FIN600 Financial Management Case Study 2 Sample

FIN600 Financial Management Case Study 2

Assignment Details

Instructions

The basic requirement isto undertake a general financial analysis, comparing financial position and performance over the two most recent financial years, of an ASX listed company. Your Learning Facilitator will provide the details of the ASX listed company.

The annual report for the chosen company should be available on the company website and/or will be provided by your Learning Facilitator.

The analysis should consider each of the following financial ratios:

- profitability and market performance

- efficiency,

- liquidity,

- capital structure

This assignment will contain two elements:

1. Schedule(s) of relevant ratios and other useful calculations

- The detailed calculation of relevant ratios and other useful calculations should be included, as one appendix, prepared using Excel. An example template is provided under the assessment 2 information, FIN600 Assessment 2 Appendix template.xls.

- You will be advised by your facilitator as to which ratios to calculate.

- You are advised to show the formulae used in determining particular ratios and other figures.

2. A written report

The written report is the main element of this assessment. A sample template is provided under the assessment 2 information, FIN600 Assessment 2 report template.doc.

The written report should:

- Explain what is revealed by the ratios and other calculations, in the context of the company’s profitability, asset efficiency, liquidity, capital structure, and market performance.

- In particular, any important changes over the two financial years should be identified, discussed and, where possible, explained.

- Provide an overall assessment of whether the company, over the recent financial year, has been better than the previous financial year, in the perspective of existing equity investors (shareholders).

In preparing this report, students should:

- analyse the financial statements of the business;

- identify key ratios and apply ratio analysis;

- argue the case of why the organisation may or may not succeed in the future and what the business should be doing to help it succeed;

- consider the impact of the political and competitive environment on the business;

- include external factors that need to be taken into consideration and the likelihood of a merger or acquisition;

- provide a recommendation, that is, would you invest in this company after your own analysis or under what circumstances would you buy/save the business?

Solution

1. Introduction

1.1 Background and Business

Fortescue Metals Group (Fortescue) is a pioneer when it comes to the iron ore sector and has crafted a niche in the green energy sector too. Established in 2003 the company and having a concentration in Western Australia Pilbara, the mining company operates in coal, rail and port network. With the due passage of time the company attained new heights in sustainable mining as well as decarbonization

Fortescue's business spans multiple segments:

• Metals: It has large iron ore deposits in Pilbara and wants to work for magnetite-mining licences. It can make more than 190 million tonnes per year.

• Green Energy: It is growing rapidly its portfolio in green hydrogen and green ammonia renewable sources around the world focusing on decarbonization by 2030 (Fortescue annual report 2024).

• Technology: Fortescue develops green technologies, including battery-powered vehicles and green metal exploration, to help power mining and energy projects.
Fortescue’s commitment to "Real Zero" emissions for its mining by 2030 positions the company as one of the most sustainable companies in the world (Fortescue annual report 2024).

2. Company Analysis

Fortescue achieved strong operating results during FY24 thanks to its efficiencies, innovative work and decarbonization efforts. Other notable successes include low production costs, as well as reaching important milestones in green energy and hydrogen initiatives. As a result, the firm’s underlying net profit after tax stood at USD 5.7 billion and cash position was USD 4.9 billion, confirming the firm’s strong balance sheet (Fortescue annual report 2024).

Financial highlights/events of 2024

Iron Ore Shipments: 191.6 million tonnes, keeping production steady despite problems including ore car derailments.

Production Cost: C1 USD 18.24/wet metric tonnes, operation efficiency.

Cash Position: USD 4.9 billion cash reserves (Fortescue annual report 2024).

Green Energy: Built a 100 MW solar farm at North Star Junction, which reduces 125,000 tonnes of CO2 emissions a year (Fortescue annual report 2024).

Decarbonisation: Made further headway towards Real Zero 2030, with Australia’s biggest hydrogen plant up and running.

Economic Outlook

Global Green Energy:

• Fortescue has increased green hydrogen deployments in the U.S., Brazil, Norway, and Australia.

• Decarbonization investments (including battery electric haul trucks and solar-generated infrastructure) bolster its long-term approach.

Sustainability Goals:

• Zero Scope 1 and 2 emissions by 2030, zero Scope 3 emissions by 2040 (Fortescue annual report 2024).

• Increased investment in green technologies and innovation to maintain its lead in green mining..

Iron Ore Demand:

• Underpinned by the robust Chinese demand, Fortescue remains a key partner which helps the business expand.

Risks and Challenges:

• Geopolitical instability and iron ore price shocks may impact operations.

