Critical Use Accounting Information: Financial Analysis Report

This report provides a detailed analysis of the critical use of accounting information, focusing on the generation of shareholder wealth through the comparison of Bisalloy Steel Group Limited and Aurelia Metals Ltd. It examines key financial ratios such as asset turnover ratio, net profit margin ratio, and return on assets (ROA) to assess company performance. The report delves into the measurement of resources and wealth, differentiating between monetary and non-monetary wealth, and discusses the limitations of ROA, including the impact of intangible assets and borrowed capital. Real-world examples, such as the case of Motorola, are used to illustrate the practical implications of these financial metrics. The report concludes by suggesting improvements to ROA calculations to provide a more accurate picture of a company's financial health by incorporating liabilities.

Running head: CRITICAL USE ACCOUNTING INFORMATION
Critical use accounting information
Name of the student
Name of the university
Student ID
Author note

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Table of Contents
Answer (a)..................................................................................................................................2
Answer (b)..................................................................................................................................2
Answer (c)..................................................................................................................................4
Answer (d)..................................................................................................................................8
Reference....................................................................................................................................9

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Answer (a)
Comparing and contrasting the generation of shareholder’s wealth
Bisalloy steel group Limited Aurelia metals Ltd
Ratio 2015 2016 2017 2015 2016 2017
Return on assets 0.06 0.07 0.06 -1.13 0.10 0.15
Asset turnover ratio 1.29 1.56 2.37 0.09 1.75 0.92
Net profit margin ratio 4.62 3.16 2.74 -893.77 11.90 17.81
Asset turnover ratio – the asset turnover ratio of the company measures the efficiency of the
company with regard to producing of the revenue. Therefore, the ratio can determine the
performance of the company. It is identified that the asset turnover ratio of Bisalloy group for
the years 2015, 2016 and 2017 are in increasing trend and it reached to 2.37 from 1.29. on the
other hand, the asset turnover ratio of Aurelia metals was fluctuating and it just reached to
0.92 from 0.09 (Alghifari, Triharjono & Juhaeni, 2013).
Net profit margin ratio –it measures the efficiency of the company to earn profit from the
sales after paying off the expenses. It can be identified that the net profit of Bisalloy is in
decreasing trend whereas the net profit for Aurelia for 2015 is in negative. However, for other
2 years that is 2016 and 2017 the net profit of Aurelia is comparatively better as compared to
Bisalloy steel group (Niresh & Thirunavukkarasu, 2014).
Therefore, if above mentioned both the ratios are taken into consideration it can be
stated that the Bisalloy group is more efficient in generating shareholder’s wealth as
compared to Aurelia Steel.
Answer (b)
Return on assets – the return on asset ratio or the return on the total assets is the profitability
ratio that is used to measure net income of the company generated by the total assets of the
company during specific period of time through comparing it with the net income of the
company. It measures the efficiency of the company regarding managing of its asset for
generating the profits during the particular period (Li, 2015). ROA is calculated through
dividing the net income by the average assets of the company. It can be identified that the
return on assets of Bisalloy Steel group ltd for the year 2015, 2016 and 2017 is 0.06, 0.07 and

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0.06 respectively. On the other hand the RA of Aurelia metals for the year 2015, 2016 and
2017 were -1.13, 0.10 and 0.15 respectively. Therefore, except for 2015 the return on assets
of Aurelia metals ltd is comparatively better for the year 2016 as well as 2017.
ROA on the assets signifies that the amount of the money earned against each dollar
of the assets. Hence, the higher return on the assets value signifies that the business is more
efficient and profitable. Further, it is noteworthy that the ROA shall not be compared across
the industries; rather it shall be compared among the companies with regard to analysing their
efficiency in utilizing the assets. Further, ROA is also used for measuring how the company
is asset intensive (Grant, 2016). If the ROA of the company is lower, the company will be
considered as more asset-intensive. On the contrary, if the ROA of the asset is higher, then
the company will be regarded as less asset-intensive. ROA is generally used by the analysts
who perform the financial analysis of the company’s performance. ROA is crucial as it helps
in comparing the companies to compare their profitability positions (Graves & Shan, 2014).
Real world example – case of Motorola
(Source: Collier et al., 2013).

