Ratio commentary

When I began the task of calculating the ratios for Steel & Tube, I thought it was going to be quite a daunting process. Even though, I still considered myself a numbers person; towards the beginning of Assignment 2, I felt as though I had struggled throughout the term being able to relate to my firm or have an in-depth understanding of their financials. However, after receiving the marks that I had done for the assignment 1, I knew I was doubting myself for no reason and I had the ability and knowledge to calculate the ratios successfully. Also after watching Maria’s lecture, the task of calculating the ratios almost felt as though they were going to be easy with the most difficult task actually commentating on the findings and conclusions of the ratios.

Weighted average cost of capital

Martin suggesting using a Weighted Average Cost of Capital of 10% for step 8 unless we had reasons not to. Steel & Tube had a WACC of 9.19% for 2016, 10.5% for 2015, 8.8% for 2014 and 7.1% for 2013 which resulted in an average of 9.04%. I used the actual WAAC for each year for the Ratio Calculation instead of the 10% as I wanted to see the true figures not have that 1% variance.

 Profitability ratios

 My understanding of the Net Profit Margin is that the higher this percentage is, the better; as it indicates the business’s efficiency and how much of each dollar collected as revenue by Steel & Tube and is turned into profit. This margin has been reasonably consistent over the last four years at Steel & Tube with it progressively and constantly increasing each year whilst still not dropping below 4%. Seeing these good numbers, it made me wonder where Steel & Tube were sitting in comparison to other firms so I compared my ratios to Maria’s firm Wesfarmers. Even though the scale of these firms is non-comparable; at the end of the day every company wants to have a reasonable Net Profit Margin. Even though Wesfarmers Net Profit Margin fluctuates significantly in the past four years, they have maintained a positive figure. As mentioned, Steel & Tube and Wesfarmers are entirely different industries however Steel & Tube are generating more profit than Wesfarmers for every dollar spent with the exception of 2014.

Return on Assets (ROA) is also used to tell us how efficient the company is but in the sense of how much profit is generated from assets. Again, with this value, I believe that the higher this percentage is; the better. This means that the business is more profitable and it is earning more money on less investments. Comparing this to Wesfarmers, again shows different figures with their ROA not being consistent over the four-year period. Unlike Steel & Tube, Wesfarmers have increased every year except for the most recent whereas Steel & Tube had a small drop of 0.5% in 2014 but then consistently increased years after. ROA was actually a concept I had a good understanding on and believe that the positive and reasonably consistent figures for Steel & Tube tell us that they have continued to generate earning from their assets every year with the exception of 2014. The 2014 ROA made me wonder what happened in that year to have a lower return on assets than any of the other year. Looking back at my financial statements I determined that it wasn’t that they had less assets as they have increased assets significantly every year but it was possibly because their Net Profit after tax was only approximately 5.9% greater than 2013 but they had a sales Revenue that was approximately over 12.2%.

Efficiency ratios

Looking at the efficiency ratios for Steel & tube, it did exactly what I thought it was going to do; which was to indicate how effective the firm was operating. My understanding of efficiency / asset management ratios, is the firm’s ability to use their assets whilst managing their liabilities in a resourceful manner. Even though Steel & Tube operate in both the service and production industry; their inventory listed on the balance sheet is based off their production aspect. Once I had calculated the ratio, I found that there is a significant amount of time that Steel & Tube actually held onto their inventory for before they saw any profit from it. These figures are quite inconsistent and vary each of the years out of the four that were analysed. It does make me wonder how long is too long to have stock sitting in inventory not making or producing revenue? The shortest time that the inventory was on hand was approximately 80 days. When I reflect and compare this to Wesfarmers, it is almost double. My first thoughts were that this is a bit crazy to think that the figures are almost double but then I realised that a big contributing factor to Wesfarmers and their inventory is partly made up of food products from Coles which would mean a lot of the food has expiration dates as well as consumers coming into purchase the goods on a daily basis. Whereas the steel industry would only have commercial or big companies purchasing the good most of the time infrequently. My understanding of the asset turnover ratio for Steel & Tube is that they have produced a brilliant rate. This is because this ratio is what actually determines how well the firm generates sales from their assets. Currently Steel & Tube are turning $1.56 into sales for ever $1 of assets. This result seems like a great one when I compare it with Wesfarmers as it is a higher figure than their already good asset turnover ratio. The asset turnover ratio for Steel & Tube has fluctuated every year however it has consistently not dropped below 1.5 in the four-year period that is analysed. This did however have me questioning what is was that is happening with the firms asset which causes them to drop every second year

Liquidity ratios

Liquidity ratios are those that measure a company or firm’s ability to pay their debt and are another ratio where the higher the ratio is, the better it is. By dividing the current assets by their current liabilities, it proved that Steel & Tube are very capable of paying their debts. In 2016 Steel & Tube had the lowest of their liquidity ratio which translated into them having 1.56 times more current assets than liabilities. This was the lowest ratio that was calculated over the four-year period. Whereas Wesfarmers produced figures less than 0 which means that they had more liabilities than assets for two out of the four years analysed.

