Argent Minerals Limited and Avalon Minerals Ltd Accounting - Case Study Example

Running Head: Accounting Name Course Lecturer Date Introduction The financial statements of an entity shed light about the financial performance of the entity. The analysis of the prepared financial statements of an entity determines the quality of the statements as well as the ability of the reports to the required information to the users. Accounting analysis plays a significant role in determining the quality of the statements as well as their ability to assist the users in getting the needed information about an entity. In determining the quality of the statements, it is important to consider such factors as the choice of accounting policy, forecast errors, and resistance of the accounting policies. This is because these factors influence how the financial statements are prepared using the accounting policy in application. This report seeks to determine the quality for financial statement provided by two different firms in the same sector and industry. This report will create trend lines for key items in the financial statements over three year period in order to see how the companies are performing. The trend lines will include ratio analysis, accounting treatment as well as methods used and common size. The array of ratios will discern the relationship between the performance of the various aspects such as ability to pay for liabilities as they fall due, the debt levels and working capital. Through thorough review and evaluation of the financial statements, the report will provide investors with the state of the companies. This will help the investors to gain and understand the financial health of the two companies and hence enable them to make more effective decisions. Company background Argent Minerals Limited This company was formerly known as Kempfield Silver Pty Limited. Argent Minerals Limited is engaged in exploration of minerals in New South Wales, Australia. Recently, the company entered in to an agreement with Golden Cross Operations Pty Limited, this agreement is called farming and joint venture agreement. Golden Cross Operations Pty Limited is a subsidiary of Golden Cross Resources Limited, Golden Cross Resources Limited relate to the Argent Minerals Properties (sunny corner tenements, Kempfield tenements and west Wyalong tenements collectively constitute Argent Minerals Properties). It is a publicly listed company in the stock exchange in Australia. Avalon Minerals Ltd  This company is engaged in exploration and evaluation of minerals. The company has operations in Sweden; they include Adak Copper-Zinc project and Viscaria copper iron project. Primarily, the company explorers’ copper and iron ore deposits in Sweden. Viscaria copper iron project is its principle asset, it is located in the Kiruna region in Sweden. The company was incorporated in Australia in 2006; it is based in Milton, Australia. In addition to the properties in Sweden, the company is also a leading metal producer in the European Union. It is listed in the Australia stock exchange. Financial statements analysis Trend analysis Both companies have performed poorly in the last five years. The income statement of both companies indicates that they made losses. For the last three years, they have made losses. Although profit or loss is not the only measure of performance, the successive losses are huge and the companies have no measures to improve the performance. Argent Minerals Limited 2011 2012 2013 Sales 94650 323614 67086 Net loss 7227945 5786451 3460776 Expenses 3527862 6254756 4494519 Avalon Minerals Limited 2011 2012 2013 Sales 164138 83804 109708 Net loss 1897672 4455951 6191996 Expenses 2061810 4539755 6301704 The charts above indicate how the companies performed poorly. The expenses were far much too high than sales thereby making the company to record losses. Avalon recorded growth in current and non-current assets. Its net assets also recorded growth from 2011 to 2013. This indicates that the company, although making losses, is increasing the wealth and value of shareholders investment. On the other hand, Argent recorded reduction of current assets by a consideration margin from $3,647,716 to $849,714. Its non-current assets also recorded but at a very small margin, generally, the total assets of the company reduced from $3,207,114 to $1,385,989 from 2012 to 3013. The reduction of the assets of the company meant that the net worth of the company as indicated by the net assets reduced considerably as well. This indicates poor performance and management of shareholders wealth by the management of the company. The performance of these two companies in terms of balance sheet is contrasting as Avalon in growing while Argent is reducing. However, both