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2015

A Financial Ride to Fortesceu


Metals Group Ltd.

Fariha Muhu[ Fortescue Metals Group


Ltd.]
5/13/2015
1. Introduction: Fortescue Metals Group Ltd., a producer of iron ore has ranked itself in the

world’s fourth largest producer of iron ore. This type’s production is a high volume low margin

business as it needs significant investment in infrastructure. However Fortescue is operating the

business efficiently and aims to increase the shareholders value with being the safest, cost

effective and most profitable iron ore manufacturer in the world.

2. Assumptions: The assumptions taken to complete the financial report are:

 The facts and figures of the audited consolidated financial statements of last three fiscal

years have been taken into consideration.

 Total debt is calculated by taking only long term and short term borrowings and finance

lease liabilities.

 Net profit after tax is taken for relevant ratio calculation.

 The analysis complies with relevant Australian and International accounting standards.

3. Analysis on Income Statement Items: Income Statement evaluates the profitability of the

company by deducting all the expenses from revenues. Three core items of income statement of

Fortescue are explicated below:

 Sales Revenue: Sales revenue is one of the major and important elements of income

statement as it depicts the company’s main turnover from the product or services. The

sales revenue of Fortescue has increased to $11,753 million in FY 2014 from $8,120

million in FY 2013, registering a significant growth of 44.74%. In FY 2012, the sales

revenue was $6,716 million which boost in FY 2013 with a growth of 20.91%. The

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increasing trend is possible because of supplying superior products in the both local and

global market.

 Finance Expense: Finance expense is an important issue for a company, as failing to

serve the interest a company can become insolvent and loss goodwill in the market. The

finance expense of Fortescue has increased in last three years. The finance expense was

$741 million in FY 2014, $586 million in FY 2013 and $565 million in FY 2012. This is

due to change in interest rates and payment behavior.

 Net Income after Profit: This element measures the overall profitability of the company.

It is the major indicator of a company’s profitability. The net profit after tax was $1,559

million in FY 2012 which enhanced to $1,746 million in FY 2013 and in FY 2014 it

again boost to $2,740 million. The growth in sales has led to improve the net profit after

tax.

4. Analysis on Balance Sheet Items: The balance sheet is the snapshot of the entity comprised

of Assets, Liabilities and Total shareholders’ Equity. For scrutinizing the financial performance

of Fortescue, the main three items of balance sheet are illustrated below:

 Total Current Assets: Currents assets are important aspect for an organization as current

assets assist to solve the liquidity problems of the company. There are many companies

which are profitable but have been bankrupted for liquidity crisis. The current assets of

Fortescue consist of cash and cash equivalents, trade and other receivables, inventories,

current tax receivable and other current assets. The total current assets have increased to

$4,477 million in FY 2014 from $3,572 million in FY 2013. However comparing FY

2013 to FY 2012, the current assets declined slightly as in FY 2012 the current assets was

$ 3,650 million. The increase in cash, inventory and other current assets has enhanced the

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total current assets in FY 2014. Excess cash tied in current assets forgo the further

investment opportunities.

 Borrowings and Finance Lease Liabilities: An organization’s borrowing items are

crucial to know from what sources and from what amount the company is funding the

investment. It helps to determine the leverage and coverage ratios. Fortescue current

portion of borrowings and finance lease liabilities decreased in the last three years. It was

$283 million in FY 2012, $205 million in FY 2013 and 154 million in FY 2014. The

long-term portion borrowings were 9,403 million in FY 2014, 12,486 million in FY 2013

and $ 8,218 million in FY 2012.

 Retained Earnings: Retained earnings are profits generated by a company that are not

distributed to stockholders as dividends but are reinvested in the business. Retained

earnings are imperative as its shows the net worth of the company. Fortescue retained

earnings was $6,221, $4,043 and $2,428 in FY 2014, FY 2013 and FY 2012 respectively.

The company’s improving trend of retained earnings portrays that is performing

profitably in the industry.

5. Major Changes in Cash Flow Statement: Analyzing the cash flow statement of Fortescue,

the three major changes over the last three years in investing and financing activities are

Payments for property, plant and equipment - joint operations in investing activities and

Proceeds from borrowings and finance leases & Repayment of borrowings and finance leases in

financing activities.

 In FY 2014, the acquisition of property, plant and equipment in joint operation of $64

million was notable as there were no such investments in the last two years.

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 In investing activities the Proceeds from borrowings and finance leases was $7,330

million in FY 2013 against $3,638 million in FY 2012. In FY 2014 there were no

proceeds from borrowings and finance leases.

 The repayment of borrowings and finance lease has improved dramatically in the last

three years. In FY 2012 the repayment of $15 million significantly improved to $3,232

million in FY 2013 and $3,092 million in FY 2014.

 Another item in financing activities which is transaction with non-controlling interest of

$15 million in FY 2013 was found in the cash flow statement. There was no such

transaction occurred in both FY 2014 and FY 2012.

