Class 002

Name ID#
Ehab Basil Nazmi 201501244
Bader Adel Abduhusain 201501591
Ali Mahmood Ghuloom 201400929
Mustafa Ahmed Habib 201400253
Hamad A.Salam Ahmed 201601634
Sayed Hadi Faisal Ebrahim 201501011

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Table of Contents
Introduction: ................................................................................................................................................. 5
Task 1: ........................................................................................................................................................... 5
Liabilities Comparisons and Common liabilities: .......................................................................................... 5
ALAHLIA liabilities ..................................................................................................................................... 5
Index:..................................................................................................................................................... 6
Vertical Analysis for Al Ahlia’s Liabilities: .............................................................................................. 6
INOVEST liabilities: .................................................................................................................................... 7
Index:..................................................................................................................................................... 8
Vertical Analysis for Inovest’s Liabilities: .............................................................................................. 8
Compliance with IAS 37: ............................................................................................................................... 9
Recommendations: ....................................................................................................................................... 9
Task 2: ........................................................................................................................................................... 9
Investing activities: ..................................................................................................................................... 10
Inovest: ................................................................................................................................................... 10
Ahlia: ....................................................................................................................................................... 10
Financing activities: ..................................................................................................................................... 11
Inovest: ................................................................................................................................................... 11
Ahlia: ....................................................................................................................................................... 11
Al-Ahlia compliance with IAS7 .................................................................................................................... 11
Operating Activities................................................................................................................................. 12
Investing Activities .................................................................................................................................. 13
Financing Activities ................................................................................................................................. 14
Recommendation........................................................................................................................................ 15
1. Direct Method ................................................................................................................................. 15
2. Disclose the Revenues and Expenses.............................................................................................. 15
3. Clarify Some Information ................................................................................................................ 16
Task 3: ......................................................................................................................................................... 16
Introduction: ............................................................................................................................................... 16
Company A: Alba ........................................................................................................................................ 17
Liquidity ratios ............................................................................................................................................ 17
1. Current Ratio ................................................................................................................................... 17
2. Quick/Acid-Test Ratio ..................................................................................................................... 17

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 3. Cash Ratio ....................................................................................................................................... 17
Interpretation: ............................................................................................................................................ 18
1. Current Ratio ................................................................................................................................... 18
2. Quick/Acid-Test Ratios .................................................................................................................... 18
3. Cash Ratio ....................................................................................................................................... 19
Profitability Ratios....................................................................................................................................... 19
1. Return on Assets(ROA).................................................................................................................... 19
2. Return on Equity(ROE) .................................................................................................................... 19
3. Return on Sales(ROS)/Profit Margin ............................................................................................... 19
Interpretation ............................................................................................................................................. 20
1. Return on Assets(ROA).................................................................................................................... 20
2. Return on Equity(ROE) .................................................................................................................... 20
3. Return on Sales(ROS)/Profit Margin ............................................................................................... 20
Investments Ratio/Market Value Ratios ..................................................................................................... 21
1. Price to Earnings Ratio .................................................................................................................... 21
2. Dividend Yield ................................................................................................................................. 21
3. Book Value ...................................................................................................................................... 21
Interpretation ............................................................................................................................................. 22
1. Price to Earnings Ratio .................................................................................................................... 22
2. Dividend Yield ................................................................................................................................. 23
3. Book Value ...................................................................................................................................... 23
Company B: Gulf Hotel Bahrain ................................................................................................................. 24
Liquidity Ratios ............................................................................................................................................ 24
1. Current Ratio ................................................................................................................................... 24
2. Quick Ratio ...................................................................................................................................... 24
3. Cash Ratio ....................................................................................................................................... 25
Profitability Ratios....................................................................................................................................... 25
1. Return on assets- ............................................................................................................................ 25
2. Return on equity ............................................................................................................................. 26
3. Return on sales/Profit margin ......................................................................................................... 26
Investment ratios ........................................................................................................................................ 27
1. P/E ratio- ......................................................................................................................................... 27
2. Dividend yield.................................................................................................................................. 27

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 3. Book value ....................................................................................................................................... 28
Conclusion: .................................................................................................................................................. 28
Journalizing ............................................................................................................................................. 29
Task 4: ......................................................................................................................................................... 31
Calculations ............................................................................................................................................. 33
References: ................................................................................................................................................. 34
Appendix ..................................................................................................................................................... 36

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Introduction:
The first aim of this report is to identify and compare the current, non-current liabilities between
INOVEST B.S.C. and ALAHLIA Insurance Company. Also, to explain the common and unique liabilities in
these two companies. The second aim is to evaluate the preparing of provisions and contingencies of
INOVEST in compliance to IAS 37 and give some valid recommendations to improve their preparation.

Task 1:

Liabilities Comparisons and Common liabilities:

Unearned premium, also referred to as advance from client in Inovest’s statements, is a current liability
where the profit related to the time remaining on an insurance, having 36.70% of Al Ahlia’s total liabilities
be unearned premium, which corresponds to 5,942,100BHD, taking the limited data into consideration, it
indicated that the company is operating well because high unearned premium for an insurance company
naturally means it has a large customer base. Inovest’s unearned premium adds up to 18.8% of their
liabilities, which is 8,845,961BHD, making it much larger than Al Ahlia’s unearned premium. (Staff, 2017)

Accruals and other payables are usually non-current liabilities concerning expenses for goods or services
in which the invoices were not yet received. Ahlia’s is 5.8% of their total liabilities putting it at 938,849BD
while Inovest’s is 12.4% putting it at 5,845,892BHD. Inovest’s much higher accruals indicates that the
company tends to operate on liabilities much more often than Al Ahlia does and can afford to go into debt
much more often.