Ratio Analysis

2.2 Profitability and Market ratios

Suggested Discussion

The profitability ratios in 2024 differ a bit from 2023. Return on Equity (ROE) went from 27.14% in 2023 to 30.30% in 2024, as more equity is used to generate profits. So did the Net Profit Margin which rose to 31.38% compared to 28.43% indicating a higher profit per unit of revenue. The Gross Profit Margin not shift significantly — around 63.69% — suggesting stable operational efficiency. However, the ROA decreased from 16.95% in 2023 to 19.50% in 2024, suggesting a misallocation of resources.

Enhanced ROE and Net Profit Margin — due to higher net profit and better cost control. Yet the dramatic reduction in ROA probably reflects an accelerating growth in total assets from green energy projects and infrastructure investments which have yet to generate proportional returns. This means that while the margins are rising, the company is paying huge long-term growth costs.

The Expense Ratio declined massively from 60.38% in 2023 to 17.45% in 2024 due to lower operational expenses related to ongoing decarbonization. The constant increment in Gross Profit Margin indicates that Fortescue consistently achieves high operating efficiencies in the face of external pressures and rising costs (Carlon 2019).

This positive ROE growth and Net Profit Margin is a testament to strong profitability. But the negative decline in ROA means that assets should be more effectively deployed to achieve proportional returns (Balamuralikrishnan. et al., 2023)

These numbers reflect a financially sound business that is aligning short-term profitability with long-term green energy investments. Profitability is incredibly robust, but the way assets are used will play a key role in keeping growth going and making the most of its bold investment.

3.2 Efficiency ratios

Efficiency ratios all indicate slight drops from 2024 to 2023. Days Inventory, Days Debtors and Times Inventory Turnover, Times Receivables Turnover were also falling, which signaled an accelerated business cycle (Pucheta-Martiinez & Garcia-Meca 2019).

The decrease in efficiency ratios is likely the result of increasing inventory levels and slight shortening of the cash conversion cycle caused by increased operational expenses and decarbonization investments. Additionally, higher Days Debtors means slower collection (Pucheta-Martiinez & Garcia-Meca 2019).

Days Inventory increased from 53 days in 2023 to 75 days in 2024, reflecting inventory increases. It might be because supply chains are being adapted or because they are being prepared. The Times Inventory Turnover decreased, further showing sluggish inventories.

Asset Turnover was fairly constant (0.62 in 2024 vs 0.59 in 2023), for MBA assignment expert meaning that revenue was consistent relative to assets, even as investments climbed.

The negative changes in Times Receivables Turnover entail slower collections, perhaps because of changes in customer credit terms (Sofronas et al., 2019).
This decline in ratios points to Fortescue’s need to improve processes and management of working capital to ensure that liquidity and profitability can be maintained in the face of continuing investment and economic volatility.

3.3 Liquidity ratios

The liquidity ratios rose in 2024 versus 2023 which indicates that Fortescue Metals Group enhanced its short-term funding capacity. The Current Ratio and Quick Ratio also rose while the Cash Flow Ratio was slightly down but solid due to the firm’s strong cash flow generation capabilities (Fortescue annual report 2024).

We saw a higher Current Ratio and Quick Ratio because current assets (eg, more cash reserves and inventories) grew more quickly than current liabilities (eg, slower growth in current liabilities). But, despite this slight decline in the Cash Flow Ratio, operational cash flows failed to keep pace with an increase in current liabilities, possibly due to higher operational and decarbonization costs.

The Quick Ratio (excluding inventory) grew from 1.98:1 in 2023 to 2.10:1 in 2024. It indicates the company’s short-term ability to cover short-term needs without a dependence on inventory purchases, a sign of short-term profitability.

Despite a modest drop, the Cash Flow Ratio did not change significantly and indicated the company’s consistent operating cash flow (Shah 2023)
Its positive ratios — including the Current Ratio and Quick Ratio — exemplify Fortescue’s need to keep cash flowing while balancing decarbonisation and green energy transition costs.

Boosted liquidity ratios demonstrate that Fortescue is positioned to weather the short term, service its business requirements, and maintain investments in its long-term green energy strategy without financial distress (Smulowitz et al., 2023).

3.4 Gearing ratios

Suggested Discussion

These gearing ratios rose slightly in 2024 versus 2023, which was a measure of Fortescue’s sustainability in the balance sheet as measured by the ratio of debt to equity and assets. It reduced certain metrics, like the Debt to Equity Ratio and Debt Ratio which imply low financial leverage. The Equity Ratio slightly rose, further demonstrating the company’s strong equity position.

