Assignment: Your assignment calls for you to calculate certain financial ratios and to compare these calculated ratios with the competitor’s ratios and industry average ratios to evaluate the firm’s profitability and liquidity performance. Suppose you have been hired by a large financial institution as a financial analyst. One of your first job assignments is to prepare a report and present the analysis of the financial condition of a company. Choose a non-financial company that you would like to analyse, and obtain its financial statements. Now, select another company (preferably a competitor) from the same industry, and obtain its financial statements too. Students can obtain latest financial statements for two years (2015 & 2016) from IBIS world database (available on Moodle) OR from internet (http://www.finance.yahoo.com).
Required
a) Your task is to analyse the last two years’ performance of the selected company and present your findings in the form of a report, which will introduce the company to start with and cover financial performance analysis in a logical cohesive format. Your report should include the following analysis using ratios:
1. Comment on the liquidity of the company using Current Ratio and Quick Ratio. What can they say about the liquidity of the company?
2. Calculate the firm’s net profit margin, Return on Assets (ROA) and Return on Equity (ROE) and comment on the profitability. Which components of your company’s ROE are superior, and which are inferior (use DuPont analysis)?
3. In addition, you are told that your selected company has requested a loan. On the basis of the Capital Structure ratios for the chosen company along with the
industry averages and company’s recent financial statements, evaluate and recommend appropriate action on the loan request.
4. Comment on any long term and short-term sources of finance that your example company has used in last two years. Was there any change?
Calculate, analyse and interpret the ratios and the other data with reference to the theoretical concepts introduced in this subject to evaluate the company’s operations and performance. How well does your selected company compare to its industry peer? Your analysis should highlight the important changes within these ratios over this period and identify the reasons if any for significant changes. Discuss limitations of this analysis.
b) Suppose the chosen company and its competitor decided to expand their operations by issuing bonds. You are required to value bonds issued by two companies selected in part a) above. Both bonds mature in five years and both have a face value of $100 and both pay a coupon rate of 8%. Assume your selected company’s bond (rated as A+ by rating agencies) pays annual coupons while its competitor (rated as B+ by rating agencies) pays semi-annual coupons.
| The yield to maturity (required return) on Australian corporate bonds of different ratings and different maturity periods provided in the following table: Rating | Rating | ||||||
| A (A+, A or A-) | B (B+, B or B-) | ||||||
| Maturity | Maturity | ||||||
| 3 years | 5 years | 7 years | 10 years | 3 years | 5 years | 7 years | 10 years |
Should these two bonds sell at identical prices or would one be worth more than the other? What prices do you obtain for these bonds? Explain the difference in the value of the bonds.
What are the three main international bond-rating agencies? Why might companies try to maintain a given target rating on their outstanding debt?
Instructions
Place the ratio calculations in an appropriate appendix so that the body of the report only states the result of the calculation and not the process of calculating it. Please remember to submit a copy of the Annual Reports with your assignment.
Include referencing so that you clearly acknowledge your sources of information. All your references must be from credible sources such as books, peer-reviewed journals, magazines, company documents and recent articles. Students are highly encouraged to use peer-
reviewed journal articles as this may contribute towards a higher grade. Your assignment mark will be adversely affected if you use poor references.
Important assignment instructions
The required word length for this assignment is 2500 words (plus or minus 10%).
• Your assignment will be marked according to the criteria outlined in the assessment grading criteria (see Appendix 1).
• In terms of structure, presentation and style you are normally required to use: o AIB standard report format
o AIB preferred Microsoft Word settings
o author-date style referencing (which includes in-text citations plus a reference list).
These requirements are detailed in the AIB Style Guide.
• Reference lists for AIB assignments normally contain the following number of relevant references from different sources: 6–12 (for MBA assignments).
• All references must be from credible sources such as books, industry related journals, magazines, company documents and recent academic articles.
• Your grade will be adversely affected if your assignment contains no/poor citations and/or reference list and if your assignment word length is beyond the allowed tolerance level (see Assessment Policy available on AIB website).