ALAHLIA liabilities
Outstanding claims reserves are liabilities that occur when an insurance company gets claims that are not
settled. Having 40.20% of their liabilities consist of outstanding claims reserves indicates that most of their
liability comes from their natural operation as an insurance company (moneyterms, 2017).

Unearned commissions occur when a policyholder cancels their insurance and the remaining amount
must be returned to them. Having 2.4% of their total liability attributed to unearned commissions leads
us to believe that policyholders are satisfied with Al Ahlia’s services (Setnor Byer Insurance & Risk, 2017).

Insurance and Reinsurance Companies: is insurance for insurance company, it is used to help shoulder the
burden when a large claim is made. In this case, Ahlia is the reinsurer. Having 2.9% of their liability means
that Ahlia must pay another insurance company to provide help in case facing an order that it cannot
cover, and it means that Ahlia does not handle big orders usually (Merkel, 2017).

In the company’s statement of financial positions several liabilities were grouped together under a single
title referred to as other payables, these liabilities were mentioned by name in the notes section of the
statements. First liability was known as garage payable, it is assumed that this is what the company owes
to garages for the repair of policyholder vehicles. Unclaimed dividends were written under financing
activities in the cash flows statement, this indicates that unclaimed dividends in this case were a long-
term liability. Also, there is another liability under the title other payables which is provision for leave

5
salary and air passage this can be defined as an obligation raised when an employee leave for a prepaid
vacation and it is the lowest percentage at 0.40% due to low number of employees (knowledgiate.com,
2017).

Index:
Vertical Analysis for Al Ahlia’s Liabilities:

ALAHLIA Liabilities Amount in BHD %

Garage payable 566,891 3.50

Unclaimed reserves 431,462 2.70

Accrued expense and other payables 938,849 5.80

Provision for leave salary and air passage 68,869 0.40

Total Other payables 2,006,071 12.40

Outstanding claims reserve 6,484739 40.20

Unearned gross premium 5,942,100 36.70

Unearned commissions 392,232 2.40

Policyholders 702,993 4.40

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 Insurance and reinsurance company 464,684 2.90

Employees terminal benefits 154,769 1.00

Total liabilities 16,147,588 100

INOVEST liabilities:

In Inovest’s consolidated financial statement, under the title account payable there are seven liabilities
accounts however in this paragraph, the unique ones will be mentioned. The first one is lease rent payable
where Inovest signed a contract to rent a building for 50 years making it a long-term liability. The rent
payable is worth 40.2% from the total liabilities which indicates that most of Inovest liabilities are used in
assets for their operations. Additionally, case compensation and other contingencies are provisions for
legal fees because Inovest had a lot of historical legal claims, so they put a provision for such legal
obligations with 7% of the total liabilities.

There is another debt under the title other liabilities which is amounts to related parties, the parties were
not specified in the financial notes related to the statements. Nerveless, the amount is small which is
0.10% from the total liabilities and there was some useful information about the amount which was
unsecured, had no fixed payment and bear no profit beside it was authorized by Inovest groups’
management.

Trade payable is the amount Inovest owes to other companies for goods made or delivered and services
performed and not receiving full compensation. Trade payable represents 5.9% of Inovest’s liabilities, it is
natural for it to incur this type of liability because it has ownership over multiple companies.

Finally, the last liability under the title account payable retention payable compromises 2.5% of Inovest’s
total liabilities. Retention payable is an amount taken from a contractor and owed back to them to ensure
their work is complete. The amount totals up to $3 million leads us to believe they’re working on multiple
construction projects but not enough information is disclosed to deduce a sufficient explanation.
(Designingbuildings.co.uk, 2017)

The last liability is a commodity Murabaha financing in other words it is a loan from a bank (the name of
the bank was not mentioned) to purchase properties and to meet the requirements of the working capital
as mentioned in note 15 of their financial statements. This loan is different from other loans because it is
in Islamic way where the company let the bank purchase the properties then the company repurchase
with higher price from the bank, but the company return the debt in installments. (Staff, 2017)

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Index:
Vertical Analysis for Inovest’s Liabilities:

INOVEST Liabilities Amount (in US $000) %

Lease rent payables 50,105 40.20

Advance from a client 23,456 18.80

Accruals and other payables 15,501 12.40

Case compensation and other contingencies 8,739 7.00

Trade payable 7,308 5.90

Retention payables 3,068 2.50

Amounts due to related parties 146 0.10

Total account payable 108,323 86.90

Total financing from a bank (Commodity Murabaha Financing) 16,408 13.10

Total liabilities 124,731 100

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Compliance with IAS 37:
As stated in Inovest’s annual statements; the company faced a history of legal claims and claims that
future legal claims would be probable. Inovest set aside $8,030 for any future legal claims the company
may face. Under the operating activities section of the cash flows the company recorded their provision
as a loss but according to IAS 37 article 63 provisions should not be recorded as operating losses. While
the company provided information concerning the risk management; no information was provided
regarding risks related to provisions.

