Group Assignment Question:
Your group will perform a financial analysis of the assigned company. Every group will work on the allocated company (your group number in Blackboard assigned to you by your lecturer is also your company’s number in the assignment question below).
The analysis will consist of ratios, common size statements, and percentage change statements. Financial statements will include balance sheet, income statement, and statement of cash flow statement.
The analysis should consist of ratios, common size statements, and percentage change statements. Financial statements will include balance sheet, income statement, and statement of cash flow statement.
1. Having the company’s statements, now you are required to compute the following ratios for the last two financial years: Liquidity Ratios (current ratio, quick ratio, cash flow), and Profitability Ratios (net profit margin, gross profit margin, rate of return on assets, rate of return on shareholders’ equity, earnings per share).
2. Based on these ratio values, perform a trend analysis. This means that you are required to perform a quantitative analysis of information contained in a company's financial statements, and include these in your report.
3. Prepare a summary report that includes a basic profile of the company and identifies its chief competitors. Your summary should be in paragraph form using a word processor.
4. Finally, you are required to visit the company’s website and critically review the statement on corporate governance. Include in your final report what do you consider are the challenges face the chosen company in relation to ethical behaviour.
5. In your conclusion section, you are required to present a closing statement stating what you have learnt from doing the case study.
Financial Statement Analysis
The main purpose of the assessment is to critically analyze the financial statements of Fortescue Metals Group LTD in order to understand the financial performance of the business in last year years. In order to obtain relevant financial information, the annual reports of the company are considered for the period of two years which is 2018 and 2017.
Fortescue Metals Group Ltd is an Australian based iron ore company which is engaged in the business of mining and extraction of minerals from the surface of the earth. The company at one point of time was regarded as one of the largest producers of iron ore in the world (Fmgl.com.au. 2018). The company has its major operations and also its headquarters in western Australia.
The assessment shows analysis of key financial ratios which are related to liquidity and profitability aspect of the business. The assessment shows computation of these ratios and analysis for the same in order to identify the growth or decline of the business. The assessment also aims to identify one competitor of the business and analyze how the business is performing in terms of the competitor. In addition to this, an analysis of the corporate governance of the business is also included in the assessment.
The annual reports of the business which is presented for the year 2018 shows that the business has presented the financial statement of the company as per the conceptual framework which is usually followed by most of the companies. In order to effectively demonstrate the changes which have taken place in the financial statement over the two years period, comparative and common size statements are prepared showing changes in various items which are shown in the financial statement of the business (Weil, Schipper and Francis 2013). The comparative and common size statement are prepared for both income statement and balance sheet of the business.
|
Statement Showing Income and Expenses (Common Size Statement) |
||||
|
Particulars |
2018 |
2017 |
Amount |
Percentage |
|
US$m |
US$m |
|||
|
Operating sales revenue |
$ 6,887.00 |
$ 8,447.00 |
-1,560.0000 |
-18.47% |
|
Cost of sales |
$ -4,930.00 |
$ -4,888.00 |
-42.0000 |
0.86% |
|
Gross Profit |
$ 1,957.00 |
$ 3,559.00 |
-1,602.0000 |
-45.01% |
|
Other income |
$ 30.00 |
$ 14.00 |
16.000 |
114.29% |
|
Other expenses |
$ -114.00 |
$ -123.00 |
9.000 |
-7.32% |
|
Profit before net financing income and income tax |
$ 1,873.00 |
$ 3,450.00 |
-1577.000 |
-45.71% |
|
Finance Income |
$ 24.00 |
$ 19.00 |
5.000 |
26.32% |
|
Finance Costs |
$ -652.00 |
$ -502.00 |
-150.000 |
29.88% |
|
Profit before income tax |
$ 1,245.00 |
$ 2,967.00 |
-1722.000 |
-58.04% |
|
Income tax (expense)/benefit |
$ -367.00 |
$ -874.00 |
507.000 |
-58.01% |
|
Profit for the year |
$ 878.00 |
$ 2,093.00 |
-1215.000 |
-58.05% |
The above table shows the common size Income statement of Fortescue Metals Group Ltd which is engaged in the business of metal mining. The above table shows that the sales of the business has significantly fallen which is a matter of concern for the company. The sale for the year 2017 is shown to be $ 6887 million which has decreased from $ 8477 million in 2017. The cost of sales has also increased from the estimates which is shown in 2017. The increase is shown to be of 0.86% as per the table above. Due to the significant decrease in the sales of the business and increase in the costs of the business, the profits have also suffered showing significant decrease in the same in comparison to previous year. The decrease in profits is shown to be around 58.05% from 2017 analysis.
