The main objective of the report is to focus on the financial position and financial performance of ASX listed company OZ minerals for the year 2017 and it will compared with the performance of the year 2016. In analysing and comparing the financial performance of the company the report will analyse the company’s financial statements for the year ended 2017. Various key ratios those will be considered under the report are profitability ratio, liquidity ratio, market performance ratio, efficiency ratio and capital structure ratio. After analysing the financial position of the company the report will highlight the impact of competitive and political environment on the business. Further, the report will discuss the relevant ethical considerations in case the entity becomes insolvent. It will further focus on the external factors required to be considered and potential if acquisition or merger. Finally, on the basis of interpretation the report will deliver some recommendations regarding whether the company is suitable for making investment into or not (Ozminerals.com, 2018).
The Australian based and ASX 100 listed company OZ Minerals is one of the biggest mining company that is focussed on copper. It was established through merging 2 Australian based companies Oxiana and Zinifex during the year 2008. The company is further focussed on providing opportunities to its employees and committed for providing values, safety and capital discipline. Main growth strategy of the company is to focus on the creation of value for its shareholders. The company owns and operates the copper – silver – gold mine at Prominent Hall. Further, at present it is developing biggest copper gold resources at Carrapateena of Australia. Various mines operated by the company are West Musgrave, Prominent Hall, Carrapateena, Centrogold, Antas and Pedra Branca. It has exceptional experience regarding exploration in Australia and global sites. Major strategy of the company is to grow through the exploration which in turn will add value to the company (Ozminerals.com, 2018).
From analysis of the annual report of the company for the year ended 31st December 2017 it has been found that the company’s annual report includes 4 financial statements. These are –
From analysing above mentioned financial statements of the company it has been identified that the operating profit of the company amounted to $ 320.70 million and net profit was amounted to $ 231.10 million. Apart from the sales revenue, significant amount was received by the company from changes in the inventories of concentrates and ores. Major expenses of the company were towards consumables and other direct costs amounted to $ 332.3 million and depreciation expenses amounted to $ 323.5 million. Looking into the statement of changes in equity it has been found that the opening balance for shareholders equity was amounted to $ 2,354.3 million whereas the closing balance of the same was amounted to $ 2,516.3 million. The reason of changes in the opening balance and closing balance was addition of comprehensive income and subtraction of dividends and other transactions directly attribution to equity (Asx.com.au, 2018). While analysing the balance sheet of the company it has been found that the balance sheet of the company is segregated into 5 sections including the current assets, non-current assets, current liabilities, non-current liabilities and equity. Total assets including current as well as non-current assets amounted to $ 227 million whereas Total liabilities including current as well as non-current liabilities amounted to $ 310 million. However, it is found that the current assets of the company are sufficient to meet current liabilities of the company. Further, it is found that the equity of the company amounted to $ 2,516 million. Hence, it is evidential from the balance sheet that the major portion of the capital structure of the company includes equity and nominal portion includes debt. Hence it can be stated that the company’s capital sources is mainly the equity and its liabilities do not include any short term or long term borrowings. Finally, the cash flow statement of the company is segregated into 3 sections including cash flow from the operating activities, cash flow from the investing activities and cash flow from the financing activities (Harris & Mazibas, 2013). Total cash generated by the company from operating activities amounted to $ 342.9 million, cash outflow towards investing activities amounted to $ 197 million and cash outflow towards financing activities amounted to $ 67 million. Net increase in the cash held was amounted to $ 78.9 million. Major source of cash generated from operating activities was cash receipts from customers amounted to $ 1000.3 million whereas cash payments towards operating activities was cash payments to employees and suppliers amounted to $ 568.5 million. Further, during the year the company made payment towards plant, property and equipment amounted to $ 151.20 million (He & Krishnamurthy, 2013).
Once the company’s financial statements are prepared they shall be analysed for interpreting the company’s financial position and comparing its financial performance with its peers in the industry or with the company’s previous year’s results. Various techniques are there to analyse the financial statement of the company. However, here in the given case the performance of OZ Minerals will be analysed through using various ratios like profitability ratio, liquidity ratio, market performance ratio, efficiency ratio and capital structure ratio. Ratio analysis enables the users of financial statement to make better decisions regarding the investment through analysis its profitability, liquidity and leverage position (Heikal, Khaddafi & Ummah, 2014).
