Financial Analysis of One Steel Limited from 2007 to 2010 - Article Example

Financial Analysis of One Steel Limited from 2007 to 2010 Contents Cover Page…………………………………………………………………………….1 List of Figures………………………………………………………………………....3 Introduction…………………………………………………………………………...4 Horizontal Analysis……………………………………………………………………4 Vertical Analysis……………………………………………………………………….5 Ratio Analysis…………………………………………………………………………5 Trend Analysis………………………………………………………………………..12 Conclusion……………………………………………………………………………13 Attachment 1………………………………………………………………………...15 Attachment 2………………………………………………………………………...16 References…………………………………………………………………………….18 List of Figures Figure 1: Profitability Analysis Figure 2: Asset Efficiency Ratios (1) Figure 3: Asset Efficiency Ratios (2) Figure 4: Liquidity Ratios Figure 5: Capital Structure Ratios Figure 6: Market Performance Ratios Figure 7: Trend in Sales, EBIT and Profit after Tax for One Steel for the period 2007 to 2010 Figure 8: Trend Analysis Introduction One Steel Limited is a company based in Australia and performs in the mining and metal industry. The company came into existence in 2000 after separation from its parent company BHP and has been growing over time. The company employs over 11,000 employees and functions in over 300 locations. The report looks into the financial performance from 2007 to 2010. To gauge the performance a trend analysis, vertical analysis, horizontal analysis and ratio analysis is done to find the performance and highlight the areas that the organization needs to improve. Horizontal Analysis The horizontal analysis of One Steel Limited highlights growth and fall in certain areas. The horizontal analysis is done on a three columnar format where a comparison is made against the preceding years i.e. 2008 over 2007; 2009 over 2008 and 2010 over 2009. A look at the horizontal analysis helps to bring forward the growth rate witnessed by the company. The income statement and balance sheet of One Steel shows that in 2010 the sale has decreased by around 14% which has resulted in a decrease in profits and increase in inventories by 16% as the organization has perceived the sale to grow and produced accordingly but the reversed has happened. The overall result has been growth in assets and decrease in liabilities. The performance of 2009 shows that revenues have decreased by 3% as the economy was engulfed in recession. This resulted in the profits to fall by 6% resulting in high inventories. This was a situation which One Steel faced over the years and was due to the economic conditions which was making it difficult to ensure growth. The overall situation for One Steel was such that assets increased along with equity resulting in a decrease in liabilities. Vertical Analysis Vertical analysis helps to give more value to the financial figures as they are converted into meaningful figures so that the understanding improves and important findings can be recovered from it. The vertical analysis shows that sales grew the most by around 75% and also decreased showing widespread fluctuations. This resulted in other areas to follow suit and the Earning showed a growth on 50% in 2008 and fell in 2009 by 20%. The fluctuation in expenses show that it increased in 2009 resulting in depleting profits and brought about a change in the way the organization performed over the years. Ratio Analysis This is an important aspect of every organization as financial figures don’t reveal anything by themselves. The financial figures need to be evaluated based on different parameters so that important understanding can be developed and the areas that has to be worked upon realized (Henry, Martin & Lewis, 1991). Following is the ratio analysis of One Steel which will help to understand the performance over the years better Profitability Ratios Profitability ratios help to find the profits that have accrued to the shareholders. Looking at the profits from different angles helps to take important decision which ensures that the organization is able to generate larger profits in the future (Ryan, 1996). The following is the comparison of the performance of One Steel for 2007 to 2010 Figure 9: Profitability Analysis The profitability analysis shows a decreasing trend over the years as the gross profit has decreased