In this report, financial performance analysis of Mineral resource Ltd has been taken into consideration. There are several financial analysis tools such as ratio analysis, bottom up analysis, capital budgeting tool and share price movement analysis. It is observed these tools help investors to evaluate the financial performance of particular company in which they are going to invest their capital.
Mineral resources plc is an Australian listed company having extensive business of selling mineral service, contracting, processing and commodities production factors around the globe.
There is below given list of key main shareholders who have high investment in the Mineral resources company.
This ratio analysis is the most imperative tool to evaluate the financial performance analysis of Mineral resource Ltd. It helps in establishment of relation between two factors of business in determined approach (Faff, Gray and Tan, 2016).
|
Mineral Resources Ltd |
||||
|
Particulars (Amount in Million |
2014 |
2015 |
2016 |
2017 |
|
327 |
108 |
-47 |
288 |
|
|
EBIT |
18 |
8 |
8 |
12 |
|
Interest |
0 |
0 |
0 |
0 |
|
Net profit |
231 |
13 |
-25 |
201 |
|
Total Assets |
1,858 |
1,592 |
1,618 |
1,835.00 |
|
Total Liabilities |
740 |
530 |
629 |
721 |
|
Shareholders’ Equity |
1,119 |
1,062 |
990 |
1,114.00 |
Computation of rate of return on assets
|
1. Rate of Return on Assets |
||||
|
2014 |
2015 |
2016 |
2017 |
|
|
A. Net income |
231 |
13 |
-25 |
201 |
|
B. Total assets |
1,858 |
1,592 |
1,618 |
1,835 |
|
(A/B) |
12.43% |
1% |
-2% |
11% |
After evaluating the annual report of company, it could be inferred that rate of return of company is 12.43% in 2014 which went down by 1.43% since last four years. It is observed that company has decreased rate of return of company which is not good indicator for the business functioning.
Computation of Return on equity
|
2. Rate of Return on Equity |
||||
|
2014 |
2015 |
2016 |
2017 |
|
|
A. Net income available to equity shareholders. |
231 |
13 |
-25 |
201 |
|
B. Shareholder’s Equity |
1,119 |
17,981 |
990 |
1,114.00 |
|
(A/B) |
20.64% |
0.07% |
-2.53% |
18.04% |
This ratio analysis helps in establishment of relation between net income and shareholders’ equity. It reflects the earning available to equity shareholders. It is determined that Mineral resource limited was having 20.64% returns on equity which went down to 18.04% in 2017. It reflects that company has reduced its business efficiency and decreased its overall net income (Brigham and Ehrhardt, 2013).
|
3. Debt Ratio |
||||
|
2014 |
2015 |
2016 |
2017 |
|
|
A. Total Liabilities |
740 |
530 |
629 |
721 |
|
B. Total assets |
1,858 |
1,592 |
1,618 |
1,835.00 |
|
(A/B) |
40% |
33% |
39% |
39% |
Mineral resources limited are profit making company. However, since last four years, it has decreased its overall return on income which is not good indicators. However, Mineral resources limited has maintained stable debt ratio which was 40% in 2014 and went down by 1% only in last four years. However, company needs to reduce its financial leverage as well with the decrease in its profit. Currently, Mineral resources limited is having 39% debt ratio which reflects high financial leverage and should be lower down to 30% if it wants to control its financial leverage.
Proving the equation
This equation is based on the two sides formulas equal to each other’s.
|
Providing equation |
2014 |
2015 |
2016 |
2017 |
|
Net profit After tax/OE |
0.20643 |
0.012241055 |
-0.0253 |
0.18043 |
|
EBIT/TA*NPAT/EBIT*TA/OE |
0.20643 |
0.012241055 |
-0.0253 |
0.18043 |
(Please see the excel sheet for the proper calculation)
This equation is satisfied from both sides and reflects the true and fair calculations.
Comparison of share price changes of Mineral resources Limited with the share price movement of all ordinary indexes
It is considered that share price movement of Mineral resources Limited is quite stable and fluctuated by very small percentage. It is observed that as compared to market risk premium the share price of company is less fluctuated. It is really a good indicator for the business functioning of organization (Mineral resources Company, 2017).The share price movement of all ordinary index shares is comparatively high. In October, 2016 the average return given by all ordinary index went up by 15%. The share price movement of Mineral resources limited has less return available to equity share holders in market (Yahoo finance, 2017). Therefore, it could be inferred that as compared to market premium, company had faced high fluctuation which is not good indicator for the company (Mineral resources Company, 2017).
The below data reflected that imperative data for computing beta
|
Regression Statistics |
|
|
Multiple R |
0.223544412 |
|
R Square |
0.049972104 |
|
Adjusted R Square |
0.008666544 |
|
Standard Error |
0.023077313 |
|
Observations |
25 |
|
ANOVA |
|||||
|
df |
SS |
MS |
F |
Significance F |
|
|
Regression |
1 |
0.00064 |
0.00064 |
1.20982 |
0.282748346 |
|
Residual |
23 |
0.01225 |
0.00053 |
||
|
Total |
24 |
0.01289 |
|
Coefficients |
Standard Error |
t Stat |
P-value |
Lower 95% |
Upper 95% |
Lower 95.0% |
Upper 95.0% |
|
|
Intercept |
0.005501315 |
0.005535738 |
0.99378 |
0.33067 |
-0.005950233 |
0.016952862 |
-0.005950233 |
0.016952862 |
|
X Variable 1 |
0.040468037 |
0.036791931 |
1.09992 |
0.28275 |
-0.035641871 |
0.116577944 |
-0.035641871 |
0.116577944 |
The beta value of company is .040. It reflects the share price movement of company based on the market premium. It reflects the changes in share price of Mineral resources company would be .0040 if the price of all ordinary share price changed by 1.
