Analysis of ERL Company's Business Tools and Return on Equity

The provided assignment is a financial analysis of Emmerson Resource Limited (ERL) company. The report examines the company's application of various business tools to achieve its objectives effectively. Additionally, it calculates the return on equity and discusses the importance of controlling interest expenses through debt equity ratio. The graphical presentations show a positive market position for ERL.

Business for finance
Contents

INTRODUCTION...........................................................................................................................1
Question 1;..............................................................................................................................1
Question 2:..............................................................................................................................2
Question 2:..............................................................................................................................3
Question 3:..............................................................................................................................4
Question 4...............................................................................................................................6
Question 5...............................................................................................................................7
Question 6:..............................................................................................................................7
REFERENNCES..............................................................................................................................8

INTRODUCTION
Emmerson Resource Limited is the company which is committed in exploration and evaluation
of the mineral interests. The firm’s project covers the Tenant Creek Mineral Field in the North
region in the UK. This has an aggressive exploration program and dominant position in the
planet (Anandarajan, Anandarajan and Srinivasan, 2012). The company is implementing
advanced exploration concepts and techniques to unlock production of gold and copper deposits.
Question 1;
Emmerson resources limited is an Australian gold resources company that is currently
raise $ A20 million in wide oversubscribed IPO during 2007. They are entirely relying on gold
and copper exploration. The company is aims to increase shareholders value by making
improvisation an aggressive and planned exploration strategies during clear business procedure
(Uwuigbe, Olusegun and Agu, 2012). Because of effective measure it aims to develop and
maintain a superior quality pipeline of projects and deploy with using latest technologies for the
next coming generation. In order to determine, its performance managers need to evaluate its
past couple of year financial position. The best techniques which is more useful in this particular
process is through using ratios. Some of them are mention underneath:
ROA: It is known as one of the crucial financial ratio that indicate total percentage of
gain a company is earning in accordance with its entire resources. It is mainly identifying as net
income divided by total assets. This provide managers an indicator of profitable Emmerson Ltd
is relative to its total assets.
ROE: It is referring as a quantity of net incomes returned as a total percentage of
shareholder equity. Through this, one can measures a corporation's profitability by revealing
total gains a company is incurring from the total capital which is invested by shareholders. In
few situation this happens to be return on net worth.
Debt ratio: According to this particular ratio which is used to measure financial leverage of
Emmerson Ltd. It is termed as ratios of total assets those are expressed as a percentage or in
decimal form. It would be analysing through a proportion of company’s total assets that are
finance by debt.
Ratios Formula 2014 2015 2016 2017
ROA NPAT / Total Assets 8.88 12.26 -17.87 -18.16
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ROE NPAT/ ordinary equity -10.69 -1.99 -9.29 -7.98
Debt ratio Total Liabilities/ Total Assets 0.97 0.03 0.03 0.03
WACC: It is known as the rate that a company is expected to pay on average to its
security holders for the purpose of financing its assets. These are commonly termed as the firms
cost of capital. Every sources of capital consists of ordinary share, preferred inventory and other
long term liabilities.
Formula: WACC: = E/ V x Re+ D/V x Rd x (1 – Tc)
: ke/ (D+E) + Kd/ (D+E)
: 16.78(0.97) + 10%(2.81)
: 16.27+28.1= 44.37%
Note: Kd is assume to be 10%.
whereas,
Ke= 16.78%
D+E = 0.97
Question 2:
There are various impacts those are affecting performance of the company. The
practicability and demerits of using these assumptions are discussing underneath:
 It is more difficult to maintain capital structure.
 Maximum chances of accepting wrong projects rather than selecting positive projects.
 Plenty of difficulty in acquiring present market value of cost of capital.
Conservative investment: Most of the companies those are in volatile or seasonal
industries such as farming, construction and tourism sectors can easily adopt these particular
methods in order to deal with risks those are arises in it (Habib, Kiani and Khan, 2012).
According to the selected company which is Emmerson resource Ltd is not using conservative
investment method. This will be more effective working capital management techniques which
can lower the risk of short term cash requirements and it can make huge impacts to attain long
term profitability.
Question 2:
The value of ordinary share must be calculated based on other available data using
various formula, estimation and adjustments. During the computation of return of assets, it has
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been seen that decrease in return of assets shows that Emmerson resources Ltd is generating least
profit from all its resources during the period of 2016 to 2017. It was much effective before
because they are having sufficient profit as compare to current year time (Kadiri, 2012).
ROA is an indication that profitability of Emmerson Ltd is more relative to its total assets. With
this and idea provide to the management to use their assets in effective manner in order to
generate maximum earnings. Whereas, ROE is the total net profit returned as percentage of
shareholder capital investments. It will directly have made impacts to investors total capital
invested in the company.
Comparison about ROC and ROE:
According to the ratios calculated from collecting information from annual report from
respective four years. It has been seen that return of assets is in initial stage is more profitable till
2015 after that it become in negative (Hashemijoo, Mahdavi-Ardekani and Younesi, 2012). It has
been occurring because of total assets of Emmerson resources Ltd is much higher with
comparison to total net income.
In case of return on equity, it remains in negative from starting. Because net income of
the company is much lowers in relation to prices of ordinary shares.
Computation of (β) cost of beta:
(β): Cov.(S,m)* standard deviation of stock / standard deviation of market
: 2.13
RR: Rm+β (Rm-Rf )
: 4%+ 2.13*6
: 16.78%
Note: Value of beta is taken on an assumption of 2.13.
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Question 3:
