Executive Summary
In this document, the financial performance of two UAE-based oil companies – Emirates National Oil Company (ENOC) and Abu Dhabi National Oil Company (ADNOC) – will be discussed relative to their profitability, leverage, liquidity, and managerial efficiency ratios. This report will also compare the financial performance of both companies by comparing them to industry performance to understand the trend analysis for the years 2018 and 2019. ENOC and ADNOC are both based in the United Arab Emirates and state-owned. Established in 1993 and with annual revenues of more than AED 21.3 billion ENOC has vast interests across different energy value chains. Comparatively, ADNOC is a leading operator in the Middle East fuel distribution sector. Its core business is harnessing the energy resources of the United Arab Emirates (UAE) for nation-building purposes. The findings of this report will be integral in informing investor decisions regarding the two energy companies.
Introduction
A company’s key financial performance ratios offer investors with a reliable basis for making future business decisions. However, it is difficult to make sound judgements without having a full picture of a company’s overall financial performance (Lee & Lee, 2016). Based on this limitation, it is critical to undertake a detailed analysis of key financial ratios to understand a company’s financial performance. This report was developed with this logic in mind because the performance of ADNOC and ENOC are evaluated based on their key profitability, liquidity, managerial efficiency and leveraging ratios, subject to industry averages computed in table 1.1 below.
Table 1.1 Industry average calculations and formulas
ADNOC Financial Ratio Analysis
ADNOC is a leading operator in the fuel distribution business within the UAE. It has an annual revenue of AED 21.3 billion and its core business is harnessing the country’s energy resources for purposes of national building (ADNOC Distribution, 2020). In this section of the report, movements in the company’s key financial ratios between the years 2018 and 2019 will be discussed, relative to the financial calculations provided in table 2.1 below.
Table 2.1. ADNOC’s financial ratio calculations
Profitability Ratios
Profitability ratios provide investors with sufficient data on how well a company is utilizing its resources to maximize shareholder value. This financial index is linked with the ability of companies to generate earnings for their investors, relative to their revenue inflows (Lee & Lee, 2016). Researchers have also supported the use of profitability ratios to measure a company’s performance relative to its peers in the market, the industry or history (Samonas, 2015; Robinson et al., 2015). According to table 2.2 below, ADNOC’s profitability ratios were evaluated based on a review of the gross profit rate, return on sales, return on assets, and return on stockholder’s equity.
Table 2.2 ADNOC Profitability Ratios
Gross Profit Rate: The gross profit rate is often expressed as a percentage of sales. ADNOC’s gross profit rate increased slightly from 22.1 in 2018 to 23.3 in 2019. This change implies that the company has been enjoying improved efficiency because of good management practices (Audit IT, 2020). However, compared to the industry performance, of 36.6 in 2019 and 40.5 in 2018, the firm’s gross profit rate is still low. This means that ADNOC’s business model is subpar compared to those of its competitors.
Return on Sales: The return on sales ratio helps investors to understand how fast a company can turn its sales into earnings. ADNOC experienced a slight increase in its return on sales between 2018 (9.3) and 2019 (10.4). This means that the company’s management undertook its operations efficiently to improve its returns (Dilipkumar, 2015). This performance was higher compared to the industry ratings of 5.4 in 2019 and 5.5 in 2018.
Return on Assets: The return on assets ratio is often used to understand how profitable a company can be relative to its resources. ADNOC reported a decline in return on assets from 24.2 in 2018 to 23.8 in 2019. This change signifies weaknesses in the company’s operational plans. However, compared to the industry averages of 2.4 in 2019 and -0.2 in 2018, ADNOC’s performance is higher than its competitors,’ signifying that it utilizes its assets well to make profits.
Return on Stockholder’s Equity: ADNOC reported a slight decline in stockholder’s equity ratio from 59.3 in 2018 to 59.2 in 2019. This change means that investors suffered a decline in their return on capital (Gupta & Gupta, 2017). Comparatively, the overall performance is lower than the industry’s average because there was a significant increase in return on stockholder’s equity from -6.5 in 2018 to 0.4 in 2019 (Audit IT, 2020). Therefore, the industry’s gains in stockholders equity was higher than that of ADNOC. This means that investors could get better returns in other companies.
Leveraging Ratios
Leveraging ratios refer to the extent that a company incurs debt, relative to the items that appear on its balance sheet and other financial statements. Financial analysts may consider using several types of leveraging ratios, but for purposes of this analysis, the debt ratio, equity ratio, debt-to-equity ratio, and times interest earning, will be used for the review. Table 2.3 below shows the results of the financial calculations for these ratios, relative to industry averages.
