FACULTY OF COMMERCE

DEPARTMENT OF INSURANCE AND ACTUARIAL SCIENCE

PROGRAMME – MSC RISK MANAGEMENT AND INSURANC E

NAME ARTWELL GOSHA

STUDENT NUMBER N01910296K

COURSE INVESTMENT AND FINANCIAL ANALYSIS

(CIN5102)

LECTURER MR D. MUYECHE

Question

Choose any company of your choice and perform an analysis of the recent financial
statements. Your analysis must consider the economy and industry in which your company is
part of. Year on year comparisons must be part of the analysis as well. Your analysis must be
very engaging and eye opening.

Contents
1
1.0 Introduction...........................................................................................................................3
1.1 Background...........................................................................................................................3
2.0 Horizontal Analysis...................................................................................................................6
2.1 Consolidated Statement of Comprehensive Income – Horizontal Analysis..............................6
2.2 Statement of Financial Position – Horizontal Analysis.............................................................8
3.0 Vertical Analysis.....................................................................................................................11
3.1 Consolidated Statement of Comprehensive Income – Vertical Analysis................................11
3.2 Statement of financial position – Vertical Analysis................................................................12
4.0 Ratio analysis...........................................................................................................................15
4.1 Profitability Ratios...................................................................................................................15
4.2 Liquidity ratios.........................................................................................................................18
4.3 Leverage Ratios.......................................................................................................................21
4.4 Activity Ratios.........................................................................................................................23
4.5 Market ratios............................................................................................................................24
5.0 DuPont Analysis......................................................................................................................27
6.0 Growth Potential Analysis.......................................................................................................27
7.0 Business profile.......................................................................................................................28
8.0 Recommendations....................................................................................................................29
9.0 Conclusion...............................................................................................................................30
References......................................................................................................................................31
Appendix 1: Finacial statements....................................................................................................32

1.0 Introduction
Financial Statement Analysis is the process of understanding the fundamentals of the company
by using analytical or financial tools to examine to examine, compare and review financial
statements (Kim, 2016). A financial statement is a formal record of the financial activities and

2
position of a business, person, or other entity. Blanchard III (2008) came up with another view of
financial statements analysis as the process of identifying the relationship between various items
in the statement of comprehensive income, statement of financial position and cash flow
statement as a way of assessing the strength and weaknesses of the reporting entity so as to make
a business decision. Typically financial statement analysis is mainly useful, but not limited, to
investors, creditors, customers and management as a way to examine the health of a business.
This write up focuses on the exploration of the financial statements of Dawn Properties Limited
which deals with property business and domiciled in Zimbabwe. Objectives of financial
statements analysis includes:

 Assessment of past performance

 Assessment of current position
 Prediction of profitability and growth prospects
 Prediction of bankruptcy and failure
 Assessment of the operational efficiency.

These objectives will then differ according to the kind or category of the stakeholders.

1.1 Background
Dawn Properties is one of the industry leaders in real estate investment, development and
consulting in Zimbabwe and it was established in 2003. Its significant investments are in hotel
properties in all the major tourist destinations in Zimbabwe, as well as largely undeveloped
residential lands. There are four listed property stocks on Zimbabwe Stock Exchange (ZSE)
trading as Dawn Properties, Mashonaland Holdings (Mash), First Mutual Properties (FM
Properties) and Zimre Properties (ZPI). In terms of total assets, FM properties is the largest listed
stock property company with a share of 36%, followed by Marsh with 26%, Dawn properties
with 25% and ZPI is the smallest with 13% as depicted in Figure 1.1 overleaf:

3
 Market Share By Assets
25% 26%

Mash
ZPI
FM Properties
Dawn
13%
36%

Figure 1.1: Market share based on total assets

In terms of revenue for the year ended 2018, Dawn properties outshined other players with a
leading market share of 38%, followed by FM Properties with 28%, Mash 20% and lastly ZPI
with 14%.

Performance of listed property companies share prices was mixed in the first quarter of 2019
after the closure of the 31 December 2018 trading year. Some stocks posted losses, while others
registered small gains. Overall, the market has continued to discount property stocks due to
depressed rental income and high vacancy levels. Vacancy levels have remained high, especially
for industrial and commercial properties in central business districts (CBD). The CBD segment is
under pressure as commercial clients continue to relocate to surrounding residential areas or
office parks to escape congestion in the city and/or seek out cheaper options.

Figure 1.2: Share prices of listed property Stocks

4
In financial statement analysis, it is also critical to scrutinize inflation trend as it influences the
reported figures. The latest available figures from ZIMSTAT indicated that inflation was at
66.80% Year-On-Year (Y-O-Y) and 4.38% Month-On-Month (M-O-M) ending March 2019.
The March Y-O-Y figure would have been as high as 166%, if ZIMSTAT had not rebased the
consumer price index. Generally, prices are being pegged in line with exchange rate movements
on the parallel market. Due to shortage of foreign currency, the RTGS dollar lost value on both
the formal and the parallel markets.

Figure 1.3: Inflation trend

Financial Statement Analysis can be performed in structured ways using common Size financial
statements (horizontal and vertical analysis), ratio analysis, trend analysis, structural analysis,
industry comparisons as well as common sense judgment. The analysis is done over a series of
reporting periods. Financial statements analysis helps to measure the profitability, liquidity,
efficiency, capital composition and solvency of an enterprise. Financial statements alone can be
largely uninformative to those who are less skilled in accounting. By using the aforesaid tools
and techniques, financial statements can be interpreted and usefully applied to satisfy the needs

5
of the stakeholder, whether skilled or not (Wood and Sangster, 2005). Below is an analysis of
Dawn Financial statements for the period 2015 – 2018.

2.0 Horizontal Analysis

Horizontal analysis allows stakeholders or financial statements users to assess what has been
driving a company's financial performance over a number of years, as well as to spot trends and
growth patterns. The horizontal analysis is often expressed in percentages hence common size
horizontal financial statements. Comparisons of percentages provide analysts with an insight into
aspects that might contribute significantly to the profitability or the financial position of the
organization. Expressing an analysis as a percentage provides a much better insight into the
increase than when expressed as a currency. Horizontal analysis is used in the review of a
company's financial statements over multiple periods from a base year. A common problem with
horizontal analysis is that the aggregation of information in the financial statements may have
changed over time, so that revenues, expenses, assets, or liabilities may shift between different
accounts and therefore appear to cause variances when comparing account balances from one
period to the next.

