HI5001M: Financial Management - Financial Analysis - Report Writing Assessment Answer

Financial Management Assignment

Assignment Task

Hence, assessing and evaluating these statements is essential so that the overall performance and growth of the organisation can be assessed over time. The report presents an analysis of the financial statements of a firm operating in the Materials Industry of the Australian Stock Exchange. The report presents the performance in terms of different elements of different financial statements of the chosen firm, i.e. 3D Resources Limited and comments upon the overall performance, which will be used to then make recommendations for adequate management to achieve enhanced performance.

3D Resources Limited is an Australia based firm, which is involved in the process of mineral exploration. The company was established in 2006 and has been working towards identifying and exploring the mineral properties that are currently under-explored (Compny’s Website, 2016). It primarily focuses on and targets commodities that are valued very high such as zinc, gold, copper etc. In addition to Western Australia, operations of the firm are also expanded to Indonesia for exploration of Manganese. Some of the key projects of the firm include Mount Angelo Porphyry Copper Prospect, Cosmo Newbery gold-nickel project, Mt Padbury gold project and Mt Agnes copper-gold project (Compny’s Website, 2016). The financial statements of the firm are being analysed as given below.

2. Financial Analysis

2.1 Statement of Financial Position

Statement of financial position, also commonly referred to as the Balance Sheet, helps in evaluating and presenting the financial position of a firm at the end of a financial year. It helps in measuring the overall assets, liabilities and equity of the firm to determine if it is financially strong to pay off all its dues or not (Fridson and Alvarez, 2011). The three components of the statement include assets, liabilities and equity, which for 3D Resources are given below.

Assets refer to the various things that are owned by a firm so that different economic benefits can be derived from the same and liabilities on the other hand, refer to obligations of the firm that it needs to fulfil in the short or long run (Kieso et al 2010). Assets and liabilities can be divided into two categories, i.e. current and non-current. Current assets refer to assets that are liquid and can be immediately converted into cash and non-current assets refer to those assets like plant and property that cannot be immediately converted into cash. Similarly, current liabilities refer to liabilities that are due in the short run and non-current liabilities are those that are due in the long run (Kieso et al 2010).

Figure 1 presents the current and non-current assets of 3D Resources Ltd, the percentage change in which is also given in table 1. It has been found that both current and non-current assets have increased in 2014 as compared to the previous financial year. Frank and Goayl (2009) argue that higher the assets of a company, better it is because it means that the company has the capability of paying all its debts. Hence, an increase in assets of 3D Resources reveals a strong financial position. Major increase in current assets has been observed due to the increase in cash and cash equivalents of the firm, thus showing stronger financial position and increase in non-current assets has been because of increase in exploration expenditure (Frank and Goyal, 2009). This means that the company is expanding its operations, which would result into higher financial gains.

Current liabilities of 3D Resources as shown in figure 2 have been found to have gone down by 54% (table 1) in 2014 as compared to the previous year. Chen et al (2011) argue that lower the liabilities of a company, better it is. Lower liabilities mean that the company does not have to pay any dues, which is a positive sign for investment by the investors. 3D Resources does not have any non-current liability. And its current liability has been lower than its current liabilities, thus giving a current (liquidity) ratio of 4.29 in 2013 and 15.03 in 2014. This thus confirms that the financial position of the firm is very strong and it has high liquidity, which makes it an attractive investment option (Chen et al 2011).

Last element of statement of financial position is stockholders’ equity, which refers to the overall equity held by investors of the given firm. As discussed by Weygandt et al (2015), stockholders’ equity refers to the book value of a firm and hence firms are expected to continuously increase the same. As shown in figure 3, the stakeholders’ equity of 3D resources increased by almost 99% in 2014, suggesting that the investors and owners of the firm are contributing towards the firm’s growth and it is hence a good investment option.

Analysis of the statement of financial position of 3D Resources reveals and confirms that the firm has been performing well and is strong financially to payback all its debts and can be considered a good investment option.

