Financial Performance Evaluation Of Barrick Gold Corporation

Overview of Barrick Gold Corporation

Discuss about the Financial Performance Of Family Firms.

With the rising competition in the global marketplace, it has become difficult for the business organisations to sustain their operations and other business activities (Epstein, Buhovac and Yuthas 2015). The current report intends to provide a detailed overview of one of the leading global gold mining companies, which is Barrick Gold Corporation. A key overview of the organisation would be provided including its significant business activities and any changes in financial performance based on the message of the chairperson or the managing director. In addition, the paper would evaluate the financial performance of the organisation by computing key financial ratios based on its consolidated financial statements of the years 2014 and 2015. Finally, the report would shed light on providing valuable suggestions to the organisation so that its financial performance could be improved in future.

Barrick Gold Corporation is the leading gold mining firm in the world and the headquarter of the firm is situated in Toronto, Ontario, Canada. The main business activity of the organisation is its mining operations in Canada, Australia, Argentina, USA, Chile, Papua New Guinea, Saudi Arabia, Zambia, the Dominican Republic and Peru (Barrick.com 2018). Above 75% of gold production of the organisation is generated from US. In 2016, the organisation produced 5.52 million ounces of gold at $798 per ounce and 415 million pounds of copper at $2.05 per pound. On 31^st December 2016, Barrick had 85.9 million ounces of probable and proven gold reserves (Barrick.com 2018). The other major operating segments of Barrick comprise of Goldstrike, Cortez, Nevada, Lagunas Norte, Turquoise Ridge, Acacia Mining Plc, Pueblo Viejo and Pascua-Lama. With the help of its subsidiary, Acacia, the organisation owns gold mines as well as exploration properties in Africa.

According to the annual report of Barrick Gold Corporation in 2015, the following are the significant changes in financial performance based on the message of the Executive Chairman, John L. Thornton:

At the beginning of the year 2015, the organisation planned to minimise its total debt by $3 billion. It has been found at the end of the year that the organisation managed to reduce the same by $3.1 billion, which denotes its efficiency in minimising the overall debt burden (Barrick.q4cdn.com 2018).

Barrick intended to generate free cash flow amounting to $1,100 gold at the start of the year. In fact, it managed to over achieve the set target by generating $0.5 billion free cash flow at a recognised price of $1,157 gold. This is mainly achieved by conducting credit checks on the customers (Amit and Villalonga 2014).

Significant changes in financial performance in 2014 and 2015

Barrick intended to retain its cash costs between $600 and $640 per ounce. It succeeded in achieving the same, as the actual cash cost incurred was $596 per ounce. This signifies the ability of the organisation in minimising its cost of production by using latest machinery and equipment (Friede, Busch and Bassen 2015).

The following are the key financial ratios computed for Barrick Gold Corporation based on its consolidated financial statements in the years 2014 and 2015:

Based on the above-calculated ratios, the financial condition of Barrick Gold Corporation could be analysed as follows:

In order to conduct the profitability analysis of Barrick, the two ratios that have been taken into consideration include gross margin and net margin. In the words of Grant (2016), gross margin is a financial ratio, which gauges the ability of an organisation in controlling its costs. In case of Barrick Gold Corporation, gross margin has fallen from 33.29% in 2014 to 23.50% in 2015. The reason identified behind such decline in gross margin is the significant fall in revenue base in 2015, while the cost of revenue for the organisation has increased in the same year. This denotes that the organisation is struggling to generate adequate profit from revenue after deducting its cost of goods sold.

Net margin gauges the overall profitability of an organisation by taking into consideration all financing and operating expenses (Islam 2014). Thus, it denotes the amount of revenue generated by an organisation for different corporate activities. For Barrick, the ratio has been negative in both the years, as other operating expenses have been higher in contrast to gross income. Thus, in terms of profitability, the organisation had been struggling to maintain its position in the global marketplace.

In order to conduct the liquidity analysis of Barrick, the two ratios that have been taken into consideration include current ratio and quick ratio. Current ratio assists the investors and creditors in gaining an overview of the liquidity of an organisation and its ability to settle its current obligations (Miller-Nobles, TMattison and Matsumura 2016). An ideal current ratio is considered as 2. In this case, the current ratio has increased from 2.40 in 2014 to 2.96 in 2015, which is much higher than the ideal standard. This is because of the significant amount of inventory on hand and it denotes that Barrick is not utilising its assets base properly for converting inventory into working capital. Therefore, a huge amount of cash is stuck in inventory base for the organisation, which could otherwise be used for running its daily business operations.

