Financial Analysis of Ramelius Resource Limited and Doray Minerals Limited for 2016 - Case Study Example

Financial Analysis of Ramelius Resource Limited and Doray Minerals Limited for 2016 [Enter the date of submission] prepared by [Enter your name] Executive Summary The paper which analyzes the performance of Ramelius Resource Limited and Doray Minerals Limited for 2016 shows that Ramelius Resources Limited is better placed as compared to Doray Minerals Limited. The financial analysis shows that Ramelius Resources Limited has better return for the shareholders, higher profitability, better liquidity position, better management of debt and equity and better payment of interest as compared to Doray Minerals Limited. Investing in Ramelius Resource Limited would be a wide decision as timely payment of interest can be ensured and at the same time safety of funds can be ensured. The use of resources is better in case of Ramelius Resource Limited which has thereby enabled better returns and lower risk. Contents Introduction This paper looks at analyzing the financial report of Doray Minerals Limited and Ramelius Resources Limited for the year 2016. The report looks to carry out both a vertical and horizontal analysis for both Doray Minerals Limited and Ramelius Resources Limited. This is then followed by a ratio analysis for both the organization. The analysis is done with the perspective of identifying which is a better company to invest. The paper then presents the financial analysis in a descriptive manner so that the user can garner useful information from it. This is then followed by identifying the limitations which financial analysis has. Thus, the paper will thereby help the user to take useful business decisions and would reduce the overall risk for the investors. Question 1 (maximum 700 words) Financial analysis helps to compare the financial statement of different organization so that useful interpretations can be made. The financial analysis for Doray Minerals Limited and Ramelius Resources Limited for 2016 is as follows Profitability Analysis The profitability analysis shows that Ramelius Resources Limited has a higher profit and is better placed as compared to Doray Minerals Limited. It is seen that return on equity for Ramelius Resources Limited stands at 24.3% as compared to 10.45% for Doray Minerals Limited. This ensures that the returns for the equity shareholders are high and they are compensated properly for the risk undertaken by them (Eljelly, 2004). The gross profit margin and net profit margin is also high for Ramelius Resources Limited as compared to Doray Minerals Limited indicating that the business has been able to generate sufficient revenues. The overall profitability shows that Ramelius Resources Limited has been able to use the different resources in an effective manner. Solvency Ratio The solvency ratio shows that Ramelius Resources Limited has been able to manage the different resources in a better manner. The asset turnover ratio shows better management of asset by Ramelius Resources Limited which stands at 0.99 in comparison to 0.55 for Doray Minerals Limited. In a similar manner the other resources are also properly managed. Ramelius Resources Limited is able to revolve its stock better, ensure better collection from the debtors and overall effectiveness in managing the different resources (Deloof, 2003). This will thereby ensure that the business has appropriate assets which is required and will prevent the organization from having more assets than required (Lyroudi & Lazaridis, 2000). Liquidity Ratios The liquidity ratio shows that Ramelius Resources Limited has better liquidity and is better placed as compared to Doray Minerals Limited. The current ratio for Ramelius Resources Limited is 2.5 as compared to 0.86 for Doray Minerals Limited. This ensures that the business has sufficient short term assets which will enable the business to meet the short term liabilities (Filbeck & Krueger, 2005). In a similar manner the quick ratio is sound for Ramelius Resources Limited which would ensure that the short term obligations can be easily met even after removing inventories. In a similar manner the cash flow ratio also highlights effectiveness on the part of Ramelius Resources Limited as it has been able to generate sufficient cash from operations to meet its short term expenses. This reduces the chances of falling into a liquidity trap as Ramelius Resources Limited will be able to meet all the short term expenses easily. Capital Structure Ratios The capital structure ratio shows that Ramelius Resources Limited has better debt and equity management and is better placed as compared to Doray Minerals Limited. The debt to equity ratio shows that Ramelius Resources Limited has lower debt as compared to Doray Minerals Limited which increases the chances of raising more finance in the future. A proper debt and equity management will ensure that the business will be able to identify the strategies which will help to increase the chances of being able to raise the required finance in the future (Antony, 2004). Even the interest coverage ratio shows that Ramelius Resources Limited has been able to pay the interest on time which reduces the risk for the investors as interest are paid timely and proper management of