Financial Analysis Of Mako Gold Limited

Shareholder Details of the Company

Students are required to form a group consisting of 4 students (max). The group is required to study, undertake research, analyze and conduct academic work within the areas of business finance covered in learning materials 1 to 10 inclusive. The assignment should examine the main issues, including underlying theories, implement performance measures used and explain the firm financial performance. Your group is strongly advised to reference professional websites, journal articles and text books in this assignment (case study).

Required: This assessment task is a written report and analysis of the financial performance of a selected company in order to provide financial advice to a wealthy investor. It will be based on financial reports of a listed company on the ASX . This assignment requires your group to undertake a comprehensive examination of a firm’s financial performance and must be submitted by Week 11 HI5002: Finance for Business, Assignment, 2018 2 STAGES TO BE COMPLETED Create your group’s “business name” under which your group will be providing the financial advisory services.

Choose a company that your group will investigate/analyse for the purposes of possible recommendation to your client. The group should obtain all information about the selected company from this web site: www.asx.com.au Please note: Each group can only choose 1 company and once the company has been chosen, the other group can not choose the same company (in other words, the latter group has to choose another company that hasn’t been chosen by other groups). First come first served rule applies here, it means let your lecturer knows asap which companies your group want to discuss, your lecturer can check whether your chosen companies are still available or not and finally register your chosen company with your Lecturer Your group MUST: ? Obtain a copy of the last Financial Statements including Income Statements, Balance Sheets, Statement of Changes in Equity, Cash Flows Statements and Notes. Your group can downloaded these documents from the suggested web site using the firm’s code (example, BHP- for BHP Billiton Company, etc).

(Part 1 to 10) 1 A description of the company (Part 1) 2 Identify your company (in terms of the ownership-governance structure) (Part 2 i & ii) 3 Calculation of Performance Ratios (Part 3 i, ii and iii) 4 Two graphs from www.asx.com.au with the description of results (Part 4 i & ii) 5 Identify any significant factors which may have influenced the share price of your company. (Part 5) 6 Calculation of ’ beta values and expected Rates of Return using the CAPM (Part 6 i, ii & iii) 7 Weighted Average Cost of Capital (WACC) (Part 7 i & ii) 8 Using the debt ratios for your company over the past two years, emphasise any improvement towards the maintenance of a preferred optimal capital structure. (Part 8 i & ii) 9 Dividend Policy (Part 9) 10 Letter Recommendation (Part 10) 11 Formal structure (Part 1 to 11) Final Submission of Complete Assignment on Blackboard (Week 11) HI5002: Finance for Business, Assignment, 2018 3 QUESTIONS Your group is an investment adviser, working to build a foundation of wealth for your clients.

Performance ratio analysis of Mako Gold Limited

One of your wealthiest clients already has a diversified portfolio, which includes managed funds, property; cash/fixed interest and a few direct share investments in Australia and around the world. The assignment is a written comprehensive report and analysis of the firms’ financial performance (including referencing). 100 marks Your group is required to do the following tasks: 1. 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. 4 marks 2. Specify ownership-governance structure of the company:

i) Name the main substantial shareholders:

? With higher than 20.00% of shareholdings. Based on this argument you should classify a firm as a family or non-family company, and

? With higher than 5.00% of shareholdings. 3 marks ii) Name the main people involved in the firm governance:

? The Chairman

? Board members

? CEO. o Whether any of these people have the same surname as any of substantial shareholders (>20% share capital). If yes- you could use this as an argument for the presence of an owner or family member(s) in the firm’s governance. o Whether any of shareholders with more than 5% share capital are involved in firm governance. 3 marks

3. Calculate the following Fundamental Ratios for your selected company for the past 2 years. Annual reports are accessible via company websites: - Short term solvency (Liquidity ratios) - Long term solvency (Financial Leverage ratios) - Asset utilization (efficiency or turnover ratios) - Profitability ratios - Market value ratios 20 marks 4. Using the information from the ASX website: www.asx.com.au you must complete the following tasks: HI5002: Finance for Business, Assignment, 2018 4 i) Prepare a graph / chart for movements in the monthly share price over the last two years for the company that you are investigating. Plot them against movements in the All Ordinaries Index. 6 marks ii) Write a report which compares movements in the companies’ share price index to the All Ords Index. For instance, how closely correlated is the line with the All Ords Index. Above or below? More or less volatile? 6 marks 5.

