Financial Ratio Analysis of BlueScope Limited - Case Study Example

BLUESCOPE STEEL: FINANCIAL RATIO ANALYSIS By (Student’s Name) Professor’s Name Course Name Date Table Of Contents Executive Summary……………..………………………………………………3 A. Profitability Ratios………………..…………………………………………..4 Return on Assets………………………………………………………………4 Return on Equity……………………………………………………………….4 Net Profit Margin………………………………………………………………4 B. Liquidity Ratio…………………………………………………………………5 Current ratio…………………………………………………………………..5 Quick ratio…………………………………………………………………….5 C. Asset Efficiency Ratios………………………………………………………6 Asset Turnover ratio………………………………………………………….6 Days debtors………………………………………………………………….6 Creditors Turnover……………………………………………………………6 D. Capital Structure Ratios………………………….…………………………………………………..7 Debt to equity…………………………………………………………………7 Debt Ratio…………………………………………………………………….7 E. Market Performance Ratios………………………………………………….8 Earnings per share…………………………………………………………..8 Conclusion and Recommendation……………………………………………….9 References List…………………………………………………………………..10 Executive Summary From the analysis, it can be ascertained that BlueScope Limited is not operating at a healthy platform. This is attributed to its poor machine and equipment utilization hence resulting to poor profits and earnings in that case. Subsequently, the low levels of profits and thus, earnings per share are as a result of lack of market aggressiveness and other promotional strategies. It is also noted that BlueScope Limited depends more on creditors to fund its daily projects and operations as opposed to owner’s equities. This is a negative aspect especially because it dilutes their respective control capabilities. BlueScope Steel: Financial Ratio Analysis A. Profitability Ratios i) Return on Assets= Profit before interest and tax / Average Total Assets For 2009= (127.3M)/ 8,864.6= (0.014) For 2010 = 130.3M/8,997.6= 0.014 For 2011 = (1,150M)/7,793M = (0.15) For 2012 = (976.1)/6,733.5M= (0.14) ii) Return on Equity = Net Profit / Average Ordinary Equity For 2009 = (66.8M)/4,032.6= (0.02) For 2010 = 139.5M/4,032.4 = 0.03 For 2011 = (1,040.4)/4,073.8M= (0.27) For 2012 = (1,027.9M) /3,679.3M= (0.28) iii) Net Profit Margin = Net profit / Net sales For 2009 = (66.8M)/10,328.7= (0.006) For 2010= 139.5M/8,623.1= 0.02 For 2011 = (1,040.4)/ 8,991.3= (0.12) For 2012 = (1,027.9)/ 8,472.5 = (0.12) (BlueScope Limited 2013) Trend Analysis: The company’s return-on-asset ratio decreases insignificantly from (0.014) in 2009 to (0.14) in 2012 which is an indication that the ratio of profits for each asset investment made is destabilizing significantly. This can be as a result of poor maintenance of equipment as machines in order to facilitate optimum production. Subsequently, the return-on-equity ratio decreases significantly from (0.02) on 2009 to (0.28) in 2012 which is an indication that the firm’s ability to post profits for available equities made is deteriorating faster. This can be attributed to poor formulation of strategies by the management. The net profit margin ratio also decrease significantly from (0.006) in 2009 to (0.12) in 2012 which is an indication that the amount of profits recorded by each sale made is deteriorating faster. This can be attributed to poor marketing structures as well as promotional campaigns. B. Liquidity Ratios i) Current ratio = total assets / total liabilities For 2009 = 8,864.6/3,201.3M= 2.77 For 2010 = 8,997.6/3,241.9M = 2.78 For 2011= 7,793M/3,396.9M= 2.29 For 2012 = 6,733.5M/ 2,954.7M= 2.28(BlueScope Limited 2013) ii) Quick ratio = (total current assets - inventory) / total current liabilities For 2009 = 3,058.1-1,628.9/1,680.1 = 0.85 For 2010 = 3,265.2-1,762.5/1,801.3= 0.83 For 2011 = 3,222.1-1,947.4/1,878.2= 0.68 For 2012 = 2,567.1-1,337.4/ 1,802.2= 0.68 (BlueScope Limited 2013) The company’s current ratio decreases from 2.77 in 2009 to 2.28 in 2012 (BlueScope Limited 2013). This is an indication that although the firm is able to meet its short term obligations, there is likelihood that the trend will not be similar in future as it will be lack the capacity. Consequently, the company’s quick ratio decreases significantly from 0.85 in 2009 to 0.68 in 2012(BlueScope Limited 2013). This is an indication that the company’s ability to meet its short-term obligations without relying on inventories is deteriorating faster and in a significant pace. This can be