Course

Code: FIN301 Semester: Summer 2022

Group name

‘Team Top Gun’

Topic: Effects of Profitability and Liquidity on the performance of

Digital Realty Trust Inc.

Group Representative / Leader Name: Tahjeeba Kabir Lamia

ID # 2021219

Phone Number: 01834822263

Submitted By

Name ID Contribution

1) Intesar Maruf Apurbo 2022661 Executive Summary, Company &

Literature Review, PPT, MS Word
Compilation

2) Jarin Tasnim 2021013 Earnings Per Share, Accounts

Receivable

3) Lamia Anjum 2020925 Return on Asset, Return on Equity,

Profit Margin

4) Tahjeeba Kabir Lamia 2021219 Current Ratio, Common size trend

analysis of interest cost and
profitability indicators

5) Uzaer Jahangir 2010657 Payable Period, MS Excel,

Recommendation

Date of submission: 8th August 2022

 Letter of Transmittal

8th August 2020

Mr. Anwar Zahid
Lecturer, School of Business and Entrepreneurship
Independent University, Bangladesh (IUB)

Subject: Report submission on “Effects of Profitability and Liquidity on the performance of Digital
Realty Trust Inc.”

Dear Sir,

With due respect, it is our pleasure and honor to inform you that we have completed the report that you
have assigned us for the course Business Finance. We followed the guidelines you gave in class when
writing this report and incorporated relevant ideas we acquired during our course. Thank you for your
supportive consideration of formulating of a financial performance report. We are here to submit our
report and hope that you will appreciate our plan and detailed manner. Now, we are glad to have this
opportunity to present to you the financial performance report of Digital Realty Trust Inc.
We would be grateful once again if you give your judicious advice on our efforts. We believe that you
will not face any difficulties in understanding this report. Thank you so much for your constant support.
Sincerely Yours,
Team Top Gun

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 Acknowledgement

Firstly, we would like to express our deepest gratitude to our respective faculty and mentor, Anwar Zahid.
Without him, we wouldn’t be able to have this opportunity to do this report as he gave us all the necessary
details required to complete this report.
We would like to express our gratitude towards each member of our group as they consistently provided
all the necessary information that they provided us with their skills and findings. Without all of the group
members and peers, this report wouldn’t be possible as this is an important report for us.

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 Table of Contents
Executive Summary ............................................................................................................................................ 5
Literature Review ................................................................................................................................................ 5
Company Overview ............................................................................................................................................. 6
Investigation Report 2018-2021 .................................................................................................................... 6
Current Ratio: .............................................................................................................................................................. 6
Payable Period: ........................................................................................................................................................... 7
Account Receivable Period: ......................................................................................................................................... 8
Earnings Per Share: ..................................................................................................................................................... 9
Return on Asset: ........................................................................................................................................................ 10
Return on Equity: ...................................................................................................................................................... 11
Profit Margin: ............................................................................................................................................................ 12

Conclusion and Recommendation: .............................................................................................................. 13

Reference: ............................................................................................................................................................ 14

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 Executive Summary

The report analyzes and contrasts the profitability and liquidity ratios of "Digital Realty Trust Inc." from
2018 to 2021. The research examines key categories of profitability and liquidity ratios in time-series
analysis of each year, as well as a comparative analysis of ratios over all four years. The ratios used here
are the Current Ratio, Payable Period, Account Receivable Period, EPS, ROA, ROE, and Profit Margin.
In this report, we analyzed all the ratio data from different years to assess the company's present state in
terms of how effectively they are managing its operations and what its situation was throughout the
pandemic. This paper discusses the impact of the covid epidemic on company performance regarding
profitability and liability.
And lastly, we concluded the report with some recommendations which will assist the firm in maintaining
excellent liquidity and profitability for better performance.