Research via the internet or financial/business publications: From research via the internet (using credible sources) or financial/business publications, note any significant announcements which may have influenced the share price of your company. These factors could include merger activities, divestitures, changes in management’s earnings forecasts, changes in analysts’ forecasts, unusual write-offs or abnormal items, macroeconomic factors, industry wide factors, significant management changes, changes in the focus of the company, impact of competitors or law suits etc. (Restrict the number of announcements to 5). 10 marks 6. Go online to and type in the code for your company into the Search Stocks field and click on the magnifying glass button.

i) What is their calculated beta (β) for your company? 2 marks

ii) If the risk free rate is 4% and the market risk premium is 6%, use the Capital Asset Pricing Model (CAPM) to calculate the required rate of return for the companies’ shares. 4 marks

iii) Is the company you have chosen a “conservative” investment? Explain your answer. 2 marks

7. Weighted Average Cost of Capital (WACC) i) Using information from the latest company report for the company (i.e. interest rate on their major source of long-term loans) and the estimated cost of equity capital calculated (in part 6ii above), calculate the WACC for your company. 6 marks ii) Explain the implications that a higher WACC has on management’s evaluation on prospective investment projects. 4 marks 8. Consider the debt ratio for your company over the past two years: i) Does it appear to be working towards the maintenance of a preferred optimal capital structure? (i.e., does it appear to be “stable”?). Explain your answer. 4 marks ii) What have they done to adjust/amend their gearing ratio? Increase or repay HI5002: Finance for Business, Assignment, 2018 5 borrowings? Issue or buy back shares? Has the Director’s Report given any information as to why they have made any adjustments? 4 marks

9. Dividend policy Discuss what dividend policy of the management of the company appears to be implemented. Explain any reason related to that particular dividend policy. 7 marks 10. Based on your analysis above, write a letter of recommendation to your client, providing an explanation as why you would like to include this company in his/her investment portfolio. Please refer to the ratio results calculated earlier and any other trends or factors that you believe to be important. 10 marks 11. Formal structure and referencing. 5 marks __________________ Total = 100 Marks

Shareholder Details of the Company

There are several financial tools which could be used by the management of the Mako Gold Limited to implement the effective strategic program.  Ratio analysis, top-down analysis, bottom-up analysis and Du Pont analysis are the some of the financial tools which could be used by investors and management to make the effective financial planning. The ratio analysis and CAPM methods are used to evaluate the capital structure and financial performance of the company.  In this report, financial analysis of Mako Gold Limited has been taken into consideration to identify the future performance of the company..

1.Description of Mako Gold Limited

The Mako Gold Limited is an exploration company focussed on the discovery of large high-grade hold deposit under-explored terrains working in the several countries This Company has been undertaking several gold projects which are mainly mineralised terrains business around the globe (Mako Gold Limited. 2018).

2.Governance and Ownership structure

The CEO of the company is M Elliott who takes all the imperative decisions in an effective manner. Mako Gold Limited established harmonization in its reporting frameworks by complying with the IFRS rules and regulations.

The governance structure of Mako Gold Limited is accompanied by the following key managerial person who takes all the imperative decisions.

It Is evaluated that the  Mark Elliott who is the executive directs holds 8,666,667 shares,  Peter Ledwidge, Executive directors holds  18,333,433 shares and independent directors Michele Muscillo holds 500,000 shares in the company (Yahoo Finance, 2017).

Shareholder details of the company 

Source: Mako Gold Limited, 2017).

3.Performance ratio analysis of Mako Gold Limited

By using the ratio analysis, financial performance and trend of Mako Gold Limited could be analyzed (Mako Gold Limited, 2015).

Short-term solvency ratio

1. Current ratio

The current ratio of Mako Gold Limited has increased the drastic rate which divulges that company has invested more capital in its current Assets (Mako Gold Limited, 2017).

