Financial Management - Case Study Example

Supervisor Financial Management - Financial Analysis Paper  The Case of Blue Scope Steel Company Ltd and One Steel Company Plc. By: April Table of Contents 1.1Introduction 2.0 Overview of the Activities of Blue Scope Steel Corporation Ltd 2.1 Financial Analysis of Blue scope Steel Corporation Ltd 2.1.1 Profitability Analysis of Blue Scope Steel Corporation Ltd 2.1.2 Liquidity Analysis of Blue Scope Steel Corporation Ltd 2.1.3 Solvency Analysis of Blue Scope Steel Corporation Ltd 3.0 Overview of the activities of a Competing Firm, the case of One Steel Corp. Plc 3.1Financial Analysis of One Steel Corporation Ltd 3.1.1 Profitability Analysis of One Steel Corporation Plc 3.1.2 Liquidity Analysis of One Steel Corporation Plc 3.1.3 Solvency Analysis of One Steel Corporation Plc 4.0 Conclusion, Recommendation and the way forward Executive Summary The purpose of this paper was to carry out a financial analysis of two of Australian based Steel companies in order to make an informed judgment as to a buy, a hold or a sell decision. Using information of the companies’ annual report, and using relevant ratios indicators the companies were analyzed. In the course of our analysis, we discover that the two companies are quite profitable though their activities for the year 2008 have been affected by the global financial crisis. The first part of the report provide an overview of each of the two companies under review, section two of each section analyses each of the companies by focusing on the profitability, liquidity and solvency ratios. We found that, though the two companies are quite profitable, Blue Scope Steel Limited is more profitable as we recommend those currently holding its stock should hold or buy more. Our recommendation is for our company to invest in this particular company. 1.0Introduction Globalization, the new information technology, and deregulation of financial markets and the quest for market dominance have eased the provision and search of finance. Today, millions of shares are traded every day on the world’s stock markets. (Penman, 2003). Most often, investors see valuation as the first step toward intelligent investing. It has been argued (e.g. Penman 2003) that an investor can make informed decisions about where to invest once the value of shares are determine based upon the fundamentals. This is so because, without this value investors can either buy high or sell low Investors who trade on these stocks are often forced to ask themselves whether they are buying or selling at the right price. (Penman, 2003). Faced with too much information, Investors at times get confused with no clear indication of what the true prices of stocks should be. (Penman, 2003). Under such circumstances, the investor either make decision based on his or her instinct, such investors according to Penman (2003) are intuitive investors while others who make their decision based on capital market efficiency are referred to as passive investors (Atrill & Elliot2005). Penman, (2003) further argues that in making their decision, passive investors assumed that the market price is a fair price of the shares quoted. These investment mechanisms appear to be very simple, as they do not require much effort. (Penman, 2003: pp 3). How ever that is not the case as neither passive nor intuitive investor turn to be better off in the face of their decision. This is so because these sets of investors can either pay to high or sell too low (Damodaran, 2002). 1.1BlueScope Steel Limited According to the Company 2008 report, BlueScope Steel Limited (BlueScope Steel) is an Australia-based company (Report 2008). The Company is made up of different subsidiaries and is principally engaged in the manufacture and distribution of flat steel products; manufacture and distribution of metallic coated and painted steel products; steel building products, and sometimes in the design and manufacture of pre-engineered steel buildings while providing building solutions (Company Report 2008). It businesses can be identified within six business segments: Coated and Industrial Products Australia; Australia Distribution and Solutions; New Zealand and Pacific Steel Products; Coated and Building Products Asia; Hot Rolled Products North America, and Coated and Building Products North America (Company Report 2008). BlueScope Steel operates in four geographical areas: Australia, New Zealand, Asia and North America. 