Leighton Holdings: An Australian Multinational Success - Case Study Example

ANALYSING LEIGHTON HOLDINGS: AN AUSTRALIAN MULTINATIONAL SUCCESS By (Students’ Name) Professor’s Name Course Name + City Date of Submission Analyzing Leighton Holdings: An Australian Multinational Success Corporate Background Leighton Holdings (LEI) is a company that provides construction, development, contract mining, operation and maintenance services to various markets that include infrastructure and property in over 20 countries. These countries are in Australia, Asia, South Africa and Middle East. Lei operate independent and diverse companies that it owns. These companies include the Leighton contractors, John Holland, Leighton Asia, Thiess, Leighton properties and India and offshore (LEI, 2012). Strategy Analysis The business model of Leighton Holdings (LEI) has a focus on diversification. It undertakes contract mining, construction, infrastructural maintenance services and property and resource markets in Australia, Asia, South Africa and Middle East (LEI, 2012). The senior management has concentrated on risk assessment, management and project delivery on construction projects and large scale infrastructure. To minimize on all problems that might arise to the company, the company changed its strategic approach contracts and major tenders. LEI now focuses more on the accuracy of tenders , the management of risks, satisfactory time allowance, identification of risks, delivering projects according to the exact requirements of the client, adequate pricing risk and creating investor confidence. By lowering the company’s risk profile, the company has won most of the investor’s confidence and trust. LEI reported net profit after tax of $450.1 million on its financial results for the year ending on 31 of December 2012 (LEI, 2012). The ordinary activities generated $18.95 billion in revenues. This was a 3% rise as compared to the year ended 2011. The diluted earnings per share were 133.3 cents. The previous year was 101.0 cents. The net operating cash flows were 1.21 billion and the full year dividends were 80 cents as compared to 60 cents for the year 2011(LEI, 2012). Global Peer Comparison % EPS GROWTH % P/E % DIVIDEND YIELD Company Market capitalization 2011 A 2012 F 2011A 2012F 2011A 2011F Cardno CDD $915M -0.055 0.1074 11.8847 12.5395 0.0567 0.0575 Clough(CLO) $1138 0.4623 - 8.9220 - 0.0000 - Leighton (LEI) $6660M 0.3175 0.2388 14.8385 11.9777 0.0405 0.0490 Monadelphous (MND) $1744M 0.1979 -0.1495 11.2460 13.2230 0.0714 0.0657 UGL (UGL) $1352 -0.4535 0.2485 14.6929 11.7528 0.0480 0.0564 Profitability Ratios These ratios explain on how the organizational performance of a firm is. Return on Investment This ratio measures the efficiency of an investment. An investment with a positive higher ROI should be accepted (Dake, 1972). Return on Investment = net profit after interest and tax / Total assets (Bull, 2008). 2012 2011 450.1/11206.2 = 0.04 285/9900.4 = 0.03 This ratio is positive. This is an indicator that the investment is a worthy venture and efficient enough to yield profit to the company. Therefore the organization will be able to get back the capital invested through the profits generated as a result of the investment efficiency. There is also an improvement of the ratio from 0.03 in the year 2011 to 0.04 in the year 2012 (Katarina, Ivana and Nikolina, 2012). Return on Equity This ratio is used to measure the amount of the net income that is returned as a percentage of the shareholders equity. It shows how profitable a company is. It is calculated by the formula; ROE = net income after tax / shareholders equity (Bull, 2008). 2012 2011 450.1/2916.9 = 0.15 285/2766.9 = 0.10 This ratio reveals that the Leighton holdings are making profits with the amount of money that the shareholders have invested. The company has improved this ratio from 0.10 in the year 2011 to 0.15 in the year 2012. Asset Utilization Ratios Fixed Assets Turnover This ratio measures the productivity and the utilization of the plant and equipment. It is calculated by the formula; sales / fixed Assets (Bull, 2008). 2012 2011 18951.7/473.4=40 18372.2/420.4= 44 A higher ratio means that the company is using its fixed assets and the property plant and equipment optimally for the benefit of the firm. This ratio means that the company is utilizing its fixed assets properly and efficiently to make the organization profitable. From the calculation there seems to be a decrease in the asset utilization ratio from 44 in the year 2011 to 40 in the year 2012. This is attributed to increased property plant and equipment without a proportionate increase in the amount of sales in 2012. However, with more production using the acquired fixed assets, the ratio is expected to go up. Total Assets Turnover This ratio measure whether the company is generating an amount of business that is sufficient enough and equal to the size of the assets that have been invested. A larger ratio is acceptable as this shows that the assets are generating a higher volume of business. Total Assets Turnover = sales / Total assets (Bull, 2008). 2012 2011 18951.7/11206.2 = 1.69 18372.2 / 9900.4 = 1.86 There is a decrease in total assets turnover in the year 2012 as compared to the year 2011. This is attributed to acquisition of more assets in the year 2012 that are yet to be put into use by the company. It means that there has been no proportionate increase in the sales revenue as compared to the increase in the value of the fixed assets that have been employed. Liquidity Ratios Current Ratio This ratio measures the extent to the short term obligations of the firm can be met. It is calculated by dividing current assets by current liabilities. = current assets/current liabilities a large ratio is preferred (Bull, 2008). 2012 2011 6520.2 /5794.3= 14.18 4543.3/5030.2 = 0.90 From the results above, it is evident that the company continues to improve the current ratio. The ratio has increased from 0.9 in the year 2011 to 14.8 in the year 2012. This means that the short term obligations of the firm can easily be met without problems hence making good the obligations of the firm as and when they fall due in the short term. Quick Ratio This ratio is a measure of an extent to which without the sale of inventories that the firm can meet its short term obligations as and when they fall due. It is calculated by dividing (current assets minus inventory) by current liabilities. = current assets less inventory/current liabilities (Bull, 2008). A large ratio is preferred. 2012 2011 (6520.2-459.5) / 5794.3 = 1.05 4062/5060.2 = 0.80 There is an improvement in this ratio from 0.80 of the year 2011 to 1.05 of the year 2012. This means that as short term obligations falls due, Leighton holdings will easily make good this obligations even without having to sell its inventory. Debt Utilization Ratios This ratio determines the extent to which the company’s earnings can go down without hampering the ability of the firm to meet its interest costs annually (Gupta and Hueffner, 1972). Time Interest Earned Ratio Time interest earned ratio determines the number of times the expenses of interest are covered by the income before interest and tax (net operating income) of the company. Time interest earned ratio is a long term solvency ratio showing the company’s ability to make good its interest charges as and when they fall due. It is calculated by dividing the total income before charging interest and tax by the interest expense (Ednlister, 1972). = income before charging interest and tax / interest expense (Bull, 2008). A large ratio shows a better position of the firm, therefore a large ratio is preferred. 2012 2011 563.1 / 162 = 3.48 340 / 200.2 = 1.7 There is an improvement in the time interest earned ratio from 1.7 of the year 2011 to 3.48 in the year 2012. This means that the company continues to improve in the number of times that it can cover its interest expenses as and when they fall due (Altman, 1968). Fixed Charge Coverage Ratio This ratio shows the ability of a company to service its fixed financing expenses like leases and interests. It is calculated by the formula; (EBIT + lease expenses) / Interest + (lease expenses) (Bull, 2008). A large ratio is preferred. 2012 2011 (561 - 0) / 162 + 0 =561 / 162 = 3.5 (340-0) / 200.2 + 0 =1.6 The fixed charge coverage ratio in the year 2011 was 1.6. The ratio has increased to 3.5 in the year 2012. This means that the company’s ability to service its fixed financing expenses like leases and interests can be made easily even if the earnings of the company goes down. Currency Management and Performance by LEI From the ratios calculated, Leighton holdings have shown performance improvement from the previous year 2011. The profitability ratios show a good financial performance of the firm. The ROI increased by 33.3 % in 2012 and ROE increased by 50% in the same year. The asset utilization ratios declined in the year 2012. This is due to the acquisition of Property, plant and equipment towards the end of the year. Therefore, the ratio is expected to increase as it will be put into use in the future. The quick ratios shows the firm continuing to be in a position to make good its short term liabilities as and when they fall due. This improved in the year 2012 by 31.2 %. Finally the company shows a good ability to make good its interest expense as and when they fall due even if the earnings of a company goes down. This means that Leighton Holdings is a viable company for investments. Reference List Altman, E. 1968, Financial ratios, discriminant analysis and the prediction of corporate bankruptcy, Journal of Finance, vol. 23, issue 4: pp.589-609 Bull, R.2008. Financial ratios: how to use financial ratios to maximize value and success for your business. Oxford, CIMA Dake, J, L. (1972), Comment: An empirical test of financial ratio analysis, Journal of Financial & Quantitative Analysis, vol. 7, issue 2: p.1495-1497 Ednlister, R, O. (1972). An empirical test of financial ratio analysis for small business failure prediction, Journal of Financial & Quantitative Analysis, vol.7, issue, 2:pp.1477-1493 Graham, J, R. and Campbell R. H. (2001), “The theory and practice of corporate finance: evidence from the field,” Journal of Financial Economics, vol.60:pp.187-243 Gupta, M, C and Hueffner, R, J. (1972), A cluster analysis study of financial ratios and industry characteristics, Journal of Accounting Research, vol.10, issue1:pp. 77-95 Kootanaee, A, J. (2012), A comparison of performance measures for finding the Best measure of business entity performance. Journal of Finance and Investment Analysis, vol.1, issue 4:pp. 27-35 Katarina, Z, Ivana, M and Nikolina, D.(2012), Financial ratios as an evaluation instrument of business quality in small and medium-sized enterprises, International Journal of Management Cases, vol.14, issue 4:pp.373-385 Ketz, J, E. (1978).The effect of general price-level adjustments on the predictive ability of financial ratios, Journal of Accounting Research, vol.16:pp. 273-284 LEI. (2012). 2012 annual report, Retrieved from http://investing.businessweek.com/research/stocks/financials/financials.asp?ticker=LEI:AU Merridee, B. (2012), Industry identification through ratio analysis. Accounting Perspectives, vol.11, issue 4:pp. 315-322 Read More