Bluescope Steel Limited and Onesteel Limited Financial Analysis - Assignment Example

Executive Summary Bluescope Steel Limited and Onesteel Limited have been successful as steel players which deal in different steel products being manufactured by them. Their market has grown which is reflected by the growth in sales. There is even scope for the company to move further as this sector is showing improvement. The financial analysis also highlights some important fact related to liquidity and capital structure. The liquidity shows soundness with current assets being above 1.5 times in respect of current liabilities for both Bluescope Steel Limited and Onesteel Limited. Even the ratio after removing stocks shows soundness. The capital ratio shows an equal mix of equity and debt. This is supported by 50% debt being financed by assets in case of Bluescope Steel Limited and Onesteel Limited has a high debt ratio. The turnover ratios shows soundness as the company has better policy in revolving stock and managing assets. Bluescope Steel Limited and Onesteel Limited revolves inventory around 4 times and has an asset turnover around 1. The profits and return on equity supports it as the company has posted a profit of over 1% after all expenses for Bluescope Steel Limited and 3.5% from Onesteel Limited. This has enabled the company to distribute dividend which has helped the share price soar up resulting in better earnings. The analysis shows that Bluescope Steel Limited and Onesteel Limited performance has improved drastically in 2010 over 2009. It still needs to work on certain areas to stay ahead of other competitors as the company has shown stability so that it is able to withstand competition and capture a bigger market. Content Introduction 3 Financial Analysis 3 Liquidity ratio 4 Capital Structure ratio 5 Profitability Ratios 7 Asset Efficiency Ratios 10 Market Performance Ratio 12 Findings 13 Conclusion 13 Recommendations 13 References 15 Appendix 17 Introduction Bluescope Steel Limited is having its presence in “steel market and produces galvanized steel, automotive steel and other forms of steel”. (Bluescope Steel Limited, 2011) The company has been in operation since 2002 and started its operation in Australia. The company serves worldwide and has revenue of $8.9 billion in 2007. The company has profits in the tune of $2.84 billion. The company has been able to grow and employees around 17,500 people. (Bluescope Steel Limited, 2011) Onesteel Limited is also a steel giant. The company deals in “mining, manufacturing and metals distribution and has been able to build a wide market”. (Onesteel Limited, 2011) The company has been operating since 2000 and started its operations in Sydney, Australia. The company serves worldwide and has revenue of $7.3 billion in 2009. The company has profits in the tune of 229.5 million. The company has been able to grow and employees around 11,000 people. (Onesteel Limited, 2011) Financial Analysis Financial analysis is very important for all business. Analyzing the statement helps in “planning, budgeting, monitoring, forecasting and improving the financial performance by taking vital decision”. (Micro Strategy, 2010) The following is the ratios for Bluescope Steel Limited and Onesteel Limited. Liquidity Ratios This ratio plays an important part and helps “to identify the firms ability to meet its short term obligations and plays a huge role in the performance”. (Financial Modelling Guide, 2010) The ratios for Bluescope Steel Limited and Onesteel Limited are Current Ratio: “It measures the ability to pay the short term liabilities out of short term assets”. (Financial Modelling Guide, 2010) It is calculated as “Current Assets / Current Liabilities”. The graph looks as follows The ratio shows that Bluescope Steel Limited has a better liquidity position as compared to Onesteel Limited. Onesteel Limited need to improve the ratio as it is a concern as the short term obligations are higher. This might make investors and suppliers stay away. Bluescope Steel Limited on the other hand is in a better position but still needs to take it slightly up. When we consider the two companies together it shows that Bluescope Steel Limited has better policies and strategies as compared to Onesteel Limited. They need to work more and ensure that it reaches around 2. Quick Ratio: It is also known as acid test ratio. (Financial Modelling Guide, 2010) It is calculated as “(Current Assets – Inventories) / Current Liabilities”. The graph looks as follows The ratio also indicates that Bluescope Steel Limited is better positioned as compared to Onesteel Limited. Onesteel Limited need to improve this as it is a concern and presenting a bleak picture. Even, Bluescope Steel Limited needs to