funds have become possible. It denotes that the business has been able to use the different resources effectively and have been able to perform in a better manner thereby enabling better returns. Question 2 (maximum 250 words) The financial analysis for both the companies shows that Ramelius Resources Limited is a better company to invest as compared to Doray Minerals Limited. This is on the premise that the returns for Ramelius Resources Limited are better. The financial analysis shows that Ramelius Resources Limited has higher profits as compared to Doray Minerals Limited. Even the liquidity analysis shows Ramelius Resources Limited is more liquid as compared to Doray Minerals Limited which increases the chances of being able to meet all the expenses. Even the equity debt management shows better management of the resources and a proper balance between debt and equity. The assets and liabilities are better managed by Ramelius Resources Limited which will improve the chances of being more capable in the future. The overall financial analysis shows that the different resources are being used efficiently by Ramelius Resources Limited. It is also seen that Ramelius Resources Limited has shown improvement in both the horizontal analysis and vertical analysis. Doray Minerals Limited has also shown improvement but when compared to Ramelius Resources Limited the improvement is little. Investing in Ramelius Resources Limited will be beneficial as it will provide an opportunity to provide better chances of return on investment. Since a proper balance is seen between debt and equity it will help the investors to be able to ensure better returns and at the same time ensure safety of the investment that has been made. Question 3 (maximum 250 words) Ratio analysis despite providing different gains has certain limitations which are as Inflation might have impacted the figures shown in the financial statement which might have distorted the financial figures (Padachi, 2006). This will have an impact on the profits as well. Interpreting the financial statement without taking care of the financial analysis will not fetch the expected returns. This will make the entire exercise of carrying out the financial analysis to be not effective as correct results will not be available Different companies use different accounting principles and techniques so comparing the performance will not fetch the correct result (Padachi, 2006). This makes it imperative that while comparing the performance of two organizations changes are made in the accounting principles and techniques so that both the organization use similar techniques so that correct results can be achieved Seasonal factors also impact the financial analysis. While preparing the ratio analysis it is important that the seasonal factors are taken into consideration so that misinterpretation in the financial statement can be reduced (Padachi, 2006). This will provide better results and increase the chances of ensuring better financial analysis The two non financial aspects which the organization should take into consideration while comparing the performances are Changes in seasonal factors and the impact it has on demand and supply should be considered. This will help to gauge the performance correctly and would reduce the chances of misinterpretation of data Different industries work in different environment. This would require that the financial analysis considers the environment and the impact it has on performance. Taking decisions about generalizing the environment would fetch better results. Conclusion The paper shows that Ramelius Resources Limited is better placed as compared to Doray Minerals Limited. The financial analysis shows that Ramelius Resources Limited has better return for the shareholders, higher profitability, better liquidity position, better management of debt and equity and better payment of interest as compared to Doray Minerals Limited. Investing in Ramelius Resource Limited would be a wide decision as timely payment of interest can be ensured and at the same time safety of funds can be ensured. Along with it the vertical and horizontal analysis shows growth for both the organization but the degree of growth for Doray Minerals Limited is more as compared to Doray Minerals Limited. References (the reference list is not counted in the word count) Antony, T. 2004. Thin Capitalization: Issues on the Gearing Ratio. Journal on Australian Taxation, 7 (1), 39-57 Deloof, M. 2003. Does Working Capital Management Affect Profitability of Belgian Firms? Journal of Business Finance & Accounting, 30 (3&4), 573-587. Eljelly, A. 2004. “Liquidity-Profitability Tradeoff: An empirical Investigation in an Emerging Market”, International Journal of Commerce & Management, 14(2), 48 - 61 Filbeck, G., & Krueger, T. M. 2005. An analysis of working capital management results across industries. Mid-American Journal of Business, 20(2), 10-17. Lyroudi, K., & Lazaridis, Y. 2000. The Cash Conversion Cycle and Liquidity Analysis of the Food Industry in Greece [Electronic Version]. EFMA 2000 Athens Padachi, K. 2006. Trends in working capital management and its impact on firms’ performance: an analysis of Mauritian small manufacturing firms. International Review of Business Research Papers, 2(2), 45-58. Read More