Evaluation And Analysis Of Fortescue Metals Group Limited

WACC of the company

Discuss about the Fortescue Metals Group Limited.

Evaluation and analysis on the financial statement, stock price, dividend policies, corporate policies, capital structure etc of an organization is crucial for making a decision about the company. In the report, Fortescue Metals group limited has been evaluated and a report about the financial performance of the company has been prepared to offer an insight about the firm’s financial condition to the chief financial officer of the company. In the report, WACC of the company has been calculated to measure the total cost of capital and the discount rate of the company (Hogarth and Makridakis, 2011). Further, the capital structure of the company has been measured to identify the risk position and the competitive position of the company in market,

In addition, dividend policy of the company has been measured to identify the policies and the attractiveness level of the company among the stockholders. Moreover, various other policies have also been studied and discussed about the Fortescue Metals group limited to recognize the overall financial performance and position of the company in the market.

According to the case, Fortescue Metals group limited is an Australian company which is operating its business in iron ore production and exploration activities the company is fourth largest Australian company in iron ore industry. The company has been founded in the year if 2003. Headquarter of the company is in Western Australia (Home, 2018). Currently, the company has 2 production sites. The financial performance and the position of the company have been better from last few years.

WACC stands for the weighted average cost of capital. Weighted average cost of capital of the company explains about the average cost of various sources which has been used by the company to raise the funds for long term projects of the company. It explains about the total cost of capital of the company (Higgins, 2012). WACC calculations make it easier for the organization to identify that how much would have to pay by the company to the stockholders for the funds and how much amount must be minimum earned by the company to pay off the dividend and interest amount to the stockholders.

In case of Fortescue Metals group limited, it has been found that the WACC of the company is 4.41% which explains that the cost of capital of the company is not that much huge. But before investing into any new projects and the operations, company has required ensuring that more than 4.41% returns could be got form the project.

Capital structure of the company

For calculating, the WACC of the company, it has been found that the main source of funds of the company is debt and equity. Debt amount of the company is $ 12,19,57,87,831 and equity amount is $ 12,65,47,06,188. And the cost of debt and cost of equity of the company is 3.75% and 5.05% respectively (Annual report, 2015).

The debt interest % has been calculated on the basis of total interest amount paid by the company and the total debt amount. On the basis of the calculations, it has been determined that the cost of debt of the company is 3.75% and the total share of debt amount in the capital structure of the company is 49.08%.

Further, for calculating the cost of equity of the company, CAPM model has been evaluated. On the basis of the calculations, it has been determined that the cost of equity of the company is 5.05% and the total share of equity amount in the capital structure of the company is 50.92%.

It briefs that the total cost of capital of the company is 4.41%.

Capital structure is how an organization funds its growth and entire operations of the company by using the various sources of finances. Capital structure could be a measurement of common equity, long term debt, short term debt, preferred equity etc. of an organization. Capital structure of an organization must be in such a manner that the cost and the risk associated with the different source of funds of the company could be lower (Halili, Saleh  and Zeitun, 2015).

In case of Fortescue Metals group limited, it has been found that the total debt amount of the company in the year of 2017 is $ 12,19,57,87,831 and the total equity amount of the company is $ 12,65,47,06,188. It leads that the total capital of the company in the current year is $ 24,85,04,94,019 (Gibson, 2011).

It briefs that the total weight of the company of debt amount is 49.08% and the total weight of equity amount of the company is 50.92%. It explains that the debt amount and equity amount of the company is quite similar and it leads to the conclusion that the long terms solvency position of the company is quite better (Reuters, 2018).

Further, it has been found that the cost of debt and cost of equity of the company is 3.75% and 5.05% respectively. It explains that the risk position and the cost position of the company are quite lower. However, the cost of equity of the company is bit higher than the cost of debt (ASX, 2018). So, it is recommended to the company that raise the funds from debt next time so that the cost of the company could be lowered and the company could perform better in the market.

Earnings distribution policy of the company

Further, the study has been performed on the earnings distribution policy of the company. Earnings of an organization could be distributed through providing the net amount to the shareholders of the company is through retaining the amount for future projects and the investment for long term.

The financial statement of Fortescue Metals group limited explains that the company is paying a great amount of dividend to its stakeholders as well as the company is also retaining some amount for future investments and sudden requirement of the company. On the basis of the annual report of last 5 years of the company, it has been found that the dividend payout ratio of the company is quite fluctuating (annual report, 2013). However, the average % of dividend payout of the company is quite better.

It explains that the company is paying a good amount to its shareholders by the name of dividends. It shows that the company is following the relevant dividend policy. This policy explains that the investors only invest into the companies to generate the returns so an organization must pay the dividend to the shareholders on the regular basis to attract them and enhance the share return of the company.

The dividend payout ratio of the company explains that the company does not have a fixed dividend payout ratio and it paid the dividend amount to the shareholders on the basis of the industry condition, market trend and the performance of the company. There are various other factors in the organization which impacts on the dividend payout ratio of the company.

