Financial Ratio Analysis of Zain Vs.

STC
Telecommunication Services Industry

EMBA Program
BUSE 602: Corporate Finance

Student name: Nada Baajajah

ID: 2002041
Table of Contents

Introduction

1. Executive Summary………………………………………….…………...

2. Company Profile…………...……………………………………………...

Firm Analysis

1. Enteral comparison …………………...………………………………......

2. External comparison …………………..………………………………….

Investment decision

1. Recommendation………………………………………………………….

2. Conclusion ………………………………………………….…………….

Appendix ………………………………………………………………………...

References …………………………………………………………………….....

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Introduction:

EXECUTIVE SUMMARY:

This report evaluates and measures the ratio analyses of different businesses operating in
Saudi Arabia as well as listed in the Saudi Stock Exchange (Tadawul). The ratios performed to
weigh the performance of the businesses include profitability ratios, liquidity ratios, asset
utilization ratio and debt utilization ratio for two sequential years that are 2017 and 2018 for two
companies in the same industry. In this regard, the companies that were chosen to be analyzed are
ZAIN Saudi Arabia and STC Saudi Arabia. Both the companies are of telecommunication
industry and are dealing in Telecom business for many years. The companies are well reputed in
the market and deal in a very wide range of Telecom services.

COMPANY PROFILE (1):

Company name: Mobile Telecommunication Company Saudi Arabia

Trading name: ZAIN KSA
Industry Group: Telecommunication Services
Founded: 2008
Headquarters: Riyadh, Saudi Arabia
Company Code in Tadawul: 7030
Website: www.sa.zain.com

Mobile Telecommunications Company Saudi Arabia (Zain KSA), provides mobile

telecommunication services in the Kingdom of Saudi Arabia in which it operates, purchases,
delivers, installs, manages, and maintains telecommunications services.

COMPANY PROFILE (2):

Company name: Saudi Telecom Company

Trading name: STC
Industry Group: Telecommunication Services
Founded: 1998

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Headquarters: Riyadh, Saudi Arabia
Company Code in Tadawul: 7010
Website: www.stc.com.sa

Saudi Telecom Company is STC offering variety of ICT solutions and digital services in
several categories including telecommunication, IT, financial technology, digital media,
cybersecurity, and other advanced digital solutions, with that we are leading the digital
transformation nationally and regionally.

Firm Analysis:

INTERNAL COMPARISON:
Here will present internal comparison for ZAIN Co., the analysis will show the variance that
have been done in ZAIN Co. during 2018 and 2017 years according to the financial statements of
ZAIN Co. announced in Tadawul com.sa

PROFITABILITY RATIOS:

Profitability ratios are used to weigh and measure the ability of the organization or business to
generate the profits associated with its revenues, equity, assets in balance sheets and cost of
operations. Profitability ratios show the performance of the business in the market or industry and
it is mostly utilized in analyses of finance for the business or organization. (Why Profitability
Ratios Matter.2020)

1) RETURN ON ASSETS:
This ratio is utilized to observe how the business is using its resources or assets to generate
profits and revenues. This calculates the return on the basis of how effectively; the
business is operating with the utilization of its assets. It is calculated by dividing the net
income with the total assets of the business.
2017:

= Net income / Total assets

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 = SAR11,539 / SAR25,940,128

= 0.04%

2018:

= Net income / Total assets

= SAR332,362 / SAR26,323,310

= 1.26%

Analysis and Comparison:

The utilization of assets by Mobile Telecommunication was more effective in 2018 than in 2017.
The company generated higher percentage of net income in 2018 of 1.26% and lower in 2017 of
0.04%.

2) RETURN ON EQUITY:
This ratio helps to assess the return on equity by the business or organization. Higher
returns on equity could better preserve the expansion or growth of the business. It is
calculated by dividing the net income with the total equity of shareholders.
2017:
= Net income / Shareholder equity

= SAR11,539 / SAR3,563,561

= 0.32%

2018:

= Net income / Shareholder equity

= SAR332,362 / SAR4,012,248

= 8.28%

Analysis and Comparison:

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 The return on Equity of Mobile Telecommunication is higher in 2018 than 2017, which
shows that company generated higher income for the shareholders in 2018. This is positive
for company as investment in company will increase and value of shares will rise.

