is a major player in Kuwaits retail and leisure, hotels and office markets. The company has consistently achieved market-leading returns. The Company's services are structured into three segments, namely Real Estate Operations, Hotel Operations and Care Home Operations. The Real Estate Operations segment consists of development and leasing of properties. The Hotel Operations segment consists of the hotel hospitality services provided through the joint-ventures Marriott Hotel - Kuwait, Courtyard Marriott Hotel - Kuwait and Arraya Ball Room - Kuwait. The Care Home Operations segment consists of care home activities provided by subsidiary companies. It also offers property management services through its subsidiaries located in Kuwait, Germany and the United Kingdom. The Company's project portfolio includes retail and leisure, offices, hotels, residential, industrial and logistics, and care for the elderly. It stands as the fourth largest developer in Kuwait and has recently been involved in Al Asima. Its other major projects are Farnborough town centre in Hampshire, a multipurpose project in the centre of Birmingham and a major residential development planned for the Midlands town of Rugby. The company has been involved in various M&As over the period and has two long standing and successful joint ventures: Key Property Investments and Drawbridge Securities. The present market price of the companys stock is 208.00 Kd.3

2. Ratio Analysis

It is a method of analyzing the operations of a company. It uses the financial statements of the company and calculates various ratios based on the various terminologies involved. It gives a quantitative understanding which helps to compare the operations of one company with other. It

also helps to compare companies of different sizes. Several ratios are involved in this technique but the actual no of ratios calculated depends on the purpose and objectives of analysis. It helps in evaluating the firms performance: The financial health, efficiency and profitability of the company can be estimated. It tells whether management is utilizing all the assets in a proper and optimized way or not, which must to increase investors wealth is. It helps in inter-firm comparison: A small company can be compared with a large company as the ratio analysis removes the size factor. It gives a platform for relative comparison between different types of companies. It helps in determining the financial position of the concern: The trends can be judges to examine whether the company is rising or is falling. The profits may be positive but if they are reducing, then it is a point of concern for the investors. Ratio analysis can suggest the reasons for the same. It is helpful in budgeting and forecasting: A manager can analyze the ratio and forecast its sales or plan the budgets to improve the ratio and hence the financial conditioned the company. The ratios provide a good platform to start the strategic discussions. Liquidity position: The liquidity position of the company defines its relations with the other business partners or members of the value chain. Hence ratios give an over view of the same and proves beneficial for the suppliers as well, as they can understand a compare the liquidity of the company and can have an idea about the payment cycle. Help in investment decisions: The investment decisions taken by investors and lending decisions taken by bankers are influenced by financial ratios of the company. It helps them to take right decisions.

List of Ratios used for analysis Short Term Liquidity Ratios2

Current ratio = Current assets / Current liabilities Quick ratio = Current assets minus inventories / Current liabilities Accounts receivable turnover = Sales / Average accounts receivable Average collection period = 365 / Accounts receivable turnover Inventory turnover = Cost of goods sold / Average inventory at cost

Long-term solvency ratios: Total-debt-to-total assets = Total liabilities / Total assets Total-debt-to-total-equity = Total liabilities / Stockholders' equity Interest coverage = EBIT / Interest expense

Profitability ratios Return on common stockholders' equity = Net income / average common stockholders' equity Gross profit rate = Gross profit / Sales Return on sales = Net income / Sales Asset turnover = Sales / Average total assets EBIT to sales = EBIT / Sales Return on assets = EBIT / Average total assets Earnings per share =Net income less dividends on preferred stock, if any / Average common shares outstanding

Market price & dividend ratios Price-earnings =Market price of common share / Earnings per share Book value per common share =Common stockholders' equity / Number of common shares outstanding Market-to-book =Market price of common share / Book value per common share Dividend-yield =Dividends per common share / Market price of common share Dividend-payout =Dividends per common share / Earnings per share

