Financial Ratios Analysis
The primary learnings of the study are based on analysing the financial perspectives of “Adelaide Brighton Cement”, which is a cement manufacturing group based in Australia. The assessment of the financial performance we consider the movement of share prices and provide relevant recommendations on the rational of investments in the stocks of the company. The comprehensive evaluation of financial performance will be performed by combining the shareholding structures and many individuals involved in reporting the corporate governance for “Adelaide Brighton Cement” (Adbri.com.au. 2018).
The common financial ratios competition will be based on the financial statement published by the company in the last two years. In addition to this, the movement of the share prices will be carried out by plotting the percentage changes in the closing share price from 2016 to 2018. The understanding of capital structure will be considered with “weighted average cost of capital” which shall be used as the main model by considering the investment making decision. In addition to this, solvency ratios such as debt equity ratio and dividend policy structure will be conducive in accompanying the recommendations and reason for investing in the shares of “Adelaide Brighton Cement” (Adbri.com.au. 2018).
Description of Company:
Adelaide Brighton established in 1882 is identified as a leading Australian integrated “construction materials and lime producing group”. Some of the main manufacturing and supply line of the production process includes mineral processing, infrastructure, construction and building materials. The principal activities encompass “production, importation and distribution of clinker, cement, industrial lime, premixed concrete, aggregates and concrete products”. It is listed under “S&P/ASX100 company with 1400 employees”. The main culture of the companies seen to be culturally diverse and built on an environment friendly work atmosphere (Adbri.com.au. 2018).
Adelaide Brighton has distribution and manufacturing facilities across South Australia, in areas including “Northern Territory, Fyansford, Victoria and New South Wales”. Some of the importance of plate end of the products of Adelaide Brighton is discerned with “building, construction, infrastructure and mineral processing” throughout the country. In terms of cement it has major production facilities across “Western Australia and South Australia”. It is also considered as a market leader in Northern Territory. Apart from excelling in terms of domestic production, Adelaide Brighton is also recognized as the largest importer of “cement, clinker and slag” (Adbri.com.au. 2018).
The coastal network of the company is depicted to supply across every capital city located in the mainland. The lime production facilities of the company are concentrated in the production plants of “South Australia, Northern Territory and Western Australia”. The company is further seen to be committed to follow an inclusive workplace culture which promotes diversity and values. Adelaide Brighton is identified with one of the best “diverse workforce, extending across different cultures, backgrounds, nationalities and languages” (Adbri.com.au. 2018).
Manufacturing and Supply Line of Adelaide Brighton Cement
Some of the other sustainability initiatives is presented in terms of range of initiatives and actions that are implemented throughout organizations. It is believed that the sustainability aspect is not only the responsibility for environment but also is seen to be economically beneficial thereby assisting the various types of long-term commitment for a prolonged business performance (Adbri.com.au. 2018).
Ownership and structure of governance of the company:
Main Substantial Shareholders:
Based on the evaluation of the shareholder analysis it is depicted that Company’s major shareholder, “Barro Properties Pty Ltd” is considered as non-independent director. Some of the largest shareholders shall not spur the register of members as at 3 April 2018 is listed below as follows:
|
Shareholders |
Number of Ordinary Shares Held |
Percentage of Issued Capital |
|
“Barro Properties Pty ltd” |
202,096,059 |
31.08% |
|
“HSBC Custody Nominees (Australia) Limited” |
62,734,726 |
9.65% |
|
“Barro Group Pty Ltd Citicorp Nominees Pty Ltd” |
62,652,619 |
9.63% |
|
“JP Morgan Nominees Australia Limited” |
53,682,442 |
8.26% |
|
“Citicorp Nominees Pty Ltd” |
36,608,447 |
5.63% |
The above presentation of information clearly shows that “Barro Properties Pty ltd” is identified as the major shareholder holding 31.08% percentage of the issued capital. There are four other major shareholders with more than 5% of the ordinary shares for Adelaide Brighton. These are considered with “HSBC Custody Nominees (Australia) Limited” with 9.65% “Barro Group Pty Ltd with 9.63%, “JP Morgan Nominees Australia Limited” with 8.26% and “Citicorp Nominees Pty Ltd” with 5.63% (Amran, Lee and Devi 2014).
