The accounting ratio of the company can be analysed using the various types of financial ratios computed in the excel file. These ratios fall into many different sub categories like operating ratios, profitability ratio, activity ratios etc. Accounting Performance Assignment Help solution is of consultant project.
The activity ratio of the company in the last three years provides a mix of results. The activity ratios basically show how much time does it take for the company for important activities like customer receivables collection, supplier outstanding payables and inventory being converted into finished goods and sold in the market. The Days outstanding of AR for the last three year shows a bit of a spike in 2010 but has been improved again in the next year which shows that the company is becoming aggressive with respect to collections which is good for the working capital of the company. The days in AP is also high compared to AR which shows that the company is slower in giving out payments than in receiving them which gives the company a lot more cash in working capital. The worrying factor is the days in inventory which has increased by 20% over three years. This means that the company is not able to move all its inventory at a given pace and is lacking in sales and can do better.
The liquidity ratios of a company help in understanding the amount of liquid assets like cash that the company holds which can cover its short term obligations. By the looks of it the company is doing well in the liquidity ratios as the current ratio seems to be improving year on year for the past three years for the company. The company when compared to its closest rival which is BHP, shows a significantly better current ratio which increases the working capital of the company and its ability to pay the short term debts.
The solvency ratios help understand the ability of the company to cover its financing costs in the short term. One of the ratios which shows this is the interest coverage ratio which shows a heavy dip in the last but one year but which has been recovered in the past financial year by the company.
The profitability ratios are the key ratios for the shareholders of the company as they show how profitable the company is actually is. The ROE of the company has dipped heavily in 2012 but has since recovered and the company has strong fundamentals which will help it boost this ratio to pre-2012 levels. Similarly, the profit margin of the company has also been recovered over the last year which shows a strong upward trend and a better performance by the company.
Know more about Financial Accounting.
The market performance of the company can be judged based on the Beta and the Jensen alpha along with the market statistics of the share value of the company. The beta of the company has been calculated as 1.39 which shows that the stock is volatile to the external market situation and the price movements are correlated to the market.
A Jensen’s alpha calculates the return of the stock given its risks. It is an indicator which shows how much return the stock is earning given the amount of risk that is involved in investing in the stock. Currently, the Jensen’s alpha has been computed as -0.08 which is negative. Hence, this shows that the risk of investing in the stock outweighs the returns being given by the company and stock investment currently would not be prudent or advisable.
Annualized Stock Performance
The annualised stock performance also show how the standard deviation is high compared to the market which shows high volatility as the stock has fluctuated from mean more than the market which shows higher risk. The beta is also an example of the risk that the stock has with respect to the returns.
Stock price analysis:
The chart above shows the stock price trend of the company against its main rival and the market. The chart above shows that the market in general has risen in 2010-2011 to record levels and then had a dip in the year 2012 post which it has again started to recover in 2012-2013. The same holds true for the BHP which is the chief competitor of the company. While Rio has been outperforming the competition till 2012, the dip in Rio in year 2012 has been huge when compared to the market and the competition. This shows that the stock is more volatile and more prone to dips due to market conditions. Although now recovering, it is still not beating the competition in the trends till 2013 where BHP is still ahead of it.
The current debt to capital ratio of the company stands at around 31%. The optimal ratio for the company would be around 40% debt which would be ideal considering the industry and the market of the company. The company is improving on all the key indicators post the troubles in 2012. The sales of the company have again looked up while more importantly, the costs of the company for these sales has gone down which means that the company is also concentrating on lowering costs along with increasing sales. The company profit margin also shows an upswing after 2012. All these changes post 2012 make the company a bit risky to invest in since it has moved around a lot in the market and would more time to stabilise. Currently the volatility of the stock is high and so is the risk when compared to the returns.
In conclusion, it is recommended that risk averse individuals stay away from the stock as it might fluctuate a bit more before stabilising but for risk neutral or high risk takers, this stock can be invested in keeping the future of the company in mind.
Read about Return on Investment.
The main issue with the Rio performance has been the one off write off with bad market timing in 2012. Rio took the decision to one-off write-off the business in Mozambique in coal and aluminium as part of the management decision. These write offs put a downward pressure on the financials and created a complete negative financial report for the company post which the stocks tanked more than usual given that the market conditions were not good.
Rio should leave behind 2012, as it has, and focus on developing its core businesses ahead. It has already shown a strong comeback in 2013 and should continue on the same path ahead.
- Jegadeesh, N., & Titman, S. 1993, Returns to buying winners and selling losers: Implications for stock market efficiency. The Journal of Finance, 48(1), 65-91.
- Mautz, R. D., & Angell, R. J. 2006, Understanding the basics of financial statement analysis. Commercial Lending Review, 21(5), 27-34.
- Banerjee, S., Gatchev, V. A., &Spindt, P. A. 2007, Stock market liquidity and firm dividend policy. Journal of Financial and Quantitative Analysis, 42(02), 369-397.