Introduction
This report consists of financial analysis and how company has used this process to increase the overall outcomes throughout the time. In this report, Iron Road Ltd Company has been taken into consideration.
Present description of Iron Road Ltd Company
Iron Road Ltd is engaged in exploring Australia iron ore and mining business. The main headquarter of company is in in Perth, Western Australia. It develops world classified mining and iron ore products around the globe (Iron Road Ltd Company, 2017).
Ownership and governance structure
Iron Road Ltd Company is public working department in which more than 50% shares is hold by the government and other public working organizations (Iron Road Ltd Company, 2017).
Name the substantial shareholders of company
|
Name of shareholders
|
Shares held
|
% of shareholding
|
|
1 HSBC Custody Nominees Australia Limited
|
570,680,789
|
84.23%
|
|
2. SANBA II Inv Company
|
9,861,112
|
1.46%
|
These shareholders do not have any interest with the business of Iron road and they are independent person to company (Vogel, 2014).
Key people of company
CEO Of Company is Magnus Kniving who guides the employees towards effective achievement of goals.
- Peter Cassidy (Chairman);
- Andrew J. Stocks (Managing Director)
- Board members of Iron Road Company
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Name
|
Position
|
Date of appointment
|
Independence status
|
|
Peter Cassidy
|
Chair
|
11 October 2012
|
Director of major shareholder
|
|
Andrew Stocks
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Managing Director
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29 November 2007
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Executive position
|
|
Jerry Ellis AO
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Non-executive director
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20 December 2010
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Associate of major shareholder
|
|
Leigh Hall AM
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Non-executive director
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2 November 2012
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Associate of major shareholder
|
|
Julian Gosse*
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Non-executive director
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27 February 2009
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Independent
|
|
Ian Hume
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Non-executive director
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27 February 2009
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Associate of major shareholder
|
These board members do not have the same surname and they only have substantial shareholding in company (Robinson and Burnett, 2016).
Performance ratio analysis
Liquidity ratio
This ratio has shown that Iron Road Limited has increased its working capital and also increased its overall liquidity throughout the time. Current ratio has increased by 30 points in one year and on the other side, quick ratio has also increased by 40 points in one year.
|
Description
|
Formula
|
Iron Road Limited
|
|
|
|
|
2017
|
2016
|
|
Liquidity ratio
|
|
|
|
|
cash ratio
|
cash equivalents + cash / current liabilities
|
0.539187469
|
0.172129759
|
|
Current ratio
|
Current assets/current liabilities
|
0.63
|
0.22
|
|
Quick Ratio
|
Current assets-Inventory/current liabilities
|
0.63
|
0.22
|
Profitability ratio
Iron Ore Company has negative profitability which has shown that company is not efficient in earning good amount of profit from its business. Return on equity, assets and other income of company is in negative which reflects that company is not creating value on its investment.
|
Description
|
Formula
|
Iron Road Limited
|
|
|
|
|
2017
|
2016
|
|
Profitability
|
|
|
|
|
Return on equity
|
Net profit/revenues
|
-890.9199002
|
-1217.704433
|
|
Return on assets
|
Net profit/Equity
|
-0.030328888
|
-0.053489131
|
|
Financial leverage
|
EBIT / EBIT – Interest
|
1
|
1
|
|
Asset turnover
|
Total assets / total sales *365
|
10919194.4
|
8648542.745
|
|
Earnings per share
|
Net income – prep div / shares outstanding
|
-0.030328888
|
-0.053489131
|
Efficiency ratio
This ratio has shown that company has been blocking very low amount in its business. However, the operating cycle of company is also not efficient which could reduce the overall cost of capital (Radebaugh, Gray and Black, 2016).
|
Description
|
Formula
|
Iron Road Limited
|
|
Efficiency ratio
|
|
2017
|
2016
|
|
Receivable turnover
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Receivables/ Total sales*365
|
0.33
|
0.36
|
|
Inventory turnover
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Inventory / cost of goods sold *365
|
–
|
–
|
Market based ratio
Company has failed to have profit in its business and also has been finding difficulties in paying return to its investors. Since last two years, company has zero level of market based ratio which is not good indicators for business.
