Deme Group

o
Key Financial Figures For
The Fy 2020 Quick Review
And Comparison
Table of Contents
Introduction............................................................................................................................... 3
- DEME GROUP KEY FINANCIAL FIGURES of THE GROUP Quick review ................................................. 4
- MAIN SUBSIDIARIES (FULLY CONSOLIDATED), as of December 31, 2020 ........................................... 6
- MAIN JOINT VENTURES (EQUITY METHOD), as of December 31, 2020 .............................................. 7
- MAIN ASSOCIATES (EQUITY METHOD), as of December 31, 2020 ...................................................... 7
Financial Principles and Bottom-Line impact: ............................................................................. 8
- KEY TAKEAWAYS .................................................................................................................................. 8
- Table 1. Key Differences between generally accepted accounting principles GAPP and International
Financial Reporting Standards (IFRS) ............................................................................................................ 8
Ratio Analysis & Financial Interpretations, based on DEME FS 2019/ 2010, and competitors. ...12
- Table 2. Financial results of DEME group and calculated financial metrics....................................... 12
- Overview and recommendations: ..................................................................................................... 14
- Understanding Ratio Analysis and compare with market norms ...................................................... 15
Liquidity ratios ............................................................................................................................................ 15
- Liquidity ratios ................................................................................................................................... 15
- Table.3 Comparative Liquidity Ratios Analysis for 3 major contractors. ........................................... 16
- Table.4 Comparative Turnover Ratio Analysis for 3 major contractors. ........................................... 16
- Profitability ratios indicate how assets used internally to generate income. ................................... 17
- Table.5 Comparative profitability Ratios Analysis for 3 major contractors. ...................................... 17
Leverage, Solvency, Gearing Ratio .............................................................................................................. 17
- Table.6 Comparative Leverage Ratio Analysis for 3 major contractors............................................. 18
Literature Review on Budgeting Practices: ................................................................................19
- Traditional budgeting definition ........................................................................................................ 19
- Traditional Budgeting. ....................................................................................................................... 19
- Traditional and Zero-Based Budgeting. ............................................................................................. 19
Activity-Based Budgeting (ABB) .................................................................................................................. 19
- Insight – the top trump ..................................................................................................................... 22
Investment Appraisal Techniques .............................................................................................23
The payback period ..................................................................................................................................... 24
- Discounted Payback Period ............................................................................................................... 24
The Internal Rate of Return (IRR) ................................................................................................................ 24
The Net Present Value (NPV) ...................................................................................................................... 25
Bibliography .................................................................................................................... 26
Introduction

Dredging, Environmental and Marine Engineering NV (DEME) Group is a Global leader, based
in Zwijndrecht, Belgium, active in the highly specialized fields of capital and
maintenance dredging, land reclamation, port infrastructure development, offshore related services for
the oil & gas industry, offshore windfarm installation, environmental remediation, infra marine and
environmental works, and for the offshore energy market.

Dredging, Environmental and Marine Engineering NV (DEME) stands fir four activities – dredging,
offshore, environmental and infra, all meet the essential needs of modern human society and our planet.

Dredging, Environmental and Marine Engineering NV (DEME) Group has a single shareholder. That
is the Brussels-based civil engineering contractor CFE, that’s in turn, is controlled by the Belgian
investment Group Ackermans & van Haaren. both publicly listed companies on Euronext Brussels.
(DEME GROUP, 2021)

Group’s share capital at the end of December 2020 had been composed of 4538100 ordinary shares.
These shares are without any nominal value.

In addition to Dredging, Environmental and Marine Engineering NV (DEME) Group , The CFE Group
is active in the fields of marine engineering, contracting and real estate development.

DEME fosters a strong innovative approach throughout its history and has executed major works of
marine engineering infrastructure such as new ports, waterways, airports, and artificial islands on all
continents.

In support of its dredging activities, DEME has become a global solutions provider developing a whole
range of new activities in the field of energy and mining such as installation of offshore wind farms
and sea aggregate winning.

As one of the biggest four marine and dredging contractors in the world, DEME has created a global
network of regional branch offices, yards, and business development, and agencies. DEME companies
can rely on a permanent workforce of 5,400 dedicated people and a modern engineered fleet consisting
of 100 main vessels backed by a broad range of support vessels and auxiliary equipment, both onshore
and offshore. DEME offers dredging, reclamation, harbor and marine construction, offshore energy,
and green energy solutions across the globe.

Dredging, Environmental and Marine Engineering NV (DEME) is visionary in the field of marine
construction considering environmental impact and sustainable future. Project teams always consider
offering solutions for global challenges such as a rising sea level, reduction of CO2 emissions and
carbon print of the societies and human activities, polluted beaches, rivers, oceans and soils, a growing
population and the scarcity of natural resources.
All projects awarded to Dredging, Environmental and Marine Engineering NV (DEME) being subject
for tight environmental impact assessment, execution methods are weighted against carbon print and
other environmental impacts. Environmental mitigation measures receive all required priority to ensure
minimum impact of the work sites.
The pandemic disrupted normal business on projects in Belgium and abroad. This resulted in a lower
level of activity and profitability at DEME. ( Ackermans & van Haaren NV, 2021)

Despite challenges experienced in early 2020 by the sudden evolution COVID-19 pandemic and related
restrictions imposed on ongoing projects as well as business development teams, Order book of DEME
Group had increased as of December 31st, 2020 by 20% to 4.5 billion euros, compared to recorded
order book value of 3.75 billion euros at the end the 2019 financial year.

Above figures of firm order book values excludes the below listed contracts which are not yet included
in this order book as still Pending financial close:
- Arcadis Ost offshore wind farm, and Courseul- les-sur-Mer, and Hai Long and Zhong Neng
offshore wind farm projects in Taiwan (total contracts value worth more than one 1120 million
euros;Among international contractors, DEME had been announced as preferred bidder)
- The Right Bank of the Oosterweel link and Hinckley Point in the UK, which were awarded to
DEME at the beginning of 2021.

That record level order book indicates trust of global clients in Group’s performance and promises
increase of revenue over the next few years.
DEME group management plans to utilize such record order book in innovative capital expenditures,
to maintain Group’s position on top of global contest in dredging, offshore, and environmental market.

