The paper "Applied Finance - Coates Hire Limited" is an outstanding example of a business assignment. Coates’ revenue growth is dependent on demand for equipment rental services, and its ability to supply this demand. In turn, demand is dependent on the level of activity in construction, mining, and oil drilling; and construction, in particular, is sensitive to the overall state of the Australian economy and perceptions of future trends. (While Coates does have some presence outside Australia, the vast majority of its business is domestic. ) Coates’ ability to supply the increasing demand for its services will depend on its ability to acquire additional equipment, either by purchasing new equipment or by acquiring other companies with an appropriate stock of equipment. The high growth forecasts for 2007 and 2008 assume that overall economic activity in Australia will increase, or at least remain stable; and that Coates will be able to expand its equipment-rental fleet in order to improve its market share.
If the economy suffers any unexpected reversals (which could reduce the level of construction activity), or if Coates is unable to increase its fleet size fast enough, these growth forecasts will not be met. [I’ M NOT REALLY SURE ABOUT THIS ONE – I DIDN’ T SEE A CUSTOMER-INDUSTRY BREAKDOWN IN THE ANNUAL REPORT! ] Sustained declines in commodity prices would reduce activity in the mining and oil sectors – and thus reduce Coates’ revenues from these sectors.
Given that Coates derives most of its revenue from construction rather than resource extraction, the effect of such a decline on Coates’ revenues should be only marginal. While oil prices have declined since mid-2006, they remain at relatively high levels and are unlikely to decline further – at least not for long.
As a result, drilling activity should remain at a stable or increasing level. Since the oil industry represents only a small proportion of Coates’ overall business [CHECK THIS! ], Coates’ overall revenue shouldn’ t be affected much one way or another – barring a major interruption in oil supply or a sustained and severe increase in oil prices. The main reason earnings per share grew at a lower rate than after-tax profit from 2005 to 2006 is that a larger number of shares were outstanding – 249 million compared to 208 million.