|
Statement Showing Balance Sheet (Common Size Statement) |
||||
|
Particulars |
2018 |
2017 |
Amount |
Percentage |
|
US$m |
US$m |
|||
|
Assets |
||||
|
Current Assets |
|
|
|
|
|
Cash and cash equivalents |
$ 863.00 |
$ 1,838.00 |
-975.0000 |
-53.05% |
|
Trade and other receivables |
$ 120.00 |
$ 141.00 |
-21.0000 |
-14.89% |
|
Inventories |
$ 496.00 |
$ 588.00 |
-92.0000 |
-15.65% |
|
Other current assets |
$ 92.00 |
$ 38.00 |
54.0000 |
142.11% |
|
Current tax receivable |
$ 79.00 |
$ - |
79.0000 |
0.00% |
|
Total current assets |
$ 1,650.00 |
$ 2,605.00 |
-955.0000 |
-36.66% |
|
Non-current assets |
|
|
|
|
|
Trade and other receivables |
$ 3.00 |
$ 3.00 |
0.000 |
0.00% |
|
Property, plant and equipment |
$ 16,189.00 |
$ 16,493.00 |
-304.000 |
-1.84% |
|
Intangible assets |
$ 4.00 |
$ 7.00 |
-3.000 |
-42.86% |
|
Other non-current assets |
$ 3.00 |
$ 7.00 |
-4.000 |
-57.14% |
|
Total non-current assets |
$ 16,199.00 |
$ 16,510.00 |
-311.000 |
-1.88% |
|
Total assets |
$ 17,849.00 |
$ 19,115.00 |
-1266.000 |
-6.62% |
|
LIABILITIES |
|
|
|
|
|
Current liabilities |
|
|
|
|
|
Trade and other payables |
$ 678.00 |
$ 708.00 |
$ -30.00 |
-4.24% |
|
Deferred income |
$ 267.00 |
$ 461.00 |
$ -194.00 |
-42.08% |
|
Borrowings and finance lease liabilities |
$ 97.00 |
$ 121.00 |
$ -24.00 |
-19.83% |
|
Provisions |
$ 197.00 |
$ 227.00 |
$ -30.00 |
-13.22% |
|
Current tax payable |
$ - |
$ 685.00 |
$ -685.00 |
-100.00% |
|
Total current liabilities |
$ 1,239.00 |
$ 2,202.00 |
$ -963.00 |
-43.73% |
|
Non-current liabilities |
|
|
|
|
|
Trade and other payables |
$ 50.00 |
$ 50.00 |
$ - |
0.00% |
|
Deferred income |
$ 528.00 |
$ 427.00 |
$ 101.00 |
23.65% |
|
Borrowings and finance lease liabilities |
$ 3,878.00 |
$ 4,350.00 |
$ -472.00 |
-10.85% |
|
Provisions |
$ 546.00 |
$ 509.00 |
$ 37.00 |
7.27% |
|
Deferred joint venture contributions |
$ 270.00 |
$ 266.00 |
$ 4.00 |
1.50% |
|
Deferred tax liabilities |
$ 1,606.00 |
$ 1,557.00 |
$ 49.00 |
3.15% |
|
Total non-current liabilities |
$ 6,878.00 |
$ 7,159.00 |
$ -281.00 |
-3.93% |
|
Total liabilities |
$ 8,117.00 |
$ 9,361.00 |
$ -1,244.00 |
-13.29% |
|
Net assets |
$ 9,732.00 |
$ 9,754.00 |
$ -22.00 |
-0.23% |
|
EQUITY |
|
|
|
|
|
Contributed equity |
$ 1,287.00 |
$ 1,289.00 |
$ -2.00 |
-0.16% |
|
Reserves |
$ 46.00 |
$ 39.00 |
$ 7.00 |
17.95% |
|
