Financial Performance refers to the degree to which financial objectives of an organization is accomplished and is an important aspect of financial management. It is the process of measuring the results of a firm's policies and operations in monetary terms. It is used to measure firm's overall financial health over a given period of time and can also be used to compare similar firms across the same industry or to compare industries or sectors in aggregation. The financial performance of a firm can be assessed with the help of financial analysis. Financial analysis involves the use of financial statements. The growth and contribution of the service sector in national economies has brought telecommunications into the spotlight. The quality of telecommunications is improving rapidly with the advancement of science and technology. The Sultanate of Oman has established itself as one of the most progressive telecom sectors in the region in terms of liberalization and promotion of competition in recent years. A total of sixteen mobile network operators cater to a population of approximately four million. The market leader is Omantel, part of Oman Telecommunications Company, in which the government owns a 70% stake. It is followed by the Omani Qatari Telecommunications Company known as Ooredoo.        

The mobile sector in Oman has become more and more competitive in recent years due to the market becoming saturated as well as the rise of Mobile Virtual Network Operators (MVNO). There are three MVNOs, all of which operate under the two former MNO. They are Friendi, part of Virgin Mobile Middle East and Africa; Renna, part of Oman's Majan Telecommunications; and, most recently, TeO, short for Integrated   Telecommunications   Oman. In April 2016,  the Telecommunications Regulatory Authority of the Sultanate of Oman (TRA) issued the Access and Interconnection Regulation (A&I). Telecom sector in Oman is regulated by Telecommunication Regulatory Authority (TRA). Omantel a public sector telecom service provider is extending its service to its customers since 1980. Omantel contributes to around 70% of the total telecom revenue of the country. Ooredoo Company is the Oman’s first private telecom company owned by Qtel group which was incorporated in the year 2004. Ooredoo’s market share of mobile subscribers is 41% and broadband subscribers are 40%. The study aims at a comparative analysis of the financial soundness of the two prominent telecom industry players in Sultanate of Oman.

Rationale of the Study

The telecommunication services in Oman is provided by sixteen service providers out of which the two prominent companies are Oman Telecommunication Company (Omantel), Qatar Telecommunication Company (Qtel) offering telecommunication services in the country under the brand of Oreedoo, even though Oman telecom market is believed to have room for growth in, the two major telecom companies i.e. Omantel and Oreedoo reported declining profits recently due to higher royalties and tax rates. Royalties paid by telecom companies operating across various classes in the Sultanate jumped 45 per cent to RO 78.3 million in 2018, up from RO 53.9 million a year earlier, according to figures published by the Telecommunications Regulatory Authority (TRA). Royalties paid by Omantel and Ooredoo, the biggest telecom operators in the Sultanate, accounted for around 97 per cent of the total and the remaining goes to other telecom companies operating in the sultanate. In this outline it was considered important to study the financial performance of two major telecommunication service providers. The study attempts to compare financial performance of these leading telecom companies in terms of working capital, retained earnings, market value of equity and sales. To study the financial performance, Z-Score model will be an apt tool to make a comparative analysis.

Significance of the Study

As there are only two prominent telecom service providers in Oman, the TRA had announced to invite bids for mobile operator license. With this announcement, the opportunities for growth and investment of other telecommunication companies have increased considerably. The financial performance analysis is useful for all stakeholders particularly the investors. An investor who would like to be rational and scientific in his investment activity has to evaluate a lot of information about past performance and the expected future performance of the companies, industries and the economy as a whole before taking the investment decision. The study attempts to do a comparative analysis on the financial performance and soundness of the two leading telecommunication companies in Oman. To study the financial performance, the Z-Score model is adopted as it is regarded to be an apt tool to make a comparative analysis.

Objectives of the Study

• To analyze the overall financial performance of Omantel and Oreedoo 

• To evaluate the financial strength of the companies using the Z-score model.

