Industry analysis (insurance) Dubai

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ARAB ORIENT INSURANCE: Arab orient insurance company started its operations in 1982 under a group of Al Futtaim Group. The company has been continuously growing at a sustainable growth with increase in profits as well as Net income. In FY07 the company’s income was around Dhs. 767 Million and Net Profit of Dhs. 136 million. This company is known as one of the best insurance company in the market as compared to its competitors. The company has a paid up capital of around Dhs. 250,000,000. The rating of Arab Orient Insurance is (A-) as of 2007 given by Standard and Poor (S&P). AOI is desired to fulfill the needs of its customers with the experience of 25 yrs in the market. They have a strong financial base which keeps them ahead of its competitors.

RATIO ANALYSIS OF ARAB OREINT INSURANCE: Financial results and its performance is measured through Ratio Analysis to check whether financially it is competitive or not.

1. Short Term Solvency or Liquidity Ratios: The first Ratio is current ratio which is (Current assets/Current Liabilities). AOI current ratio is 1.029 AED which means that AOI has Dhs 1.029 in current assets for every 1 Dhs in current liabilities. The second ratio is the quick ratio [(Current Assets-Inventory)/Receivables], which is 0.0639 times. The third ratio is cash ratio [(Cash + marketable Sec)/current liabilities], which is 0.056 times, that means that for every 1 Dhs of Liability Dhs 0.056 is Cash. Net working Capital Ratio is (NWC/Total Assets), AOI has NWC ratio of 0.0141.

2. Long Term Solvency or Financial Leverage Ratios: The first ratio in Long term Solvency ratios which companies calculates is Total Debt Ratio [(T. Assets-T. equity)/T. Assets]. AOI has Total Debt Ratio of 0.631 which is 63.10 %. This means that the company finances 63.10% of its Assets with Debts. The second ratio is Debt/Equity ratio (T. Debt/T. Equity), AOI has Debt/Equity Ratio of 1.710 times. The equity multiplier of AOI is 2.710 times. Long Term Debt ratio is (L. Term Debt/L. Term Debt + Equity), AOI has Long term debt ratio of 0.284. It means that the company has 28.4% of is its debts on long term Basis. The other ratio is Times interest earned ratio (EBIT/Interest) that is AOI has 8.784 times. Cash coverage ratio is [(EBIT + Dep)/Interest], AOI has Cash coverage ratio of 8.808 times.

3. Asset Utilization Turnover Ratios: The first ratio is Inventory turnover ratio (COGS/Inventory) that is AOI has Inventory turnover of 0.629 times. The second ratio is Receivables Turnover (Sales/Accounts Receivables), AOI has A/R Turnover of 1.269 times. NWC turnover is (Sales/NWC), AOI has NWC turnover of 35.95 %. The company’s fixed asset turnover is (Sales/net fixed assets) which is 1.014 Times. Total asset turnover is calculated as (sales/total assets) which is 0.508 that is 50.8%.

4. Profitability Ratios: The first ratio for profitability is Profit margin (Net income/sales), which the company has 0.133 that is 13.3%. The company is making a profit of 13.3% on its sales. The second ratio is Return on Equity (ROE) which is (Net income/ total equity) which is 27.7%. The third ratio is Return on Assets (ROA), (Net income/ Total Assets) which is 0.214 times.

5. Market Value Ratios: The first Ratio is Price Earnings Ratio (Price per share/Earnings per share), AOI has PE ratio of 2.4%. The earning per share of company is 2.4% of the price. The other ratio is Market to book ratio (M. Value per share/ Book value per share) that is 3.2 times.

COMPARATIVE RATIO ANALYSIS OF ALLIANCE INSURANCE (DUBAI)

1. Short Term Solvency or Liquidity Ratios: The first Ratio is current ratio which is (Current assets/Current Liabilities). Alliance Insurance current ratio is 1.019 AED which means that AOI has Dhs 1.019 in current assets for every 1 Dhs in current liabilities. The second ratio is the quick ratio [(Current Assets-Inventory)/Receivables], which is 0.0439 times. The third ratio is cash ratio [(Cash + marketable Sec)/current liabilities], which is 0.048 times, that means that for every 1 Dhs of Liability Dhs 0.048 is Cash. Net working Capital Ratio is (NWC/Total Assets), Alliance Inc has NWC ratio of 0.0147.

2. Long Term Solvency or Financial Leverage Ratios: The first ratio in Long term Solvency ratios which companies calculates is Total Debt Ratio [(T. Assets-T. equity)/T. Assets]. Alliance Inc has Total Debt Ratio of 0.581 which is 58.10 %. This means that the company finances 58.10% of its Assets with Debts. The second ratio is Debt/Equity ratio (T. Debt/T. Equity), Alliance Inc has Debt/Equity Ratio of 1.520 times. The equity multiplier of AOI is 2.510 times. Long Term Debt ratio is (L. Term Debt/L. Term Debt + Equity), AOI has Long term debt ratio of 0.354. It means that the company has 35.4% of is its debts on long term Basis. The other ratio is Times interest earned ratio (EBIT/Interest) that is Alliance Inc has 7.684 times. Cash coverage ratio is [(EBIT + Dep)/Interest], Alliance Inc has Cash coverage ratio of 8.50 times.