Main people involved in Company’s Governance:
The list of main individuals associated to the governance of Adelaide Brighton are stated below as follows:
|
Executives |
Balance at beginning of year |
|
M Brydon |
39,296 |
|
M Kelly |
5,000 |
|
G Agriogiannis |
NA |
|
AL Dell |
NA |
|
BD Lemmon |
NA |
|
Nonexecutive Directors |
Balance at beginning of year |
|
LV Hosking |
4,851 |
|
RD Barro |
22,75,79,355 |
|
GF Pettigrew |
7,739 |
|
KB Scott-Mackenzie |
5,000 |
|
AM Tansey |
10,000 |
|
Z Todorcevski |
20,000 |
Henceforth, it is discerned that the highest shareholding is made by RD Barro who is a nonexecutive director of the company. Therefore, it is evident that none of the executive directors have more than 5% of shareholdings in the company. It shall be stated that there is any presence of family members in the corporate governance of Adelaide Brighton. Based on these evaluations it can be stated that Adelaide Brighton is not a family company thereby having none of the team involved in holding highest percentage of ordinary shares (Tricker and Tricker 2015).
Computation of Fundamental Ratios:
Short Term Solvency:
Table 1: Table Representing Solvency Ratios
(Source: As Created by Author)
Table 2: Table Representing Long Term Solvency Ratios
(Source: As Created by Author)
Asset Utilization:
Table 3: Table Representing Asset Utilization Ratios
(Source: As Created by Author)
Profitability Ratios:
Table 4: Table Representing Profitability Ratios
(Source: As Created by Author)
Table 5: Table Representing Market Value Ratios
(Source: As Created by Author)
Graphical Descriptions of Results:
Comparative Analysis of Movement in Share Price Index to All Ords Index:
Workplace Culture and Sustainability Initiatives of Adelaide Brighton Cement
The main depictions from the graphical representation clearly shows that despite of occasions of market volatility from 2016 to 2018, the company has performed moderately well compared to the market index. The dips in the share price is mostly evident in July 2016 when the percentage change in the share price was close to 12% in compare to All ord market index. A similar negative fluctuation is evident in the month of April 2017. However, the stocks of the company have performed really well in the month of October 2016 and February 2017. In addition to this, the share price movement September 2017 and has been also considerably better in terms of market performance. Based on the depictions of the present market trend company has performed at par with All Ords Index (Ioannou and Serafeim 2017).
Significant amount of positive volatility of the share prices of the company is depicted in February 2017 when the percentage increase in the market index was only 2% whereas it was close to 6% for Adelaide Brighton Ltd. Some of the other depictions have clearly stated that in the month of January 2018 the market index was seen with declining person to change of 2% whereas there was a positive increase in the stock prices of Adelaide Brighton Ltd. In 2017, the company has witnessed a medium volatility for the share prices when compared to the total ordinary index. Based on the significant depictions of total ordinary index it can be stated that there is a moderate volatility for the share prices of Adelaide Brighton Ltd (Armstrong et al. 2015).
Identifications of factors that influences the share price of the company:
The fundamental factors affecting the share prices of Adelaide Brighton Ltd. is categorized with industry wide factors, changes in company focus, management earnings forecasts and macroeconomic factors. The main depictions on the share price for “industry wide factors” have been able to state on the operating strategy based on geographically diverse and vertical integration of construction materials which benefits from the strong demand in the industry. Compared to the industry for lime business, “Adelaide Brighton’s Western Australian lime business is underpinned by low cost, long term raw material reserves”. This business is for the discerned was secured by the statutory approvals and state agreements. The Munster plant near Perth has been but to focus towards facing the global competitive nature of Australian mineral processing industry. This is considered as one of the lowest and largest lime operations division in the world with a total capacity of 1.25 million tons per annum. The successes of the company as per the industrywide factors is conducive for the investors to count on the company for higher returns (ArAs 2016).
Major Shareholder of Adelaide Brighton Cement
Significant discussions on the share price of as per the “changes in company focus” has been discerned with focusing on relevant vertical integration as downstream aggregates, concrete, logistics and masonry businesses. In addition to this, the lime business has been focusing on cost and efficiency with significant initiatives towards cost stabilization and cost improvement. The energy efficiency focus also remains one of the key objectives of the company. Due to these factors there may be several investors who may be willing to invest in the shares of Adelaide Brighton Ltd. (Davies 2016).