The company made a reliable estimate for the contingent liability, but it cannot be recognized because it
is possible (less than 50% chance) to cause an outflow of resources arising from a past event leading the
company to make payments in behalf of their customers if the conditions are met. Inovest set aside
$27,578 for Guarantee in 2016.

Recommendations:
1. In the 30th note of Inovest’s annual financial report the contingent liability was mentioned and a
brief explanation was provided. However, we believe that the statement can be improved by
providing more details when it comes to the contingencies. For example, they could mention
when the events that led to the obligation occurred and what they were.
2. Under the provisions section of Inovest’s financial report only the type of provision and the
amount was mentioned. We recommend including additional elements such as accounting
policies and uncertainties [reference here]
3. We recommend that Inovest does not record provisions as losses in the statement of cash flows.
4. We believe that the company should disclose how they arrived at the estimated amount for the
provision
5. In the statement of financial only two liabilities were presented; however much more were
presented in note 14. We believe that all the liabilities should have been presented in their
statement of financial position.

Task 2:

Operating activities cash flows take account of the activities that regularly generate revenues from an
organization. Investors focus more on the operating activities part of the cash flow statement as they are
recurring so for example, even if investing activities show a higher cash flow amount, this could be because
of selling an expensive asset which happens occasionally. Having a positive cash flow from operating
activities gives a better picture of a company’s financial position.

Firstly, Ahlia had a massive increase in their cash from operating activities of 154.92%. In 2015, Ahlia had
a negative cash flow in operating activities of BD557,824 and in 2016, the figure was raised to BD306,346
which is excellent. This was from various factors; one significant factor was an increase of insurance funds
which was a result of an increase in current liabilities, this means that more cash was available in 2016,
hence leading to a positive cash flow amount. Insurance funds figure was negative BD1,561,505 and this
amount increased to BD2,891,722 in 2016 which is almost triple (BD4,453,227). Another significant factor
was that in 2015, had a net loss while in 2016, they had of profit. There was an increase of BD654,507 and

9
obviously this played a big factor in increase the cash from operating activities. Other small factors were
non-cash activities such as an increase of around BD14,000 in depreciation.

Secondly, Inovest had a cash inflow from operating activities of $5,580,000 in 2016. The figure is higher
than Ahlia, but in 2015, Inovest had a cash inflow from operating activities of $26,115,000 which is
significantly higher which is a 78.63% fall. Therefore, even if Ahlia has a lower figure, regarding percentage,
Ahlia did better in 2016 than 2015. It was the opposite scenario in Inovest, hence making it unstable to
invest in. This is unappealing to investors and having a stable income and investing in a company that
grows is considered to be the right choice. The main factor for such a drastic change was the decrease in
current liabilities in 2016. Paying off debts of $12,177,000 will significantly impact the cash flows from
operating activities because companies should aim to take as much time to repay their liabilities as
companies will have more time to use the cash. In 2015, there was an increase in liabilities of $41,693,000.
Thus, there was a big fall in the current liabilities which negatively impacted Inovest which makes Ahlia a
better option to invest in with regards to operating activities.

Investing activities:
Investing activities analyze the cash flow that follow the change in a company’s cash from investments,
operating subsidiaries and changes as a result of acquiring long term assets (Schwab, n.d.).

Inovest:
In 2015 Inovest’s cash flow from the investing activities was $11,219,000 and in the end of 2016, it was
2,885,000, resulting in a 74.28% decrease in the net cash from investing activities.

Going into detail, the cash flows statement shows that Inovest acquired Dannat Resort Development
company by bumping their equity stake from 49.66% to 58.29% for $4,800,000 (reference here, Inovest
statement). Additionally, in 2015 the company invested $418,000 in real estate and $3,154,000 in 2016
while making 9,931,000 and 8,657,000 by selling real estate in 2015 and 2016, respectively. Looking
further into note 11, it is mentioned that Inovest had an unrealized fair value loss in the 2015 investments,
while making a gain on the sale of the 2016 investments. In 2015, Inovest invested in a joint venture for
$326,000 which eventually led to receiving dividends of 636,000 and an inflow of 6,347,000 from capital
redemption. Inovest also made 7,693,000 from the sale of their available for sale non-current assets and
invested 5,966,000 in purchase of assets.

Ahlia:
Ahlia had a 37.26% decrease in the cash flows from investing activities going from 2,765,471 in 2015 to
1,734,978 in 2016.

In 2015, Ahlia made 372,220BHD from dividend income and 343,100BHD in 2016, 7.82% less than the
previous year. They also received 179,321BHD from interest in 2015 and 114,360BHD, making it 36.22%
less than 2015. While they weren’t specified in the statements, Ahlia purchased 2,215,505BHD worth of
available for sale investments in 2015 and only 51,360BHD worth in 2016. Ahlia’s largest inflow in both
2015 and 2016 in the investing activities was from selling their available for sale investment, making
4,435,835 in 2015 and 1,378,200 in 2016 with a 68.93% difference.

