Financial Performance Coursework Example

Financial Performance
Name
Institutional affiliation
Date

Introduction
AmanahRaya Real Estate Investment Trust (AmanahRaya REIT), a real estate investment trust, is a solely owned subsidiary of Amanah Raya Berhad (ARB). The company was established in 2006 under the Trust Deed the same year between the manager (AmanahRaya-REIT Managers Sdn Bhd) and CIMB Islamic Trustee Berhad who was the trustee. AmanahRaya REIT is classified as a real estate investment fund, and it was among those listed in Bursa Malaysia Securities in 2007. By the end of 2016, the portfolio of the company included fifteen properties with its assets valued about RM1.040 billion.
Another company listed by Bursa Malaysia Securities in 2007 is AmFirst REIT. The company is also classified under a real estate investment fund and therefore, it directly competes with AmanahRaya REIT. The company was also established in 2006, and it is headquarters are located in Petaling Jaya, Malaysia. The projects of AmFirst REIT include Menara AmBank, Bangunan AmBank, and Menara AmFIRST among others.
Financial Performance of Amanahraya REIT and AmFirst REIT
The profitability ratio is the measure of the performance of a company. Profitability is basically the ability of a business to make earnings as compared to its expenses and extra costs that are incurred within a particular time of operation usually a period of one year. For most of the profitability ratios, having a greater value as related to that of a competitor or as compared to the same ratio from a preceding period designates that the company is performing well.

The common profitability ratios that are used to analyze the performance of a company include; operating margin, gross profit margin, the return on equity (ROE), return on assets (ROA), return on investments (ROI) and return on sales. Analyzing these profitability ratios provides information about the financial position, operation success, and the cash flow. The information on the reports enables the managers, shareholders, and investors to assess the balance sheet, cash flow statement and income statement to determine the strength of a company on a financial basis (Delen, Kuzey & Uyar, 2013).
Financial reports for Amanahraya REIT and AmFirst REIT
Financial reports of a company include the operation success, the financial position, and cash flow. Generally, the information from the reports can be used by the stakeholders and the management as well as the investors to help them make appropriate and effective decisions (Brown, 2012). The tables below show financial reports of Amanahraya REIT and AmFirst REIT for financial years 2015 and 2016.
Revenue in millions
Amanahraya REIT AmFirst REIT
2016 53,549 61,092
2015 58, 132 53,417
Net income
Amanahraya REIT AmFirst REIT
2016 40,541 68, 372
2015 59,682 66, 618
Working capital
Amanahraya REIT AmFirst REIT
2016 47,003 53,405
2015 51, 131 59,382
Cash flows
Amanahraya REIT AmFirst REIT
2016 20,291,475 44,777,884
2015 99,027,492 4,702,840
The revenue of a company refers to the total of money that the company makes before any deductions such as taxes, and other expenses. As from the table, in the financial year 2015, Amanahraya REIT had more revenue than AmFirst REIT. However, in the financial year that followed (2016), AmFirst REIT’s revenue has been higher than its competitor Amanahraya REIT.
AmFirst REIT has recently generated additional revenue this year compared to the preceding year while Amanahraya REIT’s revenue reduced.
The net income is what the company remains with after deducting the operating expenses and taxes. In 2016 and 2015, AmFirst REIT generated more net income than Amanahraya REIT, its competitor. AmFirst increased its net income from 2015 to 2016 by about 2.48 percent. On the other hand, Amanahraya REIT decreased its net income by about 32.07 percent. This shows that AmFirst REIT has been able to grow consistently during the period while Amanahraya REIT operated at a loss. Therefore, during the two financial years, AmFirst was a better investment as compared to Amanahraya REIT.
Working capital measures the efficiency of a business and its current health. It is the difference between the current assets and the current liabilities (Baños-Caballero, García-Teruel, & Martínez-Solano, 2014). Both companies Amanahraya REIT and AmFirst REIT have their working capital drop lower in 2016 than in 2015. The reduction in the working capital of the two companies may be attributed to the purchasing and acquiring new properties.
