Financial Analysis of Ramelius Resources Limited and Doray Minerals Limited - Assignment Example

Financial Analysis: Ramelius Resources Limited & Doray Minerals Limited Prepared by Executive Summary The report has noted that Ramelius is fairly positioned in comparison to its rival Doray in relation to profitability levels, liquidity and capital structure. In fact, it has been recommended that potential investors should invest with this company since it possess a higher chance of maximising shareholders’ wealth due to less debt burden and, also has an efficient management with effective policies aimed at maximising the use of existing equity and assets to generate profits. Ratio analysis is restricted by a difference in sectors and focuses on past as opposed to current and future data. Contents Introduction The focus of this paper is to conduct a financial analysis of two companies Doray Mineral Limited and Ramelius Resources Limited in the period between 2015 and 2016. In doing so, the report focuses on conducting both horizontal and vertical analysis as well as a ratio analysis. The major assumption in formulating this report rests with the fact that the analysis will only cover a two-year period to establish the overall performance of the company. It is also assumed that these companies operate within a similar sector and sub-sector and possess almost a similar model of operations. Question 1 (maximum 700 words) Profitability Ratio Analysis The return on equity of the two companies is both positive. Doray’s and Ramelius ratio values are 10.4% and 24.3%; ROA is also positive at 6.86 and 15.6%; gross profit margin of 24.6% and 18.9%; profit margin of 12.6% and 15.8%; and cash flow to sales ratio of 46% and 37.7% in the period ending 2016. In overall, the both of the companies have ensured to maintain positive returns over this period meaning that the level of profits generated from each assets and equity invested within the period have remained relatively stable and positive. The degree of both gross profit and profit margins have also been positive over the year, which is an indication that the two companies have devised effective ways of marketing their products to the potential and existing customers (Penman & Penman, 2007). It is assumed that the mineral prices have been priced using a premium strategy thereby prompting a great deal of sales revenues that translates to enough profits over the period. It is important to note that the profitability of these two companies can also be attributed to the lower costs of production as a result of adoption of effective and fairly-advanced technological processes, which has the capacity of increase the overall gross profit that can later be translated to profits as a whole. Asset Efficiency Ratio The asset turnover ratios are 1 and 0.98 for Doray and Ramelius respectively for the 2016 period. This indicates that both of these companies have not been efficient in utilizing the existing equipment-based for purposes of efficient mining processes. It can also be a result of poor wear and tear policies by the management at hand. The day’s inventory is 833 and 35 for Doray and Ramelius respectively. In this regards, it can be seen that unlike Doray, Ramelius takes a shorter number of days for which to convert its existing inventories into sales revenues. This could be associated with poor management policies in relation to marketing of the products to elicit higher sales (Kumbirai & Webb, 2010). The days’ debtor for Ramelius is fairly high at 6 days while Doray seems to be only selling their minerals on a cash basis. The times inventory turnover for the two companies are 0.43 and 10.3 while the time debtor’s turnover is 3855.3 and 60.7 for Doray and Ramelius companies respectively. Basically, Ramelius seems to be performing well in terms of asset efficiency strategies by the management. Liquidity Ratio Analysis The companies’ current ratio within the period is 1 and 2.5 for Doray and Ramelius respectively. This indicates that Ramelius is fairly position to meet its overall short-term obligations as and whenever they fall due. This is attributed to the fact that for each liability held, it enjoys more than 2 assets to offset it within the period. Quick ratio for the two companies’ stand at 0.6 and 1.8 for Doray and Ramelius respectively, which means that the latter company is fairly positioned to meet its short-term obligations and debt whenever the fall due even without having to depend on its underlying stock level (Chordia, T., Roll, & Subrahmanyam, 2008). The cash flow ratio is 0.9 and 2.4 for the two companies, which also means that Ramelius is fairly-positioned to meet its short-term commitments from the level of cash flows it receives