ANALYZING FINANCIAL PERFORMANCE OF OMANTEL AND OREEDOO TELECOMMUNICATION COMPANIES IN OMAN
INTRODUCTION
Finance is the backbone of any business and therefore must be looked at by keen analysis so as to help any profit making company evade ruin. The business world is always characterized by limited financial resources working to fulfill the unlimited wants therefore effective financial analysis must be applied to strike a profitable balance to the company. Financial performance analysis comes in handy in judging the financial health of any organization and determining the earning performance of the organization. These analyses are suitable in conducting project appraisals and determining the potentiality of investments so as to gain a favorable competitive advantage in the market. Many companies are nowadays directed to make financial performance evaluations by the fast rising financial markets and operational markets.
Every business goal is to improve their profitability by increasing their overall financial performance. The company’s goal is to maximize profit and sales so as to perform better as compared to the its previous year’s performance. This significant financial performance helps the company in enhancing its overall skills and innovative ideas. Financial performance of a company puts into consideration measure of profitability like return on capital employed, economic value addition and operating income. These measurements help in determining the overall return on investment and the growth in sales of a given organization in comparison to another firm who is a competitor in the same sector over a specific period of time. Organizational financial analysis effects actual and potential stakeholders and therefore is not an ordinary process that only serve management and staff in a company. Therefore, it must be shaped according to the efficient forms of the company’s innovations.
Telecommunication industries have grown exponentially over the past decades. It is a sector which constitutes all companies that work in a d to make communication in global scale possible through many mediums such as internet, cables, airwaves and many others. This sector generally creates infrastructure that allows worded information, video and audio to be sent anywhere throughout the world. Companies which control the largest market share of this sector are mostly telephone, satellite companies and internet providers.
In the past decades, the telecommunications industry consisted of a group of large operators within the regional and national scope. Rapid innovation and deregulation witnessed since the early 2000s has scaled up the operations of this sector in making the world a global village. Markets which operated traditionally have been overturned by the new innovation and growth in mobile services. In the recent past, service through mobile telephone has gained much importance in the telecommunication sector as mobile devices play a major role in communication. Communication has been transformed by mobile devices hence creating a significant demand in the business of service providers.
Oman Telecommunication Sector
By the year 2016, the population of Oman was about 4.8 million people. With this, the expected mobile penetration was estimated to grow by 151% by the end of the same year. The Oman Sultanate has greatly placed itself as one of the most advanced telecommunication sectors in the region. This has been seen through their promotion of competition and liberation in the past decade. There is a total of six network operators within Oman with Omantel being the market leader whereby the government owns around 70% of its shares. The closest competitor to Omantel is the Ooredoo company owned by the Omani Qatari Telecommunications. Many other network operators like Awasr have made attempts to enter this market. Vodafone Group is expected to enter the market too by 2020. This is expected to bring a significant overhaul in the Sultanate telecom sector.
The arrival of Vodafone is imminent and is expected to have a significant impact in the Oman Sultanate telecom sector. This market entry will create a healthy competition between Omantel, Vodafone group and Ooredoo over which company will be the first in rolling out the 5G services within the region so as to create more reliable connection within the region by offering faster speeds. The mobile sector in Oman has become very competitive within the past decade because of this market’s saturation characteristic and emergence of mobile virtual network operators. Policies in 2016 saw Telecommunications Regulatory Authority of the Oman Sultanate (TRA) issue an access interconnection regulation which makes the Omani telecom market open to new resellers and licenses for the development of investment in this sector. This has created a sustainable competition among the market players.
Omantel
Omantel incorporated in 1996 is the leading network service provider in Oman with 3G and 4G/LTE networks covering 99.2% and 93.7% of the total population respectively. The company has an extensive network infrastructure which helps residential, enterprise and mobile services with network support. In spite of domestic telecom environment remaining under stress to unfavorable market conditions, Omantel company has always maintained a commendable growth in its revenue over the past years. To maintain this trend, Omantel is putting measures which focus on providing the data consumption and growth in services in both broadband and fixed line sectors.