E(R) =
E(R) = Expected rate of return
= Risk free rate of return
β = Beta
= Market Risk Premium
|
Calculation of Required rate of return |
|
|
Risk free rate (A) |
4% |
|
Beta (B) |
0.040468037 |
|
Market Risk premium (C) |
6% |
|
Required rate of return [A+(B*C)] |
4.24% |
(Please see the excel)
The required rate of return of Mineral resource of company is 4.24 %. It is computed that rate of return of company is very low as company is easily getting finance from the market (Mineral resources plc, 2017).
It is observed that company has been decreasing its net profit throughout the time. It is considered that company is following conservative investment policy which allows it to make moderate investment in its business. Company needs to increase its overall profit if it wants to create value on its equity capital. The investment decisions of management are highly dependent upon the share price movement, net income and rate of return of company.
Cost of equity (calculated through CAPM) = -45.16%
Cost of Debt =1.17% ( It is computed after deducting the interest payment)
WACC = Cost of debt (interest rate after tax) + cost of equity
|
Particular |
Capital Amount (AUD $ in Million) |
Cost of capital |
% of portion |
WACC |
|
Equity |
1,114.00 |
4.24% |
0.6 |
2.55% |
|
Debt |
721 |
1.17% |
0.4 |
0.47% |
|
Total capital |
1,835.00 |
WACC |
3.0% |
The cost of debt of company is computing after deducting the interest rate. However, the weighted average cost of capital of company is 3% which is very low and good indicator for the organization (Scott and Scott, 2016).
It is considered that if Mineral resources Company would have higher WACC then it will have to control its investments in other projects. It is evaluated that WACC reflects the overall cost of capital of company. For instance, in capital budgeting decisions, company needs to accept the project which is having higher return on investment. The higher WACC may also results to decrease in overall return on capital employed of company.
The debt ratio of company is very high which may pose high amount of financial risk to organization.
|
3. Debt Ratio |
||||
|
2014 |
2015 |
2016 |
2017 |
|
|
A. Total Liabilities |
740 |
530 |
629 |
721 |
|
B. Total assets |
1,858 |
1,592 |
1,618 |
1,835.00 |
|
(A/B) |
40% |
33% |
39% |
39% |
It is considered that since last four years, company has decreased its overall return on income which is not good indicators. The debt ratio was 40% in 2014 and went down by 1% only in last four years. However, company needs to reduce its financial leverage. Mineral resources limited is having 39% debt ratio which showcases high financial leverage.
The gearing ratio of Mineral resource Plc reflects company’s ability cover up its all interest rate from its overall earnings before interest and tax. The gearing ratio of company was 6% in 2014 which went down by 2% since last four years. It has gone down to 4% in 2017 which is good indicator for covering interest amount (Mineral Resource plc. 2014)
|
Gearing Ratio |
||||
|
2014 |
2015 |
2016 |
2017 |
|
|
Gearing Ratio |
6% |
7% |
-17% |
4% |
The dividend policy of company is based on the profit of company. Mineral Resources Company is distributing good amount of dividend to its shareholders. However, with the decrease in its profit company is decreasing its dividend payment throughout the time. Therefore, it could be inferred that dividend policy of company is profit based dividend policy (Yahoo finance, 2018).
After evaluating the annual report and computation done in this report, it could be inferred that Mineral Resources Company is having stable income. However, investors should invest their money for long run in Mineral Resource Company. Therefore, it could be inferred that investors may invest their money in Mineral Resources Company for long run. It will surely increase the value of their capital but they needs to keep their money investment for long run in Mineral resources Limited (Scott and Scott, 2016).
Conclusion
The financial analysis tools used in this report has reflected that Mineral Resources Company is having strong financial position. Investors may include Mineral resources Company in their portfolio to increase the overall investment. It will be good for the investors. Nonetheless, investing money in short time may destruct the value of the capital investment of investors. Now in the end, it could be inferred that using financial analysis tools are the best option for the investors to keep them safe from all the possible losses.
References
Brigham, E.F. and Ehrhardt, M.C., 2013. Financial management: Theory & practice. Cengage Learning.
Faff, R.W., Gray, S. and Tan, K.J.K., 2016. A contemporary view of corporate finance theory, empirical evidence and practice. Australian Journal of Management, 41(4), pp.662-686.
Mineral resources Company, 2014 annual report, retrieved on 29th November, 2017 from https://www.mineralresources.com.au/investors-and-media/annual-reports.html
Mineral resources Company, 2015, annual report, Retrieved on 29th November, 2017 from https://www.mineralresources.com.au/investors-and-media/annual-reports.html
Mineral resources Company, 2016, annual report, Retrieved on 29th November, 2017 from https://www.mineralresources.com.au/investors-and-media/annual-reports.html
Mineral resources Company, 2017, annual report, Retrieved on 29th November, 2017 from https://www.mineralresources.com.au/investors-and-media/annual-reports.html
Scott, J.T. and Scott, T.J., 2016. The entrepreneur’s idea and outside finance: Theory and evidence about entrepreneurial roles. European Economic Review, 86, pp.118-130.
Yahoo finance, 2018 retrieved on 19h January from https://in.finance.yahoo.com/
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