Financial Comparison Of Australian Vanadium And Alcoa Inc In An Essay.

1. Select Company A and a benchmarking company for analysis. You need to choose two companies from a list of Selected ASX Listed Materials Companies provided as a separate file under Assignment on the course website.
(1) The name of the company selected as Company A should begin with the same letter of the alphabet as your surname (or your fellow student's surname should you do the assignment in pairs), e.g. if your surname is Alpha, you can use either Adelaide Brighton Limited or Alumina Limited.
(2) The name of the company selected as the benchmarking company should begin with the same letter of the alphabet as your first name (or your fellow student's first name should you do the assignment in pair), e.g. if your first name is Beta, you can use either Barra Resources Limited or BHP Billiton Limited.
Go to the company information database DatAnalysis Premium via the UniSA Library website. Under Company Reports, search for the companies you selected according to their ASX Codes or part of the company names. Go to Financial Data to review these companies financial statements from 2015 to 2017 (if 2017 reports are not available, you can use 2014 to 2016 reports). 

In the current report the selected company is ‘Yellow rock resources limited’ (YRR) which currently changed its name as ‘Australian Vanadium’. The company currently at Meekatharra, is developing a project ‘Gabanintha Vanadium’ which would produce the Vanadium of highest grade (Australian Vanadium, 2017). The main revenue source for this product is the battery company who needs these high grade materials. The growth in this sector is extremely positive because of the renewable energy popularity. The organisation wants to develop great value for their shareholders by growing in this market. On the other hand the benchmarking company here is Alcoa Inc. Alcoa has the bauxite miming facility which is one of the largest in the world. The organisation comes under the list of leading exporter of Australia with around $4 billion in export valuation (Alcoa, 2017).  Considering all of this information the following section of the report would focus on the financial and environmental aspect of these businesses.

[Source: australianvanadium.com.au, 2017]

[Source: viewmaterial, 2016] 

The “Net profit margin” ratio of the company “Australian Vanadium limited”[YRR] for the year 2016 & 2015 are (-4.43) & (-7.16) respectively. This indicates that the company is making huge loss out of the goods that are sold by the company. However a trend of improvement is observed in 2016 over 2015.A comparison with the benchmark company of “Alcoa” reveals that the “Net profit margin” ratio of that company for the year 2016 & 2015 are (-0.017) & (-0.03) respectively; this indicates that though both the companies have failed to generate profit with respect to the revenue earned by the company but the ratios of YRR are more poor comparing to that of “Alcoa” (Penman and Penman, 2007). 

The current ratio of 14.96 in 2016 and that of 8.60 of 2015 of the company YRR shows that the company is having huge amount of liquid asset in hand in comparison to the current liability of the company. More over the current ratio of 2016 is higher than that of 2015.This indicates that the company prefers to hold huge amount of liquid cash instead of investing them (MacQueen et al., 2016). An evaluation of the liquidity ratios with that of Alcoa shows that ratios of that company are around 1.13 & 1.07 for 2016 & 2015 respectively. This indicates that Alcoa is not holding good liquidity position but is also more capable to make good utilization of their liquid cash in comparison to YRR

The operational profit margin ratio of YRR are 0.81 & (-0.64) for 2116 & 2015 respectively. This indicates that the operating profit generating capacity out of the sales generated by the company is comparatively better than the net profit generation capacity of that company (Penman and Penman, 2007). However the operating profit generation capacity of that company is showing some degree of improvements in 2016 over that of 2015.That is the ratio has become positive in 2015.

The operating profit ratios of Alcoa are 0.11 & 0.16 respectively and therefore it can be seen that Alcoa is having better operational efficiency with respect to YRR.

Profitability

The resource management position of the companies would be compared through the ratios like the return on asset, return on equity and return on capital (Griffin, 2009). Return on asset of Alcoa is -0.0096 and -0.0205 for the year 2016 and 2015 respectively. On the other hand the return on asset for ‘Yellow rock resources limited’ (YRR) are -0.071 and -0.088 for the year 2016 and 2015 respectively. The ratios are both in negative as the net profit of both the businesses are in negative. For Alcoa the ratio has improved from year 2015 to 2016. On the other hand the ratio for YRR is more or less the same. So as a benchmark company the utilisation of asset in the business operation is much more efficient for Alcoa in comparison to YRR.

The ROCE ratios for RYC are 0.0132 and -0.007 for the year 2016 and 2015 respectively. On the other hand the ratios for Alcoa are 0.073 and 0.124. In case of Alcoa as a benchmark company the performance is better than RYC but the efficiency of capital employed has dropped for Alcoa from the year 2015 to 2016 (Healy and Palepu, 2012). In case of YRR the ratio has improves over the year period.

In case of return on equity the figure for RYC are -0.072 and -0.089 for the year 2016 and 2015 respectively whereas the figure for Alcoa are -0.028 and -0.035. Both of them show some minor improvement on this ratio (Higgins, 2012). Over all net profit of both the business is in negative and that is why the ratio is negative but the performance of Alcoa is better and the organisation is able to use its investment better.

