Financial Analysis of One Steel Limited from 2008 to 2011 - Example

Financial Analysis of One Steel Limited from 2008 to 2011 Contents Cover Page…………………………………………………………………………….1 List of Figures………………………………………………………………………....3 Introduction…………………………………………………………………………...4 Horizontal Analysis……………………………………………………………………4 Vertical Analysis……………………………………………………………………….5 Ratio Analysis…………………………………………………………………………6 Trend Analysis………………………………………………………………………..14 Conclusion……………………………………………………………………………16 Attachment 1………………………………………………………………………...17 Attachment 2………………………………………………………………………...18 References…………………………………………………………………………….20 List of Figures Figure 1: Profitability Analysis Figure 2: Asset Efficiency Ratios (1) Figure 3: Asset Efficiency Ratios (2) Figure 4: Liquidity Ratios Figure 5: Capital Structure Ratios Figure 6: Market Performance Ratios Figure 7: Trend in Sales, EBIT and Profit after Tax for One Steel for the period 2007 to 2010 Figure 8: Trend Analysis Introduction One Steel Limited as the name suggest is a mining and metal industry being established in Australia. The company has been increasing its sheer presence in Australia after it became separated from BHP in 2000. The organization has more than 11,000 employees and carries out their operations at over 300 places all across the globe. The report looks into the financial performance of One Steel for the period 2008 to 2011 so that a trend about the performance can be analyzed. The report looks to evaluate the performance of One Steel based on different parameters like trend analysis, vertical analysis, horizontal analysis and ratio analysis which will help to understand the manner in which the different aspect of their working environment has been covered by the organization. This will help the investors and others associated with the organization and will provide the framework through which better estimation of the future performances can be determined. Horizontal Analysis The horizontal analysis which looks to compare the performance of One Steel Limited from the previous year shows mixed response as improvement in certain areas and a decrease in the performance in some areas. This has thereby ensured that the analysis is done 2009 over 2008; 2010 over 2009 and 2011 over 2010. The horizontal analysis throws light on the performance based on the manner in which it has worked in the previous year. The analysis shows that in 2011 the sales has grown over the previous year 15% but the profits have decreased by 10% which is a worrying factors. The inventories on the other hand have increased by 12% which shows that the business has increased its inventory holding but the same hasn’t been reflected through the increase in profits. When looking at performance for 2010 over 2009 the financial highlights the revenues from the sale of goods has decreased by 14% which is matched by a proportionate decrease in profits signifying the manner in which sales contribute towards the profit. The balance sheet highlights an increase in inventory by 16% which could be due to decrease in sale which has piled up inventories. The overall impact has been that the asset base of the organization has grown and increased whereas the liabilities have reduced and equity have grown A look at the performance of 2009 over 2008 highlights a decrease in revenue by 3% which is primarily due to recession which had engulfed the world economies. The impact was witnessed through a drop in profits by 6%. Despite a drop the overall financial condition seems sound as One Steel has been able to ensure that the liabilities base reduces which has helped the equity base to grow and a proportionate increase has been witnessed in the assets. Vertical Analysis Vertical analysis helps to understand the financials in a better way as it helps to convert the figures into meaningful figures which can be used by different people associated with the company for their decision making. The analysis highlights that on an overall basis the financials have increased by 75% but highlights fluctuations in the different years where it has grown in some year and decreased in some. The financials further highlight that the earnings have grown by 50% in 2008 whereas the same reduced by 20% in 2009. The financials thereby shows