|
Ratio |
Formula |
OZ Minerals |
|
|
2017 |
2016 |
||
|
Profitability ratio |
|||
|
Interest coverage ratio |
EBIT/interest expense |
84.39 |
26.50 |
|
Net profit ratio |
Net profit/net sales *100 |
22.59 |
13.10 |
|
Market performance ratio |
|||
|
Earnings per share (cents) |
Given |
77.40 |
35.70 |
|
Price earnings ratio |
Market value per share/EPS |
11.07 |
25.60 |
|
Efficiency ratio |
|||
|
Net sales/total assets |
0.36 |
0.31 |
|
|
Account receivable ratio |
sales/average inventory |
4.45 |
4.18 |
|
Liquidity ratio |
|
|
|
|
Current ratio |
Current assets/current liabilities |
5.06 |
5.40 |
|
Quick ratio |
(Current assets-inventories)/Current liabilities |
3.88 |
4.25 |
|
Capital structure |
|||
|
Debt equity ratio |
Total liabilities/shareholder’s equity |
0.12 |
0.12 |
|
Debt ratio |
Total liabilities / Total assets |
0.11 |
0.11 |
Profitability ratio
Analysts use the profitability ratio for evaluating the company’s ability to generate income from its revenues against the expenses. Various profitability ratios like net profit margin and interest coverage ratios are used at different level of cost to analyse the profitability position of the company from different angles (Zhang, 2014). Net profit ratio is ratio of income remained with the company against its revenue after paying all the expenses required for running the operation. Net profit margin is considered as one of the best measure for analysing the overall performance of the company. However, it does not indicate the cash flows as it includes various non-cash expenses like depreciation, amortization and accrued expenses. From the above table it can be identified that the net profit of the company has been increased significantly from 13.10% to 22.59% from the year 2016 to 2017. Interest coverage ratio, another profitability ratio is used for measuring the ability of the company to pay its interest expenses on its borrowing with the available operating profit of the company. It is considered that if the interest coverage ratio is high the company is in better position to meet its interest obligation. From the above table it can be identified that the interest coverage ratio of the company has been increased significantly from 26.50 times to 84.39 times from the year 2016 to 2017 (Easton & Sommers, 2018). Hence, it can be stated that both the profitability ratios are indicating that the company’s profitability position has been improved in 2017 as compared to the year 2016.
Market performance ratio
Market performance ratios are used by the analysts to compare current stock price of company that is quoted in the stock exchange. These ratios plays important role in understanding that the quoted price of stock is not the share’s actual prices. It means the price that is the investor ready to pay for each share to obtain earning in the company. It further determines whether the share is over-priced or under-priced in the market. EPS is the profit percentage that is distributed to shareholder on each share held by the shareholders (Ajanthan, 2013). From the above calculation table it is recognized that the EPS of OZ minerals have considerably enhanced from 35.70 cents to 77.40 cents during the period of 2016 to 2017. On the other hand P/E ratio is the relationship among the company’s EPS and stock price. It provides the investors with better understanding of the company’s value. It shows the market expectation and the price the investor shall pay for one unit of the current earnings (Finance.yahoo.com, 2018). From the above calculation table it is recognized that the P/E ratio of OZ minerals have considerably enhanced from 11.07 to 25.50 during the period of 2016 to 2017
Efficiency ratio
Efficiency ratio is used for measuring the ability of the company regarding usage of its assets and managing the liabilities. Various ratios used for measuring the efficiencies are accounts receivables ratio and asset turnover ratio. Asset turnover ratio is utilised to measure total amount of revenues that is earned by the company against each dollar of the asset owned by it. This ratio is computed by the analysts for analysing the business efficiencies regarding the asset utilization for generating revenues (Halili, Saleh & Zeitun, 2015). It determines the company’s efficiency regarding asset deployment and higher ratio denotes better performance of the company. From the above calculation table it is recognized that the asset turnover ratio of OZ minerals has been increased from 0.31 to 0.36 over the period of 2016 to 2017. On the other hand, the receivable turnover ratio is used for measuring the efficiency regarding the activeness of the company in collecting the debts and extending the credits (Bodie, Kane & Marcus, 2014). The company with higher receivable ratio is considered as favourable and the company will be regarded as more efficient. From the above calculation table it is recognized that the receivable turnover ratio of OZ minerals have increased from 4.18 to 4.45 during the period of 2016 to 2017.
Liquidity ratio
Liquidity ratio or the short-term solvency ratios are computed to measure the ability of the entity regarding its ability to meet the short-term obligations with the short-term available assets of the company. These ratios are used to determine the company’s ability to avoid financial distress over the short term period. 2 liquidity ratios computed for measuring the liquidity status of OZ Minerals are current ratio and quick ratio. The company’s current assets are the assets that are likely to be converted into cash in 12 months period and current liabilities are likely to be paid in 12 months period (Altaf & Shah, 2017). Though the current ratio of the company is dependent upon the type of industry it is dealing in, generally the current ratio of 1 or more is considered good. From the above calculation table it is recognized that though the current ratio of OZ minerals are considerably high for both the years it is reduced from 5.40 to 5.06 during the period of 2016 to 2017. On the other hand while calculating the quick ratio the assets those take reasonable time to convert into cash like inventories are not considered. From the above calculation table it is recognized that though the quick ratio of OZ minerals are considerably high for both the years it is reduced from 4.25 to 3.88 during the period of 2016 to 2017
Capital structure ratio
Capital structure ratios are computed by the analysts to measure the ability of the company to meet its financial obligation over the long term period. The analysts who use these ratios are mainly the creditors and shareholders to make it sure that the money invested by them will be repaid by the company. Debt equity ratio reveals the relationship among the fund raised by the company through borrowing and equity. To be more specific it is the borrowing that is raised from outsiders and are payable after 12 months period. On the other hand, equity is the amount invested by the shareholders. Though the appropriate debt equity ratio of the company depends upon the type of the industry in which the company operates, 2:1 is considered better for any company (Akeem et al., 2014). It is found that for both 2016 as well as 2017 the company’s debt equity ratio is 0.12. On the other hand, the debt ratio measures the leverage extension of the company. It is the proportion of total debt against the assets of the company. In other words, it reveals the percentage of company’s asset financed through debt. It is found that for both 2016 as well as 2017 the company’s debt ratio is 0.11 (Albul, Jaffee & Tchistyi, 2015).
