Financial Analysis Of BlueScope Pty Ltd Assessment 1 Answer
1. Executive Summary
This report reveals the key understanding on the financial performance of the company. There are several financial analysis tools which could be used by investors to assess the financial outcomes and return on capital employed offered by company to investors. The report has provided an insight about the position and performance of the company in comparison to the Australian metal and mining industry and the Australian market in general. A highlight is also provided about the accuracy of the valuation of the shares of the entity.
The information reflected in the annual report of every organisation does provide a lot help to the readers in understanding the manner of performance. A proper analysis however is always necessary to grab best knowledge into the trend as well as the current situation of the entity. The current report has been prepared to analyse the performance and position of financial information and results of the entity, BlueScope Pty Ltd. the key ratios have been calculated demonstrating the liquidity, solvency, profitability and capital structure positioning of the company over a span of five most recent financial years (Barr, Higgerson, and Whitehead, 2017). The horizontal analysis has provided the rise or fall in the elements of income statement and balance sheet in percentage form for financial years 2014 to 2018, when compared with year 2013.
3. Description of the company and industry
BlueScope Pty Ltd. is popular with the name of BlueScope Steel Limited. Operations of the entity are limited to steel industry which ranges geographically over multiple locations. The areas served by the organisation through the major product, “Steel”; include Asia, Australia, New Zealand and North America majorly. Headquartered in Melbourne, Victoria the company employs around 16,000 employees currently. Other products dealt comprises of hot rolled coil, steel slab, automotive steel, coated steel, steel plate, corrugated galvanised iron, galvanised steel and etc.
The company was established long back in year 1985 and currently the CEO position is chaired by Mark Vassella. The industry of company’s operation tends to get affected by the general market movements at the global level as well. The industry players belonging to the entity, including it are usually preferred as a suitable buying option at the time of market crashed generally. The former name with which the entity gained popularity was BHP Steel Limited (Smith, and Somogie, BlueScope Buildings North America Inc, 2019).
4. Ratio Analysis
4.1. Efficiency ratios
The operational wellness with which an entity puts its assets and liabilities to business use is checked by efficiency or activity ratios, which are computed as follows for BlueScope Pty Ltd:
|RATIO||FORMULA||BLUESCOPE PTY LTD|
|a. days inventory||(average inventory/cost of goods sold)*365||98||94||105||114||114|
|b. days debtors||(average debtors/operating revenue)*365||44||43||45||46||46|
|c. days creditor||(average creditor/purchases)*365||73||76||88||91||87|
|d. asset turnover||total sales/ average total assets||1.12||1.13||1.07||1.11||1.08|
The day’s inventory ratio signifies the number of days inventory remains in business before it’s sold to the customers. A fall in the ratio in the recent financial years indicates good sales strategy or better stock management by the organisation. The day’s debtor reflects the number of days the payment remains blocked with the debtors on an average. This ratio has remained however same over the span of five financial years, yet better in 2018 as compared to 2014. The day’s creditor shows the number of days the organisation takes to make payment to the creditors. The lower the ratio is the effective the payment making by an entity is. This ratio has improved.
Asset turnover helps the organisation to compute the sales in terms of number as generated by the organisation on every dollar of assets it holds on an average. This ratio has risen in the recent financial years which present the organisation’s ability to utilise its assets in a much efficient manner for generating sales.
4.2. Liquidity ratios
BlueScope Pty Ltd’s strength to handle the current period obligations from the current resources is analysed by the liquidity ratios. Some important liquidity ratios are as follows:
|RATIO||FORMULA||BLUESCOPE PTY LTD|
|a. current ratio||current assets/ current liabilities||1.72||1.58||1.40||1.59||1.62|
|b. quick ratio||quick assets/ current liabilities||0.92||0.85||0.75||0.80||0.79|
BlueScope Pty Ltd is working with a good amount of working capital, which is clearly observant from the rise in the current ratio as well as the quick ratio. The current assets as well as the current liabilities for the business are higher than earlier, yet the portion of current assets is way too high leading to an improvement in both the current as well as the quick ratio.