• To have a comparative analysis of the financial strength of these companies

• To determine the relationship between the variables used to assess the financial strength of these companies

Research Hypotheses

The following hypotheses were formulated for the study:

• H0: There is no significant association between working capital and total assets 

• H1: There is a significant association between working capital and total assets 

• H0: There is no significant association between retained earnings and total assets 

• H2: There is a significant association between retained earnings and total assets 

• H0: There is no significant association between EBIT and total assets 

• H3: There is a significant association between EBIT and total assets 

• H0: There is no significant association between sales and total assets

• H4: There is a significant association between sales and total assets

• H5: The four variables (total assets, working capital, retained earnings and EBIT) are significant in explaining the variance in total assets

• H0: There is no significant association between market value of equity and total liabilities

• H6: There is a significant association between market value of equity and total liabilities

Literature Review

Nithya & Abbhijeet [1], analyzed the financial performance of telecom companies in Oman. Annual reports of two telecom companies were collected for seven years (2010-2016) and the financial statement data was analyzed using Z score model. The results of the analysis show that the performance of Omantel was better than Ooredoo. The parameters selected for analysis proves to be useful to an investor for his basic analysis of selecting portfolio of investment. The profitability of telecommunication industry of Ghana has been studied during the period 2002 to 2006 [2]. The relationship is analyzed between NP, EBIT and NPM, ROA. Trend analysis is calculated and the impact of assets, liabilities and revenue on NP, EBIT were also accessed. The growth level of the industry has increased upto 5 times starting from the base year 2002 to 2006. Raza [3], conducted a Comparative Study of Bharat Sanchar Nigam Limited and Bharti Airtel to analyze the Financial Performance of Indian Telecom Industry. Telecom industry is one of the main contributors for the development of Indian economy. The result of the financial performance analysis of the selected companies revealed that the performance of Bharti Airtel was better than the BSNL. Sarika [4], used ‘Z’ – score model, which captures the predicate viability of a company’s financial health by using a combination of financial ratios that ultimately predicts a score, which are used to determine the financial health of a company. The study assessed the financial Sustainability of the Reliance Industries in terms of retained earnings to total assets, networking capital position, equity and debt position, Return on total assets position and net sales turnover position of the company. The study has been done through data from the Reliance Industries financial statements for the period of 5 years i.e. 2003-04 to 2007-08. According to Vijayalakshmi et al. [5], financial performance is done to evaluate capability, stability and profitability of the company. The study focuses on the Bharti Airtel Company’s financial performance and the profitability level of the company for a period of six years. It is analyzed using short term, long term and profitability ratios for the period 2011- 2016. Equity ratio has increased due to the increase in the outsider’s fund. Profitability position of the company is not stable due to decrease in sales. Due to the increase in operating profit the Earnings /share value and dividend payout ratio has increased. According to Megha & Vanishri [6], financial performance is a subjective measure of how well a firm can use assets from its primary mode of business and generate revenues. The study analyzed the financial performance of Indian telecom sector specially focused on BSNL, Airtel and Vodafone. Developing the Financial health of the organization is the first step and next step of financial performance is to compare the financial result of the firm with same industry or firm which helps to improve the financial position of the company. The Gulf Cooperation Council (GCC) was established on 25th May 1981 in Riyadh, Saudi Arabia. The member countries are Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and UAE. As telecommunication is gaining importance in this current technological era, a study on financial soundness of the telecom companies was found to be important. The study was done to study the financial soundness by calculating various ratios and by applying “Z-Score” model. It was found that none of the companies Z-score is less than 1.8, hence there is no probability of bankruptcy. The comparison of Z- score between the study periods shows that Ooredoo of Kuwait, Oman and Qatar show negative change in the year 2017. Zain Company of Kuwait and Omantel Company of Oman shows a negative change during the year 2018.The rest of the companies shows a positive change during the study period [7]. Companies in any market stand with different factors such as Revenue, expenses, net earnings, subscriber’s number and customer satisfaction. The study of the competition focused on large telecom providers in India: Tata communication, Vodafone Communication, Bharti Airtel and three more companies by taking secondary data of the six years and compare the net revenue, Income, expenses & Profit after tax to see their performance. The study findings that Bharti Airtel is the leader of the five companies. Substantiates the claim that the company shows good measurement in the revenue, Income, expenses and net earnings more than the other companies and the Bharti Airtel customer satisfaction is higher with comparing to others [8]. Ramachandran & Kelkar [9], studied the financial Performance of Telecom Industry in Sultanate of Oman to compare and analyze the financial performance of telecommunications corporations in Oman for 7 years (2010-2016) collected data. Z-score was the model used to analyze the financial performance. Omantel financial performance better than Ooredoo in Oman. The major findings are, from 2010 to 2010 Omantel EBIT has shown an increase while Ooredoo has shown both increase and decrease in the EBIT, which leads to the results that the investors will gain more returns if they invest in Omantel rather than Ooredoo. Goto [10], examined the financial performance analysis of US and world telecommunications companies especially the importance of Information Technology in the telecommunications industry after the AT&T breakup and the NTT divestiture: This study examined the financial performance of the global telecom industry by DEA-DA (Data Cover Analysis - Premium Analysis) suggested use of DEA-DA has an association with Altman's Z score. After evaluating the companies' financial performance, this study pays attention to the financial performance of AT&T (American Telephone & Telegraph) and NTT (Nippon Telegraph and Telephone) after the liquidation. This study found that AT&T outperformed NTT because AT&T changed itself into an Information Technology company that provides wireless communications and other IT services, but NTT has separated IT and wireless services to other companies after the crash.