concentrate on it and improve it. The ratio when compared to current ratio also indicates huge inventories. Since, both the companies deal in products where the inventory has to be high so having a low ratio is predictable. Capital Structure Ratio This ratio is of prime importance and provides relevant information about the company. “It identifies how much of the firm’s assets are financed through debt and includes long term debt”. (Transtutor, 2010) The ratios which help to determine it are as Debt to Equity Ratio: “It helps to find how much percentage long term debt are in proportion to equity fund”. (Debt to equity, 2010) It shows the soundness of the business firm. It is calculated as “Total liabilities / Equity X 100”. The graph looks as follows The ratio indicates soundness on the part of Bluescope Steel Limited. It shows that the company has a scope for more investment through debts. This is a good sign and shows the company has a space for future projects. Onesteel Limited ltd has very high debt and needs to reduce it so that it can utilize it in the future. As both the companies work in a type of market where to grow large debt is needed so the ratio seems to be sound. Debt Ratio: “It determines the proportion of long term debt in relation to the shareholders fund and long term debt”. (Transtutor, 2010) This ratio helps to identify the financial soundness. It is calculated as “Total Liabilities / Total Assets”. The graph is as follows The ratio indicates soundness on the part of both the companies. It shows that the company has a scope for more investment through debts. This is a good sign and shows the company has a space for future projects. Bluescope Steel Limited has reduced its debt a lot by paying off is a worry and needs to raise it so that it can save on taxes. As both the companies work in a type of market where to grow large debt is needed so the ratio seems to be sound. Debt Coverage Ratio: It is defined as “the ability to pay the monthly debt on the loan taken on the mortgage of property”. (Financial Modelling Guide, 2010) It is widely used by banks. It is calculated as “Non Current Liabilities / Net Cash Flow from Operating Activities”. The graph looks as follows The ratio for Onesteel Limited shows better performance in 2009. It indicates that the company is way ahead of its competitor i.e. Bluescope Steel Limited. Bluescope Steel Limited and Onesteel Limited on the other hand have shown consistency though there is a slight change in this ratio. Profitability Ratios Profitability ratios help to understand the profit which can be attributed to the different factors which work in tandem to achieve the desired results. Comparing it with the previous years and the competitors’ helps to evaluate the shortcomings, and shows area which needs to be improved. The profitability ratios are as follows Net Profit Margin: “It is the profit which is calculated after all the expenses has been accounted for and is based on the sales achieved by the organisation”. (Net Profit margin, 2010) A high ratio shows high profits for the owners. It is calculated as “Earnings before Interest and taxes (EBIT) / Sales X 100.” The graph looks as follows The ratio indicates Onesteel Limited is better placed than Onesteel Limited ltd both in 2010 and 2009. It is seen that the net profit has decreased for both the company. This is a bad sign and reflects inefficiency to maintain the indirect expense. Bluescope Steel Limited needs to improve its overall process so that it is able to match Onesteel Limited. Return on Assets: It is the profit attributable to assets in per dollar term”. (Cleveland & Alim, 2007) It helps business to analyze the manner in which assets are used. It is calculated as “Earnings before Interest and Taxes (EBIT) / Average assets X 100). The graph looks as follows Here we see that the return on assets for both Bluescope Steel Limited and Onesteel Limited have improved in 2010 as compared to 2009. The worrying factor for Bluescope Steel Limited ltd is that their assets are underutilized when compared to Bluescope Steel Limited. This has resulted in having more assets that warranted. The other important part to note is that players have huge assets which results in the ratio being lower. Still, on an overall basis we see that Bluescope Steel Limited need to improve their return as it is have very heavy assets and needs to improve it as compared to the competitors. Return on Equity: It is defined as the profit attributed to the shareholders after all expenses have been paid for”. (Little, 2010) It is calculated as “net profit available to ordinary shareholders / Average Equity (excluding minority interest and preference capital) X 100”. The graph looks as follows We see that Onesteel