Financial Analysis of IBISWorld | Report

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Executive SummaryThe subject of this analysis is Adelaide Brighton Ltd, established in 1882, distributed instrategic locations across Australia. Adelaide Brighton, the largest importer of cement inAustralia, supplies building, construction and infrastructure markets with material. Proactivemanagement has kept costs under control with a reliable and efficient asset base.The prime motive for business is to make a profit and for investors to have a return on theirinvestments. The analysis of the financial statements looked at liquidity, profitability, capitalstructure and share value providing a rounded analysis. The ratios representing liquidity,profitability and capital structure show an organisation that is sustainable in the long-termand supports investment. Analysis of the capital structure shows potential for theorganisation to grow the capital base.The response from the investor market shows a share value that is above the share valuecalculated using the constant dividend discount model. The financial statements leantowards a recommendation to invest, while the investor market indicates a no-buy position.
Contents1.Introduction...........................................................................................................................................12.Financial Analysis...................................................................................................................................12.1Liquidity: Current ratio...................................................................................................................12.2Profitability: Net profit margin ratio and Return on total assets...................................................32.3Capital structure: Debt ratio and Interest cover ratio....................................................................52.4Market value: Price-earning (P/E) ratio.........................................................................................63.Share Valuation - Constant Dividend Discount Model...........................................................................84.Recommendation................................................................................................................................105.Conclusion...........................................................................................................................................11References...................................................................................................................................................126.Appendix 1...........................................................................................................................................141Financials.........................................................................................................................................142Growth & Ratios..............................................................................................................................153Industry Averages............................................................................................................................164Competitive Environment................................................................................................................177.Appendix 2...........................................................................................................................................21
1.IntroductionAdelaide Brighton Ltd is a publicly owned company, established in 1882 and is registered on theAustralian Stock Exchange (ASX) under the code ABC. Adelaide Brighton (ABC) manufactures anddistributes material across the building construction and infrastructure markets as well asmineral processing market. Major manufacturing facilities are strategically located in SouthAustralia, Western Australia and the Northern Territory, enabling ABL to supply all Australianmajor centres. To support this, ABL have distribution joint ventures in Victoria and Queensland.The majority of revenue, 104.92%, for ABC is derived from the cement, lime, concrete andaggregates segment with concrete products providing 10.09% and unallocated industrysegments returning -15.01%[ CITATION IBI15 \l 3081 ].Adelaide Brighton has a 38.6% share ofthe cement and lime-manufacturing segment, followed by Cement Australia Holdings Pty Ltd andBoral Ltd[ CITATION IBI15 \l 3081 ].This report on the financial analysis of ABC, to support or not support investment in ABC, willlook at liquidity using the current ratio, profitability using net profit margin and return on totalassets, and finally the capital structure using debt ratio and interest cover ratio. The results ofthe analysis will be presented in the recommendation section of this report with concludingremarks in the conclusion.Towards the end of November 2015 the shares recovered to an upward trend. The past fiveyears has seen patterns of upward and downward trends. Overall, there has been an upwardtrend in the share price. The cyclical nature of the share price trends for ABC has seen drops inprice close the beginning of the year with recovery around July. Recovery for 2016 was early,around January reflecting the possibility that the share price might be over inflated and due for adownward trend.2.Financial AnalysisThe financial analysis from financial records published by ABC and reported on by IBISWorld(2016).2.1Liquidity: Current ratioNote: Unless otherwise stated, the values used are from Appendix 1.Page |1