Renewable energy and green hydrogen projects are getting increasing interest in global market, that
provides a potential advantage for DEME affiliates which had already built capabilities in that field as
well as strong relations and direct access to major clients in international markets.

Meanwhile, to accelerate recovery of pandemic consequences on financial performance, Management

needs to consider series of measures to improve the application of working expenditures, sharpen cash
management, meet current liabilities, and improves the efficiency employing current capitals.

- DEME GROUP KEY FINANCIAL FIGURES of THE GROUP Quick review

Among all, DEME’s traditional dredging activities were the worst that had been hit by the drawbacks
of COVID-19 pandemic, and followed restrictions and lockdowns, due to logistical complications
which had resulted in delays in the start-up execution, and delivery and of projects. That had badly
affected the amount of receivables related to delivered works and progress rates.

Turnover from the dredging activities had sharply decreased by 19% compared to those from the 2019
results. Turnover from dredging and related activities in the financial year 0f 2020 had fallen down to
877 million euros.
Dredging, Environmental and Marine Engineering NV (DEME) had been actively engaged in 2020 on
many key projects, such as dredging and deepening works on the Elbe in Germany, where hopper
vessels had been engaged, as well as maintenance dredging in Belgium. And the Świnoujście-Szczecin
project in Poland, as well as dredging an access channel to the port of Sabetta in the Arctic Ocean.

on a similar course, the turnover of DEME Offshore related operations had shown a decrease by 18%
to 934.6 million euros ( Ackermans & van Haaren NV, 2021).
However, Infra, a Subsidiary of DEME group, specializing in large-scale infrastructure works reported
an increase turnover compared to previous year, namely to 208.8 million euros. That can be described
by the local nature if Infra projects when compared to global nature of dredging and offshore projects.
The three major infrastructure projects DEME that Infra is carrying out in the Netherlands (Terneuzen
lock, Rijnland route and Blankenburg connection) are continuing.
As of January 1st, 2021, EPC works had started on the world’s longest immersed tunnel that will link
up Denmark and Germany, the Fehmarnbelt.
Nevertheless, DEME won major contracts in the course of 2020 in its various activities, thus Order
book of DEME Group had increased to a record level of 4.5 billion euros:
- Dredging Port of Abu Qir, Egypt: the biggest ever dredging and land reclamation contract
awarded by DEME, in terms of dredging quantity, with more than 150 million cubic meters
(+300 million euros).
- Dredging of the access channel to the port of Sabetta, Arctic Ocean, Russia, (150 - 300 million
euros).
- DoggerBank, UK: EPCI of the subsea power transmission cables for the world’s largest
offshore wind farm under development, 3.6 GW, (150 - 300 million euros).
- Scheldt tunnel, Antwerp, (140 million euros).
- Fehmarnbelt: (700 million euros).

End of year results (in millions of EUR)

Difference
Financial Metrics 2020 2019 Difference
%
Turnover 2,195.80 2,622.00 -426.20 -16.25%
EBITDA 369.50 437.00 -67.50 -15.45%
Net Profit 50.40 125.00 -74.60 -59.68%
Equity 1,467.50 1,435.50 32.00 2.23%
Net financial Position -489.00 -708.50 219.50 -30.98%

While

(CORPORATION, 4,500.00 3,750.00 750.00 20.00%

2021)Order book

A quick look on the results of the financial year 2020 shows that DEME had recorded 2,195.8
million euros as consolidated turnover of the group in 2020. That is a decrease by 16,25% when
compared to 2,622.0 million euros of consolidated revenue in 2019.

A substantial part of this decrease, estimated at around 300 million euros, is attributable to the
health crisis and its indirect impact on the economy ( Ackermans & van Haaren NV, 2021).

Due to successful measures, DEME recoded a decrease group’s net debt position in 2020 to 489.0
million euros at year-end 2020. That’s a reduction by by 219.4 million euros, Despite the challenges
created by the pandemic in FY 2020. Mainly due to effective financial management, and dept
maintenance measures.
 DEME reported an EBITDA of 369.5 million EUR, which is 16.8% of the sales, that is in line with
2019’s margin of 16.7%.

By end of December 2020, DEME had reported 621.9 million euros in cash and cash equivalents
in addition to 141.0 million euros of unused, confirmed credit lines. DEME closed 2020 with a
very solid liquidity position. ( Ackermans & van Haaren NV, 2021)

Despite the fact that negative impact of the covid-19 pandemic and related consequences is still
expected to extend over in the first months of 2021, or even beyond, DEME, supported by secured
record order book, most of it to be completed within 2021, and 2021, and due to the start of some
large projects, All Would support to realise a higher turnover and net result of the group in 2021.

- MAIN SUBSIDIARIES (FULLY CONSOLIDATED), as of December 31, 2020

*Newly created or acquired during 2020 (1) The economic rights in this company are 100%
**Change in % of shareholding (2) The economic rights in this company are 54.43%.
(3) The economic rights in this company are 95%.
(4) The economic rights in this company are 98%
 - MAIN JOINT VENTURES (EQUITY METHOD), as of December 31, 2020

* Newly created or acquired during 2020

- MAIN ASSOCIATES (EQUITY METHOD), as of December 31, 2020

* Newly created or acquired during 2020 ** Change in % of shareholding

Financial Principles and Bottom-Line impact:

Accounting Standards are employed as one of the main compulsory regulatory mechanisms for
preparation of general-purpose financial reports and subsequent audit of the same, in almost all
states of the globe.

In the United States, financial reporting practices are set forth by the Financial Accounting
Standards Board (FASB) and organized within the framework of the generally accepted accounting
principles (GAAP). These refer to a common set of accepted accounting principles, standards, and
procedures that companies and their accountants must follow when they compile their financial
statements. (ROSS, 2021)

On the other hands, International Financial Reporting Standards (IFRS) Issued by the International
Accounting Standards Board (IASB). International Financial Reporting Standards (IFRS) are a set
of international accounting standards, which state how particular types of transactions and other
events should be reported in financial statements.

