Anglo American Public Limited Company - Essay Example

?Introduction The financial performance of corporations is very important in order to comply with the expectations of the investors. The four main financial statements that are released in the annual report of a firm are the income statement, balance sheet, statement of retained earnings, and statement of cash flow. The data contained within the financial statements can be used to perform quantitative analyses such as ratio analysis. Ratio analysis is a very useful tool to assess the financial performance of an enterprise. This tool can be used to compare the internal performance of a company as well as to compare its performance with the competition. The five major categories of financial ratios are liquidity, financial leverage, asset efficiency, profitability, and market values (Peavler, 2013). The purpose of this report is to analyze the financial performance of the company Anglo American Plc by performing ratio analysis. Trend Analysis Anglo American A trend analysis of some key financial indicators of Anglo American is illustrated below. 2012 (millions) 2011 (millions) % change Sales 28761 30580 -5.94% Gross profit 2768 13237 -79.09% Expenses 30449 21141 44.03% Interest payable 798 695 14.82% Net profit before tax 138 10599 -98.70% Total assets 79369 72422 9.56% Total liabilities 35582 29253 17.79% Capital and reserves 37657 39092 -3.67% Advantages ratio analysis Ratio analysis is a tremendous analytic tool that can be used to evaluate the financial performance of an enterprise. One of the virtues of this type of analysis is that any person with access to the internet can extract the financial statements of a company to realize the analysis. The basic formulas used as input in ratio analysis mostly utilize data from the financial statements of the company. The use of ratio analysis can help people instantly check weather a company is sound financially (Bott, 2013). Another advantage of ratio analysis is that the ratios can be compared against the performance of other companies or the industry. Financial ratios can also be compared against the financial ratio results of previous years. The ratio analysis performed on Anglo American in this paper includes the use of 21 different ratios. Ratio Analysis Anglo American The net margin of Anglo American in 2012 was -2.1%. Net margin measures the absolute profitability of a company. It is calculated dividing net profit by total sales. A negative net margin result is an unfavorable outcome. This ratio was chosen because it shows the profitability of the firm. In 2012 Anglo American obtained an earnings per share (EPS) metric of -$1.19. The company’s EPS went down by $3.91 since the previous fiscal year. Earnings per share is the portion of a company’s profit allocated to each outstanding share of common stock (Investopedia, 2013). EPS was selected because this metric influences the buying decisions of investors. The return on assets (ROA) of the company in 2012 was -0.8%. ROA is calculated by dividing net income by total assets. The reason I selected this ratio is because it shows how effective a company has been at generating profits from its assets. The efficiency of the company is an important aspect of the operations to measure. Anglo American achieved a return on equity (ROE) in 2012 of -1.4%. This metric measures the extent to which financial leverage is working towards benefiting the company. The formula to calculate return on equity is net income divided by total equity. ROE was used in this analysis because this metric demonstrates the ability of the firm to generate income from its equity. The debt ratio of the company is calculated dividing total debt by total assets. Anglo American had a debt ratio in 2012 of 0.45: 1. This ratio shows how well prepared the company is to pay off its long term debt. Anglo American does not seem to have overextended its debt position. The debt ratio was used in the analysis due to the fact that this ratio evaluates the long term solvency of the firm. Typically companies are in trouble when the debt ratio is too high. The current ratio shows the ability of a company to pay off its short term debt which is the reason why this ratio was selected. It is calculated dividing current assets by current liabilities. The company’s current ratio in 2012 was 2.05: 1. Current ratio is calculated dividing current assets by current liability. A current ratio is favorable when is above the 1.0 threshold. Anglo American is in a good position to pay off its short term debt. The working capital of the firm last year was $9,244 million. Working capital is a liquidity ratio that measures the company’s ability to pay off its short term debt using solely its current assets. A positive working capital ratio is a good outcome. The quick ratio of the firm was 1.48: 1. This metric is another liquidity ratio that is more rigorous than the current ratio due to the fact that inventory is not considered in the formula calculation. The working capital and quick ratio were selected in this analysis to further evaluate the short term solvency of the organization. The debt to equity ratio of Anglo American in 2012 was 0.81: 1. Debt to equity is measured by dividing the total debt by the total equity of the company. This metric measures the company’s financial