The paper 'Fortescue Metal Group Ltd Financial Analysis " is a good example of a finance and accounting case study. Fortescue Metal Group Ltd (FMG) is a Western Australian based company which was founded in 2003 and operates in iron production and exploration. The companies headquarter is located in East Perth, Australia. Fortescue Metals Group Limited extensively produces and sells iron ore to China and South East Asia. The company holds various tenements reserves of over 2.34Bt of hematite covering the Chichester and Solomon hubs situated throughout the Pilbara region of Western Australia.
The company primarily vested in a joint venture with Hunam Valin Iron and steel group to increase the extension for its Glacial valley magnetite deposits. Profitability Ratios Profitability ratios are financial ratios used in determining the firm’ s effectiveness in generating earnings from the major investments over the financial periods. When a higher value is reported by the company, this indicates that the business advancing well in its operations over the last financial years. The profitability ratios are critically discussed under net profit margin, gross profit margin, return on equity and return on assets. Net profit margin ratio Net profit margin is a profitability ratio that describes the company’ s efficacy in generating earnings in relation to sales.
Profit margin ratio shows the company’ s financial strength in meeting operational expenses and generating surplus from sales of both goods and services. It is computed by dividing the company’ s net profits after tax by sales revenue reported in a financial year. When the company’ s net profit margin is higher, it indicates that the company is capably converting its sales into actual earnings. Net profit margin = Fortescue Metal Group Ltd profit margin ratio depicts increasing profitability from 17.99% in fiscal 2010, 24.53% in 2011, 33.70% in the financial year 2012 and a slight decrease to 30.37% in the 2013 financial year.
FMG Company reveals a positive contribution in the four financial years ending 2013 thus indicating that the company revenue gathered the operating expenses. According to the company’ s sensibility of profitability index depicted by a sequential increase the company’ s sales revenue in the four financial years, the company reported a slight decrease depicts that the company operating expenses was more that it lessens the generated profits.
However, the pragmatic net profit margin accentuates that the Fortescue Metal Group Company is profitable enough in meeting operating expenses and generates earnings generated attributable to investors at the end of financial years. Return on Equity Return on Equity is a profitability measure that depicts the number of returns as a percentage of the shareholder's equity contribution to the company. Return on Equity ratio assists the company shareholders to determine their returns on the equity invested in the company. The company return on equity ratio is the most valuable profitability and financial matrix that describes the viability of shareholders’ investment.
When the company’ s return on equity is higher this reveals the company’ s good financial performance. As depicted from the table, Fortescue Metal Group shows an impressive increasing percentage ratio for every dollar of equity invested. In the financial year 2010, the company’ s return on equity was 39.22% where it increases in the subsequent year 2011 to 54.84% in and 60.15% in 2012. In the year 2013 Fortescue Metal Group Ltd return on shareholders reflects a decrease to 46.63% which describes that the company’ s management has relaxed in enhancing greater earnings on the equity invested.
The company show’ s a sensible trend of respective increase in earnings contributed by an increase in equity invested. From the table 2010, 2011 and 2012 income reveals a corresponding increase as the investment increases but in the year 2013, the company’ s equity increase from $3,762,000 to $5,289,000 and unnerving $2,263,000 to $2,466,000. This, therefore, shows that the company’ s return equity invested fetches optimistic income thus viable for investment.
Altman, E. I. “Financial ratios, discriminant analysis and the prediction of corporate bankruptcy.” The journal of finance (2008): 589-609.
Ball, R. “International Financial Reporting Standards (IFRS): pros and cons for investors. .” Accounting and business research. (2006): 5-27.
Benston, G. J. “Accounting and corporate accountability. Accounting, Organizations and Society .” 2008. 87-105.
Chordia, T., Roll, R., & Subrahmanyam, A. “Liquidity and market efficiency.” Journal of Financial Economics (2008): 249-268.
Depree Jr, C. M., & Grant, C. T. “Earnings management and ethical decision making: Choices in accounting for security investments.” Issues in Accounting Education. 2009. 613-640.
Penman, S. H., & Penman, S. H. (). Financial statement analysis and security valuation. 2007.