More than 144 countries around the world have adopted IFRS, which aims to establish a common
global language for company accounting affairs. While the Securities and Exchange Commission
(SEC) has openly expressed a desire to switch from GAAP to IFRS, development has been slow.

IFRS was established in order to have a common accounting language, so business and accounts
can be mutually understood.

- KEY TAKEAWAYS

GAAP is a common set of accepted accounting principles, standards, and procedures that
companies and their accountants must follow when they compile their financial statements.

IFRS is a set of international accounting standards, which state how particular types of transactions
and other events should be reported in financial statements. GAAP is rules-based and IFRS is
principles-based.

- Table 1. Key Differences between generally accepted accounting principles GAPP and
International Financial Reporting Standards (IFRS)

The primary difference between the two systems is that GAAP is rules-based and IFRS
is principles-based. This disconnect manifests itself in specific details and interpretations.
Basically, IFRS guidelines provide much less overall detail than GAAP. Consequently, the
theoretical framework and principles of the IFRS leave more room for interpretation and may often
require lengthy disclosures on financial statements.

On the other hand, the consistent and intuitive principles of IFRS are more logically sound and
may possibly better represent the economics of business transactions.

Perhaps the most notable specific difference between GAAP and IFRS involves their treatment of
inventory. IFRS rules ban the use of last-in, first-out (LIFO) inventory accounting methods. GAAP
rules allow for LIFO. Both systems allow for the first-in, first-out method (FIFO) and the weighted
 average-cost method. GAAP does not allow for inventory reversals, while IFRS permits them under
certain conditions.
1 Adoption
2 Methodology
3 issued by
4 Inventory Methods
5 Inventory Reversal
6 Income Statements
7 Intangible Assets
8 Fixed Assets
9 Development Costs
10 Quality Characteristics
1. Adoption
IFRS is a globally adopted method for accounting, while GAAP is exclusively used within the
United States.
2. Methodology
GAAP focuses on research and is rule-based, whereas IFRS looks at the overall patterns and is
based on principle.
IFRS
globally adopted method for
accounting
looks at the overall patterns and
is based on principle.
International Accounting
Standard Board (IASB)
Allows use either Last In, First
Out (LIFO) method, or FIFO for
inventory estimates
The amount of the write-down
can be reversed
Extraordinary or unusual items
are included in the income
statement and not segregated
Considers whether an asset will
have a future economic benefit
as a way of assessing the value
uses revaluation model for fixed
assets evaluation
can be capitalized under, as long
as certain criteria are met
works with same hierarchy
characteristics, but with the
exception that decisions cannot
be made on the specific
circumstances of an individual.
GAPP
exclusively used within the
United States.
focuses on research and is rule-
based
Financial Accounting Standard
Board (FASB)
the LIFO method for inventory is
not allowed
the amount of the write-down
cannot be reversed
Extraordinary or unusual items
are separated and shown below
the net income portion of the
income statement.
are recognized at the fair market
value and nothing more
value these assets using the cost
model
development costs are not allowed
to be capitalized.
works within a hierarchy of
characteristics, such as relevance,
reliability, comparability and
understandability, to make
informed decisions based on user-
specific circumstances.
3. Developed by

The principles of IFRS are issued by the International Accounting Standard Board (IASB), while
GAAP are issued by Financial Accounting Standard Board (FASB)

4. Inventory Methods

GAAP uses the Last In, First Out (LIFO) method for inventory estimates. However, in IFRS, the
LIFO method for inventory is not allowed.

5. Inventory Reversal

IFRS and GAAP accounting also differ when it comes to inventory write-down reversals. In
GAAP, the amount of the write-down cannot be reversed. However, under IFRS, the amount of the
write-down can be reversed.

6. Income Statements

Extraordinary or unusual items are included in the income statement and not segregated under
IFRS. While, under GAAP, they are separated and shown below the net income portion of the
income statement.

7. Intangible Assets

When it comes to intangible assets, IFRS takes into account whether an asset will have a future
economic benefit as a way of assessing the value. Intangible assets measured under GAAP are
recognized at the fair market value and nothing more.

8. Fixed Assets

In fixed assets, companies using GAAP accounting must value these assets using the cost model.
IFRS uses a different model for fixed assets called the revaluation model.

9. Development Costs

Development costs can be capitalized under IFRS, as long as certain criteria are met. With GAAP,
development costs are not allowed to be capitalized.

10. Quality Characteristics

Finally, the qualitative characteristics to how the accounting methods function. GAAP works
within a hierarchy of characteristics, such as relevance, reliability, comparability and
understandability, to make informed decisions based on user-specific circumstances. IFRS also
works with the same characteristics, but with the exception that decisions cannot be made on the
specific circumstances of an individual.

To serve the needs of our shareholder, customers, banks and other stakeholders, DEME chose to
draw up an Activity Report and Sustainability Report accompanied by financial information that is
prepared in accordance with the recognition and measurement principles of International Financial
Reporting Standards (IFRS) as adopted by the EU. The underlying consolidated financial
statements do not contain all the explanatory notes required by IFRS and are therefore not fully
compliant with IFRS as adopted by the EU.

Applications of generally accepted accounting principles GAPP or International Financial

Reporting Standards (IFRS) is not an option in modern company financial reporting system.
Application of these commonly accepted rules leaves TIGHT margin for manipulations, which is
a major accounting fraud.

Companies manipulating financial statements do that either forced by forced by management

intentions to inflate revenues or deflate expenses or liabilities. Most probably, they want to show
financial performance that is better than what is already real, so they can collect more benefits,
which is usually tied to financial performance.

Relations between company management and auditing firms would generate conflict of interest,
especially standards afford a significant amount of flexibility.

Financial statements can show unreal situation of the firm financial performance if been subject to
manipulation due to any of the below tricks being applied.

- Reporting non-invoiced, or undelivered services or goods based on project books, before

client confirmation. Client interpretation with received good or services might alter value or
time of records.
- Capitalizing ordinary business expenses, thus shifting them from the income statement to the
balance sheet.
- Reporting income from investments or capital obtained by taking out a loan as business
revenue.
- Inaccurately reporting liabilities.
- Recording revenue before supplying goods or services.
- Overestimating current assets and inventories.