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It can be identified from the above image that the large amounts of fixed and variable
expenses are adversely impacting the ROA. As per the management’s view, these expenses
particularly the variable expenses that include the general, administrative and selling
expenses are required to be evaluated closely as they are considered as easily controllable.
Further, the increase in the revenue may also help to increase the ROA status. Although
overall poor market condition is also responsible for the low sales figure of Motorola, the
management also critically evaluated the reason why it lost market share in some of its key
business segment over the last few years that led to poor operating results. The management
therefore took the decision to develop the business and business strategy for increasing the
sales and controlling the fixed and variable expenses at the same time (Collier et al., 2013).
It can be seen that the ROA of Aurelia Metals Ltd is -1.13 for the year 2015, it
signifies that the negative net income of the company led to negative return on assets.
Therefore, the company should have been try to control its fixed as well as variable expenses
that will increase its net income (Muhammad & Scrimgeour, 2014). Further, it shall carry on
some market research regarding the customer demand, preference so that it can increase its
sales which in turn will help to increase the net income as well as the ROA. On the other
hand the ROA of Bisalloy Steel Group for all the 3 years are 0.06, 0.07 and 0.06 respectively
for the year 2015, 2016 and 2017. Therefore, to increase the ROA the company must try to
increase its net income through controlling its fixed as well as variable expenses. Further, it
can also try to increase its revenue through market research (Xiang, Worthington & Higgs,
2015).
Answer (c)
Measurement of resources and wealth with company asset and profits
The surplus that remains after payment of total cost from the revenue and from which
the tax is computed and the dividend is paid is known as the profit. Profit is represented to
reduce the liabilities, increasing the assets and increasing the wealth of the company. Further,
it furnishes the resources of the company available for investing in the future operations and
the absence of which may lead to extinction of the company. As indicator of the comparative
performances, it is less valuable as compared to return on investment that is also known as
gain, earnings or income. On the other hand the net assets represents the cash, tangible assets
like land, building, property and other intangible assets reduced by the liabilities of the

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company. Total of all the assets of any economic unit that is used to generate the current
income or that has the potential to create the future income includes the human capital and
natural resources. However, it excludes the securities and money as it represents claims to the
wealth only. 2 common economic wealth types are –
 Monetary wealth – it represents that anything can be sold or bought and for which a
market exists there and therefore the price. However, the market price represents the
commodity price only and not the value necessarily. For instance, the product that is
sold or services provided by the company (Heikal, Khaddafi & Ummah, 2014).
 Non-monetary wealth – these things are depended on scarce resources and there is a
demand for threes things but are not sold or bought in the regular market and
therefore, price is not fixed. For instance, goodwill and patents.
Limitations of ROA
ROA is the valuation multiples that are commonly used by the investors for
evaluating the potential investments. Main objective of this ratio is determining the efficiency
of the company to work on its assets available with it. Though this ratio is beneficial, some
limitations are also there those are associated with the company. They are as follows –
 Intangible assets – the biggest limitations associated with ROA is that it does not
consider the intangible assets. Most of the companies in present scenario heavily rely
on the the intangible assets for providing great deal of the value to the entity (Graves
& Shan, 2014).
 Borrowed capital – another limitation associated with using the ROA is that it does
not consider borrowed capital. Large company’s success is generally depends on the
combination of equity and debt financing. If this metric is used for making
investment decisions the investor will ignore the borrowed capital part of the
company that plays important in making investment decisions (Cook & Glass, 2014).
Incorporating above limitations in comparability of the companies
Bisalloy Group Ltd
It can be observed that for all the 3 years that is 2015, 2016 and 2017 the company
had interest bearing loans and bearings amounted to $ 7,666 million, $ 7,167 million and $

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7,000 million respectively that were not taken into consideration while the ROA was
calculated (Welcome to Bisalloy, 2018).
Year 2015 –
For 2016
For 2017