• Useful resources when working on your assignments include: o AIB Assignment Guide Competitor’s ratios and industry average ratios
o AIB Style Guide
o AIB Online Library.
competitor’s ratios and industry average ratios
TO BE RE-WRITTEN FROM THE SCRATCH
Financial Analysis: Case study of Gold Road Resources Limited
This report will look at Gold Road Resources Limited (Gold Road), a gold mining company in Australia that is traded in the stock exchange ASX index. The financial performance will be analyzed against the industry performance, with Gold Road being compared with Evolution Mining, one of its competitorswhich is also a leading player in the mining industry.
The financial performance analysis will involve determining the liquidity, profitability and capital structure. Financial tools that help in the analysis will include financial statements, ratios and DuPont Analysis. The limitations of the analysis will also be pointed out.
Further, the paper makes the assumption that Gold Road and Evolution Mining are expanding operations by issuing bonds. The two bonds are almost similar with the difference being that Gold Road has an A+ rating and makes annual coupon payments whereas Evolution Mining has a B+ rating and makes semi-annual coupon payments. Consequently, the possible value of their respective bonds and the price are determined and discussed.
Finally, the paper analyses the three main rating agencies and why a company may want to maintain its rating for outstanding debts.
Financial performance analysis
This section looks at the liquidity, profitability and capital structure of Gold Road and Evolution Mining companies.
Liquidity
The liquidity of the companies will be determined by analyzing their current and quick ratios Competitor’s ratios and industry average ratios .
Current ratio
The current ratio, also known as the working capital ratio, helps determine whether a company is able to meet its short-term and long-term obligations. This is by determining the current liabilities that can be covered by the current assets, both liquid and illiquid(Bragg 2012). Unlike the quick ratio, the current ratio considers all the current liabilities and all the current assets as shown in the formula below:
Current ratio = Current Assets/Current Liabilities
The calculation of this ratio, and other calculations required in this paper, is presented in the Calculation Appendix at the end of this paper.
From the calculations, the current liabilities of Gold Road are covered 15.25 times in 2015 compared to 15.33 times in 2016. This is a favorable ratio that shows good liquidity that continues to improve. Moreover, if Evolution Mining’s current ratios are used as the industry standard at 3.09 for 2015 and 1.67 for 2016, then Gold Road’s liquidity is very favorable compared to the liquidity of both the competitor and the industry.
Quick ratio
Unlike the current ratio that determines a company’s ability to meet its short-term and long-term obligations, quick ratio only determines the ability of the company to meet its short-term obligations using liquid assets(Bragg 2012). As hence, inventories are not considered when calculating quick ratios, with the following formula being used:
Quick ratio = (current assets – inventories) / current liabilities
Notably, Gold Road had no inventories in 2015 and 2016; hence its quick ratios remained the same as its current ratios over the 2 years at 15.25 and 15.33 respectively. This is unlike Evolution Mining that had inventories of $66 million in 2015 and $201 million in 2016, leading to quick ratios of 2.38 in 2015 and 0.61 in 2016. This shows that the short-term liquidity of Gold Road remains favorable with the company able to meet its short-term liabilities over 15 times as opposed to Evolution Mining that could meet its short-term liabilities two times over in 2015 but could not meet them in 2016. Hence, while Gold Road maintains a healthy short-term liquidity, Evolution Mining short-term liquidity gradually becomes negative from 2015 to 2016 as attested to by the acid-test ratio.
Profitability
To determine the profitability of a company, some of the data used include net profit margin, Return on Assets and Return on Equity.
Net profit margin
The net profit margin shows the relationship between the net profits and revenues expressed as a percentage(Revsine, Collins, Johnson, Mittelstaedt and Soffer 2014). This is by showing how much of the revenue is profits and is calculated as follows:
Net profit margin = (net profit / revenue) x100.
From the Calculations Appendix, Gold Road’s net profit margins for 2015 and 2016 were -400% and -500% respectively while that of Evolution Mining were 15% and 10.7%. This indicates that the profitability of the gold mining industry in Australia is shrinking. Indeed, Gold Road’s expenses are about five times its revenues compared to Evolution Mining that is still making profits, albeit reduced.
Return on Assets
Return on Assets (ROA) relates a company’s …………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………….. Competitor’s ratios and industry average ratios
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