Gearing ratios rose primarily due to steady equity growth that outpaced increases in liabilities. Fortescue’s tactical investment in green energy and decarbonisation schemes was offset by prudent financial controls that curbed debt growth. In the meantime, regular operating cash flows bolstered the company’s ability to hold onto its liabilities.

The Debt Coverage Ratio went down slightly from 1.04 in 2023 to 0.99 in 2024. That means that while the company’s non-current liabilities remained relatively constant, the cash flow from operations was slightly lower. Yet this is presumably a short-term consequence of increasing operational and decarbonisation costs (Sofronas et al., 2019).

The Interest Cover Ratio increased from 25.52 times in 2023 to 114.70 times in 2024 and was indicative of Fortescue’s high operational earnings and low interest liability. Such a stability underlines the company’s minimal debt exposure and ability to easily fund interest payments.

This positive decrease in gearing ratios was due to Fortescue’s successful debt management and share appreciation. Yet the minor dip in the Debt Coverage Ratio indicates that operational cash flows need to be closely tracked against growing liabilities.

Improved gearing ratios emphasize Fortescue’s financial stability and the capacity to fund its bold green energy agenda without excessive leverage. Yet the ability to generate steady operational cash flows will be a key consideration for maintaining sustained financial stability as the company continues its strategic growth efforts (Taher 2023).

3. Recommendations and overall assessment

Discussion

Has the reporting year been better than the prior reporting year for the company?

This reporting year (2024) has been a bit of a constant (though somewhat worse than 2023) in most ratios. The Return on Equity (ROE) and Net Profit Margin also sank somewhat (ROE from 32.17% to 30.28%, Net Profit Margin from 27.14 % to 30.30%) that is the company was quite profitable but rising costs and strategic investment reduced efficiency by only a slight margin.

Also moderate declines in efficiency ratios: Times Inventory Turnover (6.37 in 2023 to 4.84 in 2024) and Times Receivables Turnover (33.96 in 2023 to 30.85 in 2024), indicate shorter periods of activity. But liquidity ratios like Current Ratio (2.67:1 vs 2.45:1) stood above average and that suggested better short-term balance sheets.

While some ratios dipped from rising costs and investments, Fortescue’s strong operational and financial structure demonstrates stability and makes it resilient through the rocky road ahead.

Will the company succeed in the future?

Liquidity and Gearing Ratios for Fortescue Metals Group – It has a well-positioned company for growth in the future. That the Quick Ratio is better (2.10:1 vs 1.97:1 in 2024), and that the Interest Coverage Ratio stays consistent (114.70 times) – reaffirm short-term and long-term financial strength. The debt service and production of a stable cash stream position the business as an asset to be invested in and run.

The gearing ratios, including Debt to Equity Ratio (54.00% vs 57.00%), represent better leverage. However, the drop in Debt Coverage Ratio (0.99 in 2024 vs 1.04 in 2023) calls for tracking operating cash flows versus debt.

Decarbonization and green energy are at the heart of Fortescue’s priorities, and with its sound funding, that equates to success. Some efficiency ratios drop, but these are short-term effects of strategic investments that will return substantially in the future. Thanks to its robust operating performance and growth-driven initiatives, Fortescue is on track to keep its market leadership position and drive sustainable growth.

The likelihood of a merger or acquisition of the company?

The odds of Fortescue Metals Group getting acquired or being purchased by any other company, considering its ratios and liquidity, are pretty low. This firm has a good Equity Ratio (65.00% in 2024, compared to 64.00% in 2023) and Debt to Equity Ratio (54.00% in 2024, compared to 57.00% in 2023) suggesting healthy equity and healthy leverage. Such numbers indicate autonomy and minimal outside capital, meaning no immediate merger or acquisition (Tudose & Avasilcai 2019).

Additionally, the 114.70 times Interest Coverage Ratio for 2024 and 147.51 times in 2023 demonstrate Fortescue’s capacity to successfully service interest costs while being operationally and financially sound. The fundamentals are so robust that the company could not possibly be acquired as it is not in any sort of financial distress. But its growing green energy portfolio could make it an appealing target for strategic integrations with others focused on renewable energy.

In an effort to create greater potential for strategic partnerships, Fortescue might emphasise joint ventures rather than mergers. That’s what allows it to move in the direction of its growth without being confined by it.

Suggest what should the company be doing help it succeed

Fortescue would like to increase its Efficiency Ratios – Days Inventory (from 75.39 days in 2024, from 53 days in2023) and Times Inventory Turnover (from 6.78 to 4.84 times). These ratios indicate poor inventory turnover that can be corrected with supply chain optimization and demand prediction.