The study is analytical in nature and is a comparative analysis of financial soundness of two prominent telecommunication companies in Oman out of the sixteen telecom service providers. The period of the study is from February 2021 to March 2021. The population includes the telecommunication companies operating in Oman. Oman’s telecom sector currently has a total of 16 telecom service providers operating in the following three categories:

• Category 1: Omantel, Ooredoo, Awasr, Telecom Oman ‘TEO’, Arab International Connect, Oman Broadband Company and Almadakhel Investment Company

• Category 2: Renna Mobile, Friendi Mobile, Zajel Communications, Awasr and Albahlani Communication

• Category 3: Azyan Telecom, Rignet, MHD telecom, MHD Sat Services and Kuthban Middle East

The sample size consists of top two prominent and leading telecommunications company namely Oreedoo and Omantel. The data is collected from secondary sources like annual reports of companies, websites, newspapers and journals. Ratio analysis is used to analyze the financial strength of the companies. The financial health of the selected companies is derived through Altman score. To study the financial health, Z-score Model has been selected, which incorporates five weighted financial ratios for its formulation. Correlation analysis is used to find the association between variables used to measure the financial soundness of the companies. Regression analysis is done to measure the impact of independent variables on dependent variable (total assets and total liabilities).

Analysis of Data

The correlation analysis helped to determine the relationship between the independent variables (working capital, retained earnings, EBIT, total sales and market value of equity) and the dependent variables (total assets and total liabilities). Therefore, the R-value, together with the p-value which indicates the statistical significance of the relationship were provided in the correlation analysis in order to show the direction, strength and significance of the relationship.

Hypothesis Testing

• H0: There is no significant association between working capital and total assets 

• H1: There is a significant association between working capital and total assets 

Based on the results in Table 1 above, there is a positive relationship between working capital and total assets (r = 0.006). A positive relationship in this scenario means that when working capital increases, the total assets also increase. The r-value is 0.006, which means there is a weak uphill (positive) linear relationship between working capital of Oreedoo Company and its total assets.

• H0: There is no significant association between retained earnings and total assets 

• H2: There is a significant association between retained earnings and total assets 

There is a positive relationship between retained earnings and total assets (r = 0.587). A positive relationship in this scenario means that when retained earnings increases, the total assets also increase. The r-value is 0.587, which means there is a moderate uphill (positive) linear relationship between retained earnings and the total assets.

• H0: There is no significant association between EBIT and total assets 

• H3: There is a significant association between EBIT and total assets 

There is a negative relationship between EBIT and total assets (r = -0.761). A negative relationship in this scenario means that when EBIT increases, the total assets decrease. The r-value is -0.761, which means there is a strong downhill (negative) linear relationship between EBIT and total assets.

• H0: There is no significant association between total sales and total assets

• H4: There is a significant association between total sales and total assets

There is a positive relationship between total sales and total assets. (r = 0.014). A positive relationship in this scenario means that when total sales increases, total assets also increase. However, even though the correlation is positive, the r-value is 0.014, which means there is a weak uphill (positive) linear relationship total sales and total assets.

Regression Analysis

Regression analysis was performed to determine whether the independent variables (working capital, retained earnings, EBIT and total sales) predict the dependent variable (total assets). In addition, multiple linear regression analysis was used to determine which amongst the four independent variables (working capital, retained earnings, EBIT and total sales) contribute most to the variation of the dependent variable (total assets).

Table No 2 shows that the overall correlation of independent variables on total assets. is 0.962. The model summary illustrates the (R square) value, which helps in explaining variance in the dependent variable (total assets). R square value is 0.925 that represents the coefficient of determination. This means that the independent variables (working capital, retained earnings, EBIT and total sales) predict the dependent variable (total assets) by 92.5%, thus, leaving out 7.5 % unexplained. This means that there are other extra independent variables that were not put into consideration in this study that is significant in explaining variation in total assets.

