Unit 101 Financial Management

8/10/2019 Unit 101 Financial Management

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EXECUTIVE SUMMARY

With steady sales in 2012, Orica's performance for the 2012 financial year looked

promising. Analysing the Orica Financial Report 2012 shows that although sales

were high, the expenses increased for the year, and their net profit dropped

considerably. This report analyses Orica's overall performance for 2012. Utilising the

data provided by their Income Statement, Balance Sheet and Cash Flow Statement,

the financial analysis ratios: Liquidity, Efficiency, Profitability, Financing and

Investment ratios, are all calculated and analysed to present their financial standing at

the end of the year. Comparing the relationships of these ratios reveals that Orica

decreased their liquidity, but suffered lower profitability with heavy influences from

Minovas impairment of goodwill. With high asset utilisation and stable efficiency,

Orica should focus on improving their maintenance and reliability by addressing the

Kooragang plant shutdown. Furthermore, Orica is financing more with debt than

equity which introduces some risk to the company given their higher expenses for

2012. Finally, the investment ratios indicate that Orica could be poised for high

growth with a stable return, but should first focus on maximising their plants and

equipment.

Sample Assignment: Part of the content removed


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TABLE OF CONTENTS

Executive Summary ............................................................................................................................. II

Table of Contents ............................................................................................................................... III

A. List of Tables ...............................................................................................................................IV

1. Introduction ................................................................................................................................... 1

2. Ratios .............................................................................................................................................. 2

3. Evaluation ...................................................................................................................................... 3

3.1. Short-term Solvency or Liquidity Ratios ................................................................................ 3

3.2. Efficiency Ratios ..................................................................................................................... 3

3.3. Profitability Ratios .................................................................................................................. 3

3.4. Financing Ratios ..................................................................................................................... 4

3.5. Market-based Investment Ratios ............................................................................................. 4

4. Conclusion ..................................................................................................................................... 6

5. Bibliography .................................................................................................................................. 7

5.1. Books and Reports .................................................................................................................. 7

5.2. Websites .................................................................................................................................. 7


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A.

LIST OF TABLES

Table 2-1 - Liquidity Ratios .................................................................................................................... 2

Table 2-2 - Efficiency Ratios .................................................................................................................. 2

Table 2-3 - Profitability Ratios ............................................................................................................... 2

Table 2-4 - Financing Ratios ................................................................................................................... 2

Table 2-5 - Market Ratios ....................................................................................................................... 2


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INTRODUCTION

Orica is the worlds largest provider of commercial explosives and blasting systems to the

mining and infrastructure markets, the global leader in the provision of ground support inmining and tunnelling and the leading supplier of sodium cyanide for gold extraction.

This report provides a brief analysis of the financial performance and standing of Orica

Limited between 2011 and 2012 Financial Years through the use of Financial Analysis

Ratios. Using Orica's Financial Report 2012 and values from their 2011 report (to obtain

yearly averages to remove the effect of seasonal fluctuations), the five key financing ratios

are calculated:

The liquidity ratios indicate the companys ability to pay off short term liabilities. The efficiency ratios demonstration how effective the companys payments and

inventories are managed,

The profitability ratios show how well the company did in their overall

performance,

The financing ratios indicate how the company manages their long term solvency,

And the investment ratios help determine whether the company is worth investing

in and what direction they could be heading.

These ratios indicate how well Orica performed as well as provide insight into some

changes that have occurred between 2011 and 2012.


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RATIOS

Table 0-1 - Liquidity Ratios

SHORT-TERM SOLVENCY OR LIQUIDITY RATIOS 2011 2012 Industry Avg.1

Current ratio -- -- --

Quick ratio -- -- --

Cash flow from operations to current liabilities -- -- --

Table 0-2 - Efficiency Ratios

Table 0-3 - Profitability Ratios

PROFITABILITY RATIOS 2011 2012 Industry Avg.

Net profit margin -- -- --

Interest costs as a percentage of sales -- -- --

Asset turnover -- -- --

Return on assets -- -- --

Return on ordinary shareholders' equity -- -- --

Table 0-4 - Financing Ratios

LONG-TERM SOLVENCY OR FINANCING RATIOS 2011 2012 Industry Avg.

Debt to equity -- -- --

Debt to total assets -- -- --

Interest coverage -- -- --

Cash flow from operations to total liabilities -- -- --

Table 0-5 - Market Ratios

MARKET-BASED INVESTMENT AND OTHER RATIOS 2011 2012 Industry Avg.

