Category: Business 21st November 2018
An industry is a general term that refers to firms operating in the same market. For instance, the automobile market brings together companies involved in the sale of automobile. It is the collection of firms contributing to the demand and supply of a commodity in the economy. An industry is made of homogenous products or substitutes. On the other hand, a firm is the simplest unit of production that contributes to a commodity in an industry. It is the point of reference from which a product in the industry can be traced. Current paper evaluates two companies from the same industry in the Australian economy. The companies are Adelaide Brighton Limited and CSR Limited that work in the mining industry in Australia. Both of them are listed in the Australian Security Market in ASX Top 100.
Adelaide Brighton Limited is a mining company listed in the Australian Security Market. It is a top performer and as a result the most traded company in the top 100 securities. The company was founded in 1882 and has work stations all over Australia where 1600 employees work. The company produces construction materials and lime products. Its products are popular among companies involved in the construction and infrastructure industries. The main product lines are cement, lime and concrete. The company aims at integrating and expanding lime products through production efficiencies. Current production of the company is close to maximum production, though, there is an increased market for the products (InvestSMART Financial Services 2014, p.1; Adelaide Brighton Ltd, 2007).
Further, the company also uses equipment for the cement and lime products manufacture. There is also an expansion of the international markets. Currently, the management is working on reducing operational inefficiencies within production. The company completed the construction of a kiln in Western Australia in 2013, and as a result increased its production by 100,000 tons annually. The investment pattern portrayed by Adelaide Brighton Limited in recent times makes it a market leader in the construction industry (InvestSMART Financial Services 2014, p.1 and Adelaide Brighton Ltd, 2013, p.19).
According to Mathisen and Pellechio (2007, p.5), the short-term financial situation of the firm is represented by the difference between the short-term liabilities and short-term assets of a company. The assets majorly include the inventory and liquidity items of the firm while liabilities include recurrent costs, securities and loans. Though specific timeframe is difficult to tag to the notion ‘short-term’, assets have a time limit of up to three years, while liabilities one year. If a firm has a large negative short-term position, it indicates that it is susceptible to high interest rates and to the extension of the investment risk for investors. In this situation, the most sustainable way is to turn the short-term liability into a long-term liability, a process known as financial intermediation. The best way to assess the position of the company is through its balance sheet that shows its assets and liabilities. Items considered for the short-term liabilities have a higher liquidity value.
Adelaide Brighton Limited has a market capitalization of $2.139 million (InvestSMART Financial Services 2014, p.1). In reference to the 2013 annual report, the company had a cost of sales of $ 745.6 million, while the freight and distribution costs stood at $196.1 million. For the current assets, the company maintained a value of $382.3 million, while the total assets amount of $1.633.7 million. Current assets were about 40% of the total assets of the company. Current liabilities, on one hand, are valued at $ 211.2 million while, in totality, the assets were $ 571.9 million. Financially, the position of the company in the year 2013 was $1.061 million. In the short-term, the company possesses current liability that is about 60% of the current assets. The borrowings were about 90% of current liability in 2013. On the other hand, receivables and trade, as well as other inventories were about 90% of current assets (Adelaide Brighton Ltd, 2013, p.68).
The capital structure involves all financial instruments engaged by the company to mobilize funds for their production activities. The instruments are binding agreements between the company and other capital providing agencies, such financial companies, group or individual investments. The instruments can derive their value from other assets such as shares, future contracts, equity and debt (Chorafas 2012, p.19). Capital mobilization is important, since it raises assets and resources necessary for initiating and improving production.
According to the Adelaide Brighton Limited (2013, p.68) annual report, the company has a capital value of $1.243.5 million with reference to non-current assets. The borrowings in its balance sheet are also equal to loans. Adelaide Brighton Limited has mobilized capital through equities, such as shares. The total equity value is $1.061.8 million. The tangible capital in the company includes property, plant and equipment. The company values its intangible capital at $889.7 million. Part of the physical assets is contributed to the physical capital. The company also has non-physical assets with $189.3 million as their market value. Equally, the company has a labour capital of about 1.600 employees. Capital is also considered in terms of raw material, which is the value of suppliers. The total payment to suppliers and employees from the company in 2013 was $1.084.6 million (Adelaide Brighton Limited, 2013, p.69). From the annual report, the structure of Adelaide Brighton Limited capital include such financial instruments like loans and equity, tangible capital such as property, equipment, as well as plant, intangible assets, labour capital and raw materials obtained from the suppliers.
A dividend policy is a defined procedure on how a firm pays the shareholders of the company. It is the weight placed by the management of the firm on the business implications of such payments, as well as on the existing investment position of a company. As a result, it is rational to pay dividends when companies realize some profits. However, firms can also choose to plough back the profits earned within a financial year. Thus, profits can be shared with investors and/or invested back into the business. A dividend is the share of profits extended to investments on capital. It is the return of capital invested by shareholders (Chorafas 2012, p.63).
Adelaide Brighton Limited has a two-tier dividend policy as basic earnings per share and dilute earnings per share. According to InvestSMART Financial Services (2014, P.1), the earning per share was 0.67 in 2013 for the firm. The company did not spend all its profits as dividends to investors. Regarding the profit share of 2013 that stood at $151.1 million as net profit, only $24.2 was shared out to the investors (Adelaide Brighton Limited, 2013, p.69).
Risk assessment is a consideration between return and loss. It is the potential probability of monetary loss on the cost of capital. According to Koller (2005 p.4), the definition of risk includes uncertainty which is based on what is known and a factor of probability. Probability in the investments defines the likelihood in profits or losses on an investment. Thus, an assessment checks the extent to which the profits or losses are established within a curtain timeframe. According to InvestSMART Financial Services (2013, p.1), the balance between risk and return is influenced by various factors. Investments with the highest returns also guarantee the highest risk. Similarly, it is true that the longer time is taken for the investments, the higher is the growth for such investments. However, past results in the investments do not necessarily mean positive performance for the future.