since 2008 and is due to the global recession which has decreased the revenue generation. This is matched by a decrease in net profits which stands at 5.09% in 2007 to 3.42% in 2008 to 3.31% in 2009 and 4.2% in 2010. The dip in profit in comparison to gross profit is substantial as a 19.89% gross profit in 2010 transfers to 4.2% net profit in 2010 highlighting very high indirect expenses. This is matched by the changes witnessed in ROA and ROE which has both decreased from 2008 and slightly risen in 2010. The ROE is seen to be the highest in 2007 which stands at 13.27% and the lowest in 2009 where it stands at 5.53%. A similar result is showed for ROA where the highest return in seen in 2007 and stands at 6.13% in 2007 and lowest in 2009 which stands at 3.46%. Asset Efficiency Ratios Asset Efficiency ratios help to determine the manner in which an organization is able to use its assets and develop revenue from it. This forms an important aspect and help to find out the organization has more assets or is able to maintain a linkage between revenues and assets (Sanger, 2001). The following is the comparison of the performance of One Steel for 2007 to 2010 Figure 10: Asset Efficiency Ratios (1) The graph for debtor days and inventory days is shown below Figure 11: Asset Efficiency Ratios (2) The turnover ratio has slowly increased for One Steel as in 2007 the asset ratio stood at 1.21 times which kept on decreasing and reached 0.88 times in 2010. This highlights either decrease in sales or increase in assets stating that the assets have grown in comparison to sales and needs to be reduced. Even the inventory turnover has decreased which stood as 4.14 times in 2007 and went to 3.47 times in 2010 stating that the investment in obsolete stock has increased. This is substantiated by the days holding of inventory which has grown from around 87 days to 104 days resulting in more investment in stocks. The only positive seen in the turnover ratio is the manner in which debtors were maintained. The turnover for debtors has improved from 6.71 times in 2007 to 7.48 times stating that the outsiders are paid quickly which has transformed into better image and development of name for the organization. Liquidity Ratios This ratio helps to analyze the organizations paying ability in the short term by comparing the current assets and liabilities (Lyroudi & Lazaridis, 2000). This helps to find trends and develop strategies based on which the organization will be able to ensure better objectives in the future (Weinraub & Visscher, 1998). The following is the comparison of the performance of One Steel for 2007 to 2010 Figure 12: Liquidity Ratios The current ratio highlights that One Steel has more outside obligations that current assets stating that the short term funding is insufficient to meet the short term obligations (Eljelly, 2004). The current ratio stood at 1.7 in 2007, 1.45 in 2008, 1.92 in 2009 and 1.59 in 2010 highlighting that in every year the organization has more current liabilities. This has decreased the margin of safety and increased the likelihood of the organization defaulting in paying its debt. The situation gets worse in case of quick ratio as it stands at 0.63 in 2007, 0.85 in 2008, 0.74 in 2009 and 0.78 in 2010 highlighting huge stocks. The business is also having problems in generating cash from operations which is able to meet its liabilities increasing the likelihood of defaults. Having a sound current and quick ratio ensures that the chances of being unable to pay the short term debt reduces. This brings forward the fact that the business hasn’t recovered from the financial crisis of 2009 and needs ways to improve the liquidity conditions Capital Structure Ratios This ratio helps organization to find out the contribution of debt and equity in the financing of the organization. This ratio makes organization to take steps which will ensure that they are able to craft better strategies for the future (Lazaridis & Tryfonidis, 2006). The following is the comparison of the performance of One Steel for 2007 to 2010 Figure 13: Capital Structure Ratios The borrowing ratio shows that both the organization has a very low external debt and the organization mainly relies on equity financing especially in 2010 and 2009 where the debt