Retained earnings |
$ 8,386.00 |
$ 8,392.00 |
$ -6.00 |
-0.07% |
|
Equity attributable to equity holders of the Company |
$ 9,719.00 |
$ 9,720.00 |
$ -1.00 |
-0.01% |
|
Non-controlling interest |
$ 13.00 |
$ 14.00 |
$ -1.00 |
-7.14% |
|
Total equity |
$ 9,732.00 |
$ 9,734.00 |
$ -2.00 |
-0.02% |
Common Size Statement
The above table shows the analysis of common size statement for the balance sheet of the business. The current assets of the business have significantly fallen in comparison to previous year analysis whereas there is slight change in the current liabilities of the business. This shows that the liquidity position of the company is at stake here (Fifka 2013). There has been significant decrease in fixed assets of the business. The debt which is held by the business has reduced slightly however, the burden of debt is still on the business and affect the profits of the business which is clear from the income statement where interest expenses are shown.
|
Statement Showing Income and Expenses (Comparative Statement) |
||||
|
Particulars |
2018 |
Percentage |
2017 |
Percentage |
|
|
$ |
$ |
||
|
Revenue |
$ 6,887.00 |
100.00% |
$ 8,447.00 |
100.00% |
|
Cost of sales |
$ -4,930.00 |
71.58% |
$ -4,888.00 |
57.87% |
|
Gross Profit |
$ 1,957.00 |
28.42% |
$ 3,559.00 |
42.13% |
|
Other income |
$ 30.00 |
1.53% |
$ 14.00 |
0.17% |
|
Other expenses |
$ -114.00 |
1.66% |
$ -123.00 |
1.46% |
|
Profit before net financing income and income tax |
$ 1,873.00 |
27.20% |
$ 3,450.00 |
40.84% |
|
Finance Income |
$ 24.00 |
0.35% |
$ 19.00 |
0.22% |
|
Finance Costs |
$ -652.00 |
9.47% |
$ -502.00 |
5.94% |
|
Profit before income tax |
$ 1,245.00 |
18.08% |
$ 2,967.00 |
35.12% |
|
Income tax (expense)/benefit |
$ -367.00 |
-5.33% |
$ -874.00 |
10.35% |
|
Profit for the year |
$ 878.00 |
12.75% |
$ 2,093.00 |
24.78% |
The comparative income statement which is prepared shows the increase or decrease in every item with respect to the sales of the business. The figure of sales is considered to be the base for the analysis to be conducted. The cost of sales forms around 71.58% of the total sales which shows that the expenses are huge for the business and the same also is shown to have increased in comparison to previous year analysis. The profit of the business for the year 2018 forms 12.75% of the sales figure.