Public listed firms subject to share market rules which have regulations to punish firms, and
management staff engaged in financial statement manipulation.

That said, the application of correct ratio analysis, study past and historical financial results, as well
as compare these results and ratios with other firms in the same market who deliver similar products
or services, all that can indicate whether firms manipulate financial statement or not.
Ratio Analysis & Financial Interpretations, based on DEME FS 2019/ 2010, and
competitors.

Below table lists financial results reported by DEME Group as well as calculated financial ratios
which will help to analyze financial performance of the group over last two years and compare that
performance to market norms ad performance of competitors over the same time period.

- Table 2. Financial results of DEME group and calculated financial metrics.

“in thousands of EUR”, As of December 31

DEME
Ratio Analysis
2020 2019 ∆ ∆%

Current Assets 1,228,871.00 1,212,410.00 16,461.00 1.36%

Non-current assets 2,712,623.00 2,732,369.00 (19,746.00) -0.72%
Total assets 3,941,494.00 3,944,779.00 (3,285.00) -0.08%
Current liability 1,574,230.00 1,401,907.00 172,323.00 12.29%
Non-current liability 881,932.00 1,095,718.00 (213,786.00) -19.51%
Total liability 2,456,162.00 2,497,625.00 (41,463.00) -1.66%
GROUP EQUITY 1,485,332.00 1,447,154.00 38,178.00 2.64%
SHAREHOLDERS' EQUITY 1,467,492.00 1,435,483.00 32,009.00 2.23%
Total liability and equity 3,941,494.00 3,944,779.00 (3,285.00) -0.08%
Revenues 2,335,944.00 2,660,659.00 (324,715.00) -12.20%
Turnover 2,195,828.00 2,621,965.00 (426,137.00) -16.25%
Other operating income 140,116.00 38,694.00 101,422.00 262.11%
Cost of sales / OPERATING
(2,271,663.00) (2,519,513.00) 247,850.00 -9.84%
EXPENSES
Gross Profit / OPERATING
64,281.00 141,146.00 (76,865.00) -54.46%
RESULT
EBITDA 369,458.00 437,011.00 (67,553.00) -15.46%
FINANCIAL RESULT (25,651.00) (6,250.00) (19,401.00) 310.42%
RESULT BEFORE TAXES 38,630.00 134,896.00 (96,266.00) -71.36%
Income and deferred taxes (9,812.00) (30,321.00) 20,509.00 -67.64%
RESULT AFTER TAXES 28,818.00 104,575.00 (75,757.00) -72.44%
Share of profit / loss of joint
22,395.00 18,450.00 3,945.00 21.38%
ventures and associates
RESULT FOR THE
51,213.00 123,025.00 (71,812.00) -58.37%
PERIOD
Attributable to non-controlling
803.00 (2,016.00) 2,819.00 -139.83%
interests
Net profit / SHARE OF THE
50,410.00 125,041.00 (74,631.00) -59.69%
GROUP
Liquidity Ratios 3941494000 3944779000 (3,285,000.00) -0.08%
Current Ratio = Current
0.78 0.86 (0.08) -9.74%
Assets/Current Liabilities
Non-Current Ratio 3.08 2.49 0.58 23.34%
Quick Ratio = (Current
assets – Inventory) / Current 0.77 0.86 (0.08) -9.52%
Liabilities
Turnover Ratios
Asset Turnover Ratio= Sales or
Revenues / Total average 0.59 1.35 (0.76) -56.12%
Assets
Profitability Ratios

GPM 1.97 1.95 0.03 1.31%

NPM 2.16% 4.70% (0.03) -54.08%

(ROCE) 1.63% 5.30% (0.04) -69.24%

EBITDA / Turnover 16.83% 16.67% 0.00 0.95%

Leverage/Solvency/Gearing
Ratios
D/E ratio = Total
1.67 1.74 (0.07) -3.81%
Liabilities/Shareholders Equity
EBIT / Interest Payable
(Interest coverage ratio =
(5.21) (11.92) 6.71 -56.31%
Earnings before interest and
taxes/Interest Expense)
Growth Ratios
EPS = (Net Income – Preferred
Dividends) / Weighted Average 50,410,000.00 125,041,000.00 (74,631,000.00) -59.69%
Shares Outstanding
ROA = Net Profit / Total assets 1.28% 3.17% (0.02) -59.65%
ROE = Net Profit / shareholder
3.44% 8.71% (0.05) -60.56%
equity
 - Overview and recommendations:

Based on financial results for the year of 2020 a dividend of 20,421,450 EUR is proposed, “The final
dividend is subject to shareholder approval in the Shareholders' General Meeting of May 4, 2021”.
(DEME GROUP, 2021)

DEME Group must further sharpen its focus on cash management, that includes.
- limiting non-project-related expenditure and,
- Optimizing working capital to preserve the financial position.
- Review Capital allocation decisions and downsize the original capital expenditure plan for
2021.
- Not pay-out the financial year 2020 dividend and the temporarily suspend share buyback
plans.

These measures would have a positive effect on cash flow of approximately EUR 200 million and
contributes to a strong net cash position.

DEME GROUP must work to improve the utilization rate of equipment and plant specially for cutter
suction dredgers which was much limited in operation during 2020 (11.1 weeks compared to 26.7
weeks in 2019) by strategically allocating vessels to current project and those on order book.

Fair review of the international market indicates potential increasing chances to expand order book
considering ongoing and expected Increasing oil prices which would:
- support expansion plans for oil and gas producers and developers. Specially in reclamation,
pipelaying, field development, and dredging fields.
- Encourage offshore energy developers to accelerate plans for wind, tidal, and related energy
farms, making profit of the increasing gap between conventional and renewable energy rates.
Order book has a great potential to expand propelled by the global interest in green energy and green
hydrogen production plants. DEME concession, and affiliate of DEME Group had secured a
considerable presence in green hydrogen global market after the successful announcement of the
launch of the development of HYPORT Duqm Green Hydrogen project in last December 2020. That
innovative green hydrogen plant will be constructed in phases. the first phase of the project is
estimated to have a planned hydrogen production capacity ranging from 250 and 500 MW. All using
renewable energy sources with no carbon emission in the production process. Most of the produced
green hydrogen would be made availabl e for next generation vessels crossing the Indian ocean on
busy shipping lines between south and east Asia and Europe.
Making use of the potential development chances, and strategic location, DUQM area receives
increasing attention as Hub for energy supply, and shipping industry.
 - Understanding Ratio Analysis and compare with market norms

Ratio analysis can be best described as a “quantitative method of gaining insight into a company's
liquidity, operational efficiency, and profitability by studying its financial statements such as the
balance sheet and income statement” (investopedia.com, 2020).