Free cash flow refers to the measure of the financial performance of a company. It is given by the difference between the Capital expenditure and the cash flow. AmFirst REIT cash flow has been significantly growing allowing them the opportunity to expand. Amanahraya REIT, conversely, has been having a negative cash flow making it difficult for the company to pay bills. Having more free cash flow enables AmFirst REIT to outperform Amanahraya REIT since it can acquire more assets.
The increase in the revenue and the cash flow at AmFirst REIT allows the company to afford and acquire new assets enabling to grow and expand since it can pay its bills and debts successfully. In opposition, the significant decrease in both revenue and cash flow at Amanahraya REIT indicates that the company is getting deeper into debts as they are not able to finance its operations. This is reflected by the reduction in the net income of the company for the year 2016.
Ratio analysis
Financial ratios can be divided into different groups of ratios which include efficiency ratio, financial health ratio, and profitability ratio. Looking at each group of the ratios gives an idea about the strength of a company.
The financial health ratios include the current ratio, debt-equity ratio, and quick ratio. The current ratio indicates whether or not a business has enough sufficient cash to fulfill the short-term liabilities within the next financial year. Hence, having a high current ratio is desired and getting a ratio of not less than one is ideal in the industry (Nobanee, 2014). Both AmanahRaya REIT and AmFirst REIT have the current ratios of more than one. This means that the two companies have the ability to cover their short-term liabilities and still have some of the capital left over.
The quick ratio is used to measure the liquidity of a company. The quick ratio relates the total sum of cash plus the marketable securities plus receivable accounts to the total sum of the current liabilities. The quick ratio shows the percentage of the current liabilities that can be paid in cash. AmFirst REIT is outperforming the market mark while the AmanahRaya REIT is underperforming.
The debt-equity ratio illustrates the extent to which an organization takes on debts/ loans to fund its business operations. The higher the debt ratio, the higher the risk taken on by the creditors as opposed to the company owners pumping in the money to lessen the risk. The debt-equity ratio is determined by dividing the total debt by the equity of the shareholders. The debt to equity ratio of AmFirst REIT shows the company has more than two times more debt than equity and has been mostly taking on debts to finance its operations. AmanahRaya REIT debt to equity ratio indicates that the firm is more conservative in debt financing compared to its competitor.
Another group of ratios is the efficiency ratios which include the inventory turnover, the cash cycle and the receivables turnover. The inventory turnover shows the times at which the inventory is sold over a particular period. This ratio is determined by dividing the net sales by the average inventory. The inventory turnover for the two companies increased in the last two years. AmFirst REIT, however, had more inventory turnover than its competitor and this means that it makes more sales and as a result, more income.
The receivables turnover ratio is the measured effectiveness of the company in accumulating its credit sales. It is determined by dividing the net sales by the average accounts receivable. The receivables turnover decreased in 2016. The reduction can be associated with increased volumes of sales by the companies is doing and the prolonged period of credit transactions.
The cash conversion cycle indicates the time length, in days that it takes for a business to
Therefore, cash conversion cycle of AmFirst REIT’s is ideal for a company since it indicates its efficiency in the capacity to make returns from inputs. The cash conversion cycle of AmanahRaya REIT is about 29 days. AmFirst REIT’s cash conversion cycle is close to 21 days which means that AmFirst REIT can convert the invested capital into cash about faster than AmanahRaya REIT.
The last group of ratios is the profitability ratios which comprises of return on assets (ROA) ratio and net margin ratio. These ratios are indicated in percentages. The return on assets ratio assesses the efficiency of a company in utilizing its assets to make earnings. AmFirst REIT return on assets is much higher than that of AmanahRaya REIT. This shows that the company (AmFirst REIT) is more competent at generating earnings using the assets.
The net profit margin ratio shows how much of each unit of revenue converts into the profit for the corporation. The profit margin ratio is determined by dividing net profit by the company’s revenue and is indicated in percentage. The higher the net profit, the faster the potential growth and expansion rate of the company. AmFirst REIT has higher net profit margin than AmanahRaya REIT. This means that AmFirst REIT has a high potential rate of growing and expanding than its competitor.
