report for computer application in finance

KUWAIT NATIONAL CINEMA COMPANY (KNCC)

COMPANY PROFILE AND INTRODUCTION

Kuwait National Cinema Company was formerly known as Kuwait Cinema Company and started its operation in 1954, before the introduction of Kuwaiti Dinar. The firm was linked to the government until the privatisation of the cinema industry. The company got listed in Boursa on 29th September, 1984 with 92.72 million shares outstanding with a current market capitalisation of 69.43 Million KD.

It caters to the entertainment needs of the people of Kuwait by operating a slew of cinema theatres and operates in the importing, producing, exporting, leasing movies of different genres and sizes. Their market offering also include private VIP screens to cater to the premium segment. Most of their theatres are multi-screen and are located in shopping centres. They use high end technology for digital transmission and distribution to cater to the customer base with the highest quality of entertainment and content consumption. Post privatisation they build the company to reflect the new modern day consumer service provider in entertainment with launching a new logo and ramping up the operations to include e-ticketing in 2003, first of its kind in Middle East.

SHARE HOLDER WEALTH MAXIMIZATON

To manage and maximise share holders wealth the company has a Board of directors which comprise of 6 members including Chairman and Vice Chairman. There is an executive management team of 4 members; The Chief executive office, The Chief Manager Operations and two finance managers. This executive team ensures the company’s operations are linked to the corporate strategy and generation of profits for shareholders.

The company has employs high-tech equipments to derive high consumer satisfaction and revenue. All of its screens are fitted with Digital Cinema technology and 3D capabilities. Also through its alliances, the company distributes Independent and Arabic language films across the Middle East and the Persian Gulf. Through its investment division, the company efficiently route its additional funds and invest them in stocks, funds and real estate to derive higher returns. These higher returns thus add to shareholders wealth.

The company is motivated and determined to use technology to derive a better customer experience and higher margins. Below analysis of key business ratios will provide insights into the financial health of business.

RATIO ANALYSIS

· LIQUIDITY (Current Ratio)

Current Ratio is a measure of a company’s liquidity which is the ability to pay-off its short term obligations or liabilities due within a year. It is also called the working capital, needed by the company to run its day-to-day operations.

Current Ratio =

	2019 Million KD	2018 Million KD	2017 Million KD	2016 Million KD
Current Asset	30.585	37.209	36.533	24.049
Current Liability	25.921	35.371	34.474	29.113
Current Ratio	1.1799	1.0520	1.0597	0.8261

A current ratio of 1 is considered as a baseline to assess the firm’s liquidity. A lesser value then 1 as seen in 2016 indicates that the firm would not have been able to meet its short term obligations if it were all due at once. But in subsequent years, from 2016, a consistent improvement can be seen with a small dip in 2018. It achieves a value of 1.17 in 2019. This implies the firm has improved its liquidity stance and eliminated the risk of being not able to pay off its short term obligations. This makes the creditors feel secured about getting repaid and keeps investor confidence at par about firm’s smooth operations. Though a ratio of 1 and above should be maintained, but a significantly higher value also indicates excessive liquidity and funds at the firm’s disposal which could potentially be employed to earn higher returns elsewhere.

· DEBT (Debt Ratio)

Debt ratio measures the extent of company’s leverage. Leverage allows a company to take debt and achieve an optimum mix of debt and equity which gives a low cost of capital. It shows how much of company’s assets are financed by debt.

Debt Ratio =

	2019 Million KD	2018 Million KD	2017 Million KD	2016 Million KD
Total debt	27.024	26.228	25.004	19.883
Total Asset	119.165	111.929	109.664	99.526
Debt Ratio	0.2268	0.2343	0.2280	0.1998

As seen, the company had a debt ratio of 0.19 in 2016. This number indicates that company’s debt is only 19% of company’s asset which means a higher percentage of company’s assets are funded by equity rather than debt. The ratio increases in subsequent years and reach a value of 0.22 in 2019. It touches the highest point of 0.23 in 2019. This lower value provides opportunity for the company to leverage their balance sheet to benefit from the lower debt rates and arrive at an optimal cost of capital.

All these value remain under 1 which is considered to be a general balance between debt and equity which keeps the default risk under check. If the ratio rises above 1, it raises the default risk by company as it sits on a high debt and may fail to repay if interest rates rise suddenly. Under certain circumstances and based on the nature of industry, e.g. stable cash flows, company can sustain higher debt ratio. This also assures creditors and investors of promoters skin in the business.

· PROFITABILITY (Return on assets)

Return on assets measures the returns generated by churning the company’s assets. It is a measure to evaluate how efficiently the company’s assets are used to earn revenue.