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Financing activities:
Financing activities follow the transactions with owners or loaners to provide non-current funds for the
company or when the borrowed funds are paid (Cash flows from financing activities, 2017).

Inovest:
Inovest’s cash flow in the financing activities also saw a decrease of 38.46% as it went down from
12,118,000 to 7,457,000 from the end of 2015 by the end of 2016

Inovest only had one financing activity when they obtained financing from banks in 2015 and 2016 to help
fund their investments, buy assets and reach the required. The move in their financing from the bank saw
a 38.46% decrease in 2016, indicating that they did not need as much financing from outside sources in
2016.

Ahlia:
Ahlia had no inflow of cash from their financing activities as they only paid dividends in both 2016 and
2015. It’s interesting to note that Ahlia paid significantly less dividends in 2016 than in 2015 going down
from 2,286,045BHD to, 65,730BHD causing a 97.12% increase in the cash flows from investing activities,
this could mean that Ahlia retained much more of their earnings in 2016 to reinvest.

Al-Ahlia compliance with IAS7

To see if al Ahlia complies with IAS7 first we need to see whether the Statement of cash flows comply with
IAS1 in terms of “Presentation”, according to the IAS1 the Statement of cash flow must have the name of
the reporting entity,
information of the
reporting period, the
presentation currency,
which statement and the
level of rounding used. As
seen in the statement Al-
Ahlia have included in
their statement of cash
flows their company
name, the name of the
statement, reporting date
as well as the currency and the level of rounding.

In accordance with IAS7 the statement of cash flows must include 3 parts, the Operating activities which
includes both the current assets and current liabilities, the Investing activities that includes the Long-term
assets, and thirdly the Financing activities which includes the long-term Liability and Equity. Al Ahlia
included all three parts into their statement of cash flow1.

1
Check the appendix for evidence.

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Operating Activities
In accordance with article 14 from the IAS7 any activity that effects the profit or loss must be recorded in
the operating activities, Al Ahlia complied with this article by including the following in their Operating
activities part of the Statement of cash flow (Net profit/(loss), interest income, loss on available-for-sale
investments).

In addition to that IAS7 article also states that the Operating activities part should include any loss or gain
on sale of property, plant and equipment, Al Ahlia included that into their Operating activities part as seen
below thus complying with the IAS7.

Article 18 of the IAS7 states that an entity could report the Operating Activities part using two methods
either the direct method ( which is more detailed and reports all cash reciepts and payments) and the in-
direct method ( Reconciles from net income to cash operating activities).

In Al Ahlia’s Operating Activities, they used the in-direct method as they mentioned the net profit/loss
and made adjustments on it without mentioning the detailed cash recipts and payments. In accordance
with article 20 paragraphs A and B the in-direct method should include the following in their Operating
activities of the statement (Changes in payables, Depreciation, Provisions and outstanding claims

12
recoverable from re-insurers insurance funds), and Al Ahlia have included them into their Operating
activities of their Statement of cash flows.

Investing Activities
Article 16 paragraph A of the IAS7 states that the entity must include in the Investing Activities part of
their statement of cash flow any cash payment made to acquire Plants, Properties and equipment, Al Ahlia
complied with this article by including the purchase of property, plant and equipment, and in compliance
with Article 16 paragraph B (which states that any cash received from selling of Plant, property and
equipment must be recorded in the Investing Activities section of the statement) Al Ahlia included the
proceed from sale of property, plant and equipment as well in their statement.

Article 16 Paragraph C and D suggests that any cash received or paid for a transaction of an equity or debt
instrument must be included in the Investing Activities section of the statement, as seen below Al Ahlia
complied with this requirement by recording both the cash received from selling and paid from purchasing
of available-for-sale investments and receiving Dividends and Interest income into their Investing
Activities section of the statement.

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Financing Activities
The IAS7 Article 34 says that the company’s must include any cash payment identified as a Dividends in
the Financing cash flow because they are a cost of gaining financial resources and Al Ahlia did include the
Dividends they paid in their Financing Activities as seen below.

In addition to the 3 parts of the statement the IAS7 Article 45 the entity should also disclose the cash and
cash equivalent components in the end of the statement, Al Ahlia have complied with this article by
including the components of cash and cash equivalent as seen below. And Al Ahlia complied with IAS7
Article 48 by including in the notes the amount of significant cash and balances that are not in hand.

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Recommendation

1. Direct Method
Even though Article 18 suggests that the requirements to comply with the IAS7 is to use either the Direct
or Indirect method as mentioned above however article 19 of the IAS7 encourages the companies to use
the Direct method because it provides the end user of the Statement of cash flow a more detailed view
on the movement of cash to and from the company. However most of the company’s including Al Ahlia
use the Indirect method since it is simple and costs less effort and time to prepare, so we would
recommend Al Ahlia to use the Direct method in the future for better compliance with the IAS7.

2. Disclose the Revenues and Expenses

The IAS7 article 20 Paragraph C requires the companies using the Indirect method to record and disclose
the information about the net income in the notes to financial statement, even though Al Ahlia are using
the indirect method they did not show the details regarding the revenues and expenses within the Net
profit/loss in the operating activities.

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So, we would recommend Al Ahlia to include the detailed information of the revenues and expenses in
the Notes section.