Financial structures ratio

 Continuing on from the liquidity ratios I was expecting the debt / equity ratio would put Steel & Tube in a very good place but this was not the case. The Debt / equity ratio was reasonably simple to calculate as it is exactly what it sounds like; which is the ratio of debt to equity within the firm. Steel & Tube have slowly but consistently increased their debt to equity ratio since 2013 with it more than doubling in the four years. The question I keep asking myself, is why? Steel & Tube appear to have had a consistently high debt ratio since 2014 which is around 40-45%. This is one of the only ratios that Steel & Tube and Wesfarmers appear to have quite similar figures with high debt/equity ratio as well as reasonably high individual debt and equity ratios. The conclusion that I have come to with Steel & Tube’s financial structure ratios is that they are a moderately risky firm. I believe this is subject to change because of how much their debt ratio has changed from 2013 to 2016 which was over 15% in such a short period of time

Market ratios

 Completing the market ratios was actually the first section of the ratios where I ran into issues. This occurred when I was attempting to find my number of ordinary shares issued. I had located the number of issued ordinary shares but I hadn’t divided them by 1000. A peer had realised what I had done wrong once I had posted to the forums and social media looking for assistance. If the Earnings Per Share (EPS) where not already listed in my financial statements, I am not sure if I would have noticed my mistake. Steel & Tube have consistently increased their EPS for their investors by increasing a minimum of 4c every year in the four years that are analysed.

When analyzing the EPS to the dividends per share (DPS) I found that there was not much of a difference between the two at all.  The DPS for Steel & Tube were quite consistent over the four-year period and highlights that they are focused at returning value to their investors as they have increased every year. In comparison to Wesfarmers, Steel & Tube are not performing anywhere near as well but considering they have been a listed company for a reasonably length of time, in my opinion, I wouldn’t consider the earnings per share to be good value.

The Price per earnings ratio is to reflect the potential earnings of a company for their investors. From the price earnings ratios of Steel & Tube they are all positive and have only differed slightly over the four years that were analysed. I struggled to understand the Price earnings ratio for steel & tube and how it is an accurate representation of the success or performance of their firm considering the EPS is made up of the WACC for the firm and the WACC can be set and structured and unable to change each year.

Ratios based on reformulated financial statements

 Calculating the ratios from the reformulated financial statements was a lot easier than I was expecting it to be. Determining and understanding what they meant was the real task.  Based on the figures below for every dollar of shareholder equity Steel & Tube were generating between 10 and just over 13%. This is a very good result for the firm as it proves how profitable a business is by displaying how well the firm uses their investments to generate return/ profit. Moving onto Return on Net Operating Assets (RNOA) which we all know is the Tax operating income (OI) divided by the Net Operating Assets (OA). Steel & Tube have had a relatively stable RNOA which have seen their figures increasing slightly from 2013 to 2015 where they then dropped in 2016. My understanding of the RNOA increasing would mean that the assets are generating revenue for the firm and the assets are not costing the firm.  The Net Borrowing Cost (NBC) of a firm is the cost of debt for the firm and can be interpreted or looked as the average interest rate that the firm pays on finance. Steel & Tube have a significantly low NBC which is a great thing because it costs them less tax for their financial obligations. Compared to Wesfarmers, Steel & Tube have a better NBC ratio and have consistently kept this figure low whereas Wesfarmers has fluctuated each year analysed. If the financial statements were restated incorrectly, I can now see how much of an affect this would have on the ratios. If the Financial and Operational costs were not categorised correctly, it would alter the ratio completely providing an entirely different financial story potentially causing a firm to be paying more tax then necessary on their obligations. Profit Margin (PM) and Asset Turnover would have to be the simplest of all ratios and in my opinion; the easiest to understand with the most to relate to. The PM shows how much earnings are kept for every dollar of sales whereas the ATO shows the sales generated relative to the firm’s assets. The PM has increased consistently each year which indicates that the profitability ratio displayed as a dollar value is that there is a 5c net income for each dollar of total income earnt in 2016. It’s interesting to compare these figures between Wesfarmers and Steel & Tube because of the completely different industries and the sheer volume of income that is different between the two. One thing I really need to just say quickly about ATO (Asset Turn Over) is that I am not a fan of the acronym purely because it is the same acronym as Australian Taxation Office. The ATO is another ratio where the higher the figure, the better it is. When comparing the ATO to the TATO, the ATO is consistently at a higher rate which means that Steel & Tube are not generating as much revenue from their operating assets.

Economic profit

Moving onto the final ratio calculation of Economic profit. Economic profit is to tell us if a company of a firm has an economic profit or loss and if they are returning at a rate below or above their cost of capital. As mentioned above, I have used the actual weighted cost of capital which Steel & Tube have provided for this ratio calculation. In 2014, they recorded a negative figure with the other three years being positive but not consistently increasing. Steel & Tube have had a combination of both experiencing an economic profit and loss over the last four years. The year the loss was experienced, it was a loss of -1085.35. If you look at the contributing factors that make up this formula it is easy to see why it is in fact a negative economic loss. Steel & Tube produced the lowest RNOA in that same year which in turn has significantly contributed to the negative economic profit figure. The NOA has actually began to increase consistently since the year with the low RNOA which I think will contribute to the continued success of a positive economic profit for the firm’s future.

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