Essays on Ratio Analysis And Company Valuation Assignment

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OutlineRatio AnalysisLiquidity RatioLeverage RatioEfficiency RatioProfitability Ratio ValuationFree Cash Flow ModelEarnings Multiplier ApproachSummary of valuationsConclusion and recommendationReferencesRatio AnalysisFinancial analysis is the process of evaluating businesses, projects, budgets and other finance-related documents to determine their suitability for investment. Basically, a comprehensive financial analysis is done on an institution’s financial statements to establish if an entity is stable, solvent, liquid, or profitable enough to be invested in. When looking at a specific company, financial analyst will often focus on statements of income, statement of financial position, cash flow statement and statement of changes in equities.

Ratio analysis is a key technique for financial analysis. While inferring the current performance into the future, time value of money is taken into consideration. This section will analyze financial statements of Newcrest Mining Ltd using ratio analysis for the year 2008 to 2011 as compared to Magna Mining. Liquidity Ratio- Liquidity ratios are those which basically come from the Balance sheet which helps in knowing the liquidity of the particular company. This ratio is considered to be the important one in which its helps in knowing whether the company is able to match with its long term and short term obligations.

The liquidity ratios show the ability of the company to maintain positive cash flow while satisfying immediate obligations, that is, the availability of cash to pay debt. The computation of these ratios will be based on the cash flows or liquid assets. They define liquid asset as those tradable in an active market and thus can be quickly converted to cash at the going market price. The most common ratios used to analyze liquidity are current and quick ratio (Eugene and Michael, 2009).

Table below gives a summarized computation of the ratios. 2008200920102011Magna MiningCurrent ratio2.7223.3744.3151.8871.24Quick ratio1.8482.5233.4981.0421.1(Bloomberg BusinessWeek, 2012)From the table above, the company quick ratio 1.042 in 2011 which was lower than Magna Mining of 1.1:1. This means that Newcrest Mining Ltd covers all it current liabilities although it is lower the competitor. The current ratio for the company shows the same results although it is higher than the competitor. This determines whether the company has sufficient current assets to meet its short term current liabilities if the business is not able to generate enough cash by liquidating its current assets.

The following id the trend graph of the two ratios; Leverage Ratio- The debt utilization ratio is such that which shows the exact debt of the company in relating to its assets. In this it gives an overall view of how the company actually faces with its risk in terms of debt. The following table shows the debt ratios; 2008200920102011Magna MiningDebt-to-total assets ratio24.79%22.39%20.90%19.71%78.8%Debt to equity25.24%21.50%19.90%18.67%254.5%(Bloomberg BusinessWeek, 2012)In this the debt to total assets of the company is reducing at a slow rate from 2008-20011 which shows the assets of the company is basically being financed through the equity and not through the debt but when looking on to the industry norm it is slowly increasing from 2008-2011 in which it will be facing a higher risk especially when the interest rate is increasing in the market.

Debt to equity also shows the same trend and it is lower than the Magna Mining ratio in the year 2011. The following graph shows the trend for the two ratios;

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