Fletcher Building Limited - Assignment Example

? Accounting Analysis and interpretation report of Fletcher Building Limited Executive Summary Being one of New Zealand’s largest companies with over 100 years building experience, the Board of Directors of NZ Saver Limited are interested in investing in Fletcher Building Limited and as such, have requested for an analysis of the performance report of the corporation. This will allow them to make appropriate decisions about considering making Fletcher Building Limited a choice investment opportunity. The core of this analysis is to determine the performance of the company and submit a report of the same to the Board of Directors of NZ Saver Limited detailing the investment prospects and stability of the company. In this report, I wish to do the analysis and interpretation of the company basing my comments on the following aspects of the company: Stability of the company (Leverage and Liquidity ratios) Financial stability (Long term) Profitability ratios Cash flow Shareholder’s view (Market efficiency measures) These analyses have been based on the financial report of Fletcher Building Limited for the year ending 30 June, 2012. However, this has been compared with the financial report of the company for the year 2011 so as to bring variability in the report. To this regard, NZ Saver Limited is recorded as a superannuation company that is registered by the New Zealand Stock Exchange. Its main objective is to provide its clients with the maximum total return through the investments it seeks to make in the companies that are listed in the New Zealand or Australian share market. This report will enable the company objectively determine whether it is justified for it to invest in Fletcher Building Limited. This report also contains a round-up of the growth prospects of the two companies when analyzed and used in the determination of the various investment opportunities that NZ Saver Ltd particularly can achieve from investing in Fletcher Building Limited. Introduction Fletcher Building Limited is one of the largest companies in the New Zealand that is listed in the New Zealand Stock Exchange Market. This company has a market capitalization of nearly over NZ$4.8 billion. The formation of this company led to its splitting from the Fletcher Challenge in the year 2001. This company was formerly the largest and wealthy business and multinational company in New Zealand. Currently, it can be estimated that the company has an estimated 19, 200 employees on the global scale and has around 50 businesses it operates under its brand name of Fletcher Building Limited. Generally, this company is the largest known supplier of building materials in Australia. Basing on the company’s sustainability report of March 2013, which addressed key issues of future growth and sustainability of the company in this competitive global economy, its CEO claimed that the main objective of the Fletcher Building Limited is to always ensure that it is more productive than any other company. Consequently, the company aims at becoming the most innovative company and provider of better building solutions in the entire Australian market. Clearly, one of the steps that the company took is to be enlisted in the stock market thus, enabling the buying of its stock to generate revenue for greater expansive projects to be implemented (Payne & Frow, 2013). It is also mentioned in the report that the company shall also focus on the need to have environmental problems curtailed. This will be made possible by ensuring that it focuses more on the environment by striving to reduce any environmental footprints of its products. Consequently, it shall endeavor to maintain health and safety by reducing its TRIFR by about 85 percent from 60 percent to less than 9. Additionally, the company seeks to focus more on governance and quality standards in the future through community sponsorship and support. Analysis and Interpretation Profitability report of Fletcher Building Limited In analyzing the profitability ratios of the company this report establishes that the sales for the year 2012 rose approximately by 20 percent more than the previous year 2011. The purpose of this was due to the insertion of the initial full year of revenues from the crane and pipeline businesses. The gross return margin of the corporation for the year 2012 increased slightly to 25.1% from 24.9% in the year 2011. I wish to establish that the reasons for this could be possibly due to a result of higher sales increase of the company products. However, the costs of production such as restructuring and impairment charges were lowered during this period of 2012 (Manalo & Bartlett-Trafford, 2009). However, the net profit margin for the company is recorded as that which has declined from 5% in the year 2011 to 2.9% in the financial year 2012. The reasons for this decrease in net profit margin could have been as a result of the lower plasterboard volumes and insulation businesses. Consequently, the decline in net profit margin of Fletcher Building Company Limited could have been impacted by the continued over-supply of insulations in Australia and the growth in import. The company’s return on equity has also rose from 7.9% in the previous year 2011 to 5.4% in the current analysis year of 2012. However, the funds of the shareholders declined while the company’s profit after tax also declined. A general statement from this scenario can show that the company is not doing well in terms of the funds of the shareholders that have been invested in it. Hence, I would recommend that the Board of Directors of NZ Saver Ltd keenly review and analyze this trend as it may be a cause of worry especially when the invested funds of the company will have a negative return. On the other hand, the analysis of return on assets of Fletcher going by the 2012 report indicates that there has been a mild fall from the previous rate of 6.6% in the year 2011 to 5.4% in the financial year 2012. Should the Board of Directors choose to invest in the company then they should hope that this trend will not continue but diminish in the subsequent years to come. Consequently, both the company’s EBIT and tax paid profit have a slight decline from 2011 to 2012, while the non-current assets were reported as increased; thus, resulting in the increase in total firm assets. The resultant effect would be a fall in the return on assets. As the investment in inventory decreased in 2012, the efficiency of the Fletcher Building Limited should be considered before an investment decision is made. Liquidity report of Fletcher Building Limited I have established from the report of the company that the working capital amount has destabilized from $1,404 million in 2011 to $ 1,175 million in 2012. While there is a decrease in the current assets, the liability amounts increased between the financial years of 2011 and 2012. This resulted in the decline in the working capital amount of the Fletcher Building Limited. Additionally, in judging the adequacy of the company assets, I critically took into consideration both the current and liquidity ratios in the analysis. The current ratio is reported to have significantly decreased