Hypothesis Testing

• H0: The four variables (working capital, retained earnings, EBIT and total sales) are not significant in explaining the variance in total assets

• H5: The four variables (working capital, retained earnings, EBIT and total sales) are significant in explaining the variance in total assets

The ANOVA was performed to test the statistical significance of the regression model on whether it is a good descriptor for the relationship between the predictor variables (working capital, retained earnings, EBIT and total sales) and the dependent variable (total assets). Therefore, based on the results, (F = 3.101; p = 0.400). The p value is greater than .05. Thus the independent variables (working capital, retained earnings, EBIT and total sales) are not significant in explaining the variation in the dependent variable (total assets). The ANOVA table, proves that the overall correlation 0.962 is insignificant.

The coefficients Table 4 helped to compare which of the four predictor variables (working capital, retained earnings, EBIT and total sales) contribute the most to the variation of total assets. To make the comparison, the Beta standardized coefficients were used. The results indicate that none of the predictor variables contributes to the variation of total assets. 

Table 1: Correlations

Table 2: Model Summary

a: Predictors: (Constant), Total sales, EBIT, working capital, Retained earnings

Table 3: ANOVAa

a: Dependent Variable: Total assets, b: Predictors: (Constant), Total sales, EBIT, working capital, Retained earnings

Table 4: Coefficientsa

a: Dependent Variable: Total assets

Working capital (β = 0.122; p = 0.874), retained earnings (β = 1.581; p = 0.278), EBIT (β = -0.020; p = 0.971) and total sales (β = -1.359; p = 0.379 are not a significant predictor of total assets. Thus, it is statistically proved none of the independent variables used to assess the financial performance of Ooredoo Company has a significant impact on its total assets. Hence, the null hypothesis (H0) is accepted proving that there is no significant relationship between working capital, retained earnings, EBIT and total sales on total assets.

Therefore, the Regression equation is developed as follows

Y = a + bX1+X2+X3+X4

Where ‘Y’ is the dependent variable total assets, a and b are constants.

The predictor variables are insignificant to support the dependent variable as the p-value is greater than 0.05. It is concluded that the future value of total assets is not affected by any of the independent variables studied here. Any change in these variables will not directly affect the total asset value of Ooredoo in future.

Ooredoo Market Value of Equity and Total Liabilities

Hypothesis Testing

• H0: There is no significant relationship between market value of equity and total liabilities.

• H6: There is significant relationship between market value of equity and total liabilities

There is a strong negative relationship between market value of equity and total liabilities of Ooredoo Company. (r = - 0.871). A negative relationship in this scenario means that when market value of equity increases, total liabilities decrease. The r-value is - 0.871, which means there is a strong downhill (negative) linear relationship between MVE and total liabilities.

Regression Analysis

Regression analysis was performed to determine whether the independent variable (market value of equity) predict the dependent variable (total liabilities). In addition, simple linear regression analysis was used to determine the extent to which the independent variable (market value of equity) contribute to the variation of the dependent variable (total liabilities).

Table 6 shows that the overall correlation of independent variable (market value of equity) on dependent variable (total liabilities) is 0.871. The model summary illustrates the (R square) value, which helps in explaining variance in the dependent variable (total liabilities). The R square value is 0.758 that represents the coefficient of determination. This means that the independent variable (market value of equity shares) predicts the dependent variable (total liabilities) by 75.8 %, thus, leaving out 24.2% unexplained. 

Table 5: Correlations

Table 6 Model Summary

a: Predictors: (Constant), MVE

Table 7: ANOVAa

a: Dependent Variable: Total liabilities, b: Predictors: (Constant), MVE

Table 8: Coefficientsa

a: Dependent Variable: Total liabilities

This means that there are other extra independent variables that were not put into consideration in this study that is significant in explaining variation in total liabilities.

Analysis of Variance (ANOVA)

Hypothesis Testing

• H0: The independent variable (market value of equity) is not significant in explaining the variance in total liabilities.

• H6: The independent variable (market value of equity) is significant in explaining the variance in total liabilities

The ANOVA was performed to test the statistical significance of the regression model on whether it is a good descriptor for the relationship between the predictor variable (market value of equity) and the dependent variable (total liabilities). The model is a good descriptor of the relationship between independent variables (market value of equity) and the dependent variable (total liabilities) (F = 12.554; p = 0.024). The p value is less than .05. Thus, the independent variable (market value of equity) is significant in explaining the variation in the dependent variable (total liabilities). The ANOVA table, proves that the overall correlation 0.871 is significant.