Price/Earnings (P/E) -- -- --

Dividend yield -- -- --

Dividend cover -- -- --

Net tangible asset backing -- -- --

EFFICIENCY RATIOS 2011 2012 Industry Avg.

Debtor's turnover -- -- --

Average days sale uncollected -- -- --Inventory turnover -- -- --

Inventory turnover in days -- -- --


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EVALUATION

1.1.

Short-term Solvency or Liquidity Ratios

Oricas ability to pay off its short term liabilities was partially reduced in 2012 due to an increase in

liabilities; however, with a Current ratio of (XXX) they are still in a financially stable position for

paying off their current liabilities. Orica also marginally increased its inventory, reducing the Quick

ratio and its liquidity from (XXX)to (XXX), however; this lower Efficiency Ratios


Orica's Debtors turnover reduced in 2012 from (XXX) to (XXX) indicating that Orica has relaxed its

credit policy. This aligns with the 1 day increase in the Average days sales uncollected (to 53.6)

allowing customers more time to pay their bills. Likewise with Inventory turnover, Orica's inventory

turnover increased by 2 days (to (XXX), it should be noted that compared to the industry average,

Orica has a much shorter turnover rate, pointing to why they may not be as averse to relaxing their

credit policy). This indicates that Orica needs to access its inventory to ensure it does not hold

obsolete inventory, while ensuring the products do not deteriorate as they stay for longer periods, or

they need to improve their marketing (suggested by (Peavier, 2012)).


Average days sales uncollected, and indicates that Orica is paying off its current liabilities in a

shorter time frame. Due care must be taken in this regard as the company has a slightly low liquidity

and could potentially have issues with paying off debts in the future if the quality of Orica's

management of inventory and receivables does not improve (despite an increase in sales by almost

$500m).

1.2.

Profitability Ratios

Orica suffered a considerable decrease in Net profit margin for 2012, dropping (XX) per dollar (10cfrom 2011). Sales increased in 2012 by $490m, but expenses increased by $850m (with $367m due to

Minovas impairment of goodwill, and unfavourable foreign exchange movements (Orica Limited,

2012) contributed $109m in loss). This suggests that productivity improvements need to be initiated

and that


The Asset Turnover ratio increased marginally from (XX) to (XXX) for 2012, and although this is

low (as it does not reach 1) it is higher than the Industry average of 0.7. This indicates that

competitively, Orica is quite efficient, however; if we analyse its fixed asset turnover ratio, Orica has

a (XX) ratio in 2012 compared to its competitors who reach ratios of 3-4 (Morningstar, Inc., 2013).


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Orica needs to ensure incidences like the containment breach at the Kooragang Island plants are not

common (resulting in $87m loss EBIT in 2012 and $21m in 2011).

Orica's ROA also decreased significantly from (XX) to (XX) as a result of Minova, tax penalties

(from their US group), and the increased expenses such as inflation and depreciation (Orica Limited,2012) (had Minovas impairment not occurred, the ROA would be (XX). Although a significant drop,

8.6% meets the industry average ROA showing that Orica has a steady return on assets (supported by

the high Asset turnover ratio).


1.3.

Financing Ratios

Orica's Debt to equity is very high at 1.4 (increasing from (XXX) in 2011), with an industry average

of 0.7. This implies that Orica is financing debt at 1.4x what they use shareholder equity to finance

(this helped reduce the impact on ROE as stated above). Combined with Orica's Debt to asset ratio

increasing from (XX) to (XX) in 2012, Orica is financing almost 60% of its assets through debt

(increasing their total liabilities by $624m). Orica needs to review its borrowing practises and debt

financing as these high ratios show that they are relying more on debt than in the past (which results

in increased interest expense). These high ratios also imply that Orica is becoming more capital

intensive, which is supported by its Pilbara expansion projects.


Orica's cash flow is also very low covering only (XX) of their total liabilities (a significant drop from

(XX) in 2011). The main impacts resulting from its payment to suppliers and employees ($820m

increase over 2011), increased debt (as shown by the debt ratios) and weak cash flow generation (a

$210m decrease from 2011). With smaller cash flow from operations, Orica needs to either increase

their utilisation of assets, or initiate cost saving strategies to help preserve the future of the company.

1.4.