widespread fluctuations where the financials have increased in certain period and decreased in certain periods. In a similar manner the expenses have also fluctuated over the year which has been due to changing environmental conditions and highlight a situation where the organization has undergone different changes which have been reflected in the financial statement. Ratio Analysis Financials of an organization by themselves provides no information and requires proper interpretation of the financial statement so that better understanding can be developed. Evaluating the financial will help to determine the manner in which the organization has worked and will help to provide the required impetus through which important decisions can be made (Henry, Martin & Lewis, 1991). Below is the financials of One Steel which looks towards analyzing the manner in the organization has worked on different areas and parameters Profitability Ratios Profitability ratios help to identify the manner in which the organization has performed in the past years and highlights the manner in which the resources have been used. It is very important from the perspective of the investors as it helps to take important decisions and also highlights the manner in which the business is able to ensure productivity (Ryan 1996). Below is the comparison of the profitability ratios for One Steel from the year 2008 to 2011 Figure 9: Profitability Analysis The analysis of the different profitability ratios highlights a decrease in overall profits of the business. One Steel has witnessed a decrease in gross revenue after 2008 and is primarily due to the global economic recession which is still affecting the performance of the organization. The same has been reflected in the final profits as it is 3.42% in 2008 to 3.31% in 2009 to 4.2% in 2010 and 3.33% in 2011. Looking at the same from the perspective of the gross profits highlights very high indirect expenses which has reduced the final profits as the business continuously over the years has around 18% to 20% of their profits as indirect expenses. The decrease in the final profits also gets reflected in the return on assets and return on equity which has shown a dip in 2011. This is a worrying factors as investors might feel that the organization is unable to provide the required returns. The financials shows that ROE was highest 2007 which stand at 13.27% and the lowest in 2009 where it stands at 5.53%. Similarly, ROA was the highest in 2007 and stands at 6.13% in 2007 and lowest in 2009 which stands at 3.46%. The organization needs to deal with the different issues and need to gain effectiveness so that the performance improves and the investors are able to understand the manner in which the different resources are used effectively within the organization. Asset Efficiency Ratios This ratio helps to understand the manner in which the organization is able to use its assets and generate appropriate revenues based on it. This thereby helps to develop the required link between revenue and assets and creates a point which will help to understand whether the business has more assets than required or fewer assets which is hindering the growth of the business (Sanger, 2001). Below is the comparison of the profitability ratios for One Steel from the year 2008 to 2011 Figure 10: Asset Efficiency Ratios (1) The graph for debtor days and inventory days is shown below Figure 11: Asset Efficiency Ratios (2) The use of assets has decreased over the years as it stood at 1.01 times in 2008 which has reduced to 0.86 times in 2011. This is a worrying factor as it shows the inefficiency in the use of asset. The change or decrease could have arisen due to the reason that the assets base is considerably growing which is due to the purchase of more assets than required or shrinking sales which is affecting the use of assets. The inventory turnover on the other has grown in 2011 from 2010 and 2008 and has reached 3.59 times which shows an increase risk as the chances of the inventory becomes high. Looking at both the ratios together highlights that a decrease in sales has affected the business as it has increased the inventory and has also ensured that the assets are not used effectively. A look at the debtors turnover ratios shows that