Company Statement Analysis: Argent & Avalon Minerals Limited - Case Study Example

COMPANY STATEMENT ANALYSIS: ARGENT & AVALON MINERALS LIMITED By Student’s Name Code + Course Name Professor’s Name University Cite, State Date 1.0 Introduction The focus of this paper on evaluating the annual reports for two companies; Avalon and Argent Minerals Limited, in regards to three-year trend, common size statement and financial ratio analyses. Moving forward, the paper evaluates the qualitative, notes of the annual reports and non-financial information for purposes of ascertaining their role in availing easily understandable company operations. Subsequently, the last section of the paper comments on the quality of financial data in regards to aiding investors’ decision making processes in the two companies. It is important to understand that the above analyses are conducted for purposes of providing potential investors with sufficient information, which would facilitate their investment decisions between the two companies. 2.0 BODY 2.1 Company Background Argent Minerals Limited is considered to be one of Australia minerals exploration based company listed within the Australian Stock Exchange platform. It operates about three projects in New South Wales that are focused on developing silver, gold and base metal resources (Argent Minerals Limited, 2014). Other significant projects that the firm is directly involved with its ownership interest with flagship Kempfield Silver Project that deals in new mineralisation lens, production of a higher temperature zone within the north-west of the field and also, production of highly graded silver, lead and zinc. Recently, the company in conjunction with West Wyalong acquired Polymetallic Sunny Corner Project that is focused on the production of both copper and gold deposits (Argent Minerals Limited, 2014). Avalon Minerals Limited is also an Australian based company listed within the Australian Stock Exchange and conducts exploration operations. It also has significant higher quality assets in Sweden, which is one of the leading metal producers within the European Union. One of the fundamental flagship projects in terms of assets base is the Viscaria Copper-Iron Project that is situated about 1,200km north of Stockholm where mainly copper and iron mineralisation exploration activities are executed (Avalon Minerals Limited, 2014). 2.2 FINANCIAL STATEMENT ANALYSIS 2.2.1 Trend Analysis Avalon Minerals Limited has continued to incur losses over the three year period starting 2011 to 2013 given that its net losses for the period between 2011 and 2012 increases tremendously from $(1,897,672) to a low of $ (4,455,951) and later to a low of $ (6,191,996) in 2013(Avalon Minerals Limited, 2014).. On the other hand, Argent also portrays a loss record for the three year period that starts from 2011 to 2013. The company’s losses increases from $(4,399,869) to $(5,786,451) in the periods between 2011 and 2012 and later drops insignificantly to a loss of about (3,460,776) in the financial year ending 2013 (Argent Minerals Limited, 2014). Sales Chart Expenses Chart Net profits Chart Analysis Analysis Sales amounts for Avalon Minerals limited increases significantly from -52.3% to 40.72% in the periods, 2011-2012 and 2012-2-13 respectively. On the contrary, sales revenues for Argent Minerals Limited decrease from 241.9% to -79.27% within the same period. Compared to other companies within the industry, the sales revenues are behaving in a similar manner probably because of stringent policies brought forward by the governments of the day. Avalon’s expenses decreases significantly in the period between 2011 and 2012 by 120.18%and later decreases further by 38.81% in the periods between 2012 and 2013. On the contrary, Argent’s expense base decreases by 39.16% in the period between 2011 and 2012 and later falls further by -43.6% in the period between 2012 and 2013. This fall in the level of expenses is positively related to the industry averages within the same periods. Avalon’s net losses remain relatively high in the period between 2011 and 2012 by 134.81% and later increases by 38.96% in the period between 2012 and 2013. On the other hand, Argent’s net losses increases by 31.51% in the period between 2011 and 2012 but later falls by -40.19% in the period between 2012 and 2013. Avalon’s total assets base expands significantly within the three year period from $23,311,882 to $39,297,601in the period between 2011 and 2013 while liabilities also increase from $1,321,301 to $2,677,348. On the other hand, Argent’s total assets base contracts within the same period from $11,171,795 to 1,385,989 while liabilities also decrease from $2,549,662 to $413,482. 