Liquidity ratio	Years
	2017	2016
Current ratio	3.8	.10
Quick ratio	3.5	.08

Interpretation

The Mako Gold Limited has increased its current ratio to 3.8 points in 2017 which is 3 points higher as compared to last year data.  It has increased its current ratio with a view to meet its future liabilities.

Quick ratio

The quick ratio of Mako Gold Limited has also increased to .08 which reveals company’s investment in its current assets other than inventory. The quick ratio shows company’s immediate ability to pay off its short term and long term debts from its current assets except for inventory.

Proving the equation

Providing equation	2016	2017
Net profit After tax/OE	-0.5157	-0.917238987
EBIT/TA*NPAT/EBIT*TA/OE	-0.5157	-0.917238987

Performance ratio analysis of Mako Gold Limited

Long term Solvency ratios

Debt to equity

The debt to equity ratio reveals the debt to equity capital structure of the company. It is observed that the debt to equity of company was showing the negative results in 2016. Company maintained an impartible debt to equity ratio in 2016 which went down to 17% in 2017.  This reveals that company increased its equity portion by issuing more capital in the market.

Computation of debt to equity of Company

3.    Debt Ratio
	2017	2016
A.  Total Liabilities	1,34,348	28830
B.      Total assets	7,77,724	2,486.00
(A/B)	17%	1160%

Interpretation

            The debt to equity of company has been reduced to 17 % which shows that Mako Gold Limited increased its debt portion and equity portion and maintained 17% debt to equity ratio.

Gearing ratio discussion

The gearing ratio of Mako Gold Limited shows its ability to pay off its interest payment out of the earning available. After analysing the annual report, it could be inferred that Mako Gold Limited has negative earnings in its business. However, the interest payment of company is also zero which shows no gearing risk in business (Mako Gold Limited, 2017).

Gearing Ratio
	2016	2017
Gearing Ratio	0%	0%

 This ratio is zero as the company has no interest payment in its business.  

Asset utilization

1. Inventory turnover ratio

It is observed that Mako Gold Limited has not been keeping the inventory in its business. Therefore, there would be no efficiency to reduce the cash blockage in its inventory assets.

Efficiency ratio	Years
	2017	2016
Inventory turnover ratio	0	0
Asset turnover ratio	0.120	2.10
Receivable turnover ratio	4.13	0
Days' sales in inventory	0	0
Days' sales in receivables	0	0

(Mako Gold Limited, 2017)

2. Assets turnover ratio

The asset turnover ratio of Mako Gold Limited reflects its ability to earn money from its deployed assets. Mako Gold Limited is having a negative profit which shows that it has Assets turnover in 2016. However, in 2017, it had 101 times asset turnover ratio.

3. Debtor turnover ratio

The debtor turnover ratio should be higher if a company want to maintain effective business. The debtor turnover is 4.13 times which is very less. The debtor turnover ratio of Mako Gold Limited should be higher if a company want to block less capital in its business. However, the company has already kept its cost of capital by keeping the high debt portion and less cost of capital. All of the capital funding of the business is private funding.  

Profitability ratios

The profitability ratio divulges Mako Gold Limited’s ability to earn a profit on its investment.

Return on assets

1.        The rate of Return on Assets
	2017	2016
A.      Net income	-69,280	-26,444
B.      Total assets	7,77,724	2,486
(A/B)	-9%	-1064%

Interpretation

The return on total Assets of the company has been showing negative results which reflects that company has destructed the business assets and failed to use it efficiently. With the increased profitability, the company will have good and effective sustainable future.

Liquidity ratio

Return on Equity

Return on Equity
	2017	2016
A. Net income available to equity shareholders.	-69,280	-26,444
B. Shareholder’s Equity	1,34,348	28,830.00
(A/B)	-52%	-92%

 Interpretation of the data

It is the amount of return available to equity shareholders. It is observed that Mako Gold Limited has shown the negative % of its earning which is available to shareholders. The company has destructed the value of an investment which will negatively impact the business sustainability of the Mako Gold Limited. 

Market value ratios

1. Earnings per share

The earning per share is the amount of earning available for the equity shareholders.

Market Value ratios	Years
	2017	2016
Earnings per share	0`	0
P/E ratio	-	-
Dividend payout ratio	-	-

There is no market value of the company has company has been facing high destruction in its business.