Omantel is currently seeking to pursue a policy which supports the Sultanate’s enterprise growth and also strengthening its corporate clientele by providing essential services beyond just connectivity. For instance, the Omantel acquisition of around 22% of the Zain group stakes has consequently expanded its geographic tracks to 9 countries. This prolific acquisition has made Omantel become one of the largest telecoms group in the middle east region by serving ten markets and approximately 50 million subscribers. Omantel will continue working with the Zain group company so as to achieve long term economic benefits through embodiment of wholesale and ICT collaborations.
Ooredoo
This is the second largest internet service provider in Oman which have achieved many milestones throughout its digital transformation journey. Incorporated in December 2004, Ooredoo stands as the first private sector telecommunication firm in Oman launching its official service delivery in March 2005. Recently, Ooredoo has continually invested in network coverage within the region and now enjoys 95% 4G network coverage within Oman which offers faster end to end connectivity. This has seen Ooredoo offer a healthy sustainable competition to Omantel company. Similarly, its revenues have remain steadfastly growing in the challenging market it operates in. this is due to the innovative measures put up by the company so as to reach a wider subscription base.
Ooredoo has managed to penetrate the Omani telecom market through its many innovations and incorporation of AI in its operations. The company has a mobile application which has led to a revamp in enhancing customer’s digital experience and providing an efficient getaway to worldwide exclusive offers on everything which the subscribers need. The company has also incorporated a Chatbot known as Saeed which provides a 24 hours’ customer service within the app. Being the first telecom firm to inculcate AI in its operations, customers can easily access its services and interact with the company hence gaining the company a wider market share.
Research Question
Every profit making organization’s goal is to derive the highest returns as possible in its operations. The overall financial performance of the company also needs to grow positively at a sustainable rate so as to remain a float in the market faced by stiff competition and market challenges. This study will focus on the telecom industry in Oman and compare the financial performance of the two market players; Omantel and Ooredoo companies to determine the best performing firm.
Research Objectives
- To assess the companies’ going concern assumption
- To judge the profitability position of each of the company
- To analyze the short term as well as long term liquidity position of the two firms
- To identify the reasons for change in profitability and financial position of the two firms over a period of two years
- To study and compare the financial soundness of the two companies to make inter firm comparison
Research Questions
- Which company will be able to meet its long term financial obligations in the long run?
- What is the profitability position of the two companies?
- How liquid are the two firms in the long and short runs?
- Which company enjoys a better financial performance in the sector?
Limitations of the study
The viability of this study is not assured as the data to be used is secondary data which will be extracted from the annual reports of the companies from their websites.
LITERATURE REVIEW
This study is intended to apply the non-systematic literature review in identifying the financial ratios presented in the articles which have been pre reviewed.
Business financial performance analysis is one of the most vital measures in gauging the profitability of any given firm. Financial performance is measured by analyzing profitability growth, increase in production capacity, increase in sales and how capital and resources are utilized. Investors and creditors are always more anxious with a given entity’s financial performance. They evaluate an enterprise execution on productivity by using estimation measures and comparison among competing firms prior to making meaningful decisions concerning the business. This substantial information surrounding the performance of a business therefore helps the management in formulating and implementing the managerial decisions geared towards achieving long lasting operating company.
Profitability of a business is the core objective of any firm as the profit is used to measure the firm’s efficiency and financial performance. For any company to achieve a going concern and be in a position of managing the future liabilities, profitability should be on the rise gradually as time goes by. (name) in their study noted that there is a positive association between sales and profitability ratios and also pointed out that there is a strong positive correlation between firm profitability and sustainable growth. The results of their study suggested that diversified companies enjoy healthy financial performance with minimum variations which can be established statistically.
