Detailed Financial Analysis Report: ADX Energy Limited - HI5002

This report provides a comprehensive financial analysis of ADX Energy Limited. It begins with a company description and explores its ownership structure, including significant shareholders and governing authorities. The report delves into a detailed ratio analysis, examining key financial metrics like current ratio, debt ratio, and asset turnover, along with their implications. Market analysis is conducted through graphs illustrating share price movements and a comparison with market indices. The report also identifies factors influencing share prices, such as economic conditions, political stability, and management capability. Furthermore, it applies the Capital Asset Pricing Model (CAPM) to determine the required rate of return and assesses the company's beta. The Weighted Average Cost of Capital (WACC) is calculated, and the report concludes with a recommendation for investors. The analysis covers the company's dividend policy and includes a recommendation letter to a client, summarizing the key findings and investment considerations.

HI5002: Finance for Business
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Table of Contents
Introduction:....................................................................................................................................2
1: Description of the company.....................................................................................................3
2: Ownership Structure of company:...........................................................................................4
3. Analysis of Ratios:...................................................................................................................6
4: Market analysis through Graphs:.............................................................................................8
5: Factors which influenced the share price of ADX Energy Limited......................................10
6: Capital Asset Pricing Model (CAPM) and Beta....................................................................12
7: Weighted Average Cost of Capital........................................................................................13
8: Debt ratio Analysis:...............................................................................................................15
9: Dividend policy of ADX Limited:........................................................................................16
10: Recommendation letter to MR. George Mathew (client)....................................................18
Conclusion:....................................................................................................................................19
References;....................................................................................................................................20
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Introduction:
Financial analysis of an organisation helps the investors to understand the internal situation and
makes them more capable to take quality investment decisions. In current assessment, financial
analysis of ADX Energy Limited is made to give exhaustive information to the investors so that
they can take beneficial decisions and increase their capital. The financial analysis of ADX
Limited includes depth investigation of solvency and profitability together with the analysis of
market cap and share price variance. This assessment covers an overview of company’s dividend
policy and cost of capital too along with a recommendation for investors which is based on the
analysis of all these factors which will be helpful for the user in capital investment decisions.
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1: Description of the company
ADX Energy Limited is an international company engaged in the generation and distribution of
gas and oil industry. The company was established in 1987 with a name 1987 AuDAX Resources
Limited and in 2007, the company was fully engaged in oil and gas sector by after closing its
Gold mining business.
The corporate structure of ADX: it is an international company which is listed on Australian
Stock Exchange and working in the area of Energy generation. The company have various oil
and gas permit in Europe, North Africa and Australia. The ADX limited is working with a vision
of highest capital returns to its investors by applying efficient and ethical management policies
(Annual Report, 2017). ADX has now put itself in a solid part by a method for securing
significantly up and coming assessment and research openings in sectors where management has
running skill and contacts and making utilization of uncommon in class examination procedures
to renovate the chance of progress.
Business strategy: Company is working to be the superior player in oil and gas industry and the
strategy of the company is focused to gain maximum profit with the minimum investment so that
capital cost can be reduced which ultimately will increase the profits. The association's running
thinking is to maintain up head dispatch thru the examination and exam time of the desired point
of view cycle to make a certain affordable effect, the potential to hold up imperative
understanding capacities and increment greater crucial get right of entry to new asset gain
chances Company (Website, 2018).
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2: Ownership Structure of company:
I. Shareholders are real owners in a limited company and in the case of ADX Limited
following are substantial shareholders: (have lodged a notice with the company)
S.R. No. Name Number of shares
1. Jetosea Ltd 93,967,073
2. Willow Scent Limited 54,749,090
Other largest shareholding of the company:
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II. Governing authority:
S.R.