2.1 Consolidated Statement of Comprehensive Income – Horizontal Analysis

Table 1.1 below provides the horizontal analysis of the income statement of Dawn properties for
the period under review.

Table 2.1: Consolidated Statement Of Comprehensive Income

Horizontal Analysis formula = [(Amount in comparison year – Amount in base
year)/ Amount in base year] x 100.
Horizontal Analysis 2018 2017 2016
Revenue 117% 18% 27%
Gross profit 36% 18% 27%

Fair value gain on investment -3% -2919% -65%

Other income 229% -53% 84%

Total income 27% 62% 33%

Operating expenses 31% 10% -25%
Net impairment (losses)/gains on financial -667% - -
assets

6
Operating profit 16% 145% 744%
Net finance expense -21% 508% 226%
Profit before income tax 19% 133% -842%

Income tax expense 30% 33% -82%

Total comprehensive income for the year 16% 195% -127%

The comparative income statement for the years 2015-18, indicates that the total revenue for the
year 2016 has increased by 27% from 2015, whilst an increase at decreasing rate revenue was
registered in 2017 of 18% and lastly a huge growth in terms of revenue was witnessed in 2017
where a 117% was registered. Therefore a revenue growth of 90% was noted from 2015 to 2018.
The growth rates are in line with projects and huge investments of the company in the hotel
industry. However, the huge growth rate in 2017 to 2018 trading year may also have been
influenced by Y-o-Y inflation rate of 42.09% as at December 2018 up from 3.46% in December
2017. In terms of Gross Profit (GP), the same growth rates were witnessed in 2016 and 2017
except 2018 where there was a huge chunk of cost of sales which resulted in 36% growth in GP.

Total income improved by 33% from 2015 to 2016, 62% from 2016 to 2017 and declined by
27% from 2017 to 2018. The improvements or decreases were mainly caused by gains or losses
on investment and other incomes.

A positive performance in terms of operating expenses was witnessed in 2016 as they declined
by 25% from 2015. An increase by 10% was then registered in 2016 - 2017 trading year whilst a
huge positive variance was noted in 2017- 2018 of 31%. This huge increased in operating
expenses in 2017 -2018 trading year could be mainly as result of new huge investment projects
as stated in the chairman’s report as well as due to the increase in the cost of materials
consumed, purchase of products for sale and other expenses. As a result of huge operating
expenses in 2018, a decrease in growth rate of the registered operating profit of 16% was noted
from 145% in 2017, whilst that of 2015 – 2016 was 744%.

The profit before tax is increased by 19% as compared to the previous year 2017. This is due to
the increase in the cost of sales and operating expenses of the company during the year 2018 as
the company witnessed a decline in finance expense by 21%. In 2016 – 2017 business year, a
growth of 133% was noted. Generally, during the period 2016 -2018, there was increase in the

7
tax amount due to increases in the profits, except for 2015 where a loss was recorded. The total
comprehensive income changes were 16%, 195% and 127% for the period 2018, 2017 and 2016
respectively. In conclusion, the company has satisfactory overally on profitability.

Trend of Major Indicators

14,000,000.00
12,000,000.00
10,000,000.00
8,000,000.00
Revenue
6,000,000.00 Operating expenses
4,000,000.00 Profit for the year
2,000,000.00
-
(2,000,000.00) 2015 2016 2017 2018
(4,000,000.00)
(6,000,000.00)

Figure 2.1: Revenue, Income and Profit Trend

2.2 Statement of Financial Position – Horizontal Analysis
The following section is a horizontal analysis of the statement of financial position.

Table 2.2: Consolidated Statement Of Financial Position

Horizontal Analysis
2018 2017 2016
ASSETS
Non-current assets
Investment property 3% 2% 2%
Property and equipment 7% -11% -14%
Total Non-current Assets 6% 2% 2%

Current assets
Inventories -52% 54% 270%
Trade and other receivables -35% -10% 212%
Current income tax assets - -100% -51%
Cash and cash equivalents 727% -49% -61%
Total Current Assets -27% 15% 139%
TOTAL ASSETS 3% 3% 7%

EQUITY
Share capital 0% 0% 0%

8
Share premium 0% 0% 0%
Revaluation reserves 0% 0% 0%
Retained profits 5% 5% 2%
Total Equity 4% 4% 1%

LIABILITIES
Non-current liabilities
Borrowings -54% 127% -
Deferred lease income 45% - -
Deferred tax liabilities 7% 7% 7%
Total Non-current liabilities -18% 43% 47%

Current liabilities
Borrowings 38% -61% -
Deferred lease income 109% 100% -
Trade and other payables 48% -39% 152%
Current income tax -100% -16% -71%
Total current liabilities 33% -50% 222%
Total liabilities -6% -1% 97%
TOTAL EQUITY AND
LIABILITIES 3% 3% 7%

The total non-current assets of the company have increased by 6% as compared to the year 2017
and 2016 where there were no significant changes. In the period 2016 -2017 there was a decline
property and equipment as a result of disposals, whilst investment in property and equipment
was significant in 2017-2018 with a 7% increase being recorded. On the same note, intangible
assets in the form of trade and other receivables were incorporated in non-current assets in 2018,
hence an improvement.

The total current assets of the company increased by 139% from 2015 to 2016, whilst in the
period 2016 to 2017 they increased by 15% and decreased by 27 in 2018. A decrease which was
witnessed in 2017 -2018 is as a result of reduced inventories by 52%, reduced trade and other
receivables by 35% and there were no current income tax assets. This could mean that the
company has improved on its inventory and receivables management practices. In terms of cash
and cash equivalents, there was an improvement by 727% in the period 2017 to 2018 whilst the
prior periods indicated a down ward trend. The current assets section is important in assessing
the working capital position of the company. In summing up the assets section, total assets
improved by 7% from2015 to 2016 and maintained a 3% apiece in 2017 and d2018.

9
On the liabilities section, trade payables increased by 152% in 2016 compared to the previous
year 2015 and deteriorated by 39% between 2016 and 2017. In 2017 – 2018 trading period,
payables improved by 48% meaning that the company was enjoying favorable credit terms and
that the company has purchased materials on credit basis from its creditors. The same trend was
followed in total current liabilities section were 97%, 1% and 6% in the trading years of 2016,
2017 and 2018 respectively.

