Sample FIN600 Financial Management Case Study 2

FIN600 Financial Management Case Study 2 Sample

Context

The purpose of the assignment is to provide you with the opportunity to apply the knowledge and skills acquired in FIN600 Financial Management, to a practical task, involving the use of ‘real world’ accounting information. This is intended to consolidate your accounting knowledge and skills.

Instructions

The basic requirement is to undertake a general financial analysis, comparing financial position and performance over the two most recent financial years, of an ASX listed company. Your Learning Facilitator will provide the details of the ASX listed company. The annual report for the chosen company should be available on the company website and/or will be provided by your Learning Facilitator.

Note: Assessment 2 submissions based on the incorrect company or a company not chosen by the Facilitator will be regarded as a Non-Submission and no grade will be allocated.

Non-Submissions of Assessment 2 will prohibit a Supplementary assessment for the student.

The analysis should consider each of the following financial ratios:

- Profitability and market performance
- Efficiency
- Liquidity
- Capital structure

Note: Please use the ‘consolidated’ data in conducting your analysis. You are only required to look at the most recent financial report. For those ratios which involve averages, you will calculate an average for the most recent year only, the prior year ratio calculation will NOT consider average calculations.

Points to consider

i. You are encouraged to seek and use additional public information about the company from sources, other than the annual report (for example, the internet, journal articles, newspapers, and business magazines).

ii. However, it is NOT envisaged that you will be engaged in extensive research of this nature and it is expected that the annual report will be the primary resource relied upon, in completing the assignment.

iii. You are asked NOT to try and make direct personal contact with the company or its officers (for example by telephone, fax, letter or email), in an attempt to gather further information.

iv. It is important to note that you must NOT reproduce company promotional material from the annual report or company website and represent it as critical analysis.

v. You will be provided relevant share price data for the company by your facilitator so that investment ratios (such as a price earnings ratio) can be calculated.

vi. You may find it useful to consult accounting references, in addition to the prescribed text, which deals with the analysis and interpretation of company financial reports.

vii. As this is a Masters-level subject, students are expected to engage with high quality credible resources (eg. academic journal articles) to support and
develop arguments and position statements, using the Torrens University Library: http://library.laureate.net.au. References to ‘Wikipedia’ or similar unsubstantiated sources will not be accepted.

viii. It is essential that you use the appropriate APA 6th referencing style, for citing and referencing research. The assignment is to include in-text citations and a reference list following the appropriate APA 6th referencing style. Please see more information on referencing here: https://library.torrens.edu.au/academicskills/apa/tool 

Solutions

1 Introduction

1.1 Background and Business

Orica Limited is a multinational company that is engaged in the business of providing commercial explosives and blasting equipment to the mining, oil and gas, construction companies. The company is based in Australia and is listed on the Australian stock exchange. For Assignment Help, The company has a workforce of more than 15,000 employees and is providing services to customers in more than 100 countries (Orica Limited, 2020).

The market and industries in which the company deals are:

1. Oil and gas
2. Quarrying
3. Underground mining
4. Surface coal and metal

The company deals in supply of various kinds of products and provide different types of services as well and have multiple business segments which help the company to earn desired revenue to run their business. Some of these business segments are specified below:

1. Blasting: The company is one of the largest companies that provide blasting equipment to different mining and explosive companies. This includes supplying products like boosters, data analytics and reporting, explosives that are packaged, etc.

2. The company also supplies sodium cyanide for the extraction of gold. The product and services include providing training, involvement of analyzers etc.

2 Company Analysis

2.1 Current Financial performance, Key financial highlights,Economic outlook

*Summary of financial performance for the reporting year

The financial performance of the company is being average in the current financial year as compare to previous financial year. company has lower profitability ratio as compare to past years. It also disclosed that company has compete the industry benchmark but still require the efforts o put so that better performance can be achieved.

Financial highlights/events of YYYY

• The financial year 2020 has been a rather challenging year for the company and it is because of the pandemic, and supply chain management of the company to supply products and services to customers in different countries.

