The important learnings from the study have analysed the financial perspectives of Emergent Resources Limited and prepared a financial advisory report. Emergent resources Ltd is identified as an iron ore exploration and mining company listed under ASX with the code EMG.AX. The main depictions of financial performance have been taken into account with stock market performance and depiction of other financial areas such as liquidity, profitability and efficiency.
The competition of the common financial ratios is performed by considering the excerpts from the financial reports published in 2017 and 2016. The analysis of the share price movement is considered with the change in closing share price of the company in the last two years and compared the same with changes with ^AORD index. The important understanding of capital structure has been taken into account with “weighted average cost of capital” which is conducive for suggesting the rationale for investment decision. In addition to this the consideration of solvency ratios along with dividend policy structure is also evaluated for investing in the shares of the company (Emergentresources.com.au 2018).
Emergent Resources Limited was inaugurated in 2007 at Subiaco, Australia. The company is depicted to engage in exploration activities related to “iron, base metal, and precious metal properties” in various regions of Western Australia. The Company’s “Beyondie Iron Project is located adjacent to the Great Northern Highway and Goldfields Gas Pipeline in the northern part of Western Australia’s mid-west iron ore precinct”. Emergent Resources Limited is also depicted to explore manganese and vanadium deposits. It has been further discerned to comprise “E52/2215 iron-ore tenement” with more than 46 blocks covering an area of “142 km2 located in Western Australia”. The company is listed under ASX with the code EMG.AX.
Emergent Resources Limited have shown continued efforts in developing “Beyondie Iron Ore Projects” and able to rationalise the tenement portfolio to prove itself as effective cost Explorer in the market. Moreover, the main strength of the asset base and technical expertise is discerned with strong cash position of the company. Some of the other considerations made by the board is depicted with looking forward to develop the existing projects and contribute to the growth of the company through investment and acquisition (Emergentresources.com.au 2018).
Since the introduction of “ASX Corporate Governance Council’s Principles of Good Corporate Governance and Best Practice Recommendations (ASX Guidelines or the Recommendations)”, the company has taken several initiatives to adopt such a system for CG perspectives. However, based on the recommendations as per CG Council, the board has not maintained a separate nomination committee with independent directors and do not comply with recommendations as suggested in 2.1. The company is not seen to be taking any proactive initiative for sustainability of the environment and providing a long-term commitment for an efficient business performance (Emergentresources.com.au 2018).
Based on the list of substantial shareholders of the company “International Natural Resources Inc” is depicted as the major shareholder. Edmond Yao is depicted as the largest shareholder of EMG with 20% shareholding. This shows that the company is a non-family-based business (Tricker and Tricker 2015). Some of the list of largest shareholders have been depicted below as follows:
|
Shareholders |
Number of Ordinary Shares Held |
Percentage of Issued Capital |
|
“International Natural Resources Inc” |
25150000 |
11.08% |
|
“International Natural Resources Inc” |
20244609 |
8.92% |
|
“Advanced Endeavor Enterprises Limited” |
20000000 |
8.81% |
The above assessment of information clearly shows that “International Natural Resources Inc” is identified as the major shareholder holding equal to 20% of the issued capital. Another important shareholder is depicted with “Advanced Endeavor Enterprises Limited” which has 8.81% of the issued capital. It needs to be further noted that Edmond Yao holding the largest number of shares of “International Natural Resources Inc” is a non-executive director and this shows the presence of an owner in the firm’s governance (Emergentresources.com.au 2018).
The individuals associated to the corporate directory along with the balance at the end of 2017 is listed below as follows:
|
Company Secretary |
Balance at beginning of year |
|
Matthew Foy |
28519 |
|
P. Burke |
18500 |
|
Nonexecutive Directors |
Balance at beginning of year |
|
Edmond Yao |
58600 |
|
Bevan Tarratt |
64110 |
|
Jian-Hua Sang |
68110 |
|
David Rod |
23519 |
It is discerned that the company is mainly run by only nonexecutive directors. As it has incurred loss consecutively for the last three years, none of the non-executive directors have shown an interest in ordinary shares of the company. Based on the above assessment is it can be clearly stated that the non-executive director does not have shareholding is more than 5%. It can be further stated that the company is not a family company as the no member of company secretary is not holding highest percentage of ordinary shares (Warren and Jones 2018).
The main interpretations of share price movement of the company in the last two years is seen with high amount of volatility in compared to the market index. It is to be understood that initially the shares of the company performed well during the initial month of 2016. This is evident with market performance of only 6.28% whereas the share price of emergent was depicted with a positive increase of 18.8%. Moreover, in the month of July 2016, the company performed disastrously poor in terms of the market index. This is seen to be evident with a negative fluctuation of more than 23.08% between July to August in 2016. Similarly, in the month of November 2016 the company performed via below the expected market performance. This is considered to be evident with the market index of 3.94% in the month of November whereas the company’s decrease in percentage with the fluctuations of share price was seen with -9.09% (Davies 2016.)