No
Name Description
1. Ian Tchacos Chairman
2. Paul Fink Director (Executive) and CEO
3. Andrew Childs Director (Non-Executive)
4. Peter Ironside Company Secretary
5. Amanda Sparks Company Secretary
The executive director Paul Fink and non-executive Andrew Childs have a significant
shareholding in the company (Annual Report, 2017). Mr Fink has 2.99% and Mr. 1.37%
shareholding in the company and there is no governing person have shareholding more than 5%.
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3. Analysis of Ratios:
Particulars 2017 2016
cash and market security 1,840,247 734,152
Receivables 164,814 152,683
Current Assets 2005061 1153709
Net profit -2,147,956 -1,903,896
Earnings per Share -0.21 -0.25
Total of Liabilities 931,897 422,249
Current Liabilities 675,711 422,249
Total of Equity 1,073,342 731,741
Sales 909,777 1,841
Total asset 2,005,239 1,153,990
Particulars FORMULA 2017 2016
Return on Capital
Employed
Net Operating Profit/Employed
Capital -2.00118508 -2.6018714
Current Ratio Current Assets/Current Liabilities 2.967335148 2.7322954
Debt ratio Total of Liabilities /Total of Assets 0.464731137 0.36590352
Cash Ratio
( Cash + Market Securities )/Current
Liabilities 2.723423179 1.73867078
Receivables Turnover
Ratio Credit Sales/Average Receivables 12.1666788 0.01205766
Debt-Equity Ratio Total Liabilities /Total Equity 0.868220008 0.57704707
Net Profit ratio Net Profit/Net Sales X 100 -2.36096978 -1034.164
Asset turnover ratio Net sales/Total asset 0.453700033 0.00159533
Working Note:
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The net loss reported by the company in 2016 and 2017 so profitability ratios are negative. The
company does not have long-term borrowings so capital employed will be equal to Total capital.
In the absence of information, all sales are assumed as credit sales. This assumption also
supported by the nature of the company.
Return on capital employed: this ratio denotes the gaining of the company against the capital
employed. The capital employed is the sum of long-term borrowings and equity fund. In the case
of ADX, ROCE is negative because the company is reporting a loss in both recent years (Dao,
2016).
Current Ratio: Current ratio is utilised to investigate the solvency of a company regarding its
short-term Repay liabilities. An Ideal level for this ratio also denoted and that is 1:1 which
express that if a company have equal or more current assets then its current liabilities it is a good
situation. ADX limited also have a current ratio more than 2 which proves the soundness of
solvency.
Debt ratio: it is used to find out the percentage of total liabilities against the total assets of the
business. Below one is a suitable debt ratio.
Receivables Turnover Ratio: this ratio is used to investigate the soundness of credit and sales
policy. ADX is reporting 1200% debtor turnover which is the good sign.
Asset turnover ratio: asset turnover ratio is used to determinate the efficiency of the company
for generating the sales by using assets (GOYAL, 2016). ADX is generating $0.45 sales against
investment every dollar in assets.
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4: Market analysis through Graphs:
(a): Share price movements (Graph):
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(b): Compression report on movements in share price:
Introduction: This report covers an overview of the fluctuation in the share price of ADX
Energy Limited and gives depth description of variations in the prices of shares in last two years.
The report is based on above two graphs and prepared to give a detail about share price changes.
Graph one is showing monthly changes in share prices and graph two is denoting the yearly price
changes along with a comparison with all order index line.
Comparison:
A leading power generation company ADX Limited reporting regular fluctuation in share prices.
The monthly share price graph denotes that continuous ups and downs are reported by the shares
between June and December. In January-2018, shares of the company report a sudden hike due
to market increase and in February, it shows a downward trend (Market Index, 2018). If we
ignore the hike of January, the price of shares is fluctuating between $ 0.01and $0.02 (Market
Index, 2018).
2nd Graph is showing the comparison between All Over index line and share price changes. The
share price of the company is below from All Odr line and highly volatile. From 2014, the share
price of the company shows a heavy decreasing trend up to 2017. During this period, the
difference between All Odr Line and share price line was very high. After 2017, company make
a comeback and the price of shares was show a high growth trend (Market Index, 2018). After
this sudden improvement, a regular little upward and downward trend was reported by the
company share but it remains below from All Odr Index line (Market Index, 2018).