3. Clarify Some Information

For the Dividend Income and Interest Income they were mentioned once in the operating activities with
a negative value and once in the investing activities as “receivables” with a positive value, and in the notes
to financial statements there was a lack of information since it was not clarified to why they were recorded
that way.

Therefore, we would recommend Al Ahlia to show information in a more understandable way and give
information that would explain why the Dividend income and Interest income were recorded the way
they were.

Task 3:

Introduction:
In this section my colleagues and I will be analyzing two companies financial statements of the year 2016
that we believe are appropriate to invest in using financial ratios and eventually choose one of the two
companies to invest our 5 million BHD in, financial ratios are an indicator of an entities performance and
financial situation (Netmba.com, n.d.), and it is an important element in the investing decision as it
improves the assessment and understanding of a firms financial results, strengths and weaknesses.
(demonstratingvalue.org)

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Company A: Alba
Alba is one of the biggest companies in the middle east and one of the largest aluminum producers in the
world with a revenue of around 1.7 billion dollars in 2016, alba has 2650 employees and 84% of their work
force are locals (Bahraini nationals). (Albasmelter.com, n.d.).

Liquidity ratios
Liquidity ratio is mainly concerned with short-term debt, and as the term “liquidity”2 suggests these ratios
measure the ability of a company to meet their current obligations/liabilities as they come due using their
current assets (Study.com, n.d.), three frequently used liquidity ratios that we believe would influence
our decision-making prices are:

1. Current Ratio
this ratio reflects how well a business is positioned by its ability to pay current liabilities using current
assets (Netmba.com N.D.) and how many times can the company cover the current debts after
liquidating their current assets. The formula used to find this ratio is Current assets divided by current
liabilities and the answer is in “times” (businessmoneytoday.com, n.d.).

2. Quick/Acid-Test Ratio
This ratio is similar to the current ratio however the quick ratio measures the ability of a company to pay
its current obligations when they come due using only their most liquid assets3
(myaccountingcourse.com, n.d.), and the Inventory is not accounted for in the equation since it takes a
long time to liquidate or turn into money. The formula used to calculate this ratio is Current assets
(excluding the inventory) divided by the current liabilities and the answer should be in “times”.

3. Cash Ratio
The cash ratio measures a company’s financial position in terms of cash, and how many times they could
cover their short-term debts using their most liquid form of assets which is cash in hand, this ratio is
measured by dividing Cash Over Current Liabilities.

2
Liquidity is the ease with which a company can turn their assets into cash and meet their obligations.
(Investopedia.com, N.D.).
3
Most liquid assets refer to the assets that can be quickly and easily turn into cash (Study.com N.D).

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Interpretation:

1. Current Ratio
In this ratio if the number was less than 1 that would mean that the company has more bills to pay than
liquid assets (Businessmoneytoday.com N.D.), it is always better to have a higher number however
having a very higher ratio than the industry average might mean that the company has more money in
hand that is not being invested within the company thus losing an opportunity to expand their operations
and performance and gain more profits. (Study.com N.D).

referring to Albas Statement of Financial

Position4 the calculated current ratio was
as seen bellow

This means that Alba has 1.81BD of current

assets to cover each 1BD in current
Liabilities, this ratio also suggests that the
company is in a safe position financially for
the next 12 months. (Businessmoneytoday.com N.D).

2. Quick/Acid-Test Ratios
Referring to the statement of financial position5 of Alba the calculated quick ratio is 0.89 times.

This means that for every 1BD worth in

current liabilities Alba has 0.81BD
worth of assets that can be quickly
liquidated to cover their short-term
obligations with, and like the current
ratio having a higher number would be
better unless it is too high in
comparison with the industry average.
(Businessmoneytoday.com N.D).

4
As seen in appendix 1.
5
See appendix 1

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 3. Cash Ratio
In this ratio it is always better to have a higher number since it would mean the entity is more secure in
terms of having cash and avoiding bankruptcy, in this case Alba has a cash ratio of 0.49 times which is a
very low ratio meaning they have a
low sum of money in hand and they
could only cover 49% of their short
term debts using the cash in hand, on
the other hand having a low cash ratio
might mean that Alba are investing
more of their money into the
expanding of the company and its
performance.

Profitability Ratios
Profitability ratios focus on any businesses main goal which is to generate profit, therefore it measures
the company’s performance by assessing its ability to manage and produce profits from its operations,
(study.com, n.d.).

1. Return on Assets(ROA)
This ratio gives you an idea on how efficient the management or board of directors are at using the
company’s assets to generate an income it is also used by a company to track asset-use within the
company over time (Inc.com, n.d.), it is calculated by dividing the net income by the total assets of a
company (investopedia.com, n.d.).

2. Return on Equity(ROE)
Return on equity is a measurement tool for a corporation that mainly concerns the equity holders, it
reveals how much profit is generated with the money shareholders have invested which is an indication
of the efficiency of the management/ board of directors (Investopedia.com, n.d.), this ratio is expressed
as a percentage and calculated by dividing the net income of a company over the shareholders equity
(investopedia.com, n.d.).

