Finance for Business Analysis Report

This report provides a detailed analysis of Lithium Australia NL, covering aspects like company description, ownership structure, key financial ratios, share price movements, WACC, debt ratio, dividend policy, and a recommendation for including the company in an investment portfolio.

Finance for Business
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Table of Contents
Introduction:................................................................................................................................3
1...........................................................................................................................................4
2...........................................................................................................................................5
3...........................................................................................................................................7
4.................................................................................................................................................11
5.........................................................................................................................................14
6.........................................................................................................................................16
7.........................................................................................................................................17
8.........................................................................................................................................18
9.........................................................................................................................................19
10.......................................................................................................................................20
Conclusion:................................................................................................................................21
References:................................................................................................................................22
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Introduction:
This preparation of this report is essential for the proper acknowledge of financial
environment related to Lithium Australia NL (LIT) Company to concerning various issues
and financial matters which directly affects the decision of the company. This report includes
various facts such as dividend policy, dent ratio analysis, WACC and changes in share prices
based on financial performance of the company. A brief introduction to company’s core
activities, changes in management, factors that affect share prices movement, identification
those nature and components that impact company’s financial performance through ratio key
analysis. A deep discussion in company's position and whether it would be included in the
investment portfolio or not" included in this report to make proper recommendation to the
client for accordingly.
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1.
Prepare a brief description of the company.
Lithium Australia NL (LIT) is a company with one over-arching Goal; an application of the
disruptive processing technologies related to the production of Lithium Chemical on the scale
of a commercial economy at operating cost or at minimum Quartile. Company follows the
following concept to achieve its ends targets (Lithium Australia, 2017)
LIT is a management of: -
 Procuring access to get material with their lowest exposure to mining expenses.
 A procedure of material considered to be wasted by other miners.
 Developing strong strategic investment policies and partnerships goals.
 Maintenance of equity in resource projects globally.
Core activities of the company:
LIT engages in recognising the necessity and requirement for metal and lithium security while
developing exposure "SiLeach® processing hubs with the company's results and position
which would be taken into major Lithium Provinces Across the world. LIT is also negotiating
farm out position based on the plenty of exploration properties in return of refusal from that
field which is to be retained in accessing to the supply chain without evaluating and spending
high-risk dollars of exploration to revalue and release their reserves (Lithium Australia, 2017)
(Source: Lithium Australia, 2017)
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2.
Specify ownership-governance structure of the company.
(i) Substantial shareholders of a company:
 With higher than 20% of shareholdings
 With higher than 5% of shareholdings
Solution:
Substantial shareholders of the company was Lanstead Capital L.P. with 30,000,000 of
shareholding around 12.95% of total shares in 2016 annual report, this shareholding was
categorised in the second category of higher than 5% of shareholding but in FY17 company
has no substantial shareholder as on 20 September 2017 (Lithium Australia, 2017)
(ii) Name the main people involved in the firm governance:
a. Chairman
b. CEO
c. Board Members
Solution:
a. Name of the Chairman is George Bauk (Non-Executive Chairman).
b. CEO: there is no specific declaration in the name of CEO.
c. Board members:
Board members of the Company are:
Ranking Member name position
1 Adrian Griffin Managing Director
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2 George Bauk Non-Executive Chairman
3 Bryan Dixon Non-Executive Director
(Source: Lithium Australia, 2017)
Notes:
No, there is no specific people (board members) with the same surname under 20% or 5% of
shareholding, so this company cannot be considered as the family organisation. There is
specific interference of any family member in corporate governance of Lithium Australia
(NL).
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3.
Calculate the following key ratios for your selected company for the past 4 years.
Calculated key ratios are given under:
Return on asset = NPAT/Total assets: return ion asset is computed after dividing net
earnings after interest and taxes from total assets. It is indicated the relation between net
profits of the company during a particular financial year in proportion to total assets employed
in particular year.
Return on equity = NPAT/Common equity – this ratio is calculated by dividing Net profit
after tax with the common equity used by the company in FY.
Debt ratio: total liability/total asset = the dent ratio is represented the solvency capacity of the
company which is exhibited the ability to pay all the debts in comparison to total assets of the
company.
