Since Corporate Tax arrived, every UAE business has to prepare proper financial statements. Many owners see them as a compliance document for the FTA and the bank. That is a missed opportunity: the same statements can tell you whether your business is really profitable, whether cash is trapped, and how much risk you are carrying. You do not need to be an accountant to use them. Seven ratios cover most of what an owner needs to know.
We will use a simple trading company in Dubai with these figures for the year:
| Item | AED |
|---|---|
| Revenue | 6,000,000 |
| Cost of sales | 3,900,000 |
| Operating expenses (including depreciation of 150,000) | 1,500,000 |
| Finance costs | 120,000 |
| Trade receivables | 1,500,000 |
| Inventory | 600,000 |
| Cash | 300,000 |
| Trade payables | 900,000 |
| Short-term bank loan | 700,000 |
| Long-term bank loan | 1,100,000 |
From these: gross profit is AED 2,100,000, operating profit is AED 600,000, and profit before tax is AED 480,000.
Gross profit / Revenue = 2,100,000 / 6,000,000 = 35%
This shows how much of each dirham of sales is left after the direct cost of what you sold. A falling gross margin usually means pricing pressure, rising supplier costs or discounting. Compare it month by month and by product line, not only once a year.
Operating profit / Revenue = 600,000 / 6,000,000 = 10%
This measures how efficiently the business is run after rent, salaries and other overheads. If gross margin is healthy but operating margin is thin, the problem is overheads, not pricing.
Current assets / Current liabilities = 2,400,000 / 1,600,000 = 1.5x
Current assets (receivables, inventory and cash) cover short-term obligations (payables and the short-term loan) one and a half times. Below 1.0x is a warning sign. Banks often look at this ratio in loan covenants.
Trade receivables / Revenue x 365 = 1,500,000 / 6,000,000 x 365 = 91 days
On average, customers take three months to pay. If your terms are 30 or 60 days, cash is stuck with your customers. Reducing DSO to 60 days would release about AED 500,000 of cash, more than the company earns in a year.
Add inventory days to DSO and subtract the days you take to pay suppliers:
Every dirham invested in stock and sales takes about two months to come back as cash. The shorter the cycle, the less working capital and bank financing you need.
Operating profit / Finance costs = 600,000 / 120,000 = 5.0x
Operating profit covers interest five times. Below about 2-3x, a small drop in sales can make debt service difficult.
EBITDA is operating profit plus depreciation: 600,000 + 150,000 = AED 750,000. Total bank debt is 700,000 + 1,100,000 = AED 1,800,000.
Debt / EBITDA = 1,800,000 / 750,000 = 2.4x
It would take about two and a half years of EBITDA to repay the bank debt. Lenders and investors use this ratio constantly, and it is also a starting point in business valuation.
The company is profitable and not over-borrowed, but its biggest issue is cash collection. The most valuable action is not a new loan but tighter credit control: clear payment terms, invoicing on time, and weekly follow-up of overdue accounts.
Taxable income starts from accounting profit. Assuming no tax adjustments, Corporate Tax on AED 480,000 would be 9% of the amount above AED 375,000, which is AED 9,450. Because revenue is above AED 3 million, Small Business Relief does not apply. Accurate financial statements are therefore both a management tool and the basis of your tax return.
KPIs Advisory Group prepares monthly management accounts and IFRS financial statements, builds financial dashboards, and provides business valuation and financial modelling for UAE businesses. Our Financial Statement Analysis for Decision Makers course teaches managers to read and challenge financial information. Contact us to turn your numbers into decisions.
This article is for general information. The example is illustrative; Corporate Tax outcomes depend on your specific adjustments and circumstances.
