The main purpose of this assessment is to analyze the financial statement of Alecto Minerals Plc which is engaged in the business of mining and extraction of minerals from the surface of the earth. The company has recently been restructured and the name of the business has also changed in order to improve the performance of the business.
The company was originally set up as Cue Energy and listed on AIM in 2006. The primary focus of the company then was to provide energy products for the consumers. Over the past decade the company switched its primary product line in order to enhance the profitability and revenue generation capacity of the business (Cradlearc.com. 2018). The company is current named as Alecto Minerals Plc and the company is listed in London Stock Exchange. The company has further diversified its business and became a African Miner as the management of the business acquired the Matala Gold Project and also the economical Mowana Copper Mines. The company has enhanced its copper production and has been acquiring new sites for such a purpose and in coming years the production of copper is estimated to double which would further increase the revenue generation capacity of the business. The gold project undertaken by the business is also anticipated to take effect in coming years as the business in current situation has the necessary resources to fund the operations in the same.
The assessment would interpret the financial performance of the business for a period of five years with the help of ratio analysis. The computation of key financial ratios would cover essential area of profitability, liquidity, efficiency, gearing and shareholders ratios. On the basis of such ratios, the trend in performance is to be identified (Carraher and Van Auken 2013). The assessment would be concluding with recommendations as to how the performance of the business can be improved further.
Thee financial ratios are tools which are used by management of a business for making comparison and interpreting the performance of a business for a given period. The ratios of the business are used for measuring the performance of the business considering different area of performance and also measures important aspects such as profitability, liquidity, capital structure, efficiency and investor relations (Weygandt, Kimmel and Kieso 2015). The ratios are also used for making comparison between past year performance and current year performance.
In this case, the ratios of Alecto Minerals Plc are computed for a period of five years and the same are shown for different areas of performance for the business.
Figure 1: (Chart Showing Gross Profit Margin of the Business)
Source: (Created by the Author)
The gross profit margin of the business is considered to an important ratio in the profitability analysis of a business. The gross profit margin of the business is shown to be 29.52% in 2017 which is significant improvement in the estimate in comparison to 2016 and 2015 estimates. The increase in profitability of the business is due to the increase in sales of the business and also due to fall in the costs of good sold of the business which suggest that the operational structure of the business is efficient (Weil, Schipper and Francis 2013). The estimates further show that the profit margin was negative in 2015 and the same has improved significantly which shows that the business has slightly restructured in order to make its operations more favorable. The gross profit margin for the business was shown to be highest in 2013 as suggested by Figure 1. The formula used for computing gross profit margin of the business is shown below:
Net Profit Margin
Figure 2: (Chart Showing Net Profit Margin of the Business)
Source: (Created by the Author)
The net profit margin of the business is considered to be an important indicator of whether the business is profitable or not. The net profit of the business is shown in the income statement which is prepared by the management of the company and the same is used to determine the profit generation capacity of a business. The net profit of the business for the year 2017 is shown to be 11.43% which has reduced in comparison to previous year which is shown to be 25.81%. The net profit has reduced which can be due to high costs of production which the management needs to improve (Gitman, Juchau and Flanagan 2015). The above figure shows that the business has incurred significant amount of losses in the year 2015 and from that point the profitability has improved significantly in the 2016 and 2015. The management needs to stabiles the profitability of the business by increasing the sales and reducing the overall costs of the business. The net profit margin of the business is computed considering the formula:
Return on Assets
Figure 3: (Chart Showing Return on Assets of the Business)
Source: (Created by the Author)
The return on assets of a business is one of the key financial indicator for the success of a business and the same considers the return which is generated by the business in comparison to the assets which were employed by the business in its operations. The return on asset of the business is shown to have reduced further in 2017 which may be due to fall in the profitability of the business. The estimate for 2015 is shown to be negative from where the business has made significant recovery (Bentley, Omer and Sharp 2013). This estimate can be improved by the business by improving the profitability of the business. The formula which is used for computing the return on assets of the business is shown below:
Return on Equity
Figure 4: (Chart Showing Return on Equity of the Business)
Source: (Created by the Author)
The above chart shows return on equity of a business and the same is considered to be one of the financial indicators for overall success of a business. The return on equity considers the return which is generated by the business on the basis of the equity investment made by the business. The return on equity of the business for the year 2017 is shown to be 0.061 and the same is shown to have decreased in comparison to previous year analysis (Delen, Kuzey and Uyar 2013). The maximum return which is generated by the business is in 2016 and the same is shown to be 0.224. The analysis also shows that the return which is generated is not appropriate and the management needs to consider that there is a further scope of development in the business. The formula which is used for computation is shown below:
Current Ratio
Figure 5: (Chart Showing Current Ratio of the Business)
Source: (Created by the Author)
The current ratio of the business is associated with the liquidity position of the business and the same is also shown to be favorable for the business of Alecto Minerals Plc. The current ratio for the business is shown to be 3.480 which has increased significantly in comparison to previous year analysis (Warren, Reeve and Duchac 2013). The current ratio for the year 2015 is shown to be significantly low. The current ratio of a business shows the ability of the business to effectively meet the current obligations of the business and is also related to the liquidity status of a business. The current ratio is shown to be more than the ideal standards and therefore the is favorable from the perspective of the business. The current ratio of the business is computed considering the following formulae as shown below:
Quick Ratio
Figure 6: (Chart Showing Quick Ratio of the Business)
Source: (Created by the Author)
The above chart depicts the quick ratio of the business and is also related to the liquidity position of the business. The quick ratio is related to the ability of the business to meet the current obligations of the business and in the computation of such an estimate considers the liquid assets and liabilities of a business (Giles et al. 2014). As per the chart which is portrayed above, the quick ratio of the business is shown to be 2.60 which has improved significantly in comparison to analysis of previous year. The lowest estimate for quick ratio of the business is shown in 2013 and 2015 and since then the liquidity position of Alecto Minerals Plc has improved significantly. The business can effectively undertake any project as their liquidity position is appropriate. The formula which is used for computing the quick ratios of the business is given below:
Figure 6: (Chart Showing Debt to Equity Ratio of the Business)
Source: (Created by the Author)
The above chart shows debt to equity ratio of the business and the same forms a part of the gearing ratio of the business. The estimate is shown to have decreased during the year which suggest that the business has made changes in the capital structure of the business which would have bee done with a view to improve the liquidity of the business. However, the debt to equity ratio is shown to have decreased from 2015 analysis which suggest that the business might be trying to reduce the debt capital which is used by the business (Guay, Samuels and Taylor 2016). The formula which is used for computation of debt to equity ratio is shown below:
Figure 7: (Chart Showing Debt Ratio of the Business)
Source: (Created by the Author)
The debt ratio of a business shows the amount of debt which is used by the business in funding the activities of the business. The debt ratio of a business is shown to have improved and the same is shown to be 0.165 in 2017. The debts of the business is shown to have reduced significantly which suggest that the management of the is trying to bring about change in the capital structure of the business. The formula which is used to compute the ratio is shown to be
Figure 8: (Chart Showing Equity Ratio of the Business)
Source: (Created by the Author)
The above figure depicts the equity ratio of the business and the same is related to the capital structure of the business. The equity ratio of the business is shown to have increased significantly in comparison to the estimates which is presented for 2015. This shows that the management of Alecto Minerals Plc is focusing more on equity capital rather than debt capital. This also signifies that the management is making changes to the capital structure of the business. The formula which is used for the purpose of computing the equity ratio of the business is shown below:
Figure 9: (Chart Showing Inventory Turnover Ratio of the Business)
Source: (Created by the Author)
The above chart shows the inventory turnover ratios of the business and the same is related to the efficiency standards in the business. The estimate for the year 2017 is shown to be 3.364 which has significantly reduced from the analysis of previous year. The inventory turnover ratio of the business reflects the ability of the business to properly manage the inventory of the business. An ideal inventory turnover ratio should be high which would then suggest that the inventory of the business should be cleared as soon as possible. The management of Alecto Minerals Plc needs to effectively formulate strategies in order to manage the inventories of the business more effectively (Vernimmen et al. 2014). The formula which is used for the purpose of evaluating the estimate is shown below:
Figure 10: (Chart Showing Receivables Turnover Ratio of the Business)
Source: (Created by the Author)
The receivables turnover ratio of the business also forms a part of the efficiency ratios of a business and the above chart shows that estimate for receivable turnover ratio has reduced in the current year. The estimate which is shown for 2017 is 8.750 and the same was 12.778 in 2016 which suggest that there has been a change in the receivables policy of the business and there might also be a case where in the efficiency of the business has fallen. The higher the receivable turnover ratio of a business, the more favorable and efficient is the policies and structure of the business. The receivable turnover ratio suggest that the management needs to revise the debtor policy which is followed by the business so that the turnover can be increased. It is to be also noted that receivables turnover ratio has an impact on the liquidity position of the business. The formula for receivables turnover ratio is shown below:
Figure 11: (Chart Showing Earnings Per Share of the Business)
Source: (Created by the Author)
The above table shows the earning per shares of the business and the same is considered to be an important indicator for the performance of the business. The estimate is also considered by potential shareholders while taking decisions whether they want to invest in the business or not. The EPS of Alecto Minerals Plc is shown to be 0.3 per share which has significantly reduced from the estimate which is shown in 2016. The decrease in the EPS of the business is mainly due to fall in the profitability of the business. The management of the company needs to improve the profitability of the business in order to improve the EPS of the business.