3. Financial Analysis Snapshot of ratios

Profit and Loss statement
Revenues Operating Costs Gross Profit Share in joint venture results Share of associates General and administrative expenses Depreciation Sales an marketing expenses EBIT Investment income Gain on sale of properties Foreign exchange gain Interest income Other income Provision for impairment Finance costs Profit before tax Foreign tax (LOSS) PROFIT BEFORE CONTRIBUTION TO KFAS, NLST, ZAKAT AND DIRECTORS FEES Contribution to KFAS NLST tax Zakat Directors fees PROFIT for the year Attributable to: (Loss) profit attributable to equity holders of the parent company Minority interest 2005 33,777,609 13,667,315 20,110,294 1,497,748 2006 36,503,370 -16,179,798 20,323,572 1,667,576 2007 40,802,911 -17,225,126 23,577,785 755,382 -447,996 -7,385,664 -5,201,549 -978,591 10,319,367 6,129,855 26,780,863 2,364,837 781,140 157,909 -4,861,886 -7,144,652 18,633,616 -455,854 -8,846,378 51,822,675 -971,917 -7,500,382 34,171,703 -1,715,775 2008 44,146,975 -18,799,472 25,347,503 2,544,012 -2,031,962 -5,884,649 -5,180,805 -1,023,621 13,770,478 8,606,288 0 -704,612 175,447 391,768 -47,894,714 -3,673,427 -7,158,296 -36,487,068 -47,629 2009 44,213,336 -17,249,380 26,963,956 -271,773 -1,389,735 -4,372,819 -5,042,706 -856,746 15,030,177 7,773,641 0 -856,859 75,734 1,169,948 -9,513,832 1,059,157 -6,263,287 8,474,679 -1,075,728 2010 42,995,724 -17,894,944 25,100,780 1,163,735 -1,427,815 -4,535,700 -6,238,917 -823,324 13,238,759 8,878,706 0 -331,031 245,843 206,328 -4,157,730 -2,541,349 -4,719,480 10,820,046 -461,006

-5,204,004 -5,198,216 -2,140,232 9,065,590 11,467,025 4,911,750 286,233 69,011 101,764 -123,105

-5,322,741 -5,200,448 -986,940 10,481,019 884,544 49,056,614 30,282 131,375 285,219 -200,000

18,177,762 -163,985 -403,114 -110,000 17,500,663

50,850,758 -457,657 -1,271,269 -165,000 48,956,832

32,455,928 -290,167 -789,129 -19,703 -165,000 31,191,929

-36,534,697 -36,534,697

7,398,951 -35,015 -202,295 -76,514 -135,000 6,950,127

10,359,040 -97,140 -264,435 -107,933 -120,000 9,769,532

17,543,488 -42,825

49,030,836 -74,004

30,976,727 215,202

-35,494,609 -1,040,088

7,248,686 -298,559

10,203,837 -434,305

17,500,663 Basic and diluted (loss) earnings per share attributable to equity holders of the parent company Total no of shares outstanding Dividend

48,956,832

31,191,929

-36,534,697

6,950,127

9,769,532

57.9

163.2

81

-90

19

26

314,923,698 362,162,253 398,378,478 399,221,255 405,925,305 50 50 50 15 20

Balance Sheet
2005 Cash and bank balance Fixed deposit Inventories Accounts receivable Available for sale investments Investment in associates Investment in joint venture Investment properties Current assets Property, plant and eqp Total assets Liabilities, Deferred Gain And Total Equity Liabilities Due to banks and financial institution Accounts payable and other liabilities Long-term loan Total liabilities Deferred gain Equity Share capital 19,477,462 10,769,952 83,910,926 114,158,340 6,925,347 62,276,228 44,964,253 33,015,794 1,399,085 17,304,659 64,376,959 83,080,703 14,354,122 2,540,085 430,222 7,107,680 28,098,958 15,446,824 18,575,195 2006 2,458,249 20,000,000 462,308 8,369,777 2007 4,459,505 5,886,303 350,717 43,026,740 2008 6,472,316 1,162,900 366,565 6,387,309 71,829,726 14,407,638 10,956,432 9,040,006 2009 7,472,144 336,880 9,627,574 63,798,084 10,290,764 2010 7,384,622 305,110 6,434,726 23,405,050

36,819,030 102,672,764 -

64,158,563 51,812,449 35,985,414 39,030,846 68,786,388 66,078,372 117,782,332 138,497,008 206,789,081 136,206,094 159,061,076 113,898,644 99,281,129 103,955,924 117,907,102 127,803,454 103,280,478 95,785,162 217,063,461 242,452,932 324,696,183 264,009,548 262,341,554 209,683,806

11,559,613 19,848,731 18,662,082 17,148,147 79,875,419 80,735,805 82,586,066 77,921,038 98,360,379 162,860,764 146,212,401 128,084,979 9,056,614 9,504,610 11,536,572 12,926,307

31,492,370

31,492,370

36,216,226

39,837,848

39,922,126

40,592,531

Share premium Treasury shares Treasury shares reserve Statutory reserve Voluntary reserve General reserve Foreign currency translation reserve Cumulative changes in fair value Employee share options plan reserve Retained Equity Attributable To Equity Holders Of The Company Parent Company Minority interest Total Equity Total Liabilities, Deferred Gain And Total Equity

