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HI5002 Analysis Of Financial Performance For Mission NewEnergy Limited

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Question:

Prepare a brief description of the company, outlining the core activities, the market(s) in which it operates within and any factors in the companies’ history which you
consider help present a “picture” of your company.
 
 

Answer:

Introduction

The overall analysis of company’s financial performance is known as financial analysis. It is very important for the investors to conduct such analysis in order to have an idea about company’s financial position and to decide whether to invest in such company or not. This report contains a whole financial analysis of Mission NewEnergy Limited, listed on ASX. In the analysis, various factors like dividend policy, ROE, ROA, WACC and debt ratio are considered to measure the financial position of the company. The objective of this report is to provide recommendations to the investor regarding its investment in this company. 

 

Company’s Description

Mission NewEnergy Limited is a renewable energy company based in Australia. The company is listed on Australian Securities Exchange. It has biodiesel plant which operates in Malaysia and its segments include Biodiesel Refining and Corporate. Mission NewEnergy owns an interest in a biodiesel refinery in Malaysia and its subsidiaries are Mission Biofuels Sdn Bhd and M2 Capital Sdn Bhd. The strategy of the company is to become one of the lowest cost producers of biodiesel in the world (Missionnewenergy.com, 2018). 

 

Ownership and Governance Structure

Substantial holders

  • More than 5% shareholdings:

Nathan Mahalingam

13.7%

Guy Burnett

12.5%

James Garton

12.5%

KajaintharanSithambaran

12.2%

MuralidharMenon

12.2%

MohdAzlan bin Mohammed

12.2%

Main people involved in governance

  • Chairman and CEO: Nathan Mahalingam(Missionnewenergy.com, 2018).
  • Board members: Nathan Mahalingam (Chief Executive Officer), Guy Burnett: Chief financial Officer (Executive), James Garton: Head of Corporate Finance (Executive). 
 

Key ratios

  • ROA and ROE

Calculation of both the ratios is done on the basis of data taken for the past four years from annual report of the company. 

Mission NewEnergy Limited Financial Statements for year 2014-17

Particulars

2014

2015

2016

2017

 

AUD$

AUD$

AUD$

AUD$

EBIT

-2,271,681

5,063,392

-2,217,694

-4,509,178

Net profit

-1,077,231

28,357,244

-2,328,545

-4,550,604

Total Assets

4,049,265

12,621,248

6,170,964

399,473

Total Liabilities

15,400,486

5,851,692

1,405,698

204,957

Owners' equity

-11,351,221

           6,769,556

4,765,266

194,516.00

 

1.        Rate of Return on Assets

 

2014

2015

2016

2017

A. Net income

-1,077,231

28,357,244

-2,328,545

-4550604

B. Total assets

4,049,265

12,621,248

6,170,964

399,473.00

          (A/B)

-                   0.27

                    2.25

-                  0.38

-                11.39

 

2.       Rate of Return on Equity

 

2014

2015

2016

2017

A. Net income available to equity shareholders.

 

-1,077,231

    28,357,244

 

-2,328,545

-4,550,604.00

B. Owners' Equity

-11,351,221

                17,981

4,765,266

194,516.00

(A/B)

                    0.09

             1,577.07

 

-0.49

 

- 23.39

 

3.    Debt Ratio

 

2014

2015

2016

2017

A.  Total Liabilities

15,400,486

5,851,692

1,405,698

204957

B.      Total assets

4,049,265

12,621,248

6,170,964

399,473.00

(A/B)

        3.80

       0.46

           0.23

          0.51

Proving the equation 

 

2014

2015

2016

2017

EBIT

-2,271,681

5,063,392

-2,217,694

-4,509,178

TA

4,049,265

12,621,248

6,170,964

399,473

NPAT

-1,077,231

28,357,244

-2,328,545

-4,550,604

OE

-11,351,221

6,769,556

4,765,266

194,516

EBIT/TA (A)

-          0.56

          0.40

-        0.36

-      11.29

NPAT/EBIT (B)

            0.47

          5.60

          1.05

          1.01

TA/OE (C)

-          0.36

          1.86

          1.29

          2.05

NPAT/OE (D)

            0.09

          4.19

-        0.49

-      23.39

(A)*(B)*(C) = (D)

            0.09

          4.19

-        0.49

-      23.39

The phenomenon captured by the variable TA/OE is an equity multiplier which is generally used to measure the degree of leverage maintained by a company. Equity multiplier is an essential factor in DuPont Analysis. It breaks down the ROE into various parts like net profit after tax, total assets, owners’ equity and EBIT. It generally observes the changes in these parts to examine the corresponding changes in ROE. It is said that higher the equity multiplier, higher will be the portion of debt financing (Leach and Melicher, 2011).