|
Statement Showing Balance Sheet (Comparative Statement) |
||||
|
Particulars |
2018 |
Percentage |
2017 |
Percentage |
|
|
$ |
$ |
||
|
Assets |
||||
|
Current Assets |
||||
|
Cash and cash equivalents |
$ 863.00 |
4.84% |
$ 1,838.00 |
9.62% |
|
Trade and other receivables |
$ 120.00 |
0.67% |
$ 141.00 |
0.74% |
|
Inventories |
$ 496.00 |
2.78% |
$ 588.00 |
3.08% |
|
Other current assets |
$ 92.00 |
0.52% |
$ 38.00 |
0.20% |
|
Current tax receivable |
$ 79.00 |
0.44% |
$ - |
0.00% |
|
Total current assets |
$ 1,650.00 |
9.24% |
$ 2,605.00 |
13.63% |
|
Non-current assets |
|
|
||
|
Trade and other receivables |
$ 3.00 |
0.02% |
$ 3.00 |
0.02% |
|
Property, plant and equipment |
$ 16,189.00 |
90.70% |
$ 16,493.00 |
86.28% |
|
Intangible assets |
$ 4.00 |
0.02% |
$ 7.00 |
0.04% |
|
Other non-current assets |
$ 3.00 |
0.02% |
$ 7.00 |
0.04% |
|
Total non-current assets |
$ 16,199.00 |
90.76% |
$ 16,510.00 |
86.37% |
|
Total assets |
$ 17,849.00 |
100.00% |
$ 19,115.00 |
100.00% |
|
LIABILITIES |
|
|
||
|
Current liabilities |
|
|
||
|
Trade and other payables |
$ 678.00 |
8.35% |
$ 708.00 |
7.56% |
|
Deferred income |
$ 267.00 |
3.29% |
$ 461.00 |
4.92% |
|
Borrowings and finance lease liabilities |
$ 97.00 |
1.20% |
$ 121.00 |
1.29% |
|
Provisions |
$ 197.00 |
2.43% |
$ 227.00 |
2.42% |
|
Current tax payable |
$ - |
0.00% |
$ 685.00 |
7.32% |
|
Total current liabilities |
$ 1,239.00 |
15.26% |
$ 2,202.00 |
23.52% |
|
Non-current liabilities |
|
|
||
|
Trade and other payables |
$ 50.00 |
0.62% |
$ 50.00 |
0.53% |
|
Deferred income |
$ 528.00 |
6.50% |
$ 427.00 |
4.56% |
|
Borrowings and finance lease liabilities |
$ 3,878.00 |
47.78% |
$ 4,350.00 |
46.47% |
|
Provisions |
$ 546.00 |
6.73% |
$ 509.00 |
5.44% |
|
Deferred joint venture contributions |
$ 270.00 |
3.33% |
$ 266.00 |
2.84% |
|
Deferred tax liabilities |
$ 1,606.00 |
19.79% |
$ 1,557.00 |
16.63% |
|
Total non-current liabilities |
$ 6,878.00 |
84.74% |
$ 7,159.00 |
76.48% |
|
Total liabilities |
$ 8,117.00 |
100.00% |
$ 9,361.00 |
100.00% |
|
Net assets |
$ 9,732.00 |
|
$ 9,754.00 |
|
|
EQUITY |
|
|
||
|
Contributed equity |
$ 1,287.00 |
13.22% |
$ 1,289.00 |
13.24% |
|
Reserves |
$ 46.00 |
0.47% |
$ 39.00 |
0.40% |
|
Retained earnings |
$ 8,386.00 |
86.17% |
$ 8,392.00 |
86.21% |
|
Equity attributable to equity holders of the Company |
$ 9,719.00 |
99.87% |
$ 9,720.00 |
99.86% |
|
Non-controlling interest |
$ 13.00 |
0.13% |
$ 14.00 |
0.14% |
|
Total equity |
$ 9,732.00 |
100.00% |
$ 9,734.00 |
100.00% |
The comparative balance sheet which is shown in the above table shows that the base which is taken by the business is of total assets in case of assets of the business, total liabilities in case of liabilities of the business and total equity in case of equity items which are shown in the annual reports of the business (Nobes 2014). The decrease in the current assets of the business is clearly shown which is a matter of concern for the business. The borrowings of the business which is shown in the liabilities side form the maximum portion of the liabilities of the business during the period. In case of the equity-based funds the retained earnings of the business form the maximum part of the estimate.