27,524,906 -8,745,531 994,242 9,942,579 9,942,579 4,250,000 1,897,798 -66,452

27,524,906 -9,439,596 994,242 15,035,055 15,035,055 4,250,000 3,376,005 -2,695,527 -

27,524,906 -7,093,274 1,033,002 18,259,091 18,259,091 4,250,000 3,758,396 -4,302,706

27,524,906 -1,072,354 1,807,235 18,259,091 18,259,091 4,250,000 -2,131,003 3,135,277 227,549

27,524,906 -2,428,530

27,524,906 -3,439,031

1,807,235 1,807,235 18,648,149 19,727,484 18,648,149 19,727,484 4,250,000 -1,448,555 10,767,888 -2,472,526 -1,425,588

24,732,713

48,537,767

53,217,737

-3,806,930

2,282,984

9,667,784

101,965,204 134,110,277 151,122,469 106,290,710 119,974,352 111,710,279 939,917 925,662 1,208,340 -30,135 1,355,916 538,702 102,905,121 135,035,939 152,330,809 106,260,575 121,330,268 112,248,981

217,063,461 242,452,932 324,696,183 264,009,548 262,341,554 209,683,806

Snapshot of ratios
Name of the Ratio Short Term Liquidity Ratios Current Ratio Quick Ratio Accounts receivable turnover Average collection period Inventory turnover Long Term Solvency Ratios Total-debt-to-total assets Total-debt-to-total-equity Interest Coverage Profitability Ratios 2006 7.49 7.47 4.72 77.38 36.26 2007 2.52 2.51 1.59 229.88 42.37 2008 2.14 2.13 1.79 204.27 52.42 2009 3.17 3.16 5.52 66.10 49.04 2010 6.09 6.07 5.35 68.18 55.75

0.41 0.73 1.18

0.50 1.07 1.38

0.55 1.38 1.92

0.49 1.06 2.40

0.40 0.74 2.81

Gross Profit Margin (%) Return on sales Asset turnover EBIT to sales Return on assets Return on common stockholders' equity Earnings per share Market price & dividend ratios Price-earnings Book value per common share Market-to-book Dividend-yield Dividend-payout

0.56 0.00 0.16 0.29 0.05 0.37 163.20

0.58 0.11 0.14 0.25 0.04 0.21 81.00

0.57 -0.83 0.15 0.31 0.05 -0.34 -90.00

0.61 0.16 0.17 0.34 0.06 0.06 19.00

0.58 0.23 0.18 0.31 0.06 0.09 26.00

0.43

0.42

0.27

0.30

0.28

0.31

0.62

-0.56

0.79

0.77

4. Analysis of various Financial Ratios

Short Term Liquidity Ratios
Current Ratio:

The ratio is used to advice about the ability of the company to pay back the liabilities (shortterm) from assets (short-term). It is good for a company to have a high current ratio. It also tells little about the operational efficiency of the company. It speaks about the liquidity of the company. It should not be very high than the industry average.

Current Ratio
8.00 6.00 4.00 2.00 0.00 2004 2006 2008 2010 2012 Current Ratio

This ratio decreased up to 2008 and then increased again till 2010. The recent increase is due to lower current liabilities (loans due to banks and financial institution) especially in year 2010. It has been greater than 1 for last 5 years which is a good sign.

Quick Ratio It is similar to current ratio except it does not include inventories in calculation.

Quick Ratio
8.00 6.00 4.00 2.00 0.00 2004 2006 2008 2010 2012 Quick Ratio

It is also having the similar trend as the current ratio has. Hence, it is positive for the company.

Accounts Receivable Turnover It is important to understand how a company making sales on credit terms. This ratio is a short term liquidity measure.

Accounts receivable turnover

10.00 5.00 0.00 2004 2006 2008 2010 2012 Accounts receivable turnover

This ratio increased in recent years. It is expected as due to recessionary pressure, company had to make more sales on credit terms. A sharp change is trend in 2008, when global financial recession happened, supports the above argument.

Average collection period The average collection period follows the reverse trend to Accounts Receivable Turnover ratio.

Average collection period

300.00 200.00 100.00 0.00 2004 2006 2008 2010 2012 Average collection period

Inventory turnover It tells us about the number of times a company sells its inventory or replaces its inventory over a period.