2.2.2 Common Size Statements Avalon’s net losses incurred increased in comparison to industry’s average to $6,191,996M in the period ending 2012. It is ascertained that the increase is largely attributed to a significant increase in share based payment expenses, which was also associated with options and performance rights that was awarded to directors’ management team and other employees of the company. The larger increase in the aforementioned expense item was partially offset by decreased lower exploration expenses that were written off in the period between 2012 and 2013. Argent’s net losses decrease significantly as opposed to the industry’s average. This is largely due to the fact that the company has managed to decrease its administration as well as exploration and development expenditures in the periods between 2012 and 2013. Significantly, the company’s income tax expense has been decreased to nil from $144,691M in the period between 2012 and 2013. In regards to company structure, both Avalon and Argent maintains a board of directors that comprises of executive and non-executive members as well as a managing director that also doubles up as the chief executive officer. Avalon’s capital finances are mainly accessed through equity finances with nil levels of debt. This also goes for Argent Minerals Limited, which depends on reserves and issued forms of capital to execute its projects. This observation is line with the industry averages under which borrowings are shunned at all costs for all mineral-based companies listed within the Australian Stock Exchange platform. 2.2.3 Ratio Analysis Liquidity Ratios (Current ratio= current assets/current liabilities) Avalon’s current ratio decreases significantly for the period between 2011 and 2013, from 2.23 to 0.52 respectively (Exhibit 1). The decrease depicts an unfavorable phenomenon given that the ratios fall below the industry averages and also, the standard averages of 2:1. The fall in the ratio is a clear postulation that the firm’s ability to pay-off its short-term commitments is also losing grip altogether hence, it would affect a potential investor’s investment decision in a negative way. On the contrary, Argent’s current ratio increases significantly in the period between 2011 and 2012 from a low of 4.15 to 9.78 respectively, however; it then reduces to 2.05 in the financial year ending 2013. This decrease in the ratio is still favorable given that it falls within the standard ratio of 2:1 hence it means that the company still enjoys a capacity to pay-off its short-term obligations whenever they fall due (Helfert, 2002). This means that personal investment decision on this company would be positive since it is able to guarantee future operations. Profitability Ratio: (profit margin= net income/sales) Avalon’s profit margin increases significantly in the period between 2011 and 2013 from -11.96 to -58.22 respectively. On the other hand, Argent’s ratio decreases from -76.36 to -51.59 (exhibit 2). Both of these ratios are not conforming to the standard averages however; unlike Avalon, Argent’s ratio is somewhat favorable meaning that it possesses the capability to translate sales into enormous net income revenues (Helfert, 2002). This means that as a potential investor, I would rather put my investments with Argent as opposed to Avalon since it has the opportunity to record huge net income over sales in the near future. Efficiency Ratios: (Receivables turnover= Sales/Accounts receivable) Avalon’s receivables turnover ratio decreases unfavorably from 0.62 to 0.53 in the period between 2011 and 2013 respectively. On the other hand, Argent’s ratio increases favorably from 0.02 to 1.06 within the same period in regards to both the industry and standard averages (exhibit 3). This means that unlike Avalon, Argent’s relatively higher ratio postulates that it is able to operate on a cash basis and also, its credit term policies and collection of debt are effective and efficient in that manner (Penman, 2004). Investment Ratios: (Earnings per share (EPS) = Profit available to equity shareholders / No. Of Ordinary Shares) Avalon’s earnings per share ratio remains relatively constant within the three year period at -0.01 while Argent’s ratio increases significantly from -0.15 to -0.02 in the period between 2011 and 2013 respectively (exhibit 4). All of these company ratios