Table 2.3 ADNOC Leveraging Ratios
Debt Ratio: Debt ratios are used to determine the extent that a company has leveraged its assets to acquire debt. Stated differently, this ratio refers to the percentage of assets owned by a company that is acquired through debt (Gupta & Gupta, 2017). According to the findings highlighted in table 2.2 above, the percentage of assets financed by debt increased from 22.1 to 23.3 in the years 2018 and 2019, respectively. This change is significantly higher than the industry average of 0.5, meaning that ADNOC is heavily indebted to its investors.
Equity Ratio: The equity ratio is a financial measure for assessing how well a company uses its debts to finance its assets. ADNOC’s equity ratio is lower than the industry average of 5.45 because in 2018 and 2019, it posted equity ratios of -6.5 and 0.4, respectively. These findings may mean that the oil company has used a lot of debt to finance most of its asset purchases. This is a significant area of financial risk because an economic downturn could cause insolvency (Lee & Lee, 2016). In this regard, ADNOC should consider lowering its debt obligations before undertaking further investments.
Debt-to-Equity Ratio: The debt-to-equity ratio highlights the relationship between a company’s total liabilities with its debt obligations. It is also used to reflect the ability of shareholders to cover all debt obligations of a business in case of an economic downturn. ADNOC’s debt-to-equity ratio declined from 24.2 in 2018 to 23.8 in 2019. These figures are higher than the industry averages of less than 1.0 in the same period under analysis. These statistics affirm the findings of the equity ratio analysis highlighted above, which show the company’s heavy indebtedness.
Times Interest Earned: The times interest earned financial ratio is often used to assess a company’s ability to meet its debt obligations based on its current income. The financial measure is evaluated by reviewing the relationship between earnings before interest and tax with the interests accrued on debt. In 2018 and 2019, ADNOC’s time interest earned was 59, while the industry’s average was less than 2. These statistics mean that the oil company cannot effectively meet its debt obligations based on its income. However, this is unlikely to be a significant problem for investors because a majority of the company’s debt is state-owned and the government is the major shareholder in the oil company.
Liquidity Ratios
Liquidity ratios help investors to understand whether a company would be able to meet its debt obligations relative to its current assets. For purposes of this review, the liquidity ratio of ADNOC is evaluated based on an analysis of its current, quick, and cash ratios. Table 2.4 below outlines these ratios in 2018 and 2019.
Table 2.4 ADNOC Liquidity Ratios
Current Ratio: The current ratio is a financial performance indicator for evaluating how well a company can meet its short-term financial obligations that typically mature within one year. This financial ratio is expressed as a function of a firm’s current assets and liabilities (Lee & Lee, 2016). ADNOC’s current ratio for 2018 was 1.57 and in 2019 it was 1.7. These statistics mean that the company significantly improved its ability to pay its short-term financial obligations within the period under analysis by a factor of 0.2, meaning that it has improved its ability to pay short-term financial obligations (Mayes & Shank, 2017). Furthermore, the overall performance of the company is higher compared to its peers in the industry because the average current ratio in the industry was 1.02 for 2019 and 1.10 for 2018. These statistics mean that ADNOC could cover its short-term financial obligations better than its rivals do by at least a factor of 0.5.
Quick Ratio: The quick ratio is also referred to as the “acid test ratio” and it estimates how well a company can cover its debt obligations using its cash or current assets. This financial measure is derived by understanding the relationship between liquid current assets and current liabilities (Mayes & Shank, 2017). According to table 3 above, ADNOC’s quick ratio increased from 0.35 in 2018 to 0.42 in 2019. This difference means that the oil company has increased its capacity to meet its short-term debt obligations with its cash and cash equivalents. Although ADNOC has reported positive gains in its quick ratio performance, the statistics highlighted above are still lower than the industry averages of 0.87 in 2019 and 0.92 in 2018. In other words, its rivals can cover their debt obligations much faster than ADNOC does.