companies are performing within the industry average. Common statements The internal efficiency of Avalon is very good, the company recorded growth in sales from $75,574 in 2012 to $106,352 in 2013. This indicates improved performance by the company, the management is utilising the company assets to generate revenue and make increased sales and hence improved internal efficiency. For Argent, the sales reduced from $323,614 in 2012 to $67,086 in 2013. This indicates a considerable decline of sales for the company. As such, the internal efficiency of the company has not improved; instead, it has declined by a big margin. Again, Avalon has better performance than Argent in terms of internal efficiency. Compared to the industry average, Argent Company is below the industry average while Avalon is showing signs of improved performance and hence it is within the industry average. Avalon Company is financed by equity. The company does not use debt to finance its operations and projects but it prefers equity, this is indicated in the statement of equity whereby it has issued shares to the public in the last three consecutive years in order to raise capital to finance its investments. Argent company also uses equity to finance its operations and projects. It issued shares win the last three consecutive years to raise capital as well, it does not use debt. Both companies are financed by equity. For financing, the companies are above the industry average. Many firms in the industry are financed by both equity and debt and debt taking the highest proportion. However, for these two companies, they are fully financed by equity. Ratio analysis Profitability ratios These ratios measures how well the companies perform in generating income or profit. Profitability ratios 2011 2012 2013 Net income margin – Avalon - Argent - Industry Average 11.56.14 7636.50 5317.11 1788.07 5644.07 5158.72 Operating profit margin – Avalon - Argent - Industry Average 11.56.14 4648.57 5317.11 1832.78 5644.07 5158.72 Return on capital employed (ROCE) – Avalon - Argent - Industry Average 0.09 0.51 0.20 1.55 0.17 3.56 The profitability ratios above indicate poor performance by the company. The company is not able to generate enough revenue to cover expenses. By making losses for the last three years consecutively, it means that the company will not give dividends to the shareholders. Essentially, I would not invest in this company; i would also not recommend any investor to invest in this company. The profitability ratios are bad. Compared with other company, the performance is bad and it is well below the industry average. Efficiency ratios These ratios indicate the efficiency of the company. They indicate how the company utilised its assets to generate revenue. Efficiency ratios 2011 2012 2013 Efficiency – Avalon - Argent - Industry Average 11.56.14 7636.50 5317.11 1788.07 5644.07 5158.72 Total assets turnover – Avalon - Argent - Industry Average 11.56.14 4648.57 5317.11 1832.78 5644.07 5158.72 Return on capital employed (ROCE) – Avalon - Argent - Industry Average 0.09 0.51 0.20 1.55 0.17 3.56 The efficiency ratios indicate that the company is not utilising its assets to the optimum. The company has to utilise its assets more effectively in order to generate more revenue. In addition, the assets that more utilisation capacity and hence the company should take the opportunity to increase the company revenues. This will be crucial in its attempts to improve performance from loss to profits. Based on the efficiency ratios, i would not invest in the company nor would I recommend any investor to invest in the company. The ratios are bad and they are below the industry average. The ratios indicate that the quality of the management is very low and hence poor; this translates to poor performance of the company. Liquidity ratios These ratios measure the ability of the firms to remain in operations. They are fundamentally the most important ratios. The ability of the companies to pay current liabilities is not questionable. Both firms do have enough current assets to meet their current obligations. Even with3out inventories, the firms have enough current assets to meet their current obligations. This indicates good management of current assets and current obligations. Investment ratios The investment ratios of the two companies indicate that their long term future will not improve. This is because the companies are not investing in long term investments. The ratios are bad and the company performance as indicated by the investments ratios is below the industry average. As such, i would not recommend any investor to invest in the two firms. Conclusion The report have analysed different accounting aspects of Avalon and argent minerals limited. This report