The changes pertaining to the management earnings forecasts are also relevant to influence the share price of Adelaide Brighton. The various types of factors relating to “management earnings forecasts” has been considered with increased focus on Mawson Group. This group is identified as not just premixed concrete and query operator operating in the southern New South Wales and North Victoria. This decision of management is important for the aggregates producer in the region and in general is seen to be holding a major position in the market which it serves. The earnings have significantly improved in terms of strong demand on major projects lifted margins and volume. In addition to this, the vertical integration of the company has been a significant part of the sales and earnings in the last five years which is focused on construction activities in the East Coast (Ijiri 2018).
Calculations of Beta and the Expected Rate of Returns using CAPM:
Computed Beta of the Company:
The calculated beta for Adelaide Brighton Ltd. Stands 1.
Calculations of the required rate of Return using CAPM Model:
Table 6: Table Representing the Required Rate of Return for Adelaide Brighton Ltd. (Source: As Created by Author)
The main depictions from the required rate of return is 6% with it risk-free rate of 4% and market risk premium of 6%
Justification behind the “Conservative Investment”
The main rationale behind conservative investment in Adelaide Brighton Ltd. seen with better earnings in compared to investment in long-term bonds with only redone a 4% person. It has been further considered that the total Beta of 1 clearly shows that despite of marginal improvement in terms of market risk premium not only the company will be able to provide more earnings than government bonds but also it would involve very low risk to invest in the company. The low beta also suggests a less volatile investment in compared to the market performance. In addition to this, the business continued with an improved performance all along 2017 its total revenue growth of 11.7% to $ 1560 million. This is an increase of 10% compared to the previous year’s depiction (Schaltegger and Burritt 2017).
Individuals Associated with the Governance of Adelaide Brighton Cement
There are several other financial indicators which have been able to state on the rational for conservative investment in the shares of Adelaide Brighton Ltd. The company has continuously increased its growth earnings over the past five years. Additionally, Adelaide Brighton is able to utilize its assets more effectively over the years. This is evident with total assets turnover ratio of 0.76 in 2016 which increased to 0.77 in 2017 (Berk and Van Binsbergen 2016). In addition to this, it has also utilized the fixed assets in a better way in compare to the previous year’s results. There have been several other projections which have stated on improving quick ratio which is particularly evident with improving inventories of the company. Based on the significant depictions on the price-to-earnings ratio it has been an increase its price-to-earnings from 19.86 and 2016 to 20.14 in 2017 (Warren and Jones 2018).
Table 7: Weighted Average Cost of Capital for Adelaide Brighton Ltd.
(Source: As Created by Author)
Explanation of WACC has on management evaluation of investment prospective:
The main interpretations pertaining to WACC is considered with higher percentage for greater risk for the functional operations of the organization. However, in this particular case the WACC of 5.32% is discerned as stable in nature. This instrument is important for anticipating the costs which are involved in financing the resources. Some of the main consideration of WACC is comprised with value associated with obligations of debt and the costs which are related to debt financing (Zabarankin, Pavlikov and Uryasev 2014).
It needs to be also understood that a large number of listed companies usually involves several funding sources. The main aim of WACC has been seen with the consideration of creating a balance in the relative costs of several resources in such a way that a single cost of capital figure is generated. In general theory of practice, WACC is seen to be comprising of the expenditures which are associated to raising of an additional amount of money. In this particular case, the investors can significantly rely on the investment of the company as the risk is significantly low.
Debt Ratio:
The debt ratio is considered is the measurement of degree of organization leverage. This is calculated by consideration of the proportion of total debt by total assets. The debt ratio has slightly degraded from the 2016 2017. This is evident with debt ratio of 0.322 in 2016 and 0.380 in 2017. This increase shows greater dependency of the company to finance its assets based on long-term borrowings. It can be also depicted that debt is not seen to be covered by short-term assets. In addition to this, it is also seen that overall debt has increased in the last five years. However, it has shown lesser reliance of use of short-term borrowings for financing owner’s equity (McKay and Haque 2016).
Share Price Movement of Adelaide Brighton Cement
Dividend policy:
The significant depictions based on dividend policy of Adelaide Brighton Ltd. have stated that the company’s dividend per share has increased over the period of five years. In addition to this, there has been significant improvement in “dividend pay-out ratio, dividend yield rate and price-to-earnings ratio”. The increasing nature of dividend pay-out ratio is evident with is 70% dividend pay-out ratio in 2016 which increased to 73% in 2017. The dividend yield rate of the company further increased from 3.52% in 2016 3.65% in 2017. Moreover, the price-earnings ratio has also increased from 19.86 in 2016 20.14 in 2017. Based on the aforementioned evaluation of market value ratios the company has performed well in terms of paying its shareholders and at the same time improving its earnings per share (Macve 2015).
