BACC1AMD Assignment: Accounting for Management Decisions Report

This report presents a financial analysis of Incitec Pivot Limited, examining its performance based on provided financial data from 2017 and 2018. The analysis includes a horizontal analysis of revenue, expenses, assets, and cash flows, revealing trends such as increased revenue and operating profits, offset by abnormal losses impacting net profit. Ratio analysis is conducted, assessing profitability (net profit margin, return on equity), efficiency (inventory turnover, asset turnover), and financial leverage (debt-equity ratio, current ratio). The report highlights changes in key financial metrics, such as a decline in net profit margin due to abnormal losses, and discusses the implications of these changes on the company's financial health and investment potential. The conclusion suggests an improved financial position, increased market demand, and advises investment based on the company's liquidity and solvency. The report uses financial data, including income statements, balance sheets, cash flow statements, and ratio analysis to support the findings.

Accounting for Management Decisions
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Question-1
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Question-2
Industry and any Key Regulations for Company
Incitec Pivot Limited engages in the business of manufacturing and trading the industrial
chemicals and fertilizers in Australia and other parts of the world. Apart from manufacturing
chemicals, the company also provides industry explosive and blasting services (Yahoo Finance,
2018). Due to hazardous nature of products, the company has to comply with work health and
safety (WHS) regulations contained chapter-7 of WHS regulations. Further, the company also
has to take certificate from international organizations for standardization (ISO) and abide by its
rules and regulations (Pececca, 2017).
Horizontal Analysis of the Company
The results show that the revenues of the company have significantly increased by
11.02% in the current year as compared to the previous year. This increase in revenues is caused
by the increase in demand of the company’s products in the market (Greco, Figueira, and
Ehrgott, 2016). The increased demand caused increase in production which consequently caused
the operating expenses to increase by 8.89% in the current year. The overall impact of increase in
demand could be perceived to be positive as depicted from the increase in operating profits by
10.94%. However, there were significant abnormal losses in the current year which caused
decline in the net profit by 34.45%.
There has been observed to be an increase of 1.27% in the total current assets in the
current year as compared to the previous year. All the components of the current assets have
reduced except inventories. There has been enormous increase (by 27.35%) in the inventories
which appears to be due to increase in production. The total assets increased by 1.50% which
indicate enhancement in the scale of operations in the current year. The company seems to have
arranged finance for surge in production from the short term loans. There has been vast increase
in the short term loans by 1659.50%.
The net operating cash flows show an increase of 2.32% while the net investing cash
flows have been found to be enhanced by 12.38%. The increase in investing cash flows is due to
company liquidating few of its investments in the current year. Further, there has been observed a
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significant increase in the net cash flows from financing activities. This category of cash flows
shows 156.64% increase which is mainly due to company raising more finance for its expansion
in the scale of operations.
Ratio Analysis of the Company
The net profit margin has declined by 1.93% due to abnormal losses being written off in
the current year. However, the profitability of the company has actually improved as depicted
from the increase in return on equity ratio (9.25%). Further, the EBIT can seen to be increasing
but the EBIT margin shows decline (of 0.07%) which may be due to inefficiencies of the
management in utilizing the funds optimally. The decline in inventory turnover ratio by 12.82%
confirms the management’s inefficiency. However, the overall asset turnover ratio shows
improvement in the current year by 9.40%.
The financial leverage was 1.85 times which increased to 1.89 times in the current year.
The increase in financial leverage has been due to increase in the short term debt. The debt
equity ratio has also increased by 7.13%. The increase in the debt level appears to be sustainable
and hence it is expected that the company would be benefited from this. The current ratio and
quick ratio shows decline. The current ratio went down from 1.25 times to 1.05 times and quick
ratio decreased from 0.91 times to 0.69 times. The reason for this change is again the same as
like before, the increase in short term debt.
The market capitalization of the company has increased by 6% in the current year.
However, the enterprise value to EBIT ratio shows decrease by 2.76%. This indicates that there
is a scope for increase in the enterprise value in the coming time periods in future (Damodaran,
2016).
Conclusion
Based on the discussion done above, it could be articulated that the company’s financial
position has improved in the current year and it is expected to do much better in the coming
years. There has been observed to be increased demand of the company’s products in the market
as signified from the enhanced revenues. Further, the operating profitability of the company has
also improved. However, due to heavy abnormal losses in the current year, the net profitability of
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the company is showing declining trend. The company is also strong on the account of liquidity
and solvency. The data analyzed above shows low risk of liquidity and solvency. Therefore, from
the investors view point, it is advised to invest in the company.
References
Damodaran, A., 2016. Damodaran on valuation: security analysis for investment and corporate
finance (Vol. 324). John Wiley & Sons.
Greco, S., Figueira, J. and Ehrgott, M., 2016. Multiple criteria decision analysis. New York:
Springer.
Pececca, V. 2017. Australian Chemical Regulation Compliance. [Online]. Available at:
http://www.cirs-reach.com/news-and-articles/Australian-Chemical-Regulation-Compliance.html
[Accessed on: January 11, 2019].
Yahoo Finance. 2018. Incitec Pivot Limited: Profile. [Online]. Available at:
https://finance.yahoo.com/quote/IPL.AX/profile?p=IPL.AX [Accessed on: January 11, 2019].
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Appendix
Income statement
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Balance Sheet
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Cash Flow Statement
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Ratio Analysis
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