Lynas Corporation - Financial Analysis, Profitability, Efficiency, and Financial Stability Ratios - Example

Table of Contents Introduction 2 Compnay Background 2 Financial Analysis 3 Profitability Ratios 3 Efficiency Ratios 7 Financial Stability Ratios 10 Recommendations 14 Conclusion 15 References 16 Appendix 18 Introduction Financial analysis holds an important aspect for all business as it helps them to understand the manner in which the company is performing thereby helping to evaluate the future growth opportunities of the company. This helps the user of financial information to gather valuable information regarding the risk and return based on which the business can look towards garnering their investment appetite. This report thereby looks to present the financial analysis of Lynas Corporation & Greenland Minerals & Energy which looks to concentrate on the profitability ratio, efficiency ratios, asset utilization and debt situation. Further, it also helps to understand the manner in which the operational and financial issues are dealt with and thereby helps to identify the potential company for the investors to invest in. Company Background Lynas Corporation is a company based in Australia and deals is exploration business from the earth. The main activity of the company is exploration of minerals from the earth surface (Lynas, 2012). The company while doing so ensures that the environmental standards are maintained and looks towards finding minerals and ores from the surface of the earth which is rarely available. Greenland Minerals & Energy is a company based in Greenland and looks towards exploring minerals and ores while keeping the environmental standards intact (Greenland, 2012). The company while doing so ensures that the environmental standards are maintained and looks towards finding minerals and ores from the surface of the earth which is rarely available like uranium, heavy metals and zinc which has helped the company to create a niche market for itself Financial Analysis Financial analysis holds an important aspect for business and investors as it helps to identify the direction in which the business is performing. This helps to make future decisions and decide the course of action that the business is looking to achieve so that the business is able to achieve efficiency (Finance, 2011). Decisions based on it are sounder and helps to reduce the risk for the all which has thereby gained efficiency so that the business is able to ensure maximum gain over a period of time. Profitability Ratios This ratio helps the investors and users of financial statement to understand the mechanism through which the business is able to generate profits so that they are able to sustain their daily operations. This ratio is of prime importance and helps to understand the manner in which the business will be able to perform in the long run. The ratios are as Return on Assets (ROA): This ratio helps in understanding the manner in which the business is able to generate revenues and profits from the use of its assets. This helps to understand the optimum mix of assets that the business requires to maintain so that they are able to generate sufficient profits for the long term performance of the business (Eljelly, 2004). The ratio are as The ratio highlights that both Lynas Corporation & Greenland Minerals & Energy have performed poorly both in 2010 and 2011 due to which they have a negative return on assets. This is primarily due to the fact that the business has incurred losses in both the year. Still, comparing the performance of both Lynas Corporation & Greenland Minerals & Energy based on the negative profits it is seen that Lynas Corporation is better placed than Greenland Minerals & Energy as Greenland Minerals & Energy has incurred huge losses in 2011. This is an area which both the company needs to look into and look towards generating positive returns so that the investors are provided the correct return for the risk they have undertaken. Net Profit Margin: This ratio helps the investors and the users of financial information to understand the manner in which the business is able to generate profits from its normal operations. This ratio also helps the investors whether the business is able to ensure that they are able to use its resources effectively and generate adequate profits for the daily operations of the business. Following is the ratios The ratio highlights that both Lynas Corporation & Greenland Minerals & Energy have performed poorly both in 2010 and 2011 which has resulted in a negative profit for the business. This shows that the business is unable to ensure that they are able to use its resources in the most effective manner. Still, comparing the performance of both Lynas Corporation & Greenland Minerals & Energy based on the negative profits it is seen that Lynas Corporation is better placed than Greenland Minerals & Energy as Greenland Minerals & Energy has incurred huge losses in 2011. Both the companies need to look towards ensuring that they are able to generate profits as it will lead towards dilution of the image and will make it difficult for the companies to sustain their business over a period of time. Return on Equity (ROE): This ratio helps to understand the manner in which the business is able to generate revenues for its stockholders. This ratio helps to understand the return that the business is able to ensure that the business is able to generate adequate return over its equity so that the shareholders are provided adequate return for the risk they have undertaken. The ratio are The Return on Equity highlights that both Lynas Corporation & Greenland Minerals & Energy have performed poorly both in 2010 and 2011 which has resulted in a negative profit for the business. This shows that the business is unable to provide adequate return for the risk that the shareholders have taken and has misused their resources. Still, comparing the performance of both Lynas Corporation & Greenland Minerals & Energy based on the negative profits it is seen that Lynas Corporation is better placed than Greenland Minerals & Energy as Greenland Minerals & Energy has incurred huge losses in 2011. This makes it important that the management takes some tough decisions which help to improve the profit so that the shareholders are provided adequate return over their investments. Efficiency Ratios This ratio improves the understanding regarding the manner in which the assets of the business are being used. This helps to understand whether the business is able to ensure that they have the required infrastructure and assets to generate the profits they are looking for and also helps to check whether the business is over burdened with assets or not. The analysis is as Payable Turnover Ratio: This ratio helps to understand the time span after which the business clears its dues. This ratio is of prime importance to lenders as it helps to understand the mechanism through which the debt in the market is cleared by the companies. This ratio thereby helps the lenders to understand the time period for which their money will be blocked in the company and also helps to understand their ability to pay the same (Padachi, 2006). The ratio are The ratio shows that both Lynas Corporation & Greenland Minerals & Energy looks towards paying off their short term liabilities within a year. This is a good sign and shows that the management looks towards ensuring that the lenders are returned their money on time. A comparison of the performance of Lynas Corporation & Greenland Minerals & Energy shows that Lynas Corporation has a better ratio in 2011 despite a dip from 2010 in comparison to Greenland Minerals & Energy who has slightly improved their ratio and shows increasing concern for the lenders. Debtors Turnover Ratio: This ratio throws light on the manner the company recovers its dues from the market and also helps to understand the chances of bad debts. It is important to control the amount due in the market so that the business is able to manage its cash requirements and ensure that they don’t fall under a liquidity trap (Lyroudi & Lazaridis, 2000). The ratio are The ratio shows that both Lynas Corporation & Greenland Minerals & Energy are able to recover its money from the market within an accounting year. The ratio also highlights that both Lynas Corporation & Greenland Minerals & Energy recovers money before paying off its dues which shows proper management of the cash requirements. A comparison shows that Lynas Corporation performance has dipped in 2011 which is an area of concern whereas Greenland Minerals & Energy has improved their rotation policy and shows better management of the cash requirements for the near future. Asset Turnover Ratio: This ratio throws light on the manner the company uses its assets in generating profits for the business. This ratio thereby helps the business to understand the manner in which the assets are used and also help to understand whether the business has more assets or fewer assets than required. This thereby helps to find the optimum requirements for the business. The ratio are The ratio shows that both Lynas Corporation & Greenland Minerals & Energy has more assets than the sale generated by the business which shows that the business has more assets than required. The ratio also highlights that both Lynas Corporation & Greenland Minerals & Energy has invested heavily on assets but have not been able to generate sales accordingly. Both the companies highlight similarity with