Cash Flow Analysis: EMAAR PJSC Real Estate Company
January 5, 2022
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Emaar Properties PJSC is a real estate development company located in Dubai, United Arab Emirates. The organization mostly deals with shopping malls and retail, property, and hospitality. Emaar was founded in 1997 and is listed on the Dubai Stock Exchange market as a Public Joint Stock Company (Emaar Properties PJSC, 2016 a). One of the activities carried out by Emaar is the development of master-planned communities in Dubai. The organization has expanded its services to serve the international real estate market. The company has established various master-planned communities, such as Arabian Ranches, Dubai Marina, and Emirates Living (Emaar Properties PJSC, 2016 a). The current paper analyzes the cash flow statements of Emaar Properties for the 2014 and 2015 financial years. In the analysis, each item found under operating, investing, and financing categories of the cash flow statement is defined. A comparative analysis of the recorded figures is carried out by calculating the percentage decrease or increase of each cash flow item. The current paper explains the possible causes and implications of the percentage changes in the cash flow items, based on accounting literature and the provided notes to financial statements in the annual report. Finally, the paper provides certain recommendations on the ways the company can improve its cash flow.
Operating activities are the normal business activities that the organization carries out to meet its core objectives (Albrecht, 2007). Operating activities include the sale of products and services, purchase of inventories for resale, and incurring various operational expenses and paying those expenses. The operating activities of the company depend on its core business because various companies have different primary activities.
Depreciation of Property, Plant, and Equipment
Depreciation of property, plant, and equipment is wear and tear, as well as the impairment of possible costs or losses that are attributed to the company’s long-term assets like plant, property, and equipment. Normally, plant, property, and equipment are subject to wear and tear, as they cannot be used forever. Depreciation involves the allocation of the cost or expense of property, plant, and equipment over their useful lives.
The net depreciation charge for property, plant, and equipment has decreased in 2015 by 8.2%. The decrease implies that Emaar Properties reduced its property, plant, and equipment through sale or transfer. Therefore, there was no depreciation charged for some component(s) of the company’s property, plant, and equipment. The decrease in depreciation charge at Emaar properties signifies an improvement in the company’s performance and profitability. The reason for this assertion is that note 9 to the financial statements indicates that the company has managed to transfer its leasehold improvements from capital assets to investment properties (Emaar Properties PJSC, 2016 b). Therefore, there was no depreciation charged on the leasehold improvements in 2015. It is recommended that the company should put various capital assets to good use by converting them into investments, which would reduce the depreciation expenses for better performance in future.
Depreciation of Investment Properties
Depreciation of investment properties refers to the decrease in value of the company’s investment assets. The charge that is allocated to an investment property to reflect its impairment with time is its depreciation. Depending on the category of company investments, physical damage to such properties, like houses and other tangible assets, is inevitable. Emaar invested in land, buildings, plant and machinery, and furniture, fixtures, and others.
Emaar Properties’ depreciation of investment properties increased in 2015 by 10.1% (Emaar Properties PJSC, 2015). The augment in depreciation implies the investment in additional investment properties. Thus, additional depreciation charges were levied on the new investment properties. The increase is symbolic of the company’s performance improvement in investing. The reason for this claim is that note 10 of the 2015 financial statement shows the transfers of buildings and furniture, fixtures and others from property, plant, and equipment to investment properties. The company should go for more investments in property in order to enhance its performance and increased revenues.
Provision for or Reversal of Doubtful Debts
Provision for doubtful debts is an estimate of bad debts that may not be recovered by the company. Through experience, a firm can estimate the accounts receivable, whose payments it may not receive. Therefore, an organization like Emaar can use the historical information on payment trends of its clients to establish the amount to provide for doubtful debts.
The analysis indicates that Emaar Properties’ provision for doubtful debts exhibited a drastic increase of 166.2% in 2015 (Emaar Properties PJSC, 2016 b). An increase in the provision for doubtful debts may have been caused by the increase in customers with a repayment defaulting trend. Such an increase is bad for the company, as it may lose a significant amount of its anticipated revenues. The company should employ an aggressive debt collection approach or offer the incentives to clients to make the prompt payments to avoid accumulation of debts, which might lead to loss of revenues.