Literature Review

Making the maximum profit possible is the top priority for a business as an organization. To guarantee
that a firm is effectively governed and managed, an organization must have financial risk management
and corporate governance. In addition, a company's profitability may be evaluated yearly through its
financial reports. Thus it needs to have a solid management team and risk-reduction strategies.
A company's ability to earn profits from the operational processes put in place to assure its survival in the
future is presented as having a high level of profitability (Manoppo & Arie: 2016). It is evident that
profitability affects capital structure since higher profits made by a firm would boost investor and creditor
confidence in lending money and investing capital, correspondingly. This is in accordance with the
Pecking Order Theory, according to which a company uses less debt, the more profitable it is (Guna&
Sampurno: 2018). According to the signal theory, the firm's profits will be a signal from management to
indicate the prospects of a company that may be viewed based on the amount of profits achieved by the
company. Research by Yanti & Darmayanti backs up this theory that profitability influences the value of
the company (Yanti & Darmayanti: 2019).
Liquidity is used to assess a company's capacity to pay short-term obligations. It could also be claimed
that a company's liquidity influences its capital structure since a high level of liquidity enables it to pay
down short-term debt, which tends to lower overall debt and result in a smaller capital structure.
According to the Pecking Order Theory, managers are more likely to use retained earnings as their
primary source of finance, followed by debt and the selling of new shares. Research by Septiani &
Suryana demonstrates that this is true (Septiani : Suryana: 2018). According to the signal theory, the stock
market will respond favorably to a company's capacity to meet its short-term liabilities, which raises the
company's worth, supporting the claim that liquidity influences a company's value. Research by Yanti &
Darmayanti supports this theory (Yanti and Darmayanti: 2019).

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 Company Overview

Digital Realty Trust, Inc. is a real estate investment trust (REIT) that owns, acquires, develops, and
operates data centers. It was formed in the year 2004 in San Francisco, California. The company offers
data center, colocation, and interconnection solutions to customers in a variety of industries, including
cloud and information technology services, communications, and social networking, as well as financial
services, manufacturing, energy, healthcare, and consumer products.
Customers from all around the world are served by Digital Realty Trust. The company's portfolio includes
data centers across the United States, Europe, Latin America, Asia, Australia, and Canada.
PlatformDIGITAL is the company's worldwide data center platform for expanding digital firms, allowing
clients to establish crucial infrastructure with a global data center provider.

Investigation Report 2018-2021

Current Ratio:

This ratio is frequently used by businesses to assess a company's chance to settle short-term obligations,
or debts due within a year. The current liabilities are divided by all current assets, including cash,
inventories, and accounts receivable. A current ratio greater than one is preferred since it indicates the
company is more solvent and can make its current debt payments. Generally speaking, a higher current
ratio is more encouraging. This ratio is taken into consideration by shareholders, investors, and financial
experts to assess how financially solid a company is in managing its existing debts. The company's
condition is not, however, reflected in obvious and tangible terms by the current ratio.

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 Current Ratio (2018-2021)
45% 42%
40% 36% 35%
35%
30%
25%
20%
14%
15%
10%
5%
0%
2021 2020 2019 2018

Here we can see the current ratio figure of Digital Realty Trust Inc. (2018-2021). From the graph we can
see before covid period in the year 2018, current ratio was 0.14, But gradually this ratio gets increased for
the year 2019. The ratio was 0.42. But for the year 2020 the ratio started decreasing due to covid-19
effect. The ratio was 0.35. But in 2021 this ratio has been increased. But the increasing level was not that
much. we know, current ratios are generally between 1.5 and 3 for healthy businesses. The reason behind
the Digital Realty Trust Inc. never get down that much even after the lockdown due to covid. That’s why
they were able manage healthy current ratio during covid period and became more efficient and effective
to deal with the short-term debts.

Payable Period:

The term "payable period" refers to the average number of days it takes a business to pay its supplier the
amount due. If a company takes longer to pay its creditors and bills when it has a high days payable
outstanding ratio. A high payable period is generally a good thing because it indicates that the company
has additional cash on hand that might be put to use for short-term investments.

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 Payable Period (2018-2021)
200.00 190
182.50
180.00
155
160.00
140.00 128.5
120.00
100.00
80.00
60.00
40.00
20.00
0.00
2021 2020 2019 2018

The term "payable period" refers to the average number of days it takes a business to pay its supplier the
amount due. If a company takes longer to pay its creditors and bills when it has a high days payable
outstanding ratio. A high payable period is generally a good thing because it indicates that the company
has additional cash on hand that might be put to use for short-term investments.
In general, a high payable period indicates one of two things: either a company has better credit terms
than its rivals or it has a history of late payments. On the other hand, a low ratio of days shows that a
business pays its obligations quite swiftly. However, it makes the company have less cash in hand.
As you can see from the table above, during 2018, they used to make payments within 128 days.
However, during the pandemic years it rose up to 190 and gone down to 155 days. This is because, during
the pandemic it was all about surviving. Therefore, they chose to keep the cash in hand rather than paying
it off. During 2021, it started to gradually dip.