Market-based Investment Ratios

The P/E ratio for Orica almost doubled from 13.53 to (XXX) for 2012. This can be attributed to the

decrease in net profits for the year, but also due to a larger decrease in earnings per share (XX) from

1.74, a partial result from Minovas impairment). Combined with its decrease in ROE, Orica needs to

determine whether the $200m they are investing over 3 years is sufficient enough in increasing the

reliability and maintenance of its plants and equipment compared to their expansion plan. This high

P/E also indicates that


The dividend cover is (XXX) for 2012, a significant drop from 2011s (XXX). This reduced ratio

indicates the dividend payment is unlikely to remain sustained at the current rate of profitability, a

result that will reduce investor confidence. If Minovas impairment does not improve, the dividendcover is unlikely to restore to a healthy value. A reduction in dividends paid is also looked poorly


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upon by investors, and this can result in a decreased stock price as investors seek higher dividend-

paying stocks from other companies, however Orica may want to consider lowering their dividends,

have their share price impacted (for short term), but use the money to reduce their debt to equity.

The NTA/share for 2012 is (XX) (a fall from (XX) in 2011). This decrease of 50c arises from a$170m decrease in tangible assets and delving into the intangible assets, there is a $450m loss from

impairment losses for 2012.


The low NTA/share also reveals that the shares are highly overvalued, and that if Orica was forced

into liquidation, investors would theoretically only receive (XX) of their (XX) shares. With an

increase in share price for 2012, and a drop in NTA/share, it is could be viewed that investors should

sell their shares in case the company starts to deteriorate.


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CONCLUSION

In 2012, Orica's liquidity decreased slightly, resulting in a decrease in both Current ratio and Quick

ratio indicating that the company would have to sell some of its inventory to pay off its short termdebt. Reviewing the efficiency ratios, it appears that Orica has slightly relaxed its credit and collection

policies for its customers. Although this would not normally raise any issues, it should be noted that

the Debtors turnover is almost doubt the Inventory turnover period which could result in Orica paying

for lost inventory if affected by bad debts.


The financing ratios show that Orica is financing more with debt than shareholder funds, resulting in

an increase in interest expense (and risk of bankruptcy). An Interest Coverage ratio of (XX) (that

could have been 8 had Minovas impairment not attributed to a lower net profit) suggest that

maximising Return on Equity was a safe move given their end of year position. Unfortunately Orica's

net profit margin decreased by 40% due to higher expenses despite increased sales.



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BIBLIOGRAPHY

1.5.

Books and Reports

Anderson, R., 2013.Financial Management Study Guide. 5th ed. Melbourne: Chifley Business

School.

Mike Bazley, P. H., 2013. Contemporary Accounting. 8th ed. South Melbourne: Cengage Learning

Australia Pty Ltd.

Orica limited, 2011. Orica Annual Report 2011, East Melbourne: Orica Limited.

Orica Limited, 2012. Orica Annual Report 2012, East melbourne: Orica Limited.

Orica Limited, 2012. Sustainability Report 2012, East Melbourne: Orica Limited.

1.6.

Websites

AccountingExplained.com, 2013.Financial Accounting. [Online]

Available at: http://accountingexplained.com/financial/

[Accessed 26 June 2013].

Direct Broking (part of ANZ New Zealand Securities Limited), 2005.Direct Broking. [Online]

Available at: http://www.directbroking.co.nz/directtrade/static/educationalarticles.aspx

[Accessed 16 July 2013].

Investopedia US, A Division of ValueClick, Inc, 2013.Investopedia. [Online]

Available at: http://www.investopedia.com/

[Accessed 21 June 2013].

Morningstar, Inc., 2013.Morningstar's Take. [Online]

Available at: http://quotes.morningstar.com/stock/ocldy/s?t=OCLDY


Peavier, R., 2012.Financial Ratio Analysis Tutorial 101. [Online]

Available at: http://bizfinance.about.com/od/yourfinancialposition/ss/financial-ratio-analysis-tutorial-101.htm


Small Business Development Corporation , 2012.Balance Sheets. [Online]

Available at: http://www.smallbusiness.wa.gov.au/understanding-balance-sheets/


The Brandow Company, 2012.Industry Income-Expense Statements. [Online]

Available at: http://www.bizstats.com/corporation-industry-financials/manufacturing-31/chemical-

manufacturing-325/other-chemical-product-and-preparations-325905/show


Unit 101 Financial Management

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