Key financial ratio analysis

Quick ratio gauges the capability of an organisation to settle its existing obligations when they become due with quick assets only like cash, accounts receivable, marketable securities and short-term investments (Liu 2018). For Barrick, the ratio has increased significantly from 1.31 in 2014 to 2.01 in 2015, which again denotes improper utilisation of short-term assets, as they could be used for future expansion projects.

In order to conduct the efficiency analysis of Barrick, the two ratios that have been taken into consideration include receivables turnover and inventory turnover. Inventory turnover ratio helps in depicting the efficiency of an organisation in managing its inventory by comparing cost of revenue with average inventory for a year. A lower ratio in terms of days is always favourable for an organisation (Wahlen, Baginski and Bradshaw 2014). In case of Barrick, the ratio has fallen from 144 days in 2014 to 117 days in 2013, as it has focused on minimising its inventory base greatly. Receivables turnover gauges the number of times an organisation could convert its accounts receivable into cash in a year. For Barrick, the ratio has fallen from 23 days in 2014 to 22 days in 2015 and thus, a slight improvement could be seen in its efficiency position due to stringent credit policy for the customers (Vogel 2014).

In order to conduct the solvency analysis of Barrick, the two ratios that have been taken into consideration include gearing ratio, debt ratio and equity ratio. Gearing ratio indicates the financial risk of a business organisation to which it is subjected, as additional debt could result in financial troubles (Wagner et al. 2015). In case of Barrick, the ratio has increased from 0.67 in 2014 to 0.71 in 2015, which is much higher than the ideal standard of 0.5. This is because of the significant rise in deferred revenues in 2015 and repayment of long-term loans by disposing a portion of its assets. Hence, it is placed in a risky position. This is supported further by debt ratio and equity ratio, which have increased and declined respectively over the years. Thus, in terms of solvency position, Barrick might experience financial difficulties in future.

Hence, based on the above evaluation, it could be cited that Barrick has been struggling to maintain its financial condition in the marketplace and thus, it needs to undertake remedial measures for improving the same.

Conclusion and recommendations:

From the above discussion, it is evident that Barrick Gold Corporation is suffering from financial troubles, as it incurred net losses in both the years due to significant decline in revenue base and rise in operating expenses. In addition, it has focused on maintaining too much inventory on hand and raising funds through debt, due to which it might lose its competitive position in the marketplace. Therefore, it needs to minimise its inventory base so that better liquidity position could be ensured. Moreover, it needs to reduce other operating expenses in order to avoid further net losses. Finally, it is advised to raise some additional equity shares in the market for avoiding the risky financial position of the business.

References:

Amit, R. and Villalonga, B., 2014. Financial performance of family firms. The Sage handbook of family business, pp.157-178.

Barrick.com., 2018. Barrick Gold Corporation - Home . [online] Available at: https://barrick.com/ [Accessed 21 Jul. 2018].

Barrick.q4cdn.com., 2018. [online] Available at: https://barrick.q4cdn.com/788666289/files/doc_financials/annual/2015/Barrick-Annual-Report-2015.pdf [Accessed 21 Jul. 2018].

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Friede, G., Busch, T. and Bassen, A., 2015. ESG and financial performance: aggregated evidence from more than 2000 empirical studies. Journal of Sustainable Finance & Investment, 5(4), pp.210-233.

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Liu, Z., 2018. Financial Situation Assessment of a Selected Company.

Miller-Nobles, T.L., Mattison, B. and Matsumura, E.M., 2016. Horngren's Financial & Managerial Accounting: The Managerial Chapters. Pearson.

Vogel, H.L., 2014. Entertainment industry economics: A guide for financial analysis. Cambridge University Press.

Wagner, D., Block, J.H., Miller, D., Schwens, C. and Xi, G., 2015. A meta-analysis of the financial performance of family firms: Another attempt. Journal of Family Business Strategy, 6(1), pp.3-13.

Wahlen, J., Baginski, S. and Bradshaw, M., 2014. Financial reporting, financial statement analysis and valuation. Nelson Education.