HI5002 Finance for Business Assignment Sample
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Introduction
This accounting paper examines the financial performances and position of ABU-ABM Resource Company that operates in Australia. The company is engaged in exploring the gold in northern area of Australia. Financial position of the resource based company is evaluated through the balance sheet and profit and loss statement of the company. The details have been collected from the reliable financial websites like ASX, Morning Star, Yahoo finance, and others. Fundamental ratio, WACC, beta, and CAPM have been analysed with the help of the financial metrics. These indicators are used to recommend the financial position of the company, and to share the important details with the investors. The purpose to do so is to find the profit margin and the actual position of the resource company that operates in Australia.
Company analysis
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History of the company
ABM is an Australian based company that carries out the gold exploration work, and identifying new gold extraction areas. The operational works are planned to improve the exploration works in the mining and processing in this industry. Some of the important projects carried out by the company are in Tanami, Twin Bonanza, North Arunta, and Tanami North. These exploration areas are the major revenue earning sectors for the company, and has contributed towards the development and growth. In comparison to the other exploration companies in Australia, AWM has the highest number of junior explorer located in the Central Desert to explore the gold. The market cap recorded in 2017 was around $36M and it had recorded a negative earnings (Weygandt et al., 2001).
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Ownership and governance system
Board of directors of the company make the important business decision. These members are accountable for the corporate governance system and it includes monitoring of the works and implementing the guidance for the conduct of the works. Business decisions examine the shareholders interest and ensure to share the relevant changes in the operations with the investors. The long-term benefits provided to the staffs are also carefully analysed by the management, while implementing the relevant changes in the operational system.
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Firm governance and key people
The details of the key people of the company –
| Name of the people | Positions | Positions held |
| Mr Matthew Briggs | MD | 3/10/2016 |
| Mr Thomas McKeith | Non-executive director | 27/06/2016 |
| Mr Brett Robert Smith | Non-executive director | 09/05/2016 |
| Mr Faull | Non-executive director | 12/06/2017 |
The shareholder ratio for the company has a share capital of around 5% which exists in the form of firm governance system. Key individuals make the relevant decisions, and assist the management to works.
- Fundamental ratios
Fundamental ratio,
The fundamental ratio for the company is examined to understand how the operating performances, financial performances, and others affect the decided performances. Through the strategic value the long and short term business plan that is being decided by the management.
Short term solvency
In the short term solvency ratio, the ability of the managers to meet the short term financial goals is decided to improve the financial short plans developed to deal with the operational issues.
| Liquidity health | 2016 | 2017 |
| Current Ratio | 4.01 | 7.80 |
| Quick Ratio | 3.90 | 7.50 |
Current ratio reflect an increasing trend of 4.01 to 7.80, as the current liabilities the liabilities were calculated through the account payable method which had decreased from 3.90 to 7.50 respectively. Quick ratio reflects the cash position for the company and it had increased to 7.50 and this incurred due to the increase in the cost of the inventor and the account payable. It can be stated that the short term solvency factors are favourable.
Long term solvency
The financial leverage ratio for the company determines the ability of the company to deal with the long-term financial measuring factor or commitments to avoid the long-term financial distress. The company needs to optimistic net-worth which is done through the debt load controllable factors.
| Long term solvency | 2016 | 2017 |
| Financial Leverage | 22.90% | 15.80% |
The resources stated that the financial leverage which was 22.90% in 2016 and it decreased 15.80% in the 2017. Financial majority related to the operational activities were determined through the equity rates. The leverage company indicated good factors which are discussed with the dividend distribution method.
Asset utilisation factors
The ratio determines the ability of the organisation is based on employee the assets and handing the liabilities improvement (Weygandt et al., 2001).
| Asset utilization | 2016 | 2017 |
| Asset turn-cover ratio | 0.74 | 101.22 |
| Inventory turnover ratio | 0.02 | 0.29 |
| Receivables turnover ratio | 0.02 | 0.12 |
Assets utilization of the company reflected the adverse position which had incurred to the low income in the year 2017. The company had restricted the strategy and focus on finding new exploration areas. Management had invested in procuring the best pipeline to drill the unexplored areas to improve the exploration process. This affected the overall business performances and the flow of the income.