Calculation given below:
Particular 2017 2016 2015 2014
NPAT -4,592,255 -1,774,446 -1,470,265 -2,646,780
Total asset 16,026,524 10,621,644 982,075 557897
Total liabilities 898,030 569,017 425,535 538167
ordinary equity 15,128,494 10,052,627 556,540 19730
ratio analysis
Return on assets -0.28 -0.167 -1.49 -4.74
Return on
equity
-0.3 -0.17 -2.64 -134.15
Debt ratio 0.056 0.0564049 0.43 0.96
(Source: Lithium Australia, 2017)
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Analysis to be proven:
EBIT/TA * NPAT/ EBIT * TA/ OE should be equal to NPAT/ OE
(4,592,255)/ 16,026,524*-4,592,255/ (4,592,255)* 16,026,524/15,128,494 = -
4,592,255/15,128,494
0.30 = 0.30 (hence proved).
Through this satisfied equation, it is concluded that the total assets of the company could be
directly related to ordinary equity of the company when NPAT get influenced with the Cost of
capital of the company related to the balance sheet. By the above analysis, it is interpreted that
the overall ratio that indicates actual company's financial position. Vis such analysis it can be
indicated that return on assets would be greater than the return on equity from past two years
in 2017 and 2016 respectively. This is occurred due to excessive employed value of equity
employed by the management comparatively to the assets employed in the Lithium Australia
Company (Lithium Australia, 2017)
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Explain what phenomenon is being “captured” by the variable TA/OE, and how it is
impacting on the relationship between Return on Assets and Return on Owners Equity.
The above analysis indicates actual results related to return on investment. The actual relation
between total return on asset and return on owners’ equity represents company’s liabilities in
subject to recognising owner’s leverages the relationship between owner's equity and
company's assets measure changes in financial performance of the company. Total assets
include measurement of the total property of the company tangible plus intangible property.
On the other side owner's equity includes differences between total assets and total liabilities
(Entrepreneur, 2017).
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III. Explain why the ROE (EBIT) is significantly greater than or less than the ROA
(EBIT):
Return on equity is considered as ROE (EBIT) and Return on asset indicated as ROA (EBIT).
The relation between ROE and ROA shows crucial measurement related to the financial
performance of the company. ROE analysis represents and provides company acknowledge
dictating company’s strategic benefit in the case of sales and profit margin, declining in the
value of ROA (net margin profit) will lead their financial performance towards negative
growth and the level of sales will be declined on the other hand if ROA increases the level of
sales would be increased and it would be predetermined the value based on ROE and ROA
relation (Entrepreneur, 2017).
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4.
I) prepare a graph/chart for movements in the monthly share price over the last two
years for the company that you are investigating. Plot them against movements in the All
Ordinaries Index.
Solution:
Comparison between All Ordinaries share prices and movement in share prices of Lithium
Australia based one-year performance:
(Source: Hot copper, 2017).
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Comparison based on two-year fluctuation in share prices of LIT:
(Source: Invest SMART, 2018).
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(ii) Write a report which compares movements in the companies’ share price index to
the All Ords Index
Introduction:
This report is going to be prepared to justify the changes in share prices of LIT and proper
analysis will be done to analyse the reason and impact on company’s share prices in
comparison to All Ords Index.
Report:
Through above analysis, it is easily concluded that company's share prices have fluctuated in
last two years. In Mar-AL 2016, the share movement was positive and more than All Ords
Index. Then after October 2016, the share prices had been decreased rapidly. The upward
trends could be seen in share prices of the company but in July 2017, it reached to its
downturn around -50%. After such loss, the rapid growth has been seen after October 2017
around 30% which crossed the All Ords Index share prices movements. At the end, share
prices of the company have been reached to 6131 from 6188. Share prices of LIT decreased
by 52.8 share movement and 0.85% downward. All overall movement in share prices was
stable & company was able to cover up its losses of last year (Invest SMART, 2018).
Conclusion:
This report has been briefly described changes in share prices of Lithium Australia which has
included movement of last two years based on comparison with All Ords Index.
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5.
Significant announcements which may have influenced the share price of your company.
1. Changes in the interest of shareholders:
The company has decided to changes interest of shareholders by following Section 671
corporation act 2001. Such changes have made fluctuation in substantial shareholding; present
a previous voting power, changes in association and relevant interest of shareholders. These
changes have made movement in company's share prices which reached to $0.190 from
$0.115 around 65.22%
2. New announcement (Appendix 3B):
The new announcement related to Appendix 3B is related to changes and announcement
regarding issues of application for the quotation of additional securities and agreement. Such
announcement was made on 27 July 2017. The changes related to principle terms of securities,
classify securities to be issued and maximum number of securities to be issued were included
in Appendix 3B in order to exercise such options that would be ranked equally with the
ordinary shares to be issued. These changes had increased the values of shares by 46.15%
from $0.130 to $0.190 with rapid growth in share prices movement (Hot copper, 2017).
