Blue steel financial report

Executive summary
The best way to analyze a business is to use its financial statement.
Business analysis helps both shareholders and decision makers in the entity to take the proper decisions. Shareholders will decide based on the analysis whether to invest more or sell. The decision makers or managers of the company will understand the performance of the company. Thus, managers will be able to follow the proper strategy.
Assets, revenues, liability and financial ratios are among the tools a financial manager should be using to take a deep look into the business.
Also knowing the industry, the country and understanding the environment of the business also help in making decisions about the company.






















Table of contents
Executive summary 5
1. Introduction 8
2. Background 9
3. Revenues 10
4. Profits 10
5. Dividends 10
6. Taxes 11
7. Account receivable 11
8. Inventory 11
9. Ratio Analysis 12
9.1 Liquidity Ratios 12
9.1.1 Current ratio 12
9.1.2 Quick, or Acid Test ratio 12
9.1.3 Account payable turnover ratio 13
9.2 Asset Management Ratios 13
9.2.1 Inventory Turnover Ratios 13
9.2.2 Number of days in inventory Ratios (DSI) 14
9.2.3 Total assets turnover Ratios 14
9.2.4 Working capital turnover ratio 14
9.3 Profitability Ratios 15
9.3.1. Gross profit ratio 15
9.3.2 Operating profit margin (or Return on Sales) Ratios 15
9.3.3. Net profit margin (or net Return on sales) Ratios 16
9.3.4 Return on stockholder's equity (or return on net worth) Ratios 17
9.4 Financial leverage ratios 17
9.4.1 Debit Ratio 17
9.4.2 Debt to Equity Ratio 18
9.5 Efficiency ratios 19
9.5.1 Collective period ratio 19
9.5.2 Assets to sales Ratio 20
Conclusion: 20
Recommendations 20
References 21
Appendix 1 23
Appendix 2 25
Dividends 25
Appendix 3 26
Working capital 26
Appendix 4 27
Calculations of the ratios 27























1. Introduction
This report aims to examine in detail the 2014 Annual Report of the BlueScope Steel. We will gain an understanding of the level of activity you can expect in such information and a measure of the degree of decision management exercises in presenting information to its shareholders.
This particular report was chosen because the management did a particularly good job of spelling out their decisions.
An extract from the 2014 Annual Report is included as Appendix.
The Appendix contains abstracts from the financial statement of the company and the calculations of the ratios.
What the investors consider good results?
Investors like the earnings to raise in a smooth way, otherwise the company shares drop severely. Because market does not like surprises specially bad news.
Also investors like to receive dividends particularly if they depend on it as income for example, retired people. If a company used to pay dividends, cutting them is received badly.
So, to gain the maximum benefit from Annual Report one should read it with some expectation. The most significant information is obtained from the difference between what we expect and what we find.



2. Background
BlueScope Steel is a flat product steel producer with operations in Australia, Asia, New Zealand, North America and Pacific Islands. It was demerged from BHP Billiton on 22 July 2002 as BHP Steel and renamed BlueScope Steel on 17 November 2003.
For the last 2 years, the company had been recovering from an earlier drop in earnings. The Chairman stated that 2015 is going to be a good year. (KRAEHE, 2014)
The company employs 16,000 personnel. It has its largest operating plant, an integrated steelworks, at Port Kembla, near Wollongong, New South Wales. In October 2011, No6 Blast furnace, one of two at Port Kembla, was shut down, reducing the plant's production capacity by 50% after the company decided to exit the export market.
(http://en.wikipedia.org/wiki/BlueScope_Steel, n.d.)