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Description
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Formula
|
Iron Road Limited
|
|
Market based ratios
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|
2017
|
2016
|
|
Price / earnings ratio
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Market value per share / earnings per share
|
(5.61)
|
|
|
Dividend yield ratio
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dividend / current share price
|
–
|
–
|
Solvency ratio
Company has low debt in its business which reflects that company should raise the funds from the market by issue of debts in market. Company should diversify its business to increase its overall profit (Brigham, 2014).
|
Description
|
Formula
|
Iron Road Limited
|
|
Solvency
|
|
2017
|
2016
|
|
Times interest earned
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EBIT / Interest expenses
|
0
|
0
|
|
Cash coverage ratio
|
EBIT + non-cash expenses / interest expenses
|
–
|
–
|
|
Debt to Equity Ratio
|
Debt/ Equity
|
0.02
|
0.04
|
Impact on the return on assets and return on owner equity
Company has been facing decrease in its profit throughout the time which showcases that company has negative return on its total assets. On the other hand, same impact is seen on the return to equity shareholders. There is zero return offered to shareholders since last two years (Brigham and Ehrhardt, 2013).
Why ROE is greater than or less than ROA
It is observed that Iron road has facing decrease in its profit. It is reflected that company has same ROE and ROA in its business. Nonetheless, return on equity is less than return on assets due to its interest expenses and amount differences between assets and equity (Iron Road Ltd Company, 2017).
Two years share price fluctuation of Iron Road Company with ASX index
Share price fluctuation of Iron Road Company with ASX index graph
Report of share price fluctuation of Iron Road Company with ASX index
It is observed that as compared to ASX return, the share price of Iron Road has gone down. This plummeted share price led to major loss of business operations of the company.
It has shown that company has high fluctuation in its share price due to the loss of its business. In addition to this, ASX share price of company has less fluctuation and there may be chances that company would wind up soon if its business continues to operate in its present situation.
Significant factors affecting the share price
- High amount of loss in its business
- Less core competency in its business
- Non-effective business functioning and brand image of company.
Now in the end, it is concluded that investors should not invest their money in the Iron road otherwise they would have to face high loss in their investment.
Recent news disclosed by Iron Road Company
The management department of company has selected two particular projects to make investment. It is observed that three Chinese banks have agreed to provide funds to company which will help the company to invest in better opportunities (Bekaert and Hodrick, 2017).
Computation of the Beta of Iron Road Company
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SUMMARY OUTPUT
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|
|
Regression Statistics
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|
|
Multiple R
|
0.336703
|
|
R Square
|
0.113369
|
|
Adjusted R Square
|
0.071148
|
|
Standard Error
|
0.226876
|
|
Observations
|
23
|
|
ANOVA
|
|
|
df
|
SS
|
MS
|
F
|
Significance F
|
|
Regression
|
1
|
0.138212
|
0.138212
|
2.685152
|
0.116184466
|
|
Residual
|
21
|
1.080929
|
0.051473
|
|
|
Total
|
22
|
1.219142
|
|
|
|
|
Coefficients
|
Standard Error
|
t Stat
|
P-value
|
Lower 95%
|
Upper 95%
|
Lower 95.0%
|
Upper 95.0%
|
|
Intercept
|
-0.01928425
|
0.049836319
|
-0.386951729
|
0.702685
|
-0.122924548
|
0.084356
|
-0.12292
|
0.084356
|
|
X Variable 1
|
3.093454821
|
1.887814577
|
1.63864336
|
0.116184
|
-0.83247051
|
7.01938
|
-0.83247
|
7.01938
|
The beta of company is 3.09 which is very high and reflect that company has high fluctuation in its business (Iron Road Ltd Company, 2017).