Cash Ratio: The current ratio is used to understand a company’s liquidity position as a percentage of the cash it has and its current liabilities. Some researchers contend that this ratio is applicable in enabling investors to understand how a company would meet its financial obligations using cash or marketable securities (Lee & Lee, 2016). According to the findings highlighted in table 3 above, ADNOC has improved its cash ratio from 0.35 in 2018 to 0.39 in 2019. This finding means that the oil giant can meet its short-term financial obligations without necessarily having to sell its assets (Schindeldecker, 2017). If the cash ratio for ADNOC is compared with the average liquidity in the industry, it emerges that the oil company is a leader of its peers in this regard because its cash ratio is higher than the industry’s average of 0.18 in 2019 and 0.23 in 2018. This finding means that ADNOC can meet its short-term financial obligations much better than its rivals in the industry can do.
Managerial Efficiency Ratio
As its name suggests, the managerial efficiency ratio is used as an indicator of how effective a company’s management is in meeting its short-term and long-term obligations. This analysis may involve how well a company’s top leadership is using its resources to implement common strategies. For purposes of this review, this financial measure is assessed by evaluating the total asset turnover, receivable turnover, and inventory turnover of ADNOC as shown in table 2.5 below.
Table 2.5 ADNOC Managerial Efficiency Ratios
Total Asset Turnover Ratio: The total asset turnover ratio refers to how well a company can use its resources to generate revenue or sales. Relative to this assertion, the total asset turnover ratio of a company is hinged on understanding the relationship between its net sales as a percentage of its total assets (Lee & Lee, 2016). The total asset turnover for ADNOC slightly increased from 532 days in 2018 to 518 days in 2019. When compared to the industry average, it is established that the company’s total asset turnover is higher for 2018. In 2019, there was a steady increase in industry turnover from 1062 days to 273 days, which outpaced ADNOC’s performance. Overall, these findings suggest that ADNOC has posted a positive performance in its total asset turnover, relative to industry averages.
Receivable Turnover Ratio: A company’s receivable turnover ratio is used to understand its efficiency in recovering debt from its clients. It is calculated by understanding the relationship between net credit sales and the average accounts receivables. Based on these calculations, ADNOC’s receivable turnover ratio was steady in 2019 (3.7) and 2018 (3.9) respectively. However, the industry averages are higher at 14 for 2019 and 52 for 2018. These findings suggest that ADNOC has an inefficient collection system for its debt or may be serving low quality customers.
Inventory Turnover Ratio: The inventory turnover ratio is used to evaluate how many times a company sells its stock within a specific analytical period. This financial measure is derived by understanding the relationship between the average inventory and sales of a company. The inventory turnover ratio for ADNOC remained steady at 2.3 for the two years under review. However, this number was significantly lower than the industry’s average of 4 for 2019 and 19 for 2018, respectively. This finding means that ADNOC has been selling its inventory at a lower rate than its competitors have.
ENOC Financial Ratio Analysis
ENOC is a global oil company wholly owned and managed by affiliates of the Dubai governments. Established in 1993, the company has expanded its operations across different energy sectors and integrated its activities across varied value chains to become a leading integrated player in the Middle East oil and energy industry (ENOC Company, 2020). As highlighted in the introduction section of this report, ENOC is also another giant energy firm in the UAE and the wider Middle East region. Based on this merit, its financial performance is assessed through a review of its profitability, leverage, managerial efficiency, and liquidity ratios calculated in table 3.1 below.
Table 3.1 ENOC’s financial ratio calculations
Profitability Ratios
Table 3.2 below shows that ENOC’s profitability has been assessed through a review of key financial indices that include gross profit rate, return on sales, return on assets, and return on stockholder’s equity as shown below.
Table 3.1. ENOC Profitability Ratios
Gross Profit Rate: ENOC’s gross profit rate increased from 35.2 in 2018 to 37.4 in 2019. This change means that the company’s good management policies have a positive effect on its performance. This level of profitability is consistent with the industry’s performance of 40.5 in 2018 and 36.6 in 2019. The numbers mean that ADNOC’s business model is at par with those of its competitors.
Return on Sales: ENOC experienced an increase in return on sales ratio from 5.4 in 2018 to 7.3 in 2019. This means that the company’s management undertook its operations efficiently to maximize returns. Its 2018 performance was at par with the industry’s 5.5 but in 2019, ENOC’s return on sales ratio was significantly higher at 7.3. This means that the company has been implementing effective business strategies in meeting its sales objectives.
Return on Assets: ENOC reported an increase in return on assets from 1.7 in 2018 to 2.3 in 2019. This change means that the company has been effectively utilizing its resources to create value. The performance is consistent with that of the industry, which also experienced a significant increase in return on assets from 0.2 in 2018 to 2.4 in 2019.