The coefficients Table 8 helped to analyze the extent to which the independent variable (market value of equity) contribute to the variation of dependent variable (total liabilities). Beta standardized coefficients were used. The results indicate that market value of equity contributes to the variation in total liabilities (β = -0.871; p = 0.024). Market value of equity has a significant impact on total liabilities. For hypothesis no. 6, the alternate hypothesis (H6) is accepted proving that there is significant relationship between market value of equity and total liabilities. For Hypothesis No. 1, 2, 3 ,4 and 5, the null hypothesis (H0) is accepted proving that there is no significant relationship between working capital, retained earnings, EBIT and total sales on total assets.

Therefore, the Regression equation is developed as follows

Y = a + b X

Where ‘Y’ is the dependent variable total liabilities, a and b are constants

The model equation based on the analysis is given below:

Y = 204615.856 + - 0.169 (X1)

Where X1 represents market value of equity

It is concluded that the future total liabilities is affected by the market value of equity. Any change in the market value of equity will directly affect total liabilities of Ooredoo.

Omantel

Hypothesis Testing

• H0: There is no significant association between working capital and total assets 

• H1: There is a significant association between working capital and total assets

There is a negative relationship between working capital and total assets (r = -.224). A negative relationship in this scenario means that when working capital increases, the total assets decrease, vice versa. The R-value is-.224, which means there is a weak downhill (negative) linear relationship between working capital of Omantel Company and its total assets.

• H0: There is no significant association between retained earnings and total assets 

• H2: There is a significant association between retained earnings and total assets

There is a positive relationship between retained earnings and total assets (r = 0.753). A positive relationship in this scenario means that when retained earnings increases, the total assets also increase. The r-value is 0.753, which means there is a strong uphill (positive) linear relationship between retained earnings and the total assets.

• H0: There is no significant association between EBIT and total assets 

• H3: There is a significant association between EBIT and total assets

There is a positive relationship between EBIT and total assets (r = 0.779). A positive relationship in this scenario means that when EBIT increases, the total assets increase. The r-value is 0.779, which means there is a strong uphill (positive) linear relationship between EBIT and total assets.

• H0: There is no significant association between total sales and total assets.

• H4: There is a significant association between total sales and total assets

There is a positive relationship between total sales and total assets. (r = 577). A positive relationship in this scenario means that when total sales increases, total assets also increase. However, even though the correlation is positive, the r-value is 577, which means there is a moderate uphill (positive) linear relationship total sales and total assets.

Regression Analysis

Regression analysis was performed to determine whether the independent variables (total assets, working capital, retained earnings and EBIT) predict the dependent variable (total assets). In addition, multiple linear regression analysis was used to determine which amongst the four independent variables (total assets, working capital, retained earnings and EBIT) contribute most to the variation of the dependent variable (total assets).

Table 10 shows that the overall correlation of independent variables on employee performance is 0.924. The model summary illustrates the (R square) value, which helps in explaining variance in the dependent variable (total assets). The R square value is 0.854 that represents the coefficient of determination. This means that the independent variables (total sales, working capital, retained earnings and EBIT) predict the dependent variable (total assets) by 85.4%, thus, leaving out 14.6 % unexplained. This means that there are other extra independent variables that were not put into consideration in this study that is significant in explaining variation in total assets.

• H0: The four variables (total sales, working capital, retained earnings and EBIT) are not significant in explaining the variance in total assets

• H5: The four variables (total sales, working capital, retained earnings and EBIT) are significant in explaining the variance in total assets

The ANOVA was performed to test the statistical significance of the regression model on whether it is a good descriptor for the relationship between the predictor variables (total sales, working capital, retained earnings and EBIT) and the dependent variable (total assets). Therefore, based on the results, (F = 1.465; p = 0.545). The p value is greater than .05. Thus the independent variables (total sales, working capital, retained earnings and EBIT) are not significant in explaining the variation in the dependent variable (total assets). The ANOVA table, proves that the overall correlation 0.924 is insignificant.

The coefficients table helped to compare which of the four predictor variables (working capital, retained earnings, EBIT and total sales) contribute the most to the variation of total assets Beta standardized coefficients were used. The results indicate that none of the predictor variables contributes to the variation of total assets. Working capital (β = 0.135; p = 0.812), retained earnings (β = 0.517; p = 0.656), EBIT (β = -1.602; p = 0.418) and total sales (β = -1.302; p = 0.453 are not a significant predictor of total assets. Thus, it is statistically proved none of the independent variables used to assess the financial performance of Omantel Company has a significant impact on its total assets. Hence, the null hypothesis (H0) is accepted proving that there is no significant relationship between working capital, retained earnings, EBIT and total sales on total assets.

