Bahrain Financing Company's Financial Condition Analysis for the period from 01.01.2007 to 31.12.

2011

CONTENTS

1. Bahrain Financing Company's Financial Position Analysis 1.1. Structure of the Assets and Liabilities 1.2. Net Assets (Net Worth) 1.3. Financial Sustainability Analysis 1.3.1. Key ratios of the company's financial sustainability 1.3.2. Working capital analysis 1.4. Liquidity Analysis 2. Financial Performance 2.1. Overview of the Financial Results 2.2. Profitability Ratios 2.3. Analysis of the Business Activity (Turnover Ratios) 3. Conclusion 3.1. Key Ratios Summary

The reduction of total assets of Bahrain Financing Company occurred due to value lowering in the following assets (amount of change and percentage of this change relative to the total assets growth are shown below):

Other current financial assets BHD 4,570,197 (85.4%) Cash and cash equivalents BHD 716,883 (13.4%)

With that, one could see a reduction in the section "Equity and Liabilities" of the company's balance sheet in the following positions:

Trade and other current payables BHD 7,377,997 (62.2%) Other reserves BHD 2,847,955 (24%) Retained earnings BHD 1,628,365 (13.7%)

The positively changed items in the balance sheet for the last 5 years are "Property, plant and equipment" in assets and "Other current financial liabilities" in the company's sources of finance (BHD +480,148 and BHD +3,757,041, respectively). Correlation of basic asset groups is demonstrated in the chart below.

For the whole period analysed, the current receivables were observed to grow quickly by 18.3 times.

The net tangible assets amounted to BHD 15,645,277 on the last day of the period analysed (31.12.2011). A lowering in the net tangible assets was BHD 976,320 for the period analysed (31.12.0631.12.11). In this case, Bahrain Financing Company has no goodwill or other intangible assets. This is why amounts of net worth and net tangible assets are equal on 31 December, 2011. The net worth (net assets) of Bahrain Financing Company was much higher (by 3.1 times) than the share capital on 31.12.2011. It positively describes the company's financial state. Net worth is used as a measure of the company's book value (as opposed to a shareholder's value, the value based on expected earnings and other methods used to estimate the company's value). In financial analysis, amount of net worth (own equity) is one of the key indicators of property status of the company.

Increase in the issued (share) capital was abrupt in the reviewed period.

First, attention should be drawn to the debt-to-equity ratio and debt ratio as the ratios describing the capital structure. Both ratios have similar meaning and indicate if there is not enough capital (equity) for stable work for the company. Debt-to-equity ratio is calculated as a relationship of the borrowed capital (liabilities) to the equity, while debt ratio is calculated as a relationship of the liabilities to the overall capital (i.e. the sum of equity and liabilities). The debt-to-equity equaled 0.47 on 31.12.2011. On 31.12.2011, the debt ratio was equal to 0.32. For the 5 years, the debt ratio fell significantly (by 0.08). The debt-to-equity ratio and debt ratio for Bahrain Financing Company demonstrate optimal values on 31.12.2011. It is as a result that percentage of the liabilities is 32.1%, while the percentage of equity is 67.9%. It is recommended to keep the percentage of liabilities at a level which will not exceed 60%. The debt ratio had an acceptable value during the whole of the evaluated period. In the chart below, the correlation of the company's equity and liabilities is demonstrated:

According to common rules, non-current investments should be made, in the first place, with the help of the most stable source of financing, i.e. with the help of own capital (equity). On the last day of the period analysed (31.12.2011), the ratio was 0.08. That is significantly higher than the level of the ratio on 31 December, 2006. On the last day of the period analysed, the value of the ratio can be described as absolutely normal. The current liability ratio is 0.98 at the end of the period analysed. It means that the overall shares of current and non-current liabilities of a company's liabilities are 97.9% and 2.1%, respectively. An unbalance of financial sources to the side of liabilities with short maturity can negatively influence financial stability and the company's solvency. This is why it is important to be careful with an increase in short-term liabilities.

The change in the main ratios of financial stability of Bahrain Financing Company is demonstrated during the period analysed in the chart below.

5 4 4 3 3 2 2 1 1 0 31.12.06 31.12.07 31.12.08 31.12.09 31.12.10 31.12.11

Current ratio Quick ratio Cash ratio

1.4. Liquidity Analysis

Liquidity related ratios are one of the most widespread indicators of a company's solvency. There are three liquidity related ratios: current ratio, quick ratio and cash ratio. Current ratio is one of the most widespread and shows to what degree the current assets of the company are meeting the current liabilities. The solvency of the company in the near future is described with the quick ratio which reflects if there are enough fund's for normal execution of current transactions with creditors. The following table demonstrates all three liquidity ratios for Bahrain Financing Company.
Change (col.7 31.12.2006 31.12.2007 31.12.2008 31.12.2009 31.12.2010 31.12.2011 col.2)
2 3 4 5 6 7 8

Value

Liquidity ratio

1. Current ratio (working capital ratio)

2.45

2.59

4.16

1.17

1.98

2.94

0.49

2. Quick ratio (acidtest ratio)

2.45

2.59

4.16

1.17

1.98

2.94

0.49

3. Cash ratio

2.42

2.53

4.15

1.17

1.64

2.57

0.15

On 31 December, 2011, the current ratio equaled 2.94. The current ratio notably grew (by 0.49) during the entire period analysed. On 31.12.2011, the value of the ratio can be characterized as very good. During almost the whole of the analysed period, the current ratio kept a normal value. The quick ratio equaled 2.94 on the last day of the period analysed, which is 0.49 higher than the level on 31.12.2006. During the whole of the reviewed period, multidirectional changes of the rate were observed; the values were in the range of 2.45 to 2.94. On 31.12.2011, the value of the quick ratio can be characterized as first-rate. It means that Bahrain Financing Company has enough liquid assets (cash and other assets which can be rapidly sold) to meet all their current liabilities. Similar to the two previous ratios, the cash ratio has a value of 2.57 on 31 December, 2011 which demonstrates that the company has more than enough liquid assets (cash and cash equivalents) to meet current liabilities.

