ACCT7101 Financial Report Analysis and Investment Decision Making

This report analyzes the financial statements of Evolution Mining Limited and Fortescue Metals Group Limited, two prominent companies in the mining industry. The report begins with an executive summary and background research, focusing on the financial health of Evolution Mining and assessing its loan application to Brisbane Bank. It calculates shareholders' wealth, evaluates liquidity and solvency using financial ratio analysis (current ratio, quick ratio, debt to equity ratio), and provides a lending decision. The second scenario involves an investment decision, comparing the two companies' financial performance, including earnings per share (EPS) and dividend payments. The report concludes with a recommendation for Capital Investments Limited, based on the financial performance of both companies. References are provided for further study.

Running head: ACCOUNTING
Accounting
Name of the Student:
Name of the University:
Authors Note:

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Executive summary:
Financial statements are prepared by business and non-business entities on periodical
basis, generally at the end of each financial year. These statements are prepared by an
organization to portray the true and fair picture of the organization. In order to understand the
financial performance and position of an organization stakeholders use these statements to assess
the state of affairs and performance of the organization as on a particular date. The detailed
discussion in this document shows that Evolution Mining Limited and Fortescue Metals Group
Limited have regularly prepared financial statements to provide their stakeholders with financial
report to assess the state of affairs and performances of these organizations.

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Contents
Executive summary:........................................................................................................................1
Scenario 1:.......................................................................................................................................3
Background research:..................................................................................................................3
Financial ratio analysis:...............................................................................................................5
Scenario 2:.......................................................................................................................................8
Investment decision:....................................................................................................................8
Conclusion:....................................................................................................................................13
References:....................................................................................................................................14

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Scenario 1:
Background research:
Evolution Mining Limited is Australian gold mining company. Using the financial
statements of Evolution Mining Limited the financial health of the company shall be assessed to
determine whether the loan applied by the company to Brisbane Bank can be approved or not.
An Australian company, Fortescue Metals Group Limited is the fourth largest iron ore producer
company in the world. Similarly the financial statements of Fortescue shall help in assessing the
financial state of the company to take important decisions (Cohen, 2013). Evolution Mining
Limited is in the business of mining of iron ore whereas Fortescue Metals Group is a gold
mining company.
Company Economy wide factors Industry factors Specific factors
Evolution I. Large
economy
provides huge
opportunity to
expand its
business.
II. Stable
economy in
Australia and
America
gives the
freedom to
the company
to achieve
organizationa
l objectives.
I. Mining
industry in
Australia
provides
huge
opportunity
for market
expansion.
II. Perfect
competitio
n exist in
the market
with big
players like
BHP and
others.
I. Experienced
and skillful
professionals
are working
tirelessly to
provide
competitive
advantage to
the company.
II. Technological
advancement
within the
business set
up is
impressive.
Fortescue I. One of largest
gold mine
companies it
has a huge

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advantage
over its
competitors
in the market.
II. Controls large
portion of
Gold mines in
the country.
Memorandum
As per the scenario Evolution Mining Limited has applied for a loan to the Brisbane Bank
Limited. The amount of loan is 40% of total equity shareholders wealth as at the end of 2018
financial year. Thus, firstly let us calculate the total equity shareholders’ wealth in the last three
financial year from the annual reports of the company (Cumming, Helge Haß and Schweizer,
2012).
Computation of shareholders' wealth as at the end 2018 financial year
Years (All amounts are in $'000) 2018 2017 2016
Issued capital 2,183,727.00 2,183,727.00 1,770,987.00
Reserves 45,407.0
0
38,795.0
0
29,363.0
0
Retained earnings /(Accumulated losses) 59,260.0
0
(94,270.00
)
(248,917.00)
Total equity shareholders’ wealth 2,288,394.00 2,128,252.00 1,551,433.00

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Thus, equity shareholders’ wealth as on 30th June, 2018 is $2,288,394,000. Considering that the
requirement of loan is 40% of total shareholders’ wealth as on 30th June 2018 the company will
apply for a loan of (2,288,394,000 x 40%) = $915,357,600.
Now taking into consideration the financial position and performance of the company along
future prospects the Brisbane Bank shall determine whether the application of loan of Evolution
Mining Limited shall be approved or not (Dontoh, Ronen and Sarath, 2013).
The above table showing equity shareholders’ wealth over the last thee financial years makes it
clear that the wealth of the shareholders have increased in each year since 2016. This shows the
ability of the company to create wealth for its owners.
The long term solvency and liquidity position of loan applicants are assessed by banks and other
financial institutions before taking final decision on the loan applications. It is important for an
organization to have strong liquidity and solvency position to take final call on approving or
disapproving loan applications. The solvency and liquidity position of Evolution Mining Limited
have been calculated in the table below to ascertain whether the company has required stability
and liquidity position to repay the loan and interests on time (Financial Statements, 2012).
Financial ratio analysis:
Ratio calculation
Years (All amounts are in $'000) 2018 2017 2016
Current ratio (Current assets / Current liabilities)
Total current assets 658,7 377,373 335,037