The liquidity of a business can be defined as the ability for a business’s short-term assets to meetshort-term liabilities and provide an indicator of near future cash flow[ CITATION OMa15 \l 3081], that is the ability to meet short-term obligations[ CITATION Vas15 \l 3081 ]. The current ratiois the result of dividing current assets into current debts. A value belowone represents currentliabilities which are higher than current assets and raises concern providing indication thatinventory levels may be excessive, borrowing power utilisation, or potential difficulties inoperations[ CITATION Vas15 \l 3081 ].Vasiu, et al. (2015) states that although high levels ofcurrent ratio—current ratio above two times—may not indicate critical issues, it is still an area ofconcern for the firm. Issues that contribute to a higher current ratio includes poor customercollection, and low stock rotation.The current ratio for ABC is 2.25 times, indicating a liquid financial position. In comparison to theindustry average of 1.64 we find that ABC’s liquidity is above the industry average in which itoperates. Inventory levels have grown 4.6% over the year while sales revenue has grown 5.7%over the same time period, providing evidence that inventory is not contributing to a highercurrent ratio. ABC has a debtors’ turnover of 41.52 days, down from 43.67 days for the previousyear, compared to an industry average of 40.44 days. The higher than average debtor turnovermay account for a part of the reason that there is a higher than average current ratio. Theimprovement in the customer collection period has contributed to the change in the currentratio from 2.33 the previous year to 2.25.A limitation of this ratio is that it is a static measure, fixed point in time, and manipulated easilyto show favourable ratios. In addition, the receivable item in the financial statements influencesthis ratio. As the collection period for receivables extends, the value of receivables increasesresulting in a higher current ratio. While this may show favourable liquidity, receivable defaultscould negatively affect the overall liquidity of ABC[ CITATION Cag13 \l 3081 ].In a comparison to the quick ratio, current ratio excluding inventory, we find that ABC remains ina liquid state. The trend, as shown in fig 1, shows the two ratios have a stable trend over time.Page |231-Dec-201031-Dec-201131-Dec-201231-Dec-201331-Dec-201431-Dec-20151.722.301.881.852.332.250.981.351.181.201.401.34Liquidity RatiosCurrent RatioQuick ratio
Figure1ABC Liquidity ratiosTable1Liquidity ratios31-Dec-201531-Dec-201431-Dec-201331-Dec-201231-Dec-2011Total Current Assets(Refer Appendix 1)403100387,200390,200363,700307,800Total CurrentLiabilities(Refer Appendix 1)179300166,000211,200193,500133,700Inventory(Refer Appendix 1)161500154,700136,300134,800127,900Current Ratio(Calculated usingAppendix 1 values)2.252.331.851.882.30Quick ratio(Calculated usingAppendix 1 values)1.351.401.201.181.35Formulas used for calculations:CurrentRatio=CurrentAssetsCurrentLiabilitiesQuickRatio=CurrentAssetsInventoryCurrentLiabilities2.2Profitability: Net profit margin ratio and Return on total assetsNote: Unless otherwise stated, the values used are from Appendix 1.Page |331-Dec-201031-Dec-201131-Dec-201231-Dec-201331-Dec-201431-Dec-20151.722.301.881.852.332.250.981.351.181.201.401.34Liquidity RatiosCurrent RatioQuick ratio
The net profit margin reflects the outcome of operations after all the costs incurred by thebusiness are considered and is calculated by dividing net profit into sales. The net profit margindemonstrates the company’s effectiveness at controlling costs[ CITATION Tit16 \l 3081 ]andshould be viewed as part of a bigger picture. In addition to profit margin, analysis of the returnon the capital investment required to produce profits and revenues is required to demonstratefurther the profitability. The sustainable part of earning is of particular interest to investors andanalysts because estimated future earnings are the basis of equity value[ CITATION Ext13 \l3081 ]a premium will be paid on sustainable earnings.The return on assets (ROA) ratio combines cost control with asset usage and presents a measureof operating profitability[ CITATION Tit16 \l 3081 ].The return on assets is calculated by dividingthe operating profit—earnings before interest and tax (EBIT)—by the total assets.Titman[CITATION Tit16 \n \l 3081 ]decomposes this to show the cost control and assetutilisation components, presenting the following equation:ReturnonAssets=OperatingProfitMargin×TotalAssetTurnoverWhere OPM represents cost control of the firm and TATO represents the asset utilisation of theorganisation.The net profit margin for ABC is 14.7% up in 12.9% from 2014 and an industry average of 8.4%indicates that ABC has a competitive advantage over the average industry. The return on assetshas grown from 9.5% for 2014 to 11.3% for 2015. Comparing the ROA for ABC against theindustry average of 5.18%, the indication is that ABC is utilising their assets more efficiently thanthe industry average. ABC actively engages in activities to enhance and promote companyperformance and efficiency, and continually look for opportunities to improve[ CITATIONBry15 \l 3081 ].Both measures are above the industry average, indicating that ABC is profitable when lookingprofits against sales and profits against assets. The indication is that ABC are able to control costsin an efficient manner as well as make use of assets efficiently. The net profit margin has shownpositive values over the past five years, with growth in the net profit margin between December2013 and December 2015.Page |4
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