it has improved and has reached around 7.71 times or 47 days highlighting that the money is recovered around 8 times in a year or is collected within 47 days. This reduces the chances of bad debts and also ensures that based on it the business can plan the necessary strategies for future expansion as the cash flows can be better ascertained and will ensure that the overall productivity increases. Liquidity Ratios This ratio helps to understand the financial position in the short run as it compares the current assets and liabilities (Lyroudi & Lazaridis, 2000). Analyzing the current ratios correctly provides an important opportunity to achieve the objective as it ensures that the business is able to use its resources effectively and chalk out a plan which will ensure liquidity within the business (Weinraub & Visscher, 1998). Below is the comparison of the profitability ratios for One Steel from the year 2008 to 2011 Figure 12: Liquidity Ratios The current ratio highlights that the business the business has more current assets and if the risk to pay off their liabilities which are short term in nature is created then it will be paid off. The only concern as the juncture is that the ratio is slightly low and the organization needs to rise is slightly for better functioning (Eljelly, 2004). The current ratio stood at 1.45 in 2008, 1.92 in 2009, 1.59 in 2010 and 1.89 in 2011 showing continuous improvement and needs to work on the same direction so that the short term liquidity situation improves. When looking the same from the perspective of quick ratio the situations looks gleam as it shows that the ratio stands at 0.85 in 2008, 0.74 in 2009, 0.78 in 2010 and 0.63 in 2011. This shows that when inventories is removed from the assets base the risk increases and creates doubt whether the organization will be able to meet its current obligations. This is an area of concern that One Steel needs to look at and needs to develop a process which will ensure better productivity. The same gets reflected through the cash flow from operations and requires improving the ratios so that better liquidity can be ascertained and the organization is able to meet its short term obligations easily. Capital Structure Ratios This ratio helps the business to understand the future potential of raising finance and looks at identifying the manner in which debt and equity contributes towards the business. Identifying and looking at the balance between debt and equity will help to develop situations to finance the business and will improve the manner in which strategies are made within the business (Lazaridis & Tryfonidis, 2006). Below is the comparison of the profitability ratios for One Steel from the year 2008 to 2011 Figure 13: Capital Structure Ratios The ratio shows that the business has borrowed very little money through external financing and relies mostly on self financing which has been possible to the issue of equity in the market. It is seen that the debt equity is around 87% in 2011 and 60% in 2009 and 57% in 2010 which stood at 113% in 2008. This shows a continuous growth in equity financing. This reduces the risk for paying off the external debts but has an impact on the financials as it doesn’t allow the business to take advantage of the tax structure which allows interest on debt to be treated as an expense. To improve the leverage the organization has to maintain a balance between debt and equity and needs to develop a framework through which better financing opportunities can be developed. The debt to equity ratio shows the manner in which external financing have been ignored by the business. The interest coverage ratio highlights that the business was able to pay the interest every year has decreased year after year showing a decrease in external financing. It is important that the organization looks towards taking the interest coverage ratio to an arbitrary value of 3 which will ensure that the interest will be easily paid and will reduce the risk for the external loan providers as the safety of the interest and the sum can be ensured. This will help One Steel to shape up their performance and ensure better standards based on which performance can be generated. Market Performance Ratios This ratio is one of the most important as investors