Limited has a very high return on equity as compared to Bluescope Steel Limited both in 2010 and 2009. The return for Bluescope Steel Limited has fallen but is far beyond Bluescope Steel Limited. This is a worrying factor and shows the strategies and policies implemented hasn’t been successful. The return for Bluescope Steel Limited is very low which might lead to shareholders moving out to other companies or investing in risk free securities. This requires some introspection and strategies to be taken to improve those. Asset Efficiency Ratios Operating ratios forms a very important part as it helps to “show the efficiency of the management and also indicates the company’s efficiency to manage its capital”. (Joseph, 2010) this ratios help to find the efficiency when it comes to turnover. The following ratio helps to calculate the operating efficiency. They are as Asset Turnover Ratio: It is defined as “sales which is generated due to the manner in which assets are used”. (Asset Turnover ratio, 2010) It is calculated as “Sales Revenue / Average Total Assets”. The graph looks as follows The ratio indicates similarity in performance for Bluescope Steel Limited and Onesteel Limited. Both the company has shown soundness in the use of assets. It needs to continue similarly. More steps should be taken to further improve the ratio. Inventory Turnover Ratio: “It is defined as the rotation inventory makes in an accounting cycle”. (Little, 2010) Companies prefer it to be high. It is calculated as “Cost of Goods Sold / Average Inventory”. The graph looks as follows The above ratio indicates that Onesteel Limited has revolved its inventory more compared to Bluescope Steel Limited in 2010. Bluescope Steel Limited and Onesteel Limited have also been consistent and show proper management. This is a sign of a good company but it needs to be replicated so that the inventory levels come down. This will ensure less money in inventory and help to ensure that the funds are not blocked. Market Performance Ratio This ratios help to find the shareholders confidence in the company. A company having sound capital market ratios ensures that people prefer this companies and this is seen by the growth in share prices. The ratios which will help to find the capital market are as follows Earnings per Share: “It is the profit which is attributed to each individual share”. (Little, 2010) It is calculated as “Net profit available to ordinary shareholders / weighted number of ordinary shares on issue”. The graph looks as follows The above ratio indicates soundness on the part of Bluescope Steel Limited. Bluescope Steel Limited has higher earnings per share indicating that the shareholders are getting a good return. The overall result for both the giants seems sound and is a good prospect to invest. Findings The liquidity position especially the current ratio is sound for Bluescope Steel Limited and Onesteel Limited needs to improve it. Both the companies due to the nature of business have a huge inventory which are affecting the quick ratio but is according to industry standards. The long term debt ratios is sound for both the companies and have the scope to take loan for further development. The companies have used their short term debt to finance long term assets is a worrying factor and steps needs to be taken. Conclusion Bluescope Steel Limited and Onesteel Limited both have been performing on similar lines and have been successful. The financial statement even highlights similar facts. Both the companies can improve with better strategy. The financial ratios of both the companies show some demarcating things and also highlight the different strategies taken by each. This even highlights that companies similar in nature use different strategies and improve their performance. Both this companies have room for improvement and with the growth this sector is showing it gives them opportunity to capture a good market and grow. Recommendations Onesteel Limited needs to improve its current ratio so that it reflects soundness in its policies and strategies Both the companies need to reduce the amount held in inventories as it is high leading to a lot of money being invested Both the companies need to take more debt especially long term so that they are able to save on the taxes Bluescope Steel Limited needs to improve its operating ratios so that it can match its competitor Bluescope Steel Limited and Onesteel Limited needs to reduce its indirect cost, improve efficiency, bring down assets and improve their management References Asset Turnover Ratio, 2010, “asset turnover ratio”, retrieved on February 12, 2011 from http://www.buzzle.com/articles/asset-turnover-ratio.html Bluescope Steel Limited, 2011, “Bluescope steel Limited