3. Asset Utilization Turnover Ratios: The first ratio is Inventory turnover ratio (COGS/Inventory) that is Alliance Inc has Inventory turnover of 0.615 times. The second ratio is Receivables Turnover (Sales/Accounts Receivables), Alliance Inc has A/R Turnover of 1.56 times. NWC turnover is (Sales/NWC), Alliance Inc has NWC turnover of 38.65 %. The company’s fixed asset turnover is (Sales/net fixed assets) which is 1.134 Times. Total asset turnover is calculated as (sales/total assets) which is 0.670 that is 67.0%.

4. Profitability Ratios: The first ratio for profitability is Profit margin (Net income/sales), which the company has 0.115 that is 11.5%. The company is making a profit of 11.5% on its sales. The second ratio is Return on Equity (ROE) which is (Net income/ total equity) which is 24.7%. The third ratio is Return on Assets (ROA), (Net income/ Total Assets) which is 0.184 times.

5. Market Value Ratios: The first Ratio is Price Earnings Ratio (Price per share/Earnings per share), Alliance Inc has PE ratio of 2.1%. The earning per share of company is 2.1% of the price. The other ratio is Market to book ratio (M. Value per share/ Book value per share) that is 2.9 times.

COMPARATIVE RATIO ANALYSIS OF DUBAI NATIONAL INSURANCE

1. Short Term Solvency or Liquidity Ratios: The first Ratio is current ratio which is (Current assets/Current Liabilities). DNI current ratio is 1.015 AED which means that DNI has Dhs 1.015 in current assets for every 1 Dhs in current liabilities. The second ratio is the quick ratio [(Current Assets-Inventory)/Receivables], which is 0.0449 times. The third ratio is cash ratio [(Cash + marketable Sec)/current liabilities], which is 0.065 times, that means that for every 1 Dhs of Liability Dhs 0.065 is Cash. Net working Capital Ratio is (NWC/Total Assets), DNI has NWC ratio of 0.023.

2. Long Term Solvency or Financial Leverage Ratios: The first ratio in Long term Solvency ratios which companies calculates is Total Debt Ratio [(T. Assets-T. equity)/T. Assets]. DNA has Total Debt Ratio of 0.583 which is 58.3 %. This means that the company finances 58.3% of its Assets with Debts. The second ratio is Debt/Equity ratio (T. Debt/T. Equity), DNA has Debt/Equity Ratio of 1.450 times. The equity multiplier of DNA is 2.514 times. Long Term Debt ratio is (L. Term Debt/L. Term Debt + Equity), DNA has Long term debt ratio of 0.364. It means that the company has 36.4% of is its debts on long term Basis. The other ratio is Times interest earned ratio (EBIT/Interest) that is DNA has 6.84 times. Cash coverage ratio is [(EBIT + Dep)/Interest], DNA has Cash coverage ratio of 6.85 times.

3. Asset Utilization Turnover Ratios: The first ratio is Inventory turnover ratio (COGS/Inventory) that is DNA has Inventory turnover of 0.539 times. The second ratio is Receivables Turnover (Sales/Accounts Receivables); DNA has A/R Turnover of 1.369 times. NWC turnover is (Sales/NWC), DNA has NWC turnover of 28.95 %. The company’s fixed asset turnover is (Sales/net fixed assets) which is 1.16 Times. Total asset turnover is calculated as (sales/total assets) which is 0.542 that is 54.2%.

4. Profitability Ratios: The first ratio for profitability is Profit margin (Net income/sales), which the company has 0.151 that is 15.1%. The company is making a profit of 15.1% on its sales. The second ratio is Return on Equity (ROE) which is (Net income/ total equity) which is 25.4%. The third ratio is Return on Assets (ROA), (Net income/ Total Assets) which is 0.219 times.

5. Market Value Ratios: The first Ratio is Price Earnings Ratio (Price per share/Earnings per share), DNA has PE ratio of 2.2%. The earning per share of company is 2.2% of the price. The other ratio is Market to book ratio (M. Value per share/ Book value per share) that is 3.0 times.

RECOMMENDATIONS AND SUGGESTIONS FOR ARAB ORIENT INSURANCE: Arab orient insurance is a well financial position company it has certain areas in which they can improve more. Through liquidity ratios we found that company has a strong liquidity backup but Cash ratio tells that company holds cash at a small scale and they have invested more in liabilities then in equity. The circulations of receivables are slow which makes them to lose cash requirement. Debt financing is high and the capital structure requires a change as they have structured their business on 70-30 basis. Long term debts are low which cost us more in short term. The company according to their capital structure should emphasize on borrowing on long term basis to increase profits and circulation of cash. The foreign ownership of shares is not allowed which restricts foreign investment in company and chances of growth become less.

SOURCE

1. Brealey, Myers and Marcus. (2002). Fundamentals of Corporate Finance. Prentice Hall.