4.3. Profitability ratios
The performance and position of any organisation is usually judged by the amount of profits it generates with every other operations going simultaneously in hand.
|RATIO||FORMULA||BLUESCOPE PTY LTD|
|a. gross profit margin||(gross profit/ total revenue) * 100||41.90%||43.92%||44.89%||43.89%||43.13%|
|b. (net) profit margin||(net profit after tax/ total revenue) * 100||14.13%||7.33%||4.58%||2.07%||-0.50%|
|c. return on equity||net income/ shareholder's equity||25.47%||15.26%||9.26%||4.14%||-0.90%|
|d. return on assets ratio||net income/ total assets||14.90%||8.08%||4.55%||2.25%||-0.53%|
Over the years, the price of raw materials has rose in the business because of general price level rise and the timing of purchases. This has led to a rise in the cost of goods sold leading to a reduction in the quantum of gross profits earned in the most recent financial year. The net profit on the other hand is generated almost at the double rate in year 2018 in comparison to the financial year 2017.
The return on equity as well as the return on assets ratios has improved. This improvement pins the increase realised in the net income generated by the entity on every dollar of equity incorporated and every dollar of asset invested in business respectively.
4.4. Capital Structure ratios
|RATIO||FORMULA||BLUESCOPE PTY LTD|
|a. debt ratio||total debt/ total assets||0.37||0.42||0.46||0.40||0.41|
|b. debt to equity ratio||total debt/ total owner's equity)||0.63||0.80||0.93||0.73||0.69|
Both debt ratios and debt to equity ratios have shown a decline in the financial year 2018, mainly when compared with financial year 2017 and 2016. The fall is because of the reasons already discussed. The involvement of debt in business has reduced. The reason is the same, i.e. high end availability of free cash flows and strong generation of profits which has backed the repayment of debts bringing the debt ratio and debt to equity ratio on the lower end (Gleason, Bruce Johnson, & Li, 2013).
5. Trend Analysis
5.1. Horizontal analysis
The horizontal analysis of BlueScope Pty Ltd is undertaken to analyse the trend observed in the several important elements of balance sheet and income statement over a time span. This is considered as an important measure to analyse the business trend especially by depicting the results in graphical manner. The reason is a clear picture of rise or fall in the elements is clearly visible through the graphical element of the horizontal analysis. A base year is selected based upon which the increase or decrease in the elements over the consecutive following years is computed. The given horizontal analysis is calculated by taking year 2014 as the base year (Robinson, Henry, Pirie, and Broihahn, 2015).
The formula used to compute the percentage change is:
Amount of element in year of computation – amount of element in base yearx100
Amount of element in base year
5.1.1. Income statement
|HORIZONTAL ANALYSIS OF BLUESCOPE PTY LTD FROM 2014 TO 2018 TAKING 2013 AS BASE YEAR|
|Cost of Revenue||58%||39%||18%||13%||8%|
|Earnings Before Interest and Taxes||4436%||3807%||1542%||677%||292%|
The revenue for the BlueScope Pty Ltd has rose explicitly in the five year span from year 2014 to 2018 reaching to $ 11,526,300 thousand in year 2018, which is almost 150 times then the revenue company was generating in 2013. Along with the revenues the cost of goods sold have also marked a rise which was lacking the rise of revenue till year 2017, but is almost equivalent to the rise in revenue for year 2018 (Green, & Figlewski, 2019). The rise in the cost of goods sold for year 2018 is this high because of the high cost of high materials especially that of coal and iron ore. Also the timing at which the purchases of raw material are undertaken has also contributed in increasing the costs of the raw materials. However, the ability to extract higher returns from market for some of the products has enabled the organisation in offsetting this rising cost of sales.
The net income for year 2013 was negative being $85,600 thousands. The company’s net profits have not only risen, but the growth is in quadrupled figures. The rise is drastic and appreciated in the market as well. The same is the case with the earnings before interest and taxes. The current year’s rise of approximately $ 24 million in the EBIT figure has been possible due to the rising prices of steel beyond the rise in the costs of its raw material in the Midwest U.S. market (Gruca, & Rego, 2015).
5.1.2. Balance sheet
|HORIZONTAL ANALYSIS OF BLUESCOPE PTY LTD TAKING 2013 AS BASE YEAR|
|Total Current Assets||52.78%||31.68%||9.00%||8.31%||6.47%|
|Total non-current assets||46.65%||29.91%||35.38%||6.88%||-0.05%|
|Total Current Liabilities||56.29%||46.69%||36.86%||20.16%||15.63%|
|Total non-current liabilities||19.43%||32.20%||56.39%||-5.71%||-5.76%|
|Total Stockholder Equity||43.35%||13.68%||0.83%||-4.14%||-0.08%|
The major trend reflected is in the pattern of debt in business. The debt quantum in business was the highest in year 2016 reaching almost 156 times the debt incorporated in business in year 2013 (Grzegorz, 2008). After year 2016, the proportion of debt in business fell drastically. An analysis into the business signifies the presence of a strong free cash flow at company’s end leading the entity to reduce the amount of debt by repaying it at a faster rate. The same is the reason behind the fall in the non-current liabilities. The current assets as well as the current liabilities both have rose on the same pace signalling the entity’s intention to keep the working capital intact.