ROA =

	2019 Million KD	2018 Million KD	2017 Million KD	2016 Million KD
Net income	8.572	8.341	10.168	9.333
Total Asset	119.165	111.929	109.664	99.526
ROA	7.19%	7.45%	9.27%	9.38%

The company generated a 9.38% return on its invested capital in 2016. The ratio decreases in proceeding years and falls down to 9.27% in 2017 and to 7.19% in 2019. As seen above, this is due to an increase in asset base over the period. Due to the nature of the industry the asset investment takes some time to generate returns and hence the income does not rise in accordance with the asset investment. On the other hand, the income is also seen to be decreasing, this could be due to a downfall in business or due to divesting in existing assets and reinvesting into new assets. The ROA varies from industry to industry, for entertainment sector is usually is around 10% (approx).

· PROFITABILITY (Earnings per share)

Earnings per share (EPS) is the net income of company divided by the number of outstanding common shares. It is the amount of money that each shareholder of the company will receive at the end of the year if the profits of the company is distributed.

EPS =

	2019 Million KD	2018 Million KD	2017 Million KD	2016 Million KD
Net income	8.572	8.341	10.168	9.333
Common shares outstanding	92.718	92.746	94.297	94.093
EPS (fils)	94.25	89.29	107.89	99.05

A higher EPS is preferable than a lower EPS as it means that company is able to generate more profits and will be able to distribute more profits to its shareholders. In 2017, exceptionally, there is a higher EPS due to higher incomes despite of issue of new common stock. Common stock rises in 2017 which shows issue of fresh shares. In the following years, the EPS declines as a result of reduced profits despite of a share buyback which reduced the outstanding shares.

· MARKET (Price to earning ratio)

Price to earning (P/E) ratio measures the company’s current share price with its earnings (EPS). A higher P/E ratio indicates that the investors seek a higher growth in the future or the company is over-valued. It is used to determine the KD amount to be invested in the company to gain 1 KD of the company’s earnings.

P/E ratio =

	2019 Value in Fils	2018 Value in Fils	2017 Value in Fils	2016 Value in Fils
Market value of a stock	1048	1065	1300	1240
EPS	94.25	89.29	107.89	99.05
P/E Ratio	11.119	11.927	12.049	12.519

**Market value of stock is taken as the closing price of stock on the last working day of the financial year

As seen in 2016 the company had the highest P/E ratio of 12.519, which indicates that an investment of 12.519 KD will fetch 1 KD return to the investor. But eventually the ratio constantly is on decline and stands at a value of 11.11 in 2019. This states that the value of the company has declined in terms of its market price and/or EPS and thus a loss for the existing shareholders, who will now earning less on their stocks. The situation stands in favour of new investors as they can now expect the same return (of 1 KD) on lesser investment, if they invest.

CONCLUSION

From the above we could conclude that the Kuwait National Cinema company (KNCC) is a company that is sufficiently liquid and has the ability to meet its short term liabilities based on the standard current ratio of 1:1. Further, the liquidity is gradually increasing year on year.

With a relatively low leverage which is around 22% on average, as shown in debt ratio. Since the company is a profitable so it can take more debt to finance its needs till the ratio reaches to the recommended threshold of 0.5:1 and improve its cost of capital.

With respect to its profitability, KNCC’s profits are decreasing gradually year on year from the past 2 years under analysis which is not a good sign for the foreseeable future of the company. The return on assets are also declining year after year even though assets are increasing which implies company should rethink to distribute the income to shareholders of the company rather than reinvesting. The earning per share is quite stable but falling, a falling P/E ratio confirms the same. To overcome the situation company could think to proceed with a ‘Buyback’ scheme, using debt, to boost returns and EPS, offering a better value to the shareholders.

KNCC is the sole player in the local market due to its monopoly. International competitors such as PVR Ltd., Cineplex INC., Cinemark Holding INC., have an EPS of 160 fils, 140 fils, 630 fils respectively. The above international competitors are way ahead of KNCC in providing returns to their shareholders while maintaining sufficient liquidity and solvency norms.

REFERENCES

K.R. Subramanian, John Wild, Financial Statement Analysis, (Tata McGraw-Hill) (10th edition).

Boursa Kuwait. (2019). Listed Companies. Retrieved from:

https://www.boursakuwait.com.kw/market-participants/listed-companies

Boursa Kuwait. (2019). Financials. Retrieved from:

https://www.boursakuwait.com.kw/stock/601/financial-data/balance-sheet

https://www.boursakuwait.com.kw/stock/601/financial-data/income-statement

Investopedia.com. Financial Ratios - Investopedia. [online] Retrieved from: <https://www.investopedia.com/financial-ratios-4689817>

Reuters.com. Past stock quotes – Reuters. [online] Retrieved from: <https://in.reuters.com/finance/stocks/chart/KCIN.KW>