6. Ratio Analysis: Ratio analysis helps to present different performance indicators of a

company. Solvency ratios measure how a company meets its debt obligations, Leverage ratios

assess the company’s financial structure, Profitability ratios compute profitability and Operation

efficiency ratios determine the operating efficiency of a company. Analysis of different ratios is

demonstrated below:

a) Solvency Ratio

 Times Interest Earned Ratio: Times Interest Earned ratio which is also known as Interest

Coverage Ratio measures how well a company can cover the interest obligations. The

ratio shows an increasing trend which is 6.25 times in FY 2014, 5.15 times in FY 2013

and 4.90 times in FY 2012.

 Cash Coverage Ratio: Cash coverage ratio measures the cash available to pay interest.

This ratio also shows an increasing trend which is 6.53 times in FY 2014, 4.95 times in

FY 2013 and 4.47 times in FY 2012.

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7.00
Times Interest
6.00
Earned ratio
5.00 (EBIT/Interest)
4.00
3.00 Cash Coverage
2.00 Ratio
(EBITDA/Interest)
1.00
0.00
FY 2014 FY 2013 FY 2012

b) Leverage Ratio

 Total Debt Ratio: Total debt ratio was 41.11% in FY 2014 against 60.82% in FY

2013 and 56.44% in FY 2012. This ratio means that In FY 2014, 41.11% of

company’s assets are financed by total debt.

 Debt to Equity Ratio: This ratio was 55.76% in FY 2014 which means the

company’s capital structure consists of 55.76% debt and 44.24% equity. In FY

2013 the ratio was 70.58% and 69.32% in FY 2012.

80.00%
70.00%
60.00%
50.00%
Total Debt ratio (Total
40.00% Debt/Total Assets)
30.00% Debt to Equity ratio
20.00% (Debt/(Debt+ Equity)
10.00%
0.00%
FY 2014 FY 2013 FY 2012

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c) Profitability:

 Net Profit Margin: The net profit margin declined to 21.50% in FY 2013 from

23.21% in FY 2012 however it increased in FY 2014 to 23.31%.

 ROA: The ROA was 12.07% in FY 2014 against 8.37% in FY 2013. It shows

that every $100 dollar of asset the company is making 12.07 worth of net

income.

25.00%

20.00%

15.00% Net Profit Margin (Net


Profit/Sales)
10.00%
ROA (Net profit/Total
12.07% Assets)
5.00% 10.35%
8.37%

0.00%
FY 2014 FY 2013 FY 2012

d) Operating Efficiency

 Cost to Revenue Ratio: This ratio was 59.58% in FY 2014, 63.30% in FY 2013

and 59.68% in FY 2012. This ratio presents the percentage of cost in terms of

revenue.

 Total Asset Turnover: This ratio enhanced to 0.52 times in FY 2014 from 0.39

times in FY 2013. The company is generating $0.52 dollar of sales in every $1

dollar of assets in FY 2014.

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70.00%
60.00%
50.00%
40.00% Cost to Revenue Ratio
30.00% (Costs of sales/Sales)
20.00% Total Asset turnover (
10.00% Sales/Total Asset)
0.00%
FY 2014
FY 2013
FY 2012

7. Two Important Aspects for making Investment Decision: The financial analysis is based on

audited consolidated statements. The individual financial statements of Fortescue are not

presented clearly in the audited report. Before making an investment decision the investors

mostly considers the financial statements to know the overall performance of the company and

without the individual statements it is hard to understand what actually the position of the parent

company is.

Now-a-days investors not only consider the quantitative factors but also qualitative factors before

making investment decisions. As Fortescue is an iron producer, it has a significant effect on the

environment, however in the financial statements they didn’t mention about the management and

control of environmental costs by the company. Maintaining environmental management

accounting, the company can save its cost by improved use of resources and contribute positive

impact on environment and create a good public image.

8. Conclusion: Fortescue is one of the key major players in industry of iron ore producer.

Scrutinizing the qualitative factors like corporate governance, management etc. and financial

quantitative factors, it can be stated that the company is proficiently executing its operation.

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Appendix

Ratio Formulas

Profitability Margin

Net Profit Margin (Net Profit/Sales)

ROA (Net profit/Total Assets)

Gross margin (Gross margin/Sales)

Operating Efficiency

Cost to Revenue Ratio (Costs of sales/Sales)

Total Asset turnover ( Sales/Total Asset)

Leverage Ratio

Total Debt ratio (Total Debt/Total Assets)

Debt to Equity ratio (Debt/(Debt+ Equity)

Solvency Ratio

Times Interest Earned ratio (EBIT/Interest)

Cash Coverage Ratio (EBITDA/Interest)

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Top 10 Iron Ore Producers

Rank Country Iron ore production year

(thousands of tonnes)

World 2,950,000 2013

1 China 1,320,000 2013

2 Australia 530,000 2013

3 Brazil 398,000 2013

4 India 150,000 2013

5 Russia 102,000 2013

6 Ukraine 80,000 2013

7 South Africa 67,000 2013

8 United States 52,000 2013

9 Canada 40,000 2013

10 Iran 37,000 2013

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