Ratio analysis helps investors, managers, shareholders, auditors, and business students to understand
the financial performance of the firm. Accurate calculation and application of ratio analysis can
indicate the current financial situation of the examined firm, the financial performance, and
efficiency to manage firm’s assets in generating revenues. It also can provide a vision on the future
financial situation of the firm and can be used to generate measures and plans to improve financial
performance.

Comparison of the financial ratios with competitors in the market would also indicate the ability of
the firm to compete, attract clients, increase revenues, and improve market share.

Financial ratios can be grouped in major indicative groups, Liquidity, profitability, leverage
/solvency, and Growth ratios.

Liquidity ratios measure a company's ability to pay off its short-term debts, using the company's
current assets.

Profitability ratios indicate how assets used internally to generate income.

Leverage Solvency Gearing Ratio compares shareholder’s equity to debt, or money borrowed by
the company from outside sources, e.g., banks, financial houses against cash payment plan. It
indicates how far a company's business is funded by owners' own funds compared to external
debtors' funds

For the purpose of current research assignment, analytical study using inputs and records from
DEME GROUP financial statement of 20202 and 2019 had been carried out. Making comparison
with another strong Dutch marine contractor with competitive operations around the globe “ROYAL
BOSKALIS GROUP”. To improve results and relate study to marine construction and dredging
industry in UAE local market, as well as middle east, results from the major marine construction and
dredging contractors in UAE “National Marine dredging Company” had been tabulated against
results of the selected international contractors.

- Liquidity ratios

DEME GROUP’s Current ratio had fallen by 9.74% to 0.78 compared to 2019 level of 0.86. Quick
Ratio = (Current assets – Inventory) / Current Liabilities had fallen by 9.74% to 0.77 compared to
2019 level of 0.86. Both ratios indicate negative working capital that would result in minor
challenges in meeting current liabilities of the group, however ability to meet these current liabilities
can be improved by above dedicated measures to sharpen cash management.

Group remains reliable considering safe Non-Current Ratio which had been increased by 23.34% to
3.08 compared to 2019 level of 2.49. despite being less efficient approach, conversion of part of the
current liabilities into non-current liabilities through rescheduling these liabilities or applying
financial solutions remains an applicable option.

High non-current ratio indicates commitment of the group to clear current liabilities and avoid un-
necessary excessive financing costs.

All Liquidity ratios remain in-line with competitors’ and market reported levels.
Royal Boskalis group, and National marine dredging Company had reported matching liquidity ratios
as indicated in below table.

- Table.3 Comparative Liquidity Ratios Analysis for 3 major contractors.

“in thousands of EUR”, As of December 31

DEME BOSKALIS NMDC
2020 ∆% of 2019 2020 ∆% of 2019 2020 ∆% of 2019
Current Ratio 0.78 -9.74% 0.98 5.61% 1.86 -13.99%

Non Current Ratio 3.08 23.34% 5.24 -20.63% 4.05 3.29%

Quick Ratio 0.77 -9.52% 0.92 7.11% 1.73 -11.80%

(345,35
Net working capital 82.25% (38,627.00) -102.74% 579,238.93 -32.38%
9.00)
DEME GROUP turnover ratio had dropped by -13.55% to 0.59 compared to 2019 ratio of 0.69.
Despite that indicates reduced efficiency with which a company is using its assets to generate
revenue, it remains within market norms and expectations taking into account the effect of challenges
imposed by COVID-19 pandemic.

Below table compares Turnover ratio for DEME Group compared to other two major contractors in
market.

- Table.4 Comparative Turnover Ratio Analysis for 3 major contractors.

in thousands of EUR”, As of December 31

DEME
2020 2019 ∆ ∆%
0.59 0.69 (0.09) -13.55%
Asset Turnover = Total Sales / 0.5 BOSKALIS
(opening Assets+ Ending Assets)
2020 2019 ∆ ∆%
0.56 0.60 (0.04) -7.11%
NMDC
2020 2019 ∆ ∆%
0.58 0.55 0.03 5.56%
 - Profitability ratios indicate how assets used internally to generate income.

DEME GROUP results showed 1.31% increase in Gross Profit Margin “GPM”. 2020 results
indicate GPM of 1.97 compared to 1.95 in 2019. However, results indicate -51.86% drop in Net
Profit Margin “NPM” from 4.77% on 2019 to 2.30% on 2020.

That indicates healthy and profitable business, but the drop in net profit generated calls the need to
examine operating and other expenses to maintain business efficiency.

Group results show drop in ROA, and ROE by 60%. ROA and ROE measured in 2020 as 1.28% and
3.44% respectively compared to 3.17% and 8.71% measured in 2019.
DEME reported an EBITDA of 369.5 million EUR, which is 16.8% of the sales, that is in line with
2019’s margin of 16.7%.
Again, challenges born by the sudden COVID-19 pandemic explains that drop, However Group
financial situation remains healthy as well as profitable for the shareholders, considering negative
records of the competitive Royal Boskalis Group.