from its underlying operating activities. Capital Structure Ratio Analysis The debt-to-equity ratios are 65% and 52.2% for Doray and Ramelius respectively. The values indicate that Doray depends a lot on debt funds to conduct its overall operations within the period. The debt ratio stands at 39.2% and34.3, which ascertains that Doray is heavily dependent on debt funds to conduct operations. The equity ratio stands at 61% and 65%, which confirms the argument that Ramelius is heavily dependent on equity as opposed to debt funds to conduct daily operations (Frank & Goyal, 2009). The interest coverage ratio stands at 16 and 30.7 for Doray and Ramelius, which is an indication that Ramelius is fairly-placed to pay its outstanding debt interest as well as principal amounts within the period. For this reason, it can be safely argued that Ramelius is able to meet its long-term obligations of paying-off underlying debt (Frank & Goyal, 2009). Question 2 (maximum 250 words) As an investment analyst, I would recommend that one should go ahead and invest with Ramelius due to the following reasons. First, it can be seen that unlike Doray, which has a huge debt burden, Ramelius is heavily dependent on equity funds to conduct its operations hence little level of finance costs to pay. This means that the investor’s will be sure that the money invested will be used for maximizing their shareholder’s wealth as opposed to paying-off borrowings (Frank & Goyal, 2009). Secondly, it can be seen that the firm enjoys a greater profitability level hence a higher chance that the potential investor will enjoy future dividends on their investment. Consequently, investing with Ramelius will likely be beneficial to the investor given that the management of the company have been effective in coming up with policies aimed at maximizing wealth. Following this line of reasoning, potential investors should focus their money to purchasing shares of Ramelius due to a higher chance of continuity of operations into the future and an almost guaranteed level or returns within the period and into the future period as a whole. Question 3 (maximum 250 words) The three main limitation of financial ratio analysis indicate that; first, the analysis is basically focused on expounding on past relationships while the different users of the recommendations are more interested with the information that is current and possibly describes the future of the company’s operations (Birt,2016). Secondly, it is important to note that financial accounting information is hugely affected by estimates and assumptions that are attributed to different accounting policies. In this regards, ratio analysis is considered to be less useful (Birt, 2016). Consequently, there is a possibility that different set of companies can operate in different sectors with each of them being a subject to different environment situations hence a comparison of these companies can be misleading. To effectively come up with sustainable and comprehensive investment decisions, two non-financial aspects that can be looked into include; first, ascertaining whether a company has met both current and future legislation (Birt, 2016). Secondly, the non-financial aspect related to whether the company has ensured to improve relationship with its suppliers, staff and customers can also be used to determine its going-concern capacity as an entity. Conclusion The report has successfully conducted a financial ratio of the two companies and established that potential investors should go ahead and invest with Ramelius Resources Ltd because it is highly profitable; it does not a huge debt burden that can inhibit maximization of shareholders wealth and has efficient management strategies to utilize existing assets and equity to generate profits. It has also been noted that such non-financial items as ascertaining whether a company has meet its legislation requirements and, its relationship with the suppliers, customers and employees can be used to make sustainable investment decisions. References List Birt J, Chalmers K, Maloney S, Brooks A & Oliver J 2016, Accounting: Business Reporting for Decision Making, 6th Edn, Wiley, Milton, Queensland. Chordia, T., Roll, R. & Subrahmanyam, A., 2008. Liquidity and market efficiency. Journal of Financial Economics, 87(2), pp.249-268. Frank, M.Z. & Goyal, V.K., 2009. Capital structure decisions: which factors are reliably important? Financial Management, 38(1), pp.1-37 Kumbirai, M. & Webb, R., 2010. A financial ratio analysis of commercial bank performance in South Africa. African Review of Economics and Finance, 2(1), pp.30-53. Penman, S.H. & Penman, S.H., 2007. Financial statement analysis and security valuation (p. 476). New York: McGraw-Hill. Read More