Calculate the required rate of return for the company’s shares
|
Computation of CAPM
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|
Details
|
Amount
|
|
RF
|
4%
|
|
RM
|
10%
|
|
Beta
|
3.093
|
|
Return on equity
|
22.561%
|
Conservative investment
Iron Road has faced high amount of loss in its business which reflects that company should invest its funds and capital in other diversified business. In addition to this, company has followed conservative investment policies in its business due to its loss.
Computation of WACC of company
The weighted average cost of capital is computed on the basis of % of debt and equity funding of company. In this case, company has zero long term debt which reflects that WACC of company will be equal to cost of equity.
|
Weighted average cost of capital
|
|
Particular
|
Amount
|
% of the debt
|
Cost of the capital
|
|
Equity
|
12,94,56,908
|
100%
|
0.225607289
|
|
Debts
|
–
|
0%
|
0%
|
|
WACC
|
0.225607289
|
Implication of higher WACC on management evaluation
If company has higher WACC then management of Iron Road company has to use capital budgeting technique to select the particular project. It is considered that higher WACC may destruct the return on capital employed by company.
Debt ratio of company over the last two years
It is considered that company has reduced its debt to equity ratio by 20% in 2017 as compared to last year data. However, management of company has taken steps to reduce its financial leverage and risk of the business (Iron Road Ltd Company, 2017).
|
Description
|
Formula
|
Iron Road Limited
|
|
|
Solvency
|
|
2017
|
2016
|
|
Debt to Equity Ratio
|
Debt/ Equity
|
0.02
|
0.04
|
Optimum capital structure
There is no borrowed funding in the business. It is observed that company has planned to raise capital by issue of debts in market. It is determined that directors cannot identify the optimum capital structure. It is based on the nature and other factors of business. However, debt to equity ratio should be around 30 to 70 i.e. 70% of the capital should be equity and 30% would be borrowing.
General requirement
Changes in gearing ratio
This Iron Road Company has no amount of interest payment. Therefore, there is no gearing ratio in this company. Gearing ratio define company’s ability to pay off its interest amount from its earning. It is evaluated that directors of company is planning to raise capital from its debt funding and will increase the gearing ratio as well.
Dividend policy followed by company
Iron Road Company has not been paying any profit to its shareholders since last two years due to its loss in business. Company has followed profit based dividend policy in which it will pay dividend to its shareholders only when it has profit in its business.
Recommendation letter to client
It is observed that this Iron road company has not been performing well in the market. It has faced high amount of loss in its business which shows its inefficiency of running its business. In addition to this, company has faced high loss in its business which has destructed the value of invested capital. Investors should not invest its money in this business otherwise they will have to face high loss in their business.
Conclusion
It is evaluated that if company could use proper level of strategic analysis and maintain proper capital structure then it would increase the return on capital employed of company as well. If investor wants to invest their money in Iron Road Company then they should invest for long run. Investing in Iron Road Company for short term will destruct the value of the investment.
References
Bekaert, G. and Hodrick, R., 2017. International financial management. Cambridge University Press.
Brigham, E.F. and Ehrhardt, M.C., 2013. Financial management: Theory & practice. Cengage Learning.
Brigham, E.F., 2014. Financial management theory and practice. Atlantic Publishers & Distri.
Iron Road Company, 2017, annual report, retrieved on 18th December, 2017, from <https://www.ironroadlimited.com.au/investor-centre/company-reports/annual-reports>
Radebaugh, L.H., Gray, S.J. and Black, E.L., 2016. International accounting and multinational enterprises. New York, NY: Wiley.
Robinson, C.J. and Burnett, J.R., 2016. Financial Management Practices: An Exploratory Study of Capital Budgeting Techniques in the Caribbean Region.
Vogel, H.L., 2014. Entertainment industry economics: A guide for financial analysis. Cambridge University Press.