Profitability ratio
The ratio measures the ability of the organisation in creating more income as compared to the expenses and other costs.
| Profitability | 2016 | 2017 |
| Return on Assets % | -54.70 | -31.20 |
| Return on Equity % | -68.40 | -37.40 |
| Profit Margin | -0.61 | -38.93 |
In the profitability factor, it was found that the company was poorly performing, and this incurred heavy losses for the company. The performances in last 2 years were the major factors that affected the overall performances of the company. The loss had impacted the future growth plan for the organisation. Major loss for the company was occurred due to the impairment that had capitalised the exploration process, the expenses and other assets were examined.
Market value ratio
These ratios are measured through the current share price for the company, in respect for the earnings. With this ratio, the investors could confidently invest in the company.
| Investors Ratios | 2016 | 2017 |
| EPS | -0.07 | -0.03 |
| Price earnings ratio | -1.94 | -6.43 |
EPS was negative earnings during the year, was because of low income that was earned by the company. The loss of the income was due to the lower income earned by the company. Price earnings and the profit earnings for the company were low, and this affected the overall performances. Market valuation process reflected a negative performances and this affected the overall performances. The objective was to get more investors and to share the price with the future earnings of the company.
- Price movement
- Monthly share over the last 2 years
ABU-ABM eservices reflected the share price movements against the ordinary shares that were recorded in the year 2016-17.
- Analysis of the equity price movements
The share price of the ABU-ABM process analysed the ordinaries movements of the products, which reflected the positive correlation factor. It stated the positive correlation factor increased, and it boosted the performances for the company. In case of the ordinaries index, the price ABU-AMB process that reflected the resources that were used in the evaluation process. Poor indexation process reflected that the company had to be analysed, and accurate measures had to be implemented to get the right price for the services. The concern was quite high, and the volatility can be evaluated (Zain, 2008).
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Research via internet or the financial business publications
The share price reflected the resources that improved during the year 2017 and after the project execution was announced. Different projects were undertaken by the management, and the relevant changes within the system were introduced to increase the performances. New projects were taken up to increase the income and to improve the turnover for the stated reasons. The company had earned huge profit and the negative earnings for the company had reduced. The target for the company, during 2018 was about taking a new project in Capstan Target that improved the overall business performances.
The other project taken by the company was “Suplejack [project exploration” that was meant to increase the overall business performances. With the decided factor, the management could take be processes to increase the overall business activities, and to deal with the related challenges. The contractual agreement was entered into between the parties and the relevant changes were implemented to deal with various challenges. Contracts were examined for its reliability and effectiveness, and this was the major factor that helped in increasing the earnings and the renew for the company. The objective was to reduce the losses and to improve the earnings. With an effective measure and the forecasted plan, the management could indulge into the long term plan that were supposed to increase the overall business perforates. Through the strategic plans and the valuation process, the management evaluated the associated challenges with different projects and implemented accurate measure to increase the operational works (AWE,2017).
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Financial information
- Calculated beta
ABU-AMB beta calculation was recorded at 0.01 percentage, which was highly lower than 1 and this stated that the company had lower volatility.
- Risk free rate at 4% and the market share risk premium recorded at 6% uses the capital assets pricing model to evaluate the required rate of returns of the company’s shares
In order to calculate the CAPM, the ABU-ABM facts had to use the below mentioned formula, Ra = Rrf + [Ba x (Rm – Rrf)]
Here,
The security expected return was termed to be –RA
Risk free rate – Rrf
Security beta – Ba
Market expected return – Rm
Risk premium – (Rm-Ref)
As provided in the data,
Risk premium =(Rm – Rrf) = 5.8%
Rrf=3.8%
Ba = 0.01
Ra = Rrf + [Ba x (Rm – Rrf)]
Ra = 3.5% + [0.01 x (5.8%)]
Ra = 3.5% + 0.0012
Ra = 3.12%
- Is the company a conservative investment
A company is stated to be conservative investor, when it has the capability to preserve the capital and reduce the risks through the diversified risk analysis factor. The profile management is quite an important factor that assists in determining the relevant challenges and in implementing accurate orioles that determines the ratio to be used for the evaluation and the valuation process.