Therefore, the Regression equation is developed as follows

Y = a + b X1+X2+X3+X4

The predictor variables are insignificant to support the dependent variable as the p-value is greater than 0.05. It is concluded that the future value of total assets is not affected by any of the independent variables studied here. Any change in these variables will not directly affect the total asset value of Omantel in future.

Omantel MVE and Total liabilities

Hypothesis Testing

• H0: There is no significant relationship between market value of equity and total liabilities

• H5: There is significant relationship between market value of equity and total liabilities

There is a strong negative relationship between market value of equity and total liabilities of Ooredoo Company. (r = -0.981). A negative relationship in this scenario means that when market value of equity increases, total liabilities decrease. The r-value is -0.981, which means there is a strong downhill (negative) linear relationship between MVE and total liabilities.

Regression Analysis

Regression analysis was performed to determine whether the independent variable (market value of equity) predict the dependent variable (total liabilities). 

Table 9: Correlations

Table 10: Model Summary

a: Predictors: (Constant), Total sales, working capital, Retained earnings, EBIT

Table 11: ANOVAa

a: Dependent Variable: Total assets, b: Predictors: (Constant), Total sales, working capital, Retained earnings, EBIT

Table 12: Coefficientsa

a: Dependent Variable: Total assets

Table 13: Correlations

Table 14: Model Summary

a: Predictors: (Constant), MVE

Table 15: ANOVAa

a: Dependent Variable: Total liabilities, b: Predictors: (Constant), MVE

Table 16: Coefficientsa

a: Dependent Variable: Total liabilities

In addition, simple linear regression analysis was used to determine the extent to which the independent variable (market value of equity) contribute to the variation of the dependent variable (total liabilities).

Table 14 shows that the overall correlation of independent variables on dependent variable is 0.981. The model summary illustrates the (R square) value, which helps in explaining variance in the dependent variable (total liabilities).

Table 17: Financial Ratios Used in Calculating the Altman’s Z score

Based on the results in Table, the (R square) value is 0.962. The R square value represents the coefficient of determination. This means that the independent variable (market value of equity shares) predicts the dependent variable (total liabilities) by 96.2 %, thus, leaving out 3.8% unexplained. This means that there are other extra independent variables that were not put into consideration in this study that is significant in explaining variation in total liabilities.

Hypothesis Testing

• H0: The independent variable (market value of equity) is not significant in explaining the variance in total liabilities

• H6: The independent variable (market value of equity) is significant in explaining the variance in total liabilities

The model is a good descriptor of the relationship between independent variables (market value of equity) and the dependent variable (total liabilities) (F = 101.648; p = 0.001). The p-value is less than 0.05. This means that the independent variable (market value of equity) is significant in explaining the variation in the dependent variable (total liabilities). The ANOVA table, proves that the overall correlation 0.981 is significant.

The coefficients table helped to analyze the extent to which the independent variable (market value of equity) contributes to the variation of dependent variable (total liabilities). Beta standardized coefficients were used. The results indicate that market value of equity contributes to the variation of employee performance (β = -0.981; p = 0.001). Thus, it is statistically proved that market value of equity has a significant impact on total liabilities. Hence, the alternate hypothesis (H6) is accepted proving that there is significant relationship between market value of equity and total liabilities. For Hypothesis No. 1, 2, 3, 4 and 5, the null hypothesis (H0) is accepted proving that there is no significant relationship between working capital, retained earnings, EBIT and total sales on total assets.

Therefore, the Regression equation is developed as follows

Y = a + b X

Where ‘Y’ is the dependent variable employee performance, a and b are constants.

The model equation based on the analysis is given below:

Y = 8692838.058+ -7.277 (X1)

Where X1 represents market value of equity

Hence, it is concluded that the future liabilities are affected by the market value of equity. Any change in the market value of equity will directly affect total liabilities of Omantel.

The Altman’s Z Score Model

The financial strength of the telecommunication companies is derived through the Altman’s Z score model. The Altman Z-Score is a formula of 5 basic financial ratios to help determine the financial health of a company. In particular, it is a probabilistic model to screen for bankruptcy risk of a company. The data for the analysis has been obtained from the annual reports of the company. The study covers a period of 6 years from 2015 till 2020.

