Finance for Business (Energia Minerals Limited and Caltex Australia.)
Introduction
Finance is the concept of managing resources and investing in a right way to generate money for benefitted for the company or government. Finance is a broad term which is mainly focused few more areas such as- household investment, corporate investment, monetary policy, inflation and interest rate of a country. The exchange of currency is another main reason why financial decisions are being changed by the management and people are affected by the changes which made by government or corporation. The assignment all about understanding the calculation of an organization share price movement which changes from month to month and year to year. Not only this thing is covered but also here the calculation of two companies’ liquidity ratio, profitability ratio and leverage is being calculated for which the data is being collected from the annual report of the companies which downloaded from ASX listed side to get an accurate result of the analysis.
1. Description of operation and comparative advantages of the two chosen companies
Bannerman Resources Limited
Uranium development is always an emerging business as there are not so many competitors in the market. By considering the uranium market of Australia, Bannerman Resources Limited will come first as the most emerging business. The company has properties in southern part of Africa and Namibia. The principal asset of the company is owned by Etango Project which is situated in Rio Tinto’s Rössing and west of Paladin Energy’s Langer-Heinrich. Etango has named as the most underdeveloped uranium deposit. Bannerman is mainly concentrated on the open pit uranium operations within the larger scale. This operation has started from the beginning of 2015 demonstration programs at a larger scale heap is continuing for the assurance to financing parties. So, the generation of information for managing the detailed engineering design can be managed so perfectly.
This is the main competitive advantage of Bannerman Resources Limited is that the company has a massive response with the joint groups and their operations are derived in multiple regions. Engineering design phases and internal capability of the business can enhance performance in resource management and fully efficient use of resources. The company has owned around 80% of the interest of the Etango Uranium Project which is covered an area 500 square kilometers in the locality of Swakopmund town, this indicates the availability of their resource backup to manage the business functions.
Energia Minerals Limited
Energia Minerals Limited is a well-known small-cap company which has capitalized their market with less than $2billion (Abbott, 2017). The organization has the highest growth capability among other competitors though the size and operational scope of the organization are limited. This is the reason behind their less diversified actions and susceptible downturn performance in the broader economy system. By considering the performance of near competitor EMX sports. The company is suffering for low-debt on its statement of financial position for the with debt-equity ratio 25. On the other hand, Energia Minerals impressed all for its low debt to equity ratio. The company has the capability to carry on the perfect use of strong earnings and covers the interest costs. But as per the present accounting data of Energia Minerals, liquid assets to debt ratio could have been better if the resource utilization comes to end with the proper outcome. EMX has stable positon now where the current asset is $5 million. ASX: EMXis looking forward to making further expansion in a different market as the company worth $24 back to back drilling on cost and this represents the strengths of ASX: EMX in order to perform proactively by the managersBailey, 2014).
2. Calculation and comparison of performance ratios
| Energia Minerals Limited | BANNERMAN RESOURCES LIMITED | |||||
| Liquidity ratio | 2017 | 2016 | 2015 | 2017 | 2016 | 2015 |
| Current ratio | (991,330/1,386,246)
=0.715 |
(6,712,667/1,998,544)
=3.36 |
(4,336,667/869,297)
=4.99 |
(3,531 /291 )
=12.34 |
(1,734/250 )
=6.94 |
(2,539 /891)
=2.85 |
| Quick ratio | (991,330-67,555)/1,386,246
=0.67 |
(6,712,667-3,805,743)/1,998,544
=1.45 |
(4336667-0)/869297)
=4.99 |
((3531-54)/291)=11.95 | ((1734-107)/250)
=6.508 |
((2,539 -82)/891)
=2.76 |
| Cash ratio | (647,710/1,386,246)
=0.47 |
(2,494,771/1,998,544)
=1.25 |
(4,109,628/869,297)
=4.73 |
(3,420/291)
=11.75 |
(1,600 /250)
=6.4 |
(2,291 /891)
=2.57 |
| Profitability ratio | ||||||
| Net profit margin | (-10,715,180/29,881)