Figure 1: Line chart
(Source: line chart of Emmerson Resource Ltd, 2018)
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Figure 2: Comparison between Emmerson resource Limited and market index.
(Source: Comparison between Emmerson and market index)
Explanation: Under the abovementioned chart, this can be said that the ERM company is
showing its last 2 years share price traded monthly. Further, these are compared to the market
index. Under this, it can be said that the company needs to compare their data with the stock
price. From these two graph, it can be shows that the cited company is consistently trying to
perform with the market index which reflects the good sign for the firm. This also can be find
that the company is lightly volatile.
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Explanation of ASX chart terms: Under this, red line reflects the price of the primary stock in
the requested time frame (Lee and et. al., 2015). The real price level depicts on the right axis.
The chart might not reflect the real share prices like share prices which are adjusted.
The blue line reflects the value of the secondary stock over the requested time frame.
Green line reflects the turn-over for the primary stock.
Dark green bars reflect the turnover for the primary sources.
Burgundy line reflects the volume moving average for the primary stock.
Moving average- The average value of the security over a fixed period of time. A moving
average assists to smooth out volatility in the security price or volume. For instance, 20 day
average of the closing prices which is measured by adding last 20 closing prices for the stock and
dividing by 20.
Question 4.
This has been observed that Merger and Acquisitions are the major strategic tools which are used
by the firm for the growth strategy (Anbar and Alper, 2011). In addition to this, this can be said
that shareholders and the organisations could be benefitted by the mergers, where this can be said
that it enhances market shares and the market power in order to render economies of scale and
scope, lowering the cost of capital, and others. on the contrary, mergers have been observed that
few disadvantages can be said that the this could spoil shareholders value, operating higher firms
that could be problematic, between acquires and target company that could be overestimated by
managers as an outcome they are required to pay additional amount for the targeted firm.
However, this can be observed that the company is forecasting to concentrates on
obtaining target firm in the natural resources sector, the organisation’s efforts for determining a
prospective target organisation. ERL might therefore obtain a target firms in order to consider
links with the firm operating in these jurisdictions, any of which might expose it to
considerations or risks links with the firm. ERL might acquire a target business with the firm
which operates in such jurisdiction.
Although, this can be said that natural resource sector is subject to variance in commodity
prices that have potential to badly influence the organisation’s operations, financial condition
and prospects following an Acquisition. After Acquisition, ERL company becomes a market
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participant as the buyer or seller of any one or higher commodities. The organisation revenues
and earnings might rely on the prices of the commodities which it forms. This is not in the hand
of the firm because it does not able to control the share prices it attains for any commodities it
generates.
Question 5.
Ratios Formula 2014 201
Debt ratio Total Liabilities/ Total Assets 0.97 0.0
The debt ratio of the company seems to the stable as this remains constants in the year of 2015,
2016 and 2017. But in 2014, it was 0.97 which was simply means that the company’s total
liabilities are almost equal to the firm total assets. But later on, this was reduced and in the
subsequent year it becomes optimal or constant (Hevert, 2013). As this will make out the
business plan effective and efficient. Company’s gearing ratio reflects the capital structure of the
company which simply means the proportion of the finance which is rendered by the debt related
to the finance rendered by the equity. The gearing is calculated by using: long term liabilities/
capital employed*100.
But in this case, there is nothing non-current liabilities hence forth this can be possible for the
firm.
There are so many factors which affects the dividend of the company. But company have
ownership structure which affect the policy. An organisation with the greater promoter holdings
would prefer a low dividend pay-out which might affect to reduce in the value of the share. On
the other hand, a great institutional ownership would favour more dividend pay-out as this would
assist them to enhance the maintain over the administration.
Question 6:
Finance manager
Emmerson resource Limited
Date: 11 December 2017
Dear sir,
On the basis of above mentioned report, this can be concluded that the ERL company
applied various business tools so that the business activities can be attained in order to make
certain objectives effectively. although, return on equity can be calculated so that the decisions
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can be made related to the investor. As per above analysis it is measured that the cost of beta
shows the positive results with the effective rate of 16.78%. it is recommended that the
managers should have to pay attention on debt equity to control the interest expenses and
maintain optimum level of profitability. Over all the graphical presentations shows positive
market position.
Sincerely
John Banner
Finance analyst
Emmerson resource LTD.
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REFERENNCES
Books and Journals:
Hevert, S.R.B., 2013. Return on Equity.
Anbar, A. and Alper, D., 2011. Bank specific and macroeconomic determinants of commercial
bank profitability: Empirical evidence from Turkey.
Lee, B.S., Paek, M., Ha, Y. and Ko, K., 2015. The dynamics of market volatility, market return,
and equity fund flow: International evidence. International Review of Economics &
Finance, 35, pp.214-227.
Hashemijoo, M., Mahdavi-Ardekani, A. and Younesi, N., 2012. The impact of dividend policy
on share price volatility in the Malaysian stock market.
Habib, Y., Kiani, Z.I. and Khan, M.A., 2012. Dividend policy and share price volatility:
Evidence from Pakistan. Global Journal of Management and Business Research, 12(5).
Uwuigbe, U., Olusegun, O. and Agu, G., 2012. An Assessment of the Determinants of Share
Price in Nigeria: A Study of Selected Listed Firms. Acta Universitatis Danubius, 8(6),
pp.78-88.
Anandarajan, M., Anandarajan, A. and Srinivasan, C.A. eds., 2012. Business intelligence
techniques: a perspective from accounting and finance. Springer Science & Business
Media.
Kadiri, I.B., 2012. Small and medium scale enterprises and employment generation in Nigeria:
the role of finance. Kuwait Chapter of the Arabian Journal of Business and Management
Review, 1(9), p.79.
Online
Charting. 2017 (Online). Available through: https://www.asx.com.au/prices/charting/?
code=ERM&compareCode=ASX200&chartType=LINE&priceMovingAverage1=30&priceMov
ingAverage2=30&volumeIndicator=SMA&volumeMovingAverage=30&timeframe=daily.
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