Non-current liabilities were generally increasing during the period under review. In the period
2015 to 2016 they improved by 47%, 2016 to 2017 by 43% and decreased by 18% in the period
2017 to 2018. A decrease in non-current liabilities mean that the company has reduced its fixed
costs expense and its now more attractive to debt financiers.

The equity section indicated that there were no changes in the share capital and share premiums
sections. Main changes were witnessed on the retained profits were they improved by 2% in
2016, and 5% very year in 2017 and 2018. In summing up the equity section, the aforesaid
trend was witnessed with a 1% increase in 2016 and 4% improvement apiece in 2017 and 2018.

Assets, liabilites and Equity trends

120,000,000.00

100,000,000.00

80,000,000.00 Total Assets

Total Equity
60,000,000.00 Total Liabilities
40,000,000.00

20,000,000.00

-
2015 2016 2017 2018

Overally the financial position of the company is satisfactory.

3.0 Vertical Analysis

Vertical analysis (Common Size) is a technique used to identify where a company has applied its
resources and in what proportions those resources are distributed among the various income

10
statement and statement of financial position accounts. The analysis determines the relative
weight of each account and its share in asset resources or revenue generation. A vertical analysis
consists of a representation of standard headings on a financial statement that are expressed as
percentage of those headings. By doing this every year, insight will be created into the change in
the distribution of total assets or revenues. A vertical analysis is also often used to compare
companies with one another in the form of benchmarking. Because the headings occur in any
given organization, this makes it easy to compare organizations.

3.1 Consolidated Statement of Comprehensive Income – Vertical Analysis

Table 3.1 below indicates the vertical analysis resultant computations. The total revenue of the
company is considered as 100% and all the other line items are compared to the total revenue
during the period under review.

Table 3.1: Consolidated Statement Of Comprehensive Income

Vertical Analysis Formula (Income Statement) = Income Statement Item / Total Sales *
100
Vertical Analysis 2018 2017 2016 2015
Revenue 100% 100% 100% 100%
Cost of sales 37% 0% 0% 0%
Gross profit 63% 100% 100% 100%
Fair value gain on investment 17% 38% -2% -6%
Other income 2% 1% 3% 2%

Total income 82% 139% 102% 96%

Operating expenses 35% 58% 62% 104%

Net impairment (losses)/gains on financial
assets 3% 1% 0% 0%
Operating profit 44% 82% 40% -8%
Net finance expense 2% 6% 1% 1%
Profit before income tax 42% 76% 38% -7%
Income tax expense 10% 17% 15% -105%

Total comprehensive income for the year 32% 59% 24% -112%

In the periods before 2018, there were no costs of sales. In 2018 cost of sales consumed 37% of
the total revenue which translated to a 63% gross profit. After the inclusion of faire value gains
on investments and other incomes, in 2015 the percentage of total income to revenue was 96%

11
meaning that the aggregate of other incomes was -4%; in 2016 total income was 102% of
revenue whilst in 2017 a whopping 139% was recorded meaning that in these two years
investment and other income contributed positively to the total income. Lastly in 2018, total
income was 82% of revenue and this poor result was as a result of cost of sales.

The operating expenses of the company were 35% of the total revenue in 2018, 58% in 2017,
62% in 2016 and 104% in 2015. The above figures indicate that in 2015 a loss was incurred
since revenues were trounced by expenses with a 4% margin. In the years 2016 and 2017 the
expense consumed more than half of the revenue which dwindles the realized operating profit.
Only in 2018 expenses were below 50% which signals a healthy organization. The results require
the company to try and further minimize its expenses so as to improve on profits.

Finance expense for 2015 and 2016 were 1% of the revenue generated in the respective periods.
In 2017 finance expenses were 6% of the revenue generated. Despite an increase in revenue,
finance expenses increased meaning that there were new debts in the company. In 2018 a 2%
finance expense to revenue ratio was recorded meaning that increased revenues outwitted the
fixed expense charge and some debts were repaid. Income tax ratios were determined by the
earnings before tax. The total comprehensive income for 2018 was 32% of the revenues, whilst
that for 2017 was 59%, 2016 recorded 24% and 2015 a net loss of 112%.

3.2 Statement of financial position – Vertical Analysis

Statement of financial position analysis was done after the above section on statement of
comprehensive income vertical analysis.

Table 3.2: Consolidated Statement Of Financial Position

Vertical Analysis
2018 2017 2016 2015

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ASSETS
Non-current assets
Investment property 90% 90% 91% 95%
Property and equipment 1% 1% 1% 1%
Total Non-current Assets 94% 91% 92% 96%
Current assets
Inventories 2% 5% 4% 1%
Trade and other receivables 2% 4% 4% 1%
Cash and cash equivalents 2% 0% 0% 1%
Total Current Assets 6% 9% 8% 4%
TOTAL ASSETS 100% 100% 100% 100%
EQUITY
Share capital 2% 2% 2% 2%
Share premium 17% 18% 18% 20%
Revaluation reserves 7% 8% 8% 8%
Retained profits 64% 62% 61% 64%
Total Equity 90% 89% 89% 94%

LIABILITIES
Non-current liabilities
Borrowings 2% 3% 2% 0%
Deferred tax liabilities 5% 4% 4% 4%
Total Non-current liabilities 6% 8% 6% 4%

Current liabilities
Borrowings 1% 1% 3% -
Deferred lease income 0% 0% 0% 0%
Trade and other payables 2% 1% 2% 1%
Total current liabilities 3% 2% 5% 2%

Total liabilities 10% 11% 11% 6%

TOTAL EQUITY AND
LIABILITIES 100% 100% 100% 100%

The company’s investment property is the major sole component of total assets as observed by a
95% in 2015, 91% in 2016 and 90% in 2017 and 2018. On the same note, property and
equipment constitutes 1% of total assets for the four year period under review. In aggregate, total
non-current assets are the major component of total assets as follows 96% in 2015, 92% in 2016,
91% in 2017 and 94% in 2018.