Interpretation of Z Score Results

The Z Score formula used to evaluate the financial health of publicly traded companies is given below:

Z-Score = 1.2(A) + 1.4(B) + 3.3(C) + 0.6(D) + 1.0(E)

Where:

• A = Working Capital (Current Assets – Current Liabilities)/Total Assets

• B = Retained Earnings / Total Assets 

• C = Earnings Before Interest & Taxes (EBIT) / Total Assets 

• D = Market Value of Equity (Mkt. Cap. + Preferred Stock) / Total Liabilities 

• E = Sales / Total Assets

Z-Score Results

• Z-Score of < 1.81 represents a company in distress zone

• Z-Score between 1.81 and 2.99 represents the caution/ grey zone.

• Z-Score of over 3.0 represents a company is in the safe zone

The elements of the Z score values and the trend of the two telecom companies Ooredoo and Omantel are presented below:

The Table 18 shows that the Z score of Ooredoo was highest in 2016 and lowest in 2020. The company was in the grey zone from 2015 to 2017 which showed that the financial viability of the company was considered healthy and thereafter in 2018, its Z Score improved and the company entered the safe zone. But in the next year the score declined and the company was back to the grey zone and in 2020, the company falls to the distress zone with a Z score of less than 1.8. The company’s first six-year financial viability was considered as healthy but it has fallen to the distress zone in the last year.

The above table shows that the Z score of Omantel was highest in 2015and lowest in 2017. The company was in the safe zone in the first two years ie. 2015 and 2016 which showed that the company was considered very healthy and thereafter in 2017, its Z score fell drastically and the company continues to be in the distress zone thereafter till 2020. The company’s Z score has improved slightly in the last two years compared to 2017 and 2018 but it continues to be in the distress zone since 2017.

The financial health of Omantel was better than that of Ooredoo for the first two years. But later on, the financial health of Omantel decreased drastically. It showed improvement in 2018 and 2019 (11.24% and 16.60% respectively) but again declined slightly in 2020 by 4.74%. Ooredoo shows alternate increase and decrease until 2018 but shows decline in the last two years. It has the highest decline percentage in 2020 (47.12%) which is an alarm for distress. Comparatively the financial health of Ooredoo is better than Omantel Company.

Findings of the study

The major findings of financial ratio analysis done with data obtained from annual report of Ooredoo and Omantel for a period of six years is listed below

Ooredoo Company: The company has shortage of working capital/negative working capital from 2015 to 2020. The retained earnings show increase after 2017 and is more or less consistent and so the dividend payout is comparatively less in these years. The EBIT and total sales have decreased in 2020and the total liabilities of the company have increased in 2020 compared to the other 5 years.

Table 18: Z Score of Ooredoo

Table 19: Z Score of Omantel

Table 20: Comparative analysis of Z Score of Ooredoo and Omantel

The market value of equity shows decreasing trend since 2015. The fall in the market value is highest in the year 2020.

Omantel Company

The company has shortage of working capital/negative working capital from 2015 to 2020. Like Ooredoo, the retained earnings show increase after 2017 and is more or less consistent and so the dividend payout is comparatively less in these years. The EBIT shows decrease in all years except 2019 where there is an increase compared to the previous year. The total sales and total liabilities show increasing trend and is maximum during the year 2019. The market value of equity shows decreasing trend since 2015. The fall in the market value is highest in the year 2019 and thereafter in 2020 it has improved slightly for Omantel Company. 

The market value of Omantel shares is comparatively higher than Ooredoo shares.

The findings of analysis of relationship between variables is listed below

Ooredoo Company: There is a positive correlation between the working capital and total assets and between total sales and total assets. The retained earnings and total assets have moderate positive correlation while the EBIT and total assets and the market value of equity and total liabilities have strong negative correlation. The independent variables (working capital, retained earnings, EBIT and total sales have no significant impact on the variation of dependent variable (total assets). The independent variables (working capital, retained earnings, EBIT and total sales) predict the dependent variable (total assets) by 92.5%, thus, leaving out 7.5% unexplained. There are other extra independent variables that were not put into consideration in this study that is significant in explaining variation in total assets. There is no significant relationship between working capital, retained earnings, EBIT and total sales on total assets. The independent variable (market value of equity shares) predicts the dependent variable (total liabilities) by 75.8 %, thus, leaving out 24.2% unexplained. There are other extra independent variables that were not put into consideration in this study that is significant in explaining variation in total liabilities. There is significant relationship between market value of equity and total liabilities and hence the alternate hypothesis is accepted in case of Ooredoo Company.