However, it has been found that the company is paying a good range of the dividends to its stakeholders (Annual report, 2015). In the year of 2015, the company has paid 108.20% dividend in context with the net profit to its stakeholders to enhance the market position of the company. In addition, the retained earnings of the company has also been studied and it has been found that the company is also managing a good amount of retained earnings so that the company could raise funds for long term project without any cost. The retained earnings % of the company in context with the total net profit of the company is as follows:

It also briefs that the company is following neither the relevant dividend policy nor the irrelevant dividend policy. Company is following both the policies on the basis of the market performance and the current trends in the market. The earnings management of the company is quite impressive and it offers a huge competition to the competitors of the company.

In addition, the current performance of the company has been evaluated on the basis of the market position and stock position of the company on the day of dividend announcement. The company has announced its dividend 10^th July 2017 when there were total 3,113.798 million outstanding stocks in the security market and the stock price of the company on that day was $ 5.21. Yahoo finance (2018) explains that the stock price before announcing the dividend amount was $ 5.1 which has been enhanced and after announcing the date the stock price of the company has continues enhanced for next 1 week.  

This study explained that the dividend amount directly affects the market stock price of the security of the company. If the good amount of dividend is announced by the company than the stock price of the company directly enhances and vice versa. It explains that the dividend amount and the stock price of an organization have positive relationship. Positive changes into one factor affect the other factor positively (ASX, 2018).

In addition, it has also been found that there are various other factors also which impacts on the stock price of the company.  Such as the annual report, auditor’s report of the company, changes into the directors of the company, changes into the industry position, economical position etc are some of the few factors which could affect the stock price of an organization at any time.

Financial times (2018) explains that stock price of the company has been fluctuated a lot in last few months after the announcement of dividend. However, the changes are not huge. The average changes in the stock of the company from 22-05-2017 to 26-2-2018 are 0.4% which explains that the performance of the company is quite positive.

The stock price of the company has been fluctuated due to changes into the economical position, reduction in the industry share, internal changes into the company, new projects of the company and the strategies of the company. The exchange rate has also played a major role in fluctuate the security price of the company. 

Conclusion:

On the basis of the above analysis on Fortescue Metals group limited of the company, it has been measured that the performance of the company is quite significant in the market. The WACC position of the company explains about the lower cost of the company as well as the capital structure of the company explains that the cost and the risk level of the company is lower and thus the structure of the company is quite optimal.     

It has also been recognized that the dividend payout ratio, retained earnings and the earnings distribution policies of the company are also significant and have been prepared by the company in such a way that the company could retain some profits for future investment and the amount could also be given to the shareholders for attract them. The stock position of the company is also impressive. To conclude, the financial position and the performance of the company are quite competitive.

References:

Annual report. 2013. Fortescue Metals group limited. Available at: https://www.fmg.co.nz/globalassets/about-fmg/corporate-information/annual-report-and-publications/fmg-annual-report-2013.pdf (accessed 22/05/2018).

Annual report. 2014. Fortescue Metals group limited. Available at: https://www.fmg.co.nz/globalassets/about-fmg/corporate-information/annual-report-and-publications/fmg-annual-report-2014.pdf (accessed 22/05/2018).

Annual report. 2015. Fortescue Metals group limited. Available at: https://www.fmg.co.nz/globalassets/about-fmg/corporate-information/annual-report-and-publications/2743_fmg_annualreport_2015_vfinal_digital_mr.pdf (accessed 22/05/2018).

Annual report. 2016. Fortescue Metals group limited. Available at: https://www.fmg.co.nz/globalassets/about-fmg/corporate-information/annual-report-and-publications/fmg_annual_report_2016.pdf (accessed 22/05/2018).

Annual report. 2017. Fortescue Metals group limited. Available at: https://www.fmgl.com.au/docs/default-source/default-document-library/fy2017-annual-report.pdf?sfvrsn=1f931875_2 (accessed 22/05/2018).

ASX. 2018. Fortescue Metals group limited. Available at: https://www.asx.com.au/asx/share-price-research/company/FMG (accessed 22/05/2018).

Financial Times. 2018. Fortescue Metals group limited. Available at: https://markets.ft.com/data/equities/tearsheet/forecasts?s=FMG:ASX (accessed 22/05/2018).

Gibson, C.H., 2011. Financial reporting and analysis. South-Western Cengage Learning.

Halili, E, Saleh, A and Zeitun, R. 2015. ‘Governance and Long-Term Operating Performance of Family and Non-Family Firms in Australia’, Studies in Economics and Finance, vol.32, no.4, pp.398-421.

Higgins, R.C., 2012. Analysis for financial management. McGraw-Hill/Irwin.

Hogarth, R.M. and Makridakis, S., 2011. Forecasting and planning: An evaluation. Management science, 27(2), pp.115-138.

Home. 2018. Fortescue Metals group limited. Available at: https://www.fmg.co.nz/ (accessed 22/05/2018).

Morningstar. 2018. Fortescue Metals group limited. Available at: https://financials.morningstar.com/balance-sheet/bs.html?t=FMG&region=aus&culture=en-US (accessed 22/05/2018).

Reuters. 2018. Fortescue Metals group limited. Available at: https://www.reuters.com/finance/stocks/financial-highlights/FMG.AX (accessed 22/05/2018).

Yahoo finance. 2018. Fortescue Metals group limited. Available at: https://finance.yahoo.com/quote/FMG.AX/history?period1=1495436782&period2=1526972782&interval=1d&filter=history&frequency=1d (accessed 22/05/2018).

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