The Financials of Port Broome for the Year 2010 to 2014 - Case Study Example

Executive Summary The report which looks to analyze the financials of Port Broome for the year 2010 to 2014 shows that Port Broome has been able to work properly and has developed strategies which have improved their performance. The business needs to work on certain areas like reducing indirect cost and improving the profits so that better performance is revealed. In addition to it consistency is another area which needs to be focused on. The liquidity position of the business is sound and shows good management of short term assets and liabilities. The capital structure also shows good policies as the business has been able to manage debt which thereby provides an opportunity to garnering future debt. Thus, the overall performance is satisfactory and improving in certain areas will help to improve the performance better. Table of Contents Introduction 3 Overview of the Organization 3 Ratio Analysis 3 Conclusion 7 References 9 Introduction This report looks to evaluate the financials of Broome Port which is located in Western Australia for a period of 2010 to 2014. The report will analyze the financials based on profitability, liquidity and capital structure and will bring forward the manner in which the port has performed over the last 5 years. This will help the users to understand the performance and take decisions regarding investments, trends in the future and other relevant areas through which the overall risk will be reduced. Overview of the Organization The Port of Broome is the main deepwater port in Western Australia. This port is located in the Kimberley region and supports different activities like livestock export, offshore oil and gas exploration supply vessels, pearling, fishing charter boats, cruise liners and is the main fuel and container receivable point for the region (Port Broome, 2015). The Port due to the nature of its business has been confined to that region but has opened up more offices and looks to carry out business in the Western Australian region. Ratio Analysis This section will look at analyzing the different ratios based on past performance and will help to understand the manner in which the organization has performed. Since, financial statements doesn’t reveal anything own its own so carrying out a ratio analysis provides more information to the users which helps them to take important business decisions (Finance, 2011). The detailed analysis of the different ratios for 2010 to 2014 is as Profitability This ratio will help to analyze the manner in which the business was able to use its different resources and generate profits based on it. It reflects the manner in which the business activities were carried out and the ability of the business to make profits out of its operations (Filbeck & Krueger, 2005). The different ratio and its analysis with regard to liquidity is as Profit Margin: This ratio reflects the manner in which the business is able to generate profits out of its operations and shows the manner in which the different resources are used. The analysis shows that Port Broome was able to make profits of 18.79% in 2014 which has decreased from 27.03% in 2013. The profits in 2012 were 11.96%, 3.2% in 2011 and 16.29% in 2010 which shows widespread fluctuations. This is the final profits which the business has made after meeting all the expenses and shows fluctuations highlighting that the business is not stable and fluctuates. The management needs to work on it and has to look towards reducing the different expenses so that the overall profits for the business improve. In addition to it the profit for the business is low as the industry in which they are working has less competition and is bound to have higher profits which the management needs to consider and look at so that better returns can be ensured. Return on Shareholders’ Equity: This ratio reflects the manner in which the business is able to generate profits for its shareholders and the manner in which the different needs of the shareholders are met due to the risk which has been undertaken by them. The analysis shows that Port Broome return to shareholder was 9.12% in 2014 which has decreased from 19.14% in 2013. The return to sharholders in 2012 was 4.08%, 0.56% in 2011 and 6.18% in 2010 which shows widespread fluctuations. It is further seen that the business has been able to generate return for its shareholders in all the year which is a good sign and the business needs to look at working in the same manner and improve their profitability by cutting cost so that the return to the shareholders can improve. This will put the business in better light and getting new investment from the shareholders will becomes possible Return on Total Assets: This ratio reflects the manner in which the business is able to generate profits based on the total asset which has been used for the generation of the profits. The analysis shows that Port Broome return on total assets was 9.13% in 2014 which has decreased from 17.14% in 2013. The return on total assets in 2012 was 5.44%, 1.31% in 2011 and 7.32% in 2010 which shows widespread fluctuations. It is further seen that the business profits based on total assets is very low which states that the business has more assets than required. This is an area where Port Broome needs to work on and has to look at reducing their assets base so that the asset are used in a better way and will provide an opportunity through which the business will improve its