3. Notice of general meeting/Proxy form:
The company has noticed to shareholders for general meeting procedure & adopting Proxy
form. Such general meeting had affected the share prices of the company and their right to
vote. The company had followed Pursuant regulation 7.11.37 rule of corporation act 2001.
The company had issued proxy form to allow other shareholders to attend the general meeting
to vote on behalf of their proxy, such decision and changes had decreased the share prices of
the company on 30th October 2017.
4. Lithium Australia advises RM research report:
Company had got an advisory notice as research report by the third party in which advice to
the company about the activities related to corporate lithium metal was provided but it was not
purported to be the complete description of company's business activities. There was no
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presentation, no proper notice, warranty and earing in explicit and implied way to any
individual, therefore, company's share prices had been decreased by such negative influences
by the third party. Share prices had been decreased by 5% (Bordo & Haubrich, 2017).
5. Chairman addressed to shareholders:
Chairman of the Lithium Australia had made the announcement for the company and
shareholders in AGM meeting. It was an ASX announcement in which all changes regarding,
home electronics, rapid growths, uses of energy metal cycle and so in were included. These
announcements were made no any changes in share prices of the company. This
announcement was made to adjust and make a concern for company's management and
growth (Buehlmaier and Whited, 2016).
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6.
Financial data of company:
(i) Calculated Beta of the company:
Calculated Beta of the LIT Company is 1.96.
This analysis indicates the actual volatility of the share prices of the company is subject to the
factors of market and fluctuation occurred in market demands and movement in shares prices.
The actual volatility beta rate of LIT is 1.96 which represents variations into share prices of
the Lithium Australia which increases more than expectation and sometimes movement in
share prices would be downward with the changes in market factors.
(ii) Calculation of Required rate of return:
RF + B (Rm – RF)
0.04 + 1.96 (0.06)
0.0.4 + 0.1176
0.15 Or 15.76% (answer)
(iii) Is the company you have chosen a “conservative” investment? Explain your answer.
The investment policy of the company Lithium Australia will result in aggressive growth as
shown in market Beta. As per explained in director's report of the company, it is analysed that
shareholder's expectation regarding investment return are very high that ensure high risk for
the share prices and stock of the LIT. On the other side, a company is at a loss for past three
years and it has not provisioned any adjustment regarding profits and in investment policies.
Therefore in this situation, yielding of high return would create the high risk that would be
associated with the investment (Lithium Australia, 2017).
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7.
Weighted average cost of capital
WACC = E / (E+D) * Cost of equity + D/ (E+D) * Cost of debt * (1-tax rate)
Equity of the company: 10,052, 229
Cost of equity: 15.76%
Cost of debt: 0.00%
Debt: there is not debt considered in Lithium Australia Annual report. In the other words, it is
observed that there is no debt mentioned in company annual report so that weighted average
cost of capital would be equal to the cost of debt that is 15.76%. (WACC = 15.76%)
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8.
Debt ratio of company
(i) Does it appear to be working towards the maintenance of a preferred optimal capital
structure? Does it appear to be stable?
The debt ratio of Lithium Australia of past two years was 0.056 & 0.057 which was
considered to be stable according to a market condition of the company. But as it is indicated
that Debt ratio is a ratio in which actual relation shows between debt and equity to measure
company actual leverages capacity. Debt ratio indicates that whether a company would be
able to finance their assets in a precise way or not. A higher value of debt ratio (more than
100%) represents that company is capable to maintain its assets in comparison of debt. If debt
ratio would be lower than 100% then the debt of the company would be higher than assets
which measure company's actual investment risks that present financial health of the
company. Lithium Australia company debt ratio is less than100% which is in stable condition
but on the other side, it is also an issue that company is utilising its funding resources
properly. Availability of resources are not being utilised in a precise way (Nesticò and Pipolo,
2015).
(ii) What have they done to adjust/amend their gearing ratio? Increase or repay
borrowings? Issue or buy back shares? Has the Director’s Report given any information
as to why they have made any adjustments?