Hence, from the above discussion it can be determined that the profitability position as well as the market performance of the company has been improved in 2017 as compared to the previous year. Further, the efficiency of the company has been improved along with the stability in capital structure. However, the liquidity position of the company has been fallen slightly in 2017 as compared to 2016.
|
Ratio |
OZ Minerals |
Resolute Mining |
||
|
2017 |
2016 |
2017 |
2016 |
|
|
Profitability ratio |
||||
|
Interest coverage ratio |
84.39 |
26.50 |
50.91 |
18.17 |
|
Net profit ratio |
22.59 |
13.10 |
30.69 |
36.19 |
|
Market performance ratio |
||||
|
Earnings per share (cents) |
77.40 |
35.70 |
19.05 |
19.82 |
|
Price earnings ratio |
11.07 |
25.60 |
7.40 |
5.80 |
|
Efficiency ratio |
||||
|
Asset turnover ratio |
0.36 |
0.31 |
0.65 |
1.13 |
|
Account receivable ratio |
4.45 |
4.18 |
2.88 |
3.19 |
|
Liquidity ratio |
|
|
|
|
|
Current ratio |
5.06 |
5.40 |
4.07 |
2.98 |
|
Quick ratio |
3.88 |
4.25 |
2.42 |
1.01 |
|
Capital structure |
||||
|
Debt equity ratio |
0.12 |
0.12 |
0.29 |
0.45 |
|
Debt ratio |
0.11 |
0.11 |
0.23 |
0.31 |
Resolute mining the main competitor of OZ Minerals that is engaged in gold production with the experience of more than 25 years will be considered for comparing the performance of OZ minerals. If both the company’s performances are compared it can be identified that whereas both the profitability ratios are in increasing trend, for Resolute Mining the net profit margin has been reduced from 36.19% to 30.69% over the years from 2016 to 2017. Further, the market performance ratios of OZ Minerals are significantly better as compared to that of Resolute Mining. Liquidity position of OZ Minerals is better as compared to that of Resolute Mining and it is more leveraged as compared to OZ Minerals. Hence, if overall performance of the companies is considered, it can be stated that OZ Minerals is financially more stable as compared to its competitor Resolute Mining (Resolute, 2018).
Political factors play major role in finding out factors that have an impact on the long term profitability of OZ Minerals. As the company is operating its business in various countries it exposes itself to various political system and environmental risks. Therefore to get success the company shall diversify its systematic risk with regard to political risks (Basu et al., 2015). Various political factors that have impact on business of OZ minerals are as follows –
On the other hand, if the impact of competitive environment is considered, it can be stated that OZ minerals is among the leading mining companies in Australia. During the last few years the company redefined the ways for carrying out the business in the mining industry. Whereas the levels of copper are declining, OZ minerals is producing high grade of copper with low impurities. However, as the prices for some specific commodities are in reducing trend the mining companies are looking for the ways for staying competitive in industry along with paying their employee’s wages at stable rate (Zharan & Bongaerts, 2017). Further some costs are there like employees safety and productivity cannot be reduced. These add challenges in running the business successfully.
Inability to pay for the debts leads any organization to insolvency. Managing this time of heading towards insolvency is difficult. However, various ethical considerations are there those needs to be taken into consideration. These are –
OZ Minerals was formed through merging 2 Australian based companies Oxiana and Zinifex during the year 2008. However, in near future no likelihood of mergers or acquisition is evidential for OZ Minerals.
From the above discussion it can be concluded that if the financial performance and financial position of OZ minerals over the last 2 years that is 2016 and 2017 is considered, it can be stated that the profitability position as well as the market performance of the company has been improved in 2017 as compared to the previous year. However, the liquidity position of the company has been fallen slightly in 2017 as compared to 2016. Further, the efficiency of the company has been improved along with the stability in capital structure. Hence, it can be considered as good option for investment.
Reference
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