little difference to choose between them which require them to ensure a proper mix between assets and the sale the business is generating so that the business is able to ensure proper use of their assets. Financial Stability Ratios This ratio looks both into the short and long term financial soundness of the business and helps the investors to determine the manner in which they are able to invest in the company. A sound financial business also helps to ensure that the business has adequate cash flows and is able to manage its resources in a manner which will ensure growth and help to develop a structure where the business is able to get the financial requirements in the future easily. The ratios for the short and long term are as Short Term Ratios Current Ratio: This ratio helps to understand the short term liquidity position and determines whether the business is able to manage its short term cash requirements effectively (Filbeck & Krueger, 2005). While calculating this ratio inventories are included along with other assets that can be converted into liquid cash at a short duration. The ratio are The ratio highlights that both Lynas Corporation & Greenland Minerals & Energy has sufficient liquidity and will be able to meet their daily expenses easily. The comparison between both Lynas Corporation & Greenland Minerals & Energy shows that Lynas Corporation has more assets than required and needs to reduce it as it has resulted in having more short term assets than required (Gandy, 2011). Greenland Minerals & Energy on the other hand has shown improvement and is likely to further improve their condition so that the business is able to ensure proper cash management abilities. Quick Ratio: This ratio also helps to understand the short term liquidity position of the business and looks towards ascertaining the short term liquidity after removing the inventories as inventories take time to be converted into cash (Deloof, 2003). The ratio are The ratio highlights that both Lynas Corporation & Greenland Minerals & Energy has sufficient liquidity and will be able to meet their daily expenses easily. Both Lynas Corporation & Greenland Minerals & Energy has little inventories which show that there has been little difference between the current ratio and quick ratio. This reduces the risk for them because the short term assets are high in comparison to those which will make it easy to ensure that the external bodies are paid back on time. It will also result in ensuring that the business doesn’t have to face the risk on inventories becoming obsolete over a period of time. Long Term Ratios Total Debt Ratio: This ratio helps to understand the amount of debt the business has in relation to its total assets. This ratio thereby helps to understand the manner in which the business will be able to get finance in the future and will help to understand the financial strength of the business (Antony, 2004). The ratio are The ratio shows that Lynas Corporation & Greenland Minerals & Energy both has a strong total debt ratio as they will be able to get future loan in the future easily. This also shows that the business will be able get future debt. A further look at the ratio between Lynas Corporation & Greenland Minerals & Energy shows that Greenland Minerals & Energy has lower debt content and have a brighter chance of getting loan in the future. Further, both Lynas Corporation & Greenland Minerals & Energy needs towards taking more loans so that they are able to save on taxes through the interest paid on loan and needs towards developing a mechanism which provides adequate return to the investors. Debt Equity Ratio: This ratio is used by investors, analyst and others associated with the company to gauge the earnings that they will receive on their shares. This thereby helps the business to garner more investment and provides an avenue to generate finance for the future. The ratio are The ratio shows that both Lynas Corporation & Greenland Minerals & Energy has low debt content in comparison to equity and needs to improve it by taking more loans so that the business is able to save on taxes. A comparison between Lynas Corporation & Greenland Minerals & Energy shows that Lynas Corporation is better placed as they have a better ratio in comparison to Greenland Minerals & Energy and needs to further look towards improving those so that the business is able to garner sufficient investment in the future and grow their business accordingly. Recommendations The above financial analysis helps to identify the fact that both Lynas Corporation & Greenland Minerals & Energy are incurring losses for consecutive year which has resulted in a negative performance for both the companies. This makes it difficult to invest in any company but