In December 2016, the share price experienced less market volatility and depicted with an increase of 11%. However, in the beginning of 2017 the market experienced several negative fluctuations with more than 10% decrease in compared to the market index. In the month of July 2017, the company performed poorly with negative increase of -22.2%. It needs to be noted that there was a significant increase of percentage change in the closing price of shares between the months July to November 2017, with market fluctuations reaching as high as 87.50%. However, this is mainly due to the fact that company was on the verge of liquidation and many shareholders at that time sold the shares of Emergent Resources Limited. Since December 2017, the company has experienced only negative changes as per the market index. Despite of such a poor performance in the stock market it has recently shown some signs of improvement with a positive increase of 4.67% in the changing share prices (Berk and Van Binsbergen 2016.)
Some of the main factors associated to the changing share prices at “Emergent Resources Limited” has been identified with industry related factors such as “changes in company focus, management earnings forecasts and macroeconomic factors”. Some of the main interpretation of the “industry wide factors” has been identified with operating strategies of expansion of the business on a particular domain such as in this case it is identified with continued efforts in developing “Beyondie Iron Ore Projects” and able to rationalise the tenement portfolio to prove itself as effective cost Explorer in the market. In various situations, the businesses dependent on approval from state agreements. However, the company has not shown much improvement in the industry wide factors and henceforth investor should be particularly cautious before investing in the shares of “Emergent Resources Limited”.
The other extent of changes on the share prices associated with “changes in company focus”, this is seen to be having a relevance with the vertical integration such as “downstream aggregates, iron ore, logistics and masonry businesses”. It is to be discerned that Emergent Resources Limited has significantly underperformed in compared to its peers such as BHP Billiton, Iluka Resources, Rio Tinto and South32. Due to such reasons, several investors may be willing to buy the shares of other companies instead of investing in the shares of “Emergent Resources Limited”.
The significant decisions related to management earnings forecasts also influence the changes in share price. Some of the main rationale for the changes relating to “management earnings forecasts” has been identified with investments in several types of new upcoming projects and more exploration activities of manganese and vanadium deposits. It has been further discerned to comprise “E52/2215 iron-ore tenement” with more than 46 blocks covering an area of “142 km2 located in Western Australia” (Ijiri 2018).
The beta value of “Emergent Resources Limited” is computed as 1.64.
The main interpretations from the capital asset pricing model has been able to suggest a rate of return of 7.28%, with a “risk-free rate of 4% and market risk premium of 6%” (Zabarankin, Pavlikov and Uryasev 2014).
Based on the present findings of the financial performance the potential investors cannot be recommended even for a Conservative investment in the shares of the company. This is due to the fact that the company is on the verge of being defunct. Despite of considerable improvement in the net profit margin from -31.60 to – 14.09, the company needs to make considerable improvement in terms of profitability. Similarly, the return on equity is also -43.36% which is not at all favourable for investment purposes. The decreasing return of assets clearly suggest that the company has not been able to utilise its assets in an efficient manner in order to make revenues (Ioannou and Serafeim 2017).
The several types of assertions as per liquidity ratio shows that the company has a very high current ratio. However, as the current ratio is well past 3, it necessarily does not indicate that the company is in a financial well-being. It clearly shows that the company has not been able to allocate the assets in an efficient manner. The high current ratio in this case also depicts that current assets are not used in an efficient manner for efficiently managing its working capital. Henceforth, due to such inefficiencies in terms of liquidity ratio the growth prospect is bleak and investors should be cautious has before investing in this company (Macve 2015).
Some of the various depictions on financial leverage is able to suggest that the equity ratio is significantly high with 0.972 in 2017 and 0.973 in 2016. This clearly suggests company’s reliance on the assets in order to finance shareholders equity. Moreover, the debt equity ratio has also increased from 0.027 in 2016 to 0.028 in 2017. This suggests higher utilisation of assets to pay the long-term liabilities. This sort of situation is not suggested for making any investment in the company (McKay and Haque 2016).
The different types of depictions on the stock market performance have been able to state that due to consecutively on huge sum of loss for the past three years, the company has not declared any dividend. Moreover, the price to earnings ratio has reduced down from 0.20 in 2016 to 0.04 in 2017.
The interpretations of WACC concerns are suggested with higher percentage calls for greater risk of functional operation. In this particular case, WACC is significantly high with 7.19% which is considered to be unstable in nature. This depicts that the investors cannot rely to invest in such a risky venture which is evident with a high amount of WACC.
