Financial Analysis of Sims Metal Management Limited and Transpacific Industries Group Ltd - Example

COMPARATIVE ANALYSIS [Students’ Names] [Course Title] [Professor’s Name] 12th August, 2011 COMPARISON OF SGM AND TPI Introduction This is a report on comparison between two companies: ‘Sims Metal Management Limited’ and ‘Transpacific Industries Group Ltd’. Both of these companies are in clean technology sector and are listed in ‘Australia Stock Exchange’, ASX with codes SGM and TPI respectively. The report gives a brief background of each company. It also performs a financial analysis of each company and a concise discussion on the performance of the company in 2010 in comparison with their performance in 2009. The performance of the companies has also been analyzed against themselves which have enabled to compare the positions of the two companies (Donald, et al., 2009). The report has discussed external benchmarks that can be used when performing financial analysis. Cost, quality and pricing have been as dimensions for external benchmarks to compare the companies against. Background of ‘Sims Metal Management Limited’ Sims metal management limited, formerly called Sims Group, is a global company that is based in Australia. It specializes in the recycling of metals. It has its operations in around 200 centres (scrap metal recycling) in the UK, Australia, Canada, USA, and New Zealand. The company was formed out of the merger between Sims Group and Metal Management (a company based in the U.S) in 2008. This merger resulted in the formation of a scrap metal company that is the largest global company, now known as Sims metal management limited. Sims metal management limited is listed in ‘Australia Stock Exchange’ (ASX) with ASX Code SGM. The company has a recycling division for electronics whose brand name is ‘Sims Recycling Solutions’. This division has close to 30 operations. Background of ‘Transpacific Industries Group Ltd’ Transpacific industries group ltd is a public company that is listed in Australia Stock Exchange (ASX) with ASX Code TPI (listed in May 2005). It has its operations across Australia and the New Zealand. The company provides recycling, industrial cleaning and solutions to waste management to its large customer base. It is the parent company to many subsidiary companies involved in recycling and waste management. TPI is based in Queensland and has its head office in Milton. The Chief Executive is Kelvin Campbell and Warburg Pincus is the cornerstone investor following the capital restructure of 2009. The company provides environmental services on a full range to municipal, commercial and industrial clients. The chief competitors to the company are those companies who are in the business of providing environmental services to overseas markets in addition to Australian community. The major operations of the company include collection operations, waste to energy sites, recycling plants, transfer stations and compositing facilities. The company has a commitment to safe waste management, compliance to the regulations and enhancing the environment. Financial Analysis of ‘Sims Metal Management Limited’ for 2009 and 2010 From the analysis of ‘Sims Metal Management Limited’, the company is not performing as well in 2010 as it was in 2009. The revenue for the company has declined by 10.89%. This is a clear indication that the company is not fully utilizing its potential since the revenue generated in 2009 is higher than the revenue generated in 2010. This shows that the company has the capacity to increase sales revenue (Suzanne, et al., 2004). The corresponding gross profit has, however, increased by 0.80%. A decline in revenue may have been as a result of a reduction in sales volume or a reduction of selling price per unit. Note that the cost of revenue is also expected to decline as the cost of items sold has declined. However, a change in gross profit will indicate the direction of change clearly. A positive change in gross profit shows that the company has performed well compared with the previous year. Considering the net income, the company shows good performance from 2009. The net income has increased by 213.55%. This is majorly attributed to the increase in operating income (209.13%) and increase in net income from continuing operations (160.69%). The company has performed well as can be seen from its asset performance. The total asset has increased by 14.02% showing that the asset base of the company is significant. In specific, the current asset has increased by 36.84%. The increment current asset shows that the company will be in a position to pay its short period debt obligations (Weygandt, et al., 2009). The working capital of the company is also high. The increase in fixed assets is not proportionate to the aggregate increase in total assets. This is a good performance since most resources are not tied up in fixed assets. Although there is a slight increase in total liabilities of 5.41%, there is a significant decline in long term debt (42.55%). Through this method the company will avoid the obligation to pay the fixed interest payments (Viswesvaran, 1996). This saving will meet the short term requirement to pay debts out of the 18.07% rise in current liabilities. Moreover, the 16.54% increase in stockholders equity is a significant performance. Financial Analysis 0f ‘Transpacific Industries Group Ltd’ for 2009 and 2010 From the analysis of ‘Transpacific Industries Group Ltd’, the company is not performing as well in 2010 as it was in 2009. The revenue for the company has declined by 6.17%. According to Oberuc (2004), this is an indication that the company is not fully utilizing its potential since the revenue generated in 2009 is higher than the revenue generated in 2010 which shows that the company has the capacity to increase sales revenue. The corresponding gross profit has also declined by 0.59%. A decline in revenue may be as a result of a reduction in sales volume or a reduction of selling price per unit. Note that the cost of revenue is also expected to decline as the cost of items sold has declined. However, a change in gross profit will indicate the direction of change clearly. A negative change in gross profit shows that the company has performed poorly compared with the previous year (Cleveland, et.al, 1998). Considering