=-0.36 |
(401,242/72,655)
=5.52 |
(-4,618,121/101,397)
=-45.54 |
(-2,696/41)
=-65.76 |
(-152/30)
=-5.067 |
(-4,241/75)
=-60.55 |
| Gross profit margin | (-10,260,447/29,881)
=0.34 |
(-7,944,426/72,655)
=-1.09 |
(-3,682,545/101,397)
=-3.63 |
(-2,955/41 )
=-72.07 |
(-297/30)
=-9.9 |
(-4,741/75)
=-63.21 |
| Return on assets | (-10,715,180/2,848,111)
=-3.76 |
(-7,944,426/8,367,811)
=-0.9494 |
(-3,682,545/6,712,656)
=-0.55 |
(-2,955/58,578 )
=-0.05 |
(-297/51,230 )
=-0.005 |
(-4,741/64,688)
=-0.07 |
| Return on equity | (-10,715,180/1,410,082)
=-7.60 |
(-7,944,426/6,249,943)
=-1.27 |
(-3,682,545/5,649,568)
=-0.65 |
(-2,955/57,847)
=-0.05 |
(-297/50,610 )
=-0.006 |
(-4,741/53,117
=-0.09 |
| Capital structure (Leverage ratio) | ||||||
| Debt to assets ratio | (1,438,029/2,848,111)
=0.50 |
(2,117,868/8,367,811
=0.25 |
(1,063,088
/6,712,656) =0.16 |
(731/58,578 )
=1.24 |
(620/51,230 )
=1.21 |
(11,571 /64,688 )
=0.17 |
| Debt to capital ratio | (1,438,029/(1,438,029+1,410,082))
=0.50 |
(2,117,868/(2,117,868+6,249,943))
=0.25 |
(1,063,088/(1,063,088+5,649,568)
=0.62 |
(731 /(731 +57,847 ))
=0.12 |
(620 /(620 +50,610 ))
=0.12 |
(11,571 /(11,571 +53,117 ))
=0.18 |
| Debt to equity ratio | (1,438,029/1,410,082)
=1.020 |
(2117868/6,249,943)
=0.34 |
1,063,088/5,649,568
=0.19 |
731/57,847
=0.013 |
620/50610
=0.12 |
11571/53117
=0.22 |
Table-1: Ratio analysis
| Energia Minerals Limited | |||
| 2017 | 2016 | 2015 | |
| Current ratio | 0.715 | 3.36 | 4.99 |
| Quick ratio | 0.67 | 1.45 | 4.99 |
| Cash ratio | 0.47 | 1.25 | 4.73 |
| Net profit margin | -0.36 | 5.52 | -45.54 |
| Gross profit margin | 0.34 | -1.09 | -3.63 |
| Return on assets | -3.76 | -0.9494 | -0.55 |
| Return on equity | -7.6 | -1.27 | -0.65 |
| Debt to assets ratio | 0.5 | 0.25 | 0.16 |
| Debt to capital ratio | 0.5 | 0.62 | 0.16 |
| Debt to equity ratio | 0.5 | 0.34 | 0.19 |
Table-2 Ratio analysis of Energia Minerals Lmited
Figure-2 Ratio analysis of Energia Minerals Lmited
|
BANNERMAN RESOURCES LIMITED |
|||
| 2017 | 2016 | 2015 | |
| Current ratio | 12.34 | 6.94 | 2.85 |
| Quick ratio | 11.95 | 6.51 | 2.76 |
| Cash ratio | 11.75 | 6.4 | 2.57 |
| Net profit margin | 65.76 | -5.07 | -60.55 |
| Gross profit margin | -72.07 | -9.9 | -63.21 |
| Return on assets | -0.05 | -0.005 | -0.07 |
| Return on equity | -0.05 | -0.006 | -0.09 |
| Debt to assets ratio | 1.24 | 1.21 | 0.17 |
| Debt to capital ratio | -0.12 | 0.12 | 0.18 |
| Debt to equity ratio | 0.013 | 0.12 | 0.22 |
Table-3 Ratio analysis of BANNERMAN RESOURCES LIMITED
Figure-3 Ratio analysis of BANNERMAN RESOURCES LIMITED
The calculation which measures in this part of the assignment shows the statistics of the financial ratio and past three years’ comparison between two companies in the Energy industry that selected under ASX listed company. Energia Minerals limited current ratio was excellent in 2015 but it decreasing year after year because lessens the current assets of the company. The situation is similar to quick ratio and it happens because the company didn’t capture enough inventories in the stock and due to this their number of cash ratio is less in the current year compared to others. From profitability ratio, the company is incurring a net loss in the current year and 2015 but in between 2016 they earn 5.52 times profit from profit margin ratio which means the company was in good position in this year (Bhaskar, 2017). But their return on assets is all negative since 2015-2017 and it happens because of net loss which incurs into the company since 2015. The situation of return on equity is almost the same as like return on assets. The next ratio portion which is covered known as leverage ratio and from this ratio it can be stated that the company has a better debt to assets ratio in 2015 because they had a lower number of debt compared to assets and exactly same as debt to capital ratio and debt to equity ratio. The condition of BANNERMAN RESOURCES LIMITED is inverse compared to the first company because their current ratio is good in the current year at 12.34 times and due to this reason their quick ratio is also performed well and affect the cash ratio at a positive way. But their profitability ratio condition was same as the previous company they didn’t earn any profit from the company and because of this net loss margin happen in the calculation and company get -0.05 return at a current year (Callen, 2017). But not terms of leverage ratio they earn better compare to the previous ratio which is 1.24 and debt to equity ratio at 0.013 but their debt to capital ratio condition is not good enough for the company as it has negative return.