In addition, we are having the slightly lower Debt Coverage Ratio (1.04 vs 0.99 in 2024) which means that we will need to make the most of our cash flow. Fortescue will have to cut costs and watch cash flow carefully in order to keep its debt well covered. By addressing these, Fortescue can ensure it operates efficiently and stabilises its cashflow so it can maintain its market position in the industry and meet its sustainability targets.

External impacts that need to be taken into consideration The impact of government on the business

Fortescue Metals Group is part of a highly regulated industry, with both internal government policy and externalities at stake. The company’s Australian mining operations are under rigorous environmental controls, particularly in terms of emissions, land use and disposal. Fortescue’s ambitious decarbonisation programme complements the Australian government’s renewable energy drive, providing grants, subsidies and favorable policies to back its green agenda. But violating these rules can lead to fines or project delays.

Political influences in export markets like China influence Fortescue, too (Mcgregor 2022). Being a leading supplier of iron ore to China, the company is well-versed in trade and geopolitical tensions. Tariffs, export tariffs or government policy shifts in those areas could influence revenue stability.

Furthermore, Fortescue’s international growth in green energy projects places it under international regulations and political pressure. Its operations in the U.S. and Europe, for example, are subject to energy regulations and competition law, and emerging markets may be fraught with bureaucratic bottlenecks and political turbulence. Fortescue must maintain robust compliance systems and expand its reach in order to mitigate these risks.

Would You Invest in This Company?

Given its excellent results and long-term growth, Fortescue Metals Group appears to be a good investment. Its Return on Equity (30.28% in 2024) and high liquidity ratios, like the Current Ratio (2.67:1), imply stability and sound resource management. Its emphasis on sustainability and decarbonisation positions it at the forefront of green energy to take advantage of international investment trends.

But minor decreases in Net Profit Margin (31.38%) and Debt Coverage Ratio (0.99) indicate near-term challenges caused by increasing operating expenses. However, despite these concerns, the company’s strong gearing ratios and innovation-focused strategy have made it a solid and reliable bet.

Long-term investors will find Fortescue extremely profitable given the global need for green energy solutions.

4. References/Bibliography

Carlon, S. (2019). Financial accounting: reporting, analysis and decision making. 6th ed. Milton, QLD John Wiley and Sons Australia, Ltd, https://eprints.qut.edu.au/125138/

Pucheta-Martiinez, M. & Garcia-Meca, E. (2019). Monitoring, corporate performance and institutional directors. Australian Accounting Review, 29(1), 208-219. doi:10.1111/auar.12262

Balamuralikrishnan C, Francis G.I, Arul R,P, Rajesh E, Natarajan R, & Satyanarayana P. (2023). The Relationship between Promoters’ Holdings, Institutional Holdings, Dividend Payout Ratio and Firm Value: The Firm Age and Size as Moderators. Journal of Risk and Financial Management, 16(11), 489–489. https://doi.org/10.3390/jrfm16110489

Fortescue annual report. (2024). Annual Report 2024 Annual General Meeting. Retrieved from https://cdn.fortescue.com/docs/default-source/uncategorised/fy24-annual-report.pdf

Fortescue. (2024). About. Retrieved from: https://www.fortescue.com/en/about-fortescue

Shah, F. (2023). Financial Accounting for Management, Third Edition, Paresh Shah, Oxford University Press. Journal of Business Strategy Finance and Management, 05(01), 58–61. https://doi.org/10.12944/jbsfm.05.01.06

Smulowitz, S., Cossin, D., & Lu, H. (2023). Managerial Short-Termism and Corporate Social Performance: The Moderating Role of External Monitoring. Journal of Business Ethics, 188(4). https://doi.org/10.1007/s10551-023-05498-7

Sofronas, C., Archontakis, F., & Smart, P. (2019). Decision making under uncertainty? R&D activity and market value during financial crisis. European Journal of Innovation Management, 23(3), 383–401. https://doi.org/10.1108/ejim-05-2018-0103

Taher, A. (2023). Do corporate values have value? The impact of corporate values on financial performance. Future Business Journal, 9(1). https://doi.org/10.1186/s43093-023-00254-9

Tudose, M. B., & Avasilcai, S. (2019). The assessment of the financial performance based upon ratios. A comparative analysis. IOP Conference Series.Materials Science and Engineering, 568(1) doi:https://doi.org/10.1088/1757-899X/568/1/012069

McGregor, R. (2022). Chinese coercion, Australian resilience. Retrieved from: https://www.lowyinstitute.org/publications/chinese-coercion-australian-resilience