3. Revenues
Let's take a look at the sales.
The revenues increased from 7,290.3 M to 8,006.8, about 9.8% increase in revenues. It is good because it is about 3 times how the economy grows in a year (in Square 1). The economy in Australia grows by 3% a year. Steel business is tied to economy, so if it grows by only 3% and the company grows by 9% then this is considered great. (www.tradingeconomics.com/australia/gdp-growth-annual, 2014)
4. Profits
Revenues increased by 9.8% so it is expected that earnings increase by about same ratio. However, the company has equipment of about 3.5 Billion USD (2). This means that 46.6% of the total assets are invested in properties, plant, buildings and equipment (PPE).
This means that the company is a capital intensive business. The company has high fixed cost related to depreciation charges, high fixed costs related to interest expenses because these long term assets can be financed by long term debts. With financial leverage because the interest cost and operational leverage, because the depreciation cost, we expect that when sales go up earnings go up more in percentage basis than sales.
We can see that loss decreased from 85.6 M to 40.2 M. This is about 53% increase in profits. This gives indication that things are better than good. But such increase requires us to look more in depth.
5. Dividends
We can also notice that the company choose not pay any dividends in 2013 as well as 2014(See appendix). Retain the earnings in order to invest the money. Acquisition of other companies is a strategic decision and only managers can justify such a decision.
As was widely expected the company did not declare a dividend. Mr. O'Malley said recommencing a dividend was top of the board's agenda.
(http://www.smh.com.au/business/mining-and-resources/bluescope-steel-narrows-loss-but-misses-forecasts-20140825-107z4u.html, n.d.)


6. Taxes
There was only increase in tax by 2.6 Million than last year. Also there was an increase in deferred taxes by 42.9 M. this will make extra profit of 45.5 M.
7. Account receivable
Sales were up by 9% we also expect that receivable increase by the same percentage. It was not like that
(1062.5-952.3)/952= 11.5%
Sales increased by 9% while receivable increased by 11.5%. That means that the company is collecting slower. But the slower we collect then the bigger the reserve we need for bad debts. So what was done for the reserve for bad debts? It was decreased by (222-205.5= 16.5 M). This could be explained: If the company thought that the next year is going to be a good year then everybody buy will pay for them otherwise they will get no steel. However the normal practice is to increase the reserve. This 16.5 M are expenses that have not been incurred as a result the profit increased.
8. Inventory
The inventory increased by about 10%. This could be attributed to the company believe that the next year is going to be a good year, thus we should be ready to deliver and render more service. Good thinking and planning on behalf of the company.
9. Ratio Analysis

It is impossible to take a glimpse at the financial report of a company without looking at some of its fundamental financial ratios. The ratios may be divided into these categories:

- Availability of cash for operations: Liquidity ratios
- Efficient utilization of the resources: Asset management ratios
- Assure that the debt is within reasonable range: Debt management ratios
- Measure the degree of accounting profits: Profitability ratios


9.1 Liquidity Ratios

These ratios focus on the availability of cash to manage the day to day operations of the company.

9.1.1 Current ratio

(Current ratio = Total current assets / Total current liabilities)
The current ratio of a company gives us a quick way to look at its current assets and current liabilities. They should be nearly equal to one another.
The Assets are more than liability, thus the ratio is more than 1. However, the ratio decreased from 1.7 to 1.6. Although the assets of the company increased there were a significant increase in liabilities, this can be attributed to the new expansions of the company.
9.1.2 Quick, or Acid Test ratio
It is more stringent ratio that gives us the cash position of a company by removing the value of the inventories from the current assets.
(Quick, or Acid Test =Current assets-inventories /Current liabilities)
This indicates the cash position is getting worse (0.94 in 2013 falls to 0.84 in 2014).


9.1.3 Account payable turnover ratio
A measure used to quantify the rate at which a company pays off its suppliers. The short-term liquidity measure shows investors how many times per period the company pays its average payable amount.
Account payable turnover ratio= total purchases / average account payable
There is slight increase in the ratio between 2013 (1, 21) and 2014(1.33). This means that the company is paying of suppliers at a faster rate. It is an indication that the company is doing well through the year and gaining the trust of the suppliers.



9.2 Asset Management Ratios

The asset management ratios evaluate how assets are efficiently used by the company.

9.2.1 Inventory Turnover Ratios

Inventory Turnover = Cost of goods sold / Inventories (average)

This ratio measures the efficient use of inventories. As the turnover of the ratio increases that means that the company is managing its inventory properly. In steel industry the turnover is generally slow.

It seems like the company has gained more grip on the inventory because the ratio increased from 0.96 in 2013 to 1.04 in 2014. Or the company is managing cogs in a better way.

9.2.2 Number of days in inventory Ratios (DSI)
Number of days in inventory = 365/ Inventory Turnover
This ratio measuring the number of day's inventory is held. A financial measure of a company's performance that gives investors an idea of how long it takes a company to turn its inventory -including goods that are work in progress, if applicable- into sales. Generally, the lower the DSI the better the per. (www.investopedia.com, n.d.)
Because it is steel industry the days are usually high.