The manner in which this variable impact the relationship between ROA and ROE is that increase in the multiplier means increase in the total assets which ultimately led to the decrease in Return on Assets Ratio. However, rise in the quantity of sales will make ROA to rise but the equity multiplier remains the same. Hence, it can be identified that the variable TA/OE has a negative or no relationship with ROA. Thus, a high multiplier can increase ROE and as a result of which, ROA reduces, whereas increase in ROA will increase ROE, keeping the multiplier stable (Brigham and Houston, 2012).

Considering the ROE and ROA of 2014 and 2015, it can be said that return on equity of Mission NewEnergy is more than its return on assets. Reason may be, company was making more returns from its investments rather than its assets. Moreover, in year 2015, company has high profits and less equity in proportion to it, that’s why its return was highest in that particular period. Having a high ROE means that the company is managing its owners’ equity very well and in an efficient manner (Parrino, Kidwell and Bates, 2011).The trend got reversed in 2016 where company made losses and its ROA was more than its ROE. The total assets were much higher than shareholder’s capital in 2016 and 2017. Though both the returns were negative but return on assets was bit higher. Reason for having a negative ROE was not having sufficient profits to pay returns to the shareholders (Droms and Wright, 2010).

 

Share price movements

  • Graphical representation of share price movement of Mission NewEnergy Limited and ordinary indices

Mission NewEnergy Limited

The above figures shows the graphical representation of the movements of share prices of the company and All Ordinaries Index. The fluctuations in the share prices of Mission NewEnergy Limited (Figure 1) are compared to the movements in ordinaries index (Figure 2). Data taken is related to the past two years and the graphs made represents that the movements in ordinaries remain almost stable whereas, many variations can be noticed in the share prices of the company. Starting from February 2015, the share price was $0.1 which increases to $0.12 in April 2015. After that a downfall is noticed and prices continues to reduce in the subsequent months. The movement got stable in months of May and June 2015 followed by many fluctuations in the remaining year. During this period the market index remains stable though declining. In January 2016, the price was $0.04 which remains stable for next two months and then continues to decline, reaching at $0.02 in January 2017. In contrast to it, a fall is noticed in the ordinaries index at $4,880.90 in January 2016. After that, prices increases and reaches to $5,665.80 in November 2016. Looking at the figure 2, it can be concluded that All Ordinaries Index remains almost stable during the past two years and the line shown in figure 1 is below it.

Announcements

  1. In November 2013, Mission NewEnergy made an announcement about the agreement with Benefuel Inc., a technology provider in US. It will provide a patented technology process that would help company’s biodiesel refinery to get operated by using substantially lower cost feedstock. The company also announced about its joint venture with Felda Global Ventures Downstream Sdn Bhd to operate its Malaysian subsidiary in an integrated manner (Asx.com.au, 2014).
  2. An announcement regarding successful completion of company transformation was made on February 2015. The company announced that it had completed the transformation plan with success which was started in 2012. This completion result in the various achievements to the company. Balance sheet had been improved and the operations were restructured achieving major milestones in 2013 and 2014. The announcement also stated about the sale of US$22.5 million of Mission’s 250,000 tpa biodiesel refinery. Moreover, the company added 40.28 cents to its share of asset value (Asx.com.au, 2015).
  3. In December 2016, the company publicised about its acquisition of AUS group. It had entered into an agreement to acquire 100% business of AUS group who was a leading manufacturer of materials products in Australia. This acquisition resulted in the issue of new shares by the company at $0.30 per share for raising funds to acquire AUS. Moreover, it also resulted in the increased revenue in the year (Asx.com.au, 2016).

Stock Details

  • Calculated Beta of the company is 6.42
  • Required rate of return using CAPM formula: 

E(R)

 

E(R)

Expected rate of return

 

Risk free rate of return

 

Beta

 

Risk Premium

 

Calculation of Required rate of return

Risk free rate (A)

4%

Beta (B)

6.42

Market Risk premium (C)

6%

Required rate of return [A+(B*C)]

42.52%

 

  • The investments which have low return and low risk are known as conservative investment. It is very much helpful in short term funding and for risk averse investors. It is basically an investment strategy used by the investors for preserving the value of portfolio by investing in lower risk securities. The calculated standard deviation of the company is very low plus its return on equity is in negative. This means company is not performing better and is not able to provide returns to its investors. From the standard deviation point of view it can be considered conservative but looking at the negative ROE, it will be better not to invest in it (Huffman, 2016).