The important findings on the debt ratio is considered with total assets and total liabilities of the company. The debt ratio is depicted to increase from 0.027 in 2016 to 0.028 in 2017. This suggests higher utilisation of assets to pay the long-term liabilities. This sort of situation is not suggested for making any investment in the company (Schaltegger and Burritt 2017.)
The company has not declared any dividend in 2017. Moreover, the price to earnings ratio has reduced down from 0.20 in 2016 to 0.04 in 2017.
To ABC
Unit 5, Ground Floor, 1 Centro Avenue
Subiaco WA 6008
Dear Sir,
This is to bring your kind attention that based on the financial evaluation of “Emergent Resources Limited”, the portfolio of the company is not suitable for investment. The present share price of the company is $ 0.01 AUD and henceforth the investors should be considering the opportunity for better investment in other companies.
It is further discerned that the net loss of the company in 2016 and 2017 $ -1862176.0 and $ -554611.0 respectively. This clearly suggest that the portfolio is not suitable for investment purpose based on the present performance. Despite of several outlook of the company in terms of strong asset base and technical expertise it has not been able to utilise these efficiently pay its creditors. Based on all the aforementioned considerations it is not suitable to make investment in “Emergent Resources Limited”.
Hope the aforementioned evaluation has guided you in terms of your decision to invest in the company. “We are looking forward to serve you better in the future”.
Thank You
Conclusion:
Emergent Resources Limited have shown continued efforts in developing “Beyondie Iron Ore Projects” and able to rationalise the tenement portfolio to prove itself as effective cost Explorer in the market. The main strength of the asset base and technical expertise is discerned with strong cash position of the company. However, the main interpretations of share price movement of the company in the last two years is seen with high amount of volatility in compared to the market index. In the month of July 2016, the company performed disastrously poor in terms of the market index. This is seen to be evident with a negative fluctuation of more than 23.08% between July to August in 2016. Similarly, in the month of November 2016 the company performed via below the expected market performance. This is considered to be evident with the market index of 3.94% in the month of November whereas the company’s decrease in percentage with the fluctuations of share price was seen with -9.09%. Since December 2017, the company has experienced only negative changes as per the market index. Despite of such a poor performance in the stock market it has recently shown some signs of improvement with a positive increase of 4.67% in the changing share prices. Based on the present findings of the financial performance the potential investors cannot be recommended even for a Conservative investment in the shares of the company. This is due to the fact that the company is on the verge of being defunct.
References
Berk, J.B. and Van Binsbergen, J.H., 2016. Assessing asset pricing models using revealed preference. Journal of Financial Economics, 119(1), pp.1-23.
Davies, A., 2016. Best practice in corporate governance: Building reputation and sustainable success. Routledge.
Emergentresources.com.au. (2018). 2015 Emergent Resources Annual Report – Emergent Resources Limited. [online] Available at: https://www.emergentresources.com.au/2017-emergent-resources-annual-report [Accessed 23 May 2018].
Emergentresources.com.au. (2018). 2016 Emergent Resources Annual Report – Emergent Resources Limited. [online] Available at: https://www.emergentresources.com.au/2017-emergent-resources-annual-report [Accessed 23 May 2018].
Emergentresources.com.au. (2018). 2017 Emergent Resources Annual Report – Emergent Resources Limited. [online] Available at: https://www.emergentresources.com.au/2017-emergent-resources-annual-report [Accessed 23 May 2018].
Emergentresources.com.au. (2018). Home – Emergent Resources Limited. [online] Available at: https://www.emergentresources.com.au/ [Accessed 23 May 2018].
Ijiri, Y., 2018. An Introduction to Corporate Accounting Standards: A Review. Accounting, Economics, and Law: A Convivium, 8(1).
Ioannou, I. and Serafeim, G., 2017. The consequences of mandatory corporate sustainability reporting.
Macve, R., 2015. A Conceptual Framework for Financial Accounting and Reporting: Vision, Tool, Or Threat?. Routledge.
McKay, W. and Haque, T., 2016. A study of industry cost of equity in Australia using the Fama and French 5 Factor model and the Capital Asset Pricing Model (CAPM): A pitch. Journal of Accounting and Management Information Systems, 15(3), pp.618-623.
Schaltegger, S. and Burritt, R., 2017. Contemporary environmental accounting: issues, concepts and practice. Routledge.
Tricker, R.B. and Tricker, R.I., 2015. Corporate governance: Principles, policies, and practices. Oxford University Press, USA.
Warren, C.S. and Jones, J., 2018. Corporate financial accounting. Cengage Learning.
Zabarankin, M., Pavlikov, K. and Uryasev, S., 2014. Capital asset pricing model (CAPM) with drawdown measure. European Journal of Operational Research, 234(2), pp.508-517.
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