Iluka Resources Company’s Business Analysis

Subject: Company Analysis
Pages: 8
Words: 2042
Reading time:
8 min
Study level: College

Prospective Analysis

In relation to information availed from ILLUKA Resource limited, business analysis, accounting and financial assessment between 2009 and 2013, a prospective examination of the subsequent years is relevant for assessing the future financial performance of the business, as well as deciding on the nature and magnitude of sales promotion to be undertaken.

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Net Capital Expenditure

Relative valuation is an approach for estimating the value of the company’s assets by appraising the assets with the same assessed property in the market. Having a peer group assessment on the similar asset in the market and translating the same asset into an identical price to a major statistics is vital approach to relative valuation because assessment of complete price is difficult to ascertain.

The value of the company is also ascertained using the enterprise value approach like the earning before interest and tax (EBITT) since the approach discloses the evaluation of the company’s capital structure separately (Palepu, Healy, Peek & Bernard 2007). In the above data analysis on the discounted cash flow of the company, there is an increase in earning before interest and tax. This signifies that the value of the company will increase in the near future. Care should be taken where the total revenue of the company starts to decline because it signifies a turn down in the value of stock in which the shares of the company will be overvalued.

Growth Rate Assumption

The assumption laid down in ascertaining the company anticipated free cash flow for the next five years; is that, a standard approach is to project the income growth for a period of five years (Brigham 2011). This is achieved by classifying the after tax proceeds for the projected time, anticipated capital expenditure as well as the working capital of the company.Assessing the probability of market expansion or contraction as well as the manner in which the stock in the security market is performing are some of the key drivers for projecting the company’s sales growth.

The corporation should assess whether a new product is in the market or the selling price is forthcoming, since this will affect the growth rate and steadiness of the sales revenue and the income as well. Due to uncertainty, the company should consider multiple variable factors that would affect the achievability of the anticipated sales revenue

Sales Forecast

From the data analysis, there is a steady growth rate in sales of 3 %, this implies that the company will have stable returns in the future and thus projection of the company future stocks value would be easy. Some of the factors that are vital in ascertaining the value of a company is the rate of returns depicted by the steadiness of sales revenue (Palepu 2007). A good projection should have an increasing forecasting rather than fixed return since constant projection will be susceptible to threat of external factors such as inflation or entries of new product into the market. This will affect the company projection and consequently lead to the loss and insolvency withing the company.

The management

The management will be adding value to the company since employment of skilful and competent employees would mean that the quality of work is enhanced as well as employees will know what is expected of them. This will ease administration of employee’s behaviour at work place (Damodaran 2012). To meet expected return and value in the company, a manager should understand those processes and become accustomed to the changing environment. Thus, a good management would be first in adapting to the latest changes in business that might bring threat to the company operation. This therefore signifies that skilful management adds value to the company.

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Gross Profit Margin

The ratio indicates the ability of the company to control its production and the cost of sales. The gross profit of the company is 13.95% of the company’s total asset, while 86.04 % of the sales relate to cost of sales. This ratio signifies that the company is unable to control its cost of production and consequently some stringent measures must be put in place to reduce this effect.

Returns on Investment

This ratio indicates the return generated on utilization of total assets. From the above ratio analysis, a return of 2% from net asset is envisaged. This implies that for every $ 100 of total asset of the company, $ 2 was generated as return. This amount is too small for a return to finance the company as well as to satisfy the shareholders’ wealth. Consequently, management should improve on the rate of return on investment because the company is spending more on investment for a less return.

Performing sensitivity analysis on the company’s intrinsic value of the shares and the current market per shares

In performing Sensitivity analysis on the intrinsic value of ILLUKA Resource limited, a reduction in stock value of the company in the future financial periods is depicted by the intrinsic value of the share. Fabozzi (2003) ,states that an overvaluation of the shares occurs as investors pay more than the intrinsic value, which is worth $1.5 per share. Investors should therefore consider not buying the shares in the company, as they might incur costs from their investment in the company’s stock.