Weighted Average Cost of Capital

  • Cost of equity = 42.52%

Cost of debt = 0%

WACC = cost of equity + cost of debt

       = 42.52% + 0%

       = 42.52%

Cost of debt is zero because company has no borrowing and long term liabilities.

  • WACC of a company represents its overall cost of capital including preferred and ordinary shares and debt along with their weights. A high or low WACC can impact the management decision regarding evaluation of investment projects. High WACC means the project is having more risk. It increases because of the increase in beta and ROE which upsurges the risk and decreases the evaluation. If WACC goes on rising then the risk also increases making the project no more viable for investment. Management will decide to quit the investment in that project (Kim and Kim, 2011).

Analysis of Debt ratio

  • The debt ratio of Mission NewEnergy does not appear to be stable in past four years. The ratio has reduced from 3.80 in 2014 to 0.23 in 2016. After that a slightest increase was there in 2017 where the ratio was 0.51. This reduction in the debt ratio shows that company is paying off its debt in as efficient manner as it can. Reason being, it has stopped operating in recent years and trying to reduce its debt with the available assets (Doss, et. al. 2013).
  • Gearing ratio mainly include long term liabilities and borrowing. As it can be identified from company’s recent annual report that it has no borrowings or non-current liabilities, so the adjustments related to gearing ratio cannot be made. The company only has current liabilities which are to be paid off within a year.

Dividend policy

Dividend is that amount which is paid to stockholders, out of the earnings retained by the company. There are basically four types of dividend policies which are regular, irregular, fixed and no dividend policy. Considering the information given in the annual reports of the company, it can be said that the company has followed no dividend policy in its past years. One of the reason for this is that Mission NewEnergy was occurring losses from past two years and does not have enough retained earnings to pay dividend to its shareholders. Moreover, the company has stopped operating in past years which can also be the reason for following no dividend policy (Baker, ed., 2009).

Recommendation letter

From the above analysis, it can be concluded that this company should not be in the investment portfolio. It has negative ROE, negative profit margin and follows a no dividend policy. On the top of that, Mission NewEnergy Limited is at the stage of winding up, so it will be better not to include this company in the portfolio. 

 

References

Asx.com.au. (2014). Mission signs plant purchase and joint venture agreement with world's largest palm oil producer and US technology provider. [Online] Available at: https://www.asx.com.au/asxpdf/20140901/pdf/42rxhxqr1h71cs.pdf [Accessed 23 Jan. 2018].

Asx.com.au. (2015). Successful completion of Company Transformation. [Online] Available at: https://www.asx.com.au/asxpdf/20150219/pdf/42wpv27wvjtfh3.pdf [Accessed 23 Jan. 2018].

Asx.com.au. (2016). Mission to acquire 100% of the business operations of AUS group. [Online] Available at: https://www.asx.com.au/asxpdf/20161205/pdf/43dhd4j5bjwj9h.pdf [Accessed 23 Jan. 2018].

Au.finance.yahoo.com. (2018). ^AXJO Historical prices | S&P/ASX 200 Stock - Yahoo Finance. [Online] Available at: https://au.finance.yahoo.com/quote/%5EAXJO/history?period1=1421865000&period2=1485023400&interval=1mo&filter=history&frequency=1mo [Accessed 23 Jan. 2018].

Baker, H.K. ed., 2009. Dividends and dividend policy (Vol. 1). John Wiley & Sons.

Brigham, E.F. and Houston, J.F., 2012. Fundamentals of financial management. Cengage Learning.

Doss, D.A., Sumrall III, W.H., McElreath, D.H. and Jones, D.W., 2013. Economic and financial analysis for criminal justice organizations. CRC Press.

Droms, W.G. and Wright, J.O., 2010. Finance and accounting for nonfinancial managers: All the basics you need to know. Basic Books (AZ).

Finance.yahoo.com. (2018). MNELF Historical Prices | MISSION NEWENERGY Stock - Yahoo Finance. [Online] Available at: https://finance.yahoo.com/quote/MNELF/history?period1=1421865000&period2=1485023400&interval=1mo&filter=history&frequency=1mo [Accessed 23 Jan. 2018].

Huffman, B., 2016. Assessing the Risk of Conservative Investments. Journal of Applied Financial Research, 1, p.42.

Kim, K.A. and Kim, S.H., 2011. Global Corporate Finance: A Focused Approach.

Leach, J.C. and Melicher, R.W., 2011. Entrepreneurial finance. Cengage Learning.

Missionnewenergy.com. (2018). Home. [Online] Available at: https://missionnewenergy1-web.sharepoint.com/Pages/default.aspx/ [Accessed 22 Jan. 2018].

Parrino, R., Kidwell, D. S. and Bates, T. 2011. Fundamentals of corporate finance. John Wiley & Sons.

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