slightly from 1.83:1 times to 1.61:1 times. These results are clearly above one rule of thumb which states that the ratio should be not lower than 1.5:1, but lower than another law of thumb that the ratio ought to be 2:1. However, the liquidity ratio for Fletcher Building Limited, which is usually a measure of a firm’s ability to meet it debts in the immediate future, has been reported as have been slightly increased from 0.99 in 2011 to 1.14 in 2012. This ratio increase is above that which is commonly accepted guidelines of 0, 9:1 and 1:1. The company’s operating cash flow to debt ratio was relatively stable at 0.11 in 2011 and 0.12 in 2012, both below the standard level of 0.5:1. The working capital movements of the company have substantially resulted from the decrease in inventories and the increase in debtors. The current liabilities in the mean time have increased by a small amount. Though the working capital declined, the sales in 2012 increased almost by 20%. The resultant effect of this increase in sales further resulted in the increase in the amount of accounts receivables. In overall, the liquidity position of Fletcher Building Limited does not appear to be strong enough to merit making an investment decision about. However, in the year of analysis 2012, there was a rise in activities in North America and business in Asia of Fletcher Building Limited. These should serve as indications of goods business returns in future but, since they are only segmental, the same cannot be relied upon for making investment decisions more particularly when NZ Saver Limited is seeking to hold long term investments in the firm. In this case, the liquidity is basically adequate for short term investments in the future and not long term (Manalo & Bartlett-Trafford, 2009). Fletcher Building Limited Report Cash flow analysis According to the 2012 report, the operations from cash flows arose by 11% in 2012 to NZ$448 million up from NZ$402 million that the company accomplished in the earlier year 2011. The automatic explanation for this would be that the receipts from the customers increased by a large proportion in this particular year as opposed to the year 2011 when the receipts were lower. However, the gains on disposals of affiliates and fixed assets for this particular year decreased. The cash flow improvements were possibly due to the strong cash flows the company experienced from its activities such as Formica and Construction and Crane and Steel Divisions. Analysis f the shareholders’ view of the company The earnings per share of the company for the year 2012 have gradually fallen by 6.7%, from 27.0 cents per share in 2009 to 25.2 cents per share in 2010. A study of the market price of the shares found on the NZX website reveals that the price declined from NZ$8.4 in 2011 to NZ$ 5.87 in 2012. The decline in Earnings per share (EPS) of the company would be regarded as unfavorable since it was caused by a decline in the profitability of the company. This scenario is enough to raise doubts about the company’s future growth. Additionally, the decrease in share market price implied the market or shareholders does not think Fletcher Building Limited would make a profit in the future. The reasons for the unsatisfied investment ratios as claimed by the Chairman of FBL that continued uncertain global reality, a weak recovery in New Zealand, a decline in Australian construction activity, and the continue earthquakes and aftershocks are frustrating to the building market also clearly show that the company failed to meet the shareholders’ expectations. As such, the NZ Saver Ltd shareholders should be sure whether they need to invest in the company (Payne & Frow, 2013). Looking at the price earnings ratio shows an increase from 18.7% in 2011 to 21.6% in 2012. The explanation for this is that in terms of price earnings, the company worked hard and ensured that its shares performed better in the market in the year 2012. However, the return to shareholders shows a dismal performance as the return rate stood at 27% in the year 2012 while the gearing ratio increased from 33.8% in 2011 to 34.5% in the year 2012. This shows that there have been negative sentiments from the investors within the building sector that reflected particularly the down turn in the building sector. Generally, the company is likely to face challenges in the future about its shares market; however, there is the possibility to a turnaround based on the good performance of the price earnings ratio. Therefore, it might be an excellent concept to invest in the firm (Manalo & Bartlett-Trafford, 2009). Environmental and social reporting 1. Purpose of SDR The SDR-Special Drawing Rights is a worldwide reserve sheet that was initiated by the IMF-International Monetary Fund to aid member countries official reserves. As such they can be exchanged freely for usable currencies. The proceeds from issuing these SDRs can be covered in the Exchange Stabilization Fund of the stock market. The SDRs work by augmenting international liquidity through the supplementing of standard reserve currencies of various countries. The general allocations of the SDRs have to base on the global long term need of supplement for its existing reserve assets (Wilkie, 2012). 2. Current and suggested reporting areas Fletcher Building Limited is currently reporting on a yearly basis that has the financial year ending in June of every year. The same trend is expected to continue in the near future and as such I would advise the Board of Directors of NZ Saver Ltd to consider this as a prudent reporting period for the company. Conclusion To conclude, the analysis of Fletcher Building Limited that operates in New Zealand has shown that the company’s performance rates averagely since it scores variedly on most of its ratios. While at times the ratios and profitability dwindle, it is expected that should NZ Saver Ltd invest in the company, the stability of the company would be more as it is currently. For instance, the Board of Directors can use the interest cover ratio of the FBL Company to analyze the performance of the company with regard to the expected earnings. The ratio should indicate the margin of safety that the company has with regard to meeting its interest payments from its earnings. Recommendation After reviewing all these aspects of the FBL Company, I would recommend to the Board of Directors of NZ Saver Ltd that, despite the company’s dwindling performance at times, it should proceed with the investment decisions it has on Fletcher Building Limited. The investment decision should just be carried on as earlier planned. However, the company should brace itself for an occasion when it has to incur loses with varying investment outcomes (Payne & Frow, 2013). References Annual Report and sustainability report for Fletcher Building Limited (year ended 30 June 2012) Manalo, Wong-Toi, and Bartlett-Trafford (2009), The Business of Writing (3rd ed.), Pearson: Prentice Hall Payne, A., & Frow, P. (2013). Strategic customer management: Integrating relationship marketing and CRM. Wilkie, C. M. D. (2012). Special drawing rights (SDRs): The first international money. Oxford [etc.: Oxford University Press. Read More