the net income, the company shows good performance from 2009. The net income has increased by a huge 407.04%. This is majorly attributed to the heavy reduction in the income tax expense which has reduced by 215.79%. Although there is a slight increase in total assets by 0.65%, the current assets has reduced 1.92%. a decline in current assets is not a good performance as it threatens the capability of the company to pay its financial obligations in the short term. The failure to honour these financial obligations can result in the company being declared insolvent or negatively affect its credit rating. However, the company has reduced its liabilities by 39.60% which means it has offloaded most of its debt burden. This is a good performance since the risk of being declared bankrupt as a result of non payment of debt is reduced. In specific the current liabilities have reduced by 645.26%. The company is in a position to continue with its operations as the working capital is high due to reduction in current liability. The 97.83% increase in long term debt may not be a good performance as these debts attract some fixed interest payment. Failure to service such a debt may result in jeopardizing the smooth running of the company. Increase in stockholders equity by 47.62% is an encouraging performance for the company. The stockholders are the major financiers to the company (source of finance). The cost of this source of finance is less compared to other sources like issue of debentures and other long term debts. Comparison 0f Performance and Position The liquidity ratios of the two companies indicate that they are both in a position to meet their obligations to pay short term debts. The performance of SGM is, however, good compared to that of TPI. Therefore, TPI is more likely to default on its financial obligations than SGM since its ratio is a bit low. Both companies depend on external debt as a source of finance. The debt ratios for TPI are higher than those of SGM. Even if the extent of use of debt finances is high for TPI and hence taking advantage of the tax benefits, its “interest coverage ratio” it does not manage its subsequent obligation well. The profitability ratios of the two companies indicate that SGM is more profitable than TPI. The ‘return equity’, ROE and the ‘return on investment’, ROI as well as the ROCE of SGM are bigger than that of TPI. Generally, SGM is more efficient in managing its assets than TPI. The “total asset turn over” and “the fixed asset turn over” of SGM are all higher than those of TPI. The high ratios of SGM are not attributable to shortages and therefore it can be taken to indicate that SGM’s efficiency level is equally higher than TPI. External Benchmarks for Performing Financial Analysis Every business is distinguished in many respects from the other business despite the fact that they are in the same industrial sector of the economy. This is particularly important so that the businesses can develop competitive strategies that will see them thrive in the industry. Therefore, it is very difficult to find two businesses whose processes are exactly the same. When performing financial analysis, it is worth using some external benchmarks in order to have a good comparison of any given companies. Most of the dimensions used in external benchmarking relate to time, quality and the cost of operations which are then compared to the best companies in the industry. Cost: every company incurs some cost in the process of its production. However, each one of the companies aims at minimizing cost as much it can. A company that uses the least cost in its production process is regarded as the best in the industry. However, it should not minimize cost at the expense of quality of the product. TPI shows high cost effectiveness (42.86%) than SGM (81.25%). Quality: every firm should desire to offer the best quality to the market. Rosen (1974) asserts that this is a sure way of winning customers and hence gaining a market share of the product. A company that has quality product will have high demand for its products and high cases of repeat purchase. Eventually, the customers will develop product loyalty and it can be hard for them to switch to the competitor’s product. Pricing: a company should be cautious enough when pricing its products so as to avoid overcharging its clients. On the other hand a firm should not under price its product as to forfeit the profits. This is unhealthy competition and is not encouraged in the industry. Conclusion Both SGM and TPI are international companies that are listed in ASX. SGM is performing well in 2010 as it was in 2009, but the performance of TPI in 2010 is poor than it was in 2009. Generally, the performance of SGM is better than that of TPI. SGM has shown efficient use of assets and its profitability is also high unlike the TPI which indicates bad management of the obligation to pay its financial debts. However, SGM should put a good leverage in order to take advantage of tax benefits. Cost effectiveness and the quality of a company’s product are a good benchmarks to compare the companies against. A company should incur the least cost possible in its production while meeting the highest quality of the product and price its product in a manner that is affordable to the public and avoid unhealthy competition in the industry. References Cleveland, J., Murphy, K. & Williams, E., 1998. "Multiple uses of performance appraisals: Prevalence and correlates," Journal of Applied Psychology, 74(1): 130-135. Donald, E. et al., 2009. Intermediate Accounting. New Jersey: John Wiley and Sons. Oberuc, R. E., 2004. Dynamic portfolio theory and management: using active asset allocation to improve profits and reduce risk. New York: McGraw-Hill Professional. Rosen, S., 1974. “Hedonic Prices and Implicit Markets: Product Differentiation in Pure Competition”, The Journal of Political Economy, 82(1): 34 – 55. Suzanne, R. et al., 2004. Information technology and organizational transformation: solving the management puzzle. Butterworth: Heinemann. Viswesvaran, C., 1996. "Comparative analysis of the reliability of job performance ratings", Journal of Applied Psychology 81(5): 557-574. Weygandt, J. et al., 2009. Managerial Accounting: Tools for Business Decision Making. New York: John Wiley and Sons. Read More