Letter of Recommendations
To ABC
GPO Box 2155, Adelaide SA 5001
Dear Sir,
This is to bring your kind attention towards the several types of depictions based on the financial statement analysis of Adelaide Brighton Ltd. The noteworthy findings are considered with the recommendations which is conducive for making investment in the company. At present, the share price of the company is fairly cheap amounting 6.65 AUD. Henceforth, the decision to purchase the shares of the company needs to be considered with a robust outlook for a better investment.
In addition to this, the significant evaluations of the financial statements have able to state that the company has significantly improved its NPAT from $ 187.5 million in 2016 to $ 197.8 million in 2017. This needs to be considered as the main criterion for investment decision in the company. Some of the other positive aspects for the investment has been duly absorbed fit increasing revenue which is evident with $ 1396.2 million in 2016 which surged to $ 1560 million in 2017.
A remarkable improvement of the company in terms of liquid assets such as cash and cash equivalents has been evident from an increase of $ 21.5 million in 2016 to $ 57.6 million in 2017 also needs to be considered as the main rationale behind investment due to the improving performance of the company. Furthermore, the depictions on the stock market performance has able to reveal a significant improvement in “dividend pay-out ratio, dividend yield rate and price-to-earnings ratio”. The increasing nature of dividend pay-out ratio is evident with is 70% dividend pay-out ratio in 2016 which increased to 73% in 2017. The dividend yield rate of the company further increased from 3.52% in 2016 3.65% in 2017. Moreover, the price-earnings ratio has also increased from 19.86 in 2016 20.14 in 2017.
We hope that the aforementioned assessment has been able to guide you with the final decision for investment in the company. We are looking forward to serve you better in the future.
Thank You
Conclusion:
The depictions made from the discourse of the study have stated on significant rationale for conservative investment in the company. However, the investors need to be particularly of air off decreasing operating cash flow of 9.7% in the previous year which has amounted to $ 224.2 million. The main reason for such decrease has been seen with newer cash conversion of revenues and increasing tax payments which is “partially offset the increasing dividends from joint ventures”. In addition to this, the capital expenditures of the company amounting to $ 169.3 million was higher than $ 82.8 million in compared to the previous year. At the same time, some of the other notable performance increase is evident with increasing working capital which is seen as $ 22.2 million. The significant improvement in the stock market depictions has been able to act as the main rationale for investment decision in the company. In addition to this, the significant improvement in profitability ratio over the last five years have been seen with an increasing interest of the investors over the years.
References
Adbri.com.au. (2018). Adelaide Brighton produces clinker, cement, concrete and lime.
Amran, A., Lee, S.P. and Devi, S.S., 2014. The influence of governance structure and strategic corporate social responsibility toward sustainability reporting quality. Business Strategy and the Environment, 23(4), pp.217-235.
ArAs, G., 2016. A handbook of corporate governance and social responsibility. CRC Press.
Armstrong, C.S., Blouin, J.L., Jagolinzer, A.D. and Larcker, D.F., 2015. Corporate governance, incentives, and tax avoidance. Journal of Accounting and Economics, 60(1), pp.1-17.
Berk, J.B. and Van Binsbergen, J.H., 2016. Assessing asset pricing models using revealed preference. Journal of Financial Economics, 119(1), pp.1-23.
Davies, A., 2016. Best practice in corporate governance: Building reputation and sustainable success. Routledge.
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Ioannou, I. and Serafeim, G., 2017. The consequences of mandatory corporate sustainability reporting.
Macve, R., 2015. A Conceptual Framework for Financial Accounting and Reporting: Vision, Tool, Or Threat?. Routledge.
McKay, W. and Haque, T., 2016. A study of industry cost of equity in Australia using the Fama and French 5 Factor model and the Capital Asset Pricing Model (CAPM): A pitch. Journal of Accounting and Management Information Systems, 15(3), pp.618-623.
Schaltegger, S. and Burritt, R., 2017. Contemporary environmental accounting: issues, concepts and practice. Routledge.
Tricker, R.B. and Tricker, R.I., 2015. Corporate governance: Principles, policies, and practices. Oxford University Press, USA.
Warren, C.S. and Jones, J., 2018. Corporate financial accounting. Cengage Learning.
Zabarankin, M., Pavlikov, K. and Uryasev, S., 2014. Capital asset pricing model (CAPM) with drawdown measure. European Journal of Operational Research, 234(2), pp.508-517.
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