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Total current assets were 4% of the total assets in 2015, 8% in 2016, 9% in 2017 and 6% in
2018. Inventories relative to total assets are dominating the current assets section with 1% in
2015, 4% in 2016, 5% in 2017 and 2% in 2018. The observed scenario of cash and cash
equivalence as well as trade and other receivables being outshined by inventories is unhealthy for
the company as this scenario may cause an inability to meet short term obligations. Cash and
cash equivalence balances of the company are less than 2% of its current assets. It means
company’s liquidity position is weak. The non-current assets mainly consist of fixed assets
which indicate that the company has invested funds in long-term assets to utilize it appropriately.

In year 2015, the company depended mostly on its own funds which were 94% (total equity)
rather than the outside fund which was 6% (total liabilities) which shows that the company was
following traditional method of funding to save the interest expenses. The same trend was
maintained up to 2018, however with slight swings. In 2016 total equity was 89% whilst total
liabilities were 11% and the same was maintained in 2017. In 2018, equity improved by 1% to
close at 90% of total assets whilst liabilities were standing at 10%. Share capital maintained its
2% composition on total assets and retained earnings was the major component in total assets
with a range of 61% to 64% in the trading period under review. The company has maintained a
reserve position of 7% in 2018 and 8% in the other three years. From the balance sheet we can
see that the fixed assets are mainly funded by shareholders’ fund rather than any other long-term
borrowings and working capital

The liabilities section indicates that non-current liabilities to total assets was 6% in 2018 and
2016 whilst 8% and 4% were recorded in 2017 and 2015 respectively. On the same note, current
liabilities in the 2015, 2016, 2017 and 2018 were 3%, 2%, 5% and 2% respectively indicating
that the company’s long term debt is more than short term debt hence a healthy organization.

4.0 Ratio analysis

Ratio analysis is a mathematical method in which different financial ratios of a company, taken
from the financial statements, are analysed to gain insights into company’s financial and

14
operational details. Ratios are useful tools used for expressing the relationship between data that
can be used for internal comparisons and also be used for comparisons across firms. The purpose
and importance of ratio analysis are to evaluate or analyze the financial performance of the firm
in terms of risk, profitability, solvency, and efficiency. One goal of financial analysis is to
identify problems that affect the firm. By identifying problems early stakeholders including
investors, creditors or managers can make corrections to improve or maintain their interest in an
organization. Some problems may be hard to identify. A firm that seems to be earning profits but
is constantly short of cash may turn to financial analysis to identify why this is occurring.

While ratios are very important tools of financial analysis, they are not spared to limitations,
such as the following: a firm can make some year-end changes to their financial statements, to
improve their ratios hence they end up window dressing. Ratios also ignore the price level
changes due to inflation. Many ratios are calculated using historical costs, and they overlook the
changes in price level between the periods. Ratios ignores the qualitative aspects of the firm,
they only take into consideration the monetary aspects. Ultimately, ratios do not resolve any
financial problems of the company hence they are a means to an end, not the actual solution.

4.1 Profitability Ratios

Profitability ratios help to determine how profitable a firm is. They measure the results of an
organization’s day-to-day management or overall performance and effectiveness of management.
Some of the most commonly used profitability ratios are: gross profit ratio, net profit ratio,
operating ratio and return on equity capital, return on capital employed ratio and these are
calculated and presented in table 4.1 over leaf:

Table 4.1: Profitability Ratios

Ratio Formulae 2018 2017 2016 2015
Operating profit Operating profit/ Net sales 44% 82% 40% -8%
margin

15
 Net profit margin Net earnings/ Net sales 32% 59% 24% -112%
Cash flow margin CFO/ Net Sales 37% -8% -66% -23%
Return on total assets Net Earnings / Total Assets 4% 3% 1% 4%
(ROA)
Return on equity Net earnings/ Stockholder's 4% 3% 1% -5%
(ROE) Equity
Cash return on assets CFO/ Total Assets 4% 0% -3% -1%

Operating profit margin ratio – operating profit is a useful indicator of a company's financial
health as it expresses operating profit as a percentage of net revenue. Companies with high
operating profit margin ratios are generally better able to pay for their fixed costs and interest on
debt as well as able to survive economic downturns. It also indicates that the company is more
competitive because they can offer lower prices than the competition because of their higher
profit margin ratio. From the calculated ratios, it can be noted that in 2015 the company’s ratio
was at -8%, whilst in the succeeding years the ratio improved to 40% in 2016, 82% in 2017 and
dropped by38% to close at 44% in 2018. The ratios for 2016 – 2018 indicates that the company
can service its fixed costs and interest on debt hence this attracts fixed cost costs capital investors
as well as creditors.

Net profit margin ratio - this is a key indicator for investors and creditors to see how businesses
are supporting their operations. The net profit margin can indicate how well the company
converts its revenue into profits (Net earnings divided by Net revenue). Net profit margin helps
investors assess if a company's management is generating enough profit from its sales and
whether operating costs and overhead costs are being contained. The ratio for 2015 was -112%
indicating that the company was not a favorable investment destination. However for the years
2016 and 2017 the obtained ratios of 24% and 59% indicated a growth trends, whilst that of 2018
of 32% indicates an acceptable position though a slump. If companies can make enough money
from their operations to support the business, the company is usually considered more stable. Net
margin includes all the factors that influence profitability whether under management control or
not hence ideal for investment.

Cash flow Margin: The Cash Flow Margin ratio is an important ratio as it expresses the
relationship between cash generated from operations and revenue hence the ability of a firm to
translate sales into cash. The ratios obtained for Dawn properties were as follows: 23% in 2015, -
16
166% in 2016, -8% in 2017 and a positive 37% in 2018. In 2018 the company had a positive
position which enables it honor its obligations. Cash is important as it is the spinal code and life
blood for a company’s daily operations that is working capital. The company needs cash to pay
dividends, suppliers, service debt, and invest in new capital assets, so cash is just as important as
profit to a business firm.

Return on total assets (ROA): Asset turnover tells an investor total sales per dollar of assets on
the balance sheet. ROA is also a sure-fire way to gauge the asset intensity of a business. The
lower the profit per dollar of assets, the more asset-intensive a business is. The higher the profit
per dollar of assets, the less asset-intensive a business is. All things being equal, the more asset-
intensive a business, the more money must be reinvested into it to continue generating earnings.
The company recorded a negative ROA in 2015 of 4% meaning that the company made a loss of
4cents per each dollar of assets. For the other periods it was positive as follows: 1%, in 2016, 3%
in 2017 and 4% in 2018. In 2016 the company generated 1cent of revenue per each dollar of
assets and the highest asset utilization was recorded in 2018 where the company generated 4cents
per each dollar of assets.