Anis Ali (2017) noted that telecommunication plays a vital role in the development of an economy. In the study, main focus emphasis was put to service quality, customer satisfaction and increased sales as determinants for a positive financial performance. It was found that Zain is the leading telecommunication company in Saudi Arabia despite of the lower customer satisfaction within the sector. SERVQUAL model was used as the to measure the service quality of the firms and found that the customer perception about quality service is low. Further, the results indicated the existence of a significant difference between customer satisfaction and service quality among different service providers. The author suggested that an increase in quality of services would eventually impact positively on customer satisfaction and sales thus leading to a growth n financial performance.
Profitability of telecommunication firms have been studied far and wide. Koi-Akrofi (2013) conducted a study in Ghana applied correlation analysis to analyze the relationship between earnings ability and return on assets. In his study, trend analysis was carried out and the subsequent impact of assets and liabilities on net profit and earnings ability were assessed. This study showed that the industry growth level had increased spontaneously within a period of 5 years. This growth in the earnings was effected by the rise in demand progressively as time went by. Many new customers managed to subscribe to the available telecommunication platforms such as GLO as they offered favorable services.
Comparatively, a study by (Jan, 2016) found the telecommunication industry as the fastest growing sector in India. Because of this pre stated hypothesis, it was vital to examine the available market players in India so as to determine and estimate their survival in the long run. The India telecommunication market is characterized by many services which are effectively offered to the subscribers. These consist of modern services like digital telephone exchanges, fiber optics which connect different media getaways and microwave relay networks. This assisted the study also in determining the financial performance of two top performing internet and network service providers which were Reliance telecom and Idea cellular. Profitability and liquidity ratios were compared so as to determine the best performing firm and the results were used for prediction.
In his study (Raza, 2015) stated that having knowledge about the industry where specific firm operates is the most valuable aspect to a company’s quest in earning a continued profitability. This industrial soundness can easily be determined based on the firm’s financial statements and performance levels. An effectively conducted financial performance of a company, enables the firm to develop efficient strategies which propel the business growth. This study did a comparative analysis in the Indian telecom sector by considering two firms: Bharti Airtel and BNSL and found out that Bharti Airtel was performing better than BNSL. This study also revealed that the telecom industry in India positions itself as one of the highest contributors to the country’s economy.
RESEARCH METHODOLOGY
This study is intended to analyze the annual financial data from the websites of these selected two telecom companies in Oman ranging from 2015 to 2019. This therefore indicate that the data which will be analyzed will be secondary data hence model analysis approach will be applied. The overall financial health of each company will be analyzed through Altman score. To effectively analyze the data, Z-score Model will be used to analyze the five weighted financial ratios needed to explain the financial performance of the companies (Vijayalakshmi, 2013). The results obtained will be used to determine the specific objectives of the company and eventually compare the performance of the companies.
Altman’s Z-score Model
This model was developed in 1968 by Edward Altman to be used as a measure of financial soundness of companies. It is a numerical model which is used to measure and predict the going concern of companies and the probability of going under in the future.in this model, a lower Z-score in any factor of financial performance increases the probability of the company failing in the future. This model is based on measuring five financial ratios from a company’s financial reports over long periods. The aspects which are commonly analyzed include profitability, leverage, liquidity, solvency and measuring the company’s ability in meeting its long term financial obligations.
The Z-score is determined by the following formula:
Whereby;
This ratio tentatively represents the difference of a company’s current assets and current liabilities. A firm’s short term financial soundness is determined by its available working capital. a company will be able to meet its short term financial obligations if it has a positive working capital. this provides space for more funds needed for growth and investment. The reverse is true as the company will be struggling to meet its short term financial obligations since current assets are inadequate.
This ratio basically indicates the value of losses in a company or retained earnings. If this ratio is low, then t means that the firm is mainly meeting its obligations by financing its expenditure by use of borrowed funds rather than retained earnings. This is an early sign of ruin of the firm. On the contrary, when this ratio is high, it implies that the company uses its retained earnings to finance its expenditure. This indicates that the company had sufficient profit in the past financial years and therefore does not need to rely on borrowings.
