Introduction
Financial analysis involves the assessment of performance of a business. A business in this case can be a company, a firm, a corporation or a financial institution. In this paper, the aim will be to analyze the financial statements of Al Rajhi bank situated in Saudi Arabia. The analysis will look in to the ratio analysis and stock performance of the bank over three to four years.
The ratio analysis will include the profitability ratios, liquidity ratios, current ratios, debt ratios as well as leverage ratios. Additionally, this report will analyse the market ratios such as the earnings per share ratio. Finally, the focus will be on the performance of Al Rajhi bank’s stocks in Saudi Arabia’s stock exchange. The above features are therefore explained in full in the paper.
Objectives
The main aim of this report is to analyze the financial operations of Al Rajhi Bank. This has been done by use of various ratios and stock evaluations. By doing this analysis, it is possible to understand the business activities, and performance of the company. Additionally, this analysis can be used to forecast future performance of the bank. The analysis is to be carried out using historical data such as financial reports, ratios and stock charts.
Scope of the report
The report will aim at providing professional financial analysis of the financial reports. The other source of information to be used in this analysis is the board of directors’ statement of Alrajhi bank for the last four years from 2008 to 2011. All this information is available on the bank’s website and other websites which contain stocks prices. The findings will be used to conclude about the bank’s performance over the years.
Brief about the company operations
Al Rajhi Bank is a well-known public bank in Saudi Arabia. It is ranked among the best performing banks in Saudi Arabia. It is also rated as the world’s biggest Islamic financial institution. Al Rajhi is strong and focuses on delivering banking and business services to Saudi Arabia’s kingdom. It allows its clients to access small and medium size enterprises which are commonly known as SMEs. One of the bank’s strengths is its domestic network accounts.
The bank is also well known for contributing to the region’s development. It is run within the framework of Shariah and Islamic laws. Al Rajhi is one of the chief ventures in joint stock business in Saudi Arabia. It has a paid up capital of SR 6.75 billion. The bank has its headquarters situated in Riyadh. It has six regional offices and branches in countries like Malaysia, Kuwait and Jordan. The bank offers services in both the retail and corporate sectors. The regional expansion has seen the increase in the bank’s performance.
Company History
Al Rajhi’s banking and trading operations started in 1978. In the beginning of business, the bank’s operations were combined to form Al Rajhi Trading and Exchange Corporation. In 1987, the bank was changed in to a joint stock company. In February 2006, the company was renamed Al Rajhi Bank although it is still registered as Al Rajhi Banking and Investment Corporation.
The main equity holders of the corporation are the four sons of Abdul Aziz Al Rajhi. These are Abdullah, Mohammed, Saleh and Sulaiman. Seven out of the twelve members of the board are members of the Rajhi family. The board members that originate from the family have been known to have conservative policy which ensures that their operations do not affect the performance of the bank.
Al Rajhi bank has a capital base of around SR 13.50 billion as at March 2007. The bank has expanded to establish over 18 branches in Malaysia and various branches in Kuwait and Jordan. The bank has also been listed in the Saudi stock market therefore enabling it to trade its securities.
Al Rajhi Financial Statements
Al Rajhi’s Income Statement for the periods ended December 31st 2008- December 31st 2011 (All the figures are in Millions of Saudi Arabian Riyals)
Al Rajhi’s balance sheet for the periods ended December 31st 2008- December 31st 2011
Al Rajhi’s statement of cash flow for the periods ended December 31st 2008- December 31st 2011
Analysis of the income statement
Al Rajhi Bank has shown increase in its revenues from SAR9.347 billion in 2008 to SAR10.857 billion in 2011. The other features that have shown improvement in the income statement are gross profit, earnings from continuing operations and net income. This increase could be associated with the expansion strategy as well as the continuous good reputation of the bank. The operating expenses have also been on the rise although this could be associated with the opening or establishment of new branches.
Analysis of the balance sheet
It is worth noting that Al Rajhi bank relies on very little or no debt to raise capital. This makes it to incur few financial risks as compared to the other financial players in the industry. This means that changes in inflation and interest rates in the economy cannot affect the profitability and performance of the bank.
Al Rajhi bank’s total assets increased from SAR163.373billion in 2008 to SAR220.813billion in 2011. This could be associated with the expansion strategy which saw the establishment of regional branches in Kuwait and Jordan. On the other hand, the total liabilities before equity increased from SAR136.341billion in 2008 to SAR187.992billion in 2011. This could be associated by increase in accounts payable.
Analysis of the statement of cash flow
Although Al Rajhi bank’s net income has been increasing, cash flow operating and investing activities have been reducing. For instance, between 2009 and 2011, cash flow from operating activities reduced from SAR6, 249.3billion to SAR-17,286.6 billion. This could be as a result of increased costs used in the expansion strategy. However, cash flow from financing activities has been rising. For instance, between 2009 and 2011, cash flow from financing activities rose from SAR-2,254.2 billion to SAR26, 240.4billion. The increased number of branches could have made the level of finances to rise as more clients open accounts with the new branches.
Financial ratios and trend analysis
Profitability Ratios
Profitability ratios are used to relate a company’s profit level to its sales or fees. They show the extent to which every dollar of sales or fees creates or generates profit for a business. They show how the productivity of a company’s assets is good in generating income and profits. Examples of these ratios are the Return on Assets, Return on Equity and Gross Profit Margin.