The closest competitor of Fortescue Metals Group Ltd is Rio Tinto ltd which also has operations in Australia and is regarded to one of the largest mining companies operating in Australia. Another close competitor of the company is BHP Billiton ltd which is also regardd to be one of the largest in the mining industry. The annual reports of Rio Tinto ltd shows that there has been an increase in the profits of the business in comparison to last year and the business is able reduce the overall costs of the business during the current year. In the case of Fortescue Metals Group Ltd, the profitability of the business has been severely been affected due to the fall in the sales of the business. The costs of Fortescue Metals Group Ltd during the year has also risen which is a serious matter of concern for the business and needs to be handled by the management of the company. The annual reports of the Fortescue Metals Group Ltd also shown significant fall in the current assets of the business as well as total assets of the business which is matter and can affect the going concern principle of the business as the liquidity of the business is also in appropriate.
The performance of the business in terms of profitability and liquidity can be further effectively understood with the help of key financial ratios which are computed and shown below considering the information which are provided in the annual report of the business (Carraher and Van Auken 2013). Ratios are analytical tools which are used for the purpose of making comparisons and analysis of the performance of the business.
|
Profitability Ratios |
||
|
Particulars |
2018 |
2017 |
|
US$m |
US$m |
|
|
Total Revenue |
$ 6,887.00 |
$ 8,447.00 |
|
Cost of Good Sold |
$ 4,930.00 |
$ 4,888.00 |
|
Gross Profit |
$ 1,957.00 |
$ 3,559.00 |
|
Net Profit |
$ 878.00 |
$ 2,093.00 |
|
Total Assets |
$ 17,849.00 |
$ 19,115.00 |
|
Total equity |
$ 9,732.00 |
$ 9,734.00 |
|
Borrowings |
$ 97.00 |
$ 121.00 |
|
Gross Profit Margin |
28.42% |
42.13% |
|
Net Profit Margin |
12.75% |
24.78% |
|
Return on Assets |
0.049 |
0.109 |
|
Return on Equity |
0.090 |
0.215 |
|
Earning Per Share |
28.2 |
67.3 |
|
Solvency Ratio |
||
|
Particulars |
2018 |
2017 |
|
Total Assets |
$ 17,849.00 |
$ 19,115.00 |
|
Total equity |
$ 9,732.00 |
$ 9,734.00 |
|
Total Liabilities |
$ 8,117.00 |
$ 9,381.00 |
|
Current Assets |
$ 1,650.00 |
$ 2,605.00 |
|
Current Liabilities |
$ 1,239.00 |
$ 2,202.00 |
|
Debtors |
$ 120.00 |
$ 141.00 |
|
Inventory |
$ 496.00 |
$ 588.00 |
|
Current Ratio |
1.332 |
1.183 |
|
Quick ratio |
0.931 |
0.916 |
|
Debtor Collection period |
6.360 |
6.093 |
|
Inventory held period |
36.722 |
43.908 |
|
Debt Ratio |
0.455 |
0.491 |
|
Equity Ratio |
0.545 |
0.509 |
The ratios which are computed and shown in the above table shows that the significant ratios which are computed for the business considering the annual reports of the business for the year 2018 and 2017. The profitability ratio which is shown in the above table comprise of gross profit margin, net profit margin, return on assets, return on equity and earning per share of the business.
The gross profit margin of the business is shown to have decreased significantly during the period from last year which is mainly due to the fall in the sales of the business. The gross profit margin of the business is shown to be 28.42% while the same was 42.13% in 2017. Similarly, the net profit margin of the business is also shown to have decreased significantly in comparison to previous year analysis which is also due to the fall in the overall sales of the business during the period. The net profit margin of the business for 2018 is shown to be 12.75%. Return on assets and return on equity are considered to key estimates and are indicators of success of the business and the same is shown to have fallen during the current year which is not a positive sign for the business and this also suggest that the profitability of the business has significantly reduced in the current year (Ongore and Kusa 2013). The earnings per share of the business has also reduced due to the fall in profits of the business and the EPS of the business is specified in the annual report of the company.