leverage. This ratio was selected to evaluate the relation between debt and equity at Anglo-American. The operating cash flow ratio of the firm in 2012 was 0.63: 1. The result from this ratio is unfavorable due to the fact that the ratio is below the 1.0 threshold. Anglo American’s cash position is too low for its level of current debt. The operating cash flow ratio was selected to assess the cash flow position of the firm. The times interest earned of Anglo American in 2012 was -0.77: 1. This metric measures the company’s ability to make interest payments. The purpose of choosing this ratio in the analysis was to determine if the company is solvent enough to make all interest payment owed. The sale to inventory ratio of Anglo American was 5.74: 1. The ratio compares how many times inventory was moved in relation to its sales. The reason of selecting this ratio was to determine how many times inventory was sold during the year. The gross margin of the company is 9.62%. Gross margin is a measure of the broad profitability of the firm. During 2012 Anglo American had an operating margin of 0.48%. I choose gross margin and operating margin ratios in the analysis due to the fact that both these ratios provide a general idea whether a company is profitable. The return on capital employed (ROCE) and return on ordinary shared funds (ROSF) of the company were 0.22% and -4.5% respectively. Both figures demonstrate that the company did not perform well in 2012. ROCE was chosen as a ratio in the analysis to determine the ability of the company to generate profits from its capital, while ROSF was selected to know if the company is generating profits from its ordinary shared funds. The average inventory period of the organization is 59.84 days. This metric implies that it takes 59.84 days for the company to sell its entire inventory. The average inventory period metric was selected in the paper to determine how many days it takes the company to sell its inventory. The sale per employee ratio of the firm is $287,610 which means that each employee is generating that amount of revenue per year. The reason to include sales per employee in the analysis was to measure how much revenue the firm generate from each employee. The dividend payout ratio and dividend cover of Anglo American were -177.04% and -0.56: 1. These two ratios were selected to determine how effective the company is at providing dividends to its shareholders. The revenue to ROCE ratio was 13,237,771.28: 1. The ratio was selected to show the relation between revenues and ROCE. All ratio calculations performed in this section are illustrated in Appendix A. Comparison Ratio Analysis To evaluate the performance of Anglo American during 2012 some of the ratios calculated in the previous section are going to be compared against a competitor and against the industry standard. The database that is going to be used to extract data regarding the industry standard ratios is Dun & Bradstreet. The SIC code used to identify the industry is 1081 or metal mining services. The company that was selected for comparison purposes is Rio Pinto. Appendix B shows a comparison of financial ratios of Anglo American, Rio Pinto, and the industry standard. At first glance the ratio analysis performance seems unfavorable in various ratios due to the fact that the company had net losses for the year. For instance Anglo American had a net margin of -2.13%, but its competitor Rio Pinto perform more poorly with a net margin in 2012 of -5.9% (Riotinto, 2013). The mining industry in 2012 had a tough year with an overall profitability or net margin of -16.90%. The return on assets of Anglo American was better than Rio Pinto by 1.8%. The firm’s ROA of -0.8% was better than the industry standard of -48.8%. The sale to inventory ratio of the company at 5.74: 1 was lower than Rio Pinto’s performance of 8.30: 1. The industry standard sales to inventory ratio was also much higher at 21.70: 1. The current and quick ratios of Anglo American were superior to Rio Pinto. In 2012 Anglo American had a current and quick ratio of 2.05: 1 and 1.48: 1, while Rio Pinto had ratios of 0.42: 1 and 0.29: 1 respectively. The liquidity position of Anglo American is superior to Rio Pinto. Anglo American’s current and quick ratios were also better than the industry. The debt to equity ratio of Anglo American was lower than Rio Pinto by 0.21. The debt position of the company is higher than the industry standard. Limitations Ratio Analysis The use of ratio analysis is a tremendous tool to analyze the financial performance of a corporation, but it also has its limitations. Ratio analysis does not have any predictive value since its utilization cannot be used to forecast the future performance of a company. Another limitation of ratio analysis is that it does not take into consideration qualitative information that may affect the performance of a company. When comparing companies from different industries ratio analysis does not take into consideration environmental factors such as regulation and market structure (Accountingexplained, 2013). The focus of ratio analysis places too much emphasis on past information. The quality and reliability of the financial information is a limitation of ratio analysis. Ratio analysis does not take into consideration the effect of inflationary forces. Often