based on it are able to take decisions whether investing in the shares of the company will be beneficial or not. This ratio helps to understand the performance based on the different style of working demonstrated by the organization and helps to develop a pattern and trend based on which the future performance is likely to be identified (Salmi & Martikainen, 1994). Below is the comparison of the profitability ratios for One Steel from the year 2008 to 2011 Figure 14: Market Performance Ratios This ratio helps to understand the mix between risk and return and provides an important juncture based on which the investors are able to take important decisions. The earnings per share was 17.33 in 2011 which has reduced from 19.51 in 2010 highlighting that the returns for the investors have decreased. This is a worrying factor as it might lead towards a situation where certain section of the society refrain from investing in the shares of the company due to lower return which they might get. This might thereby tend to increase the risk and is an area which needs to be examined so that proper strategies based on it can be developed. The organization has further declared dividend for all the year from 2008 to 2011 showing that the business is ready to provide investors with some additional revenue based on the performance it has been able to generate. This is a good sign as it will make the investors feel that the organization is committed towards them and looks towards compensating them with some reward for the risk undertaken by them by investing in the shares of the organization. The overall aspect requires working in some direction and developing a process through which effectiveness can be improved in the future. Trend Analysis Trend analysis looks at comparing the performance from one base year and looks to highlight the manner in which the performance has improved or not over the years. The comparison is made within the same company and highlights the effectiveness through which the business has controlled all the areas. The trend analysis for One Steel for the year 2008 to 2011 is as follows Absolute Figures 2011 2010 2009 2008 Sales revenue 7133 6204.6 7241.5 7434.3 EBIT 302.5 334 223.1 359.1 Profit after tax 237.5 260.7 239.6 255.1 Trend analysis (in percentage) 2011 2010 2009 2008 Sales revenue 95.947 83.4591 97.4 100 EBIT 84.238 93.0103 62.13 100 Profit after tax 93.101 102.1952 93.93 100 Figure 15: Trend in Sales, EBIT and Profit after Tax for One Steel for the period 2008 to 2011 The graph highlighting the trend looks as follows Figure 16: Trend Analysis The analysis shows that sales have been unable to match the figures of 2008 in any year and has decreased or increased in different years but has never surpassed the sales of 2008 which stood at 7343.3 in 2008. The same gets reflected in case of EBIT as it has also continuously decreased and has been unable to match 2008. The EBIT represents more clear picture and looks true as it fell to 98% in 2009 and 93% in 2010 and finally reduced to 84% in 2011 highlighting fear and the inability of the business to generate adequate revenues for the investors. The same gets reflected in the profit after tax and is an area which needs to be understood and policies need to be developed so that One Steel is able to ensure better use of the resources and develop a positive trend which will ensure improvement in productivity and better results over the year. Conclusion The horizontal, vertical and ratio and trend analysis helps to find the performance of One Steel over the period of 2008 to 2010 shows that the performance has fluctuated changed over the years. This has been due to the changing business environment and scenarios which has brought widespread changes in the overall style of working. There are some areas where One Steel needs to lay focus on like improvement in profits, better use of assets and so on so that the future performance increases. Developing strategies which are positive and aims towards improvement of the business will help to develop the framework through which stronger performances can be achieved in the future. Attachement 1 Ratios 2011 2010 2009 2008 Profitability Ratios         Return on Equity (ROE) 5.27% 5.80% 5.53% 7.43% Return on Assets (ROA) 2.86% 