Improvement of One Steel's Performance - Case Study Example

Contents Introduction…………………………………………………………………………...2 Horizontal Analysis……………………………………………………………………2 Vertical Analysis……………………………………………………………………….3 Ratio Analysis…………………………………………………………………………3 Trend Analysis………………………………………………………………………..9 Conclusion……………………………………………………………………………11 Attachment 1………………………………………………………………………...12 Attachment 2………………………………………………………………………...13 References…………………………………………………………………………….15 Introduction One Steel Limited is based in Australia and performs in the mining and metal sector. The company has grown its business and since its existence after participating from BHP in 2000 has helped the company. The organization presently has more than 11,000 employees who are spread over 300 different locations all over the world. The report looks to present the financial analysis of One Steel Limited over a period of 4 years from 2007 to 2010. The ratio also looks into the horizontal, vertical and trend analysis so that better picture of the organization can be created. Horizontal Analysis The analysis shows a mix result and shows that the company has performed in some areas and lacked in others. To make a comparison the analysis is done on the premise i.e. 2008 over 2007; 2009 over 2008 and 2010 over 2009. The analysis through the horizontal methods brings forwards the growth of the organization over a period of time. The horizontal statement highlights the fact that in 2010 revenues are down by 14% which has made the inventories increase by 16% and resulting in the bottom line to fall. This has made the organization ensure that the assets of the organization grow but the liabilities decrease over that period. The analysis for 2009 shows that the revenues felt by 3% which was due to the economic recession had engulfed the entire country. This made the inventories to soar high and made the final profits to be low by 6%. This was a situation which all organizations faced and was beyond control. Despite the slowdown and the way the economy has progressed the organization has growth with increase in assets and equity. Vertical Analysis Vertical analysis helps to provide useful insights which will help the user of the financial statement to understand the performance better and find out areas which will result in the growth of the value of the shareholders. The analysis shows fluctuations as sales have both grown and decreased making the variation to be high as 75%. This has been replicated by the earning which grew in 2008 by 50% but fell in 2009 by 20%. The expenses followed a similar trend showing the fact that the performance has fluctuated over the years and the performance has been affected by the economic conditions prevalent in the country. Ratio Analysis Analyzing the financial statement based on different parameters and finding important results based on the figures helps the user to develop different ideas and perception about the way the company will perform in the future. Ratio Analysis holds and important areas and understanding the different parameters and drawing information based on it helps the users and the organization (Henry, Martin & Lewis, 1991). Below is the ratios for the organization which will help to understand their performance Profitability Ratios This ratio is of prime importance and determines the way the company has performed and helps everyone associated with the company to understand whether there investment is safe or not (Ryan, 1996). This ratio helps the shareholders as they are able to understand the return that accrues to them. Below is the comparison for One Steel Figure 1: Profitability Analysis The ratio shows that the profits have dipped since 2008 after growing in 2007. This trend is demonstrated in both the gross and net profit highlighting the fact that the economic conditions have made it difficult for the organization to sustain high profits. This is matched by a decrease in net profits which stands at 5.09% in 2007 to 3.42% in 2008 to 3.31% in 2009 and 4.2% in 2010. The decrease in net profits is high which is also attributed to the increasing indirect expenses which have made it difficult for the company to carry out the operations as fluently as it used to. The same gets reflected in both ROA and ROE which has decreased over the period of 2007 to 2010. The ROE is highest for 2007 where it stands at 13.27% and the lowest in 2009 where it stands at 5.53%. The same is demonstrated by ROA showing that all factors which have an influence of profits have followed a similar trend. Asset Efficiency Ratios This ratio helps to find out the manner in which an organization is able to use its resources i.e. assets to generate revenue (Sanger, 2001). Organizations look towards ensuring that a mechanism is develop which helps to ensure that the organization is able to use its assets efficiency and grow the business over a period of time. Below are the ratios for