3) PROFIT MARGIN:
This helps to determine the profitability of the business or organization at different levels
of cost that comprises of net profit margin, gross profit margin, pre-income tax margin and
operational margins. The ratio used for the business is the gross profit margin to evaluate
and measure its profitability in the years 2017 and 2018. It is calculated by dividing the net
sales after subtracting the cost of revenue with the net sales of the business.
2017:
= Net Income / Net Sales
= SAR11,539 / SAR7,305,822
= 0.16%

2018:

= Net Income / Net Sales

= SAR332,362 / SAR7,530,527
= 4.41%

Analysis and Comparison:

The net profit margin of the company has improved significantly from 2017 to 2018,
which illustrates that cost of production was comparatively lower in 2017.

LIQUIDITY RATIO:
These ratios help to determine the ability or capability of the business to settle its obligations or
debts. It is also utilized to assess the margin of safety for the business or organization. The mostly
used liquidity ratios include the current ratio, cash ratio, and quick ratio. These ratios generally
used to measure and evaluate the proficiency of business to pay its short-term liabilities or
obligations. It shows the aptitude of the business to transform its assets into quick cash to pay off
the obligation. (Bragg, S.2020)

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 1) CURRENT RATIO:
This ratio assists to measure the ability of the business to settle its liabilities with the
current assets. Higher current ratios show a healthier and better position of liquidity for the
business or organization. It is calculated by dividing the current assets of the business with
its current liabilities.
2017:
= Current Assets / Current Liabilities
= SAR3,652,539 / SAR11,488,310
= 0.32

2018:
= Current Assets / Current Liabilities
= SAR3,721,570 / SAR7,351,606
= 0.51

Analysis and Comparison:

The current ratio of the company was better in 2018 than in 2017. In 2018 the company
increased its current assets considerably which had positive impact on current ratio.

2) QUICK RATIO:
This ratio helps to assess the ability of the business to settle its current liabilities with its
assets that are the most liquid ones. It eliminates the involvement of inventories in the
calculation as it could not be easy to trade off them quickly. Therefore, it is also identified
as the Acid test ratio and it is calculated by dividing the current assets after subtracting the
inventories with the current liabilities.
2017:

= Current Assets – Inventory / Current Liabilities

= SAR3,652,539 – 103,959 / SAR11,488,310
= 0.31

2018:

= Current Assets – Inventory / Current Liabilities

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 = SAR3,721,570 – 223,005 / SAR7,351,606
= 0.48

Analysis and Comparison:

The quick ratio of the company is favourable in 2018 and it has positive trend. The
inventory increased in 2018 as well as the current liability decreased.

OVERALL, The liquidity of cash and cash equivalent of Mobile Telecommunication is also very
low. In 2018, it is lower than 2017 therefore, the company should strongly work to increase its
cash in order to improve its liquidity.

ASSET UTILIZATION:
This ratio helps to measure and weigh the value of sales and revenues of the business linked with
the assets. This is also known as the indicator of the productivity and efficiency which the
business is utilizing to generate profits through its assets. (Asset Turnover Ratio.2020)

1) ASSET TURNOVER RATIO:

The higher asset utilization or turnover explains the effective and operative use of assets
by the business. Turnover ratio for the assets is calculated by dividing the sales of the
business with assets at start add assets at the end after separating by 2.
2017:
= Sales / Total assets
= SAR7,305,822 / SAR25,940,128
= 0.28 times

2018:
= Sales / Total assess
= SAR7,530,527 / SAR26,323,310
= 0.29 times

Analysis and Comparison:

The asset utilization of the company is almost same in both years. However, in 2018 it improved
slightly which shows a positive sign for the company.