- Table.5 Comparative profitability Ratios Analysis for 3 major contractors.

in thousands of EUR”, As of December 31 in thousands of EUR”, As of December 31

Ratio DEME BOSKALIS
2020 2019 ∆ ∆% 2020 2019 ∆ ∆%
GPM 1.97 1.95 0.03 1.31% 2.02 1.97 0.05 2.5%
NPM 2.16% 4.70% (0.03) -54.08% -4.11% 3.67% (0.08) -212%
Return on
capital
1.63% 5.30% (0.04) -69.24% -5.27% 1.06% (0.06) -595%
employed
(ROCE)
EBITDA
16.83% 16.67% 0.00 0.95% 14.51% 14.21% 0.00 2.1%
margin
ROA 1.28% 3.17% (0.02) -59.65% -2.31% 2.18% (0.04) -205%
ROE 3.44% 8.71% (0.05) -60.56% -4.58% 4.03% (0.09) -213%

Leverage, Solvency, Gearing Ratio compares shareholder’s equity to debt, or money borrowed by
the company from outside sources, e.g., banks, financial houses against cash payment plan. It
indicates how far a company's business is funded by owners' own funds compared to external
debtors' funds
DEME GROUP results showed -3.81% decrease in Debt-to-Equity ratio, which had been measured
as 1.67 in 2020 compared to 1.74 in 2019.

Despite that remains considerably higher than market and competitors records, the decrease of D/E
ratio indicates commitment and ability of DEME group to improve its dept profile and use of equity
to drive group’s activities.
 - Table.6 Comparative Leverage Ratio Analysis for 3 major contractors.

in thousands of EUR”, As of December 31

Leverage Ratio Analysis DEME
2020 2019 ∆ ∆%
1.67 1.74 (0.07) -3.81%
BOSKALIS
Debt to Equity ratio is a 2020 2019 ∆ ∆%
gearing ratio = Total
0.98 0.84 0.14 16.36%
Liabilities/Shareholders
Equity NMDC (EUR)
2020 2019 ∆ ∆%
0.89 0.66 0.23 34.41%

Generally, Firm’s activities were badly affected over the last year by the health crisis.
Border closures, travel restrictions, were logistical challenges that resulted in considerable extra
costs. These costs had been increased in relation to recorded sales, as a percentage, despite absolute
value of these expenses recorded at almost same levels of 2019.
Saying that, the measures implemented by the local and governmental authorities in most of the
countries and regions DEME’s operations, especially those including offshore energy, marine
construction, dredging and reclamation, take place resulted in reducing productivity on most of the
considered projects and delays in project development and construction or execution rates.
we can understand that the crisis also had increased the cost of project execution above expected
budget due to additional measures implemented by the group nad project managers to meet
restrictions local and international authorities. For example, regarding health insurance, travel
restrictions, and cost, administration costs, sanitizations, ports, and customs’ measures, quarantine
cost and time, as well as the increase in logistical operations cost, and cargo handling charges and
time.

Finally, the pandemic and its impact on the global oil and gas market also resulted that most of oil
and gas producers and developers decided to postpone many contract awards and the kick-of several
awarded projects.

Major oil and gas producers had experienced a huge reduction in demand and consequently loss of
revenues expected in 2020, and beyond. That can be described as:
– Drastic reduction in demand on oil by the consumers. Where most airlines suspended
operations, streets locked down, industrial and service firms closed doors.
– Unclear vision of the global market oil demand after the pandemic. It’s difficult to expect a
recovery model for the consumers who had suffered huge losses in the pandemic. Many
airlines suspended or cancelled new aircraft orders. Many industrial firms had experienced
grate depts. On average purchase power of average global consumer had dropped by the
pandemic. It’s not clear how soon these consumers will recover to improve orders on oil and
gas

In view of that uncertainty in future demand on oil, many oil and gas producers slowed down oil
production and export facilities to protect prices from collabs.
Literature Review on Budgeting Practices:

- Traditional budgeting definition

A budget, an outcome of the budgeting process. It is an accounting tool that helps you predict and
analyze your business’s earnings and expenses. Business tries to stick to its budget as closely as
possible and avoid overspending. (patriotsoftware.com, 2020).

budgeting process can be divided in three phases; budget creation, budget follow up and budget
analysis.

- Traditional Budgeting.

Traditional budgeting is the process of projecting your business’s revenue and expenses for the
upcoming year based on your previous budget.

Traditional budgeting is also important if you try to obtain financing. Investors and lenders want
to see financial plans and projections. Traditional budget shows projections and back up reasoning
by referencing previous year’s budget.

However, traditional budgeting might be an inaccurate representation of goals. Some managers can
manipulate the projections, so the actual results look more attractive. (patriotsoftware.com, 2020)

- Traditional and Zero-Based Budgeting.

In traditional budgeting, the costs aren’t minimal since we consider the previous year’s expenditure.
However, in zero-based budgeting, the costs can be minimal as we take the starting point to be
zero. (wallstreetmojo.com, 2020)

Traditional budgeting takes the preceding year’s expenses as base data points; zero-based
budgeting takes the strategic approach to assign budgets to each unit/department.

Zero-based budgeting requires that all of the activities of an organization be sub- ject to a periodic
review. It requires a seamless link to operational and financial data.

Activity-Based Budgeting (ABB) is a budgeting process where the firm first identifies, analyzes,
and researches the activities that determine the cost of the company and, after that, prepares the
budget based on the results. (wallstreetmojo.com, 2021)

It’s a fact nowadays that Most organisations actively invest in technology and cloud-based
platforms such as those provided by IBM Cognos, Oracle Hyperion or SAP BPC to improve the
speed, reliability and transparency of the budgeting processes. That allows these firms to forecast
an plan on a way more efficient collaborative basis. These CBP, and proactive software solutions
increases the capability to see and model different scenarios and the potential impact of variations
in sales, operational costs, foreign currency fluctuations as well as other variables.
Application of such technological tools and cloud-based platforms allow organisations to collect,
aggregate, report and analyse information far more quickly than it is possible with spreadsheets
alone

That allows organisations to be more responsive through a more accurate and time-efficient
understanding of the potential impact of huge number of factors applied by business or market
environment as well as internal constraints on performance.

With ABB, company can have better control and can aligne its annual budget with the overall
firm’s goals by implementing Activity Based Budgeting. Expenses and Revenue planning will
occur at an accurate level, which shall provide meaningful details regarding the estimated and
future financial projections.

ABB helps to improve the business process by identifying unnecessary activities, which leads to
an increase in cost as a lot of research is done here.