The drop in the number of days from 380 to 350 indicates that the company managed to turn the inventory and/or into sales.


9.2.3 Total assets turnover Ratios

Total assets Turn over = Net Sales / Total Assets
For a more general picture of the productivity of the firm, we can compare the sales during a period with total assets that generate these sales. (Peterson ،Frank, 1999)

There is a significant increase in the utilization of assets. Every dollar in assets produces 1.06 dollars in 2014 compared to 99 cents in 2013.
9.2.4 Working capital turnover ratio
(Tables are in Appendix 3)

Working capital Turn over= Net sales / Average working capital

(Working capital = Current assets - Current liability)

It is also referred to as net sales to working capital. It indicates a company's effectiveness in using its working capital.

The ratio increased from 5.72 to 6.66.The ratio indicates that the effectiveness of the company in using working capital increased by 16%.

9.3 Profitability Ratios
These ratios indicate the profit earning capacity of a business. We will discuss here the general profitability ratios.

9.3.1. Gross profit ratio
This measure of general profitability of the business and a tool that indicates the degree to which selling price of goods per unit may decline without the resulting in losses on operations for the firm. The gross profit should be adequate cover the operating expenses and to provide for fixed charges, dividends and building up reserves. (Thukaram Rao, 2006)
Gross profit margin = Sales - Cost of goods sold / Sales

No significant change between the 2 years 41.7% in 2013 to 42.7% in 2014. However, the company shows a higher performance in utilizing its row materials.



9.3.2 Operating profit margin (or Return on Sales) Ratios

Operating profit margin = Profits before taxes and interest / Sales.
This measure is helpful to management, providing insight into how much profit is being produced per dollar of sales. As with many ratios, it is best to compare a company's ROS over time to look for trends, and compare it to other companies in the industry. An increasing ROS indicates the company is growing more efficient, while a decreasing ROS could signal looming financial troubles. (www.investopedia.com, n.d.)
The firm did a good job by increasing profits from -0.76% to 0.4%. There is an increase about 1.16%.



9.3.3. Net profit margin (or net Return on sales) Ratios

Net profit margin = Profits after taxes / Net sales
A high net profit margin suggests a firm control its cost or has a solid position within its industry that is not threatened by cost-cutting competitors. Low net profit margins suggest a firm has not controlled its costs well or that other firms in the industry offer lower prices that may threaten its competitiveness. (Gary Powell, 2005)

Increase from -1.1% in 2013 to -0.4% in 2014.The percentage shows that the company is getting a control on the financial situation that the loss is decreased. There are 38.1 M USD profit before tax in 2014, Compared to losses of 55.8 M USD in 2013. But the taxes in 2014 were 78 M USD, more than the double of the last year. That is the cause of the severe drop of net profit after tax.



9.3.4 Return on stockholder's equity (or return on net worth) Ratios

Return on common stockholders' equity ratio measures the success of a company in generating income for the benefit of common stockholders. (www.accountingformanagement.org, n.d.)

Return on stockholder's equity = (Profits after taxes /Total stockholders' equity)*100

It is obvious that the company managed to increase income from owners' equity. (-1.95% in 2013 to 0.89% in 2014)However, the company still suffer from the tax debts which is translated into losses.

9.4 Financial leverage ratios

Any ratio used to calculate the financial leverage of a company to get an idea of the company's methods of financing or to measure its ability to meet financial obligations. There are several different ratios, but the main factors looked at include debt, equity, assets and interest expenses.
A ratio used to measure a company's mix of operating costs, giving an idea of how changes in output will affect operating income. Fixed and variable costs are the two types of operating costs; depending on the company and the industry, the mix will differ. (www.investopedia.com, n.d.)

9.4.1 Debit Ratio



Debt Ratio = Total Liability / Total assets
It is a financial ratio that measures the extent of a company's or consumer's leverage. The debt ratio is defined as the ratio of total debt to total assets, expressed in percentage, and can be interpreted as the proportion of a company's assets that are financed by debt.
There is a slight increase in the ratio 0.39 in 2013 to 0.4 in 2014. It seems that the company may insist on this ratio. May be this ratio is accepted in huge industry like steel industry.