3. Return on Sales(ROS)/Profit Margin

This ratio is a tool to evaluate the companies’ operational efficiency6, it takes into account the costs of
operating or producing their products that are unrelated to the direct production such as administrative
expenses (study.com, n.d.), and this ratio calculates how efficiently the company is at converting the
revenues into actual profits. (myaccountingcourse.com, n.d.), this ratio is calculated by dividing the net
income over the sales.

6
Operational efficiency is the capability of a company to gain profits with the least costs. (webopedia.com N.D).

19
Interpretation

1. Return on Assets(ROA)
In this ratio it is always better to have a higher rate since it would mean that the company is utilizing their
assets in a better way to generate more profit. Referring to Albas statement of financial position7 and
statement of comprehensive income8 the
ratio would be calculated as seen
below

This ratio means that Alba generates

0.412 Fils for every 1 BHD they
invested in their assets. (Study.com,
n.d.).

2. Return on Equity(ROE)
In this ratio the higher the percentage the better the performance of the company and a rising rate would
mean that Alba are increasing their ability to gain profit without the need of more capital
(investinganswers.com, n.d.), as seen
in the screenshot the ROE of Alba is
4.9% that means that for every 1BD
invested 0.049fils of profit was
generated in the year 2016.
(Study.com, n.d.).

3. Return on
Sales(ROS)/Profit Margin
In this ratio the higher the percentage the better Alba are performing by converting their sales into profits,
as seen in the screenshot Alba has a
ratio of %7.22, which means that for
every 1BD of sales revenue Alba
generates 0.072 Fils, this might indicate
that Alba are not very good at cutting
the costs and increasing revenue.
(Investopedia.com, n.d.).

7
See Appendix 1
8
Check Appendix 2

20
Investments Ratio/Market Value Ratios

1. Price to Earnings Ratio

The P/E ratio is a tool to compare the company’s current share price to its earnings per share, or in other
words it shows the amount an investor can expect to invest in order to get 1BD of earnings, this ratio is
calculated by dividing the Market Value per share over the Earning Per Share. (Investopedia.com, n.d.).

2. Dividend Yield
Dividend yield is the ratio that measures how much cash dividends is being paid out to shareholders in
comparison to the market value per share, therefore it gives the potential shareholder an idea of how
much dividends he might receive for the amount invested. (economictimes.com, n.d.). it is calculated by
dividing the Dividend per share over the Market price per share. (investopedia.com, n.d.).

3. Book Value
Book value per share compares the amount of stockholders equity to the number of shares outstanding
to calculate the per share value, the book value also represents what the investors would get for each
stock after the company had been liquidated which is the level of safety to the stock holders
(investopedia.com, n.d.), the book value is calculated by deducting the preferred equity from the total
shareholders’ equity and dividing the outcome by the number of outstanding shares. (investopedia.com,
n.d.).

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Interpretation

1. Price to Earnings Ratio

In this ratio it is better to the investor to have a low ratio since that would indicate that the stock is cheaper
and that he would get more earnings and pay less, however if the ratio was high which means that the
price of the stock is high, that would logically mean that the company would do better in the future.
(zenwealth.com N.D), according to the financial statement of Alba the Earning per share were 0.034 BD
and the Market price was 0.320 BD which would mean the P/E ratio would equal to 9.4 times which means
that investors purchasing
shares from Alba should
expect a return of 1BD for
each 9.4BD invested, the
high P/E ratio also indicates
that Alba has a potential of
expanding.

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 2. Dividend Yield
A company with a high dividend yield pays its investors a large dividend therefore investors with the
purpose of gaining from dividends always look for a company with a higher yield
(myaccountingcourse.com, n.d.). Referring to BahrainBourse.com the annual dividends distributed by
alba to their shareholders was 0.0055BD per share and their market price of the shares was 0.320BD which
means
that
the

Dividend Yield would be 1.72%, this means that for every 1 BD worth of shares in Alba the shareholder
should expect a dividend of 0.0172BD (myaccountingcourse.com, n.d.), logically since Alba has a low
dividends yield compared to other companies9 that would mean that they distribute less dividends thus
having more retained earnings to be carried to the next year and reinvested within the company to expand
and improve their performance, which would probably lead to an increase in the market price per share,
so if the investors are planning to resell the shares in the future for profit, buying Alba shares would be a
wise thing to do.

3. Book Value
According to BahrainBourse.com the book value per share of Alba is 0.701BD and since the market value
per share is 0.320BD which is lower it is an indicator that the stocks are currently underpriced
(Accountingtools.com) because the book value is measured based on historical transactions so it reflects
what the value “should be”(investopedia.com, n.d.), therefore the investors should purchase Alba shares
for possible
gain on
reselling the
shares when
the market
price increases.

However it is
worth noting
that the market
price reflects
Alba shares
current value
and the market
price is forward
looking and
takes into
account Albas
earning power
in the future, so
it increases

9
Other companies such as Batelco that has a yield of 12.5%, BBK 7.28% and Inovest that has a yield of 9.66%
according to BahrainBourse.com.

23
with an increase in Albas estimated profitability and expected growth (Investopedia.com, n.d.), while the
book value is not at all forward looking and only increases according to accounting transactions
(accountingtools.com, n.d.), thus it should not be taken as an indicator of Albas in the future.