use of resources. Further, analyzing the same from other players will also help to understand whether the industry requires huge assets or Port Broome has more assets than required which will help the management to take better decisions. Liquidity This ratio will help to analyze and understand whether the business will be able to meet its short term obligations out of short term assets. This ratio helps to understand whether the business has sufficient liquid assets so that the business doesn’t fall into a liquidity trap and is able to carry out the different activities in a proper way (Saleem & Rehman, 2011). The detailed analysis of the different ratios is as Current Ratio: This ratio helps to analyze the ability of the business to meet its short term obligations out of short term assets and includes inventories as well. The ratio highlights that Port Broome has sufficient liquidity as the ratio is 2014 are 3.07 times which has improved from 2.67 times in 2010. It can be said that the business has three times more liquidity as compared to the short term obligations which shows that the business will be able to meet its short term obligations easily. This will help the business to ensure that they don’t fall into a liquidity trap and will be able to meet the different needs easily (Lyroudi & Lazaridis, 2000). Cash flow from operations: This ratio helps to analyze the ability of the business to meet its short term obligations out of the net cash flow from operations which is the business activities which is carried out over a year. The ratio highlights that Port Broome has sufficient liquidity as the ratio is 2014 are 0.89 times which has decreased from 1.04 times in 2010. The ratio shows further fluctuations in different year as in 2011 it was 0.19 times, 2012 it was 0.13 times and 2013 it was 1.78 times. It can be said that the business has good strategies in pace as the cash generated during the year is high and will help to meet the different short term obligations to a certain extent. The business needs to further concentrate on the ratios and improve their cash from operations to 1 so that the cash generated is sufficient to meet its short term obligations (Eljelly, 2004). This will help to ensure that the reliance on inventories and receivables will reduce and will make the business more self sufficient to meet the different needs. Capital Structure This ratio will help to understand the capital structure and will help to analyze the manner in which the business has looked to gather funds to carry out its business. It will also help to understand the composition of debt and equity and provide directives through which the business can raise new finance in the future (Antony, 2004). The detailed analysis of the ratios is as Debt Ratio: This ratio highlights the long term and short term debt of the business as compared to the total asset base. It is seen that the ratio was 38.44% in 2010, 44.37% in 2011, 43.68% in 2012, 44.34% in 2013 and 43.84% in 2014 which shows consistency. It is seen that the ratio is less than 50% for all the years which is a good sign and shows that the business will be able to meet the obligations easily out of their assets (Deloof, 2003). This also provides an opportunity to raise new debt in the future as the debt position of the business is sound. Interest Cover Ratio: This ratio highlights interest paying ability of the business. It is seen that the ratio was 3.60 times in 2010, 0.66 times in 2011, 2.57 times in 2012, 8.15 times in 2013 and 4.79 times in 2014. It shows that the business is sound and can easily pay its interest expense which is a good sign and will help the business to raise new finance easily from the market. Debt Cover Ratio: This ratio highlights the ability of the business to meet its non-current liabilities out of its net cash from operations. It is seen that the ratio was 5.21 times in 2010, 21.52 times in 2011, 2.8 times in 2012, 2.28 times in 2013 and 3.48 times in 2014. It shows that the business is sound as the no current liabilities are not very high compared to the cash flow from operations and shows good management to deal with the debt needs of the business. Conclusion The overall analysis shows that Port Broome has been able to work properly and has developed strategies which have improved their performance. The business needs to work on certain areas like reducing indirect cost and improving the profits so that better performance is revealed. In addition to it consistency is another area which needs to be focused on. The liquidity position of the business is sound and shows good management of short term assets and liabilities. The capital structure also shows good policies as the business has been able to manage debt which thereby provides an opportunity to garnering future debt. Thus, the overall performance is satisfactory and improving in certain areas will help to improve the performance better. 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 May 7, 2015 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 August 18, 2014 from http://www.markgandycfo.com/2011/03/is-a-low-current-ratio-bad/ Lyroudi, K., & Lazaridis, Y. (2000). The Cash Conversion Cycle and Liquidity Analysis of the Food Industry in Greece [Electronic Version]. EFMA 2000 Athens Port Broome. 2015. Broome Port. Retrievd from May 7, 2015 from http://broomeport.wa.gov.au/ Saleem, Q. & Rehman, R. (2011). Impacts of Liquidity Ratios on Profitability. Interdisciplinary Journal of Research in Business, 1 (7), 95-98 Read More