9.4.2 Debt to Equity Ratio
Debt to Equity Ratio = Total Liability / Total Equity
The company is a capital intensive one. A lot of money is invested in the equipment and machines, however, this equipment and machines are bought by debts or leased. In other words the company is highly leveraged.
This ratio expresses the volatile position of the company.
The more the business is on debt finance, that is, the more highly geared, the greater the risk. The risk we are referring to here is that if the interest rates go up or profit margin comes down, the entity will not be able to pay the interest or repayments due on its finance. (Bazley, 2010)

A high debt/equity ratio generally means that a firm highly dependent on the investors' money to support its existence not the money generated by operations.
Unfortunately this borrowed money from investors requires high pay back in the form of interests which should be paid as dividends. When the debts outweigh the returns that the company could generate from operations this can make the financial situation of the company volatile. Indeed this can lead the company to stop paying dividends to its shareholders (as in our case) and of course may lead to bankruptcy.

The ratio increased from 2013 (0.64) to (0.68) in 2014. This indicates that the company increased the borrowing, may be in the form of issuing more bonds, to keep running the business. There is an increase in debts 191.7 M USD.





9.5 Efficiency ratios
It is the ratios that are typically used to analyze how well a company uses its assets and liabilities internally. Efficiency Ratios can calculate the turnover of receivables, the repayment of liabilities, the quantity and usage of equity and the general use of inventory and machinery.
(www.investopedia.com, n.d.)
9.5.1 Collective period ratio

It is a measure of the efficiency of a firm's credit policy and collection efforts. This ratio depends highly on the type of industry.
 Collection Period = Accounts Receivable / Sales x 365 = Collection Period in Days

It is clear that the company gaining more control in collecting the money. (54.9 days in 2013 to 50.5 days in 2014)



9.5.2 Assets to sales Ratio

Assets to sales = Average assets /Total sales

The percentage decreased from 1.01 to 0.93 during the year. This indicates that the company succeeded in turning assets into sales although the company was expanding. Although this ratio is not widely used but in this case it is a parameter showing that company is getting healthier.



Conclusion:
1. The level of activity of the company increased during the financial year.
2. Decisions management exercised was in the benefit of the company.
3. Earnings increasing smoothly which most investors like.
4. Unfortunately the company did not pay dividends this year which may affect the investors negatively.

Recommendations
1. The company should offer discount to collect money faster. The discount should indeed do not affect the profit margin because of the gearing and the interest the company is paying.
2. Increase the reserve for bad debts.
3. Taxes erode all the profits the company earnings. The company should find a way to pay taxes in installments and reduce the amount paid particularly in crisis years.
4. More participation required from the accountants which mean that the accountant manager should be involved in the decision making activity.
5. In 2015 the company should start to pay dividends to the shareholders otherwise many shareholders will start selling their shares.









References
1. Bazley, H., 2010. Financing and business structure. In: Contemporary accounting. Seventh ed. Melbourne: Cengage learning, p. 285.
2. Gary Powell, H. B., 2005. Understanding Financial Management: A Practical Guide. In: Australia: Blackwell, p. 62.
3. Peterson ،Frank, F. J. P. P., 1999. In: Analysis of Financial Statements. New York: Frank J. Fabozzi, pp. 92-93.
4. Thukaram Rao, M., 2006. In: Management Accounting. India : New age international, p. 99.
5. http://en.wikipedia.org/wiki/BlueScope_Steel, n.d. http://en.wikipedia.org/wiki/BlueScope_Steel. [Online]
[Accessed 14 Januray 2015].
6. http://www.smh.com.au/business/mining-and-resources/bluescope-steel-narrows-loss-but-misses-forecasts-20140825-107z4u.html, n.d. http://www.smh.com.au/business. [Online]
Available at: http://www.smh.com.au/business/mining-and-resources/bluescope-steel-narrows-loss-but-misses-forecasts-20140825-107z4u.html
[Accessed 15 January 2015].
7. KRAEHE, G., 2014. .bluescope.com. [Online]
Available at: http://www.bluescope.com/media/330511/bluescope%20annual%20report%20web.pdf
[Accessed 15 January 2015].
8. www.accountingformanagement.org, n.d. www.accountingformanagement.org. [Online]
Available at: http://www.accountingformanagement.org/return-on-common-stockholders-equity-ratio/
[Accessed 19 January 2015].
9. www.investopedia.com, n.d. www.investopedia.com. [Online]
Available at: http://www.investopedia.com/terms/e/efficiencyratio.asp
[Accessed 15 January 2015].
10. www.tradingeconomics.com/australia/gdp-growth-annual, 2014. www.tradingeconomics.com. [Online]
Available at: http://www.tradingeconomics.com/australia/gdp-growth-annual
[Accessed 15 January 2015].