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 2) RECEIVABLE TURNOVER:
The account receivable turnover ratio evaluates the effectiveness of the company to collect
its money from its creditor clients. This ratio evaluates how fast does a company collects
its short-term debt owed by its clients.

2017:

= Net Credit Sales / Average Accounts Receivable

=7,305,822 / ((1,954,047 + 1,674,426)/2)

=4.03 times

2018:

= Net Credit Sales / Average Accounts Receivable

= 7,530,527/ ((1,954,047 + 1,864,749)/2)
=3.94 times

Analysis and Comparison:

The receivable turnover of Zain KSA was better in 2017 than in 2018.

3) AVERAGE COLLECTION PERIOD:

The average collection period counts the number of a company takes to collects its debt
from debtors.
2017:

= 365 / 4.03

= 91 days

2018:

= 365 / 3.94

= 93 days

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Analysis and Comparison:
The collection period also shows that the company took more days to collect the account
receivable in 2018 compared with 2017.

4) INVENTORY TURNOVER:
Inventory turnover is the number of times a company sells and replaces its stock of goods
during a period. Inventory turnover provides insight as to how the company manages costs
and how effective their sales efforts have been.

2017:
= Sales / Inventory

= 7,305,822 / 103,959

= 70.28 times

2018:
= Sales / Inventory

= 7,530,527 / 223,005

= 33.77 times

Analysis and Comparison:

The inventory turnover of Zain KSA was favorable in 2017 than in 2018.

5) FIXED ASSET TURNOVER:

A higher fixed asset turnover ratio indicates that a company has effectively used
investments in fixed assets to generate sales.
2017:
= Sales / Fixed assets

= SAR 7,305,822/ SAR 21,652,508

= 0.34 times

2018:
= Sales / Fixed assets

= SAR 7,530,527/ SAR 22,378,735

= 0.34 times

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Analysis and Comparison:
The fixed asset turnover of Zain KSA is constant in both years.

DEBT UTILIZATION:
These ratios help assist to measure and value the degree of leverage, a business or organization
holds. This ratio is expressed in terms of percentage or decimal and it shows the percentage or
amount of assets funded by liabilities that are held by the business. The greater ratios of debt
utilization show that the business or organization embraces higher liabilities than the assets. (Debt
Utilization Ratios.2020)

1) DEBT TO TOTAL ASSET RATIO:

This ratio analyses the number of debts linked with the assets of the business and it assists
to compare the leverage also. The higher degree of this ratio indicates the higher risk
associated with finance. It is calculated by dividing the total debt of the business with its
total assets.
2017:
= Short term debt + Long term debt / Total Assets
= (SAR199,564 + SAR38,482) / SAR25,940,128
= SAR238,046 / SAR25,940,128
= 0.92%

2018:
= Short term debt + Long term debt / Total Assets
= (SAR412,971 + SAR336,325) / SAR 26,323,310
= SAR749,296 / SAR 26,323,310
= 2.85%

Analysis and Comparison:

The debt to assets ratio implies that company has increased its debt by higher ratio than
increasing its assets in 2018. The company had lower amount of debt against its assets in

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 2017 which increased by more than double in 2018. Although, the company still has small
amount of debt compared to its assets but the company should control it.

2) TIMES INTEREST EARNED:

This ratio measures the ability of the company to pay off its current interest charges with
income generated in current year.
2017:
= Earnings Before Interest / Interest Expense
= 903,242 / 910,093
=0.99 times

2018:
= Earnings Before Interest / Interest Expense
= 1,219,226 / 930,732
=1.31 times

Analysis and Comparison:

The times interest earned improved in 2018 than in 2017. The company has better income
to pay off its interest in 2018.

3) FIXED CHARGE AVERAGE:

There are no fixed charges paid by Zain KSA, therefore, the fixed charge average cannot
be calculated.

