Company Analysis: Qatar German and Company Medical Devices
About the paper
The paper is commissioned to conduct a comprehensive financial analysis of Qatar German and Company Medical Devices(QGMD). As part of this analysis, we will be focused on discussing the outcome of the ratio analysis and will also compare the results with the industry averages. Important to note, as we are looking for a detailed analysis, we will be using multiple financial ratios relating to liquidity, profitability, solvency, efficiency and market based ratios.
In addition to the ratio analysis, we will also calculate the intrinsic value of the stock using the price/revenue method. Important to note, since the earnings and ROE of the company are negative, it will not be possible to ascertain the intrinsic price using the gordon growth model or PE ratio.
The paper will finally be culminated with the conclusion relating to the overall financial health of the company and whether our stock valuation confirms undervaluation or overvaluation of the stock.
Ratio Analysis
This is the core section of this report where we will convert the raw financial figures of the company for the past five years into meaningful numbers using the tool of ratio analysis with the intent to adjudge the financial standing.
-Liquidity Analysis
i)Current Ratio: Current Assets/ Current Liabilities
Comparing the ratio outcome with the year 2011 to the present time, over the years, the liquidity position of the company has changed significantly, albeit in a pessimistic manner. Important to note, beginning with the year 2011, the company recorded current ratio of 4.58, which confirms strong liquidity position at that time. However, over the years, the ratio multiple has faced a consistent decline as it plummeted to 0.53 during 2015.
Important to note, we also performed the cross-section analysis and compared the ratio with the industry average. Here, we found that the current ratio of the company is almost at par with the industry average of 0.54. Therefore, in order to attain a better understanding of the liquidity position of the company, we resorted to quick ratio, which is rather a stringent liquidity measure.
ii) Quick Ratio: (Cash + Receivables)/Current Liabilities
Following a skeptical outcome of the current ratio multiple, we calculated the quick ratio multiple of the company and here also we found that over the period of five years, the quick ratio of the company has plummeted from 1.62 in 2011 to 0.23 in 2015. Additionally, the ratio multiple of the company was significantly lower than the industry average of 0.39, which signals towards the weak liquidity position of the company in the present date and questions its ability to honor its short-term obligations.
On the whole, on the basis of time-series and cross-section analysis of the liquidity position of the company, we confirm that over the period of five years, the liquidity position of the company has been badly affected and the company is not in a sustainable position to cover up its short-term obligations.
-Profitability Analysis
Shareholders of the company are largely concerned about the profitability ratios of the company as these ratios depict how profitably the resources are being used by the company. To analyze the profitability position of Qatar German Medical Devices (QGMD) calculated the ROE multiple, and found concerning results. Our calculation revealed that over the years, the ROE multiple of the company has consistently decreased and investors are now getting negative returns on their investment. It is considerable that during 2011, the ROE multiple was recorded at 0.19%, which by the end of 2015, plummeted to -11.05%. The results were also alarming because the industry average was significantly higher at 15.65%. This questions the ability of the company’s management to utilize the equity capital available, and it will be a matter of no surprise if soon the company start witnessing short positions by the equity owners.
Overall, our analysis confirmed that the company is not only witnessing poor liquidity trends, but also bizarre profitability with negative returns being generated on equity capital and available capital base.
Leverage Analysis
Leverage position help us to decompose the capital structure of the company and assist in better understanding of the overall risk embedded in the capital structure of the company. Following our calculations we found that over the period of five years, the leverage position of the company has increased manifold with leverage %, increasing from 11.70% to 105.38%, while the industry average is 68.1. This confirms that while the company is aggressively adopting for highly levered capital structure, it is doing so when it is going through ultra-bearish profitability trend. In other words, considering the current profitability structure of the company, where it is experiencing losses from the past four years, the company seems to be financing its operations only through debt funds. Consequently, the company is not only adopting a high risk in its capital structure, but considering the current financial position, it is more or less heading towards bankruptcy.
Efficiency Analysis
Also known as asset management ratios, these ratios indicate how efficiently,the management of the company is utilizing its asset base. In order to access the efficiency of the company, we calculated the asset turnover ratio of the company and yet again found that the ratio multiple is decreasing year by year, which confirms that revenue generated by the company on per unit of the asset base is declining consistently.
Market based ratios
These ratios are extensively used by the analyst to adjudge any investment opportunity hidden in the stock or to find out whether the stock is overvalued. We initiated our analysis here using EPS multiple and were left with no surprise as on account of consistently magnifying losses of the company, the EPS ratio experienced meterotic fall from 0.03 in 2011 to -0.99 in 2015.
Next, on account of negative earnings, we were unable to calculate the PE ratio of the company post 2011. However, PE ratio of 2011 strong indicates towards overvaluation of the stock.
Last, Price-to- Book ratio was found to be increasing consistently over the year and yet again this signals towards negative sentiments of the equity investors.
Stock Valuation
While the ratio analysis confirmed bearish outlook for the company, in order to concrete our conclusion relating to the financial standing of the company, we will now calculate the intrinsic value of the company’s stock using the Price/Sales ratio. Important to note, since the earnings and ROE of the company are negative, it will not be possible to ascertain the intrinsic price using the gordon growth model or PE ratio. Therefore, we have used recent current year revenue and industry P/S ratio to ascertain the stock price of the company:
Value: P/S* Revenue per share
= 8.41* (16413/4850)
= 28.41
Current Price= 11.85
Result: Undervalued
Important to note, even though the stock valuation signals towards undervaluation of the stock, however, owing to highly volatile industry average, we will not rely much on the outcome of this stock valuation. Moreover, since we are not able to calculate the fair value of the stock using other methods, the utility of stock valuation method for this stock is negligible.
Conclusion
On the basis of above analysis, we can conclude that Qatar German and Company Medical Devices is going through rough financial period and is witnessing magnifying losses year-after-year along with poor efficiency for the asset base. However, what was most concerning was the high leverage amount being included by the company in the capital structure even when it is not able to earn a single cent of profit.
Therefore,we recommend that considering the current financial standing of the company, it should be completely avoided by the investors.
Reference
Qatari German Company for Medical Devices . n.d. 15 May 2016 <http://markets.ft.com/research/Markets/Tearsheets/Financials?s=QGMD:DSM>.