Return on Equity (ROE)
Return on equity indicates the profit that a company gets with every unit of the shareholder. It is determined by dividing the net income by the shareholder’s equity. For better and simple understanding, DuPont analysis is usually utilized to break ROE into three parts; financial leverage, total asset turnover, and profit margin.
The table below shows the REO of Amanahraya REIT and AmFirst REIT for the financial years 2015 and 2016.
company Financial Year
2015 2016
Amanahraya REIT 0.365 0.487
AmFirst REIT 0.432 0.526
From the DuPont analysis, it can be seen that AmFirst REIT has been able to make higher returns than AmanahRaya REIT’s. Looking into each section of the DuPont analysis, investors were the difference between the performance of the two companies. AmFirst is performing better than AmanahRaya REIT, its competitor.
One reason for the difference, from the DuPont analysis, is the use of their financial leverage. The financial leverage for AmFirst REIT is much higher than that of AmanahRaya REIT in the two years. This essentially sped up time and allowed the company to borrow money and invest instead of waiting for cash to be available. Using the financial leverage is risky for the potential investors, but it has proved worthwhile for the AmFirst. The company has an ability to repay debts.
The asset turnover ratio is also faster for AmFirst REIT than AmanahRaya REIT’s. This is another testament that AmFirst is more efficient than its competitor. Also, there is a significant difference in the profit margins of the two companies. AmFirst has higher profit margins than its competitor indicating that that AmFirst is performing better than AmanahRaya REIT.
If AmFirst REIT needs to escalate their return on equity, it will be hard since it is currently very high. Currently, their financial leverage very high and would be unsafe to continue increasing it. Therefore, the company should emphasize on growing its asset turnover which has realized slow growth over the last two years. To achieve this, the management should focus on increasing the asset efficiency or hasten the period of collection.
AmFirst REIT, for the last two years, has been a successful company and it has invested a significant amount of money to grow and expand its business. The capital spending of the company has increased in the last two years (2015 and 2016) and is projected to even be higher in the next financial year. AmanahRaya REIT, on the other hand, has maintained in its capital spending for the last two financial years. The reason for this is that some sectors in the company reduced its capital spending for the period while some sectors slightly increased the capital spending hence, balancing or maintain the total capital expenditure of the entire company.
The beta coefficient is used to assess the volatility of security compared to the whole market. Theoretically, a beta of one is equal to the risk of the whole market. A coefficient larger than one shows that the security is highly volatile more than the market whereas a coefficient under one designates that the security is less risky than the market. A higher beta value indicates the probability of higher returns. However, the higher beta value comes with a risk of incurring huge losses. Both the companies, AmFirst REIT and AmanahRaya REIT, have a beta value that is greater than one.
Conclusion
The comparison of the two companies by looking at their financial performances, shoes that AmFirst REIT is fit to enter a lasting commitment over the next years. This is based on the performance of the overall business through the analysis, of financial ratios and stock performance which shows a potential growth of the business. In the last two years, AmFirst REIT has generated consistent returns for investors besides progressively increasing its dividends each year. The financial health ratios designate that AmFirst REIT is utilizing leverage to their advantage by taking on debts to fund its operations. The company’s liquidity is similarly much higher than that of its competitor.
Moreover, the efficiency ratios of AmFirst REIT indicate to the investors that the company is very competent in using assets to make significant revenues for investors. AmFirst REIT has increased its capital spending for the next financial year. This shows that the company is committed to generating revenues for its stockholders. Therefore, it will be good to do business with them.

References
Baños-Caballero, S., García-Teruel, P. J., & Martínez-Solano, P. (2014). Working capital management, corporate performance, and financial constraints. Journal of Business Research, 67(3), 332-338.
Brown, R. (2012). Analysis of investments & management of portfolios.
Delen, D., Kuzey, C., & Uyar, A. (2013). Measuring firm performance using financial ratios: A decision tree approach. Expert Systems with Applications, 40(10), 3970-3983.
Nobanee, H. (2014). Working capital management and firm’s profitability: an optimal cash conversion cycle. International Research Journal of Finance and Economics. March (120), 13-22.