HI5002: Finance For Business10 : Solution Essays

Question:

You are required to do the following tasks:

Prepare a brief description of the company, outlining the core activities, the market(s) in which it operates within and any factors in the companies’ history which you consider help present a “picture” of your company.

Specify ownership-governance structure of the company:

  1. i) Name the main substantial shareholders:

! With higher than 20.00% of shareholdings. Based on this argument you should classify a firm as a family or non-family company, and

! With higher than 5.00% of shareholdings.

Name the main people involved in the firm governance:

! The Chairman

! Board members

! CEO.

Whether any of these people have the same surname as any of substantial shareholders (>20% share capital). If yes- you could use this as an argument for the presence of an owner or family member(s) in the firm’s governance.

o Whether any of shareholders with more than 5% share capital are involved in firm governance.

 

Answer:

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

Name

Position

Date of appointment  

Independence status

Peter Cassidy

Chair

11 October 2012

Director of major shareholder

Andrew Stocks

Managing Director

29 November 2007

Executive position

Jerry Ellis AO

Non-executive director

20 December 2010

Associate of major shareholder

Leigh Hall AM

Non-executive director

2 November 2012

Associate of major shareholder

Julian Gosse*

Non-executive director

27 February 2009

Independent

Ian Hume

Non-executive director

27 February 2009

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

Receivables/ Total sales*365

                        0.33

                     0.36

Inventory turnover

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.

Description

Formula

Iron Road Limited

 

Market based ratios

 

 2017

2016 

Price / earnings ratio

Market value per share / earnings per share

                       (5.61)

 

Dividend yield ratio

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

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

SUMMARY OUTPUT

 

Regression Statistics

 

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

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.

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