Omantel Company

There is weak negative correlation between working capital and total assets. The retained earnings and total assets and the EBIT and total assets have a strong positive correlation. There is moderate positive correlation between total sales and total assets and a strong negative correlation between market value of equity and total liabilities. The independent variables (total sales, working capital, retained earnings and EBIT) predict the dependent variable (total assets) by 85.4%, thus, leaving out 14.6 % unexplained. There are other extra independent variables that were not put into consideration in this study that is significant in explaining variation in total assets. There is no significant relationship between working capital, retained earnings, EBIT and total sales on total assets. The independent variable (market value of equity shares) predicts the dependent variable (total liabilities) by 96.2 %, thus, leaving out 3.8% unexplained. There are other extra independent variables that were not put into consideration in this study that is significant in explaining variation in total liabilities. There is significant relationship between market value of equity and total liabilities.

The findings of analysis of financial strength using the Altman’s Z score model is listed below

Ooredoo Company: The Company was in the grey zone from 2015 to 2017 which showed that the financial viability of the company was considered healthy and thereafter in 2018, its Z Score improved and the company entered the safe zone. But in the next year the score declined and the company was back to the grey zone and in 2020, the company falls to the distress zone with a Z score of less than 1.8. The company’s first six-year financial viability was considered as healthy but it has fallen to the distress zone in the last year.

Omantel Company

The Company was in the safe zone in the first two years i.e. 2015 and 2016 which showed that the company was considered very healthy and thereafter in 2017, its Z score fell drastically and the company continues to be in the distress zone thereafter till 2020. The company’s Z score has improved slightly in the last two years compared to 2017 and 2018 but it continues to be in the distress zone since 2017.

The comparative analysis of financial strength using Z score model reveals the following

The financial health of Omantel was better than that of Ooredoo for the first two years. But later on, the financial health of Omantel decreased drastically. It showed improvement in 2018 and 2019 (11.24% and 16.60% respectively) but again declined slightly in 2020 by 4.74%. Ooredoo shows alternate increase and decrease until 2018 but shows decline in the last two years. It has the highest decline percentage in 2020 (47.12%) which is an alarm for distress. Comparatively the financial health of Ooredoo is better than Omantel Company.

The study is a fundamental analysis of the leading telecom companies in the Sultanate of Oman. Even though Oman telecom market is believed to have room for and growth for the two major telecom companies i.e. Omantel and Oreedoo the companies reported declining profits recently due to higher royalties and tax rates. In this context the study was undertaken to analyze the financial strength of these two leading telecom companies by using the Altman’s Z score model. It is concluded that Omantel was in the safe zone for the first two years and later falls to the distress score since 2017. The financial viability of Ooredoo Company was considered to be healthy until 2019 but during the last year in 2020, it has fallen to the distress zone. The study can provide useful insights to prospective investors for investment analysis and portfolio management. The Z Score is an effective tool to demonstrate credit worthiness to bankers and soundness of business model to investors. Even though Ooredoo has better financial strength than Omantel, both the companies must go ahead with innovative steps to attract customers, improve sale and cash flow and thereby strengthen its financial soundness.

Recommendations

• The Z score helps managers assess the factors contributing to poor financial health. The Z score factors that contribute to under-performance are working capital shortage, earnings retention, declining profitability and leverage. These factors can be isolated. This enables managers to initiate actions to improve the score of these factors contributing to financial distress. Targeting actions to specific under-performing stress factors will enable the management to make wise capital allocation decisions that helps to mitigate principal risk factors and produce optimal returns

• Steps to improve the earnings can improve the working capital and equity of both the companies

• Both the companies have increasing trend for total assets but negative working capital. Financing of capital expenditures (for example purchase of fixed assets) using working capital shall be avoided so as to improve the working capital position of Ooredoo and Omantel

• As the total liabilities of Ooredoo and Omantel have increased in recent years, the company may take actions for better management of outstanding receivables which in turn will contribute to improve the liquidity of the companies and lower the debt and thereby decrease the cost of debt

• Negotiations for funding and decisions in setting up the credit policy of the company will also contribute to improve the financial soundness of both the companies. Undoubtedly, the Z score gives the management an important negotiating tool to defend their credit rating during situations when excess leverage or deficient levels of working capital and equity are present

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