Financial And Non-Financial Performance Analysis Of Fortescue Metals Group Ltd

The company which often is abbreviated as FMG is an Australian based iron ore organization. The company is regarded as the fourth largest manufacturer of iron ore worldwide behind Rio Tinto, BHP and Vale SA. The company’s fully owned and integrated operations in the Pilbara region include Chichester Hub, Solomon Hub and the Western mining hubs (Reuters, 2022). With holdings in excess of 87,000 km² in Pilbara, Western Australia, FMG is the largest tenement holder within the state. The company is a public limited company and is listed on the Australian Stock Exchange. Also, the company has its principle headquarters geographically located in Perth, Western Australia.  The company is also known to export their iron ore to nations worldwide which include Japan, China, South Korea and India (Bloomberg.com, 2022)

This report is aimed towards the interests of a potential investor. The main purpose of this report is to analyse the financial performance and non financial performance of FMG over the last three financial years and to recommend to the stakeholder chosen concerning investment decision making. The financial performance of the company will be analysed using financial ratio analysis whereas the non financial performance aspects will be gauged using appropriate key performance indicators that are reported by the company in their annual reports which is aimed towards indicating sustainability in their operations.

The performance analysis of FMG using relevant financial key performance indicators have been evaluated to be positive and favourable with a noticeable performance improvement in almost all aspects which also includes non financial performance. As a result, an impression about the company can be created that its future growth prospects are favourable and thus a potential investor can be recommended an investment in the stocks of FMG.

1. Financial Key Performance Indicators

The annual report of FMG for the recent three financial years through 2019-2021 has been researched and appropriate financial ratios have been computed using the financial information extracts from the presented financial statements. The financial information extracts and formulas for calculating financial ratios have been provided in the appendix section of the report. The calculated financial ratios have been presented as follows:

(Source: Author)

2. Non Financial Key Performance Indicators of Sustainability in Operations

The relevant non financial kpi’s have been completely extracted from the annual report of the company for the last three financial years. These have been presented as follows:

(Source: Author)

1. Profitability Financial Performance

The profitability performance of an organization can be interpreted by evaluating the profitability ratios of an organization. The two relevant profitability metrics selected are the gross profit margin and the net profit margin. The gross profit margin ratio is one of the most common measures of profitability which evaluates the potential of the revenue of the company in meeting the direct costs incurred by an organization (Brigham and Houston 2021). The metric can also be interpreted as the proportion of revenue which is left behind after covering for the cost of sales. It can be analysed that the gross profit margin of FMG has been increasing year on year from 48.67% in 2019 to 55.21% in 2020 to 69.51% in 2021. The main reason for increasing gross profit margin ratios is because of a significant increase in total operating revenue for the company that has shown tremendous signs of growth over the years when the dollar value of sales are considered.

Financial Performance Analysis

There are two main geographical segments when it comes to FMG that are China and Other Nations. Both segments have witnessed a drastic increase in operating revenue. Revenue from China increased from 12,126 US$m in 2020 to 20,164 US$m in 2021 and revenue amounting from other nations also increased from 694 US$m in 2020 to 2,318 US$m in 2021. Lastly, the net profit margin is another profitability metric which is quite common among investors as it analyzes the potential of a company to generate profits from revenue after meeting the total expenses incurred during the financial year. The net profit margin ratio can be interpreted as the total proportion of revenue left behind after covering the direct expenses, operating expenses and financial expenses incurred during a financial year (Block, Hirt and Danielsen 2018). The net profit margin ratio of the company has increased consistently from 31.98% in 2019 to 36.93% in 2020 to 46.20% in 2021. FMG is a highly profitable company and a high net profit margin is because of an increase in operating revenue. It is also worth mentioning that the company’s interest expense has decreased in 2021 when compared to 2020, however the decline can be considered immaterial when absolute dollar figures are considered.

2. Liquidity Financial Performance

The liquidity position of an organization can be evaluated using the aid of liquidity financial ratios. The two liquidity ratios selected are current ratio and quick ratio. The current ratio of an organization can be interpreted as the short term resources which are available with an organization that can be relied upon for meeting short term debts and obligations (Brigham and Daves 2018). This means the reliance which a company can place upon its total current assets in order to meet its total current liabilities. The current ratio of FMG has also increased significantly from 1.37 times in 2019 to 2.25 times in 2020 to 2.31 times in 2021. The quick ratio is a much more conservative measure of liquidity as it does not consider inventories as a liquid asset owing to the time constraints behind involved with liquidating inventories and realising cash from it (Titman and Keown 2018). As a result, inventories are excluded and subtracted from total current assets to assess potentials for meeting total current liabilities. The quick ratio has also increased over the years and stands at 2.0 times in 2021.

A current ratio of 2.31 times and quick ratio of 2 times suggest that the company has enough liquidity in hand to meet all of their short term debts. An increase in the liquidity ratios is because of an increase in cash and cash equivalents which has increased from 4,855 US$m in 2020 to 6,930 US$m in 2021. The company may consider investing idle and surplus cash productively for generating incremental returns. A strong liquidity position of FMG can also be credited to their disciplined capital management process. Additionally, the financial risk management framework of FMG identifies the company’s exposure to liquidity risk which has further been amplified in all most all industries because of the Covid19 pandemic. Keeping sufficient liquidity helps in meeting the risk exposure.