As mentioned in the theory, the high beta process in the stock pricing system quickly reacts to remarket fluctuations. These fluctuations had affected the correlative investment plan, and enabled the management to overcome the low and high beta impact on the operational works. It was essential for the company to deal with these challenges as it affected the volatility factors. To deal with the associated challenges it was essential to analyse the risks and deal with various operational issues in the decided manner. The beta factors were developed and implemented to deal with the aggressive strategies that were also used for the development of the other projects.
- Weighted average costs
- Resources planning
The resource planning had to be come in accordance with the weighted average capital cost evaluation process. It was an important part of the financial measure that evaluated the costs and the finances that were required to understand the finding process in an accurate manner. The firm’s capita costs which were calculated on the basis of the average returns on the funds were examined through the proper evaluation process. It enabled the management to determine the underlying issues and in implementing the corrective measures that were used to increase the overall performances. WACC process was calcite as – (Market value of the firm’s equity/ Equity + debt Value) * Cost of Equity (Re) + (Market value of the firm’s debt/ Equity + debt Value) * cost of debt (Rd) * (1 – Corporate Tax).
Team reprices had to bigger debt liability and this improved the equity ratio for the company. Required funds for the company were raised through the shareholders requirement and owners fund. Resource planning was done after using the information that was provided in the annual report and the financial websites (Brigham & Ehrhard, 2017).
- Implication of the higher WACC factors on the management decision and the prospective investment plans
From the investor’s point of view and management plan, WACC had to use the financial instruments to analyse the effectiveness of the market. The company had used the WACC process to examine the mixed capital costs that determined the owner’s liability towards the growth of the company. With a lower return on the funds, the company had generated more value for the investors. In this case, the investors had reviewed WACC as the biggest opportunities towards the costs of the capital. A lower percentage of WACC provided the company with a positivity to withdraw the funds and affect the quality of the works. This was a crucial factor that affected the overall growth and the developmental plan required for the development and growth of the company.
A higher impact of WACC increased the risks for the company, and impacted the valuation process. It was essential to decrease the WACC factor, and increase the beta rate and this was the major risk indicating factor. A lower risk factor and project had led to the lower discount rates, which enabled the management to adopt the better methods to overcome the challenging part of the business activities.
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Resource utility and debt control ratio in last 2 years
- Preferred optimal capital structure
In the optimal capital structure factor, the objective of the company was to maximise the value for the earnings, and this was done through the valuation and the use of the own capital that was used to increase the earnings. The company proposed a plan to fund its own capital requirement and reduced the borrowed capital requirement for the organisation. In case of the primal capital structure, the long term debt and the capital was used for the financial performances and to increase the operational works. Financial administrators reflected two points of interest, one of which suede funds in the planned manner, and in the other a mixture of the debt and equity was planned to increase the overall performances. With the chosen mix, it was possible to determine the risks and evaluate the process that was suitable for the company to increase the performances (Jenkins, 2009).
There was no proper structure used for the optimal capital structure that was supposed to be used to increase the overall business activities. With a determined process, the impact of the long and the short term capital was determined, and relevant changes were used to increase the business activities. Through the planned process and activities, the equity ratio for the company can be improved, and related changes within the system can be introduced. The structural valuation processes were examined to understand how the performances for the company can be improved. In the earlier case, the changes in the structure had a direct impact on the WACC, and this also affected the price for the equity shares that were issued by the companies for the betterment of the performances. Through the planned actions the value of the capital structure, and its impact on the improvement on the operational goals were demined, and corrective measures were implemented to deal with various challenges (Diane, 2008).