Provision for Employees’ End of Service Benefits
A provision for employees’ end of service benefits is the amount that an organization sets aside to pay the outgoing employees their good service to the company. Employees are paid when they resign, retire, complete their contract period successfully or when they are retrenched to meet the labor law provisions.
The provision for employees’ end of service benefits decreased by 10.7% in 2015, as compared to 2014 (Emaar Properties PJSC, 2016 b). The decrease implies a decrease in the number of employees who left Emaar. Note 19 to the financial statements indicate that substantial payments were made in 2015. Therefore, the company did not expect many employees to leave the company. It is recommended that Emaar properties should embrace the incentives to retain employees for long-term success.
Finance costs refer to interest costs and other charges that a firm incurs when it seeks to obtain the external financing. Normally, an organization borrows money from external parties to purchase or build the capital assets. The additional charges that organizations incur in order to obtain fianc? for various projects are their finance costs.
In 2015, Emaar incurred lesser finance costs than those of 2014. Thus, a decrease of 24% in the company’s finance costs was recorded. Such a decrease is an indication of reduction in the company’s sourcing of financing from external parties. Possibly, the company relied more on internal financing than external financing in 2015, which is good for the company’s performance. It is recommended that Emaar Properties should continue funding its projects through internal sources of finances, such as retained profits, rather than loans and borrowings to reduce its gearing and increase performance.
Loss or Gain on Property, Plant, and Equipment Disposal
Gain or loss on disposal of property, plant, and equipment emanates from the sale of a long-term or capital asset of a firm. On the one hand, a gain arises when a company revalues its asset and sells it at a higher price than the written-down value. On the other hand, a revaluation of a capital asset that leads to its sale at a lower price than its written value leads to a loss on disposal of property, plant, and equipment.
Emaar incurred a significant loss on disposal of property, plant, and equipment. A loss of 129.3% was recorded in 2015. The loss has originated from the sale of an asset at a lower than the written down value in 2015, compared to the sale of an asset at a higher than the written down value in 2016 (Emaar Properties PJSC, 2016 b). Such a loss brought negative consequences for the company, as it reduced its anticipated income. It is recommended that the company should adopt a better depreciation technique to enhance the reliable valuation of assets. The company should also maintain its objective of selling capital assets at their fair values to avoid the losses.
Liabilities no Longer Payable
A company may owe other companies or creditors some amount of money due to the purchase of inventory on credit or borrowings. When such liabilities are written off by the company’s creditors, it creates an account for liabilities that are no longer payable. Defaulting liability payments is bad to business, as it may hamper an organization’s credibility. It may not obtain finance or goods on credit in future, as it may have been categorized a bad debtor by its creditors. Consequently, core business operations may be negatively affected when the company lacks the ready cash to finance its operations.
From the performed analysis, it has been noted that Emaar Properties’ liabilities that are no longer payable reduced by 100% in 2015. The company had a large figure of liabilities that was no longer payable in 2014 (Emaar Properties PJSC, 2015). However, the amount was reduced to zero in the following year. A full value decrease in liabilities no longer payable was an implication that the company started paying its liabilities on time. The move was good for the company’s health because it can borrow and purchase the inventories in credit reliably, as its credibility has been restored. It is recommended that Emaar should ensure that it settles its liabilities promptly to maintain its positive credibility.
Write-off refers to the accounts cancelled by a company, either due to bad debts or obsolescence of the asset or the amount involved. A company can write off various assets or accounts in the course of its business.
It was noted that the amount of write-off greatly increased by more than 100% in 2015, compared to 2014. Such an infinite increase indicates that Emaar Properties incurred bad debts or had to write off some of its assets that had become obsolete. In case, the write emanated from bad debts, the company’s health condition could deteriorate if such write-offs persist. Emaar Properties should refine its debt collection strategies.
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Finance income is the income that is earned from temporary short-term investments. Market securities, foreign exchange gains, and debt gains earn a company’s finance income.
There was a huge decrease in the finance income earned by Emaar Properties of 125.1% in 2015. The decrease may have originated from losses in market securities, foreign exchanges, and debts. The company may have also decreased its investments in such short-term securities. The decrease implies a poor financial status of the company. It is recommended that Emaar should increase its investments in short-term securities and refine its foreign exchange rate movement projections.