One Steel Figure 2: Asset Efficiency Ratios (1) The graph for debtor days and inventory days is shown below Figure 3: Asset Efficiency Ratios (2) The ratio shows that the efficiency in the management of assets has changed over a period of time as it is seen that the asset ratio was 1.21 times in 2007 which decreased and went to 0.88 times in 2010. This brings forwards an area the organization needs to work on as it has resulted in decrease in sales and increase in assets more than warranted which the organization needs to look into and control it. The inventory ratio shows that it has decreased to 3.47 times in 2010 compared to 4.1.4 times in 2007 which means more stock. This states that the organization has a very high percentage of stock than required which increases the likelihood of fluctuation of the stock of the organization. This is also evident from the inventory holding period which has grown to 104 days from 87 days highlighting the above view point. The company has taken a positive step by ensuring that the debtors are paid quickly in 2010 compared to 2007 as it has changed from 6.71 times to 7.48 times resulting in efficiency and development of public image. Liquidity Ratios This ratio helps to find the liquidity and the safety of funds for all investors like creditors, investors, shareholders and other associated with the organization (Lyroudi & Lazaridis, 2000). This ratio is very important as it helps to identify the future investment potential and throws light on the manner the performance will be influenced due to liquidity (Weinraub & Visscher, 1998). Below are the ratios for One Steel Figure 4: Liquidity Ratios The analysis shows that the organization is illiquid and has a high component of short debt in comparison to the assets. This is evident from the fact that the current ratio stood at 1.7 in 2007, 1.45 in 2008, 1.92 in 2009 and 1.59 in 2010 showing that the firm is illiquid and needs to improve it so that it reaches around 2. The situation decreases in case of quick ratio when stock is removed from current assets because stock takes time to be converted and has resulted in the ratio to stand at 0.63 in 2007, 0.85 in 2008, 0.74 in 2009 and 0.78 in 2010 highlighting huge stocks. This is matched by the decrease in cash flow from operations which has rendered the steps taken by the organization to be ineffective. The organization needs to look into the manner seriously and draw important findings and steps which will help to improve the performance of the organization and ensure better liquidity in the organization. Capital Structure Ratios This ratio helps to find the ability of the organization to raise future investment so that the organization is able to invest into new ventures and grow over a period of time. Below are the ratios for One Steel Figure 5: Capital Structure Ratios The organization has taken steps to reduce external debt and relied more on equity financing as it is evident from the fact that the ratios have changed to 60% in 2009 and 57% in 2010 which stood at 113% in 2008 and 116% in 2007 showing widespread changes in equity and debt. This is matched by the debt to equity ratio which shows a shift towards equity from debt. The interest coverage ratio brings forward the fact that it has fluctuated as being 1.5 times and reduced to 0.7 time in 2008 and 2009 and improved slightly to 0.9 in 2010. The organization needs to take steps and see that it reaches around 3 so that the value of the shareholders grows. Market Performance Ratios This ratio helps the investors to understand the manner the organization has performed in the market and provides guidelines to the investors (Salmi & Martikainen, 1994). Below are the ratios for One Steel Figure 6: Market Performance Ratios The EPS shows a decrease as it stood at 36.34 in 2007 and reduced to 19.51 in 2010 highlighting that the return is low and the organization needs to ensure effective steps so that the performance improves and investors find it easy to invest in the shares of the company. Despite declaring dividend in 2010 which stands at 0.4 the rate is quite low which makes it important that steps are taken to control it and improve for better investment opportunities. Trend Analysis The following is the trend analysis of One Steel for 2007 to 2010 Absolute Figures 2010 2009 2008 2007 Sales revenue 6204.6 7241.5 7434.3 4300.6 EBIT 334 223.1 359.1 284.1 Profit after tax 260.7 239.6 255.1 218.9 Trend analysis (in percentage) 2010 2009 2008 2007 Sales revenue 144.27 168.38 172.87 100 EBIT 117.56 78.53 126.4 100 Profit after tax 119.1 109.47 116.54 100 Figure 7: Trend in Sales, EBIT and Profit after Tax for One Steel for the period 2007 to 2010 The graph highlighting the trend looks as follows Figure 8: Trend Analysis The trend shows fluctuations as sales increased to 172% in 2008 to 168% in 2009 and further to 144% in 2010 showing that the performance is moving downwards and requires