The solvency ratios of the business consist of some key estimates one of which is the current ratio which determines the liquidity of the business and the same is shown to have increased considerably in 2018 which is due to the fall in current liabilities of the business. The current assets of the business however have decreased in comparison to previous year which is a matter of concern for the management of Fortescue Metals Group Ltd. The quick ratio of the business also shows similar estimates which needs to be considered as the liquidity position of the business is declining. The debt and equity ratio show slight fluctuation during the period and mostly represent the capital structure of the business.
As per the corporate governance report of the business for the year 2018, the company is dedicated towards effective and ethical practices in the overall operations of the business. The board of directors of the business is responsible for enforcing the corporate governance of the business and also for promoting sustainable practices in the business (Fmgl.com.au 2018). The cornerstone of the corporate governance principle which is followed by the management of Fortescue Metals Group Ltd are listed below:
- Transparency: The company follows the policy of being clear and accurate in the operations management and reporting of the business. The management of the company does not believe in ambiguous statements or reporting.
- Integrity:The business is dedicated towards ethical display of practices and has strict control over the same as per the corporate governance report of the business.
- Empowerment:As per the policy of the management, every individual in the business has the right and power to take decisions which are beneficial for the business. The management believes in participative leadership style.
- Corporate Accountability: The business accepts full accountability for the actions of the business which can be related to mining and restoration projects or any other case.
The business has established three committee which are responsible for maintain the corporate governance and also effectively follow their respective goals. The company also have a good working environment and has effectively focused on sustainable practices of the business.
The issues which can be identified from the corporate governance policies are listed below:
- The management needs effective monitoring practices which can identify whether the practices which are incorporate by the management are actually being followed or not.
- The safety of the employee should also be a primary concern for the business along with sustainability development.
- The waste management practices of the business can be upgraded so that the business is in adherence with environmental laws.
Conclusion
The above analysis reveals quite significant information about the current operations and performance of the business. The analysis showed that the profitability of the business had significantly fallen in comparison to previous year which was revealed due to the decline in the sales of the business. The liquidity of the business was also affected as the current assets of the business declined in 2018. Both comparative and common size analysis and ratio analysis showed that the profitability of the business was a major concern which the management of the company needed to improve in order to ensure the business earns revenue as per the expectation of the shareholders. The corporate governance report of the Fortescue Metals Group Ltd showed that the company was effectively engaged in ethical practices however further improvements can be brought about.
Reference
Carraher, S. and Van Auken, H., 2013. The use of financial statements for decision making by small firms. Journal of Small Business & Entrepreneurship, 26(3), pp.323-336.
Fifka, M.S., 2013. Corporate responsibility reporting and its determinants in comparative perspective–a review of the empirical literature and a meta?analysis. Business strategy and the environment, 22(1), pp.1-35.
Fmgl.com.au 2018. . Retrieved 28 September 2018, from https://www.fmgl.com.au/docs/default-source/announcements/fy18-corporate-governance-statement.pdf?sfvrsn=1e801e0e_8
Fmgl.com.au. 2018. Annual Reporting 2018 | Fortescue Metals Group Ltd . [online] Available at: https://www.fmgl.com.au/investors/annual-reporting-2018 [Accessed 28 Sep. 2018].
Nobes, C., 2014. International classification of financial reporting. Routledge.
Ongore, V.O. and Kusa, G.B., 2013. Determinants of financial performance of commercial banks in Kenya. International Journal of Economics and Financial Issues, 3(1), pp.237-252.
Weil, R.L., Schipper, K. and Francis, J., 2013. Financial accounting: an introduction to concepts, methods and uses. Cengage Learning.
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