Working Capital Changes
Working capital changes are the increases or decreases of a company’s working capital. An increase in current assets and a decrease in current liabilities may cause a significant working capital change.
It has established that the working capital of Emaar increased by 14.1% in 2015. The increase may have resulted from the company’s efforts of increasing its current assets and refusing its current liabilities. The increase in working capital is a good move for the company, as it enhances the company’s capability of meeting its short-term financial requirements. The company should invest more in its current assets and settle its liabilities on time in order to maintain its current status.
Inventories are the items or commodities that a company purchases for resale or the production of other products
There was a tremendous increase of 496.3% inventories at Emaar in 2015. The increase implies the company’s engagement in its core processes. As a result of business growth, the company had to purchase more inventories. It is recommended that the company should seek to sell its inventories to increase its profits.
Trade and Unbilled Receivables
Trade and unbilled receivables are a company’s due accounts that have not been paid by debtors. Debtors arise from the sale of a company’s services or products on credit.
It has been established that Emaar’s trade and unbilled receivables decreased by 130.8%. The decrease indicates that the company may not have made credit sales or debtors paid on time. It is an indication of a healthy performance. The organization should enhance its debt collection and client motivation strategies.
Due from Related Parties
The amount of money that is expected from subsidiaries and other affiliated organizations of a parent company are referred to as due from related parties.
There was a huge increase of 333.7% in the amounts due from the related parties. It is an indication of poor business practices by company’s subsidiaries. The parent should lay the restrictive measures to enhance the timely submission of due funds.
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Advances, Prepayments and Other Receivables
Advances are payments that a company receives before due time. Prepayments are payments that a company makes before they are due. Receivables are the anticipated payments from debtors.
Emaar Properties increased the prepayments that it made in 2015, which is an indication of a good business practice. The company should maintain its approach towards advances, prepayments, and other receivables.
Due to Related Parties
The amount that a parent company owes its subsidiaries is its amount due to related parties.
The amount that Emaar Properties increased by 98.6% in 2015. It is an indication of a bad business practice. The company should ensure that it settles the amounts that it owes its subsidiaries on time.
Accounts Payable and Accruals
Accounts payable are a company’s short-term liabilities, while the accruals are the accumulated bills that the company has not paid on their due date.
A percentage decrease of 3.2 was recorded in Emaar’s accounts payable and accruals. The company paid its bills and liabilities on time, which translates to good business practice. The company should continue making timely settlements of its bills and liabilities.
Advances and Security Deposits
Advances are the prior payments by customers, while security deposits are the amounts paid by clients to book assets.
A huge percentage increase of 266.8 in Emaar’s advances and security deposits increased, indicating that clients were satisfied by the company’s products. It is recommended that the organization should improve its services and products to attract more clients.
Retentions are the amounts due to contractors held by a company to enhance the successful completion of the contractor’s part.
The amount of retentions that Emaar owed contractors had reduced by 20.3%. Such a decrease implies that the company’s engagement with contractors declined or it paid the due retentions. Emaar engaged in good business practices with its contractors.
Deferred income is the revenue that a company has not earned yet. The money has been received, but the goods or services have not been delivered.
Emaar’s deferred income decreased in a tune of 156%, indicating that customer loyalty may have declined. The company should revolutionize its offers to boost the customer loyalty.
Employees’ End of Service Benefits Paid
Employees’ end of service benefits paid refer to the amount that a company has paid to its leaving employees for their good work as a service package.
The amount paid by Emaar to its employees decreased by 93.9%. Thus, the company had paid its employees in previous year, while the employees who demanded service benefits decreased. The company should continue motivating its employees to stay longer.
Investing activities of a business entail buying the assets for use in the organization (Albrecht, 2007). For instance, a company may purchase plant, property, and equipment to aid in its production services. Additionally, an organization may decide to buy the financial assets, such as investments in shares and bonds of other companies.
Purchase of Property, Plant, and Equipment
The amount that a company incurs to buy capital assets, such as property, plant, and equipment is an investing activity
Emaar’s spent 68.8% more on the purchase of plant, property, and equipment in 2015 (Emaar Properties PJSC, 2015). Thus, the company increased its investments in capital assets, which is ideal for the performance improvement. The company should continue investing in property, plant, and equipment, as long as they contribute to the increased productivity.