to equity ratio is around 60% in 2009 and 57% in 2010 which stood at 113% in 2008 and 116% in 2007. This increased the dangers for One Steel in 2007 and 2008 as the assets were not equivaent the debt thereby increasing the risk on defauts and inability to pay back by selling off the assets. The debt and equity ratio shows similar finding as debt showing that in 2007 and 2008 the organization has a slightly more debt as it stood at 53% in 2007 and 2008 which was later controlled and reduced the danger for the business. The interest coverage ratio shows that it reached the maximum value in 2007 when it was 1.5 times and reduced to 0.7 time in 2008 and 2009 and improved slightly to 0.9 in 2010. As an arbitrary value the ratio should not be less than 3 and having a low ratio increases the likelihood of the organization defaulting in paying the interest and increases the risk associated with it. Market Performance Ratios This ratio helps prime importance and guides the investor to invest in the shares of the company. This ratio helps the investor to gauge the past performances and based on it identify trends which will help them to achieve their investment objectives (Salmi & Martikainen, 1994). The following is the comparison of the performance of One Steel for 2007 to 2010 Figure 14: Market Performance Ratios This ratio helps the investor in determining the mix between risk and return when the invest in the shares of the company. Having a sound investor ratio makes it easy for organization to receive investment as investors have a preference for the company. A strong investor ratio makes the investor feel safe about their investment as they know that the company provides the appropriate return the organization is looking for. The EPS shows a decrease as it stood at 36.34 in 2007 and reduced to 19.51 in 2010 which has decreased showing that the returns from investing has slowed down and the organization has not recovered from the global financial crisis of 2009. The organization has also declared dividend and stands at 0.4 in 2010 showing that the income is low which has resulted in little money being distributed as dividend. The price earning ratio also shows little future projects as it is low highlighting some concerns for the future. Trend Analysis Trend Analysis helps to understand the way the business has grown compared to the base year and highlights the area that needs to be worked on. The following is the trend analysis of One Steel for 2007 to 2010 Absolute Figures 2010 2009 2008 2007 Sales revenue 6204.6 7241.5 7434.3 4300.6 EBIT 334 223.1 359.1 284.1 Profit after tax 260.7 239.6 255.1 218.9 Trend analysis (in percentage) 2010 2009 2008 2007 Sales revenue 144.27 168.38 172.87 100 EBIT 117.56 78.53 126.4 100 Profit after tax 119.1 109.47 116.54 100 Figure 15: Trend in Sales, EBIT and Profit after Tax for One Steel for the period 2007 to 2010 The graph highlighting the trend looks as follows Figure 16: Trend Analysis The table shows that the sales revenue decreased significantly after it grew to 172% in 2008 to 168% in 2009 and further to 144% in 2010 presenting a negative trend and showing that the organization is still facing the problems faced during the global crisis of 2009. The BIT represents more clear picture and looks true as it grew to 126% in 2008 and 117% in 2010 but fell in 2009 to 78% showing a mix trend and the inability to control all expenses. It also shows that despite an increase in sales in 2009 the profit dipped showing that the company had to divert some profits to generate the required sales. Profit after tax shows similar results to EBIT there by showing a mix trend and the importance to improve in some areas so that a positive trend is reflected. Conclusion The horizontal, vertical and ratio and trend analysis helps to find the performance of One Steel over the period of 2007 to 2010 and brings forward different findings which will help the organization to further improve its performance and ensure better developments. The analysis shows that the organization is still facing the pressure of global crisis and needs to ensure an effective way to come out of it. Attachement 1 Ratios 2010 2009 2008 2007 Profitability Ratios         Return on Equity (ROE) 5.80% 5.53% 7.43% 13.27% Return on Assets (ROA) 