EXTERNAL COMPARISON:

Here will present external comparison for ZAIN Co. Vs. STC Co., the analysis will show the
variance that have been done in ZAIN Co. comparing with STC Co. during 2018 year according
to the financial statements of ZAIN Co. and STC Co. announced in Tadawul com.sa

PROFITABILITY RATIOS:

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 1) RETURN ON ASSETS:
STC (2018):
= Net income / Total assets
= SAR10,779,771 / SAR111,948,645
= 9.63%

ZAIN (2018):
= Net income / Total assets
= SAR332,362 / SAR26,323,310
= 1.26%

Analysis and Comparison:

The (Return on Asset or ROA) of STC is favorable than Zain KSA, as STC has generates high
Net Income.

2) RETURN ON EQUITY:
STC (2018):
= Net Income / Shareholder Equity

= SAR10,779,771 / SAR65,513,684

= 16.45%

ZAIN (2018):
= Net Income / Shareholder Equity

= SAR332,362 / SAR4,012,248

= 8.28%

Analysis and Comparison:

STC has generated better Return On Equity than Zain.

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 3) PROFIT MARGIN:
STC (2018):
= Net Income / Net Sales

= SAR10,779,771 / SAR51,963,243

= 20.74%

ZAIN (2018):
= Net Income / Net Sales
= SAR332,362 / SAR7,530,527
= 4.41%

Analysis and Comparison:

The margin of STC is higher than ZAIN. This shows that STC has higher gross profit than
ZAIN in 2018

LIQUIDITY RATIOS:
1) CURRENT RATIO:
STC (2018):
= Current Assets / Current Liabilities

= SAR47,820,120 / SAR32,035,106
=1.49

ZAIN (2018):
= Current Assets / Current Liabilities

= SAR3,721,570 / SAR7,351,606
= 0.51

Analysis and Comparison:

The current ratio of STC is more favourable and reliable than Zain KSA. In 2017 and 2018
STC shows positive liquidity whereas Zain KSA shows negative liquidity.

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 2) QUICK RATIO:
STC (2018):
= Current Assets – Inventory / Current Liabilities

= SAR47,820,120 - SAR 787,456 / SAR32,035,106

= 1.47

ZAIN (2018):
= Current Assets – Inventory / Current Liabilities
= SAR3,721,570 – 223,005 / SAR7,351,606
= 0.48

Analysis and Comparison:

The quick ratio of STC also illustrates that this company has better liquidity than Zain
KSA in 2018.

ASSET UTILIZATION:
1) ASSET TURNOVER RATIO:
STC (2018):
= Sales / Total Assets
= SAR51,963,243 / SAR111,948,645
= 0.46 times

ZAIN (2018):
= Sales / Total assess
= SAR7,530,527 / SAR26,323,310
= 0.29 times

Analysis and Comparison:

The asset utilization of Zain KSA is efficient than STC in 2018. Zain KSA generated
higher turnover than STC in 2018.

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 2) RECEIVABLE TURNOVER:

STC (2018):
= Net Credit Sales / Average Accounts Receivable
= 51,963,243 / ((20,368,531 + 14,422,178)/2)
= 2.99 times

ZAIN (2018):
= Net Credit Sales / Average Accounts Receivable
= 7,530,527/ ((1,954,047 + 1,864,749)/2)
=3.94 times

Analysis and Comparison:

The receivable turnover of Zain KSA is better than STC in 2018 financial year.

3) AVERAGE COLLECTION PERIOD:

STC (2018):
=365 / 2.98

=122 days

ZAIN (2018):

= 365 / 3.94

= 93 days

Analysis and Comparison:

This ratio also shows that Zain KSA took less days to cover its payments than STC in
2018.

4) INVENTORY TURNOVER:

STC (2018):
= Sales / Inventory

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 = 51,963,243 / 787,456

= 65.99 times

ZAIN (2018):
= Sales / Inventory

= 7,530,527 / 223,005

= 33.77 times

Analysis and Comparison:

In 2018 STC has better inventory turnover than Zain KSA.