It was found that the ABM resources were around 1.89% and it also stated that the company was more financed and secured as compared to the others. It helped in raising the relevant funds that were required to deal with the operational requirements.
| Debt Ratio | ||
| 2016 | 2017 | |
| Total Liabilities – AUD value | 4.98 | 2.52 |
| Total Assets – AUD in Million | 26.58 | 18.30 |
| Debt Ratio = Total liabilities/total assets | 18.58 | 10.60 |
It can be stated that the company had no specific debt obligation and this stated that the total liabilities and the assets in the debt position was quite less. This indicated that the company performances were impacted due to the debt and equity ratio.
- What needs to be done to gear the ratio
There are no specific adjustments that need to be made to adjust the debt or to buy the shares in the prescribed manner. The funds required for the company was done by issuing shares in different business operational activities. With the financial notes, the annual report doesn’t indicate the need to adjust the gearing ratio to increase the business performances.
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Dividend policies
The resources were used to plan for the dividend policies that were used to increase the share invested in different factors. With the dividend policy ratio, the income generating factors were determined, and the relevant changes within the system were indicated. It was found that the company had to pay the dividend on time, and in case the related challenges with the system had to be examined to increase the overall performances. Through the authorised capital funding the ability of the company to pay the dividends had to be determined. This would help in determining the exact process that could be used to increase the overall business activities and in implementing the corrective measures to provide the best services to the clients. The price of the shares was low, and the external liabilities were reduced, to increase the overall performances (Thachappilly, 2009).
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Recommendation
The analysis conducted above states that the price of the share movements and the financial analyses as recommended by the company was not properly done. There were different challenges that had to be examined by the management, while implementing the changes in the share price and other factors. With an accurate measure, the management had to develop and introduce new measures that were used to pay dividends at various price. The equity and other factors had to be determined and accurate measures had to be implemented, in order to increase the business performances. The rate of the dividends along with the challenge analysis had to be done in a strategic manner, and this would help in increasing the profit earnings for the company.
Values of the stocks had to be maintained at the lower price, and the demand for the shares for the products in the market had to be determined. These factors were important to reduce the negative impact arising due to the fund earnings, and other aspects. The valuation process was used to determine the exact prices that would be used to increase the value of the shares and to provide the better returns to the investors. Company projects had to be diversified, and accurate measures had to be implemented, in order to provide the better services and the values to the clients. The changes had to be implemented to increase the competency level of the company and to provide an accurate measure to provide the sales and the value for the company.
References
AWE.,(2017). Reshaping the future. Retrieved from http://www.awexplore.com/irm/PDF/2522/AWEs2016AnnualReport
Brigham F., & Ehrhard C., (2017), Financial Management: Theory & Practice, Cengage Learning
Diane, White. (2008), “Accounts Receivable: Analyzing the Turnover Ratio‟‟, Journal of account receivable.
Jenkins, Lucia. (2009). “Contribution Margin and Breakeven Analysis: Determining when a Company will Realize a Profit ‟‟, Journal of contribution margin and breakeven analysis
Thachappilly, Gopinathan. (2009). “Profitability Ratios Measure Margins and Returns: Profit Ratios Work with Gross, Operating, Pretax and Net Profits”. Journal of profitability ratio measure margin and return.
Weygandt, J. J, Kieso, D. E, & D, Warfield Terry (2001). “Intermediate accounting: cash ratio analysis”. (10thed.). Bearcat Company, Vol-1.p.211.
Weygandt, J. J, Kieso, D. E., & D, Warfield Terry (2001). “Intermediate Accounting: total asset turnover ratio”. (10thed.). Bearcat Company, Vol-1 p.572.
Zain, Maria. (2008). “How to Use Profitability Ratios: Different Types of Calculations that Determine a Firm’s Profits ‟‟, Journal of profitability ratio analysis
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