Company B: Gulf Hotel Bahrain

Liquidity Ratios

1. Current Ratio

The current ratio of Gulf Hotel is 3.81:1 which is very high and significantly higher than the
industry average which is 0.8. Generally, the current ratio should be above 1:1 as current
liabilities should be covered by the current assets. However, when the ratio is very high such as
this one, it sometimes means that the current assets of the company were not properly utilized.
However, in this case, this is not true and will be further explained in the cash ratio analysis. The
interpretation of this ratio is that Gulf Hotel has 3.81 times the amount of current assets to pay
back its current liabilities such as short-term debts or accounts payables.

2. Quick Ratio

The quick ratio/acid test ratio of Gulf Hotel is 3.46:1 which is slightly lower than the current ratio.
The industry average is only 0.43:1, so in this case, Gulf Hotel has a much higher quick ratio than
the industry. The quick ratio shows the ability to pay back its current liabilities with its current
assets excluding inventory. This is because inventory cannot be quickly converted into cash like
other current assets such as marketable securities and cash equivalents. This indicates that Gulf
Hotel is very secure in regard to paying back its current liabilities with its ‘quick’ current assets
(CSIMarket.com, n.d.).

24
 3. Cash Ratio

This ratio is the proportion of cash to current liabilities. Companies generally have lesser cash in
comparison with current liabilities. However, Gulf Hotel has a 3.14:1 cash ratio which is very
secure in regard to paying back its current liabilities as mentioned earlier. This ratio does not
include any other current assets but Cash equivalents. A ratio of 3.14:1 means that if Gulf Hotel
needs to pay all its current liabilities at once, the organization does not need to liquidize any
other current assets since the balance of Cash equivalents covers triple the amount of current
liabilities which is excellent. Generally, having a high cash ratio may mean that an organization is
not efficiently utilizing the value of their cash as this can be used in further investments. However,
the type of industry must be taken into consideration. This organization is a hotel and hotels
generally just want to maximize the amount of cash that they incur, as there is not always room
for further investment. Fortunately for Gulf Hotel, they are succeeding at generating high
amounts of cash (Investopedia.com, n.d.).

Profitability Ratios

1. Return on assets-

The return on assets ratio for Gulf Hotel is 14.28%. This ratio is used to find out the amount of
profit generated from asset operations, therefore, the higher the percentage the better. In this
case, Gulf Hotel has an ROA of 14.28% which is good. After doing some research, no specific
industry average was available but the ROA percentage of Gulf Hotel is not low and means that
the organization is managing its assets’ efficiently.

25
 2. Return on equity

The return on equity ratio for Gulf Hotel is 16% which is good as this ratio is used to indicate the
amount of profits generated using shareholders’ equity. Hence, if the ratio is high, this means
that Gulf Hotel manages its shareholders’ investments effectively. Like any profitability ratio, the
higher the better and according to analysts, an ROE of 10% or higher is considered satisfactory.
As there is no industry average available, this ratio is considered satisfactory because it is above
10%.

3. Return on sales/Profit margin

The return on sales ratio for Gulf Hotel is 45.77% while the industry average is 18.59% which
means that Gulf Hotel has a significantly higher profit margin which is excellent, and this means
the amount of profits generated from sales is high. The profit margin in this case indicates the
amount per BD1 that Gulf Hotel keeps as earnings. Hence, a profit margin of 45.77% means that
BD0.4577 of income is earned for every BD1 of sales. This could be from excellent advertisements
that enticed customers or the quality of the hotel as a whole resulted in customer satisfaction.
In addition, a high profit margin could also mean that Gulf Hotel manages its expenses efficiently
as expenses are deducted to calculate net income (CSIMarket.com, n.d.).

26
Investment ratios

1. P/E ratio-

This ratio indicates the amount an investor should pay to get BD1 of earnings. In this case, the
P/E ratio is BD7.62 which means that investors should pay BD7.62 to receive BD1 of earnings
which is cheap considering the amount of revenues that the organization generates. This ratio is
lesser than the industry average which is BD18.55. Having a low P/E ratio means that
shareholders are not expected to generate a good number of dividends as they are not willing to
pay a high amount (CSIMarket.com, n.d.).

2. Dividend yield

This ratio determines the amount that shareholders receive in comparison to the share price.
Obviously, if shareholders receive more dividends, then they will be more satisfied and one of
companies’ main aims is to maximize shareholders’ wealth. In Gulf Hotel, the dividend yield is
3.9% (BD0.039 per BD1) which is higher than the service industry average (2.37%). This industry

27
was the closest thing to a hotel as no other average was found. Since the dividend yield is higher
than the industry average, this means that shareholders will more likely be satisfied. However,
companies must also retain their earnings, so Gulf Hotel must find a balance between future
investments and paying shareholders (dividend.com, n.d.).

3. Book value

This ratio theoretically shows how much an investor would earn if a company liquidates. This
ratio is calculated to find out whether share prices are overpriced or underpriced. According to
Bahrain Bourse, the price per share is BD0.640 while the book value is BD0.799 which means that
the price of a share in Gulf Hotel is underpriced as the book value is lower (Gulf Hotel Group, n.d.).
Hence, this results in a profit on sale of investment if shareholders were to sell their shares. This
also means that the organization will likely grow in the future (Book Value, n.d.).