Earnings before interest and tax is a measure of a firm’s profitability which help in determining the company’s ability to generate its profits mainly from its operations. Therefore, this ratio shows a firm’s ability to generate sufficient revenue so as to achieve profitability, finance ongoing projects and service debts.
Market value which is also referred to as market capitalization, measures a firm’s equity. It is the product of all outstanding shares by the current market price of stocks. This ratio hence indicates the extent to which a company’s market value would fall before liabilities value surpasses the value of assets presented in the balance sheet. A high ratio shows a higher investor confidence in the financial ability of the company.
This ratio shows the management’s efficiency in using assets to generate revenue while considering competition. A higher sale to total assets ratio translates to management’s need to use small investment to generate sales so as to increase the overall profitability of the firm therefore boosting the company’s financial performance. A contrast suggest that the management will need to use more resources in generating sufficient sales hence lowering the company’s profitability.
Z-score value interpretation
Investors, creditors and management can interpret the Z-score values to assist them in understanding the financial performance of a company. It can also be used to compare firms and grade them in terms of performance for investment recommendations. A score below 1.8 suggests that the company is likely headed to ruin and it will not be able to finance its long term financial obligations. Companies with a Z-score of above 3 is not likely to go under in the near future or in the long run as their financial soundness are considered healthy. This can inform investors and other stakeholders of the company to put in more investment as it promises more returns. Nevertheless, there exists a “gray area” on the Z-score scale which ranges from 1.8 to 3. This is the zone where most companies; financial status lie and it suggests the viability of the current projects put in place by the firms.
Altman Z-score results of the two companies; Omantel and Ooredoo will be used to determine the overall financial performance and assist in indicating the better company in terms of financial soundness. This result is intended to be used by interested parties in making informed decisions on the companies so as to achieve a favorable sustainable competitive advantage in the market and therefore improve their financial performance.
Possible limitations of Z-score to this study
The data extracted from the websites could possibly present negative working capital of a company if not all. This means that liabilities exceed current assets. When Altman Z-score is used to analyze such data, it will give values suggesting that the business is in adverse financial trouble. However, this feature can be ambiguous as it can suggest a business with low inventory and accounts receivables which operates on cash basis. This therefore can be a management tactic which should not suggest a dismal financial performance. In regards to this challenge, this study will assume a normal working capital characteristic.
Alternative model: Piotroski F-Score Model
This model is used to analyze the strength of a firm’s financial state. It mainly uses nine factors extracted from financial statements to measure the financial position of a firm. A score of zero is awarded binary numbers 0 and 1 depending whether it has been achieved or not. The higher the score, the more sound a business is financially. The challenge of using this model is that it is possible to obtain ambiguous results from its many parameters which may be difficult to interpret. This model also does not offer a single value result to be used for comparing the two firms. It gives best results when the financial performance analysis is directed only one company.
In this study, Altman’s Z-score will be favorable and is intended to give clear levels of comparison by the Z-score values of the companies’ financial data. The two values obtained will be easier to interpret and informed recommendation derived from the results.
REFERENCES
Koi-Akrofi, GY. “Profitability Analysis of the Telecommunications Industry in Ghana from 2002 to 2006”. Asian Journal of Business Management, 2013. pp. 60-76.
Jan, S. “Financial Statements Analysis of Idea Cellular & Reliance Telecommunications: A Comparative Study”. Imperial Journal of Interdisciplinary Research, pp. 1468-1485.
Raza, D. “Financial Performance of Indian Telecom Industry: A Comparative Study of Bharat Sanchar Nigam Limited and Bharti Airtel”. Asian Journal of Research in Business Economics and Management, vol. 5, no. 4, pp. 135-146.
Vijayalakshmi, B. “Financial Health of Selected Companies in Telecom Sector: A Comparative Study”. A Journal of Economics and Management. 2013.