Return on Equity (ROE) - ROE shows how well a company uses funds invested by
shareholders to generate earnings for growth. The ratio has shows a gradual improvement from
2015 where the company made loss hence a negative ratio of 5%. In 2016, the company
managed to improve to 1%, thereafter in 2017 it grew to 3 % and 4% in 2018. Return on Assets
and Return on Equity helps to understand the ability of the firm to generate earnings. Return on
equity is net income by shareholders equity. This ratio basically tells us how well a company
uses its investors’ money.

Cash return on assets: The indicator determines the amount of money generated from the
operating activity for one dollar of the average annual value of assets. The asset utilization ratio
measures management's ability to make the best use of its assets to generate cash. The ratio for
2015 was -1%, whilst 2016 had a -3%. Positive ratios were recorded in 2017 at 1% and 4% in
2018. When Cash return on assets and ROA ratios diverge, it is a sign that cash flow and net
income are not aligned, which is a point of concern for investors. However for Dawn Properties
the ratios are in tandem signifying the accuracy of the financial statements.

17
 150% Profitability Ratios

100%

50% 2018
2017
2016
2015
0%
Operating Net profit Cash flow Return on Return on Cash return
profit margin margin total assets equity (ROE) on assets
margin (ROA) or
return on
-50% investment
(ROI)

-100%

Figure 4.1: Profitability

4.2 Liquidity ratios

Liquidity ratios evaluate the current solvency of an organization’s financial position and
determine whether the company can pay its short-term obligations which can be paid off within
12 months or within the operating cycle. These may include salaries due, sundry creditors, tax
payable, outstanding expenses etc. The main liquidity ratios are calculated below for Dawn
properties:

Table 4.2: Liquidity Ratios

Ratio Formulae 2018 2017 2016 2015
Current ratio Current Assets/ Current liabilities
18
 2.01 3.66 1.58 2.13
Quick or acid-test (Current Assets - Inventory)/
ratio Current liabilities 1.25 1.57 0.91 1.54
Cash flow liquidity Cash + CFO + Marketable
ratio Securities/ Current liabilities 1.78 (0.09) (0.51) 0.16
Average collection Net Accounts receiveble/ Average
period daily Sales 76.78 258.0 338.36 137.34
2
Days inventory Inventory/ Average daily cost of 213.
held sales 42
Days payable Net Accounts payables/ Average 151
outstanding daily cost of Sales .82

Current Ratio - This indicator compares current assets and current liabilities to determine the
ability of an entity to pay current liabilities from current assets. Most literatures suggest a current
ratio benchmark of 1.5 to 3 in the properties business. In 2015, the company required 2.13
dollars in current assets to cover each dollar in current liabilities whilst in 2016 it required 1.58
dollars of current assets to cover a dollar of liabilities. The current ratio for Dawn Properties for
2017 at 3.66 indicates that the company is more liquid and is apparently in a better position to
pay off its liabilities. In 2018, the ratio dropped to 2.01 indicating that is still liquidly enough to
cater for its liabilities. The worst ratio in 2015 of 1.58 is acceptable since it is above 1.5 and
considering the nature of the properties business.

Quick or acid-test ratio - Quick ratio is considered a more reliable test of short-term solvency
than current ratio because it shows the ability of the business to pay short term debts
immediately. It therefore excludes inventory so as to remain with the most liquid assets and the
general benchmark is 1:1 to 1.5. For Dawn Properties the years 2015, 2017 and 2018 with the
ratios 1.54, 1.57 and 1.25 respectively indicates a viable position. However, in 2016 the ratio of
0.91 indicates that there are more liabilities to liquid assets which might compromise the
servicing ability of the corporation on its debts. If quick ratio is very high, it means company has
high percentage of liquid assets that shows company is not using their assets properly because
company have their asset motionless.

Cash flow liquidity ratio – the cash flow ratio is calculated using Cash plus Cash flow from
operating activities and marketable securities so as to eliminate the problem of management
manipulating the cash flow ratio by lengthening the time they take to pay the bills, shortening the

19
time it takes to collect what's owed to them, and putting off buying inventory. Investors and
creditors have keen interest in the ratio as it enable them to assess whether company is
generating enough cash from its operation to services its liabilities. The ratios for the company
were positive in 2018 and 2015 at 1.78 and 0.16 respectively hence lucrative in the eyes of the
investors. In 2016 and 2017 the company recorded negative ratios of 0.51 and 0.09 which
indicates that the liquid position is questionable as the operations are not generating enough
liquidity.

Average collection period - It is the average numbers of days it takes a company to collect its
accounts receivable. The shorter the collection period the better the company liquidity position
hence an improve cash conversion cycle. The days taken by Dawn Properties to collect are
accounts receivables was as follows for the period under review: 137.34, 338.36, 258.02 and
76.78 for the period 2015, 2016, 2017 and 2018 respectively. From these calculations it can be
noted that the company has improve immensely in 2018 which is healthy for the company and its
investors and or creditors as it needs cash to pay dividends and or fixed cost capital expense.

Day’s inventory held and Days payable outstanding were not commented since company had
cost of goods sold in 2018 only hence there is no comparison.

4.00 Major Liquidity Rations

3.50
3.00
2.50
2018
2.00
2017
1.50 2016
2015
1.00
0.50
-
(0.50)
(1.00)

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4.3 Leverage Ratios

Financial leverage ratios measure the level of debt incurred by a business entity against several
other accounts in its balance sheet, income statement, or cash flow statement. They indicate the
overall debts load of a company and compare it with the income or assets or equity. These ratios
either compare debt or equity to assets as well as shares outstanding to measure the true value of
the equity in a business. This shows how much of the company assets belong to the shareholders
rather than creditors. When shareholders own a majority of the assets, the company is said to be
less leveraged. When creditors own a majority of the assets, the company is considered highly
leveraged. All of these measurements are important for investors to understand how risky the
capital structure of a company and if it is worth investing in.