Conclusion:
Both companies indicate positive results and investing the BD5 million in either Gulf Hotel or Alba
would be appropriate. However, if we had to select one of the companies, we would choose Gulf
Hotel for various reasons. Firstly, Gulf Hotel’s liquidity ratios are all better than Alba’s liquidity
ratios mainly because of the cash equivalents balance. Having a high liquidity ratio such as 3:1
might show that an organization is not utilizing its cash properly as the cash could be used for
further investments to boost the revenues and profits generated. However, in this case, Gulf
Hotel is a different type of business, as there may not always be room for investment. The current
ratio of Gulf Hotel is 3.81 while the current ratio of Alba is 1.81, hence they are both good, but
Gulf Hotel is better as they have more current assets to repay their current liabilities. Moving on
to profitability, Gulf Hotel is again better than Alba and in profitability, the higher the percentage,
the better. The profit margin is better for Gulf Hotel (45.77%) which means it manages its
expenses efficiently. This could also mean advertisements are effective and the quality of the
hotel is high, and customers are satisfied. Regarding ROA and ROE (14.28% and 16%), they are
also higher for Gulf Hotel which means that the assets and shareholders’ investments are
managed better in Gulf Hotel. Finally, the investment ratios show mixed analysis. The P/E ratio is
lower for Gulf Hotel which means the share prices are cheaper which is good. However, this also

28
means that it is more likely that Alba has more potential to growth so both organizations have
an advantage in regard to the P/E ratio. Furthermore, the dividend yield is only 1.72% for Alba
while it is higher for Gulf Hotel which means that shareholders will receive a higher percentage
in regard to their investments, hence being more satisfied. Finally, the book value ratio shows
identical scenarios as both shares are underpriced which means that if the organizations
liquidate; shareholders would receive a profit on sale of their shares. After analyzing all the ratios,
the conclusion is to invest in Gulf Hotel as liquidity and profitability is significantly better.
Although, the book value ratio is better for Alba, overall Gulf Hotel would more likely be the right
organization to invest in for the various factors that were earlier mentioned (Gulf Hotel Group,
2016).

Journalizing
After due consideration and analysis using the ratios we have decided that we will be investing the
5million BHD in Gulf Hotel Group.

Since the market price per share was 0.640bd at the time of investment and the Dividends distributed
was 0.025BD as seen bellow,

5,000,000bd would enable us to acquire 7,812,500 shares of the Gulf Hotel Group, since the Gulf had at
the time 130,172,995 shares then that would mean we would be acquiring around 6% of the company’s

shares,

given the fact that we would purchase less than 20% of the Gulf therefore we should use the Available for
sale method of journalizing. This was discussed with and approved by our tutor Ms. Sana that since we
only have 5 million BD to be invested it would be illogical to use both methods of journalizing since 5
million is not enough to acquire between 20% to 50% of the company.

Today’s Market value per share has dropped to 0.480BD therefore the proper adjustments should be
journalized as well.

Date Details DR CR

29-Dec-16 Long term Investment (Available for Sale) 5,000,000

29
 Cash 5,000,000

(7,812,500 shares * 0.640BD)

31-Dec-16 Cash 195,312.50

Dividends income 195,312.50

(7,812,500 * 0.025BD)

27-Jan-16 Unrealized Loss on Investment 1,250,000

Market Value adjustment 1,250,000

5,000,000 - (7,812,500 * 0.480BD)

30
Task 4:
Jana Group
Consolidated Statement of Financial Position
As at 31st December 2013

DETAILS BD '000 BD '000

Non-Current Assets (NCA)

Tangible - NCA 2080

Goodwill arising 10

Total NCA 2090

Current Assets (CA)

Inventory 610

Trade Receivables 690

Bank and Cash 425

Total CA 1725

Total Assets 3815

Equity and Liabilities

Equity

Share Capital 2000

Retained Earnings 510

Non-Controlling Interest 70

Total Equity 2580

Current Liabilities (CL)

Trade Payable 940

31
Tax 295

Total CL 1235

Total Equity and Liabilities 3815

32
Calculations
Inventory = (Jana group Inventory + Tara group Inventory) – unrealized profit in inventory

= (500,000+120,000)- unrealized profit in inventory

Unrealized profit in inventory = 100,000-80,000= 20,000 (profit from the sales made Jana made to Tara)

20,000 * 0.5(percentage of goods still in the inventory)

=10,000

Inventory= 500,000 + 120,000 -10,000 = 610,000BD

Retained Earnings = (Jana Retained earnings– unrealized profit in inventory) + (Tara retained earnings–
retained earnings before acquiring * % of ownership)

= (400,000-10,000) + (200,000-50,000 * 0.8) = 510,000BD

Non-controlling Interest= (Tara retained earnings *% not owned by Jana) + (Tara Share capita * % not
owned by Jana) +Goodwill attributable to NCI

= (200,000*0.2) + (100,000*0.2) +10,000=70,000BD

Goodwill= (Investment in Tara + Non-controlling interest) – (Retained earnings + Tara Share Capital)

= (120,000 + 40,000) – (50,000+ 100,000) = 10,000BD Goodwill arising.

33
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Appendix

36
37
38
39
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