Account Receivable Period:

The average time it takes for clients to pay back the business is measured by the account receivable
period. The lower the period days, the better the overall performance of collection or credit assessment,
and the longer the period of days represents the longer the time that is not yet collected from the
customers or is to be collected. This ratio assesses the collection performance of the company.

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 Account Receivable Period (2018-2021)
60.00
52.57
50.00
42.48
40.00 34.41 34.50

30.00

20.00

10.00

0.00
2021 2020 2019 2018

In 2018, The days in account receivable ratio for Digital Realty Trust, Inc. (DLR) is 34.50. Next year we
can see it slightly decreased and the receivable days is 34.41. But in 2020 because of the covid it increase
and the receivable period is 42.48 which is some increase to previous years. In 2021 the days of account
receivable is 52.57. The longer receivables time could ultimately result in debts not being repaid, which
could produce bad debts. This might occur as a result of an increase in bad debts, where customers are
delaying payments. As a result, money may be lost as an expenditure, and there may even be no money
available to pay for collection efforts. As a result, Digital Realty Trust, Inc.(DLR) will have negative
effects and impacts on their financial data and run into financial difficulties.

Earnings Per Share:

EPS stands for earnings per share, which is the amount of profit that is divided among each share of stock
in a corporation. Profitability of a corporation is improved by having increasing earnings per share.

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 EPS (2018-2021)
$7.00
$5.84
$6.00

$5.00

$4.00

$3.00 $2.41

$2.00
$1.21
$0.99
$1.00

$0.00
2021 2020 2019 2018

In 2018, the EPS ratio for Digital Realty Trust, Inc. (DLR) is 1.21. Next year it increased and the ratio is
2.41 it means the company is more profitable this year than the previous year. Suddenly in the pandemic
situation in 2020 the eps ratio fall and the ratio is 0.99 which means the company the company gives the
lower return to the shareholders. This decreases shareholder interest since it shows that the corporation is
not managing its operations and using its resources effectively. It is not giving a good picture of the
company for the future growth potential. As a result, it does not attract the investor community. However,
we can see the EPS ratio is increased by 5.84% in 2021. Its indicates this year Digital Realty Trust, Inc.
(DLR) make profit and this higher EPS growth provides an excellent indication of the company's
effectiveness with regard to its future business possibilities.

Return on Asset:

The term "return on assets" (ROA) refers to the amount of profit a company makes from the capital it has
invested. Investors can use it to determine how well a company's management uses its resources to produce
earnings and profit growth. It is computed by subtracting the net income from the value of all assets, and it
is expressed as a percentage.

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 ROA (2018-2021)
5.0% 4.7%
4.5%
4.0%
3.5%
3.0% 2.51%
2.5%
2.0%
1.39%
1.5% 0.99%
1.0%
0.5%
0.0%
2021 2020 2019 2018

According to the following information, the return on assets (ROA) was 1.39% in 2018. The ROA ratio of
the company increased to 2.51% in 2019. This increase in the company's percentage persisted until Covid-
19 began. As a result of lockdown, the ROA declined to 0.99% in 2020 and they were unable to increase
revenue. The company's ROA began to rise again in 2021, rising from 0.99% to 4.70%.

Return on Equity:

The amount of profit that each dollar of the equity owned by common stockholders’ produces is shown by
return on equity (ROE). Potential investors need to know how well a company will use their money to
generate revenue, therefore this is a crucial factor for them to consider. Its calculation involves dividing net
income by shareholders' equity and is presented as a percentage.