1.1Financial Analysis of Bluescope Steel Ltd Profitability Ratios for Bluescope Steel Ltd Ratio Formula1 2008 2007 Profit margin 8.6% Return on Capital Employed 11.1% 12.6 Return on Equity 15.3% 18.2% Return on Investment 7.2% 9.4% From the above calculation of the profitability of Bluescope Steel Limited, the profitability ratios show that the company is doing well and there have been some reductions from 2008 in almost all the ratios. Compared with the ratios for the year 2007. However, this should not be interpreted as a poor performance. This is so because, the global financial crisis has affected businesses the world over. Again, the acquisition made for 2007 booster the financial position for that year. The profitability ratios show that though the company is doing well, when compared to the industry average and to OneSteel Limited, the situation has greatly deteriorated when compared to the previous year that is 2008 against 2007. There has been a decline from 2008 in almost all the ratios. For example the profit margin for 2007 stood at 8.6% but for 2008 it fell by three percentage point to 5.86%. The same situation holds true for the other ratios. 1.2Liquidity Analysis of BlueScopeSteel Limited Ratio Formula2 2008 2007 Current Ratio 1.03:1 1.4:1 Quick Ratio 1:1 1:1 Cash Ratio 0.89:1 0.9:1 An analysis of the liquidity position of Bluescope Steel Limited also put the company at a favorable position when compared to the other competitor OneSteel Limited. Though the year 2007 is better than 2008 in terms of liquidity, the year 2008 position is not bad as despite the financial crisis the company’s current asset could still cover more than one of its current liabilities ratio. In 2008, however, a fall in all the ratios was due to the ongoing financial crisis and stricter working capital requirements financing applied by major banks. (Penman 2003, Moreno, 2006): However, it should be noted here that, One Steel corporation did better than Blue scope Steel Limited as it had a current ratio of 1.4:1 and 1.7:1 for the year 2008 and 2007 respectively as opposed to Blue scope that had 1.03 :1 and 1.4 for the same period. 1.3 Long-Term Solvency Ratios of BlueScopeSteel Limited Solvency Stock Measures The above analysis for Bluescope Steel shows that the company uses more debt than equity in financing it activities in 2008 as opposed to a lesser debt for the year 2007. From above, it can be observed that the company uses more DEBT than equity in financing its activities. This is evidenced by the debt-t-equity ratio of 1.14:1. There are therefore an effects of financial risk. That is, the risk that the firm might not meet its long-term debt obligations. In such a scenario, management is being watched in order not to diversify funds for empire building, and act out of the shareholders value creation concept. From above, it can be observed that the company uses more debt than equity in financing its activities. This is evidenced by the debt-to-equity ratio of 1.4. There are therefore no minimal effects of financial risk. That is, the risk that the firm might not meet its long-term debt obligations. 2.0Overview of OneSteel Limited in Australia OneSteel Limited, like Bluescope Steel Limited with its subsidiaries, is principally engaged in the mining and supply of steel making raw materials to steel mills operated in Australia and overseas (Company Report 2008). In addition to its principal activities, the company is also engaged in recycling of ferrous and non-ferrous scrap metal, and the manufacture and distribution of steel long product (Company Report 2008). The Company products range from structural, rail, rod, bar, wire and pipe and tube products (Report 2008). OneSteel also distributes sheet and coil, piping systems, plate and aluminium products (Report 2008).The parent company, OneSteel owns 50.3% of the ordinary shares of Steel & Tube Holdings Limited, a New Zealand steel distribution company (Report 2008). 2.1Financial Analysis of One Steel Ltd Bodie et al (2002) states that the international economic environment might affect a firm’s export prospects, the price competition it faces from competitors, or the profits it makes on investments abroad. Although economies are linked to each other in a global macro economy, there exist considerable differences in the economic performance across countries. (Bodie et al, 2002). It is therefore necessary for an investment or security analyst to consider these differences before providing investment advice. According to the IMF World Economic Outlook (2007), The global economy remains on track for continued robust growth in 2007, and 2007 although only at a moderate rate than in 2006. The 2007 outlook also reports that downside risk to the outlook seems less threatening that at the time of the September 2006 outlook. This is because oil price declines since last august and generally benigin global financial conditions have helped to limit spillovers from the corrections in the US housing market and to contain inflation pressures. (IMF World Economic Outlook, 2007). 