benchmarks for comparison are difficult to find. Another limitation of ratio analysis is that its use provides a limited picture of the financial performance of a firm. A limitation of the ratio analysis performed on Anglo American was that there was not enough time to thoroughly research news or information about the company and industry that might have impacted the future financial performance of the firm. Recommendation / Conclusion Anglo American is a firm that has had a lot of success in the mining industry over the years. The firm in 2012 had a weak performance considering the fact that the company did not generate profits throughout the year. The poor profitability of the firm was aligned with the financial behavior of companies in the mining industry during 2012. The net profit of the industry was -48.8% which reflects that a lot of companies in this industry lost money during the year. Both the ROA and ROE of the firm were negative which implies that the company was not efficient at generating revenues from neither its assets nor equity. The financial ratio analysis demonstrated that the company is doing well in terms of its liquidity position. Anglo American is in a good position to pay both its short term and long term debt. The operating cash flow ratio was unfavorable which implied that the company does not have an adequate cash reserve. The cash reserve of the firm was depleted by over $2 billion in 2012. Based on the financial and ratio analysis performed on the company I would not recommend an investor purchase Anglo American common stocks. It is never a good idea to invest in a company that obtained negative profits during its most recent fiscal year. The firm was able to sustain the losses and reduction in cash reserves because in the past the company had saved money and accumulated capital. A determining factor in not recommending this company was the industry in which the company operates. This industry reflected major losses for all its participants. Further researching the mining industry could have persuaded my decision. The annual report did not reflect any significant accounting issues that influenced my recommendation. References Accountingexplained.com (2013). Advantages and Limitations of Ratio Analysis. < http://accountingexplained.com/financial/ratios/advantages-limitations> [Accessed 15 October 2013] Angloamerican.com (2013). At a glance. [Accessed 15 October 2013] Angloamerican.com (2013). History. [Accessed 15 October 2013] Angloamerican.com (2013). Annual Report 2012: Anglo American. < http://www.angloamerican.com/~/media/Files/A/Anglo-American-Plc/reports/aa-annual-report-2011.pdf> [Accessed 15 October 2013] Bott, F. (2013). What are the advantages of ratio analysis? [Accessed 15 October 2013] Investopedia.com (2013). Earnings Per Share (EPS). [Accessed 15 October 2013] Peavler, R. (2013). What are the five categories of financial ratios and what does each measure? [Accessed 15 October 2013] Riotinto.com (2013). Investors. [Accessed 15 October 2013] Yahoo.com (2013). Anglo American plc (AAQAY). Yahoo Finance. [Accessed 15 October 2013] Balser, D., McClusky, J. (2005). Managing stakeholder relationships and nonprofit organization effectiveness. Nonprofit Management & Leadership, 15(3). p295-315. Retrieved September 23, 2013 from EBSCOhost database. Appendix A: Ratio Calculations Anglo American Net margin = net income / sales = -614 / 28761 = -2.1% ROA = net income / assets = -614 / 79369 = -0.8% ROE = net income / equity = -614 / 43687 = -1.4% Sales to inventory = sales / inventory = 28761 / 5005 = 5.74: 1 Current ratio = current assets / current liabilities = 18047 / 8803 = 2.05: 1 Quick ratio = (current assets – inventory) / current liabilities (18047 – 5005) / 8803 = 1.48: 1 Debt ratio = total debt / total assets = 35582 / 79369 = 0.45: 1 Debt to equity = total debt / total equity = 35582 / 43687 = 0.81: 1 Times interest earned = EBIT/ interest expense = 614 / 798 = -0.77: 1 Operating cash flow = operating cash flow / current liabilities = 5562 / 8803 = 0.63: 1 Working capital = current assets – current liabilities = 18047 – 8803 = $9,244 Gross margin = gross profit / sales = 2768 / 28761 = 9.62% Operating margin = operating profit / sales = 138 / 28761 = 0.48% Return on capital employed = operating profit / (share capital + reserves + noncurrent liabilities) = 138 / (37657 + 25860) = 0.22% Return on ordinary shared funds = (profit for year – dividends) / (share capital + reserves) = (-614 – 1087) / 37657 = -4.5% Average inventory turnover period = (average inventory / sales ) x 365 = [[(3517+5005)/2] / 25993] x 365 = 59.84 days Sales revenue to capital employed ratio = revenues / ROCE) = 28761 / 0.22% = 13237771.28: 1 Sales per employee = revenues / employees = 28,761million / 100000 = $287610 Dividend payout ratio = (Dividends / earnings for year) x 100 = 1087 / - 614 = -177.04% Dividend cover ratio = earnings for year / dividends = -614 / 1087 = -0.56: 1 Earnings per share = earnings available to shareholders / number of ordinary shares in issue = -$1.19 Appendix B: Ratio Analysis Comparison Anglo American Rio Pinto Industry standard Sales to inventory 5.74 8.30 21.70 Current ratio 2.05 0.42 1.50 Quick ratio 1.48 0.29 1.10 Debt to equity 0.81 1.02 0.24 Net margin -2.13% -5.9% -16.90% Return on assets -0.8% -2.6% -48.80% Read More