Appendix 1







Appendix 2
Dividends





Appendix 3
Working capital








Appendix 4
Calculations of the ratios
9.1.1 Current ratio

Current ratio 2013 = 2,941.3/ 1,668.8 = 1.76
Current ratio 2014= 3,131.6/ 1,929.7 = 1.62
9.1.2 Quick or acid test ratio
Quick, or Acid Test 2013= (2,941.3- 1,363.5) / 1,668.8 = 0.945
Quick, or Acid Test 2014= (3,131.6- 1,503.1)/ 1,929.7 = 0.843
9.1.3 Account payable turnover ratio
Account payable turnover ratio 2013= 1,363.5 / ((1,031.7+ 1,218.6)/2) = 1.21
Account payable turnover ratio 2014= 1,503.1 / ((1,031.7+ 1,218.6)/2) = 1.33
9.2.1 Inventory Turnover Ratios

Inventory Turnover 2013 = 4,248.4 / ((4,248.4+ 4,582.6)/2) = 0.96
Inventory Turnover 2014 = 4,582.6 / ((4,248.4+ 4,582.6)/2) = 1.04
9.2.2 Number of days in inventory Ratios (DSI)
Number of days in inventory 2013 = 365 / 0.96= 380 days
Number of days in inventory 2014 = 365 / 1.04= 350 days
9.2.3 Total assets turnover Ratios
Total assets Turn over 2013= 7,290.3/ 7,330.8 = 0.994
Total assets turnover 2014 = 8,006.8/7,518.9 = 1.06
9.2.4 Working capital turnover ratio



Working capital Turn over 2013 = 7,290.3 / (2,941.3- 1,668.8) = 5.72
Working capital Turn over 2014 = 8,006.8 / (3,131.6- 1,929.7) = 6.66

9.3.1. Gross profit ratio
Gross profit margin 2013 = (7,290.3- 4,248.4) / 7,290.3 = 41.7%

Gross profit margin 2014 = (8,006.8- 4,582.6) / 8,006.8= 42.7%
9.3.2 Operating profit margin (or Return on Sales) Ratios

Operating profit margin 2013= -55.8 / 7,290.3 = - 0.76%
Operating profit margin 2014= 38.1/ 8,006.8 = 0.4%
9.3.3. Net profit margin (or net Return on sales) Ratios
Net profit margin 2013 = - 87.3 / 7,290.3 = - 1.1 %
Net profit margin 2014 = -39.9 / 8,006.8 = - 0.4 %
9.3.4 Return on stockholder's equity (or return on net worth) Ratios


Return on stockholder's equity 2013= (- 87.3 / 4,460.3)*100 = -1.95%

Return on stockholder's equity 2014= (-39.9 /4,456.7)*100= - 0.89 %
9.4.1 Debit Ratio
Debt Ratio = Total Liability / Total assets
Debt ratio 2013 = 2,870.5/ 7,330.8= 0.39
Debt ratio 2014= 3,062.2/ 7,518.9 =0.4





9.4.2 Debt to Equity Ratio
Debt to Equity Ratio 2013 = 2,870.5/ 4,460.3 = 0.64
Debt to Equity Ratio 2014= 3,062.2/ 4,456.7 = 0.68

9.5.1 Collective period ratio
Collection Period2013= ((952.3+ 145.4)/ 7,290.3)*365 = 54.9 days

Collection Period2014= ((1,062.5+ 46)/8,006.8) * 365= 50.5 days
9.5.2 Assets to sales Ratio

Assets to sales 2013= ((7,330.8 + 7,518.9)/2)/ 7,290.3 = 1.01
Assets to sales 2014= ((7,330.8 + 7,518.9)/2)/ 8,006.8 = 0.92