Return on Stockholder’s Equity: ENOC reported a decline in stockholder’s equity between the years 2018 and 2019 from 1.9 to 0.2, respectively. This means that investors have not been receiving good value for their capital (Weygandt et al., 2015). Nonetheless, this change reflects the industry’s performance, which was at 0.4 in 2019.
Leveraging Ratios
Table 3.3 below shows that ENOC’s leveraging ratios were assessed through a review of key financial indices that included debt, equity, debt-to-equity and time interest earned ratios. The findings are as shown below.
Table 3.3 ENOC Leveraging Ratios
Debt Rati: According to the findings highlighted in table 3.3 above, ENOC’s debt ratio increased from 0.1 in 2018 to 0.2 in 2019. These numbers are significantly lower than the industry’s average of 0.5, meaning that the oil firm is not heavily indebted to its investors. This is because the company is a wholly owned enterprise of the Dubai government.
Equity Ratio: ENOC’s equity ratios for 2018 (6.6) and 2019 (7.4) are higher than the industry’s average of 5. These statistics mean that the company can take debt to finance its purchases (Warren, Reeve, & Duchac, 2017b). However, this is a significant area of financial risk because if the company experiences a bad business cycle, it may be unable to meet its financial obligations.
Debt-to-Equity Ratio: ENOC’s debt-to-equity ratio increased from 0.3 to 0.5 between 2018 and 2019 respectively. However, these figures marked a decline from the industry’s average of 0.71, which was reported in 2019. The current ratio suggests that ENOC has increased its ability to cover all debt obligations in case of an economic downturn.
Times Interest Earned: ENOC’s time interest earned increased from 0.89 in 2018 to 1.7 in 2019, to imply that it improved its ability to meet its debt obligations based on its current income. This performance is within the same ratio range of the industry because the average in 2018 was 0.99 and in 2019, it was 1.44. Therefore, ENOC’s improved performance in 2018 and 2019 is consistent with that of the industry.
Liquidity Ratios
Table 3.4 below shows that ENOC’s liquidity ratio analysis was undertaken by calculating the current, quick, and cash ratios as shown below.
Table 3.4 ADNOC Liquidity Ratios
Current Ratio: ENOC’s current ratio declined from 1.54 in 2018 to 1.02 in 2019. This change means that the company has experienced a lower ability to pay its short-term financial obligations (PKF International, 2017). However, this decline in performance is not unique to the organization as the industry average of the same ratio also declined from 1.10 in 2018 to 1.02 in 2019. Therefore, ENOC’s quick ratio performance reflects that of the industry.
Quick Ratio: ENOC’s quick ratio increased from 1.05 in 2018 to 1.08 in 2019, meaning that it increased its ability to cover its debt obligations using its cash and current assets within the period in assessment. This performance is above that of the industry because the average ratio for the sector decreased from 0.92 in 2018 to 0.87 in 2019. Therefore, the quick ratio analysis shows that ENOC’s performance is better than that of its peers. In other words, the oil firm can cover its debt obligations much faster than its rivals can.
Cash Ratio: According to table 3.3 above, ENOC’s cash ratio increased from 0.18 in 2018 to 0.19 in 2019. This finding may mean that the oil giant has increased its ability to meet its short-term financial obligations without necessarily having to sell off its assets (Boyd & Mooney, 2015). This performance is better than that of its peers because the industry’s cash ratio declined from 0.23 in 2018 to 0.18 in 2019 in the same period.
Managerial Efficiency Ratio
According to table 3.5 below, ENOC’s managerial efficiency ratio was obtained by calculating the total asset turnover (in days), receivable turnover, and inventory turnover. The findings are highlighted below.
Table 3.5 ADNOC Managerial Efficiency Ratios
Total Asset Turnover Ratio: The total asset turnover ratio for ENOC increased from 666 days in 2018 to 767 days in 2019. This change means that the company decreased its ability to use resources to generate revenue or sales (Schindeldecker, 2017). During the same period of analysis, there was a decline in total asset turnover from 1062 to 273, meaning that ENOC’s performance was above those of its peers.
Receivable Turnover Ratio: ENOC’s receivable turnover ratio declined from 22 in 2018 to 10 in 2019, meaning that the company has experienced reduced efficiency in recovering debt from its clients. However, this decline is still above the industry’s drop in performance from 52 in 2018 to 14 in 2019. These changes suggest that the energy sector may be suffering from an inefficient debt collection system or global economic uncertainties.
