FINM7409 Financial Management for Decision Makers

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FINM7409 Financial Management for Decision Makers Semester 1, 2024
INDIVIDUAL ASSIGNMENT

Background


BCI Minerals Limited (ASX: BCI) engages in the development and operation of mineral assets in Australia. The company explores for salt, iron ore, and potash deposits. It primarily focuses on its 100% interest owned in the Mardie Salt and Potash Project located in the West Pilbara coast, as well as owns interest in the Iron Valley, an iron ore mine located in the Central Pilbara. The company was formerly known as BC Iron Limited and changed its name to BCI Minerals Limited in December 2017. BCI Minerals Limited was incorporated in 2006 and is based in West Perth, Australia.

Grange Resources Limited (ASX: GRR) owns and operates integrated iron ore mining and pellet production business in Australia and internationally. The company is involved in the mining, processing, and sale of iron ore; and exploration, evaluation, and development of mineral resources. It owns interests in the Savage River project located in 100km southwest of the city of Burnie; Pellet Plant project situated in Port Latta located to the 70Km northwest of Burnie; and Southdown magnetite project located 90km from Albany Western Australia. Grange Resources Limited was incorporated in 1985 and is headquartered in Burnie, Australia.

You are an assistant analyst for an investment bank. As part of a team responsible for preparing a report that sets out a complete financial analysis to the (adjusted) accounts of the above two companies, you contribute to this report by conducting financial ratio, common-size, and trend analyses of these companies’ income statements, using your knowledge from FINM7409 as well as from your independent research.


Assignment materials (available on Blackboard)

  • Excel spreadsheet template “FINM7409_Excel.xlsx”
    • This file contains the BCI and GRR income statements and balance sheets.
    • Use this template to complete Part 1) described below.
  • For background information and/or readings, you can refer to the financial reports of the two companies, available from the following links.
    • BCI: https://www.bciminerals.com.au/investors/reports-and-presentations/annual-reports.html
    • GRR: https://www.grangeresources.com.au/announcements

You don’t need to use these reports to carry out your analyses, but may want to use them to glean any relevant information you find useful for your analyses and interpretations, especially in Parts 2) and 3) of this assignment.

TASKS:

1) Complete ratio and common-size analyses of the two companies’ income statements using the Excel template mentioned above. You are also required to fill out the missing numbers in the “Other Inputs“ worksheet.

NOTE:
  • Do not change the order or the name of the worksheets.
  • Financial ratios may vary in terms of how they are defined, i.e., the same ratio could be defined in a slightly different way. For your assignment, use the definition as covered in FIMN7409, but if you have difficulty, you can refer to the definitions provided in the Appendix of this document.
2) Carry out the trend analysis for the two companies, focusing on sales revenue, operating income, and net income. Graph the trends for these metrics in the Excel.

3) Using the financial ratios, common-size reports, and trend analyses you have completed in Parts 1) and 2) above, write a short essay (Word limit: 1,000 words) to answer and discuss questions in the following areas. You can create more graphs from the Excel to support your arguments and include those graphs in the report.

3.1. Profitability:

a) Are these companies’ profit margins changing? What do you think are the underlying causes of such changes (i.e., key drivers)? Why? How do they compare?
b) Are they managing overhead and administrative costs well? How do they compare?
c) What do you think are the most important factors explaining the difference in financial performance between the two companies over the 5-year period?

3.2. Efficiency:

a) How well do they manage their inventories? Are inventory ratios changing? What do you think are the underlying causes of such changes?
b) How well do they manage credit policies?
c) Are they taking advantage of trade credit? Are they relying too heavily on trade credit? If so, what do you think are the implicit cost of relying too much on trade credit?
3.3. Liquidity and solvency (capital structure)
a) Do they have enough debt? Do they take advantage of the potential benefits of using debt?
b) What are they doing with the borrowed funds, e.g., investing in working capital or PPE?

Mark allocations
Excel computations (Part 1 and 2)
 50
Essay (Parts 3)


  • Essay: 40 marks
  • Presentation: 10 marks


50
Total 100

SUBMISSION

You will find 3 submission links in the folder “Assessment/Individual Assignment/Assignment Submission” on Blackboard:

1. Part 1&2 - Excel: Submit your completed Excel spreadsheet here. Your Excel file must be re-named in the following format: “Assignment_XYZ.xlsx”, where XYZ is UQ student number. For example, if your student number is 12345678, then your Excel file must be named “Assignment_12345678”. This Excel file will be marked.

2. Part 3 (Essay): Submit your essay in a single pdf document here. Name your file using the following format: “Assignment_XYZ.pdf”, where XYZ is your student number. You may submit your essay multiple times but only your last submission will be marked.