Website”, retrieved on February 11, 2011 from http://www.bluescopesteel.com/ Cleveland D & Alim W, 2007, “Return on Assets”, about.com Guide, The New York Times Company Debt to equity, 2010, “Debt to equity ratio”, retrieved on February 12, 2011 from http://www.valuebasedmanagement.net/methods_debt_to_equity_ratio.html Financial Modelling Guide, 2010, “Liquidity ratios”, retrieved on February 12, 2011 from http://www.financialmodelingguide.com/financial-ratios/liquidity-ratios Little K, 2010, “Understanding Return on equity”, about.com Guide, The New York Times Company Little K, 2010, “Understanding Inventory turnover ratio”, about.com Guide, The New York Times Company Little K, 2010, “Understanding Earning per share”, about.com Guide, The New York Times Company Micro Strategy, 2010, “Financial Analysis”, retrieved on February 12, 2011 from http://www.microstrategy.com/financial-analysis/ Net profit Margin, 2010, “Net Profit Margin”, retrieved on February 12, 2011 from http://www.bized.co.uk/compfact/ratios/profit4.htm Steelone Limited, 2011, “Steelone Limited Website”, retrieved on February 11, 2011 from http://www.onesteel.com/ Ward S, 2010, “Is Your Business Sick: Current Ratio”, about.com Guide, The New York Times Company Transtutor, 2010, “Capital Structure Ratios”, retrieved on February 12, 2011 from http://www.transtutors.com/finance-homework-help/dividend-decisions-and-tools-of-financial-planning/Capital-Structure-Ratios.aspx Appendix 1. Ratio Calculation for Bluescope Steel Limited Ratio Formula 2008 2009 2010 Current Ratio Current Assets / Current Liabilities 3,201.2/3,120.3 = 1.02 3,058.1/1,680.1 = 1.82 3,265.2/1,801.3 = 1.81 Quick ratio (Current Assets – Inventories) / Current Liabilities 3,201.2-1600.1)/3,120.3 = 0.51 (3,058.1-1,628.9)/1,680.1= 0.85 (3,265.2-1,762.5)/1,801.3 = 0.83 Debt to Equity Ratio Total Debts / Equity *100 (4524.4 /3,941.8)*100 = 114.78 (3201.3/5,663.3)*100 = 56.52 (3241.9/5,755.7)*100 = 56.32 Net Profit Margin Net Profit / Sales * 100 (612.3/10,491.8 )*100 = 5.83 (94.7/10,328.7)*100 = 0.91 (92.1/8,623.1)*100 = 1.06 Return on Assets Net Income / Total Assets * 100 (612.3/8,466.2)*100 = 7.23 (94.7/8,864.6)*100 = 1.07 (92.1/8,997.6)*100 = 1.02 Return on Equity Net Income / Equity * 100 612.3/3,941.8)*100 = 15.53 (94.7/5,663.3)*100 = 1.67 (92.1/5,755.7)*100 = 1.60 Inventory Turnover Ratio Cost of Goods Sold / Average Inventory 7325.3/1600.1 = 4.57 8322/1,628.9 = 5.10 6939.5/1,762.5 = 3.93 Earnings per Share Net Income / Outstanding shares 612.3/66.2 = 9.25 94.7/7.1 = 13.33 92.1/6.9 = 13.34 Asset Turnover Ratio Sales Revenue / Average Total Assets 10,491.8/8,466.2 = 1.24 10,328.7/8,864.6 = 1.16 8,623.1/8,997.6 = 0.95 Debt Coverage Ratio Non Current Liabilities / Net Cash Flow from Operating Activities 1404.1/1,303.6 = 1.08 1,521.2/424.5 = 3.58 1,440.6/376.9 = 3.82 Total Debt Ratio Total asset - total equity / total assets (8,466.2-3,941.8)/8,466.2 = 0.52 (8,864.6-5,663.3)/8,864.6 = 0.36 (8,997.6-5,755.7)/8,997.6 = 0.36 Equity Multiplier Total Asset / Total Equity 8,466.2/3,941.8 = 2.14 8,864.6/5,663.3 = 1.56 8,997.6/5,755.7 = 1.56 2. Ratio Calculation for Steelone Limited Ratio Formula 2010 2009 2008 Current Ratio Current Assets / Current Liabilities 2,364.3/1,488.6 =1.59 2,229.1/1,161.4 = 1.92 2,652.4/1,832.3 = 1.45 Quick ratio (Current Assets – Inventories) / Current Liabilities (2,364.3-1,433.0)/1,488.6 = 0.62 (2,229.1-1,239.9)/1,161.4 = 0.85 (2,652.4- 1,298.9)/1832.3 = 0.74 Debt to Equity Ratio Total Debts / Equity *100 (2,575/4,492.7)*100 = 57.31 (2,596.8/4,336.3)*100 = 59.88 (3,894.9 /3,432.9)*100 = 113.45 Net Profit Margin Net Profit / Sales * 100 (260.3/6,204.6)*100 = 4.19 (279.2/7,241.5)*100 = 3.85 (255.1/7,434.3)*100 = 3.43 Return on Assets Net Income / Total Assets * 100 (260.3/7067.7)*100 = 3.68 279.2/6,933.1)*100 = 4.03 (255.1/7,327.8)*100 = 3.48 Return on Equity Net Income / Equity * 100 (260.3/4,492.7)*100 = 5.80 (279.2/4,336.3)*100 = 6.44 (255.1/3,432.9)*100 = 7.43 Inventory Turnover Ratio Cost of Goods Sold / Average Inventory 4,970.6/1,433.0 = 3.47 5,654.0/1,239.9 = 4.56 5,753.1/1,298.9 = 4.42 Earnings per Share Net Income / Outstanding shares 260.3/19.51 = 13.34 279.2/22.59 = 12.36 255.1/37.88 = 6.73 Asset Turnover Ratio Sales Revenue / Average Total Assets 6,204.6/7,067.7 = 0.88 7,241.5/6,933.1 = 1.04 7,434.3/7,327.8 = 1.01 Debt Coverage Ratio Non Current Liabilities / Net Cash Flow from Operating Activities 1086.4/602.1 = 1.80 1,435.4/368.0 = 3.90 2,062.6/350.8 = 5.87 Total debt ratio Total asset - total equity / total assets (7067.7-4,492.7)/7067.7 = 0.35 (6,933.1-4,336.3)/6,933.1 = 0.37 (7,327.8-3,432.9)/7,327.8 = 0.53 Equity Multiplier Total Asset / Total Equity 7,067.7/4,492.7 = 1.57 6,933.1/4,336.3 = 1.60 7,327.8/3,432.9 = 2.13 Read More