Conclusion: Share prices are affected by various factors like the external market, internal
management crisis and legal facts. It should be noted that a regular but little fluctuation in price
is stated by company share from last year. The report also demonstrates that a heavy loss born by
the company shareholders due to a heavy decrease in shares price between 2014 and 2017. It is
also concluded that All Odr Index line never be achieved by the company share after 2014.
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5: Factors which influenced the share price of ADX Energy Limited.
Economic Conditions: the share prices of a company and the economic environment are
directly interconnected with each other. On the off peril that market-related conditions are huge
and positive that would continue with that way, investors tend to detect beyond any doubt.
Companies will maybe perform pleasantly and deliver strong points of interest when the
economic market-related conditions are profitable so they will likely provide high returns. In this
situation, demand will be high and prices will be increased (Gautam, R., 2017). But if the market
condition is complex and unsupportive be that as it may, investors may feel frustrated. They can
equally pressure that a company's profitability will bear if money related conditions are intense.
Doubts about future advantages will be inclined to bring down vacation activity at shares so
price may fall.
Future take-over and projects: Company moreover is obliged to reveal its donning exercises
that may affect its offer charge, comprising of a takeover or the dispatch of some other seller.
These are alluded to as legal announcements and that it should be made through insisted RIS
(Regulatory Information Service) before then the data is given to external parties (Om and Goel,
2017). If a company is doing good and is depended upon to keep up to do continuously, its
amount expense might be drawn out. Offer charges tend to expect the chance a top mark strategy
to impact if an undertaking has appropriate targets and fall if the situation is not generally
positive.
Political Stability: If a business company has a stable government and political conditions,
investors feel sure to area assets into new undertakings. Creation, preparations and benefits are
higher and in this way, proportion costs could increase. In case of variability within the
enterprise and political situation, new investment does not happen. Demand, creation and
advantages are lower and provide esteem falls.
Investment environment: Prices of share laid low with Institutional cash related pros are in like
manner impacting the Share costs. The mutual fund, pension fund and investment contracts have
a broad degree of advantages for investor and in the event that they purchase, the demand could
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be extended so-so prices of shares increased (Om and Goel, 2017). Foreign investors also play an
important role in this matter. If foreign investment is available the prices will be increased.
Management capability: If a company have a significant experienced management team, it will
generate extra competitive advantage for the company. In the case of ADX limited, the company
have highly experienced management team like the chairman of the company has 25 years’
experience in oil and gas industry. CEO and another management team also have significant
experience. It helps to maintain the growth of the company which also reflects on share prices.
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6: Capital Asset Pricing Model (CAPM) and Beta.
i. The beta of ADX Energy Limited:
ii. The required rate of return: RRR can be defined as the lowest rate of return which is
required for a business or company to invest its funds in a specific project.
Above figures denote that the Beta of ADX Energy Limited Company is 1.78
Particulars Amounts
Risk-free rate: 4%
Market risk premium: 6%
The rate of return: Risk-free rate + (Beta*Risk premium rate of the market)
4% + (1.78*6%)
4.1068
iii. What is “conservative” investment
Conservative investment is a strategy which inspires the investor to make an investment in those
assets which contains lowest risks so that the capital of investors remains secured. The company
have higher beta than its industry and a small ups and downs trend are shown by the share prices
of the company after 2017. All these conditions prove that ADX Energy Limited is a
conservative investment.
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7: Weighted Average Cost of Capital
(a): WACC is an average rate which is based on all funding resources and represents the average
of interest rates of all fund sources which are borrowed by the company. A company like ADX
Limited can borrow funds from several ways like equity share capital, debenture funding, bank
loans, institutional loans etc. and during the assessment of the profitability of a project; the
company should identify its WACC to ensure a return more than the cost of capital (Frank and
Shen, 2016). During the measurement of WACC, company Beta is also used which makes it
more relevant and uncontrollable for company management.
