BUS106 Financial Analysis for Zimplats Holding Limited Task 2 Answer
BUS106 Task 2 Financial Analysis for Zimplats Holding Limited
The following pages discuss financial performance of Zimplats Holding Limited Company (ASX: ZIM) which is a mining company registered in Guernsey. Founded in 1998, the Company is involved in production of precious metals such as, Platinum, Palladium, Gold, Rhodium, Nickel, Ruthenium, Iridium, Silver, Copper and Cobalt.
The tools used for analysis include trend analysis and ratio analysis which will then be utilized to form conclusion and recommendations for the company.
However, the period in consideration is only 2015 till 2018 which is a short period of time. Also, the mining industry is a very typical industry that may require deeper analysis and may have other important financial parameters beyond the scope of this report. Further, the ratio analysis is limited to a few key ratios and can be expanded further to gain a more comprehensive view of the performance.
1. Company Overview
Zimplats Holding Limited Company (ASX: ZIM) is a mining company registered in Guernsey. Founded in 1998, the Company is involved in production of precious metals such as, Platinum, Palladium, Gold, Rhodium, Nickel, Ruthenium, Iridium, Silver, Copper and Cobalt. These metals together are also known as Platinum Group Metals (or PGM’s). The main location of mines is Great Dyke, Zimbabwe where mining is carried out through a subsidiary called Zimbabwe Platinum Mines (Private) Limited. The company has four underground mines, out of which three are at full production and one is under re-development. The ores are processed in three company-owned concentrators and then further refined in a smelter in Selous (Reuters, 2019).
As of 2018, the Company had a workforce of almost 6500 employees, including around 3200 contractors. As of year ending 2018, the company reported mining produce of 6.8 million tonnes, a slight decline from 7.0 million tonnes in 2017. The relatively higher volume in 2017 was due to nine extra operational days due to change in reporting date. The company is also in process of developing Mupani Mine so as to ensure continuous supply of the metals ores. Revenue for the year increased from $512.5million in 2017 to $582.5million in 2018 due to high metal prices. Gross profit margin improved from 28% in 2017 to 37% in 2018. Profit before tax increased from $101.3million in 2017 to $166.0million in 2018. The profit after tax however, decreased due to benefit adjustment (Annual Report, 2018).
2. Trend Analysis
Trend Analysis is one of the tools to analyse financial performance of a company. As the name suggests, it involves analysing trends in line items for financial statements of various periods. The period can be a month, quarter, year and so on. However, the line items and figures need to be for the same entity, such that the change in numbers can be tracked. This helps to see performance over period and how management has fared with respect to this parameter. The main technique under trend analysis is horizontal analysis that involves analysing change in absolute numbers and also in percentage as compared to the base year or previous year. Besides calculating the change in numbers, it is also important to analyse the reason behind such change (DBS Partners, 2018).
2.2 Trend Analysis for Zimplats
- Sales revenue (or Revenue): The sales revenue for the Company indicates an increasing trend on year-on-year basis from 2015 to 2018 whereby it has grown from $408.4million in 2015 to $582.5million in 2018.
The increase in percentage terms was the maximum in 2016 when revenue registered an annual increase of 15.5% ($471.8million) over the revenue figure of 2015. The percentage increase slowed down to 8.6% in 2017 that can be attributed to lower production volume and sales. However, it has again gained momentum in 2018 when annual increase in revenue was to the tune of 13.7%. This can be attributed to improved prices of palladium, rhodium, nickel and copper.
- Gross profit: The gross profit of the Company indicates a decline of 12.4% in 2016 which is mainly due to depressed metal prices that caused sales revenue to be low despite high volume production. However, as prices stabilized in 2017, the gross profit indicates improvement whereby it increased by 79.3% on year-on-year basis. The gross profit was 28.4% of sales as compared to 17.2% of sales in 2016. The line item further registered a growth of 47.4% and constituted 36.8% of sales in 2018.
- The 3 largest expense categories appearing in the 2018 income statement are:
- Administrative Expense: It registered a decline of 14.2% in 2016 but increased by 29.0% and remained at similar levels in 2018 where it declined by -0.3%. The expense has increased from $41.8million in 2015 to $46.1million in 2018. The major component is employee salaries and wages and other employee benefits.
- Royalty & Commission Expense: This expense has increased from $10.2million in 2015 to $15.2million in 2018, a total increase of almost 50% over 4 years. It has registered a consistent increase on year-on-year basis where it increased by 14.9% in 2016, 8.8% in 2017 and 19.8% in 2018. The Group pays commission to the Minerals Marketing Commission of Zimbabwe (“MMCZ”) and also pays mining royalties to the Government of Zimbabwe.
- Other operating Expenses: The line item has been quite volatile with no clear trend. While it decreased by almost 97% in 2016, it increased by 690% in 2017 and decreased again by almost 48.6% in 2018. The major component is tax penalties and interest charges. Since the tax penalties vary widely on year-on-year basis, there is no particular trend for the line item.
- Profit/(loss) after tax: The profit after tax has changed drastically over the years, From a loss of $74.3million in 2015, it changed to a profit of $2.6million in 2018. However, it reached its peak in 2017 at $45.5million, mainly on account of the Government of Zimbabwe issuing T-bills in settlement of principal amount owed by the RBZ under an export incentive scheme. The decline of 94.2% in 2018 as the mining lease status changed, leading to change in tax rate (tax increased by almost 192.8% in 2018).