Table 4.3: Leverage Ratios

Ratio Formulae 2018 2017 2016 2015

Debt ratio Total liabilities/ Total assets
0.10 0.11 0.11 0.06
Long-term debt to long term debt/ (long term debt
total capitalization +Stockholder's Equity) 0.07 0.08 0.06 0.04
Debt to equity total liabilities/ Equity
0.11 0.12 0.12 0.06
Times interest Operating profit/Interest expense
earned 18.98 12.92 32.08 6.30

Debt ratio - Compares assets to debt, and is calculated as total debt divided by total assets. A
high ratio indicates that the bulk of asset purchases are being funded with debt. In 2015, the ratio
indicated that the 6 cents of each dollar of assets were financed by debt, whilst in 2016 and 2017
the ratio was at 0.11. In 2018 the ratio declined to 10 cents of each dollar of assets being
financed by debt. In a sense, the debt ratio shows a company’s ability to pay off its liabilities
with its assets. Overall, the calculated ratios indicates that at maximum, Dawn Properties must
sell 11% of its assets in order to pay off all of its liabilities, a position which attracts both equity
and debt investors.

Debt to equity ratio - Compares equity to debt, and is calculated as total debt divided by total
equity. A high ratio indicates that the business owners may not be providing sufficient equity to
fund a business. More specifically, it reflects the ability of shareholder equity to cover all
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outstanding debts in the event of a business downturn. The obtained results for Dawn Properties
was 0.06 in 2015 meaning that there are 6% as many liabilities to equity. In other words, the
assets of the company are funded at 0.06-to-1 by investors to creditors. This means that investors
own 0.94 cents of every dollar of company assets while creditors own only 0.06 cents on the
dollar. The obtained results in 2016 and 2017 were 0.12 and in 2018 it fell by 1% to close at
0.11. Lower values of debt-to-equity ratio are favorable indicating less risk. Higher debt-to-
equity ratio is unfavorable because it means that the business relies more on external lenders thus
it is at higher risk, especially at higher interest rates. A gearing ratio between 25% and 50% is
typically considered optimal or normal for well-established companies. Anything below 25% is
typically considered low-risk by both investors and lenders whilst anything above 50% s
typically considered highly levered or geared. As a result, the company would be at greater
financial risk, because during times of lower profits and higher interest rates, the company would
be more susceptible to loan default and bankruptcy.

Long-term debt to total capitalization - To achieve a balanced capital structure, firms must
analyze whether using debt, equity (stock), or both is feasible and suitable for their business.
Long-term debt can be beneficial if a company anticipates strong growth and ample profits
permitting on-time debt repayments. Lenders collect only their due interest and do not participate
in profit sharing among equity holders, making debt financing sometimes a preferred funding
source. On the other hand, long-term debt can impose great financial strain on struggling
companies and possibly lead to insolvency. Thus, for 2015 their long-term debt to total
capitalization ratio was 4%, 2016 was 6%, 2017 was 8% whilst in 2018 obtained a ratio of 7%.
Literature has it that this ratio should not exceed 40% hence for the obtained results, Dawn
Properties can safely borrow and debt market would be ready to extend credit to them.

Times interest earned - Times interest earned (TIE) is a metric used to measure a company's
ability to meet its debt obligations as it indicates how many times a company can cover its
interest charges on a pretax earnings basis. Bonds and other contractual debt interest components
are summed up. Along with looking at debt ratios, the investors should look at interest coverage
ratio to find out whether the company has enough earnings to pay off its interest. In 2015 the
company made a loss hence the ratio was -6.30 times indicating an inability to cover its fixed
cost expense from the operating profit.

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In the subsequent year, 2016, the ratio improved significantly to 32.08 whilst in 2017 it fell to
12.92 and improved to 18.98. For the three years to 2018, the company’s results lure both debt
and equity finance as the company is able to service debt and or pay a dividend.

4.4 Activity Ratios

Activity Ratios are a set of financial ratios that measures how effectively a business uses its
operating assets and convert them into sales or cash. Activity ratios help in evaluating a
business’s operating efficiency by analyzing fixed assets, inventories, and accounts receivables.
It not just expresses a business’s financial health but also indicates the utilization of the balance
sheet components.

Table 4.4: Activity Ratios

Ratio Formulae 2018 2017 2016 2015
Accounts receivable Net Sales/ Net Accounts
turnover Receivables 4.75 1.41 1.08 2.66
Inventory turnover Cost of goods sold/
inventory 1.71 - - -
Accounts payable Cost of goods sold/ Net
turnover Accounts Receivables 2.40 - - -
Fixed asset turnover Net Sales/ PPE
12.06 5.94 4.47 3.03
Total asset turnover Net Sales/ Total Assets
0.11 0.05 0.05 0.04

Accounts receivable turnover - The accounts receivable turnover ratio is an accounting

measure used to quantify a company's effectiveness in collecting its receivables or money owed
by clients. Generally, the higher the accounts receivable turnover ratio, the more efficient your
business is at collecting credit from your customers. The ratio for Dawn Properties in 2018 was
4.75 which shows a great improvement from the past trading periods where 1.41 was obtained in
2017 and1.08 in 2016. It can be observed that the company’s turnover of 4.75 in 2018 means
that Dawn properties collects receivables about 4.75 times a year or once every 77 days.

A higher ratio, therefore, can means: a company is receiving payment for debts, which increases
cash inflow, collections methods are effective, the company is extending credit to the right kinds

23
of customers, meaning bad debt are fewer and customers are paying off debt quickly, freeing up
credit lines for future business initiatives.

Fixed asset turnover – The asset utilization ratio measures management's ability to make the
best use of its property plant and equipment to generate revenue. A high ratio depicts a company
that has better managed its resources in generating revenue compared to a company that has a
lower ratio. Dawn Properties’ asset utilization ratio improved from 3.03 in 2015 times to 12.06 in
2018 times which indicates that company is continuously improving efficient management of
assets to generate revenue. The ratio for 2016 was 4.47 and that of 2017 was 5.94.

Total asset turnover – The utilization of total assets ratio demonstrates how superior or meagre
the total assets were utilized in generating the revenue during the financial year. The company’s
ratio for the four year period had been improving from 0.04 in 2015 to 0.11 in 2018. However
the ratios are generally low due the nature of the business which is capital intensive in the form
of land and buildings.