fall below the industry averages and standard ratios, however; unlike Avalon, Argent’s ratios are deemed favorable hence would affect investment decisions positively. This is attributed to the fact that the company’s profits associated to each of its ordinary shares continue to increase amid industry challenges being witnessed (Penman, 2004). Cash Ratios: (cash and cash equivalents/ current liabilities) Cash ratios are considered to be fundamental measures of extreme liquidity position for companies. It is used to indicate whether a firm can meet its short-term commitments with the amount of cash and cash equivalents in its possession without using anything else. Avalon’s ratio decreases unfavorably in the period between 2011 and 2013 from 2.04 to 0.44 respectively while Argent’s ratios of 1.86 remain at par with industry averages but below the standard averages of 2:1(exhibit 5). This means that despite both of these companies having ratios that are below the standard averages, personal investment decision will incline towards Argent Minerals Limited since its is fairly placed in meeting its short-term obligations using its cash and cash equivalents resource base(Ashton, 2011). Stability Ratios: (debt-to-equity= total debt/shareholders ‘equity) This ratio is used to determine the capacity of a company to support debt funds and also, ascertain whether or not debt and equity financing are balanced or not. From the analysis of these two companies, it can be ascertained that they both do not support debt funding for their capital projects instead, they rely mainly on equity funds and reserves. This means that both of these companies have favorably adopted stringent funding policies against debt financing in order to cushion them against the rather unfavorable operational environment that can be seen through the level of losses being accounted in each of the three periods (Fisher, Heinkel and Zechner, 1989). 2.3 Accounting Treatments and Methods Used The preparation of these two annual reports is in accordance with the Corporations Act 2001 and also, other Australian based accounting standards. In regards to revenues recognition, both Argent and Avalon Minerals Limited recognizes revenues as being interest accruals by way of an efficient interest method. This methodology allows for a company to compute amortized costs to a financial asset and thereby allocating the relevant interest income over the period using a specific interest rate. In the event that the revenues are recognized at the exact time they are realized, the profitability ratios for these two companies would be over-exaggerated hence not portraying a clear picture of the current position. In regards to trade receivables, Avalon Minerals Limited recognizes them at their immediate fair values and consequently measured at their respective amortized costs less any provision of doubtful debts. It is established that trade receivables are considered due for settlement within a period that does not supersede 120 days. This means that in the event that the trade receivables amounts do not recognize the provision for doubtful debts would overstate their figures hence giving a relatively wring impression in regards to the company’s ability to collect and extend credit terms to its customer base. In regards to cash and cash equivalents, both Avalon and Argent recognizes them as comprising of cash at bank and at hand and any relevant short-term deposits that have a maturity of either three or less months. This means that in the event that these accounting items are recognized as only being cash in hand and at bank would understate their amounts hence unable to provide a clear picture of the capacity of these two companies to meet their short-term commitments using only cash and cash equivalents. 2.4 Usefulness of Information Provided The annual reports for these two companies were fairly presented and followed an almost systematic and similar approach. Information provided was clear enough to distinguish between different items like weighted average number of shares and outstanding shares and which amounts was to be used for calculating the earnings per share (Ryan, 2006). The annual reports provide a notes section that has been qualitatively portrayed to expound on each and every item mentioned within the financial statements of the two companies. All of the necessary non-financial information has also been included like corporate governance statement, auditors and directors reports (Ryan, 2006). This is taken to mean that the statements have been edited well in order to aid with general purpose investment decisions and also, to understand the exact composition for each of the company’s management structure. In my opinion, the share prices for each of the two companies should be well reflected in order to assist with easier comparison between them within the industry. 