The formula is represented as follows,

Activity-Based Budgeting Formula = Cost Pool in the Designated Diver /Cost Driver in Units

Application of SMART Technologies in budgeting process is quite complicated process and

requires professional team and considerable investment during the application of such approach to
business budgeting, however it provides more transparent vision and control on business activities
as soon as implemented.

visualization techniques and machine learning are examples for modern cloud solutions which are
involved in planning, budgeting, and forecasting processes. Despite these advanced analytic tools,
made much more available and less costly compared to decades ago, Yet most of senior finance
executives still use extremely basic spreadsheets, in addition to pivot tables and business
intelligence techniques to mine their data for forecasting and understand these data records in an
extremely simple analytical process. No chance that would evolute ay more accurate nor faster
forecasting process.

In the Future of Planning Budgeting and Forecasting – FSN, Gary Simon suggests that “The world
of planning, budgeting and forecasting is changing in a rapid way” every day new technologies
emerge, but the actual pace of change within the finance departments of most organizations is rather
slower.

However, the transformation in the future planning, and budgeting process companies have made
in the last five years, or even last decade has been considered incremental. In general, there had
been little additional accuracy gained but with a very little change to the reliance on insight-limiting
technologies such like spreadsheets. (Simon, 2018).

Nevertheless, that debate regarding gained additional accuracy in budgeting, one can see that new
technologies had improved speed of budgeting process without loss of much accuracy, if not
improved.
New technologies had enabled firms to collect much more data that can “or cannot” participate in
an accurate budgeting process. The next challenge is to improve the process of segregating these
data, exclude frauds, and increase accuracy of data analyzing process as well as automation of
planning process.

CFOs are making incremental headway in improving their planning, budgeting and forecasting
processes, reforecasting more frequently to improve accuracy. But spreadsheet use remains a
substantial drag on process improvements, despite organizations increasingly looking towards new
technologies to progress the PBF landscape.

Replicating historical and spreadsheet driven budgets in new dynamic tools adds to complexity and
performance related issues. It limits the value an organization derives from driver-based planning
to improve forecasting accuracy, and it stops organizations feeling like they own and are
accountable for plans and actions. The ability to quickly deploy a real- time PBF process (not just
technology) across the whole organization can help Sales, HR and Operations collaborate better. It
should also improve the quality of information (Q5) through a single process and greater ownership
of the numbers. (O’MAHONY & LYON, 2015).

Cloud computing had greatly developed over the last five decades. Such development made use of
the huge size of content and resources made available for individual and cooperates. It had been
also incredibly transformed into a much more efficient tool due to the exponential increase in data
exchange speed over the cloud. Such growth has boosted the evolution of machine learning as well
as solutions for artificial intelligence.

To understand how cloud computing, and artificial intelligence work in the budgeting and
forecasting process, consider a process that starts with Machine learning platforms and digitized
tools that is programmed to collect data over certain predefined period of time, or as periodically
has been preset either based on time intervals or incident occurrence, or both.

Parallel to that or following data collection stage, Artificial intelligence or automated budgeting
assist platforms apply parameters and analytical criteria to the analysis. Finally, these intelligent
platforms can learn from the analysis and compare the results with real time records to to improve
fasting process, that can be a continuous process with limited or no Human interference.

Despite the process looks efficient, and ideally fraud-free from that point of view, most of senior
finance executives in charge of budgeting and forecasting process still consider cloud computing
process and artificial intelligence have substantial limitations. Such system or platforms will remain
unable to detect fraud, or errors if it’s part of its DNA. Meanwhile, a minor error once developed
in data collection, or processing techniques would result in a much bigger discrepancy in the final
output and accordingly would mislead the whole forecasting, planning, and budgeting process.

Detecting such source of error on a book size of terra bites or even bigger is an extremely
exhausting, and time-consuming process.

On the other hand, frequent human interference will reduce the speed of data collection, and
analysis process. That will also add huge costs to the process originally designed to reduce expenses
of planning and forecasting process. Only highly qualified personnel would be able to efficiently
engage in such sophisticated analysis. Finally, it will keep the door open for conflict of interests
always tied to engagement of human interference in data collection and analysis processes.

As the technology matures, and finance functions become more integrated, machine learning will
proliferate, but right now it remains the domain of early adopters. (Simon, 2018)

- Insight – the top trump

But technology can’t operate in isolation. Cutting edge tools alone won’t provide the in-depth
insight that is needed to properly compete against nimble start-ups. CFOs must ensure their PBF
processes are inclusive, drawing input from outside the financial bubble to build a rounded view
of the organization. This will engender respect for the PBF outcomes and align them with the
strategic direction of the business.

Most importantly though, organizations need to promote an insightful planning, budgeting and
forecasting function, by using advanced analytic techniques and tools, coupled with a broad data
pool, to reveal unexpected insights and pathways that lead to better business performance.

Due to the current development of Information Technology, which takes place in exponential rate,
it is crucial for companies and firms to be able to record, analyze or process and interpret the data
extracted from various sources.

Complicated Information Systems Today provide companies and firms with an increased
flexibility, which makes it efficient to find new ways of organizing and achieving business goals.

Today, there are some difficulties experienced in the budgeting concerning a frustration with
planning tools. The frustration mainly concerns the difficulties in using Excel spreadsheet, which
is the most commonly used planning tool. Excel or other spreadsheet programs are excellent
financial tools, they are not necessarily optimized for budgeting

budgeting process can be divided in three phases; budget creation, budget follow up and budget
analysis. The third phase, the budget analysis, gives organizations the possibility to learn from the
execution of budgets for future periods

In order to make the right decisions in the future it is important to plan the operations. Breaking
down each target of the business and related resources required to attain that target is the key point
for smart budgeting process.

Such detailed breakdown enables the firm to maximum utilize internal assets in planned operations,
as well as improve operations’ efficiency to maximize sales, or reduce delivery or execution time.

In current situation of ongoing pandemic, Conventional budget will find great challenge to estimate
growth or shrink rates in sales, cost of sales, or other operating exposes, or even capital
expenditures.
 Despite it’s quite a time consuming, and exhausting mission, zero based budgeting uses more recent
and accurate inputs and data to create a model which firm can consider to stay as close to plans as
being applicable.