Price to earnings ratio

The price to earnings ratio of the company has been negative which reflects the negative indicator for the future growth.

Dividend payment ratio

The dividend payment ratio shows that company has negative business output and failed to pay a dividend since last five years.

1.Share price graph of the Mako Gold Limited

1.1  A graph reflecting the share price movement of Mako Gold Limited and All ordinary share price index

 2 The comparison between the Share price movement of Mako Gold Limited and share price movement of all ordinary stock exchange

 Introduction  

            The above graph shows that company has increased its share price since last two years. However, there is a loss of its business which reflects that company will have to face liquidation or winding soon if it does not maintain its business.

Analysis

             In 2017, Mako Gold Limited had good increment and maintained stable business output (Badenhorst, and Ferreira, 2016). If Company failed to lower down its cost of capital then it will result to destruction of business in long run.

Conclusion

After analysing all the information, it could be inferred that Mako Company need to lower down its debt portion and increase its overall profitability throughout the time.

1. Announcements

These are the announcement which has positively and negatively impacted the share price movement of Mako Gold Limited (Morningstar, 2018).

The company has maintained a stable debt to equity ratio by increasing the equity portion of its business.

The strategic alliance has been showing the positive results for the business growth of the Mako Gold Limited in long run.

The market factors and adoption of the advanced technologies will positively impact the share price movement of Mako Gold Limited throughout the time.

The positive return on capital employed and strategic planning of the Mako Gold Limited will create an effective shield for the business loss of organization.

Long term Solvency ratios

2. Research via internet

Stock information and Beta calculation

The beta is calculated by using the excel and reversion analysis (Mako Gold Limited. (2015).

SUMMARY OUTPUT
Regression Statistics
Multiple R	0.06574033
R Square	0.00432179
Adjusted R Square	-0.0409363
Standard Error	0.02407664
Observations	24

ANOVA
	df	SS			MS		F		Significance F
Regression	1	5.53553E-05			5.53553E-05		0.095492		0.760215
Residual	22	0.012753066			0.000579685
Total	23	0.012808421
			Coefficients	Standard Error		t Stat		P-value		Lower 95%	Upper 95%		Lower 95.0%	Upper 95.0%
Intercept			0.009335838	0.004924553		1.89577349		0.071203		-0.00088	0.019549		-0.00088	0.019549
X Variable 1			0.002382571	0.007710137		0.309017973		0.760215		-0.01361	0.018372		-0.01361	0.018372

Source: Morningstar, 2018

2.1  Beta calculation

The beta of the company is computed by using the regression analysis between share price movement of the all ordinary index and share price of Mako Gold Limited (Mako Gold Limited, 2017).

6.2 Computation of required rate of return by using CAPM method

E(R) =

E(R) = expected Amount of rate of return

 = Risk free % rate of return

β = Computed Beta

= Market premium risk factor (Mako Gold Limited, 2017).

Calculation of Required rate of return of Mako Gold Limited
Risk-free rate (A)	4%
Beta (B)	0.002382571
Market Risk premium (C)	6%
Required rate of return [A+(B*C)]	4.01%

 (Please see the excel)

Notes- RF risk-free rate of return, computed by using the return available on the 10-year treasury bonds.  

6.3 Determining the investment method (Conservative investment)

The investment option or method used by Mako Gold Limited is based on the opportunity available in the market for the investors and investment decisions of the company.
After analysing the annual report of Mako Gold Limited, it could be inferred that company has not been following conservative investment method.

It has made an investment in its research and development department by investing AUD # 24 million capitals for the better expansion of its business. Nonetheless, due to the sluggish market Condition Company had to stop its investment in its operating activities. The company raised capital by using the private funding to lower down its financial leverage.

3.Computation of the weighted average cost of capital

3.1  Computed Cost of Capital through Capital Assets Pricing model

Cost of capital= KE= 4.37%

CAPM method is being used to compute the cost of equity of the company.

Cost of debt- 1.93%

The cost of debt is determined by using the cost of interest payment and debt funding.

WACC = cost of debt* portion of the debt capital+ cost of Equity * portion of the Cost of equity (Morningstar, 2018).