• However, the balance sheet of the company is strong and discloses strong earnings. The total dividend discharged by the company in 2020 is 33 cents which are lower than the dividend discharged in earlier years (Ojala,2021, p.34, para3).

• Amid the pandemic, the company has reported its liquidity of $2.4 billion which is decent and showcases that company has sufficient assets to carry its daily operations. This is because of the strong supply chain of the company which has enabled the company to keep providing products and services to their customers (BHP, Annual report, 2020).

Economic Outlook

• The company has reported that EBIT for 2021 cannot be predicted and depends on the recovery of a pandemic. However, the company is focused on making its strategies strong, which will move the organization towards a growth structure.

• However, there are various customers and suppliers which are returning to their original level and it can be predicted that if the same continues the company will be able to earn effective EBIDTA.

• The company has estimated that capital expenditure for FY 2021 will be around $380 million to $400 million and the focus of the company will be to grow capital and increase the reliability of the plant (Orica Group, Annual report, 2020).

• Hence, it can be seen from the above analysis that Orica Limited has been able to showcase resilient performance amid pandemic as well.

3. Ratio Analysis

3.1 Profitability and Market ratios

Source ; Figure 1: Table 1.1. (Annual report,2020)

Profitability and market ratios are calculated to analyze the efficiency of the company towards generating profit and cash flows for the shareholders of the company. The higher the profitability ratios are, the better the performance of the company and the more favourable will be the results. However, the analysis becomes more impactful when the comparison is drawn between two or more years. In this case, different profitability and market ratios have been analyzed, and are very important from a shareholders and investors point of view. This is because shareholders are more inclined towards companies that are generating high cash flows because it helps them to earn a higher dividend. On the other hand, market ratios help the investor to decide whether investing in a company will be beneficial or not(Cashwell, et al, 2019, p43, para4).

In the following case, on an analysis of profitability and market ratios, it can be seen that the performance of the company has declined. All the profitability and market ratios of the company have seen a decline in FY 2020 in comparison to the previous year FY 2019. This decline reflects that the company has not earned enough profits in comparison to the previous year.

For instance, the expense ratio of the company has increased in 2020. This reflects that the operating expenses of the company other than tax have increased. This is also because of the additional cost and because the sales have not increased much in comparison to expense. Also, the gross profit ratio of the company has increased, while there is a decline in the net profit ratio. This is because of the increase in expenses, which has declined the profitability of the company.

When the discussion is done about market ratios, they also see a decline. For instance, the dividend per share distributed by the company has declined and is 33 cents per share in FY 2020 in comparison to 55 cents in FY 2019. This is because of a decline in the availability of profit with the company due to pandemic and due to a decline in the financial performance of the company(Han, et al, 2020, p.65, para2).

Due to this, the share price reported by the company is also low, which is impacting the price-earnings ratio. In this case, the PE ratio of the company has increased which means the investors will be required to pay a higher amount for each share purchased by them.

Hence, it can be said, that these ratios are reflecting a negative view and are unfavourable in nature. This is because a low-profit ratio means that the company is not utilizing the resources and their expenses are exceeding the income capacity of the company. Hence, this lays a negative impact on the performance of the company. However, low ratios do not always mean that company might not perform well in the future as well.

3.3 Efficiency ratios

Figure 2: Table:1.2 (Annual report, 2020)

Efficiency ratios are calculated by the companies to evaluate the efficiency of the company to generate cash flows or profit for the company using the current assets of the companies. There are various efficiency ratios that are calculated to analyze whether the company is efficient in using the funds of the shareholders to generate profit for the company. Some of the most used efficiency ratios are accounts receivable turnover ratio, inventory turnover ratio, assets turnover ratio. These ratios help in analyzing the time taken by the company to receive cash from receivables, or whether the holding period of inventory is too long(Bunker, et al, 2019, p.54, para7).

In this case, the efficiency ratios of the company have decreased. This reflects that the capacity of the company to generate cash or profit from current assets like receivables, the stock has decreased. This decrease in efficiency ratios reflects that company is not effectively using its resources to generate cash and the policies and management of the company are poor.