considering the scenario where there are only two companies Lynas Corporation is a better avenue to invest because the company has shown sign of improvement and has a sound debt position. Further, the liquidity position signifies the same which makes Lynas Corporation have a slight edge over Greenland Minerals & Energy (Saleem & Rehman, 2011). Conclusion The report presents the financial analysis of Lynas Corporation & Greenland Minerals & Energy and looks towards analyzing the financial figures of previous year. The report present the working style of both companies but is limited to the fact that past historical data is used and no comparison with the market is done to understand the performance of the company better. Despite, the limitation the report presents the financial analysis by looking into the figures of both the company and projects Lynas Corporation slightly better than Greenland Minerals & Energy on different parameters. References Antony, T. 2004. Thin Capitalization: Issues on the Gearing Ratio. Journal on Australian Taxation, 7 (1), 39-57 Deloof, M. 2003. Does Working Capital Management Affect Profitability of Belgian Firms? Journal of Business Finance & Accounting, 30(3&4), 573-587. Eljelly, A. 2004. “Liquidity-Profitability Tradeoff: An empirical Investigation in an Emerging Market”, International Journal of Commerce & Management, 14(2), 48 - 61 Finance. 2011. Why business needs finance. Retrieved on June 22 from http://tutor2u.net/business/gcse/finance_why_needed.htm Filbeck, G., & Krueger, T. M. 2005. An analysis of working capital management results across industries. Mid-American Journal of Business, 20(2), 10-17. Gandy, M. 2011. Is a low current ratio bad? Retrieved on June 22 2012 from http://www.markgandycfo.com/2011/03/is-a-low-current-ratio-bad/ Greenland. 2012. Greenland Minerals & Energy. Retrieved on June 22, 2012 from http://www.google.com/finance?cid=706115 Lyroudi, K., & Lazaridis, Y. 2000. The Cash Conversion Cycle and Liquidity Analysis of the Food Industry in Greece [Electronic Version]. EFMA 2000 Athens Lynas. 2012. Lynas Corporation. Retrieved on June 22, 2012 from http://www.reuters.com/finance/stocks/companyProfile?symbol=LYC.AX Padachi, K. 2006. Trends in working capital management and its impact on firms’ performance: an analysis of Mauritian small manufacturing firms. International Review of Business Research Papers, 2(2), 45-58. Saleem, Q. & Rehman, R. 2011. Impacts of Liquidity Ratios on Profitability. Interdisciplinary Journal of Research in Business, 1 (7), 95-98 Appendix Ratio Calculation of Lynas Corporation Ratios Formula 2011 2010 Current Ratio Current Assets / Current Liabilities 451273 / 30893 = 14.6 407098 / 18005 = 22.6 Quick Ratio (Current Assets – Inventories) / Current Liabilities (451273 - 11569) / 30893 = 14.23 (407098 - 0) / 18005 = 22.6 Net Profit Margin Net Profit / Sales * 100 (59086) / 10006 *100 = (590.5)% (43041) / 9130 * 100 = (471.42)% Return on Assets Net Income / Total Assets * 100 (59086) / 874003 * 100 = (6.76)% (43041) / 640663 * 100 = (6.72)% Return on Equity Net Income / Equity * 100 (59086) / 626727 * 100 = (9.43)% (43041) / 619143 * 100 = (6.95)% Receivable Turnover Ratio Sales / Average Receivable 10006/ 4566 = 2.19 9130/ 1052 = 8.69 Payable Turnover Ratio Cost of Goods Sold / Average Payable 28970/27965 = 1.04 16422 / 13419 = 1.22 Asset Turnover Ratio Sales Revenue / Average Total Assets 10006 / 874003 = 0.02 9130 / 640663 = 0.02 Debt to Equity Ratio Long Term Debts / Equity 216373 / 626727 = 0.35 3515 / 619143 = 0.006 Total debt ratio Total asset - total equity / total assets (874003 - 626727) / 874003 = 0.28 (640663 - 619143) / 640663 = 0.03 Ratio Calculation of Greenland Minerals & Energy Ratios Formula 2011 2010 Current Ratio Current Assets / Current Liabilities 11452 / 2001 = 5.72 13147 / 3098 = 4.24 Quick Ratio (Current Assets – Inventories) / Current Liabilities (11452 - 238) / 2001 = 5.6 (13147 - 196) / 3098 = 4.18 Net Profit Margin Net Profit / Sales * 100 (24089) / 1117 *100 = (2156.8)% (8402) / 717 * 100 = (1171.82)% Return on Assets Net Income / Total Assets * 100 (24089) / 60056 * 100 = (40.11)% (8402) / 55878 * 100 = (15.04)% Return on Equity Net Income / Equity * 100 (24089) / 57992 * 100 = (41.54)% (8402) / 52780 * 100 = (15.92)% Receivable Turnover Ratio Sales / Average Receivable 1117/ 238 = 4.69 717/ 196 = 3.66 Payable Turnover Ratio Cost of Goods Sold / Average Payable 1527/1584 = 0.96 1111 / 1476 = 0.75 Asset Turnover Ratio Sales Revenue / Average Total Assets 1117 / 60056 = 0.02 717 / 55878 = 0.01 Debt to Equity Ratio Long Term Debts / Equity 63 / 57992 = 0.002 0 / 52780 = 0 Total debt ratio Total asset - total equity / total assets (60056 - 57992) / 60056 = 0.034 (55878 - 52780) / 55878 = 0.055 Read More