have create trend lines for key items in the financial statements over three year period in order to see how the companies are performing. The trend lines will include ratio analysis, accounting treatment as well as methods used and common size. The array of ratios will discern the relationship between the performance of the various aspects such as ability to pay for liabilities as they fall due, the debt levels and working capital. Through thorough review and evaluation of the financial statements, the report will provide investors with the state of the companies. This will help the investors to gain and understand the financial health of the two companies and hence enable them to make more effective decisions. They does not represent good investment opportunity. Argent Minerals Limited Ratio Formulae             2013 2012 2011 Profitability ratios         Net income margin (Net income/revenue) x 100 (3460776/67086)*100 5158.72 (5786451/323614)*100 1788.07 (7227945/94650)*100 7636.50 Operating profit margin (Operating profit/revenue) x 100 (3460776/67086)*100 5158.72 (5931142/323614)*100 1832.78 (4399869/94650)*100 4648.57 ROCE EBIT/net assets 3460776/972507 3.56 5931142/3834152 1.55 4399869/8622133 0.51                 Investment performance               Return on Equity Net Income/Shareholder's Equity 3460776/972507 3.56 5786451/3834152 1.51 7227945/8622133 0.84 Dividend Payout Ratio dividends/net income             Return on assets (ROA) Profit/total assets 3460776/1385989 2.50 5786451/4207114 1.38 7227945/11171795 0.65 Earnings per share Earnings to shareholders/weighted average shares 3460776/143051315 0.02 5786451/141002283 0.04 7227945/85709087 0.08                 Liquidity ratios               Current ratio Current assets/current liabilities 849714/413482 2.06 3647716/372962 9.78 10586966/2549662 4.15 Quick ratio (Current assets-inventory)/current liabilities (849714-27294)/413482 1.99 (3647716-48112)/372962 9.65 (10586966-10177)/2549662 4.15                 Efficiency ratios               Efficiency expenses/revenue 3527862/67086 52.59 6254756/323614 19.33 4494519/94650 47.49 Total assets turnover total assets/total revenue 1385989/67086 20.66 4207114/323614 13.00 11171795/94650 118.03 Net assets turnover net assets/total revenue 972507/67086 14.50 3834152/323614 11.85 8622133/94650 91.09 Return on fixed assets Profit/non-current assets 3460776/536275 6.45 5786451/559398 10.34 7227945/584829 12.36 Account receivable turnover total sales/account receivable 67086/63192 1.06 323614/254864 1.27 94650/5831995 0.02 cash ratios                   Cash turnover net sales/cash 67086/759228 0.09 323614/3344740 0.10 94650/4744794 0.02 Total assets financing total assets/equity 1385989/972507 1.43 4207114/3834152 1.10 11171795/8622133 1.30 Avalon Minerals Limited Ratio Formulae 2013 2012 2011 Profitability ratios         Net income margin (Net income/revenue) x 100 (3460776/67086)*100 5158.72 (5786451/323614)*100 1788.07 (7227945/94650)*100 7636.50 Operating profit margin (Operating profit/revenue) x 100 (3460776/67086)*100 5158.72 (5931142/323614)*100 1832.78 (4399869/94650)*100 4648.57 ROCE EBIT/net assets 3460776/972507 3.56 5931142/3834152 1.55 4399869/8622133 0.51                 Investment performance               Return on Equity Net Income/Shareholder's Equity 3460776/972507 3.56 5786451/3834152 1.51 7227945/8622133 0.84 Dividend Payout Ratio dividends/net income             Return on assets (ROA) Profit/total assets 3460776/1385989 2.50 5786451/4207114 1.38 7227945/11171795 0.65 Earnings per share Earnings to shareholders/weighted average shares 3460776/143051315 0.02 5786451/141002283 0.04 7227945/85709087 0.08                 Liquidity ratios               Current ratio Current assets/current liabilities 849714/413482 2.06 3647716/372962 9.78 10586966/2549662 4.15 Quick ratio (Current assets-inventory)/current liabilities (849714-27294)/413482 1.99 (3647716-48112)/372962 9.65 (10586966-10177)/2549662 4.15                 Efficiency ratios               Efficiency expenses/revenue 3527862/67086 52.59 6254756/323614 19.33 4494519/94650 47.49 Total assets turnover total assets/total revenue 1385989/67086 20.66 4207114/323614 13.00 11171795/94650 118.03 Net assets turnover net assets/total revenue 972507/67086 14.50 3834152/323614 11.85 8622133/94650 91.09 Return on fixed assets Profit/non-current assets 3460776/536275 6.45 5786451/559398 10.34 7227945/584829 12.36 Account receivable turnover total sales/account receivable 67086/63192 1.06 323614/254864 1.27 94650/5831995 0.02 cash ratios                   Cash turnover net sales/cash 67086/759228 0.09 323614/3344740 0.10 94650/4744794 0.02 Total assets financing total assets/equity 1385989/972507 1.43 4207114/3834152 1.10 11171795/8622133 1.30 Read More