WACC = ( E
V x ℜ ) + ( ( D
V x Rd ) x ( 1 – T ) )
D/V = percentage of capital to debt
Re = required rate of return
V = Total capital Borrowed
E/V = percentage of capital to equity
E = value of equity shares in market
D = market valuation of company debt
Rd = Cost of debt
T = Taxation rate
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(b):
WACC is a measurement of Average capital cost and used to in the selection of investment
projects to select high return provider projects. On the basis of WACC, management measures
the profitability of a project to be sure about the appropriateness of project. When company
management evaluates the project profitability, they compare the WACC with a Return rate of
the project (IRR) and if IRR is lower than the Average cost of capital, it will be excluded
(Zafiris, 2016). In the case of high IRR from WACC, the project was selected by the company.
During the project evaluation process, management will feel complexity because higher Return
rate is required due to high WACC and sometimes good projects are also rejected due to high
capital cost.
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8: Debt ratio Analysis:
(a): Preferred optimal capital structure
Debt-Equity ratio denotes the part of equity capital and debt capital used to provide finance for
company assets. Additionally, Debt-Equity ratio reports the part of Debts borrowings against
Equity funds so that company can ensure an appropriate capital balance (Enekwe, 2015). In the
calculation of debts, all borrowings other than creditors, Accrued expenses, outstanding
Dividend and deferred incomes are included.
Debt-Equity ratio = Total Debt
Total Equity
(In the case of ADX Energy Limited, the company does not have Debt borrowings in 2016 and
2017. In this way, Debt-equity ratio not calculated.)
Optimal capital structure:
An optimal capital structure is the best for a firm that intensifies its regard. The best capital shape
for an affiliation is one that offers a congruity between the precise dedication to-esteem expand
and restricts the enterprise's fee of capital (Güner, 2016).
(b): Adjustment for gearing ratio
To ensure an appropriate structure of capital, the company can buy back its shares borrow fund
from the market if the other financial factors of the company allow. By doing this, the company
can reduce its capital and can increase debt borrowing so that they can adjust their capital
gearing ratio. By increasing the borrowings, a liability of interest payment will arise but the
income tax deduction is also available for the same (Groen, 2016). In another hand, by reducing
its capital, it will reduce interference and share prices will also increase.
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9: Dividend policy of ADX Limited:
The policy of Regular Dividend: Under this kind of gain approach an association has the
system of paying advantages to its financial experts reliably. Right whilst the association makes
odd blessings then the association may not pay that more benefits to its speculators surely
alternatively it will appropriate decrease advantage because the benefit to the financial experts
and hold the excess advantages with it and accept an association makes mishap then furthermore
it's going to pay benefit to its speculators underneath popular benefit gadget. This kind of gain
system is wise for the one's institutions that have constant cash streams and have strong revenue.
The policy of Constant dividend: Under this route of motion the advantage payout quantity is
stored solid. For Example, if the benefit of the affiliation is 20 million bucks then the association
pays 15 percent of 20 million this is 3 million as advantages to its speculators, in any case, if the
advantages abatement to ten million at that factor gain will in like way diminish to 1.5. Therefore
benefit will change with advantages of the affiliation under this recreation plan and cash related
professionals can't make certain approximately the right degree of advantage.
The policy of Irregular dividend: this recreation plan is utilised by those companies which
have lack of earnings, deficiency of liquidity and dread submitting itself for paying standard
benefits to get sporadic benefit gadget. Under this sort of direction of movement there is no
summon to offer advantages to speculators of the affiliation and great organization gives it as
confirmed through its very own particular absolutely opportunity, so accept association has some
irregular blessings then company may additionally skip it definitely to its monetary experts by
supplying reprieve benefit or organization may also use it for destiny enterprise augmentation.
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ADX Energy Limited is following Irregular dividend strategy which is also concluded by the
above figures. The company does not pay any dividends to its shareholders, if there is not
sufficient profit is available. Above figures also prove that no dividend is paid by the company in
last five years.
