Accounting Ratios of Black Gold Ltd - Case Study Example

Report Writing Your name: Institution name: Dear Mr. Widodo, Black Gold Ltd is a Japanese based producer of high value thermal coal that is being sold in power generating plant customers in Japan. Black Gold Ltd currently owns underground thermal coal mines in different parts of the world. Over past years, Black Gold Ltd has enjoyed excellent logistic infrastructures and its proximity to the sear allows it to transport coal to its customer at a low cost. In recent years, the company have continued to evaluate acquisition opportunities of coal with similar geographical advantages. Currently, Black Gold is considering buying of a coal mine in Indonesia. For this project, the company has applied for purchase financing of five billion dollars from our bank. This project is expected to run for a period of 20 years. While the end-value of the whole projected is zero. The below report is the analysis of the Black Gold Ltd financial statement. Overview of Accounting Ratios 2013 2014 97,520/98720=0.98 99,676/100,870=0.99 Capitalization Ratio = Long-Term Debt / (Long-Term Debt + Shareholder’s Equity) 45,900/(45900+1200)=0.974 47500/(47500+1200)=0.975 46990-45160=1880 52750-50160=2590 Debt/EBITDA ratio = Liabilities / EBITDA 97520/1880=51.87 99676/2590=38.48 Current Ratio=Current Assets/Current Liabilities 98720/97520=1.01 100,870/99676=1.012 Profit Margin = Net Income / Revenue 1830/46990=0.0389 2590/52750=0.0491 1.0 Debit Ratio Debit Ratio is used to measure ability of a company to meet its financial obligations when they are due. In other words, the company is able to repay its principal amount of its loan, interest and the company will be able to meet it other financial obligations when they are due (Deacon, 2000). This ratio will also give an insight into the mix of debt and equity the company is using. A lower percentage of debt ratio will mean the company is less dependent on leverage and the company has stronger equity position. Black Gold ratio debit ratios increased from 98 per cent in 2013 to 99 per cent in 2014. This means, Black gold Ltd can be easily be hurt by its leverage in future if it is unable to generate enough returns above it cost of capital (Kenneth, 2003). In general, the lower the debt ratio, the lesser the risk that the company will be considered to have taken on. 2.0 Capitalization Ratio This ratio can be used to compare the total debt to total capital structure of the company. This ratio will reflect the extent to which the company will operate on its equity (Kenneth, 2003). This ratio helps banks on the extent to which the company borrowing money is using its equity to support its growth and operations (Deacon, 2000). This ratio will assist the bank in the assessment of the loan risk. Black Gold Ltd capitalization ratio increased from 97.4 per cent in 2013 to 97.5 per cent in 2014. This company is considered to be risky because it has high risk of insolvency if it fail to repay its debt in time (Weygandt, 2006). In addition, in future, it will be difficult for this company to get more loans in the future. 3.0 EBITDA Negative EBITDA will indicate that the company has a trouble with its profitability, while a positive EBITDA may not be synonymous with a healthy company but it good for the business operation (Kenneth, 2003). A company that have low liquidity if its current assets are difficult to convert into cash, but still maintain profitability (Woolridge, 2006). There was an increase in profit which made the company to have a positive EBITDA. This means the company is able to pay out it debts. 4.0 Debt/EBITDA Ratio This ratio is used to measure the company’s ability to pay-off its incurred debt (Woolridge, 2006). This ratio will give the bank the amount of time or period that the company would need to pay off it loan if the loan has been approved. This ratio is a better tool to the company than other ratio because it cannot be affected by any change in capital structure (Woolridge, 2006). For example, a company that raised it equity fiancé and use the money to repay its debt. This will contribute to low earning-per-share and higher P/E ratio. But EV/EBITDA ratio cannot be manipulated by any changes that occur in the capital structure of the company (Deacon, 2000). Another advantage of employing this ratio is that it makes it fair comparison of businesses with different capital structures (Weygandt, 2006). In addition, it removes the effect of non-cash expenses such as amortization and depreciation. From the EBITDA ratio analysis, Black Gold Ltd is able to pay off its liabilities that will be related to loan (Woolridge, 2006). Since the loan repayment will be made using the cash flow that have been generated from the business operations (Weygandt, 2006), this ratios has shown the company ability to pay-off its debt repayment obligations. 5.0 Current Ratio Current ratio is used to measure whether Black Gold Ltd has enough resources to pay its loan over a period of time (usually 12 months). This ratio compares a company’s current assets to tis current liabilities (Weygandt, 2006). In other words, the current ratio will indicate a company’s market to meet it obligation. Current ratio will vary from one sector to another and a healthy current account ratio for businesses will vary between 1.4 and 3. Although Black Gold Ltd current ratio remained the same at 1.01, this indicate that the company’s short-term financial strength is weak. In the near future, if the company’s current liabilities exceeds its current assets (the ratio is less than 1), then Black Gold Ltd will have a lot of problems and it will not be in a position to meet its short-term obligations (Kenneth, 2003). In addition, if the company has high current ratio, the mining company will not be able to use its current assets efficiently or its short-term financial facilities. 6.0 Profit Margin Ratio Profit margin is used to measure how much every dollar of sales a firm keeps in earnings (Kenneth, 2003). A high profit margin will indicate a more profitable company that is better controlled as compared to its expenses compared to its competitors. The objective of profit margin is to detect positive or negative or consistency trends in a business’ earnings. Positive profit margin will translate into positive investment quality (Woolridge, 2006). To a large extent, it is the growth, quality, of a business’ earnings that will drive the company’s stock price (Weygandt, 2006). Black Gold Ltd profit margin increased from 38.9 per cent to 49.1 per cent. This means the company’s profit has increased and the new acquisition will increase the company’s profits. 7.0 Return on equity (ROE) Return on equity (ROE) is a measure of business efficiency as well as profit (Weygandt, 2006). A rising return on equity will suggests that the business in increasing its ability to generate more profits without injecting more capital (Kenneth, 2003). ROE also indicates how well the business’s is using the shareholders’ capital (Weygandt, 2006). In other words, the higher return on equity the better for the company (Kenneth, 2003); but a falling return on equity will present a problem to the shareholders (Weygandt, 2006). In our calculation, the return on equity has been seen from increasing from 10 per cent in 2013 to 22.95 per cent in 2014. This has been contributed to the value of the shareholders’ equity that has gone down (Woolridge, 2006). Thus, increasing share buybacks and write downs have artificially affected the return of equity Recommendation Conclusion From the analysis, the company’s two financial years indicates the company’s ability to meet its short-term obligations without having to resort to borrowing from the external market. Statistics indicates that there is a small increase in current ration from 2013 to 2014, which is a good result (Deacon, 2000). It means Black Gold Ltd improved its ability which meets short-term financial obligations. There is also small increase in current ratio, which is also good. This will mean the company is improving its ability to meet its short-term obligations (Kenneth, 2003). In addition, the company has a strong market base which will help the company grows in the future. Therefore, the company should be granted the loan for five million dollars. References Deacon, A.R.(2000). Simulation and Gaming a Symposium, New York Kenneth R. P. (2003). Commercial Loan Analysis: principles and techniques for credit analysts and lenders. London: John Wiley & Sons Woolridge, J. R. (2006). Applied Principles of Finance. London: John Wiley & Sons Weygandt,(2006). Accounting Principles (4th ed.). New York, Chichester, Brisbane, Toronto, Singapore: John Wiley & Sons, Inc. p. 802. Read More