The ratio which needs attention is the receivable and inventory turnover ratio. Both the ratios have declined, due to which time taken by the company to realize cash from these assets have increased. for instance, earlier the company used to sell its inventory in 47 days and now it takes the company 57 days to sell its inventory. This is also increasing the current assets of the company, which will reflect that the liquidity of the company is strong. While the cash flows from operating activities will decline(Utomo, et al, 2019, p.32, para8).

It can be seen that the ratios do not show stability because there has been a decline in the efficiency of the company. And this is major because of the pandemic in 2020 which has disrupted the supply chain of the company and the company had to hold its inventory for a longer period of time. Also, the increase in receivables reflects that the credit policy of the company is poor and the company is allowing more time to the customers to make their payments.

Hence, the above situation has a negative impact on the performance of the company and the ratios are moving in an unfavourable direction. This is because a decline in these ratios clearly reflects that the company is not performing its duties effectively which is also declining the cash flows of the company while the current assets in the balance sheet are looking strong, but, it is holding the cash of the company.

So, this unfavourable change in ratios put a negative impact on the performance of the company, and measures should be taken by the company to improve their efficiency ratios. This can be done, by investing more assets in strategies that will generate more cash in the long term. Also, measures should be taken by the company to reduce their time. This will ensure that accounts receivable and inventory of the company decreases, which will eventually increase the efficiency ratios of the company (Fuhrer, et al, 2017, p.65, para.23).

3.3 Liquidity Ratios

Figure 3: Table 1.3(Annual report,2020)

From the above calculation, it can be seen that the current ratio of the company is more than 1 which reflects that for every 1x of liability, the company has current assets of 1.23x. Also, the current ratio of the company has increased in FY 2020 in comparison to FY 2019. This reflects that the liquidity of the company has increased in comparison to the previous year. However, when the quick ratio of the company is seen it is low than the current ratio because it does not consider inventory as a quick asset. Also, the cash flow ratio of the company has decreased which reflects that profit has decreased or current assets have increased.

This change has come because the investment of the company in current assets has increased, likewise, the amount of the current liabilities of the company has also increased because the company has taken interest-bearing securities. However, the cash flow ratio has declined, because as current assets will increase, the cash flow from operating activities will decrease. This is because the cash of the company is stuck in accounts receivable, stock etc.(Annisa, 2019, p89, para43).

Hence, it can be said that when the comparison is done for two years the ratios do not show stability because the ratios have increased and decreased. While the current ratio and quick ratio have become better, the cash flow ratio has decreased, and it attracts special attention. This is because it reflects that the company does not have sufficient cash to run the business in terms of operating profit earned by the company.

So, the current ratio and quick ratio can be said to be favourable in comparison to the cash flow ratio. But, the company should take steps to reduce its reliance on outside debt, and also analyze the efficiency of the company to generate profit from the assets held by the company. Liquidity ratios are considered as one of the most important ratios because they determine the capacity of the company to discharge its short-term obligation. Also, the quick ratio is more efficient because it does not consider the stock as a current asset which is very logical(Zhao,2017, p12, para32).

Hence, the low cash flow ratio and increase in current and quick ratio determines, that while the current ratio of the company is improving the cash-generating power of the company is decreasing. This is because the company can have a positive net income while having low operating cash flows. The decline in ratio is also because of an increase in current assets. For instance, as inventory will increase, current assets will increase but, operating cash flow will decrease because as inventory increases, the cash flow generation will decrease. Likewise, as the current liability of the company will increase, it will reflect that company gets more time to discharge its liabilities and cash flow will increase. So, it is important to analyze that the assets are not unnecessarily increasing, and this can also be due to the poor collection policy of the company in terms of receivable or inventory management (Shin, et al, 2018, p87, para12).

3.4 Capital structure ratios:

Capital structure ratio help to understand the fund utilization for the business. If the debt capital is higher than equity capital then it will indicate the higher capital risk for the company. following are the various capital structure ratio has been provided in the file.

