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## Short term solvency or liquidity ratios:

Question :

In assessing business loan applications, banks and other lenders often ask for the financial statements of applicants in order to conduct financial statement analysis before deciding whether to approve or decline the loan application.

The company chosen for calculation of the ratios is Fortescue Metals. It is the company deals in iron ore and is located in the area that is rich in Pilbara region of the Western Australia that has close proximity to Asia and India. It is the fourth largest producer of iron.

This report aims at conducting the ratio analysis of the company. (Fmgl.com.au, 2014)

The following table shows the calculated ratios:

 (Amounts in \$ in millions) (Amounts in \$ in millions) Particulars 2014 2013 2012 Short term solvency or liquidity ratios: Current assets 4,477.00 3,662.00 3,650.00 Current liabilities 3,270.00 1,414.00 2,116.00 Current ratio 1.3691 2.5898 1.7250 Current assets - inventory 1,467.00 961.00 617.00 Current liabilities 3,270.00 1,414.00 2,116.00 Quick ratio 0.4486 0.6796 0.2916 Efficiency ratios: Sales 11,753.00 8,120.00 6,716.00 Average debtors 502.50 505.00 506.50 Debtors turnover ratio 23.3891 16.0792 13.2596 Cost of goods sold 7,002.00 5,140.00 4,008.00 Average inventory 1,214.00 789.00 517.00 Inventory turnover ratio 5.7677 6.5146 7.7524 Profitability ratios: Net profit 2,740.00 1,746.00 1,559.00 Sales 11,753.00 8,120.00 6,716.00 Net profit margin 23.31% 21.50% 23.21% Net income 2,740.00 1,746.00 1,559.00 Total assets 22,694.00 20,867.00 15,063.00 Return on assets 12.07% 8.37% 10.35% Net income 2,740.00 1,746.00 1,559.00 Shareholder's equity 7,583.00 5,289.00 3,762.00 Return on shareholder's equity 36.13% 33.01% 41.44% Long term solvency or financing ratios: Total liabilities 15,111.00 15,578.00 11,301.00 Total equity 7,583.00 5,289.00 3,762.00 Debt to equity ratio 199.27% 294.54% 300.40% Total liabilities 15,111.00 15,578.00 11,301.00 Total assets 22,694.00 20,867.00 15,063.00 Debt to total assets 66.59% 74.65% 75.02% EBIT 3,913.00 2,466.00 2,263.00 Interest expense 741.00 586.00 565.00 Interest coverage ratio 5.280701754 4.208191126 4.005309735 Operating income 4,633.00 3,019.00 2,768.00 Total debt service costs 741.00 586.00 565.00 Debt service coverage ratio 6.252361673 5.151877133 4.899115044

The following are the definitions of the various ratios:

Liquidity ratios:

Current ratio:

Current ratio is the measure that tells us as to what extent the current assets are able to pay off the current liabilities of the company.

It is arrived at by dividing the current assets by the current liabilities.

The above ratio shows a decrease in it over the years. The main reason of the same could be increase in both the current assets and current liabilities.

Efficiency ratios:

Debtor’s turnover ratio:

It is a measure through which the company estimates the number of times the company collects the balance in the accounts receivables account.

It is arrived at by dividing the sales by the average of opening and closing accounts receivable.

The graph above depicts the increase in the ratio and this could be due to the increase in the sales over the years.

Long term solvency or financing ratios:

Debt equity ratio:

It is a measure to ascertain the extent to which the equity as well as the liabilities of the company is used to finance its assets.

It is derived by dividing the total liabilities by shareholder’s equity of the company.

The graph above depicts a decrease in the ratio and the main reason could be the increase in the debt and increase in total equity.

Debt to total assets:

This ratio tells us the amount of debt that has been used in order to finance the assets. The increase in the % shows that a higher amount of debt has been used for the financing of assets.

Profitability:

Profitability is the potential of a business to yield gain or profit. Profitability is measured by the profitability ratios like profit margin, return on assets ratio, and return on equity ratio.

The graph above shows a decrease in the ratio and the main reason for the same could be the increase in the amounts of total liabilities and total assets.

Interest coverage ratio:

It is the ratio used to determine the ease with which the company is able to pay off the interest on outstanding borrowings.

It is arrived at by dividing the earnings before interest and taxes by the interest expense.

The ratio has only increased over the years, which is a good indicator.

Debt service ratio:

It is the ratio expressed between a particular time period and the interest and principal over the debt.

The ratio has only increased over the years, which is a good indicator.(FMGL, 2015)

Conclusion:

The company will definitely receive the loan without any hassles.

References:

Fmgl.com.au, (2014). Fortes cue Metals Group Ltd - Share Price and Graphs. Retrieved 4 November 2014, from https://www.fmgl.com.au/investors_and_media/Share_Price_and_Graphs

www.fmgl.com.au, (2015). Annual report 2012. [Online] Available at: https://www.fmgl.com.au/UserDir/FMGReports/Documents/Fortescue%20Annual%20Financial%20Report%202012142.pdf [Accessed 21 Jan. 2015].

www.fmgl.com.au, (2015). Annual report 2013. [Online] Available at: https://www.fmgl.com.au/UserDir/FMGReports/Documents/ASX%20Release%202013%2008%2022%20-%202013%20Results%20and%20Appendix%204E182.pdf [Accessed 21 Jan. 2015].

www.fmgl.com.au, (2015). Annual report 2014. [Online] Available at: https://www.fmgl.com.au/UserDir/FMGReports/Documents/20140820%20annual%20results785232.pdf [Accessed 21 Jan. 2015].

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