Inventory turnover
60.00 50.00 40.00 30.00 20.00 10.00 0.00 2004

Inventory turnover

2006

2008

2010

2012

As this ratio is increasing over the last five years, it means the company is controlling the inventory and is trying to reduce it to improve the ratio. Investment in inventory is good when prices are increasing. In recent recessionary period, real estate has been facing loses and less no

of projects are getting executed due to lower demand. Hence, lowering the inventory levels is a positive trend.

Long Term Solvency Ratios

Total-debt-to-total assets It is used to examine the financial risk of the company. It tells us as in how much assets have been financed by debt. It should be as per industry average. A higher ratio will increase the risk and a lower ratio may affect the profitability f the company. If debt is taken low, and internal capital is used for purchasing assets, due to liquidity crunch the company may not be able to invest in all the required assets and it will impact the profitability and competitiveness.

Total-debt-to-total assets
0.60 0.50 0.40 0.30 0.20 0.10 0.00 2004 2006 2008 2010 2012 Total-debt-tototal assets

The company was not performing well in earlier years. The ratio was increasing from 20052008. The global recession in 2008 has changed the market dynamics and the process of running the business for this company. In recent years, company is following a low debt policy. It may be due to reduced demand of real estate and hence it would not be good to have increased debt to invest in assets. Secondly, low debt will reduce the finance cost of the company and hence will increase profitability. The profit for the year 2010 is 25% of that of 2006-07. Hence, the company should first focus on increasing the profitability and hence low debt policy is better.

Total-debt-to-total-equity

This ratio tells the financial leverage of the company. Equity is costlier than debt as a company gets tax rebate on interest paid on debt. A high debt/equity ratio generally means that a company has been aggressive in financing its growth with debt. This can result in volatile earnings as a result of the additional interest expense. Hence, there should be proper value for this ratio and should be in sync with industry.

Total-debt-to-total-equity
1.50 1.00 0.50 0.00 2004 2006 2008 2010 2012 Total-debt-tototal-equity

It is on similar lines to debt-to-asset ratio. The company has reduced the debt outstanding from 2008-2010 and the equity capital is almost same for these years. Hence the overall ratio has decreased.

Interest coverage ratio this ratio tells whether a company can pay its outstanding debt through the profit it earned or not. Hence, it says whether a company can satisfy the creditors or not. It should be greater than 1 for a good company.

Interest Coverage
3.00 2.00 1.00 0.00 2004 Interest Coverage

2006

2008

2010

2012

This ratio is increasing for last 5 years as company is reducing its debt portfolio and the improvement in profitability improves the EBIT component. Hence, overall it is good for the company to follow this trend.

Profitability Ratios
Gross Profit Margin (%) This ratio should be high. It tells how much gross profit a company gets by unit sales of its product.

Gross Profit Margin(%)

0.62 0.61 0.60 0.59 0.58 0.57 0.56 0.55 2004

Gross Profit Margin(%)

2006

2008

2010

2012

The overall trend is upward. The profit margin reduced first time in 2008 which is expected and financial recession could have been the reason for this. In recent years again in 2010 the ratio has reduced which is a point of concern.

Return on sales This ratio tells the net profit a company earned from its sales. It is a better measure of analyzing the companys performance (than Gross Profit Margin) as it uses the net income component, which is the actual profit been distributed or earned by the stakeholders of the company.

Return on sales
0.50 0.00 2004 2006 2008 2010 2012 -0.50 -1.00

Return on sales

The trend shows a huge dip in 2008 and then an increase in 2008-2010. The revenue of the company was almost similar in last three years, but the profit increased sharply from 2008 to 2009 and by 50% from 2009 to 2010. If the company follows the same trend in profitability it can grow in a better way. The approx same revenue in last three years is a point of concern which suggests that company should try to expand in other countries. Europe has been facing a debt trouble, and hence, company may not be getting many contracts in its UK operations in next few years. Hence, expansion of business is must in this economic environment.

Asset turnover This ratio tells how the assets are being utilized by the company for production. This ratio should be high for a good company.

Asset turnover
0.20 0.15 0.10 0.05 0.00 2004 2006 2008 2010 2012 Asset turnover

The company is utilizing its assets in a better way since 2007 as seen from the above graph. It is a positive factor for the company and it shows the efficiency of management in taking proper decisions about the usage of assets for the company.

EBIT to sales It measures the operational efficiency of the company. It uses EBIT and not the Net income. Hence, it advices about the performance of the company from its core operations and not the other noncore businesses. The impact of interest and tax which are financial aspects of the business are excluded in this calculation and the core operational work is being measured.