3. Analysis of monthly share prices movements
| Share price | |||
| 2017 | 2016 | 2015 | |
| Energia Minerals Limited | $0.012 | $0.043 | $0.055 |
| BANNERMAN RESOURCES LIMITED | $0.030 | $0.027 | $0.049 |
Table-4: Share price yearly
Figure-4: Share price yearly
The above part of the assignment is analyzing about the share price of two companies which selected in the above part of the assignment. The price of the shares is fluctuating every single day because of any reason it may be the reason of politics, economics, environment etc. (Cyert, 2010). These external factors of the companies are highly affecting share prices. From the table it has been coming to know that Energia Minerals Limited share price in 2017 is $0.012 but it was in 2016 $0.043 which is very high compared to the current year and it happens because in current year company faces several political unrest situations within their organization and it was even higher at 2015 and the amount is $0.055. The second company is BANNERMAN RESOURCES LIMITED which has $0.055 share price in 2017 but in 2016 their price was $0.27 which is very low compared to the current price. It is the exact opposite or reverse situation against the Energia Minerals Limited. The share price of this second company is $0.049 which is again rising at 2015 because of changes in the year which happen because company adopts a new strategy and customer’s response has increased in the organization which increases the amount of the share price for the betterment of the organization (Porter, 2012). The share price of the company is mostly going through this kind of situation because they are bound to face this kind of external affected situation from the organization which increases the price in one year and again falls down at another year. It can be said that because of some reason the share price of the companies are changing at a higher rate and it happens because of changing demand, supply and needs of the people within the country. The market share price outstanding is another reason of fluctuating the share price and people buying attitudes towards a company these are some factors which affected the company and make changes frequently in the share price of the company.
4. Significant factors which may have influenced the share price
The factors which affected the share price of the company are discussed in this part of the assignment briefly-
- Demand and supply highly influence the market for increasing or decreasing the share price because people buying attitudes are being changed depending on this factor.
- Bank rate is another most important part of share price which influences the share price factors the most like the interest rate of central bank of Australia influence the share market for increasing their price of a share as they are now having boom period in the market.
- Dividend announcement is another reason of affecting the share price of the company because of dividend increase a company’s trend generally and for some reason, people become aware of the fact for which they need to be more careful.
- Management profile has a higher influence on share price because if a company has high management profile than it increases shareholders trust issue towards the company and this is the reason company needs to be maintained and control a strong profile to increase their share price for the betterment of the organization.
- Trend-cycle of economics is highly affected the share price of the company because under boom situation the prices of the share going up and under declining position their share price going down which decreasing the share market at a high range (Gray, 2015). Share price highly depended on this trend cycle.
- If the relationship between workers and employees are not good, then it affects the overall process which is the reason behind the changes in the share price.
- Because of institutions investors actions, the share price of the companies are changing at a high rate for the betterment of the organization and it is controlled by the financial managers.
5. Calculation of beta values and Expected Rates of Return using the CAPM
Beta is the risk volatility of individual stock relative and volatility considers the entire stock risks in the market. Beta is the financial term which works as an indicator to notify about that risk for a particular stock and this is widely used for evaluating the expected rate of return. Calculation of Beta values is useful to determine the right time stock choosing from the business portfolio. This also able to determine the price to earnings ratio, debt-equity ratio and shareholder’s equity ratio. As per the beta principle, if the Beta score comes less than 1, then the stock indication is less volatile than the market whole. At the same time, if the Beta score comes higher than 1, then the stock is more volatile than it’s in the market as a whole. The beta score is less than zero indicates the stock is losing money during the time of market gains as a whole.
Determination of expected rate of return is entirely depended on the calculation of Capital Asset Pricing Method. In the CAPM, the interrelation between systematic risks and the expected return amount for assets are considered (Knechel, 2013). CAPM is a widely used method in the financialmanagement of an organization where risky securities are identified. Generation of the expected return for a particular stock is also part of calculating the cost of capital under CAPM.
While gathering the ideas about CAPM, the investor needs to focus on two major issues, these are- risk associated with the stock and time value of money. Risk-free rate in the presented formula is representing the time value of money and the compensated amount for an investor to place the monetary value in proper time. Beta represents the risky portion from a particular stock where the market is compared as a whole. CAPM model talks about the expected return of a security which equals the rate of risk-free security and the risk premium. SML line can be derived from the use of the CAPM model and use as the solution for beta associated expected return. Interpretation of the Beta value is able to specify the security in business.
6. Dividend policies
Dividend policies are the set of principles that are used by a company to decide the level of earnings it needs to pay to the shareholders. Some of the evidence suggest that investors are now always focused on the dividend policy but they like to get dividend with a bulk amount. Dividend policy is essentiallyindicating the control over financial data and policies.