2.2 Stockholders’ Equity

Shareholders’ or stockholders’ Equity is an important measure of a company’s financial health because it helps in evaluating the net value of the firm. As explained by Brealey et al (2012), the difference between total assets and total liabilities of a firm is measured as shareholders’ equity and it helps in calculating the amount that would be paid to shareholders if the company had to be liquidated. It is preferred for a company to have positive equity because it means that the firm has more assets than liabilities and would pay its shareholders in case of bankruptcy or liquidation (Brealey et al 2012). Hence, a firm with increasing values of shareholders’ equity is considered a safe investment option because the investors can be assured that their money would be returned in case of liquidation. Two common sources of stakeholders’ equity are the initial money that is invested in the firm by investors and also the retained earnings (Gatchev et al 2009).

Stockholders’ equity of 3D Resources Ltd increased by 99% in 2014, the breakdown of which is given in table 2 below:

The issued capital increased by 4% in 2014, which shows that the company issued more shares in that year. Though it can be argued that such a strategy would result into higher dilution of ownership of investors’ shares, it would benefit the investors in the long run because of higher return on equity. While this change seems to be beneficial and profitable in the long run, the reserves and retained earnings of 3D Resources went down in 2014. Since no dividends were paid in the year, reduction in retained earnings can be said to have caused due to income or loss from different operations. Hence, 3D resources need to adopt suitable measures to ensure that its retained earnings remain positive.

The outstanding number of shares for 3D Resources also went down from 37,000,000 in 2013 to 35,500,000 in 2014, thus showing a reduction of almost 4%. As explained by Alali and Foote (2012), the number of outstanding shares of a firm is extremely volatile and keeps fluctuating and can reduce if shares are purchased or if the company buys back its shares. Increase in issued capital as discussed earlier hence suggests higher investment in the firm, thus suggesting that the firm’s equity is invested in by the shareholders and investors can invest in the same.

2.3 Statement of Profit & Loss

Profit & Loss (P&L) Statement of a firm, also commonly referred to as the income statement, provides a measure of total expenses and income of a firm as observed during a particular period of time. Iatridis (2010) explains that the Income statement of a firm helps in measuring and evaluating the overall ability of a firm to generate revenues and to minimize its costs. Two key integral elements of a P&L statement are the expenses incurred by the firm during that period and revenues generated by it (Iatridis, 2010). Some of the key elements of the P&L statement of 3D Resources Ltd are being discussed below.

Figure 5 and table 3 present the total revenues and total expenses of 3D Resources Ltd in 2013 and 2014, showing the change that has been observed in 2014. The revenues of the firm increased to $1,005,545 in 2014, showing an increment of 74% over 2013 and its revenues went down by 53%. It has been established by Thouin et al (2009) that every firm must focus on increasing its revenues and minimizing its expenses because that would result into higher profitability, which would result into higher earnings and returns for investors. Increasing revenues and reducing costs of 3D Resources mean that the company has achieved high levels of efficiency in managing its operations, which has then resulted into higher profitability.

Figure 6 presents the non-operating gains and losses of 3D Resources, which refers to the measure of the portion of income of losses that arise because of operations that are not core to the firm. Some of the key things included in non-operating gains and losses include the profits and losses that are caused due to investments or due to foreign exchange (Levinthal and Wu, 2010). The non-operating gains and losses of 3D Resources showed an increase of 95% in 2014 as compared to 2013, thus showing the ability of the firm to generate income from multiple sources. This reflects a key strength of the company, making it a preferred investment option for stakeholders.

The last element measured and evaluated from the profit and loss statement of the firm is its earnings per share (EPS). EPS is a measure that helps in measuring the overall earnings of a company per outstanding share. Cragg and Malkiel (2009) explain that EPS refers to the proportion of a company’s profits that can be allocated towards each of the outstanding shares and hence higher value of the same is required for the firms. Investors must hence invest in companies with higher EPS because it reflects higher earning of the shareholders. 3D resources has been able to increase its earnings per share in 2014, thus reflecting stronger financial position of the firm, making it a suitable investment option.

A major cost reduction for the firm has been observed in its exploration costs, thus suggesting lower risks for the firm. Silvia and Robinson (2009), who have evaluated the accounting practices and standards of oil and gas and mining companies, have established that when the risks of a company tend to increase, the overall exploration costs also tend to increase and hence a reduction in exploration costs reveals lower risks. The P&L statement of 3D Resources reveals a reduction in exploration costs in 2014 by almost by 62.6%, thus showing a reduction in risks for the firm.