Inventory Turnover Ratio: ENOC’s inventory turnover ratio dropped from 7 in 2018 to 2 in 2019. This decline means that the company has reduced the frequency of times it sells its stock within the analytical period (Warren, Reeve, & Duchac, 2017a). The industry also experienced the same decline although with a significantly bigger drop from 19 in 2018 to 4 in 2019. This finding means that ADNOC has been selling its inventory at a lower rate than its competitors have.
Comparison between ADNOC and ENOC
Although ADNOC and ENOC are both UAE-based companies, there is a need to understand how the financial performance of both firms compare with each other, relative to industry growth. To this end, table 4.1 below compares ADNOC and ENOC’s financial performance based on their profitability, leveraging capabilities, liquidity, and managerial efficiency ratios. The information relied on to formulate the table was derived from the calculations outlined in section 3.0 above.
Table 4.1 Comparison between ADNOC and ENOC
According to table 4.1 above, ADNOC has shown a better financial performance than ENOC on the four financial indicators highlighted above. For example, the managerial efficiency ratio analysis revealed that ADNOC has a better management acumen than ENOC because its total asset turnover is higher than the industry’s average. However, ENOC has registered stronger profitability ratios compared to ADNOC. It also has better leveraging ratios, meaning that it has effectively used its debts to finance its operations and acquire assets better than ADNOC has done. Comparatively, ADNOC has better liquidity ratios on all three measures of financial performance, including current, quick and cash ratios. Alternatively, ENOC’s equity ratio was lower compared to ADNOC’s ratio. In this regard, it has a better financial performance.
Judgment on Investment Attractiveness
The attractiveness of a company as an investment driver is contingent on many factors relating to its internal and external environments. For example, financial performance is a reliable indicator of a firm’s overall health (Damodaran, 2016). Similarly, its ability to navigate the competitive landscape complements its attractiveness (Mohapatra, 2017). The investment appeal of ENOC and ADNOC is based on this criterion of analysis because the latter is a more attractive investment compared to the former due to its relatively stronger financial performance within the two years in review. However, its allure is not only contingent on this fact because its management structure and operational dynamics have also provided investors with more security and confidence in the company’s operations, compared to ENOC. For example, ENOC is owned by the Dubai government, which is a smaller public entity compared to the backing that ADNOC enjoys from the Abu Dhabi government. Furthermore, ENOC’s operations are mostly localized within Dubai and some Northern Emirates, while ADNOC’s operations are further spread within the UAE and the Middle East region (ADNOC Distribution, 2020). Therefore, investors are likely to benefit from higher economies of scale if they invest with ADNOC compared to ENOC.
The decision to rate ADNOC as a more attractive investment option is premised on studies, which have shown that larger state-backed corporations with a deep history in state building, tend to be more attractive to investors than newer corporations with relatively smaller scopes of operation (Luciani, 2015; Warren, Reeve, & Duchac, 2016). Furthermore, ADNOC has extensive resources it can use to manage most of its short-term and long-term financial obligations better than ENOC can. These resources can also be used to forge more effective partnerships with strategic entities and consequently generate better returns and revenue streams for its investors (Kraus, 2020). Nonetheless, from a financial standpoint, ADNOC needs to lower its debt burden if it is to remain competitive and become one of the highest rated stocks in the industry.
Conclusion
In this report, the financial performance of ADNOC and ENOC were evaluated based on four key financial ratios: liquidity, leverage, profitability, and managerial experience. These indices were employed to understand the efficacy of the companies’ debt management strategies, asset management practices, and ability to meet their financial obligations. It is established that ADNOC has a better financial performance than ENOC because it posted better financial ratios on managerial effectiveness, leverage and liquidity scopes of analysis. ENOC’s key strongpoint was on leverage; meaning that ADNOC has lower leverage ratios and needs to rethink its debt management strategies moving forward. In other words, it should have a lower debt burden to achieve its long-term goals.
Overall, the findings of this report demonstrate that ADNOC is a more attractive investment option compared to ENOC because it has stronger capabilities of managing its external and internal environmental factors for stable performance. Although both companies have government backing, investors can feel more comfortable funding a company that has been in operation for decades and has a firm understanding of intricacies in the oil and energy industry. This statement demonstrates that management acumen is also a significant factor to consider in predicting the future financial performance of ADNOC. Therefore, investors are more likely to get better and more secure returns by investing in it.
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