3.69% 3.46% 3.48% 6.13% Gross Profit Margin 19.89% 21.92% 22.61% 6.06% Profit Margin 4.20% 3.31% 3.42% 5.09% Asset Efficiency Ratios         Asset Turnover Ratio 0.88 times 1.04 times 1.01 times 1.21 times Inventory Turnover (days) 103.75 days 78.95 days 81.26 days 86.96 days Debtors Turnover (days) 48.13 days 41.1 days 57.52 days 53.65 days Times Inventory Turnover 3.47 times 4.56 times 4.43 times 4.14 times Times Debtor Turnover 7.48 times 8.76 times 6.27 times 6.71 times Liquidity Ratios         Current Ratio 1.59 times 1.92 times 1.45 times 1.70 times Quick Asset Ratio 0.63 times 0.85 times 0.74 times 0.78 times Cash Flow Ratio 0.40 times 0.32 times 0.19 times 0.31 times Capital Structure Ratio         Debt To Equity Ratio 57.32% 59.89% 113.46% 116.33% Debt Ratio 36.43% 37.46% 53.15% 53.78% Equity Ratio 63.57% 62.54% 46.85% 46.22% Interest Coverage Ratio 93.09% 73.15% 74.38% 151.93% Market Performance Ratios         Earnings per Share 19.51 22.59 29.45 36.34 Dividend Payout Ratio 0.4 0.62 0.5 0.39 Price Earning Ratio 0.15 0.11 0.25 0.17 Attachement 2 Ratios Formula 2010 2009 2008 2007 Profitability Ratios           Return on Equity (ROE) Net Income / Equity * 100 260.7/4492.7 * 100 = 5.80% 239.6/4336.3 * 100 = 5.53% 255.1/3432.9 * 100 = 7.43% 218.9/1650* 100 = 13.27% Return on Assets (ROA) Net Income / Total Assets * 100 260.7/7067.7 * 100 = 3.69% 239.6/6933.1 * 100 = 3.46% 255.1/7327.8 * 100 = 3.48% 218.9/3569.5 * 100 = 6.13% Gross Profit Margin Gross Profit / Sales * 100 1234/6204.6 * 100 = 19.89% 1587.5/7241.5 * 100 = 21.92% 1681.2/7434.3 * 100 = 22.61% 260.7/4300.6 * 100 = 6.06% Profit Margin Net Profit / Sales * 100 260.7/6204.6 * 100 = 4.20% 239.6/7241.5 * 100 = 3.31% 255.1/7434.3 * 100 = 3.42% 218.9/4300.6 * 100 = 5.09% Asset Efficiency Ratios           Asset Turnover Ratio Sales Revenue / Avg Total Assets 6204.6/7067.7 = 0.88 times 7241.5/6933.1 = 1.04 times 7434.3/7327.8 = 1.01 times 4300.6/3569.5 = 1.21 times Inventory Turnover (days) 360 / Inventory Turnover Ratio 360/ 3.47 = 103.75 days 360/4.56 = 78.95 days 360/4.43 = 81.26 days 360/4.14 = 86.96days Debtors Turnover (days) 360 / Debtors Turnover Ratio 360/7.48 = 48.13 days 360/8.76 = 41.1 days 360/6.27 = 57.42 days 360/6.71 = 53.65 days Times Inventory Turnover Cost of sales / Avg Inventory 4970.6/1433 = 3.47 times 5654/1239.9 = 4.56 times 5753.1/1298.9 = 4.43 times 3463.4/836.3 = 4.14 times Times Debtor Turnover Sales Revenue / Average Accounts Receivable 6204.6/829.3 = 7.48 times 7241.5/827.1 = 8.76 times 7434.3/1185.3 = 6.27 times 4300.6/640.9 = 6.71 times Liquidity Ratios           Current Ratio Current Assets / Current Liabilities 2364.3/1488.6 = 1.59 times 2229.1/1161.4 = 1.92 days 2652.4/1832.3 = 1.45 times 1545.3/907.9 = 1.70 times Quick Asset Ratio (Current Assets – Inventories) / Current Liabilities 2364.3 - 1433/1488.6 = 0.63 times 2229.1 - 1239.9/1161.4 = 0.85 times 2652.4 - 1298.9/1832.3 = 0.74 times 1545.3 - 836.3/907.9 = 0.78 times Cash Flow Ratio Cash flow from Operations / Current Liabilities 602.1/1488.6 = 0.40 times 368/1161.4 = 0.32 times 350.8/1832.3 = 0.19 times 276.5/907.9 = 0.31 times Capital Structure Ratio           Debt To Equity Ratio Total Liabilities / Total Equity * 100 2575/4492.7 * 100 = 57.32% 2596.8/4336.3 * 100 = 59.89% 3894.9/3432.9 * 100 = 113.46 % 1919.5/1650* 100 = 116.33% Debt Ratio Total Liabilities / Total Assets * 100 2575/7067.7 * 100 = 36.43% 2596.8/6933.1 * 100 = 37.46% 3894.9/7327.8 * 100 = 53.15% 1919.5/3569.5* 100 = 53.78% Equity Ratio Total Equity / Total Assets * 100 4492.7/7067.7 * 100 = 63.57% 4336.3/6933.1 * 100 = 62.54% 3432.9/7327.8 * 100 = 46.85% 1650/3569.5* 100 = 46.22% Interest Coverage Ratio EBIT / Net Finance Expenses * 100 334/358.8 * 100 = 93.09% 223.1/305 * 100 = 73.15% 359.1/482.8 * 100 = 74.38% 284.1/187 * 100 = 151.93% Market Performance Ratios           Earnings per Share Net Income / Outstanding shares 19.51 (given) 22.59 (given) 29.45 (given) 36.34 (given) Dividend Payout Ratio Dividend / Net Income 104.1/260.7 = 0.4 147.7/239.6 = 0.62 126.7/255.1 = 0.5 85.5/218.9 = 0.39 Price Earning Ratio Market Value per Share / EPS 2.91/19.51 = 0.15 2.48/22.59 = 0.11 7.3/29.45 = 0.25 6.26/36.34 *100 = 0.17 References Henry., Martin, & lewis, P. 1991. 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