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43.00 .00 .00
Total current liabilities 325,3
23.00
279,621
.00
200,660
.00
Current ratio
2.02 1.35 1.67
Quick ratio (Liquid assets, i.e. Current assets - inventories/ Current liabilities)
Total current assets less inventories 394,5
22.00
100,504
.00
121,869
.00
Total current liabilities 325,3
23.00
279,621
.00
200,660
.00
Quick ratio (Liquid assets, i.e. Current assets
- inventories/ Current liabilities) 1.21 0.36 0.61
Debt to equity ratio
Long term loans 292,4
70.00
382,723
.00
279,667
.00
Equity shareholders' fund 2,288,3
94.00
2,128,252.
00
1,551,433.
00
Debt to equity ratio

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0.13 0.18 0.18
Liquidity position of the company have improved year after year as can be seen in the improved
current and acid test ratios of the company over the three years period from 2016 to 2018.
However, a standard current ratio is 2:1 which the company has only managed to achieve in
2018. Generally anything above 1 is considered good acid test ratio. Again the company has only
managed to achieve such acid test ratio only in the year 2018. However, it must be said that the
company at present seems to have the necessary liquidity to repay the loan and interest
periodically (Iatridis, 2016).
Lending decision:
Debt to equity ratio of a company shows the ability of an organization to continue in the long
run. Thus, in order to assess ability of the company to continue its business in the long run debt
to equity ratio shall be calculated. Accordingly the debt to equity ratio of Evolution Mining is
provided in the above table to assess the long term solvency position of the company. The debt to
equity ratio shows that the company has a strong solvency position with 0.13 debt to equity ratio
at the end of 2018 financial year (Johnsen, 2015).
Taking into consideration the financial state of Evolution Mining Limited along with liquidity
and long term solvency position of the company it can be said that the company has stable
financial position. Thus, there is no apparent risk hence, the bank can approve the loan
application provided the future propose of the company is positive and good. Hence, the bank
should lend the money to Evolution Mining Limited.

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Scenario 2:
Investment decision:
The shareholders’ equity of both the companies as at the end of financial year in 2018 are shown
in the table below.
Evolution Mining Limited
Computation of shareholders' wealth as at the end 2018
financial year
(All amounts are in $'000) 2018
Issued capital 2,183,727.
00
Reserves 45,407
.00
Retained earnings /(Accumulated losses) 59,260
.00
Capital and reserves attributable to the
owners
2,288,394.
00
30% of Shareholders' equity 686,518.
20
Fortescue Metals Limited

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Amounts are in $million 2018
Contributed equity 1,28
7.00
Reserves
46.00
Retained earnings 8,38
6.00
Non-controlling interests
13.00
Total equity 9,73
2.00
30% of Shareholders' equity 2,91
9.60
The concerns of the shareholders are mainly to receive dividend and return in the form of capital
appreciation. The earnings per share of the company as well as dividend paid are two best
indicators available while determining whether to invest in any company’s shares or not. In case
of private placement too the organization responsible for private placement shall assess the

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ability of the company to pay dividend to the shareholders and the prospect of capital
appreciation in the future (Kim and Im, 2017).
The extract of income statement of both the companies are attached here to determine which
company has performed better and paid better returns to the investors. The extract below is the
extract of profit and loss account of Evolution Mining Limited (Petty, 2011).
It is clear from the above that the company has performed significantly better in 2018 as
compared to its performance in 2017. Basic EPS in 2018 has increased to 15.57 cents as

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compared to 13.28 cents in previous year. Thus, improvement in financial performance is clear
from the above extract (Pulatov, 2012).
The profit and loss account of Fortescue attached below on the other hand shows that the
performance of the company has deteriorated significantly in 2018 compared to last year.
Operating sales revenue has reduced from $8,447 million in 2017 to $6,887 million in 2018. The
net profit after tax attributable to the equity shareholders has also decreased significantly in
2018. The company has only managed to earn a net profit after tax of $878 million in 2018
compared to $2,093 million of 2017. The basic EPS of the company has also deteriorated to
stand at 28.2 cents in 2018 from 67.3 cents in 2017 (Stanisic, 2013).
However, despite the deterioration in financial performance of Fortescue Metals Group in 2018 it
still seems a better choice for investment if the share prices are same. However, if the share price