In addition to this, there is also dividend payments which is also considered, however, the business has not paid any dividend to its shareholders in recent years and therefore the analysis is not provided for the same.
The ratio analysis is considered to be an efficient tool in measuring the financial performance of the business and also checking financial viability of the business. The limitations which can be pointed out for ratio analysis are listed below in details:
Capital Asset Pricing Model is one of the most important methods used in financial management for the purpose of effectively measuring the relationship between risks and return of a business. The computation process of CAPM method considers the expected rate of return for the business and how the same is impact by the risks which is there associated with the business (Dempsey 2013). The method considers Beta which is the risk factor, market rate of return and also risk-free rate of return for the business. The advantages of CAPM approach in financial management are listed below in point form:
The disadvantages which is associated with the use of CAPM method are listed below in point form:
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Strengths · The business has diversified the business effectively and therefore has the capability to further expand in the market. · The liquidity position of the business is shown to be most favorable and therefore it can undertake any project and also meet the current obligations of the business effectively (Yuan 2013). |
Weaknesses · The business has unfavorable growth in profitability of the business and therefore the same makes the company unattractive. · The EPS of the business is shown to be low and appropriate returns are also not generated by the business. |
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Opportunities · The business has acquired Matala Gold Project and Mowana Copper mine which give the business strength and opportunity to expand the market in South Africa. · The management anticipates that the production of copper would double in recent years and therefore the revenue of the business would significantly expand as well (Bull et al. 2016). |
Threats · The business faces a serious threat from the competitors of the business and this can also impact the survival of the business. · The costs of the business is shown to have increased which needs to be controlled or the business would not be able to generate profits in the long run. |
Conclusion
The analysis of the above financial ratios of Alecto Minerals Plc reveal that the business has the capability to generate adequate amount of profits in the business but in current situation, the business is under performing. The ratio analysis also suggest that the business is unable to maintain the profitability in current year however significant improvement have been made in terms of profitability considering the estimates of 2015. In order to further improve the performance of the business, the following recommendations are suggested to the management of the Alecto Minerals Plc:
Reference
Bentley, K.A., Omer, T.C. and Sharp, N.Y., 2013. Business strategy, financial reporting irregularities, and audit effort. Contemporary Accounting Research, 30(2), pp.780-817.
Bull, J.W., Jobstvogt, N., Böhnke-Henrichs, A., Mascarenhas, A., Sitas, N., Baulcomb, C., Lambini, C.K., Rawlins, M., Baral, H., Zähringer, J. and Carter-Silk, E., 2016. Strengths, Weaknesses, Opportunities and Threats: A SWOT analysis of the ecosystem services framework. Ecosystem Services, 17, pp.99-111.
Carraher, S. and Van Auken, H., 2013. The use of financial statements for decision making by small firms. Journal of Small Business & Entrepreneurship, 26(3), pp.323-336.
Cradlearc.com. (2018). Our team – Cradle Arc PLC. [online] Available at: https://cradlearc.com/about-us/our-team/ [Accessed 12 Nov. 2018].
Delen, D., Kuzey, C. and Uyar, A., 2013. Measuring firm performance using financial ratios: A decision tree approach. Expert Systems with Applications, 40(10), pp.3970-3983.
Dempsey, M., 2013. The capital asset pricing model (CAPM): the history of a failed revolutionary idea in finance?. Abacus, 49, pp.7-23.
Giles, E.L., Robalino, S., McColl, E., Sniehotta, F.F. and Adams, J., 2014. The effectiveness of financial incentives for health behaviour change: systematic review and meta-analysis. PloS one, 9(3), p.e90347.
Gitman, L.J., Juchau, R. and Flanagan, J., 2015. Principles of managerial finance. Pearson Higher Education AU.
Guay, W., Samuels, D. hand Taylor, D., 2016. Guiding through the fog: Financial statement complexity and voluntary disclosure. Journal of Accounting and Economics, 62(2-3), pp.234-269.
Moosa, I.A., 2013. The capital asset pricing model (CAPM): the history of a failed revolutionary idea in finance? Comments and extensions. Abacus, 49, pp.62-68.
Vernimmen, P., Quiry, P., Dallocchio, M., Le Fur, Y. and Salvi, A., 2014. Corporate finance: theory and practice. John Wiley & Sons.
Warren, C., Reeve, J.M. and Duchac, J., 2013. Financial & managerial accounting. Cengage Learning.
Weil, R.L., Schipper, K. and Francis, J., 2013. Financial accounting: an introduction to concepts, methods and uses. Cengage Learning.
Weygandt, J.J., Kimmel, P.D. and Kieso, D.E., 2015. Financial & managerial accounting. John Wiley & Sons.
Yuan, H., 2013. A SWOT analysis of successful construction waste management. Journal of Cleaner Production, 39, pp.1-8.
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