Investment Appraisal Techniques

In “fundamentals of corporate finance” 1995, Brealey, R.A.; Stewart, C.M.; Marcus, A.J. had a
debate about How does a company, such as Boeing, decide to go ahead with the launch of a new
airliner?

Such a decision would involve investment of billions of dollars including massive capital
expenditures, RD, and good well. The firm has to carry out extensive appraisal techniques to
estimate the efficiency of such investment. Moreover, Boing might have more than an airliner on
the shelf ready for launching in the market. the company unlikely will be able to avail investments
essential for acquiring capital expenditures for more than a new single airliner at once. Here comes
the role of investment appraisal techniques, where all potential new airliners projects subject to
equal appraisal process to decide which new airliner the company will choose to start with. Which
project will generate more profits for the shareholders, which one will sustain operations, improve
company’s share in the market, or avail other targets considered in the appraisal process. In ideal
case, The firm will needs to forecast the project’s cash flows and discount them at the opportunity
cost of capital to arrive at the project’s NPV. A project with a positive NPV increases shareholder
value. (Brealey, et al., 1995)

Investment appraisal techniques are payback period, internal rate of return, net present
value, accounting rate of return, and profitability index. They are primarily meant to appraise the
performance of a new project. The first question that comes to our mind before beginning any new
project is “Whether it is viable or profitable? These techniques answer this question very well. Each
technique evaluates the project from a different angle and provides a different insight.
(efinancemanagement.com, 2019)
The payback period is defined as the period of time required for the cash flows which is directly
generated by the investment to repay the original cost of the total investment. For demonstration
purpose, given that an investment of $800 will generate cash flows of $200 per year for 10 years.
The number of years required to recoup the investment is four years. That means the business will
start to generate profit before four years.

Due to that nature, it should be considered as the least suitable CIAT for the appraisal of IT projects.

Since projects are judged on the period needed to compensate the initial investment, projects with
fast payback are favored. As a result, companies using the payback period technique will tend to
accept too many short-lived projects and reject too many long-lived ones (Brealey, et al., 1995).

payback period may be an adequate rule of thumb, but, considering the shortcomings, major
investment decisions should not be based solely on the results of payback period calculations.

That is why the Payback Period method is considered as most useful for comparing projects with
nearly equal lives.

- Discounted Payback Period

It should be noted that The Payback Period analysis does not take into account the time value of
money, actually that’s a huge disability of that method from for investors’ point of view. To correct
for this deficiency, the Discounted Payback Period method was created.

Unlike conventional method, Discounted payback period method takes into account the discounted
future cash flows. It discounts these cash flows back to their present value.Accordingly, the
investment and the stream of cash flows can be compared at the same time period. Each of the cash
flows is discounted over the number of years from the time of the cash flow payment to the time of
the original investment. (extension.iastate.edu, n.d.)

The Internal Rate of Return (IRR) corresponds to the rate for which the present value of the
investment’s money in-flows are equal to the present value of the money out-flows.

The Internal Rate of Return is the rate of return from the capital investment. In other words, the
Internal Rate of Return is the discount rate that makes the Net Present Value equal to zero.

IRR/ROI is more adequate than payback period because the total lifecycle of the investment is
considered. Nevertheless, as with payback period, the time value of money is not taken into
consideration. Risk can be entered into the appraisal to a certain extent by adjusting the hurdle by
which the IS services are judged, but this is not useful when dealing with mutually exclusive
projects. (Milis, et al., n.d.)

Unlike the previously mentioned techniques, Internal Rate of Return (IRR) takes the time value of
money into consideration by introducing a discount factor. This is a major improvement and makes
this technique more useful.
Still, there are some disadvantages:

• Internal Rate of Return (IRR) is a percentage. This makes it difficult to compare services that
differ substantially in size and outcome. Services can vary substantially in terms of granularity and
functions offered.

• When this technique is used as a selection tool for mutual exclusive services, risks are not
accounted for. It lacks the possibility of entering risk-levels into the selection. This is a major
disadvantage, especially when used in a services architecture where levels of future use are often
highly uncertain.

The Net Present Value (NPV) basically is an improved cash flow technique.

NPV can be defined as the amount by which the present value of the cash inflows exceeds the
present value of the cash outflows. That means, if the present value of the cash outflows exceeds
the present value of the cash inflows, the Net Present Value is negative. Accordingly, a negative
NPV means that the rate of return on the capital investment is less than the discount rate used in
the analysis.

The Net Present Value technique calculates the present value of the investment’s money flows,
using a discount rate. In opposite to IRR, different rates can be used to reflect the risk-levels of
mutual exclusive investments. The NPV technique is considered as being theoretically superior to
the IRR technique. (Brealey, et al., 1995)

Many projects require a heavy initial outlay on new production facilities. But often the largest
investments involve the acquisition of intangible assets.

Expenditures on intangible assets such as IT and R&D are investments just like expenditures on
new plant and equipment. In each case the company is spending money today in the expectation
that it will generate a stream of future profits. Ideally, firms should apply the same criteria to all
capital investments, regardless of whether they involve a tangible or intangible asset.

An investment in almost any asset would create wealth if the discounted value of the expected
future cash flows exceeds the initial investment cost. However, what to discount! That remains the
critical part of the appraisal process. As a rule of thumb, cash flow discounting process should stick
to three general rules:

- Only cash flow is relevant.

- Always estimate cash flows on an incremental basis.
- Be consistent in your treatment of inflation.

In general, The Payback Period is quite simple and shows the liquidity of the investment. However,
it doesn’t account for the time value of money or the financial performance after the end of the
payback period. On the other hands, the Discounted Payback Period, which is still relatively simple,
incorporates the time value of money but still doesn’t account the financial performance of the
project after the payback period. NPV analysis technique provides a dollar denominated present
value return from the investment.
Investment appraisal techniques have comparable advantages against other disadvantages, all
summarized in below table.

overview traditional CIAT-techniques P R I N

P O R P
I R V
Does it consider the entire lifetime of the investment? N Y Y Y
Does it consider the time value of money? N N Y Y
Can risk-levels be entered into the feasibility evaluation? N Y Y Y
Can risk-levels be entered in the selection of mutual exclusive projects? N N N Y

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