5) FIXED ASSET TURNOVER:

STC (2018):
= Sales / Fixed assets

= SAR51,963,243 / SAR 41,920,409

= 1.24 times

ZAIN (2018):
= Sales / Fixed assets

= SAR 7,530,527/ SAR 22,378,735

= 0.34 times

Analysis and Comparison:

STC generated higher sales from utilizing its fixed asset in 2018 year than that of Zain KSA,
therefore fixed asset turnover of STC is higher.

DEBT UTILIZATION:

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 1) DEBT TO ASSET RATIO:
STC (2018):
= Short term debt + Long term debt / Total Assets
= (SAR320,533 + SAR3,965,479) / SAR111,948,645
= SAR4,286,012 / SAR111,948,645
= 3.83%

ZAIN (2018):
= Short term debt + Long term debt / Total Assets
= (SAR412,971 + SAR336,325) / SAR 26,323,310
= SAR749,296 / SAR 26,323,310
= 2.85%

Analysis and Comparison:

The debts utilization of STC is better than Zain KSA in 2017 and 2018. Zain KSA has
higher amount of debt as compared to STC, whereas STC debt shows diminishing trend.

2) TIMES INTEREST EARNED:

STC (2018):
= Earnings Before Interest / Interest Expense
= 12,245,225 / 398,814
= 30.7 times

ZAIN (2018):
= Earnings Before Interest / Interest Expense
= 1,219,226 / 930,732
=1.31 times

Analysis and Comparison:

In 2018 STC has way higher income before interest than the interest expense and therefore
has better times interest earned.

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 3) FIXED CHARGE AVERAGE:

STC (2018):
= 12,245,225 / 747,667
= 16.38 times

ZAIN (2018):
There are no fixed charges paid by Zain KSA, therefore, the fixed charge average cannot
be calculated

Investment Decision:

RECOMMENDATION:

The above analyses of the businesses shows that it is better to invest in the company named as
STC communication as the quick ratio of the this business can be seen increasing from 1.37: 1 in
2017 to 1.42: 1 in 2018 which shows the betterment in the performance of the business and it
seems to be less risky for the investors

CONCLUSION:
According to the ratio analyses considered above, it could be determined that the business of
STC is performing well on the basis of returns as compared to the ZAIN KSA. Return on assets
and equity of STC is higher than that of the ZAIN KSA and cash ratios of STC are also better.
Investing in STC could be a suitable option for getting good returns as this business is offering
higher returns. Cash ratios of ZAIN KSA are better but that does not means the firm has a higher
ability to pay off its obligations or current liabilities with the cash and cash equivalents which
lowers the risk of loss to the investors.

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Appendix:

Statement of Income ZAIN KSA:

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Balance Sheet ZAIN KSA:

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Cash Flow ZAIN KSA:

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Statement of Income STC:

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Balance Sheet STC:

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Cash Flow STC:

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References:

1) Why Profitability Ratios Matter. (2020). Retrieved 11 March 2020, from

https://www.investopedia.com/terms/p/profitabilityratios.asp
2) Bragg, S., & Bragg, S. (2020). Liquidity ratios — AccountingTools. Retrieved 11 March
2020, from https://www.accountingtools.com/articles/2017/5/13/liquidity-ratios
3) Asset Turnover Ratio. (2020). Retrieved 11 March 2020, from
https://www.investopedia.com/terms/a/assetturnover.asp
4) Debt Utilization Ratios. (2020). Retrieved 11 March 2020, from
http://oer2go.org/mods/en-boundless/www.boundless.com/business/textbooks/boundless-
business-textbook/financial-statements-18/ratio-analysis-and-statement-evaluation-
108/debt-utilization-ratios-507-7923/index.html
5) Zain.com. 2020. Mobile Telecommunications Company. [online] Available at:
<https://zain.com/annualreport2018/en/consolidated.html> [Accessed 12 March 2020].
6) Stc.com.sa. 2020. STC Annual Report 2018. [online] Available at:
<https://www.stc.com.sa/stc-annual-report-2019/financials.html> [Accessed 12 March
2020].
7) Company Details – Tadawu ZAIN KSA and STC from https://www.tadawul.com.sa/

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