The evaluation of the P&L statement of the firm thus suggests that 3D Resources have been exhibiting as strong financial position with reducing costs and increasing revenues, thus showing higher ability of the firm to generate profits, making it a good option for investors.

2.4 Statement of Cash Flow

The last financial statement that is of importance for stakeholders is the statement of cash flow. Cash flow statement presents changes as observed in the cash and cash equivalents of a given company as measured on its balance sheet. Marshall et al (2011) argue that cash flow statement plays an important role in an economy because it helps in measuring the overall liquidity of a firm, thus demonstrating its ability to meet its financial obligations. Cash flow statement usually measures net cash flow from three types of activities, i.e. investing, operating and financing (Marshall et al 2011), the measures of which are given in table below for 3D Resources Ltd.

Table 4 and figure 5 present changes observed in cash flow elements of 3D Resources Ltd in 2014 as compared to 2013. The results reveal that the company has increased its cash flow from operating and investing activities, but its cash flow from financing activities has gone down. Increase in cash flow from operating activities suggests that the firm has been able to continuously improve its operations and operational efficiency, which has resulted into higher cash flow and higher liquidity (Lev et al 2010). A major increase in cash flow from operating activities has been obtained from fee income.

Cash flow from investing activities refers to the cash flow arising due to investments such as purchase or sales of any of the assets, payments that are either made or received from mergers and acquisitions (Lev et al 2010). High cash inflow of 3D Resources in 2013 was because of sale of tenements and sale of investments and hence the observed reduction does not reflect reduction in investment or operational efficiency. The financing activity based cash flow has been found to increase because of issue of shares, which has been discussed earlier as well (Garrison et al 2010). Thus, the overall cash flows from different activities of the firm have been found to be positive.

The net cash flow of the firm has also increased massively, showing an increment of almost 289%. On one hand, these figures demonstrate a strong financial and liquidity position of 3D Resources Ltd. because of positive cash flows. Garrison et al (2010) explain that a firm with positive cash flows not only has the ability to pay off all its obligations but also has sufficient cash and funds for investment purposes. However, at the same time, Faulkender et al (2012) argue that a firm should not keep very high amounts of cash but must use it for investment purposes to maximize its wealth. Thus, though the liquidity and cash positions of 3D Resources Ltd are very strong, it can utilize the same for earning high returns.

3. Conclusion

The findings and the financial measures from financial statements of 3D Resources Ltd. can be said to be of huge importance because they have given great insights into the way the company is performing and its financial strength. The analysis has thus been beneficial to evaluate the attractiveness of the firm and its equity from an investor’s point of view. The balance sheet and shareholders’ equity of 3D Resources reveal that the financial position of the firm is extremely strong and it has been able to increase its assets and liquidity to a large extent. It has also been found that the company issued new shares in 2014, reflecting stronger market sentiment. Even the income and cash flow statements have revealed that the firm has been performing well. It can be deduced from the analysis that has been carried out that the firm has been demonstrating high operational efficiency and has also been able to maintain strong liquidity. It can be thus suggested that the firm is a good investment option for shareholders. However, some of the recommendations that can be made for the firm and its investors based on the analyses are presented below.

4. Recommendations

The investors must invest in the shares of 3D Resources Ltd. because it has been demonstrating strong financial position and performance. Also, the fact that it has issued new capital in 2014 suggests high returns and performance in the long run, which makes it a suitable and preferred investment option in the long run.

Another recommendation that can be made for the firm is that it must make use of its cash for investment purposes to earn returns on the same. Analyses as presented above reveal that the firm has lot of cash lying in accounts, which is not earning any benefit to it. Hence, utilizing the cash and investing it in different liquid options can help it in maximizing its profitability and returns because of interest that would be earned on investments.

3D Resources Ltd. must also pay dividends to its shareholders. Farshadfar and Monem (2013) explain that a company that wants to re-invest its money would not pay dividends, but since 3D Resources is not doing that it can pay dividends to its shareholders. According to Farshadfar and Monem (2013), higher dividends lead to higher trust among shareholders and they feel more valued and are motivated to invest more in the firm and its equity. Hence, paying dividends can result into positive impacts for the firm.

The company must also focus on increasing its non-operating profits. The non-operating profits of the firm have increased in 2014, but the same are still negative and hence it is required for 3D Resources to increase its non-operating profits. This will not only improve profits of the firm but would also minimize its risks.