2.2Profitability Ratios for One Steel Ltd Ratio Formula3 2008 2007 Profit margin 3.27% 4.8% Return on Capital Employed 8.4% 9.3% Return on Equity 7.1% 12.6% Return on Investment 3.3% 5.8 2006 2005 9.9% 9.5 7.6% 5.8% 15.3 10.1 8.9% 11.2% Again, it can be observed that, the year 2007 was quite profitable for One Steel corporation as compared to the year 2008 in all the ratios. For example, while the profit margin stood at 4.8% for 2007, this reduces by 1.5%point for 2008. However, the company doubled its investment activities for 2008. The global financial crisis too has affected the company. The profitability ratios show that the company is doing well and there have been reductions from 2008 in almost all the ratios. Compared with the ratios for 2007. However as compared to BlueScope, the company is not doing well since Bluescope Steel outperformed one steel corporation in almost all the ratios for both years. 2.3Liquidity Analysis of One Steel Limited Ratio Formula4 2008 2007 Current Ratio 1.44:1 1.7:1 Quick Ratio 1.2:1 1.4:1 Cash Ratio 1:1 1:1 According to world economic report, there was a vigorous expansion in the global economy in 2006, with a growth rate of 5.4% implying a ¼ percentage increase in growth rate than anticipated. Activity in the United States faced strong headwinds from a sharp downturn in the housing market, while corporate investment in plant and equipment has also softened. (IMF World Economic Outlook, 2007). This affected the performance of corporation for the year 2007. For example, in the year 2007, one steel corporation had 1.7$ of current assets to cover 1$ of current liabilities. The global financial crisis and a poor economic outlook reduces this figure to 1.4$ is to 1$ for the year 2008. However, One steel Corporation outperformed Bluescope Steel corporation for the liquidity components of the balance sheet. It is however, illogical for the company to be paying interest on loans and at the same time keeping idle cash. The company’s activity that is the balance sheets and equity and liability increases by more than 80% for the period 2007 when compared to 2008. According to global economic outlook report the domestic situation in Australia remains favourable to both domestic and foreign firms. The inflation and foreign exchange rate remains constant and quite favourable to business activities. (World Economic Outlook, 2008). 1.2 Long-Term Solvency Ratios of One Steel Limited Solvency Stock Measures From above, it can be observed that the company uses more DEBT than equity in financing its activities. This is evidenced by the debt-to-equity ratio of 1.13:1. There are therefore no minimal effects of financial risk. That is, the risk that the firm might not meet its long-term debt obligations. In such a scenario, management could easily diversify funds for empire building, and act out of the shareholders value creation concept. From above, it can be observed that the company uses more debt than equity in financing its activities. This is evidenced by the debt-to-equity ratio of 1.4. There is therefore some minimal effects of financial risk. That is, the risk that the firm might not meet its long-term debt obligations. 3.0Summary of Findings Ratios Bluescope Steel Limited OneSteel Limited Ratios 2008 2007 2008 2007 NET Profit Margin 5.86 8.6% 3.41 4.6 Operating Margin 8.97 18.2% 4.8 5.4 EBITD Margin 11.25 9.6% 9.61 11.1 Return on Average Assets 7.69 9.9% 4.68 5.8% Return on Average Equity 15.61 17.4 9.87 12.6 ROCE 11.1 12.6 8.4 9.3 ROE 15.3 18.2 7.1 12.6 ROI 7.2 9.4 3.3 5.8 Current Ratio 1.03:1 1.4:1 1.4:1 1.7:1 Quick Ratio 1:1 1:1 1.2:1 1.4:1 Cash Ratio 0.89:1 0.9:1 1:1 1:1 Debt to asset 53% 48.5% 1.13:1 1.16:1 Debt to equity 1.14:1 0.94:1 1.13:1 1.16:1 This study carried out an analysis of two companies in the steel industry in Australia. In the course of the study, the two companies were found to be very profitable. However, Bluescope steel Limited is more profitable than the other company. Thus we recommend that people currently holding stocks of One steel corporation should sell them. On the other hand, we find that Bluescope steel Limited is undervalued, thus we recommend a hold and buy decision for their stocks. References Akalu, M. M., (2001) Re-examining project appraisal and control: developing a focus on wealth creation. International Journal of Project Management. Vol.19, Issue7, Pp. 375-383 Atrill P and Elliot J., (2005). Financial Accounting for non specialists. 3th Edition. Prentice Hall: London Berlin, W.J., & Lexa, J. F., (2005).Financial modelling in medicine: Cash flow, basic metrics, the time value of money, discount rates, and internal rate of return. Journal of American college of Radiology. Vol.2 Issue3, Pp. 225-231 Brealey, A.R., & and Myers, C. S., (2005).Principles of corporate finance (9th ed.), McGraw-Hill, New York Damodaran, A., (2002). 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