The power of the investors buying and selling conduct in the stock market, determines the trading price of ILLUKA Resource limited. According to Jones (2007), where the potential investors spend more than the existing intrinsic value of the shares, then the securities are underestimated. In this view, it is not mandatory for the intrinsic value and the market price per share to be equal when trading stocks. Intrinsic value of the share is a definite variable extracted from the company’s statement of financial performance.

Possible opportunity for improvement

ILLUKA Resource limited is currently facing difficulties in its operation. This can be observed by the declining trend in revenue and stock price performance in the securities market. Some of the possible opportunities to improve on the company performance are as follows.

Changing Management Strategy

Where a corporation is persistently making loss or there is a decline in profit of the company, it is advisable that the board should change the management strategy. This attained by hiring new executives with good managerial skills to improve on the company performance since poor performance starts with poor decision making and probably the current management might be less skilful when it comes to strategic decision making for the company.

Increasing the Sale and Marketing Promotion

The management of ILLUKA Resource Limited should therefore increase the level of advertising and guarantee that the product and service of the company are fully accepted in the market. Poor marketing strategy will make the company have a degraded growth rate and consequently decline in the value of its stock in the security market.

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Report on the Forecasted Stock Valuation of Illuka Resource Limited

  • Iluka Resource limited

Discounted Cash flow statement ($ 000)

Dec 2012 Dec 2013 Dec 2014 Dec 2015 Dec 2016
Sales (3%) 2060,000 2122,000 2185,454 2251,018 2318,548
NOPAT 127200 131016 134946 138995 143165
Tax shield 95.4 286.8 578 3034 4522
Net earning 127295.4 131302.8 135524 142029 147687
P.V.I.F 12% 0.8929 0.7972 0.7118 0.6355 0.5674
Cash flow 113,662 104,675 96466 90,260 83,798
Total cash flow 488,861
Outstanding shares 418.710
Value of stock $ 1.17 / shares
Market value $ 1.5/ share

Sensitivity analysis

Sensitivity test Share Price (AE) ($) Share Price(Sensitivity)($)
Sales growth rate 3% 1.5 1.55
10% 1.5 1.65
Profit Margin 13.95% 1.5 1.29
Asset turnover ratio 44.09 1.5 22.05
62.63 1.5 93.95
14.35% 1.5 1.72
Cost of equity 12% 1.5 1.68
24% 1.5 1.86

From the above sensitivity analysis test, a growth rate in revenue as forecasted will increase to $1.65 on the optimistic financial performance. The company should be warned that a threat to the company informs of substitute and loss of potential clientele might occur if the business stock value declines (Palepu 2007). The net profit margin is significant for net operating profit after tax. Consequently, where the profit margins upheld at the similar value at 13.95% in 2012, the company’s stock value would be lower as compared to the anticipated performance. Increment in the cost of equity to 24$ would imply an incremental stock price of $ 0.36 leading to an increase in abdominal earning. Since ILLUKA Resource limited is a mature company, a steady growth in asset turnover will be envisaged in the near future.

CAPM
Risk free rate 12%
Marker risk premium 6.5
Beta 0.81
Cost of equity 17.27%
WACC BOOK VALUE WEIGHT
Debt 197 11.17%
Equity 1567.1 88.83%
Total value 1764.1 100%
Cost of equity 17.27%
Cost of debt 6%
Tax rate 30%
WACC 7.25%

Sensitivity analysis

Sales Growth rate 3% Share price 3% forecast Share price
3% 1.55 12% 1.68
97% 1.5 88% 1.5
10% 1.65 24% 1.86
Profit margin ATO
13.95 1.29 44.09 22.05
13% 62.63 93.95

Sensitivity test

Sensitivity test Share Price Share Price(Sensitivity
Sales growth rate 3% 1.5 1.55
10% 1.5 1.65
Profit Margin 13.95% 1.5 1.29
Asset turnover ratio 44.09 1.5 22.05
62.63 1.5 93.95
14.35% 1.5 1.72
Cost of equity 12% 1.5 1.68
24% 1.5 1.86

The discounted Operating income Valuation approach

Actual Dec 2012 Dec 2013 Dec 2014 Dec 2015 Dec 2016
NOPAT 127200 131016 134946 138995 143165
debt 197
Cost of capital 7.25% 7.25% 7.25% 7.25% 7.25% 7.25%
Value of firm 488,861
No. Of share 418.710
Value per share $ 1.5