3. Part 3 (Turnitin submission): Submit the same essay as you did in the 2 nd submission folder above.

The purpose of this link is check for similarity and detect plagiarism. Each time you submit your essay to Turnitin, you will get a report showing similarity scores. You may re-submit through  Turnitin as many times as you like, but make sure that your last version should be the one submitted in the link below for marking.

Late submission will incur penalties as outlined in Section 5.3 of the Electronic Course Profile. For submission extension, please refer to the same section. IMPORTANT: AI tools such as ChatGPT is not allowed as per the University policies. Using such tools will be treated as plagiarism.

Appendix
Commonly Used Asset Efficiency Ratios
Activity Ratios
Numerator
 Denominator
Inventory turnover
 Cost of sales or cost of goods sold
 Average inventory
Days of inventory on hand (DOH)
 Number of days in period
 Inventory turnover
Receivables turnover
 Revenue
 Average receivables
Days of sales outstanding (DSO)
Number of days in period
 Receivables turnover
Payables turnover
 Purchases
 Average trade payables
Number of days of payables
 Number of days in period
 Payables turnover
Working capital turnover
 Revenue
 Average working capital
Fixed asset turnover
 Revenue
 Average net fixed assets
Total asset turnover
 Revenue
 Average total assets
Commonly Used Liquidity Ratios

Liquidity Ratios
 Numerator
 Denominator
Current ratio
 Current assets
 Current liabilities
Quick ratio
Cash + short-term marketable investments + receivables
Current liabilities
Cash ratio
Cash + short-term marketable investments
Current liabilities
Defensive interval ratio
Cash + short-term marketable investments + receivables
Daily cash expenditures
Additional Liquidity Measure

Cash conversion cycle (net operating cycle)
DOH + DSO – number of days payables

Commonly Used Solvency/Capital Structure Ratios

Solvency Ratios
 Numerator
 Denominator
Debt-to-assets ratio
 Total debt
 Total assets
Debt-to-capital ratio
 Total debt
 Total debt + Total shareholders’ equity
Debt-to-equity ratio
 Total debt
 Total shareholders’ equity
Financial leverage ratio
 Average total assets
 Average total equity
Coverage Ratios

Interest coverage
 EBIT
 Interest payments
Fixed charge coverage
 EBIT + lease payments
 Interest payments + lease payments

Commonly Used Profitability Ratios

Profitability Ratios
 Numerator
 Denominator
Return on Sales

Gross profit margin
 Gross profit
 Revenue
Operating profit margin
 Operating income
 Revenue
Pretax margin
EBT (earning before tax but after interest)
Revenue
Net profit margin
 Net income
 Revenue
Return on Investment
 Operating ROA
 Operating income
Average total assets

ROA
 Net income
 Average total assets
Return on total capital
 EBIT
 Short- and long-term debt and equity
ROE
 Net income
 Average total equity
Return on common equity
 Net income – Preferred dividends
 Average common equity

DuPont Analysis: The Decomposition of ROE

ROE = Net income/Average shareholders’ equity
ROE = Net income/Average total assets × Average total assets/Average shareholders’ equity
ROE = ROA × Leverage
ROE = Net income/Revenue × Revenue/Average total assets × Average total assets/Average shareholders’ equity
ROE = Net profit margin × Asset turnover × Leverage
ROE = Net income/EBT × EBT/EBIT × EBIT/Revenue × Revenue/Average total assets × Average total assets/Average shareholders’ equity
ROE = Tax burden × Interest burden × EBIT margin × Asset turnover × Leverage

DuPont Analysis
 Numerator
 Denominator
Tax burden
 Net income
 EBT
×
Interest burden
 EBT
 EBIT
×
EBIT margin
 EBIT
 Revenue
×
Asset turnover
 Revenue
 Average total assets
×
Leverage
 Average total assets
 Average shareholders’ equity
=
ROE
 Net income
 Average shareholders’ equity

Selected Valuation Ratios


Numerator
 Denominator
Valuation ratios

P/E
 Price per share
 Earnings per share
P/CF
 Price per share
 Cash flow per share
P/S
 Price per share
 Sales per share
P/B
 Price per share
 Book value per share
Per-Share Quantities
Basic EPS
 Net income minus preferred dividends
 Weighted average number of ordinary shares outstanding
Diluted EPS
 Adjusted income available for ordinary shares, reflecting conversion of diluted securities
 Weighted average number of ordinary and potential ordinary shares outstanding
Cash flow per share
 Cash flow from operations
 Weighted average number of shares outstanding
EBITDA per share
 EBITDA
 Weighted average number of shares outstanding
Dividends per share
 Common dividends declared
 Weighted average number of ordinary shares outstanding
Dividend-Related Quantities
Dividend payout ratio
 Common share dividends
 Net income attributable to common shares
Retention rate (b)
 Net income attributable to common shares – Common share dividends
 Net income attributable to common shares
Sustainable growth rate
 b × ROE


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