Gearing ratio is taken as the measurement of proportionate funding resources of the company
and its borrowing related to equity. Gearing ratio represents the proper analysis of financial
risk for the business related to business activities in future. An increment in financial debt
would create the pressure of the financial crisis. Higher values of gearing ratio show high
amount of debt to equity whereas the lower level of gearing ratio indicates lower adjustment
of debt to equity. From Lithium Australia Annual report, and its director's report, it is
concluded that company has tried to reduce its debt. There is no debt proportion in company’s
FY17 which shows the lower amount of debt instead of debt to owner's equity. It represents
more equity to rely on a financing position if it would be needed. Company has tried to reduce
debt and maintain the balance of cash flow from operation for managing debt equity
proportion (Financial Times, 2013).
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9.
Dividend policy
In the context of lithium Australia and its dividend policy of this company, it is observed that
no dividend policy has been provided to shareholders from past three years due to operating
losses from the financial year 2013 to 2017. Company has also not made any adjustment
related to dividend policy related to the payment of dividend to particular shareholders. Even
company's dividend yield is also 0%, therefore, it is said that company has no specific
dividend policy (Kent Baker and Nofsinger, 2011).
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10.
Based on your analysis above, write a letter of recommendation to your client, providing
an explanation as for why you would like to include this company in his/her investment
portfolio.
Letter to recommend company’s name in an investment portfolio:
To,
The client,
This letter of recommendation is for Lithium Company to recommending its name in the
Investment portfolio of the client on the basis of company's financial performance and market
share prices growth. Through overall analysis of company's financial statements and annual
report, it is observed that company is bearing loss from last four years. There is no debt in
2017 in company's profile which shows company WACC equals the total cost of equity which
is 15.76%. On the other side ratio key analysis of company annual report indicates the return
on investment and return on equity in negative due to operating loss of the company. Net
profit after tax is negative in past four years so company's return on investment is going
negative (Maher and Andersson, 2014).
A debt ratio of the company is 0.56 in 2017 and 2016 that is apparently to be stable due to
lower gearing ratio. By above analysis, the growth of the company is not much attractive. In
company's directors' report, it is concerned and reviewed the operation of production of
battery –grade lithium carbonate to increase company's productivity. Company is trying to
focus on major lithium resources to increase future economic growth and operating profit. So
it is recommendable to include it in investment report of the company in near future.
Company’s financial performance is appreciable for future growth so it can be said that
Lithium Australia Company can be included in clients’ portfolio for future investment
perspectives.
Thanks
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Conclusion:
This report has been prepared to observe and analyse the financial performance of the
company named Lithium Australia. This company is the energy based company which needs
to figure out its actual financial position in the market. This reading will provide knowledge
related to financial terms of ratios, changes in share prices of the company, debt ratio process
and calculation of WACC to observe the financial status of the Lithium Australia.
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References:
1. Entrepreneur, 2017. Return on Investment (ROI). [Online] Entrepreneur, Available at:
https://www.entrepreneur.com/encyclopedia/return-on-investment-roi [Accessed on: 30
January 2018].
2. Financial Times, 2013. Definition of return on equity ROE. [Online], Lexicon,
Available at: http://lexicon.ft.com/Term?term=return-on-equity--roe [Accessed on: 30 January
2018].
3. Kent Baker, H. and Nofsinger, B., 2011. Dividend Policy Decisions. Behavioural
Finance.
4. Maher, M. And Andersson, T., 2014. Corporate governance: effects on firm
performance and economic growth. The OECD principles of corporate governance.
5. Nesticò, A. and Pipolo, O., 2015. A protocol for sustainable building interventions:
financial analysis and environmental effects. International Journal of Business Intelligence
and Data Mining, 10(3), pp.199-212.
6. Lithium Australia, 2017. Annual report 2017. Lithium Australia.
7. Hot copper, 2017. Announcements. [Online] hotcopper.com. Available at:
https://hotcopper.com.au/announcements/asx/ [Accessed on: 30 January 2018].
8. Invest SMART, 2018. Latest company announcements for Lithium Australia NL
(LIT). [Online] Invest SMART. Available at:
https://www.investsmart.com.au/shares/asx-lit/lithium-australia-nl/announcements?page=1
[Accessed on: 30 January 2018].
9. Baltes, N., Dragoe, A.G.M. and Ardelean, D.I., 2015. Study regarding the
determination of the financial performance of a company through market rates. Studia
Universitatis Vasile Goldis Arad, 24(3), pp.1-10.
10. Bordo, M. D., & Haubrich, J. G, 2017. Deep recessions, fast recoveries, and financial
crises: Evidence from the American record. Economic Inquiry, 55(1), 527-541.
11. Buehlmaier, M.M. and Whited, T.M., 2016. Are financial constraints priced? Evidence
from textual analysis.
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