2.5 Limitations of FSA The process of comparing the financial statement analysis and accounting policies deployed by any given companies are exposed to certain limitations. For the case of the Argent and Avalon, the disclosed financial statements are only a representation of the firm’s position within a certain date hence does not cover the specific period under scrutiny. Information that is represented is therefore historical and may not be completely relevant and reliable in nature. The adoption of different accounting policies might also affect the comparison of two companies as it has been indicated within the report (Ryan, 2004). 3.0 Conclusion As it can be seen from the discussion above, the profitability, stability, investment, liquidity, cash and efficiency ratios for Argent are much more favorable as opposed to Avalon. This means that as a potential investor, it would be safe to invest with Argent given that it is fairly placed in terms of posting future profits and its stability in regard to capital funds. However; it is noted that the two companies have continued to suffer losses for the three year period and thus, it would be better of future research is directed towards ascertaining the exact causes of losses within the mining industry in Australia and how these losses could be offset for purposes of protecting the existing shareholders. References List Argent Minerals Limited. 2014. Annual reports; 2011-2013. Retrieved on October 9, 2014 from http://www.argentminerals.com.au/annual-and-quarterly-reports.html Avalon Minerals Limited. 2014. Annual reports: 2011-2013. Retrieved on October 9, 2014 from http://avalonminerals.com.au/reports/?page=62 Ashton, D. 2011. Residual income valuation models and inflation. The European Accounting Review, 20(3), 459-483. Fisher, E, Heinkel, R and Zechner, J. 1989. Dynamic capital structure choice: Theory and tests, Journal of Finance, vol.44: 19–40. Helfert, E. A.2002 Techniques of financial analysis: A guide to value creation (11th ed.), New York, McGraw-Hill/Irwin. Penman, S.H., 2004, Financial Statement Analysis and Security Valuation, McGraw Hill. Ryan, B, 2004, Finance and Accounting for Business, Thomson Learning. Ryan, B, 2006, Corporate Finance and Valuation, Thomson Learning. Appendices a.) Sales; Year 2011-2012 2012-2013 Avalon (75,574-158,443/158,443)*100% = -52.30% 2012-2013= (106,352-75,574/75,574)*100% = 40.72% Argent (323,614-94,650/94,650)*100% = 241.9 (67,086-323,614/323,614)*100% = -79.27% b.) Expenses Year 2011-2012 2012-2013 Avalon (4,539,755-2,061,810/2,061,810)*100% =120.18% (6,301,674-4,539,755/4,539,755)*100% =38.81% Argent ( 6,254,756-4,494,519/4,494,519)*100% =39.16% (3,527,862-6,254,756/6,254,756)*100% = -43.60 c.) Net Profits/Losses Year 2011-2012 2012-2013 Avalon (-4,455,951+1,897,672/-1,897,672)*100% = 134.81% (- 6,191,996+4,455,951/-4,455,951)*100% = 38.96% Argent (- 5,786,451+4,399,869/-4,399,869)*100% = 31.51% (-3,460,776+5,786,451/-5,786,451)*100% = -40.19 Exhibit 1 Year/ Company 2011 2012 2013 Avalon 2,914,182/1,304,249=2.23 1,164,718/1,015,200=1.15 1,387,181/2,677,348=0.52 Argent 10,586,966/2,549,662=4.15 3,647,716/372,962=9.78 849,714/413,482=2.05 Exhibit 2 Year/ Company 2011 2012 2013 Avalon -1,897,672/158,443 = -11.96 -4,455,951/75,574 =-58.96 -6,191,996/106,352 =-58.22 Argent -7,227,945/94,650 =-76.36 -5,786,451/323,614 = -17.88 -3,460,776/67,086 = -51.59 Exhibit 3 Year/ Company 2011 2012 2013 Avalon 158,443/254,148 = 0.62 75,574/470,408 =0.16 106,352/201,222 =0.53 Argent 94,650/5,831,995 = 0.02 323,614/254,864 = 1.27 67,086/63,192 = 1.06 Exhibit 4 Year/ Company 2011 2012 2013 Avalon -1,897,672/176,827,514 = -0.01 -4,455,951/246,382,783 = -0.02 -6,191,996/426,560,308 =-0.01 Argent -7,227,945/48,231,251 =-0.15 -5,786,451/118,172,966 = -0.05 -3,460,776/141,700,493 = -0.02 Exhibit 5 Year/ Company 2011 2012 2013 Avalon 2,660,034/1,304,249 = 2.04 694,310/1,015,200=0.68 1,185,959/2,677,348=0.44 Argent 4,744,794/2,549,662 = 1.86 3,344,740/372,962=8.97 759,228/413,482=1.86 Argent Minerals Limited 2011-2012 Financial Statements Argent Minerals Financials for 2012& 2013 Avalon Minerals Limited 2011-2012 Financial Statements Avalon Minerals Limited 2012-2013 Financial Statement Read More