4.5 Market ratios

The market value ratios are the financial metrics which are used to evaluate the stocks of
publicly traded companies. Market value ratios help evaluate the economic status of publicly
traded companies. These ratios are mainly used by investors to check whether the share’s prices
are valued correctly in the market or they are trading at a higher price or lower. The
overvaluation or undervaluation of shares helps investors decide whether they should go long or
short on the shares they are going to invest in. These ratios are employed by current and potential
investors to determine whether a company's shares are over-priced or under-priced.

Table 4.5: Market ratios

Ratio Formulae 2018 2017 2016 2015
Earnings per Net Earnings/ Average shares

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common share outstanding 0.14 0.12 0.04 0.01
Price-to-earnings Market Price per share/ EPS
17.86 16.08 42.50 85.00
Dividend payout Dividend per share/ EPS
0.00291 0.000093 - 0.92
Dividend yield Dividend per share/ Market
Price of common stock 0.00016 0.0000058 - 0.01

Earnings per common share - Earnings per share measure a company's net income per share of
outstanding stock, indicating a company's profitability to investors. EPS is calculated by dividing
the company's net income by the number of outstanding shares. This calculation is heavily
influenced on how many shares are outstanding. Thus, a larger company will have to split its
earning amongst many more shares of stock compared to a smaller company. Higher earnings
per share ratio often make the stock price of a company rise. Dawn properties’ EPS has been
improving from 2015 up to 2018 as follows: 0.01, 0.04, 0.12, and 0.14 in the years 2015, 2016,
2017 and 2018 respectively. This observed position is lucrative to equity investors as the
company’s profitability to shareholders is improving. A higher EPS is the sign of higher
earnings, strong financial position and, therefore, a reliable company to invest money. A
negative EPS figure denotes that the company has lost money during the period for which EPS
has been calculated.

Price-to-earnings - is a market prospect ratio that calculates the market value of a stock relative
to its earnings by comparing the market price per share by the EPS. The price to earnings ratio
indicates the expected price of a share based on its earnings. As a company’s EPS being to rise,
so does their market value per share. Dawn properties’ P/E ratio for 2015 was 85, meaning that
investors were willing to pay 85 dollars for every dollar of earnings. The ratio deteriorated in
2016 where it was 42.50, 2017 at 16.08 and 2018 it was at 17.8. The higher the P/E ratio, the
more the market is willing to pay for each dollar of annual earnings. Companies with high P/E
ratios are more likely to be considered risky investments than those with low P/E ratios because a
high P/E ratio means high expectations for a company’s potential earnings growth. Since P/E
ratio varies from industries to industries, it was more valuable to compare P/E ratios of
companies within the same industry or against a company’s historical P/E ratios. The properties
industry ratio for 2018 was 16.3 therefore that of Dawn Properties was slightly above the
industry’s average.

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Dividend payout - discloses what portion of the current earnings the company is paying to its
stockholders in the form of dividend and what portion the company is ploughing back in the
business for growth in future. It is computed by dividing the dividend per share by the earnings
per share (EPS) for a specific period. A low dividend payout ratio means the company is keeping
a large portion of its earnings for growth in future and a high payout ratio means the company is
paying a large portion of its earnings to its common shareholders. The payout ratio for 2015 was
0.92 whilst in 2016 there were no dividends paid. In 2017 the ratio was at 0.000093 whilst in
2018 the ratio was 0.00291. Whether a payout ratio is good or bad depends on the intention of
the investor. While some investors prefer that a company reinvest its earnings back into the
business to fuel future growth, many appreciate a generous cash dividend payment. Excessively
high ratios suggest that the company might be paying out more than it can comfortably afford.
Not only does this leave just a small percentage of profits to plow back into the business, but it
also leaves the firm highly susceptible to a decline in future dividend payments

Dividend yield - The dividend yield is used by investors to show how their investment in stock
is generating either cash flows in the form of dividends or increases in asset value by stock
appreciation. The dividend yield is a financial ratio that measures the amount of cash dividends
distributed to common shareholders relative to the market value per share. A company with a
high dividend yield pays its investors a large dividend compared to the fair market value of the
stock. This means the investors are getting highly compensated for their investments compared
with lower dividend yielding stocks. The dividend yield for 2015 was 0.01 whilst in 2016 the
company did not declare dividends. In 2017 the dividend yield was 0.0000058 and in 2018 it was
at 0.00016. This means that in 2018, Dawn Properties’ investors receive 0.0000058 cents in
dividends for every dollar they have invested in the company.

In summing up this section on ratio analysis, ratios have been found to ignore the size of the
business, they do not take into account contingent liability, they also does not incorporate
uniform accounting policies and are susceptible to creative accounting. Ratios are only based on
historical data and they ignore the impact of inflation as well as other market conditions. Ratios
also considers the position of the business on a particular date only and they fail to capture the
impact of seasonality

26
5.0 DuPont Analysis
The Dupont analysis also called the Dupont model is a financial ratio based on the return on
equity ratio that is used to analyze a company’s ability to increase its return on equity. In other
words, this model breaks down the return on equity ratio to explain how companies can increase
their return for investors. The Dupont analysis looks at three main components of the ROE ratio:
profit margin, total asset turnover and financial leverage and calculated as follows;

NET INCOME NET SALES TOTAL ASSETS

ROE = × ×
NET SALES AVERAGE TOTAL ASSETS EQUITY

For 2018 the calculation is as follows:

0.34 × 0.03 ×1.11 = 0.011

Based on these three performances measures the model concludes that a company can raise its
ROE by maintaining a high profit margin, increasing asset turnover, or leveraging assets more
effectively. For Dawn properties the company needs to increase its borrowing or debt financing
so as improves its ROE. Returns on equity between 8% and 15% are generally considered to be
acceptable in the properties industry. The obtained result for Dawn properties indicates that there
are lucrative investment opportunities for debt financiers in the company. Management can also
figure that there is need for the company to improve its profits though capitalizing on financial
leverage.

6.0 Growth Potential Analysis

The analysis of sustainable growth potential examines ratios that indicate how fast a firm should
grow. Analysis of a firm’s growth potential is important for both lenders and owners. Owners
know that the value of the firm depends on its future growth in earnings, cash flows, and
dividends. Creditors also are interested in a firm’s growth potential because the firm’s future
success is the major determinant of its ability to pay obligations, and the firm’s future success is
influenced by its growth. The growth of business, like the growth on any economic entity,
including the aggregate economy, depends on: The amount of resources retained and reinvested
in the entity or the rate of return earned on the reinvested funds.