ROE (2018-2021)
10.00% 9.23%
9.00%
8.00%
7.00%
6.00% 5.44%
5.00%
4.00% 3.05%
3.00%
1.93%
2.00%
1.00%
0.00%
2021 2020 2019 2018

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The information above indicates that in 2018, the return on equity or ownership capital (ROE) was 3.05%.
After that, we can observe the improvement, and in 2019 the ROE was 5.44%, which was almost twice as
high as before. As a result of Covid-19, the company's return on equity (ROE) ratio will significantly decline
by 1.93% in 2020. Lower ROE suggests inefficient use of shareholder cash and suggests that the business
did not generate enough income to return to its owners. The company's ROE increased to 9.23%, which
was a hopeful sign.

Profit Margin:

The profit margin ratio, sometimes called the return on sales ratio or gross profit ratio, is a measure of
profitability that compares a company's net income and net sales to ascertain how much net income is
made for every dollar of sales produced. In other words, the profit margin ratio demonstrates how much
of a company's sales remain after all costs are covered.

Pofit Margin (2018-2021)

45.0%
38.6%
40.0%
35.0%
30.0%
25.0%
20.0% 18.07%

15.0% 10.87%
9.13%
10.0%
5.0%
0.0%
2021 2020 2019 2018

Below the data above, it shows 10.87% in 2018. Following that, in 2019, the company's profit margin
ratio increased by 18.07%, indicating a successful revenue management strategy. This increase in the
company's ratio continued until the start of Covid-19, which affects 9.13% in 2020, despite the fact that
the company experienced lockdowns and operations halts, causing the company to fail to efficiently
utilize sales. The ratio increased by 38.60% in 2021, and we can clearly notice the significant
improvement.

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Common Size Trend Analysis:

Financial statement analysis applies size analysis. This trend evaluation shows the change from year to
year. It evaluates a company's effectiveness in terms of revenues and expenses. Regarding the income
statement ix, the trend analysis is expressed horizontally and as a percentage of revenue
Digital reality trust inc.’s common size shows that the interest expense eats up 10.55% in year 2018.But
gradually the percentage seems to decrease for year 2019,2020 and 2021. Especially during covid interest
expense decreased simultaneously for year 2020 and 2021 by 8.53% and 6.64%. Net income also flows
by 10.87% by each dollar in year 2018 but in year 2021 it flows up to 38.60%. This percentage’s helps a
lot for comparison in terms of cost control with the competitors.

Financial statement analysis applies size analysis. This trend evaluation shows the change from year to
year. It evaluates a company's effectiveness in terms of revenues and expenses. Regarding the income
statement ix, the trend analysis is expressed horizontally and as a percentage of revenue
Digital reality trust Inc.’s common size shows that the interest expense eats up 10.55% in year 2018.But
gradually the percentage seems to decrease for year 2019,2020 and 2021. Especially during covid interest
expense decreased simultaneously for year 2020 and 2021 by 8.53% and 6.64%. Net income also flows
by 10.87% by each dollar in year 2018 but in year 2021 it flows up to 38.60%. This percentage’s helps a
lot for comparison in terms of cost control with the competitors.

Conclusion and Recommendation:

In the report, we have discussed about the financial aspect of this company but we have some
recommendations of our own through which the company, digital realty trust, will be benefitted.
The company has managed to comeback strongly after the pandemic years. However, there are few areas
in which they can improve. One of them being, the payable period, which is on the higher side. They need

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to reduce it. Another factor they should work on is receivable period which is also high. They need to
come up with ideas to reduce it such as giving out discount if payment made within 10 days. Due to this,
the current ratio is getting affected in a negative way.

Reference:

• Digital Realty trust, Inc. (DLR). (n.d.). Yahoo Finance - Stock Market Live, Quotes,
Business & Finance News. https://finance.yahoo.com/quote/DLR/financials?p=DLR
• A new Digital Era. (2018, July 3). Digital Realty. https://www.digitalrealty.com/about
• HANDAYANI, S. (n.d.). Effect of liquidity, profitability, and size of companies on firm
value. Sistema de Información Científica Redalyc, Red de Revistas
Científicas. https://www.redalyc.org/journal/279/27964115031/html/

• (n.d.). 403
Forbidden. https://s22.q4cdn.com/864880006/files/doc_financials/annual/1805445.P

• Ross, S. A. (2018). Corporate finance

• Brealey, R. A., Myers, S. C., & Allen, F. (2020). Principles of corporate finance.

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