3.69% 3.46% 3.48% Gross Profit Margin 19.29% 19.89% 21.92% 22.61% Profit Margin 3.33% 4.20% 3.31% 3.42% Asset Efficiency Ratios         Asset Turnover Ratio 0.86 times 0.88 times 1.04 times 1.01 times Inventory Turnover (days) 100.28 days 103.75 days 78.95 days 81.26 days Debtors Turnover (days) 46.69 days 48.13 days 41.1 days 57.52 days Times Inventory Turnover 3.59 times 3.47 times 4.56 times 4.43 times Times Debtor Turnover 7.71 times 7.48 times 8.76 times 6.27 times Liquidity Ratios         Current Ratio 1.89 times 1.59 times 1.92 times 1.45 times Quick Asset Ratio 0.77 times 0.63 times 0.85 times 0.74 times Cash Flow Ratio 0.32 times 0.40 times 0.32 times 0.19 times Capital Structure Ratio         Debt To Equity Ratio 86.76% 57.32% 59.89% 113.46% Debt Ratio 45.81% 36.43% 37.46% 53.15% Equity Ratio 54.19% 63.57% 62.54% 46.85% Interest Coverage Ratio 36% 93.09% 73.15% 74.38% Market Performance Ratios         Earnings per Share 17.33 19.51 22.59 29.45 Dividend Payout Ratio 0.62 0.4 0.62 0.5 Price Earning Ratio 0.18 0.15 0.11 0.25 Attachement 2 Ratios Formula 2011 2010 2009 2008 Profitability Ratios           Return on Equity (ROE) Net Income / Equity * 100 237.5/4505.7 * 100 = 5.27% 260.7/4492.7 * 100 = 5.80% 239.6/4336.3 * 100 = 5.53% 255.1/3432.9 * 100 = 7.43% Return on Assets (ROA) Net Income / Total Assets * 100 237.5/8315.1 * 100 = 2.86% 260.7/7067.7 * 100 = 3.69% 239.6/6933.1 * 100 = 3.46% 255.1/7327.8 * 100 = 3.48% Gross Profit Margin Gross Profit / Sales * 100 1375.8/7133 * 100 = 19.29% 1234/6204.6 * 100 = 19.89% 1587.5/7241.5 * 100 = 21.92% 1681.2/7434.3 * 100 = 22.61% Profit Margin Net Profit / Sales * 100 237.5/7133 * 100 = 3.33% 260.7/6204.6 * 100 = 4.20% 239.6/7241.5 * 100 = 3.31% 255.1/7434.3 * 100 = 3.42% Asset Efficiency Ratios           Asset Turnover Ratio Sales Revenue / Avg Total Assets 7133/8315.1 = 0.86 times 6204.6/7067.7 = 0.88 times 7241.5/6933.1 = 1.04 times 7434.3/7327.8 = 1.01 times Inventory Turnover (days) 360 / Inventory Turnover Ratio 360/3.59 = 100.28 days 360/ 3.47 = 103.75 days 360/4.56 = 78.95 days 360/4.43 = 81.26 days Debtors Turnover (days) 360 / Debtors Turnover Ratio 360/7.71 = 46.69 days 360/7.48 = 48.13 days 360/8.76 = 41.1 days 360/6.27 = 57.42 days Times Inventory Turnover Cost of sales / Avg Inventory 5757.2/1604.7 = 3.59 times 4970.6/1433 = 3.47 times 5654/1239.9 = 4.56 times 5753.1/1298.9 = 4.43 times Times Debtor Turnover Sales Revenue / Average Accounts Receivable 7133/925 = 7.71 times 6204.6/829.3 = 7.48 times 7241.5/827.1 = 8.76 times 7434.3/1185.3 = 6.27 times Liquidity Ratios           Current Ratio Current Assets / Current Liabilities 2707.6/1431.1 = 1.89 times 2364.3/1488.6 = 1.59 times 2229.1/1161.4 = 1.92 days 2652.4/1832.3 = 1.45 times Quick Asset Ratio (Current Assets – Inventories) / Current Liabilities 2707.6 - 1604.7/1431.1 = 0.77 times 2364.3 - 1433/1488.6 = 0.63 times 2229.1 - 1239.9/1161.4 = 0.85 times 2652.4 - 1298.9/1832.3 = 0.74 times Cash Flow Ratio Cash flow from Operations / Current Liabilities 463.1 / 1431.1 = 0.32 times 602.1/1488.6 = 0.40 times 368/1161.4 = 0.32 times 350.8/1832.3 = 0.19 times Capital Structure Ratio           Debt To Equity Ratio Total Liabilities / Total Equity * 100 3809.4/4505.7 * 100 = 86.76% 2575/4492.7 * 100 = 57.32% 2596.8/4336.3 * 100 = 59.89% 3894.9/3432.9 * 100 = 113.46 % Debt Ratio Total Liabilities / Total Assets * 100 3809.4/8315.1 * 100 = 45.81% 2575/7067.7 * 100 = 36.43% 2596.8/6933.1 * 100 = 37.46% 3894.9/7327.8 * 100 = 53.15% Equity Ratio Total Equity / Total Assets * 100 4505.7/8315.1 * 100 = 54.19% 4492.7/7067.7 * 100 = 63.57% 4336.3/6933.1 * 100 = 62.54% 3432.9/7327.8 * 100 = 46.85% Interest Coverage Ratio EBIT / Net Finance Expenses * 100 302.5/840.1 * 100 = 36% 334/358.8 * 100 = 93.09% 223.1/305 * 100 = 73.15% 359.1/482.8 * 100 = 74.38% Market Performance Ratios           Earnings per Share Net Income / Outstanding shares 17.33 (given) 19.51 (given) 22.59 (given) 29.45 (given) Dividend Payout Ratio Dividend / Net Income 146.2/237.5 = 0.62 104.1/260.7 = 0.4 147.7/239.6 = 0.62 126.7/255.1 = 0.5 Price Earning Ratio Market Value per Share / EPS 3.2/17.33 = 0.18 2.91/19.51 = 0.15 2.48/22.59 = 0.11 7.3/29.45 = 0.25 References Henry., Martin, & lewis, P. 1991. 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