27
The more a firm reinvests, the greater its potential for growth. Alternatively, for a given level of
reinvestment, a firm will grow faster if it earns a higher rate of return on the funds reinvested.
Therefore, the growth rate of equity earnings and cash flows is a function of two variables: (1)
the percentage of net earnings retained (the firm’s retention rate), and (2) the rate of return
earned on the firm’s equity capital (the firm’s ROE), because when earnings are retained they
become part of the firm’s equity.
g =Percentage of Earnings Retained × Return on Equity = RR × ROE
Therefore for 2018:
g = 90.73% × 4% = 3.6%
2018 2017 2016
Retained Earnings %ge 91% 100% 100%
g 3.6% 3% 1%

The above figures indicate growth trends, that is, from 1% in 2016 through 3% in 2017 to 3.6%
in 2018. This position is ideal to investors as well as management as growth may indicate
survival of the corporate. The retention rate is a decision by the board of directors based on the
investment opportunities available to the firm. Theory suggests that the firm should retain
earnings and reinvest them as long as the expected rate of return on the investment exceeds the
firm’s cost of capital.
Therefore, a firm can increase its ROE by increasing its profit margin, by becoming more
efficient (increasing its total asset turnover), or by increasing its financial leverage (and its
financial risk).

7.0 Business profile

The company is facing price risk that the fair value of future cash flows of a financial instrument
will fluctuate because of changes in market prices, other than those arising from interest rate risk
and currency risk, whether those changes are caused by factors specific to the individual
financial instrument or its issuer or factors affecting all financial instruments traded in the
market.

The company is also facing credit risk which arises from bank balances and short term money
market investments, including rental receivables from the lessee and outstanding amounts from
the property consulting business segment, as well as loans to employees.

28
Liquidity is another risk faced by the company. The Finance and Investment Committee
monitors rolling forecasts of the Group’s liquidity requirements to ensure it has sufficient cash to
meet operational needs at all times so that the Group does not breach borrowing limits set in the
Memorandum of Association.

Dawn Properties is managing its capital so as to safeguard the Group’s ability to continue as a
going concern in order to provide returns to shareholders and benefits for other stakeholders; and
to maintain an optimal capital structure to reduce the cost of capital. In order to maintain or
adjust capital structure, the Group may adjust the amount of dividend paid to shareholders, return
capital to shareholders, issue new shares or sell assets to reduce debt.

8.0 Recommendations
The economy grew by 3.5% in 2018, driven mostly by continued growth in agriculture and
mining. The currency value distortions resulted in severe hard currency shortages in the formal
market hence Dawn properties business was not spared as prices for raw materials, particularly
in construction industry, increased significantly. However the company’s hotel portfolio was less
influenced and overall, the company’s growth was more than that of the economy. This is
witnessed by a growth rate of potential of 3.6% as calculated in the above section. In terms of net
comprehensive income for the period 2017 to 2018 it grew by 16%. The net profit margin for
2018 was 32% indicative a positive trajectory. In light of the aforesaid, debt investors and or
creditors a guaranteed that the company has the capacity to service its fixed cost expense in the
form of interest. This is also confirmed by an interest coverage ratio of 18.98 in 2019.

The company is considered to be a low risky in terms of its gearing position, that is, the debt to
equity ratio is at 11% whilst the debt ratio is at 10% in 2018. The observed trend indicates fewer
spirals hence debt investors and creditors are guaranteed of their stakes if the company is to be
liquidated.

The liquidity position of the company has been quite excellent as indicated by growth trend on
the horizontal analysis as well as the solvency ratios. This position is quite ideal to suppliers as
they became aware that their merchandise would be paid for. Also stockholders will be
guaranteed of dividend payments as they require liquid cash.

29
In terms of asset utilization, the total fixed asset turnover ratio was at 12.06 in 2018 indicating a
growth trend from 3% in 2015. Total asset turnover was at 11% in 2018. These ratios were
slightly above the industry’s average assets utilization ratio of 9.7%. The aforesaid is beneficial
to debtors and or customers of the company as they are guaranteed of service provision.

In the view of potential and current stockholder investors, the company’s dividend policy is not
lucrative as evidenced by a 0.0000058 dividend yield in 2018. However given the huge
investments on ground and retained earnings ratio 91% in 2018, stock appreciation is likely in
the near future. This can be lucrative to stockholders but depends on their objectives.

The company is holding a hefty of investments which improves its revenue growth. In 2017 and
2018, the company’s ratio of investment assets to total assets was at 90% whilst that of 2016 was
at 91%. These investment assets are crucial, however for Dawn properties they are lacking
diversity but nevertheless, huge investments had been on hotels and residential lands which are
less likely to be affected by swings. These kinds of investments are lucrative in the eyes of
investors.

9.0 Conclusion
In sum, Dawn Properties has adequate liquidity; a good operating record, including a relatively
consistent growth record that implies low business risk; below-average financial risk when we
consider its leverage; and above-average growth performance relative to the aggregate market.

References
Blanchard III (2008) (1999). Essentials for Investment, and Fincial Engineering USA.

Bordie Z. and Mucus A. (1999). Essentials for Investment, vol 1, McGraw-Hill Higher
Education. USA.

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Bordie Z. , Kane A. and Mucus A. (2004). Essentials for Investment 5TH Edition, McGraw-Hill
Higher Education. USA.

Dialynas F. and Edington V. (2004). Investor Reaction to Salient News in Closed-End Country
Funds.” Journal of Finance

Honneger P. and Mathis L. (2000). High-Yield Bonds: Assessing Risk and Identifying Value in
Speculative Grade Securities. Chicago: Probus.

Kim G (2016). Earnings Announcements: Pre- and Post-Responses.” Journal of Portfolio

Management

Kalyanaraman (2010). Advanced Bond Portfolio Management. Hoboken, NJ: John Wiley

Klopers L. (2014). Investment Analysis and Portfolio Management Strategies, Journal of

Financial Services Research

Reilly K., Kao I., and Wright G. (1992). Historic Changes in the High Yield Market.” Journal of
Applied Corporate Finance

Sherrerd F. and Katrina B. (2001). The Coming Evolution of the Investment Management
Industry: Opportunities and Strategies. Goldman Sachs, New York

http://www.imara.com/

https://dawnpropertyconsult.co.zw/

Appendix 1: Financial statements

31