Non-Financial Performance Analysis

3. Efficiency Financial Performance

The operating efficiency of an organization can be best interpreted using the efficiency financial ratios. The two financial ratios selected are the asset turnover ratio and the days sales outstanding ratio. The asset turnover ratio can be best interpreted as the efficiency of utilizing the total resources (short term and long term) which are owned by an organization in generating revenue (Banerjee 2015). The asset turnover ratio of FMG has been increasing year on year from 0.53 times in 2019 to 0.60 times in 2020 to 0.86 times in 2021. An increase is imminent given the significant increase in revenue in Chinese markets and other nations. Additionally, an increase in the average total resources each year is helping in driving revenue figures for the company which further suggests efficiency in utilizing the assets. Another common measure of efficiency performance is by analysing the days sales outstanding ratio. It is a metric which can be interpreted as the total time it takes for an organization to receive payment for their credit sales. The metric has declined favourably from 20.87 days in 2020 to 10.29 days in 2021. Since the company does not report on the credit and cash bifurcation of total revenue, total revenue has been assumed to be credit revenue. An improvement in the metric is because of efficient management of accounts receivable and efficiency in the credit collection process.

4. Solvency Financial Performance

The solvency performance of an organization can be analysed by interpreting the solvency financial ratios. The two financial indicators selected are the gearing ratio and the interest coverage ratio. The gearing ratio can be best explained as the total debt reliance of an organization in the total capital structure of an organization (Easton et al. 2018). The gearing of the company has been favourably declining from 46.17% to 43.40% to 37.52% through 2019-2021 which is because of debt repayments and a conscious effort to reduce the net debts of the company. Since the gearing of the company is as low as 37.52%, the solvency position of the company is favourable which significantly reduces the financial leverage. The issue with high gearing and debt dependence is that it increases the exposure to financial risk which may eventually result in default and liquidation. This is however not the case with FMG whose debts are low which can help the company in securing favourable terms in future to undertake capital projects and growth. The interest coverage ratio of an organization measures the total number of times an organization can meet their interest expense from available earnings before interest and taxes (Fazzini 2018). The interest coverage ratio has increased significantly from 25.41 times in 2020 to 62.28 times in 2021 which is because of an increase in operating profit and a decrease in interest expense owing to a low gearing.

5. Market Value Performance

These groups of financial ratios are important to analyse the financial performance of a stock for public limited companies and are important for investors to consider when making decisions concerning investments. The two financial ratios selected are earnings per share and dividend per share. The earnings per share can be interpreted as the total net profit available per share outstanding (Robinson 2020). The earnings per share of the company have increased consistently over the past three financial years almost tripling it from 103.12 cents in 2019 to 334.57 cents in 2021. This shows the growth potential of the company’s stock. The dividend per share has also increased from A$ 1.14 per share in 2019 to A$1.76 in 2021 that shows positive signs of growth for a potential investor.

The relevant non financial performance indicators extracted from the annual report of the company have been analysed and discussed as follows:

1. The Total Recordable Injury Frequency Rate (TRIFR) has improved over the years with a 17% improvement in 2021 and concerns the overall safety of the employees.
2. The percentage of female in senor leadership position has remained consistent over the last three financial years with a negligible drop from 26% to 25% in 2021.
3. The aboriginal employment rate across core operations has remained consistent at 14% over the last two financial years.
4. The increasing gross carbon emissions over the years are a cause of concern with emissions increasing from 1.85 million tonnes to 2.22 million tonnes in 2021.

Recommendation and Conclusion

Given the discussions and analysis presented in this report which is addressed to meet the needs of a potential investor, the stakeholder can be recommended investing in the stocks of the company. This is because FMG has a strong financial performance in 2021 with every sign of growth in the years to come. The company has seen a significant increase in total revenue which has resulted in an increase in profitability position. This also has increases the earnings per stock which increases dividend per share. Hence, the investor can also reap the benefit of dividend income as well as capital appreciation considering all signs hinting at high trading prices in future. It is also worth mentioning that FMG has a low gearing which considerably decreases default risk. The advantage of low gearing is that investors can be confident because the company is exposed to less financial risk.

Lastly, the company also enjoys a sound cash and liquidity position that a potential investor must make note of. Non financial factors are also in favour of FMG as the company ensures health and safety of their employees and also tends to focus upon diversity and people management. Therefore, a potential investor cannot go wrong with investing in the company’s stock. This report concludes upon the fact that financial ratios are quite effective when it comes to analyzing and interpreting the financial performance for making effective decisions. Lastly, this report also suggests the growing importance of an organization having to focus upon non financial performance to address the needs of a wide variety of stakeholders.

References

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Fazzini, M., 2018. Financial Statement Analysis. In Business Valuation (pp. 39-76). Palgrave Macmillan, Cham.

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