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Aurelia Metals Ltd
It can be observed that for all the 3 years that is 2015, 2016 and 2017 the company
had interest bearing loans and bearings amounted to $ 91,914,752, $ 113,025,000 and $
102,302,000 respectively that were not taken into consideration while the ROA was
calculated (Aurelia Metals Ltd [ ASX : AMI ] - Developing Hera and Nymagee Gold and
Copper Mines in New South Wales Australia, 2018).
For 2015
For 2016

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For 2017
Answer (d)
As the above items are not taken into consideration while calculation the ROA,
therefore if the investor uses this metric is used for making investment decisions the investor
will ignore the borrowed capital part of the company that plays important in making
investment decisions.
Therefore, to eliminate these issues, the ROA shall be calculated by taking into
considerations the liabilities also. While calculating the ROA, the formula that is used is
dividing the net income by total assets. Therefore, it is suggested that for calculating the ROA
instead of dividing the net income by total assets, the net income shall be divided by net
assets that is total assets reduced by liabilities. In this way, the borrowed capital will also be
taken into consideration and the potential investors will get true picture of the company while
considering ROA for making investments.

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Reference
Alghifari, S., Triharjono, S., & Juhaeni, Y. (2013). Effect of return on assets (ROA) against
Tobin's Q: Studies in food and beverage company in Indonesia stock exchange years
2007-2011. International Journal Of Science and Research (IJSR), 2, 108-116.
Aurelia Metals Ltd [ ASX : AMI ] - Developing Hera and Nymagee Gold and Copper Mines
in New South Wales Australia. (2018). Aureliametals.com. Retrieved 5 May 2018,
from http://www.aureliametals.com/public/default.aspx?id=1&Lvl=1
Collier, H., Grai, T., Haslitt, S., & McGowan, C. (2013). Using Actual Financial Accounting
Information To Conduct Financial Ratio Analysis: The Case Of Motorola [Ebook]
(pp. 27-28). University of Wollongong. Retrieved from
http://file:///C:/Users/user00/Downloads/887-Article%20Text-3499-1-10-
20110106.pdf
Cook, A., & Glass, C. (2014). Women and top leadership positions: Towards an institutional
analysis. Gender, Work & Organization, 21(1), 91-103.
Grant, R. M. (2016). Contemporary strategy analysis: Text and cases edition. John Wiley &
Sons.
Graves, C., & Shan, Y. G. (2014). An empirical analysis of the effect of internationalization
on the performance of unlisted family and nonfamily firms in Australia. Family
Business Review, 27(2), 142-160.
Graves, C., & Shan, Y. G. (2014). An empirical analysis of the effect of internationalization
on the performance of unlisted family and nonfamily firms in Australia. Family
Business Review, 27(2), 142-160.
Heikal, M., Khaddafi, M., & Ummah, A. (2014). Influence analysis of return on assets
(ROA), return on equity (ROE), net profit margin (NPM), debt to equity ratio (DER),
and current ratio (CR), against corporate profit growth in automotive in Indonesia
Stock Exchange. International Journal of Academic Research in Business and Social
Sciences, 4(12), 101.
Li, X. (2015). Accounting conservatism and the cost of capital: An international
analysis. Journal of Business Finance & Accounting, 42(5-6), 555-582.

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Muhammad, N., & Scrimgeour, F. (2014). Stock returns and fundamentals in the Australian
market. Asian Journal of Finance & Accounting, 6(1), 271-290.
Niresh, A., & Thirunavukkarasu, V. (2014). Firm size and profitability: A study of listed
manufacturing firms in Sri Lanka.
Welcome to Bisalloy . (2018). Bisalloy.com.au. Retrieved 5 May 2018, from
https://www.bisalloy.com.au/
Xiang, D., Worthington, A. C., & Higgs, H. (2015). Discouraged finance seekers: An
analysis of Australian small and medium-sized enterprises. International Small
Business Journal, 33(7), 689-707.