ResidualDividend Policy
Companies choose a residual value in order to choose and rely on the internally spawned equity to finance of any kind of project. As a result of the residual dividend policy, the value may leftover the equity only after completing the project or met the demands. ISO is the standard to protect financial data and this standard is able to target dividend of an accounting period (Pratt, 2013). The management needs to determine the optimal capital budget and this model is the ratio generator for the dividend.
Dividend Stability Policy
Dividend fluctuation has created by imposing the residual policy because it significantly contrasts the certainty of the dividend stability policy. According to the principle of this policy, companies serve dividends on basis of the quarterly. This policy is also useful to minimize the risks, financial uncertainties for investors.
Hybrid dividend Policy
This dividend policy is the combination of residual and stable dividend where the organizations are tempted and tend to follow up the debt-equity ratio for a longer period rather than only concentrating on a shorter period. By considering the competitive environment of modern business, organizations like to use this approach to pay a dividend, because the organizationshave more or less experience on the cycle fluctuation in business. High dividend payouts create values inside the user’s mind as the financialhealth of the company and it’s outstanding in performance.
The above-mentioned policies are commonly used as the dividend policies and all these are prepared for the assessment of financial data and ensure the best possible safe journey for the business.
7. Recommendation letter
To,
The Client
The analysis so far has been made upon the fundamental discussions of corporate finance. To make the discussion clear about the financialmanager in business, some mathematical discussions have been made where ratios indicate the business performance in the management of finance. Investment can be short-term and long-term but investment needs to manage with perfect judgment on the market data and the business capability. Wrong presentation of data or lack of calculation to choose project may drive the investors without a single gain. Some of the standards have been made where dividend policies have presented. CAPM, the rate of return judgment, Beta analysis are common tools to make an effectivejudgment on any business project. Energia Minerals and Bannerman Resources Limited are chosen an organization and these are operating from the separate sector. As there is some competency to manage the business resource by Bannerman Resources Limitedbut,Energia Minerals needs to give more concentration of the liquidity management process. Risk analysis on basis of the investment is also necessary to create a strong platform for organizations. A well-performed organization can offer a good amount of dividends to the shareholders and this will ultimately represent the organization positively. Financial experts or corporate finance specialists can be appointed by the organizations in order to develop the business strengths. As a group investment analyst, I need to carry out my responsibilities by focusing on the past performance of the business and predict future on basis of the generalized calculations from past data.
Thanks,
Your sincerely
Mr. ZBY
Reference
Abbott, L. J., K. Gunny and T. Pollard. 2017. The impact of litigation risk on auditor pricing behavior: Evidence from reverse mergers. Contemporary Accounting Research34(2): 1103-1127.
Bailey, A. D. Jr. 2014. Perspectives on the Public Company Accounting Oversight Board (PCAOB) 2004-2005. Accounting Horizons(December): 889-899.
Bhaskar, L. S., G. V. Krishnan and W. Yu. 2017. Debt covenant violations, firm financial distress, and auditor actions. Contemporary Accounting Research 34(1): 186-215.
Callen, J. L. and X. Fang. 2017. Crash risk and the auditor-client relationship. Contemporary Accounting Research 34(3): 1715-1750.
Marks & Spencer’s Annual Report and Financial statements 2016’ Availableat:http://annualreport.marksandspencer.com/M&S_AnnualReport_2016.pdf.
Cyert, R. M., G. M. Hinckley and R. J. Monteverde. 2010. Statistical sampling in the audit of the Air Force motor vehicle inventory. The Accounting Review (October): 667-673. (JSTOR link).
porter, B., hÓgartaigh, C. Ó. and Baskerville, R. (2012) ‘Audit Expectation-Performance Gap Revisited: Evidence from New Zealand and the United Kingdom. Part 2: Changes in the Gap in New Zealand 1989-2008 and in the United Kingdom 1999-2008’, International Journal of Auditing, 16(3), pp. 215–247. doi: 10.1111/j.1099-1123.2011.00444.x.
Gray, I., Manson, S. and Crawford, L. (2015j) The audit process: principles, practice and cases. Sixth edition. Andover, Hampshire: Cengage Learning.
Knechel, W. R. et al. (2013) ‘Audit Quality: Insights from the Academic Literature’, AUDITING: A Journal of Practice & Theory, 32(Supplement 1), pp. 385–421. Available at: http://ezproxy.lib.gla.ac.uk/login?url=http://search.ebscohost.com/login.aspx?direct=true&db=buh&AN=87781476&site=ehost-live.
Pratt, M. J. and Peursem, K. V. (2013) ‘Towards a conceptual framework for auditing’, Accounting Education, 2(1), pp. 11–32. doi: 10.1080/09639289300000002.