Efficiency Ratios
Efficiency Ratios are used to measure the number of times a business’s assets can be converted in to sales or cash. This means that the higher the turnover, the better. For example a 2.01 turnover means that Al Rajhi’s fixed assets can be converted in to income or revenue 2.01 times or twice. A positive turnover means that the business is on the safe side as opposed to a zero or negative turnover.
Liquidity Ratios
Liquidity Ratios are used to analyze the available liquid assets that are necessary in meeting the organizations obligations or current liabilities. It can also be an indicator of the assets and cash equivalents that can be converted to cash. For instance a current ratio of 118.92 means that for every 1 SAR of current liability, there is 1 SAR of current asset. On the other hand, quick ratio is used to calculate the liquidity of a business by eliminating the inventories from the current assets.
Leverage Ratios
Leverage Ratios are also referred to as gearing ratios. They are used.to measure the financial ability of a business to obtain external funding. For example, debt to equity ratio is calculated by dividing a company’s debt by equity. It therefore enables a business to decide if it should finance its operations using its equity or if it can increase its debt borrowing. Debt to total assets ratio measures the level to which the assets exceed the debt level. A high ratio is risky since it means that the level of debt is getting way above the average.
Trend Ratios
Trend ratios are used to measure the performance of revenues and income over time. Positive trend ratios are desirable since they show that a business’s profits are increasing.
Capital investing and financing
Al Rajhi Bank has ventured in to various forms of capital investment. For instance it has opened over 18 branches in different countries including Malaysia, Kuwait and Jordan. The Malaysian branches were started in 2007. The bank started with 20 branches and as of now it has over 20 branches. There are also lady branches which were recently opened in Kuwait. The bank has also increased the number of the available lady branches in Kuwait from 108 in 2008 to 110 in 2010.
With the opening of a Central Bank in Jordan, the bank is capable of operating a fully-fledged bank under Sharia Law.
The other forms of capital investments that have been undertaken by the bank are in ATMs. Al Rajhi has increased its ATMs from 2,277 in 2008 to 2,750 in 2010. This has helped it to increase the number of clients who can access withdrawal services conveniently.
Additionally, with the introduction of e-banking facilities, it has been possible for clients to deposit money or to obtain banking facilities online. This has helped to reduce time spent in queues.
The bank has also introduced several points of sale terminals. This has reduced the workload of the branches since several services offered at the branches can be offered at the points of sale. For instance, between 2008 and 2010, these terminals were increased from 17,631 to 21,000. This has helped improve the bank’s revenue and sales.
Additionally, the bank has increased the number of its employees over the years. This is possible given the bank has increased its branches.
Al Rajhi bank has also been investing in government securities. Although this is not part of the bank’s largest capital investment it has still helped to improve the level of revenue.
Al Rajhi finances its operations mainly by using its retained earnings and common stock. Therefore, it minimizes the level of debt and external borrowing as much as possible.
Cost of capital
Al Rajhi bank does not rely on borrowing to raise capital. Therefore, it mainly uses common stock and retained earnings to supplement the already available income.
To find the cost of capital we will use the weighted average cost of capital equation:
WACC= WdKd+WeKe
Assumptions:
- By the year ended 2011 the average capital structure of the company was 15% debt and 90% equity
- the cost of debt is calculated by dividing the interest payments on the liabilities which averaged to 4.00%
- the only equity used is common stock whose cost is estimated to be 10%.
WACC=(90%*10%)+(15%*4%)= 9.6%
According to the findings Al Rajhi bank has a return on assets of 3.34% as at 31st December 2011. This is a lot slower than the cost of capital which is 9.6%. This shows that the bank is incurring more in using the assets as its sources of capital. It can therefore opt for other sources of financing such as borrowing from the government or other financial institutions.
Evaluation of stock and performance
The chart below shows the performance of the bank’s stocks from 2008 to 2012. The stock prices have been unstable. They have been rising and falling over the years. For instance, in January 2008, the stock price was 92.65 while in while in January 2011, the stocks had dropped to 78.17.
The bank’s earnings per share have also been rising. Earnings per share is a ratio that is normally used to measure the number of times a share is converted in to revenue or income. It is therefore given that the higher the figure the better the performance of a business’s shares. Between 2010 and 2012, Al Rajhi’s earnings per share increased from $4.51 to $5.85. This means that the level of earnings per share is currently at five times. This is a good record and shows that the bank’s strategy of using shares as a source of capital is beneficial.
Conclusion
Al Rajhi bank is a large financial institution in the entire region of Saudi Arabia. It is operated under the Shariah law. The bank has huge volumes of assets, revenue and income. The bank has been performing well given that the level of income and revenue has been increasing over the years.
Additionally, it has continued to expand considering that it has various branches in Malaysia, Kuwait and Jordan. The bank uses common equity and retained earnings as the main sources of its capital. This minimizes any forms of external borrowings. The cost of this capital is however higher than the returns on assets. This should necessitate external borrowing which can be cheaper. The stocks have been unstable as they have been rising and falling.
This can be an indicator of fluctuating economic conditions. Therefore, the bank’s stocks are not the best place to invest in at the moment. Generally, the bank is performing well and is expected to continue doing so in the near future as its management is very stable.