From the discussion of the above ratios it can be seen that the overall financial performance of the company is quiet poor with respect to the industry benchmark standard. It is true that the company is operating in the heavy industry that demands a huge initial infrastructural investment but still it is very much required that the investments are to be done in an efficient manner so that the business can earn a good profit earning pace or momentum that can help the business to quickly recover the initial investments made by the company (MacQueen et al., 2016).

A deeper look at the ratios help us to identify that the operating  profit margin ratio of the company YRR is comparatively better than the net profit margin ratio. This indicates that the business is losing out maximum of its earrings in regulating the operation expenses of the company. Thus it can be said that YRR is badly suffering due to operational inefficiency.

The high liquidity ratios of the company are showing that the company is holding huge amount of liquid cash instead of investments (Griffin, 2009). This indicates that the company lacks good planning of investments

The Negative resource management ratios such as ROA & ROE are showing that the company has failed to generate sufficient return on total asset as well as equity capital due to inefficient management of the assets at their disposal.

Liquidity

However the cautious nature of the company that leads to holding of liquid cash (instead of making unplanned expenditure that may lead to further loss) and the effort of the company to improve their operational efficiency which leads to positive operating profit margin ratio in 2016(0.81) describes that the company is expect to sustain and to attain financial stability in near future (Healy and Palepu, 2012). 

The financial risk factors of the business need to be under considered properly and those are given below.

Risk due to interest rat

The above interest bearing account is having huge sum of money which have increase by 76% from the year 2015 to 2016. The increase in interest rate could create risk for this (Van Deventer et al., 2013). The below interest rate pattern for the economy is showing a downward pattern. So this risk is on the lower side for the company.   

Risk of liquidity

The debt level in the YRR does not have any significant exposure in the current business situation and because of that this risk is very low for the company (Van Deventer et al., 2013).

Risk from credit

The third parties are trustworthy as stated in the annual report of YRR 2016. In that context the risk from the bad debt are low in the company (Christoffersen, 2012). So the from the annual report any significant risk of credit is not visible.

Foreign currency

From the 2014 onward the USD/AUD value is in increasing mode. That means the AUD value is getting down against the USD. YRR is expected to gain from its export related activates (Higgins, 2012). Considering this the export opportunity is looking bright for the company.

Commodity price

YRR is mainly dealing with the Vanadium. The price change in the international market shows a downward trend up to 2016 and after that it is showing a strong upward trend. So risk from the commodity market is limited for the business in the current situation (Christoffersen, 2012). The price of the material is expected to increase and shows positive positions for the business.

Both of these companies have large operation in the mining sector. The mining sector creates lot of environmental damages around its operation. Considering this the sustainable approach of the business would be to look into the environmental issues carefully and take some effective steps regarding this (Brueckner et al., 2013). Alcoa is careful in this respect. In its annual report the organisation specifically states this issue and also shows the measures taken in this respect. The organisation clearly states that their aim is to reduce the carbon emission from the business for the environmental benefit. 5.5 million mt tons of carbon were reduced from its operation in the year 2015 (asx.com.au, 2015). The organisation got into the ‘Aluminium stewardship initiative’ for the sustainable standard for the aluminium sector in the world. In the annual report of 2016 the organisation mentions the reduction level of carbon emission by 6 million mt tons. So it is clear that the business is continuously putting effort in this context. This report further mentions the reduction of energy intensity by 1%, consumption of water by around nineteen million m³  and landfill related waste by 86.5k mt tons (viewmaterial, 2016). The organisation also develops product line called SUSTANA which are basically based on the recycled material and low carbon emitting process. The website of the company shows the target for the company in this regard. The organisation target is to reduce the carbon emission by 30% within 2020 and 35% within completion of 2030, reduce the energy intensity by 10 and 15% within the year 2020 and 2030 respectively, reduce the landfills by 75 and 100% within the 2020 and 2030 respectively, reduce the fresh water use by 25% and 30% within the 2020 and 2030 respectively (Alcoa, 2017). All of these approaches from the Alcoa side show that the company is serious about the environmental issues and takes effective steps to reduce the impact.

Operation

‘Yellow rock resources limited’ do not produce any of such information. In the annual report of 2015 the organisation says that currently the organisation does not come under any such regulations. But the long time sustainability of the business is one important thing (Brueckner et al., 2013). The benchmarking organisation takes a long term position in the business and its operation. Considering this ‘Yellow rock resources limited’ must also follow those approaches of environmental measures. Currently this mining sector is having some problems and there is serious profitability pressure on the organisations. Alcoa is also having problem in the profitability matter of the business operation but they are following the environmental responsibility of the business for the long term sustainability. The profitability position of ‘Yellow rock resources limited’ is much worse than Alcoa. Currently the organisation is not coming under any direction legislative obligation of the environmental matters (australianvanadium.com.au, 2017). Considering this the business must take effective steps for the improvement of the profitability position of the business. At the same time the business must also make a long term commitment for the environmental matters. A diligent effort in this context from now would help the business to keep low environmental impact in the long run (Fonseca, 2010).  Alcoa is trying to reverse the process by reducing the environmental impacts whereas ‘Yellow rock resources limited’ can take effective step to keep those environmental impacts at minimum level from now. This would reduce the requirement of large investment for the organisation to control the standards. Environment is one of the main challenges that the businesses worldwide are facing and that is why the businesses need to make long term strategy in this context.