EBIT to sales
0.40 0.30 0.20 0.10 0.00 2004 2006 2008 2010 2012 EBIT to sales

The operational efficiency of the company seems to be reducing in recent years 2009-2010 as the above graph is showing a downward trend in this period. The efficiency increased from 2007 to 2009 which needs to be followed in future years as well.

Return on assets It is similar to the Return on Sales ratio, as it tells how the assets were used to result in net profit for the company. This ratio should be high.

Return on assets
0.08 0.06 0.04 0.02 0.00 2004 2006 2008 2010 2012 Return on assets

The above graph shows that company was improving from 2007-2009 but in last year it has not made any much improvement and hence, a constant line is shown in the graph. The trend is similar to the trend observed in graph for EBIT to sales. It is expected as EBIT and Net profit are having similar nature in usual circumstances and same applies to this company.

Return on common stockholders' equity A company is run by its managers, but the objective is to give maximum return to the share holders. This ratio tells how the company is performing using the money invested by its stakeholders. This ratio should be high. More is the ratio, better is for the investor.

Return on common stockholders' equity

0.50 Return on common stockholders' equity 0.00 2004 -0.50

2006

2008

2010

2012

The above graphs shows that the returns overall are reducing in a time span of five years. The huge dip in 2008 is due to global recession which reduced the profitability of the company severely. A closer look at the financials of the company says that the equity capital was almost constant in last 5 years but the overall profitability reduced. The net profit was 17,500,663 in 2005 and 9,769,532 in 2010. Hence, a close to 50% dip is the major reason of the above downward trend. Earnings per share This ratio shows the earning made by the company for each share issued to its investors. It should be high for a profitable and growing company.

Earnings per share

200.00 150.00 100.00 50.00 0.00 -50.002004 2006 2008 2010 2012 -100.00 -150.00

Earnings per share

The above graph shows that EPS is having a similar trend as the Return on common stockholders' equity ratio has. The overall trend is low which is not appreciable for the company. It is due to similar reasons as mentioned above that the profitability of the company s reducing.

Market price & dividend ratios

Book value per common share The book value tells the valuation of the company as per the financial statements irrespective o market perspective. It is the core value of the company and should be more.

Book value per common share

0.50 0.40 0.30 0.20 0.10 0.00 2004 Book value per common share

2006

2008

2010

2012

The book value has been reducing for last 5 years as shown by above graph. The reason for this can be the reduced profitability of the company as discussed in the profitability section above. This decrease in profitability affects the balance sheet as well due to which the financial position of the company deteriorates. Over all, this ratio should increase for the company.

Dividend-payout This ratio tells the dividend distributed by the company out of the yearly earnings. The value for this ratio can be low for a growing company and high for a matured company. A growing company will have better avenues for investment in terms of new projects etc, and hence it should have low payout ratio. A mature company may not have better investment avenues and hence it should give the decision of investing the money to stakeholders instead of the managers who are running the company. Hence, it should give more dividends.

Dividend-payout
1.00 0.50 0.00 2004 -0.50 -1.00 Dividendpayout

2006

2008

2010

2012

There is an upward trend in the dividend payout ratio. This company is a matured company and hence we can see that company is distributing more dividends to the investors. In 2008 the

company as facing a financial crunch doe to recession and hence they did not follow the same trend.

5. Conclusion:
Salhia is a major player in real estate industry of Kuwait. The company stands among the top 5 players of the industry which speaks that it is quite matured in its business and operations. The profitability ratios are not showing a good picture as most of them have shown a small increase in 2009 (as compared to 2008) and a decline in 2010 (as compared to 2009). The reason for improvement in 2009 could be due to low base of 2008 which was used for comparison. The Net profit of the company is not so impressive and the sales are also almost constant for last three years. The asset turnover ratio was showing good trend, but overall when revenue is not increasing it means, company is not investing more into assets. This point needs to be noted and improvement in Revenue is must. Almost all the short term liquidity ratios are good. This shows that company is able to meet its short term financial requirements (with debtors and creditors). The long term debt ratios are also good. Interest coverage ratio is increasing. It means that the company is financially strong. On a concluding note, the short and long liquidity ratios are good, which suggests that company is financially strong. But as the profitability ratios are not showing a satisfactory trend, which will impact the financial condition and will hamper it progress. The company needs to improve their sales figures, say, by expanding into new geographies or new businesses. This will improve the profitability and hence will give more returns to the stakeholders.

6. References
1. www.salhia.com 2. www.investopedia.com 3. www.reuters.com