attributed by its poor inventory management strategies. C. Asset Efficiency Ratios i) Asset Turnover ratio = Sales/ Average Total Assets For 2009 = 10,328.7/8,864.6= 1.17 For 2010 = 8,623.1/8,997.6= 0.96 For 2011 =8,991.3/ 7,793= 1.15 For 2012 = 8,472.5/6,733.5= 1.26 ii) Days debtors = (Average Accounts Receivables * 365) / Sales For 2009 = (36.4+976.8)*365/10,328.7= 34 days For 2010 = (29.1+1,169.5)*365/8,623.1= 50 days For 2011 = (22.7+1,026.8)*365/8,991.3= 42 days For 2012 = (42.2+952.9)*365/8,472.5= 41 days (BlueScope Limited 2013) iii) Creditors Turnover= (Average Accounts payables * 365) / COGS For 2009 = 236.7*365/4,152.3= 20 days For 2010 = 140.9*365/3,671.3= 14 days For 2011 = 1,156.6*365/3,213.7= 131 days For 2012 = 1,049.1*365/ 3,553.4= 107 days (BlueScope Limited 2013) The company’s asset turnover ratio increases insignificantly from 1.17 in 2009 to 1.26 in 2012(BlueScope Limited 2013). This insignificant increase depicts the fact that the company is trying to increase the volume of business it is able to execute with the current asset investments made (Brush, Bromiley & Hendrickx 2000). The company’s day debtor’s ratio increases steadily from 34 days in 2009 to 41 days in 2012(BlueScope Limited 2013). This increase portrays the fact that the company has been able to lengthen the period upon which it collects monies for goods sold on credit. This can be attributed to the fact that it has been relying on poor mechanisms of collecting debt or that it has attained some financial stability in order to allow customers more days before they can make payments. The company’s creditor’s turnover ratio increases significantly from 20 days in 2009 to 107 days in 2012. This level of increase might be taken to mean that BlueScope is not able to pay for its supplies on time. This can be attributed to fewer cash flows that are needed for meeting such kind of supplies. D. Capital Structure Ratios i) Debt to equity = total liabilities / total equity For 2009 = 3,201.3/ 5,663.3= 0.57 For 2010 = 3,241.9/5,755.7= 0.56 For 2011 = 3,396.9/ 4,396.1= 0.77 For 2012 = 2,954.7/3,778.8= 0.78 (BlueScope Limited 2013) ii) Debt Ratio = total liabilities / total assets For 2009 = 3,201.3/ 8,864.6=0.36 For 2010 = 3,241.9/8,997.6= 0.36 For 2011 = 3,396.9/ 7,793=0.44 For 2012 = 2,954.7/6,733.5=0.44 (BlueScope Limited 2013) The company’s debt-to-equity ratio increases steadily from 0.57 in 2009 to 0.78 in 2012(BlueScope Limited 2013).This increase is an indication that there is a significant increase in the amount of capital funds that are provided by creditors in comparison to the real owners of the firm. This is not a healthy indicator given that it dilutes the control previously enjoyed by the owners. On the other hand, the debt ratio also increases steadily from 0.36 in 2009 to 0.44 in 2012(BlueScope Limited 2013). This is an indication that BlueScope has continued to rely on creditors as a source of finance as opposed to the real owners of the company. Retrospectively, it means that the firm is not able to effectively utilize funds provided by the owners through ordinary stock options. E. Market Performance Ratios i) Earnings per share = profit for shareholders / number of ordinary shares For 2009 = (7.1) cents For 2010 = 6.9 cents For 2011 = (48.6) cents For 2012 = (39.1) cents (BlueScope Limited 2013) The company’s earnings per share ratio decrease significantly from (7.1) cents in 2009 to (39.1) cents in 2012 which is an indication that firm’s market performance is unhealthy in that matter. This is also an indication that the firm is not placed at a fair position to meet its growth strategies (Ashton, 2011). Conclusion and Recommendation From the analysis above, it can be ascertained that BlueScope Limited is operating under unhealthy environment. This can be ascertained by its overreliance on creditors’ funds. Thus, it is not safe to put investments with the firm at all costs. References List Ashton, D. 2011. Residual income valuation models and inflation. The European Accounting Review, vol. 20, Issue 3.pp. 459-483. Brush, T. H., Bromiley, P., & Hendrickx, M. 2000. The free cash flow hypothesis for sales growth and firm performance. Strategic Management Journal, vol. 21, Issue 4: p. 455-472. BlueScope Limited. 2013. Annual reports, Retrieved December 26, 2013 from http://www.bluescope.com/investors/annual-reports. Read More