As the title of the report is Advice for wealthy investor, this report has been basically envisaged for the investors of the company and that too includes the investors who are not the real investors of the company as on date but will become in future and is known by the name of the potential investors. For the purpose of the preparation of this report, the company that has been made available is FAR Limited, an Australian registered company. The annual report for the financial year ending 2017 and 2016 has been considered. The report has been started with the detail of the description of the company including the history and its main activities. Along with the description the owner ship and the structure of the governance has been described with respect to the shareholders who are substantial and the composition of the governance of the company. After that the detailed analysis has been made for the accounting ratios of the company and how the same has helped in interpreting the results for the investors of the company. Then the factors have been discussed with respect to the share price of the company and the same has been presented in the excel sheet with the graphs. Also the calculations has been made of the important factors which are relevant for determining the weighted average cost of capital which is required for the next section. Apart from the accounting ratio, one ratio – debt ratio has been analysed in detail with regard to whether the company is having the adequate capital structure or any improvement is required. Thereafter the policy adopted by the company for the declaration of dividend has been detailed. The report has then concluded and ended with the due and proper recommendation to the investors.
The company – FAR Limited has been made available for the completion of the report. The company has been founded in the year of nineteen hundred and eighty four with the name of First Australian Resources NL and then the company became a listed entity in the year of nineteen hundred and eight five and in the year of two thousand and ten, the company name has been changed from the First Australian Resources NL to FAR Limited. Its headquarters are based in the Melbourne, Australia. It is the listed company in the Australia Stock exchange. The company’s operations are mainly focused in the area of Africa and are engaged in the activity of exploration of oil and gas and develop the high value assets in West and East Africa. In the area of West Africa, the company has the licenses and that too in good portfolio in Senegal and Guinea Bissau. In the area of East Africa, the company has the province of gas in Kenya and has the emerging oil acreage. The company has made two off shore discoveries commonly known as FAN 1 and SNE 1 in Senegal and which in turn has led the wave of growth in the company and on the other hand has lowered down the importance of the leases operating at the West Africa. Out of the above two discoveries, SNE 1 has been regarded as the number one discovery of the World in the year of two thousand and fourteen (FAR Limited, 2017).
The main mission of the company is to work in accordance with the requirements of the stakeholders of the company so as to provide the growth to them. Along with the working, the company also aims at providing the rewards to the stakeholders so as have the investment from the stakeholders of the company including the potential investors (FAR Limited, 2017).
The picture of the company has been depicted from the very first instance when in the year of its inception the name of the company has been the First Australian Resources NL and thus has helped in analyzing the working of the company which has been related to the exploration of oil and gas.
This part of the report deals with the structure of the organization with regards to the persons who are concerned with the management of the overall functions of the company. Thus, the ownership governance is the two words which are required to explain the composition and the function of the persons who are charged with the governance of the company. The composition of the governing members of the company shall be defined with the due care and the members thereon shall be of specific ground and shall have the requisite experience in the particular fields. Many companies in the last decade has been collapsed only because of the improper functioning of the persons who are charged with the governance and has started taking out the benefits of the company for their own instead of providing the benefits to the stakeholders of the company. It includes Lehman Brothers and HIH Insurance and many others (Zimmerman, 2015). The structure includes the shareholders of the company and majorly who have the shares in value of more than twenty percent and the chairman and the other directors who have the specific place in the governance of the company.
The shareholders of the company who owns the share in value of more than twenty percent are declared as the substantial shareholders as they carry the substantial rights in the voting. These rights entitle them to have the active involvement in the voting for passing of the resolution and accordingly are of the high significance. Following are the shareholders which have been categorized as the substantial:
On analyzing the shareholding pattern and the other details of the annual report it has been observed that the company is purely a separate entity and distinct from its owners.
The composition of the governance has been mentioned in the following manner:
The surnames of each of the member does not in any manner reconciles with the name of the substantial shareholders of the company.
Also the shareholder having more than 5% shares is not involved in the governance team.
Therefore, the company selected is not the family member company.
The accountings ratios have been calculated in the separate sheet and the analysis have been made as under (Horngren, 2012). The ratios for the past two years have been calculated ending with 2017 and 2016.
The company’s share price has been one of the biggest factor through which each and every investor is require to rely on the same. It is because it’s only the share price on the basis of which the investors invest the amount in the company. As per the historical data for the last prices of the share prices along with the graph thereon it has been observed that the share price has been on the increasing stage but has not been increased in accordance with the industry increments. The share price has been ranging from 0.02 to 0.09 and it has been checked that the share price has been changed very frequently but on the lower pace due to which the investment in the company is very less of the investors.