Amount Incurred on Investment Properties
Companies spend money in purchasing investment properties. The amount of money paid to build or secure an investment property is referred to as the amount incurred on investment properties.
The amount that the company incurred to secure investment properties went down by 58.1%. The company may have decreased its investments in properties. It is recommended that Emaar should continue investing in properties to increase its revenues.
It is the amount of money earned by a company from companies and individuals that it has loaned.
The amount of interest received by Emaar recorded an increase of 36.4%. The increase originated from the augmentation of value of interest earned in 2015, as compared to 2014 (Emaar Properties PJSC, 2015). The company’s business was on a good track, and it should continue investing in loans to earn more revenues.
Proceeds from Disposal of Property, Plant, and Equipment
It is the amount that a company receives when it sells its capital assets after revaluing them.
Emaar Properties recorded a decrease of 64.7% in the proceeds from disposed capital assets. The company may have sold its capital assets at prices lower than their fair value. The company should desist from such activities and ensure that it disposes its capital assets at their fair values in future.
Deposits under Lien or Maturing after Three Months
They are the short-term deposits made to banks using the existing collaterals. They refer to short-term loans sought by a company.
There was a remarkable decrease of deposits made under lien by Emaar. The company’s sourcing of finances through short-term loans had increased significantly. It is recommended that the company should fund its operations through internal funds.
Financing activities are those activities that an organization engages in to raise money to fund its business by other means, apart from operations (Albrecht, 2007). For instance, a company may borrow money from creditors or sell its shares to the public to raise funds.
Repayment of Parent Company Loan
It refers to the payments that the parent company makes to a loaning company to offset a loan that had been earlier advanced.
There was a drastic decrease in loan repayments to zero. It is an implication that the company had paid its loan in full during the 2014 financial year (Emaar Properties PJSC, 2015). Timely repayments of loans are beneficial, as they decrease interest expenses that the company incurs. Therefore, the company should adopt the same approach in future to reduce expenses.
Proceeds from Interest-Bearing Loans and Borrowings
This is the amount that a company receives as repayments of the loans that it had offered to other companies or individuals.
The company did not receive any proceeds from interest-bearing loans and borrowings in 2015 because they were short-term and had been repaid by the end of 2014 (Emaar Properties PJSC, 2016 b). The company should lend out more loans to earn more interest.
Repayment of Interest-Bearing Loans and Borrowings
They are the payments that a company makes to other companies and individuals to offset the loans that it had acquired before.
By 2015, Emaar had no repayments to make to offset interest-bearing loans and borrowings that it owed to other companies because it had repaid them in full in 2014.
Proceeds from Issuance of Sukuk
A Sukuk is a trust certificate issued by EMG Sukuk Limited that is wholly owned by Emaar Properties. Repayments will be made in 2024 (Emaar Properties PJSC, 2016 b).
There were no proceeds from issuance of Sukuk paid in 2015 because the Sukuk is not yet mature for repayment till 2024.
Dividends are the amounts paid to shareholders by the company out of profits. Every time a company makes profits, it shares some of it among the shareholders.
There were no dividends paid in 2015 because the proposed cash dividends had not been approved. It is expected that the cash dividends to shareholders will be approved in the near future. Dividends reflect wealth creation for shareholders by the company and should be paid whenever, there are substantial profits recorded.
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Finance Cost Paid
The cost that a company incurs in securing loans or long-term finances is referred to as finance cost.
Emaar’s finance cost paid decreased by 13.9% because the company reduced the amount of external financing in 2015, compared to 2014. It is recommended that the company should continue substituting external financing with internal financing.
It has been established that Emaar Properties PJSC recorded positive performance during the two fiscal years under review. For instance, there was an increase of 29.5% in the net cash flows from operating activities in 2015, as compared to 2014. However, net cash flows from investing activities recorded a decrease of 330.6%, as the company made numerous investments in 2015. The company’s net cash flows from financing activities went up by 83.9% in 2015, showing a positive outcome. Consequently, there was an increase of the cash and cash equivalents of the company by 80.2%, confirming excellent performance.