Equity has risen drastically and this is also highlighting the reduced dependence on debt and reliance upon the equity money to run the business. The position of assets is rising in the recent financial years with several ups and downs in between however.
5.2. Vertical Analysis
The vertical analysis helps the reader to understand the proportional change in an element of the income statement usually compared against the base revenue and of balance sheet usually compared against the element’s category total. A percentage is computed of the element’s proportion from the revenue or the element total as the case may be. It is an important comparative tool as the comparison of the performance and position is reflected over the years. The proportion of the profitability contributed by each of these elements gets visible (Grant, 2016).
5.2.1. Income statement
|VERTICAL ANALYSIS OF BLUESCOPE PTY LTD FROM TAKING REVENUE AS BASE|
|Cost of Revenue||58.10%||56.08%||55.11%||56.11%||57.23%|
|Earnings Before Interest and Taxes||10.67%||10.04%||4.90%||2.47%||1.33%|
The proportion of the cost of revenue as a percentage of revenue has almost remained constant over these years, yet in an increasing pace. The proportion of gross profit however has fallen when computed as a percentage figure to revenue base. The increase as observed most is in the earnings before interest and taxes and the net income. Net income was negative in the financial year 2014 as well but it improved in comparison to the negative earnings of 2013. The net profits have improved mainly because of the ability of the entity to generate higher returns because of improvised prices of the material offered in the Australian and U.S. markets. The rising cost of goods sold has been favourably tackled by the entity through the improved product prices (Kant, & Randall, 2011).
5.2.2. Balance sheet
|VERTICAL ANALYSIS OF BLUESCOPE PTY LTD FROM 2014 TO 2018 TAKING TOTAL AS BASE|
|Total Current Assets||41.11%||40.45%||35.04%||40.44%||41.65%|
|Total non-current assets||58.89%||59.55%||64.96%||59.56%||58.35%|
|Total Current Liabilities||64.51%||60.64%||54.86%||63.90%||63.02%|
|Total non-current liabilities||35.49%||39.36%||45.14%||36.10%||36.98%|
The proportion of the non-current assets has been higher in business always as compared to the current assets. The mix was the most unbalanced in year 2016. For rest other financial years, the proportion is nearly the same. The position in year 2018 is completely identical to year 2014 (Kaplan, & Ruback, 2015).
The current liabilities held in the entity are higher than the non-current liabilities always in the entity. However in year 2016, the proportion on the non-current liabilities rose because of the high inclusion of debt in business. The proportion the non-current debt started to fall from year 2017 onwards (Hosseinzadeh, et al. 2016). The reason is availability of a good quantum of free cash flows with the organisation which enabled it to pay off the external and long term debt to a larger extent. Also the proportion of equity has rose in business shifting the focus of entity from externally borrowed long term debt towards common stock and retained earnings (Kim, & Ritter, 2019).
6. Commentary on position with relevant industry and Australian Market
For an entity which operates and performs function on a public platform, it becomes imperative to incorporate a comparison of the performance with the industry of operation and the general market to gather an understanding of the relationship of the organisation with the market players. The question of whether the performance of an entity is justified of not is possible to be answered only when the performance of others in the market is clearly known (Slocombe, 2019).
BlueScope Pty Ltd operates in the steel industry which can be directly compared with the performance of Metals and Mining Industry. In the recent financial year 2018, the metals and mining industry has provided shareholder returns of 16.7%, while the Australian market has provided shareholder returns of 5.3% (MINISTER, 2018). The return is based upon the movement in the stock prices. Return reflected by BlueScope is a negative figure of 35.5%, which is upsetting for such a profit earning organisation. The chart shows the one year share price movement (Michalski, 2008).
However, it is expected that the performance of the organisation shall pace up with the industrial average, as the individual results are very impressive and smooth (Penman, & Penman, 2007).
Although the industry performance as compared with shareholder returns is not very impressive, yet the company is good when it comes to generating profits for business. The business can be invested upon as the chances of getting into loss are very less and certainly improbable