Figure 4: Table 1.4 (Annual report,2020)

Gearing ratios are the ratios that are used to compare the capital structure of the company i.e. comparison of the form of debt with some form of equity. The ratios are calculated to analyze the financial leverage of the company which reflects how the activities of the company are financed i.e. the capital structure of the company and whether they are funded by equity or debt. Gearing ratios are important for the company because when companies have high financial leverage the returns are also high, but, if the market is not performing well, then the chances of the company losing returns are also high, hence, the risk involved is high(Naseem, et al, 2017, p54, para90).

In the following case, the gearing ratios of the company have increased in FY 2020. This reflects that the reliance of the company on an outside debt has increased. Likewise, the interest coverage ratio of the company has decreased, and it reflects that the EBIT of the company is not sufficient to cover the interest expense of the company.

There are various gearing ratios that have been calculated here, is the debt coverage ratio. The debt coverage ratio of a company reflects that the company is capable of debt, hence, if the debt coverage ratio is high, it is a reflection that the company has the capacity to take high debt. In this case, the debt coverage ratio of the company has increased drastically and it reflects that company has the capacity to take high debt. This generally reflects that the operating income of the company is more than the debt liability of the company. However, in this case, the operating cash flows of the company has decreased drastically(Mathur, et al, 2021, p90, para12).

This change has majorly happened because of the debt that the company has taken. Due to the pandemic the operations of the company has suffered and to manage the liquidity levels, the company was required to take fresh debt which is increased the financial leverage of the company. However, the equity and total assets of the company have also increased, which has laid a positive impact and the company had been able to manage its liquidity levels which have ensured that the company has the capacity to discharge its outside obligation.

However, the liabilities and debt ratio of the company have increased, the gearing ratios of the company will be said to be unfavourable. This is because the operating income of the company is declining, and the interest coverage ratio of the company is also very low. This reflects that the operating income of the company is not sufficient to cover the increased interest expense of the company.

This situation reflects that though the liquidity of the company is strong, measures must be taken by the company to ensure that they decrease their reliance on outside debt because it is increasing the risk of the company. If the company lacks sufficient resources or funds to cover its interest and principal then it will bring a bad name to the affairs of the company. Hence, measures should be taken by the company to reduce its reliance on debt, and increase some of its reliance on equity(Pontoh, 2017, p20, para21).

4 Recommendations and Overall Assessment

Has the reporting year been better than the prior reporting year for the company?

The decline in ratios does not show stability in performance, because the ratios have not remained the same but, has declined. From the above analysis, it can be said that the financial performance of the company has declined in FY 2020 in comparison to the previous year FY 2019. This conclusion has been drawn on the basis of the ratios calculated above.

Will the company succeed in the future?

Yes, the company will succeed in the future, This can be said on the basis of the strong balance sheet and liquidity of the company. Also, the company did not suffer a heavy impact due to the pandemic.

Hence, based on the data available it can be said that the company will succeed in future.

The likelihood of a merger or acquisitionof the company?

Right now, the performance of the company is declining a little bit. However, the PE ratio of the company is high, which reflects that the share is overpriced. However, the company can look for acquiring another company because it will boost the ratio analysis of the company.
This merger with another small company will give the company what they are lacking and will improve their performance as well.

Suggest what should the company be doing help it succeed

In this case, the company should work to improve the net profit ratio. This can be done by the company by cutting down their expenses. As the company works in multi-product they can conduct analysis of products that are not adding to the profit.
Also, the company should work on gearing ratios. Right now, the financial leverage of the company is quite high, and measures should be taken to reduce the leverage by repaying the debt.

External impacts that need to be taken into consideration

The impact of government on the business

External impacts that need attention is the impact of a pandemic on the company, and the government restrictions on trade and commerce. Also, the company should work to improve their sustainability because customers are becoming more aware of a sustainable process.
Hence, in this case, measures should be taken to give more rights and analyze the impact of change in policies on the affairs of the company.

Would you invest in this company?

From, the above analysis it can be said that investing in the company will be beneficial because the prospects of the company are strong and the company will bounce back once, the effect of a pandemic will start lowering.

5 References/Bibliography

Reference: