Performance of BlueScope Steel Ltd and GPT Group - Case Study Example

Assignment Name: Course Name: Unit Name: Submission Deadline: 1.0 Introduction In this report I will examine the performance of two of the top construction companies; BlueScope Steel Ltd and GPT Group. The selected ratio will be calculated and comparison between these two companies will be made based on these ratios. This will provide an understanding of the company’s financial risk, profitability, cash flow and earnings over the past 5 years using the company’s financial statements (MorningStar, 2016b). By comparing these two companies this report hopes to provide a transparent and balanced overview of the aforementioned ratios. The ratio benchmarking and analysis will give us an insight into whether or not to acquire part of these companies as reliabile and profitable investment in the future. 2.0 Total Operating Revenues 2.1 Net Profit Net profit is the amount that is left over after the operating expenses have been substracted from the gross revenue. Net profit or loss is used to provide important information about a company viability (AAP, 2011). A company that is generating profit has a business model that works, but a company that operates at a loss needs to take a closer look at its spending and revenue befor its runs out of funds. Net Profit (in Millions) BlueScope Steel Ltd GPT Group 2016 -1,044 595 2015 -84 572 2014 -82 645 2013 136 868 2012 354 1,153 In the past 5 years, GPT Group its net profit has increased and this has been driven by the rise in commercial property values and improving comparable income growth, especially from its office property exposure (AAP, 2011). In addition, in 2016, the group cut 50 employees and this enabled the company to reduce its cost of funding; thus the company was able to hold more cash as it prepares for higher volatility (AAP, 2011). In addition, the GPT Group steady net profit has been boosted by portfolio occupancy, strong capital postion, and fixed rental increases. BlueScope made a loss in three consecutive years i.e. from 2011 to 2013, but the company was able to bounce back with a profit in 2015 and 2016 (MorningStar, 2016). The reasons for this loss is due to intense competition and margin pressure as steel price fall (MorningStar, 2016b). In addition, the company has been negatively affected from the recently implemented carbon tax, despite government handout (AAP, 2011). Further weak construction market have contributed to soft demand of steel products, and it does not appear the situation will improve in near future. 2.2 Earnings Per Share – EPS Earning per share is a ratio is used to measure the amount of net income earned per share of stock (MorningStar, 2016b). This indicator is used to show dollars of net income earned by a company in a period per share of its stock. Earnings per share = (Net Profit after Taxes – Preference Dividends)/Number of Equity Shares BlueScope Steel Ltd GPT Group 2016 0.6 0.64 2015 0.23 0.48 2014 -0.14 0.38 2013 -0.15 0.32 2012 -2.35 0.33 GTP Group earning per share is considered to be more excellent compared to BlueScope which in three financial years its earning per share have been negative (AAP, 2011). Bluescope earning per share from 2012 to 2013 shows excellent prospectus but from 2014 to 2016 its earning per share has recorded negative figures which shows a drastic change in the business operations or it may be due to the exogenous factors such as low demand of steel products especially in Australia and carbon tax which has ultimately affected the company’s operations (MorningStar, 2016). 2.3 Earning Before Interest and Taxes (EBIT) EBIT=Profit (loss)* + Finance costs + Income tax expense BlueScope Steel Ltd GPT Group 2016 5.65 155.01 2015 2.61 120.84 2014 0.48 96.89 2013 -0.37 81.60 2012 -11.55 88.46 EBIT is used to measure the profit a company generates from its operations (AAP, 2011). It mainly focus on the company’s ability to generate earnings from its business operations, but ignores variblaes such as capital structure and tax burden (Deacon, 1961). BlueScope Steel Ltd over the 5 years period has experienced a declined earnings year-on-on-year and this is due to increased operating costs and decreased sales of steel (MorningStar, 2016). This decline in EBIT would have been worse except the company showed improvement in it revenue; on the other hand, GPT Group has a stable EBIT (MorningStar, 2016b) 2.4 Equity Equity BlueScope Steel Ltd GPT Group 2016 8.07 14.58 2015 3.27 12.01 2014 -2.03 9.46 2013 -2.18 8.41 2012 -26.13 8.33 Equity is used to measure the profitability of the company’s investment in total assets. GPT Group remains the industry leader in this ration in the five year period as compared to BlueScope Steel Ltd (Deacon, 1961). This is because GPT Group has not increase their assets through debt financing as much as BluScope Steel Lted (MorningStar, 2016b). The industry average over the past 5 years has remained near 10 per cent. Bluescope Steel Ltd has been under this percentage over the last five years GTP Group is consistently in the positive side, this is a good sign when you compare to BlueScope in the past five years as they feel under 9 per cent (MorningStar, 2016). This shows that GPT Group is a strong company in the industry 2.4 Debt Debt BlueScope Steel Ltd GPT Group 2016 1.3 billion 3 billion 2015 793.7 m 2.95 billion 2014 728.2 m 2.72 bilion 2013 662.1 m 2.13 billion 2012 598.4 m 2.14 billion Bluescope steel Ltd in three consecutive years ( from 2014 to 2016) has been making losses and this has forced the company to borrow in order to pay it debts. For GPT Group the company debt exceed the revenue generated in the five year period. In the long run these two companies cannot be able to sustain themselves since there debt exceed the revenue. Therefore, these two companies should cut down o their borrowing. 2.5 D/E Ratio D/E Ratio=Total debt/total equity BlueScope Steel Ltd GPT Group 2016 0.24 0.36 2015 0.16 0.39 2014 0.17 0.39 2013 0.16 0.31 2012 0.12 0.28 D/E ratio is used to measure the ability of a company to meet its financial obligations when they fall due. A company can be financed by primarily equity, primarily debt, or combination of both. The two companies have low debt ration ( less than 0.5) then these two companies can be considered to be “lowly leveraged” This means, most of assets in these two companies are fully owned (i.e.they are wholly financed through the company’s own equity and not through debt) (MorningStar, 2016b). At the moment the two companies low debt ratio indicates that the two companies are not in danger if their creditors were to suddenly insist on the repayment of their loans. 2.6 ROC ROC BlueScope Steel Ltd GPT Group 2016 8.03 11.5 2015 3.92 9.78 2014 -0.78 8.02 2013 -0.64 7.38 2012 -18.97 7.53 This ratio looks at the company’s overall profitability. GPT Group has had a healty increase in ROC; from 7.53 in 2012 to a peak of 11.5 per centage over the 5 year period (MorningStar, 2016). This increase could be due to the company’s strong performances and their share price increase (Woolridge and Gray, 2006). In BlueScope Steel ltd, the company has also experienced a significant growth in ROC and this is due to weak sales in steel products ROC is steadily above industries average, only in 2013 it fell under industries average by 10.7 per cent, where the overall industry average was 11.76 per cent (MorningStar, 2016b). 2.7 ROE ROE BlueScope Steel Ltd GPT Group 2016 8.07 14.58 2015 3.27 12.01 2014 -2.03 9.46 2013 -2.18 8.41 2012 -26.13 8.33 Return on equity (ROE) is a measure of business efficiency as well as profit. A rising return on equity will suggests that the business in increasing its ability to generate more profits without injecting more capital (MorningStar, 2016b). ROE also indicates how well the business’s is using the shareholders’ capital. In other words, the higher return on equity the better for the company (Kenneth, 2003); but a falling return on equity will present a problem to the shareholders. Bluescope realized a reduction in return on equity while GPT realized an increased in return on equity. Bluescope reduced ROE was contributed to reduced earnings on the steel sales. In addition, the reduced share buybacks have also artificially affected Bluescope’s ROE (MorningStar, 2016b). This mean Bluescope is able to generate more profit with shareholders money as compared to GPT. 2.9 Beta 2.8 Beta (Average) BlueScope Steel Ltd GPT Group 2012-2015 1.46 1.89 Beta is used to measure systematic risk or volatility of a portfolio or a security in coparison to the market as a whole. Bluescope steel ltd beta has been low in relation to the benchmark (Kenneth, 2003). While GTP group beta has been averagely high, this simple means GTP group stocks has be stable throughout the five year period as compared to Bluescope steel Lted stock. Conclusion We conclude that Both Bluescope and GTP Group will continue to grow based on the industry and company analysis. From the financial analysis, Bluescope performance fluctuated but improved in 2016 and was better than the market, its industry and peers. Based on our valuation, we estimate Bluescope value So we recommend the investors to hold their position in both companies. References AAP (August 26th, 2011). GPT H1 profit jumps 67 per cent. Finance Nine. Retrived from https://finance.nine.com.au/2016/10/27/16/07/gpt-h1-profit-jumps-67-per-cent Deacon, A.R.(1961). Simulation and Gaming a Symposium, New York Kenneth R. P. (2003). Commercial Loan Analysis: principles and techniques for credit analysts and lenders. London: John Wiley & Sons Woolridge, J. R and Gray, G. (2006). Applied Principles of Finance. London: John Wiley & Sons MorningStar (2016). Bluescope Ltd. Retrieved from http://financials.morningstar.com/ratios/r.html?t=bsl®ion=aus MorningStar (2016b). GTP Group. Retrieved from http://financials.morningstar.com/ratios/r.html?t=GPTGF Read More