WACC	Capital Amount	Cost of capital	% of portion	WACC
Equity	28,830	4.01%	50%	2.01%
Debt	28,830	0.00%	50%	0.00%
Total capital	57,660	WACC		2.01%

            After analysing all the details, it could be inferred that the weighted average cost of capital of the company is 2.01% which is too low. It will assist the company to increase its overall outcomes and assist it to accept as many projects as it could.

7.2 Implications that a higher WACC on investment decision

The weighted average cost of capital of Mako Gold Limited is very low which shows that company could accept more projects which will eventually increase the overall return on capital employed. It is analyzed that if Mako Gold Limited will have higher WACC then it will negatively impact the company either in terms of return on capital employed and financial leverage. The higher WACC of the company will charge the higher cost of capital on business which will eventually increase the overall financial risk and result in the destruction of business if the company failed to earn a profit. It will also restrict company to create value on its investment by accepting more investment projects the lower WACC is the positive indication for the future growth and sustainable business or the organization. In case if Mako Gold Limited has higher WACC then it will negatively impact the sustainable future of the company (Mako Gold Limited, 2017).

Asset utilization

4.Debt ratio consideration of Mako Gold Limited

8.1 Stable Debt to equity ratio of the company

The debt to equity of Mako Gold Limited was totally unimaginable which reflects the negative indicator for the future growth of the business. It is observed that debt to equity ratio reveals the debt to equity capital structure of the company. It is observed that the debt to equity company reflected highly negative results in 2016. Company maintained an impartible debt to equity ratio in 2016 which went down to 17% in 2017.  This reveals that company increased its equity portion by issuing more capital in the market (Crazier, et al. 2015).

Computation of debt to equity of Company

3.    Debt Ratio
	2017	2016
A.  Total Liabilities	1,34,348	28830
B.      Total assets	7,77,724	2,486.00
(A/B)	17%	1160%

Interpretation

            The debt to equity of company has been reduced to 17 % which shows that Mako Gold Limited increased its debt portion and equity portion and maintained 17% debt to equity ratio.

8.2 Gearing ratio discussion

The gearing ratio of Mako Gold Limited divulges its ability to pay off its interest payment out of the earning available. The gearing ratio of this company impracticable to compute as Mako Gold Limited is having negative earnings in its business. However, the interest payment of company is also zero which shows no gearing risk in business (Mako Gold Limited, 2017).

Gearing Ratio
	2016	2017
Gearing Ratio	0%	0%

 This ratio is zero as the company has no interest payment in its business

5.Divided policies of the company

The dividend policy of Mako Gold Limited is profit based dividend policy. However, since last two years, Mako Gold Limited has not issued a dividend to its shareholders which may negatively impact its business. The dividend is the amount of return given to shareholders as an additional benefit for their long term benefit plan. The profit-based dividend policy is the mostly adopted policy which assists listed company to establish eh nexus between the organization developments with the stakeholder’s growth in the long run. However, the company needs to focus on creating value on the investment by using the proper work program and effective work functions it is the right time when Mako Gold Limited needs to change its dividend policy to attract more shareholders for the capital investment (Dahir, Mahat, and Ali, 2018).

Letter of recommendation

To,

Directors of Mako Gold Limited

Address:-

            With the ramified changes in the economic factor, Mako Gold Limited has also faced several challenges and used the opportunities to create value on its investment. The main positive factors which have impacted the share price movement of the Mako Gold Limited is related to reduced financial leverage and increased profitability in 2017. It is analyzed that if directors want to maintain sustainable future then firstly they will have to analysis that company has not been using its capital effectively. There is zero amount of inventory turnover which has negatively impact the business efficiency. In addition to this, the company has also faced high financial leverage which has been compensated by the management and directors by increasing the capital portion. In 2017, debt to the equity portion of the company has been 17% which reflects the positive indicator throughout the time.  It is analyzed that share price trend of the company is also increased since last two year which might be used as a positive indicator of the survival of the business.

Profitability ratios

The directors of Mako Gold Limited need to take strategic decisions to win over the market as the company has to run its business in this tough competition (Ballas, Skoutela, and Tzovas, 2010). Using of the strategic alliance, effective strategic planning and proper financial tools are the keys to the success of Mako Gold Limited.  Now, in the end, it could be inferred that directors need to focus on increasing the overall turnover and maintain the low financial leverage. The lower WACC is the positive indication for the future growth and sustainable business or organization (Brigham, and Ehrhardt, 2013).