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To assess the risks of investing in a company, macroeconomic factors must be considered. Macroeconomic indicators are factors that explain the status of an economy of a country. The key indicators in the Australian economy include interest rates, inflation rates and exchange rates. The interest rate is the cost of capital (loans) and it shows whether the cost of borrowing is high or low. Inflation rates, on the other hand, show the value customers obtain when consuming a unit value of their currency. Finally, exchange rates explain the strength of a home currency in relation to foreign currency. It makes export or import goods expensive or cheap for consumers locally. The Australian inflation rate is 3.0% and is relatively low, while the exchange rate is 0.8986 to the U.S. dollar. The exchange is almost equal or relatively superior meaning that Australian currency achieves a higher consumption basket. The macroeconomic condition indicates a very strong business environment due to the low interest rates, low inflation rates and superior exchange rates to the world superior currency (Reserve Bank of Australia, 2014, p.1; Koller 2005, p.89).
The microeconomic assessment reviews the economic conditions of a company and industry in general. It provides strong grounds of checking the risk of return to investment. The common price ratios of Adelaide Brighton Limited are higher than those of the industry indicating that the company is out performing its peers. Key price ratios discussed include price to sales ratio (P/S) and price to book ratio (P/B). The P/S ratio is the comparison of the stock prices of a company to the revenues. The P/S is 1.73, meaning that the company has a strong valuation. P/B shows the value of the stock market to quarter value of the balance sheets of a company. The P/S of the company is 1.99 that is also a strong valuation for the company.
Thus, Adelaide Brighton Limited provides a strong investment destination for any investment. The decision is not only based on the strong ratios-based valuation of the company but also on the sales and expansion programs.
CSR Limited is a manufacturer and supplier of building materials in Australian and New Zealand markets. It has its headquarters in New South Wales. It was established in 1855 and has about 3.600 employees. The company maintains a diversified portfolio with interests in cement and aluminium smelting. The specific products of the company include plasterboards, insulation, bricks, pavers and roof tiles. The company, in its business strategy, maintains a strong policy in product diversification that observes building codes and standards. The diversification is cyclical, unrelated and capital intensive. The other business tool is the effective management that maintains holistic business success in production and community engagement. As a result, the company also produces energy efficient glass and light weight concrete. In recent time, the company has partnered with Tomago Aluminium Smelter to increase its market stand in the industry (CSR Limited 2013, p.17 and InvestSMART Financial Services, 2014, p.1).
CSR Limited has a market capitalisation of $ 1.736 million. According to the CSR Limited (2013), the current assets of the company are valued at $500 million. Within current assets there were inventories, derivative financial instruments, trade items, as well as cash equivalents. Current assets are against current liabilities valued at $282 million. Current liabilities are about 56% of the value of current liabilities. The company maintains a liquidity of over $200 million that is 8% of the total value of the company. The bulk of current liabilities are made of trade, as well as other related payables (CSR Limited 2013, p.96).
CSR has various forms of capital. They include financial instruments like loans and equity, tangible capital such as property, plant and equipment, intangible assets, labour capital and raw materials from suppliers. The total equity held by the company is about $627 million. There are also derived financial instruments equitable to loans with a value of $6.2 million. In terms of raw materials, the company holds trade and other payables that are extended to suppliers at $198 million. There is also the labour capital of about 3.600 employees working within CSR limited. The tangible capital is factored as investment income (CSR Limited 2013, p.95).
According to the CSR Limited (2013, p.95), in the financial statement, there are two dividend policies for CSR Limited that include basic earnings for every share and dilute earnings per share. The earnings per share are 1.19 in 2013. InvestSMART Financial Services (2014, p.1) reported that the company spends part of its profits as capital for further investment and/or investment for shareholders. For the financial year ended 2013, the company spent $51 million for the payment of dividends. It was against $272 million share of the profits invested by the company in research and development.
Within the macroeconomic environment, CSR Limited operates in a strong and stable economic environment. The operating economy has low inflation and interest rates. However, the company is affected by exchange rates, since it’s a multinational corporation. Nevertheless, the performance of the company is strong. The key price ratios considered include the price to sales ratio (P/S) and price to book ratio (P/B). The P/S ratio of CSR Limited performs lower than the market value. It is 1.00 against the 1.56, meaning that the company is undervalued in the industry. On the contrary, P/B shows a strong valuation for the company. With a P/B of 1.59 to 1.28, it indicates that the company has a strong financial quarter in sales. Equally, the company pays better dividends than any other industry player. The overall effect is stabilised returns in the long run.
CSR Limited presents a different angle for risk assessment, most suitable for conservative investment. The company offers diversified products within the construction and mining industries. This includes traditional construction materials like concrete and modern sustainable products. Diversification spreads the risk on investment and, as a result, reduces any losses on investment capital.
The diversification in CSR Limited offers a suitable investment destination in the company especially in stable Australian Economic environment recovering from a depression. The company is able to tap in new building trends. Equally, there are other expansion programs for markets that are also based on various foreign markets that include Australia and New Zealand.
In conclusion, CSR Limited offers a more lucrative investment decision than Adelaide Brighton Limited. It is so due to the fact that Adelaide Brighton Limited, as the market leader, has a limited market for which other industry players are competing. The company is also expanding its programs for the same market. CSR Limited, on the other hand, looks into the same market but also tries to penetrate into new and modern markets by diversifying within the industry. Thus, if demands for cement construction product go down, the aluminium smelting business could introduce some income for the investor. Nevertheless, the construction industry is still suitable for both companies, since the economy is in recovery after the 2007- 09 economic recessions.