Conclusion:

The study of the financial statements of the company YRR via ratio analysis and the comparison of those ratios with that of Alcoa reveals the fact that the company is not only failed to generate any net profit over the investments made by the company, but the performance of the company is much behind compared to the benchmark standards of the Aluminium exploration industry in which it is operating (Beck et al., 2008). The main reason behind this poor performance can be identified (as revealed by the application of the tools of ratio analysis) as the operational inefficiency of the company.

To improve the financial performance of the company the following recommendations can be made:

• The company should identify each department and operations that are absorbing the maximum cash expenditure out of the total expenditure of the company
• The company should judge the rationality of that expenditure to promote control & savings of resources (Brigham and Ehrhardt, 2013). 
• The company should develop and intelligent framework of investment so that it can invest the liquid assets in hand for earning good profit.

Reference

ALCOA, Annual report 2015. (2015). asx.com.au. [online] Available at: https://www.asx.com.au/asxpdf/20160329/pdf/4363s45gbb1p3j.pdf [Accessed 23 Sep. 2017].

Alcoa. (2017). Alcoa -- About Us - Overview. [online] Available at: https://www.alcoa.com/australia/en/about/default.asp [Accessed 23 Sep. 2017].

asx.com.au. (2015). ALCOA, Annual report 2015. [online] Available at: https://www.asx.com.au/asxpdf/20160329/pdf/4363s45gbb1p3j.pdf [Accessed 23 Sep. 2017].

Australian Vanadium. (2017). About Us - Australian Vanadium. [online] Available at: https://australianvanadium.com.au/about-us/ [Accessed 23 Sep. 2017].

australianvanadium.com.au. (2017). AVL-2016-Annual-Report. [online] Available at: https://australianvanadium.com.au/wp-content/uploads/2015/02/AVL-2016-Annual-Report.pdf [Accessed 23 Sep. 2017].

Beck, T., Feyen, E., Ize, A., and Moizeszowicz, F. (2008). Benchmarking financial development.

Brigham, E. F., and Ehrhardt, M. C. (2013). Financial management: Theory & practice. Cengage Learning.

Brueckner, M., Durey, A., Mayes, R., and Pforr, C. (2013). The mining boom and Western Australia’s changing landscape: Towards sustainability or business as usual?. Rural Society, 22(2), 111-124.

Christoffersen, P. F. (2012). Elements of financial risk management. Academic Press.

Fonseca, A. (2010). How credible are mining corporations' sustainability reports? A critical analysis of external assurance under the requirements of the international council on mining and metals. Corporate Social Responsibility and Environmental Management, 17(6), 355-370.

Griffin, P. A. (2009). Financial Statement Analysis. Finding Alphas: A Quantitative Approach to Building Trading Strategies, 119-125.

Healy, P. M., and Palepu, K. G. (2012). Business analysis valuation: Using financial statements. Cengage Learning.

Higgins, R. C. (2012). Analysis for financial management. McGraw-Hill/Irwin.

InfoMine. (2017). 5 Year Vanadium Prices and Price Charts. [online] Available at: https://www.infomine.com/investment/metal-prices/ferro-vanadium/5-year/ [Accessed 23 Sep. 2017].

Kaur, M., Aggarwal, N., and Gupta, M. (2017). An Investigation into Returns from Financial Statement Analysis among High Book-to-Market Stocks. Indian Journal of Economics and Development, 13(2), 353-358.

MacQueen, M., Bergevin, P., and Mitchell, L. (2016). Financial Statement Analysis: Content and Context.

Penman, S. H., and Penman, S. H. (2007). Financial statement analysis and security valuation (p. 476). New York: McGraw-Hill.

Tradingeconomics. (2017). Australia Interest Rate | 1990-2017 | Data | Chart | Calendar | Forecast. [online] Available at: https://tradingeconomics.com/australia/interest-rate [Accessed 23 Sep. 2017].

Van Deventer, D. R., Imai, K., and Mesler, M. (2013). Advanced financial risk management: tools and techniques for integrated credit risk and interest rate risk management. John Wiley & Sons.

viewmaterial. (2016). ALCOA, ANNUAL REPORT 2016. [online] Available at: https://www.viewmaterial.com/aa/AA_16AR.PDF [Accessed 23 Sep. 2017].

Xe. (2017). XE: USD / AUD Currency Chart. US Dollar to Australian Dollar Rates. [online] Available at: https://www.xe.com/currencycharts/?from=USD&to=AUD&view=5Y [Accessed 23 Sep. 2017].