Forecasting model

Dec 2012 Dec 2013 Dec 2014 Dec 2015 Dec 2016
Sales growth rate 3% 3% 3% 3% 3%
sales 2060,000 2122,000 2185,454 2251,018 2318,548
ATO 22.05 22.05 22.05 22.05 22.05
ATO and worked NOA 93,424 96,236 99,114 102,087 105,150
Profit margin and ATO (13.95%) 13,032.65 13,424.9 13,826 14,241 14,668
Change in NOA 2812 2812 2878 2973 427
Free cash flow 10220 10613 10,948 11268 14241
Net dividend pay out 4671 4812 4956 5104 5258
Payment to debtors 5549 5901 5992 6164 8984
Cost of debt 6% 6% 6% 6% 6%
Opening debt balance 156 117.2 100.7 97 95.9
Cost of debt 9.36 7.032 6.042 5.82 5.575
Closing debt 117.2 95.9 197.0 85.8 86.1
Comprehensive income statement 93268 96,119 99,013 101,990 105054

Comprehensive income

NOA 93,424 96,236 99,114 102,087 105,150
NOPAT 13,032.65 13,424.9 13,826 14,241 14,668
DIVIDEND 4671 4812 4956 5104 5258
Cost of debt 9.36 7.032 6.042 5.82 5.575
Closing debt 117.2 95.9 197.0 85.8 86.1
  • Iluka limited ration analysis
  1. Profitability ratio
    1. Gross profit margin
    2. Gross profit margin = (gross profit/sales*100%)
    3. Gross profit margin = 47.2/338.4?*100% = 13.95%
  2. Returns on investment
    1. Returns on investment = (NOPAT/total assets)
    2. Returns on investment = 34.3/ 1,797.8 = 0.02
  • Liquidity ratio
  1. Current ratio = (current assets/ current liability)
    1. Current ratio = 920/ 558.8 = 1.65
  2. Cash ratio
    1. Cash ratio = (cash in hand –Marketable securities}/current liability}
    2. Cash ratio = (- 86.4/558.8) = – 0.15
  • Gearing ratio
  1. Debt ratio
    1. Debt ratio= Total liability/total asset
    2. Debt ratio= (230.7 / 1797.8) = 0.13
  2. Times interest earned ratio
    1. Times interest earned ratio =EBIT /Interest expense
    2. Times interest earned ratio = 61.2 / 4.9 = 12.5

Possible opportunity for improvement

The influence of the investor’s trade and selling behavior in the security market demonstrate the trading value of ILLUKA Resource limited. According to Jones (2007), if the prospective depositor spends more than the obtainable intrinsic worth of the shares than the securities are underestimated. In this examination, it is not compulsory for the intrinsic value and the market price per share to be equivalent when trading stock. Intrinsic worth of the share is a specific variable extracted from the company’s statement of financial performance. Some of the likely strategies to improve the situation is:

To provide considerable changes in the management strategy. This can be implemented if the company changes the approach to hiring new personnel and managing staff while controlling its performance and introducing training programs. The company may call for help to new team and hiring a new executive with outstanding managerial skills.

The changes in the managing sector will lead to changes in sales strategies and promotion of the products. Changing approach to advertizing of the products is a good way to attract customer’s attention to the company’s products and, as a consequence, increase sales.

References

Brigham, ‎E 2011, Fundamentals of Financial Management Concise, Cengage Learning, New York.

Damodaran, A 2012, Investment Valuation: Tools and Techniques for Determining, John Wiley & Sons, New Jersey.

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Frank, J Fabozzi, C 2003, The Handbook of Financial Instruments, Cengage Learning , London.

Jones, P 2009, Investment:Vauation and Management, John Wiley & Sons Publishers, London.

Palepu, K, Healy, P, Peek, E, & Bernard, V 2007, Business Analysis and Valuation: Text and Cases , Cengage Learning, London.

Palepu, K 2007, Business Analysis and Valuation, Cengage Learning, London.