immediate steps to stop it. The same is shown by EBIT which grew to 126% in 2008 and 117% in 2010 but fell in 2009 to 78% showing widespread fluctuations and the inability to perform consistently. Conclusion The report thereby presents the manner in which One Steel has performed over a period and the steps that need to be taken to improve the performance. The report by looking into different trends and analysis helps to provide important insights into the various directions the company needs to look at. Attachement 1 Ratios 2010 2009 2008 2007 Profitability Ratios         Return on Equity (ROE) 5.80% 5.53% 7.43% 13.27% Return on Assets (ROA) 3.69% 3.46% 3.48% 6.13% Gross Profit Margin 19.89% 21.92% 22.61% 6.06% Profit Margin 4.20% 3.31% 3.42% 5.09% Asset Efficiency Ratios         Asset Turnover Ratio 0.88 times 1.04 times 1.01 times 1.21 times Inventory Turnover (days) 103.75 days 78.95 days 81.26 days 86.96 days Debtors Turnover (days) 48.13 days 41.1 days 57.52 days 53.65 days Times Inventory Turnover 3.47 times 4.56 times 4.43 times 4.14 times Times Debtor Turnover 7.48 times 8.76 times 6.27 times 6.71 times Liquidity Ratios         Current Ratio 1.59 times 1.92 times 1.45 times 1.70 times Quick Asset Ratio 0.63 times 0.85 times 0.74 times 0.78 times Cash Flow Ratio 0.40 times 0.32 times 0.19 times 0.31 times Capital Structure Ratio         Debt To Equity Ratio 57.32% 59.89% 113.46% 116.33% Debt Ratio 36.43% 37.46% 53.15% 53.78% Equity Ratio 63.57% 62.54% 46.85% 46.22% Interest Coverage Ratio 93.09% 73.15% 74.38% 151.93% Market Performance Ratios         Earnings per Share 19.51 22.59 29.45 36.34 Dividend Payout Ratio 0.4 0.62 0.5 0.39 Price Earning Ratio 0.15 0.11 0.25 0.17 Attachement 2 Ratios Formula 2010 2009 2008 2007 Profitability Ratios           Return on Equity (ROE) Net Income / Equity * 100 260.7/4492.7 * 100 = 5.80% 239.6/4336.3 * 100 = 5.53% 255.1/3432.9 * 100 = 7.43% 218.9/1650* 100 = 13.27% Return on Assets (ROA) Net Income / Total Assets * 100 260.7/7067.7 * 100 = 3.69% 239.6/6933.1 * 100 = 3.46% 255.1/7327.8 * 100 = 3.48% 218.9/3569.5 * 100 = 6.13% Gross Profit Margin Gross Profit / Sales * 100 1234/6204.6 * 100 = 19.89% 1587.5/7241.5 * 100 = 21.92% 1681.2/7434.3 * 100 = 22.61% 260.7/4300.6 * 100 = 6.06% Profit Margin Net Profit / Sales * 100 260.7/6204.6 * 100 = 4.20% 239.6/7241.5 * 100 = 3.31% 255.1/7434.3 * 100 = 3.42% 218.9/4300.6 * 100 = 5.09% Asset Efficiency Ratios           Asset Turnover Ratio Sales Revenue / Avg Total Assets 6204.6/7067.7 = 0.88 times 7241.5/6933.1 = 1.04 times 7434.3/7327.8 = 1.01 times 4300.6/3569.5 = 1.21 times Inventory Turnover (days) 360 / Inventory Turnover Ratio 360/ 3.47 = 103.75 days 360/4.56 = 78.95 days 360/4.43 = 81.26 days 360/4.14 = 86.96days Debtors Turnover (days) 360 / Debtors Turnover Ratio 360/7.48 = 48.13 days 360/8.76 = 41.1 days 360/6.27 = 57.42 days 360/6.71 = 53.65 days Times Inventory Turnover Cost of sales / Avg Inventory 4970.6/1433 = 3.47 times 5654/1239.9 = 4.56 times 5753.1/1298.9 = 4.43 times 3463.4/836.3 = 4.14 times Times Debtor Turnover Sales Revenue / Average Accounts Receivable 6204.6/829.3 = 7.48 times 7241.5/827.1 = 8.76 times 7434.3/1185.3 = 6.27 times 4300.6/640.9 = 6.71 times Liquidity Ratios           Current Ratio Current Assets / Current Liabilities 2364.3/1488.6 = 1.59 times 2229.1/1161.4 = 1.92 days 2652.4/1832.3 = 1.45 times 1545.3/907.9 = 1.70 times Quick Asset Ratio (Current Assets – Inventories) / Current Liabilities 2364.3 - 1433/1488.6 = 0.63 times 2229.1 - 1239.9/1161.4 = 0.85 times 2652.4 - 1298.9/1832.3 = 0.74 times 1545.3 - 836.3/907.9 = 0.78 times Cash Flow Ratio Cash flow from Operations / Current Liabilities 602.1/1488.6 = 0.40 times 368/1161.4 = 0.32 times 350.8/1832.3 = 0.19 times 276.5/907.9 = 0.31 times Capital Structure Ratio           Debt To Equity Ratio Total Liabilities / Total Equity * 100 2575/4492.7 * 100 = 57.32% 2596.8/4336.3 * 100 = 59.89% 3894.9/3432.9 * 100 = 113.46 % 1919.5/1650* 100 = 116.33% Debt Ratio Total Liabilities / Total Assets * 100 2575/7067.7 * 100 = 36.43% 2596.8/6933.1 * 100 = 37.46% 3894.9/7327.8 * 100 = 53.15% 1919.5/3569.5* 100 = 53.78% Equity Ratio Total Equity / Total Assets * 100 4492.7/7067.7 * 100 = 63.57% 4336.3/6933.1 * 100 = 62.54% 3432.9/7327.8 * 100 = 46.85% 1650/3569.5* 100 = 46.22% Interest Coverage Ratio EBIT / Net Finance Expenses * 100 334/358.8 * 100 = 93.09% 223.1/305 * 100 = 73.15% 359.1/482.8 * 100 = 74.38% 284.1/187 * 100 = 151.93% Market Performance Ratios           Earnings per Share Net Income / Outstanding shares 19.51 (given) 22.59 (given) 29.45 (given) 36.34 (given) Dividend Payout Ratio Dividend / Net Income 104.1/260.7 = 0.4 147.7/239.6 = 0.62 126.7/255.1 = 0.5 85.5/218.9 = 0.39 Price Earning Ratio Market Value per Share / EPS 2.91/19.51 = 0.15 2.48/22.59 = 0.11 7.3/29.45 = 0.25 6.26/36.34 *100 = 0.17 References Henry., Martin, & lewis, P. 1991. 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