2.3 Financial Performance of Zimplats from 2015-2018
It can be seen from above analysis that the sales have indicated a consistent increase in absolute terms with the main factor being the change in metal prices. This factor also impacts gross profit as the cost of goods sold is more or less rangebound. Out of the analysed expense heads, royalty and commission expense seems to have increased drastically but since it is mainly comprised of fee or commission paid to the government, the Company has limited control over it. However, if possible, Company must look into negotiation avenues regarding the rates levied on the Company.
The Company’s financial performance seems to be dependent on production volume through mining as well as metal prices and both are under limited control of the Company as prices are market driven and mining capacity is bound to get exhausted after a point of time. Also there is a factor of uncertainty as the Company may discover abundant reserves in a period and may find nothing in the next period. Hence, there will be volatility in the performance.
3. Ratio Analysis
The required ratios have been calculated and presented in table below. The calculations have been performed in MS-Excel.
|Return on Assets||Profit/Average total assets x 100||2.4%||13.4%||0.7%|
|Return on Equity||Profit available to owners/Average equity x 100||0.8%||4.7%||0.3%|
|Debt to Equity||Total liabilities/Total equity x 100||39.5%||41.4%||50.7%|
|Current Ratio||Current assets/Current Liabilities||4.1||3.9||3.5|
|Asset Turnover||Sales revenue/Average total assets||0.35||0.38||0.40|
3.1 Return on Assets
Return on Assets is a type of profitability ratio that indicates profitability and margins that the company is able to earn. Higher margins indicate better performance and vice versa. RoA indicates profit earned per dollar of assets employed by the company. As seen above, the RoA increased tremendously from 2.4% in 2016 to 13.4% in 2017. But again, it faced a steep decline to 0.7% in 2018. This occurred due to decline in 2018 profits on account of benefit adjustment such that the profit number reduced from $45.5million in 2017 to $2.6million in 2018 and this is reflected in RoA as well (Weston, 1990).
3.2 Return on Equity
Return on Equity is a type of profitability ratio that indicates profitability and margins that the company is able to earn. Higher margins indicate better performance and vice versa. RoE indicates profit earned per dollar of equity employed by the company. The ratio holds special place for equity investors as it indicates how well the company is able to utilize the equity stakeholder funds. As seen above, the RoE increased from 0.8% in 2016 to 4.7% in 2017. But again, it faced a steep decline to 0.3% in 2018. This occurred due to decline in 2018 profits on account of benefit adjustment such that the profit number reduced from $45.5million in 2017 to $2.6million in 2018 and this is reflected in RoE as well (Weston, 1990).
3.3 Debt Equity Ratio
Debt Equity Ratio is a type of capital structure ratio or leverage ratio as it indicates the level of debt in a company’s capital structure. The higher amount of debt helps company to leverage profits but also creates fixed obligation in form of interest on debt. The lower amount of debt indicates that company can increase profits by employing debt and obtaining low cost funds as compared to cost of equity funds. However, every company needs to maintain a fine balance. Typically, as the company expands, debt increases as the operations are cash hungry and debt is the fastest mode for obtaining additional funds. However, a company needs to be mindful that additional debt does not create unnecessary stress on bottom line by creating foxed obligations that need to be met irrespective of profit level. In case of Zimplats also, the debt has been increasing consistently as indicated by the debt equity ratio that increased from 39.5% in 2016 to 41.4% in 2017 to 50.7% in 2018. The company must look into viability of further debt in the structure and make efforts to reduce this in coming years (Weston, 1990).
3.4 Current Ratio
Current ratio is a type of liquidity ratio as it indicates how well the current liabilities can be discharged using only current assets of the company. This may be important as company may need immediate discharge of some liability and for such situation, liquidity is must. A very high ratio indicates that company has too much liquidity that can be employed more effectively elsewhere and a very low ratio indicates that it may not be able to discharge obligations immediately due to liquidity crunch. The current ratio for Zimplats has been range bound with 4.1 in 2016, 3.9 in 2017 and 3.5 in 2018. This may indicate that company maintains sufficient liquidity. However, it also indicates very high liquidity level and if there is no foreseeable discharge of liability, the funds can be employed effectively elsewhere. This is especially true as company’s debt level is increasing consistently (Weston, 1990).
3.5 Asset Turnover Ratio
Asset Turnover ratio is a type of efficiency ratio as it indicates how efficiently assets of the company are being utilized in order to generate revenue. This ratio indicates sales revenue generated per dollar of assets employed. Zimplats has a range bound assets turnover ratio with slightly increasing trend which is a positive sign. The ratio increased from 0.35 in 2016 to 0.38 in 2017 to 0.40 in 2018. However, still ratio is less than one indicating that less than a dollar revenue is generated for a dollar of assets employed. The company can look into ways to improve this. However, being a mining company, the balance sheet will be asset heavy as it explores new mines and re-develops older ones that lead to lot of capex (Weston, 1990).
From the above discussion, we can say that Zimplats is involved in a different type of business, that is, mining where factors impacting the financial performance include mining production volume as well as metal prices. Hence, there is high importance of finding new mines and making existing ones work at full capacity. The company has been profitable throughout the analysis period with increase in revenue irrespective of mined volume or metal prices. Company is also investing heavily in developing new mines and also re-developing older ones. Hence, the future outlook for the company is positive.
As seen above, one of the main factors impacting profitability are metal prices. For this purpose, the company can protect itself from adverse price movements by entering into hedging agreements. This will limit the upside at small premium but will also protect the company from downside.
Another flag that could be seen was ever increasing royalties and commissions to the Zimbabwe government. If possible, the Company must look into negotiating with the government so as to freeze the rates for a period or reduce them. This will help to further boost the profitability.