The loss that the company has been incurring over the last three years has created the significant impact on the share price of the company. The company is the loss making company and has not even declaring the dividend and therefore has not be in the position to have the various investors for investment and thus is regarded as the significant event for the company (Premnath, 2012).
The calculation of coefficient of Beta has been incorporated in the separate excel sheet and accordingly the value has been 1.0004.
As per the CAPM Model,
Required Rate of Return = Rf + β (Rm – Rf) = 4% + 1.0004(6% – 4%) = 4% + 2.0008 = 6.0008%
No the selected company cannot be said to be the conservative investment. It is because the investor has not been able to receive the dividend as the company is incurring losses and also the company has disclosed that no divided has been declared and paid.
The weighted average cost of capital has been calculated below:
WACC = {Equity / Total value X Cost of Equity} + {Debt / Total value X Cost of Debt) X (1 – Tax Rate)}
Cost of Equity = 171587571 /171587571 X 6.0008%= 6.0008 %
Cost of Debt = 0 /171587571 = NIL% and After tax Cost of Debt NIL.
|
Heads |
Amount |
W |
C |
WACC |
|
Equity |
171587571 |
1.00 |
6.0008% |
6.0008 |
|
Debts |
0 |
0.00 |
0.00% |
0.00 |
|
Total |
1410082 |
6.0008 |
WACC = 6.008% and hence the present value of the cash flows will be assessed using this cost only.
As it is equal to the required rate of return, effect will be nil.
In case WACC is higher than the other related costs will also be covered and thus generates the higher revenue.
In accordance with the annual report of the company, the company does not have any borrowings which are long term in nature and therefore under the head of the noncurrent liabilities only one head is reflecting by the name of the provisions and accordingly the company has zero debt.
Debt ratio states that the higher the ratio, lower the company will have the chance in committing the defaults in repayment. In this manner as the company does not have the debt the ability of the company to have the loan and repay the same will be low and therefore the debt ratio interprets that the company is not in a good position for running in future (Kaviyani, 2011). The company will also not receive the loans and borrowings from the financial institutions and the banks and accordingly the company shall change its strategy so as to have the better debt equity ratio.
As per the annual report of the company for the year ending two thousand and seventeen, the company has not stated any policy for the dividend. Only under the dividend section of the boards report, it has been mentioned that the company has neither paid any dividend during the year nor have declared any dividend during the year. The main reason for such declaration is that the company is having the losses since the year of 2013 and since then the company is not in the position to pay the dividend and therefore has neither declared nor paid the same.
Conclusion
FAR limited is the company which can be said as the loss making company. The report has provided all the details in relation to the financial statements of the company with respect to the different ratios. These ratios has described the performance of the company and it declares that the condition of the company is not good as per the current scenario and may be closed in any day as the company is incurring losses and thereby affecting the earnings per share. Along with the ratios and the description of the losses, the report has also thrown the light of governance structure which has explained as to how the affairs and the functions of the company is being managed and has provided the necessary calculations which have detailed the cost of capital in weighted terms and the analysis thereon.
To conclude, the report has provided the actual position and performance and therefore the investor should act rationally.
The analysis that has been included in the report has detailed the company’s operation level and the management level to the great extent. The report has not only covered the analysis of the financial figures as reported by the company in their financial statements but also have explained as to how the company is functioning in terms of the description of the activities, policy of dividend and etc.
It has been noticed that the company has incurring the losses from its continuing operations and in total also from the last five years beginning from the year of 2013 and the revenue has been seen fluctuating but has not been able to generate the revenue which can set off the expenditure in future years rather the loss is being accumulated at the end of each year and thus in turn depleting the equity of the company. Also the company has not been paying any dividend to their present shareholders.
Therefore, having such situation of the company, it is not advisable to invest in the company in the belief that there will be profits in future and thus there will be higher returns from the investment. This advice shall be followed till the company does not implement the strategy to improve the business so as to reduce the losses and convert the company into profit making entity.
References
Horngren, C. T, (2012), ”Introduction to Management Accounting”, Chapters 1-17. Prentice Hall.
Kaviyani M, (2011), “A Theory to Analysis of Annual Report ”, Research Journal of Finance and Accounting, Vol 10, No. 15, pg 192-202
Premnath S, (2012), “Analysis of the Financial Statements”, International Journal of Accounting and Finance, Vol20, Issue 17, pp 24-42.
FAR Limited, (2017), “Annual Report 2017”, available on https://www.far.com.au/ accessed on 17-05-2018.
Zimmerman, (2015), “Accounting for Managers” Issues in Accounting Education, 35, 77-99.
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