6.Conclusion

After analysing all the detail shown in the annual report of Mako Gold Limited, it could be inferred that company has been using the effective financial planning to maintain its business stable. As compared to last year data, the company has planned to manage its debt portion by increasing its equity capital business. The negative net profit of company has also converted to the positive results in 2017 which reflects the positive indicator for the sustainable future and effective growth of the business. There are several other factors which have pointed out that company will survive in future. If investors want to invest their capital in Mako Gold Limited then they are advised to invest their capital in long run. If they invest their capital for short run then they will have to high loss in their investment. Now, in the end, it could be inferred that with the less financial leverage and high profitability chances company will surely create value on its investment in the long run.

7.References

Badenhorst, W.M. and Ferreira, P.H., 2016. The Financial Crisis and the Value?relevance of Recognised Deferred Tax Assets. Australian Accounting Review, 26(3), pp.291-300.

Ballas, A.A., Skoutela, D. and Tzovas, C.A., 2010. The relevance of IFRS to an emerging market: evidence from Greece. Managerial Finance, 36(11), pp.931-948.

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

Cazier, R., Rego, S., Tian, X. and Wilson, R., 2015. The impact of increased disclosure requirements and the standardization of accounting practices on earnings management through the reserve for income taxes. Review of Accounting Studies, 20(1), pp.436-469.

Dahir, A.M., Mahat, F.B. and Ali, N.A.B., 2018. Funding liquidity risk and bank risk-taking in BRICS countries: An application of system GMM approach. International Journal of Emerging Markets, 13(1), pp.231-248.

Mako Gold Limited (2015). Annual report.

Mako Gold Limited. (2016). Annual report.

Mako Gold Limited. (2017). Annual report.

Morningstar, 2018 retrieved, 

Yahoo finance, 2018 

8. Appendix

WACC	Capital Amount	Cost of capital	% of portion	WACC
Equity	28,830	4.01%	50%	2.01%
Debt	28,830	0.00%	50%	0.00%
Total capital	57,660	WACC		2.01%

Date	Adj Close	Mako Gold Limited (MKG.AX)	Adj Close (All ordinary share index)	Average Return
30-04-2016	0.210		null
31-05-2016	0.185		4947.899902
30-06-2016	0.185	-	5151.799805	0.04
31-07-2016	0.168	-                                                                       0.09	5316	0.03
31-08-2016	0.156	-                                                                       0.07	5447.799805	0.02
30-09-2016	0.143	-                                                                       0.08	5310.399902	-                   0.03
31-10-2016	0.131	-                                                                       0.09	5644	0.06
30-11-2016	0.118	-                                                                       0.10	5529.399902	-                   0.02
31-12-2016	0.106	-                                                                       0.11	5525.200195	-                   0.00
31-01-2017	0.093	-                                                                       0.12	5402.399902	-                   0.02
28-02-2017	0.081	-                                                                       0.13	5502.399902	0.02
31-03-2017	0.068	-                                                                       0.15	5719.100098	0.04
30-04-2017	0.056	-                                                                       0.18	5675	-                   0.01
31-05-2017	0.043	-                                                                       0.22	5761	0.02
30-06-2017	0.031	-                                                                       0.29	5903.799805	0.02
31-07-2017	0.018	-                                                                       0.41	5947.600098	0.01
31-08-2017	0.006	-                                                                       0.68	5761.299805	-                   0.03
30-09-2017	-0.007	-                                                                       2.14	5764	0.00
31-10-2017	-0.019	1.88	5773.899902	0.00
30-11-2017	-0.032	0.65	5776.299805	0.00
31-12-2017	-0.044	0.39	5744.899902	-                   0.01
31-01-2018	-0.057	0.28	5976.399902	0.04
28-02-2018	-0.069	0.22	6057.200195	0.01
31-03-2018	-0.082	0.18	6167.299805	0.02
30-04-2018	-0.094	0.15	6130.399902	-                   0.01
23-05-2018	-0.107	0.13	6131.399902	0.00