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10: Recommendation letter to MR. George Mathew (client)
To,
MR. George Mathew
Dear Respected,
This letter is sent to you to give a brief knowledge about the financial and market acceptability of
ADX Energy Limited. ADX Limited is an ASX listed company which works in the area of
power generation and distribution. Company's current ratio is 2.96 in 2017 and 2.73 in 2016
which proves the sound short-term solvency of the company. Company’s receivable turnover
ratio is denoting 1200% turnover of receivables. The company is highly financed by the equity
which is also proved by its Debt to Equity ratio thus the risk level is low (Arkan, 2016). The
company is reporting the loss in both 2016 and 2017 which means that the operating activity is
not so efficient in the company. The management of the company is highly efficient and
experienced and dedicated to making the company highest return provider. Recently after a high
variation in sales prices, the market price of shares is also reporting a little fluctuation from last
one year.
On the basis of above analysis, we suggest you that you can include this share in your investment
portfolio. Our Recommendation is subjected to market changes.
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Conclusion:
In this assessment, the financial aspects are discussed and understood in depth. The assessment
shows the brief financial analysis of the company named ADX energy limited. The ADX is the
Australian ASX leading company that deals in energy and utilities. The factor affecting the
monetary terms of the ADX energy limited are briefly explained. After the thorough discussion,
it is understood that all the factor affecting the price are interrelated to each other. For the ADX
energy company dividend policy is also analysed and discussed, also the report introduces the
gearing ratio of the capital responsible for proving that company is funded by the share capitals.
Further, the financial condition of the ADX energy company is also analysed using the ratio
analysis technique giving a result that ADX Company has the good financial condition.
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References;
1. Parikh, V. (2016). Types of Dividend Policies. [online] LetsLearnFinance. Available at:
http://www.letslearnfinance.com/types-of-dividend-policies.html [Accessed 24 May
2018].
2. Arkan, T., 2016. The importance of financial ratios in predicting stock price trends: A
case study in emerging markets. Finanse. Rynki Finansowe, Ubezpieczenia, (1), p.79.
3. GOYAL, P.K., 2016. A STUDY OF RATIO ANALYSIS AS A TECHNIQUE OF
FINANCIAL PERFORMANCE EVALUATION.
4. Dao, P., 2016. Performance evaluation based on financial ratios. Case: Finnair and
Scandinavian Airlines.
5. Om, H. and Goel, M.S., 2017. Analysis of factors affecting stock price behaviour: A
study on listed companies in Bombay stock exchange. Imperial Journal of
Interdisciplinary Research, 3(3).
6. Gautam, R., 2017. Impact of firm specific variables on stock price volatility and stock
returns of nepalese commercial Banks. SAARJ Journal on Banking & Insurance
Research, 6(6), pp.10-27.
7. Frank, M.Z. and Shen, T., 2016. Investment and the weighted average cost of capital.
Journal of Financial Economics, 119(2), pp.300-315.
8. Zafiris, N., 2016. The Weighted Average Cost of Capital as a Marginal Criterion. Journal
of Finance and Investment Analysis, 5(4), pp.1-27.
9. Güner, A., 2016. The Determinants of Capital Structure Decisions: New Evidence from
Turkish Companies. Procedia economics and finance, 38, pp.84-89.
10. Groen, J.B., 2016. Capital structure determinants: an inter-industry analysis for Dutch
firms (Bachelor's thesis, University of Twente).
11. Enekwe, C.I., 2015. The relationship between financial ratio analysis and corporate
profitability: a study of selected quoted oil and gas companies in Nigeria. European
Journal of Accounting, Auditing and Finance Research, 3(2), pp.17-34.
12. Annual Report, 2017. Annual repot of ADX Energy Limited. Available at: http://adx-
energy.com/documents/annual-report-december-2017.pdf [Accessed on 24-may-2018]
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