Dynamics of Liquidity Ratios

5 4 4 3 Ratio Value 3 2 2 1 1 0 31.12.06 31.12.07 31.12.08 31.12.09 31.12.10 31.12.11 Current ratio Quick ratio Cash ratio

All three ratios prove good solvency of Bahrain Financing Company.

2. Financial Performance 2.1. Overview of the Financial Results

The following table tells us about the main financial results of Bahrain Financing Company's activities during the period analysed (from 31.12.2006 to 31.12.2011).

A notable growth in the revenue (BHD +2,371,453) was observed for the 5 years. The chart below demonstrates the change in revenue and a comprehensive income for Bahrain Financing Company. During the last year, the gross profit amounted to BHD 9,714,523. The gross profit notably went up (by BHD 2,371,453 or by 32.3%) for the period. During the last year, the company posted a gross profit and earnings before interest and taxes (EBIT), which was BHD 5,113,720. The final comprehensive income for Bahrain Financing Company was BHD 5,113,720 for the year 2011.

2.2. Profitability Ratios

Value in % Profitability ratios 2007

1 2

Change (col.6 - col.2) 2011

6 7

2008
3

2009
4

2010
5

1. Gross margin.

100

100

100

100

100

2. Return on sales (operating margin).

44.4

59.5

52.6

49.4

52.6

+8.2

3. Profit margin.

44.4

59.5

52.6

49.4

52.6

+8.2

The profitability ratios given in the table have positive values as a result of the profitability of Bahrain Financing Company's activities during the year 2011. A change in the gross margin was not verified for the whole period analysed. Profitability calculated using EBIT (return on sales) deserves more attention. During the reviewed period, multidirectional changes in the return on sales (ROS) (both growth and reduction) were observed; the values were in the range of 44.4 to 52.6. For the year 2011, the return on sales was 0.53 (or 52.6% per annum), and profitability calculated by net profit was 52.6% per annum.

Value, % Profitability ratios 2007 2008 2009

1 2 3 4

Change (col.6 - col.2) 2011

6 7

2010
5

Return on equity (ROE) Return on assets (ROA) Return on capital employed (ROCE)

47.4 26.4 33.9

30.8 35 20

84 35.7 39.1

44 39.3 38.3

82.7 44 11.8

35.5 17.6 22.1

During the 5 years, the return on assets was observed to go up sharply from 47.4% to 83%. The return on assets went up in the main part of the period. During the whole of the reviewed period, the return on assets kept an acceptable value. A key indicator of business profitability is the return of equity (ROE), i.e. return from money invested by the owners. The profitability of the owners' investments in Bahrain Financing Company's assets was 35.3% per annum for the last year. It is a high rate, but it is influenced not only with factors inside the company, but also the economic environment where the company is located (inflation rate, interest rates, etc).

The chart below shows changes of the main rates of return on assets and equity of the company during the entire period reviewed.

Dynamics of Total Assets and Equity Ratios

90 80 70 60 50 40 30 20 10 0 2007 2008 2009 2010 2011 Return on equity (ROE) Return on assets (ROA) Return on capital employed (ROCE)

2.3. Analysis of the Business Activity (Turnover Ratios)

To assess Bahrain Financing Company's business activity, the following table provides the main rates of turnover: receivables, inventory, current and total assets turnovers; accounts payable and capital turnovers of the company. Turnover ratios have strong industry specifics and depend on activity. This is why an absolute value of the ratios does not permit making a qualitative assessment. When assets turnover ratios are analysed, an increase in ratios (i.e. velocity of circulation) and a reduction in circulation days are deemed to be positive dynamics. There is no well-defined interaction for accounts payable and capital turnover. In any case, an accurate conclusion can only be made after the reasons that caused these changes are considered.

3. Conclusion 3.1. Key Ratios Summary

The most important indicators of Bahrain Financing Company's financial state and activity results are summarized below by using a qualitative assessment during the period analysed (31.12.0631.12.11). The analysis revealed the following very good financial characteristics:

the debt ratio has an optimal value of 0.32; on 31 December, 2011, the non-current assets to net worth ratio shows a very good value of 0.08; the current ratio (2.94) completely corresponds to the standard criteria for this rate; an outstanding relationship between liquid assets (current assets minus inventories) and current liabilities (quick ratio is 2.94); the cash ratio is 2.57 on 31 December, 2011 (a high cash at hand required for current payments); high return on equity (35.3% per annum); return on total assets was for the year 2011 17.6% per annum; net worth (net assets) of the company is much higher (by 3.1 times) than the share capital on 31 December, 2011; working capital has a normal value in comparison with inventories owned by the company; During the last year, earnings before interest and taxes (EBIT) showed BHD 5,113,720, moreover, a positive dynamics compared with the data for the penultimate year (BHD +1,856,220) was observed.

Theese indicators positively describe the financial state of BFC the income from financial and operational activities (comprehensive income) was BHD 5,113,720 for the last year.