Boral Limited is a giant construction and material company based out of Sydney. The company enjoys the position of a market leader in the Australian market with regards to building and construction material. The company has long standing ties with USG Boral of USA. The company boasts at being the largest supplier of building material in all the respective Australian states. The company has full time employee strength of about 8,356 employees which tend to provide services to various construction plants situated all around Australia (Boral, 2015). The company is highly customer centric which is one reason for its continued success in the space and leadership position in the market. The company has presence in multiple geographies such as Australia, Asia and USA. The company has a host of competitors in the space like Holcim Ltd, RMC Group plc, James Hardie Industries Limited, CSR Limited, Aggregate Industries etc. (Boral, 2015).
The given report aims to review the financial performance of the company in FY2015 in comparison to the previous year using selected elements from the three financial statements namely income statement, balance sheet and cash flow statement. The relevant data has been collected and analysed to yield meaningful and relevant conclusion with regards to the company’s future.
Comparative financial analysis - Boral Limited
A. Statement of Financial Position
This is one of the key components of the financial report and tends to present information about the outstanding liabilities, assets and shareholder’s equity on a given date which is usually the last date of the financial year (Damodaran, 2008) The requisite entries from the balance sheet are highlighted below (Boral, 2013;2014;2015).
Current assets may be defined as those assets which tend to be liquid and hence are readily convertible into cash in the short term i.e. before one year. The various components of current assets tend to be cash and cash equivalents, inventory, account receivables, any prepaid expenses and all investments in securities undertaken by the firm which are liquid and hence convertible into cash (Petty et. al, 2015). On the other hand, non-current assets are those assets which are meant to derive benefits for the company over a period of time and thus are charged a depreciation for value erosion over the estimated useful life. Typical examples in this regard include PPE(Plant, Property & Equipment), Land, Intangible assets (Marcus & Kane, 2013).
Current liabilities may be defined as those liabilities which the company needs to settle during the short term whose horizon typically is taken as one year or current financial year. The typical examples would include account payables, tax liabilities, temporary liabilities, wages payable and other dues which are expected to be settled within one year. The non-current liabilities tend to include those liabilities which are payable over the long term i.e. over a period stretching into multiple financial years (Northington, 2016). Another relevant aspect is the shareholders’ equity which represents the amount of funds that the company has derived from investors through share issue. The major components in this regards are share capital along with the earnings that have been retained (Seal, Garrison and Noreen, 2012).
On the basis of the given table, it may be derived that there has been an increase in the current asset in FY2015 unlike FY2014 when there was a decrease. This augers well for the company as it has sufficient liquid resources so as to meet its liabilities in the short term and invest on the business. In regards to non-current assets, there has been an increase in the current asset in FY2015 unlike FY2014 when there was a decrease. This stands well for the future of the company as investment is being made which would lead to higher returns in the future.
Further, in relation to the current liabilities, the trend has continued from FY2014 to FY2015 but the severity of the same has enhanced as the company owes less to the various stakeholders as compared to the previous year. Besides, there has been a trend reversal with regards to the long term liabilities as these have increased by 36.25% in FY2015 as compared to a decrease of 43.37% in FY2014. This is indicative of a trend whereby the company is converting the short term liabilities into long term liabilities by availing term loans. Also, in relation to the shareholder’s equity, the table indicates an increase in stakeholder’s equity in FY2015 and in percentage terms, this exceeds the corresponding increase in FY2014. This is attributed to a higher contribution from the retained earnings in FY2015 compared to the previous year owing to higher profits earned by the company in the current year i.e. FY2015.
From the above discussion on selected entries relating to the financial position of the position, it would be fair to conclude that the company’s financial conditions seems sound with no liquidity concerns looming either in the short term or the long term.
B. Stockholders’ Equity
The stockholders’ equity may be defined as the residual claim of the owner during the liquidation of the company, once the debtors have been settled. The key components include paid-in capital, retained earnings along with the common stock although variations are also noticed. The money that the company has raised through the issue of the common shares is known as the paid-in-capital (Bhimani et. al., 2008). Further, retail earnings are referred to as the surplus earnings remaining from the net profits of the company after dividends on both preference and ordinary shares has been paid. Besides, treasury stock or common stock refers to the money that the company spends in relation to repurchasing the shares but does not intend to withdraw the same from capital stock of shares that it has (Drury, 2008). The movements in the various components of the stockholder’s equity are summarized in the table shown below (Boral, 2013;2014;2015).
It is evident from the table demonstrated above that common stock has seen a decline in FY2015 while in FY2014 there was a small increase. This may be attributed to the company’s share being undervalued due to which the stock in the open market has decreased. Additionally, in relation to the retaining earnings, a higher % increase in FY2015 as compared to FY2014 is indicative of higher share of profits have been diverted to retaining earnings of the company in the current year (FY2015) as compared to the previous one (FY2014).
C. Statement of Profit and Loss
Profit and Loss statement also known as income statement is a key component of the financial statement which to capture the revenue obtained by the company during the given period and the various expenses incurred to obtain this revenue. Further, based on the revenue and the related expenses, the net profit or loss may be derived (Brigham & Ehrhardt, 2013). The five major constituents of this statement are operating revenues, COGS or Cost of Goods Sold, total operating expenses, non-operational gains or losses and the EPS or Earnings per share (Christensen et al., 2013).
The operating revenue for the company is the revenue that the company derives from its routine activities and usually arises on the basis of the underlying product or service that the company sells. Besides, COGS refers to the various expenses that the company has to incur to make those goods or provide service and include costs such as raw material costs and labour costs. The total operating expenses refer to the expenses relating to the business and are indirect costs which are usually not related directly with the good or product (Parrino & Kidwell, 2011).
Additionally, at times gains or losses may be realised by the company on account of non-operating activities such as disposal of a particular business or asset and these are termed as extraordinary events as these tend to isolated incidents but may have a significant impact for the company financials. EPS is a critical element which is closely related to the market price as the investors tend to view profits not In absolute terms but rather in regards to profit generated on a per share basis (Brealey, Myers & Allen, 2008).
The relevant figures from the profit and loss statement are summarised below (Boral, 2013;2014;2015).
It is apparent on the basis of the table above, that there has been a higher decline in revenues in FY2015 (4%) as compared to that in FY2014 (1%). This may be related to weak trading conditions that are persistent in 2015. However, the COGS for FY2015 has witnessed a decline of 3% as compared to an increase of 3% in FY2014. This augers well for the company and enables higher gross margins. The credit for this goes to the various measures undertaken by the company to reduce their costs and enhance margins (Needles and Crosson, 2013). Besides, the quest for cost reduction and surplus waste reduction of the company is also visible at the level of the total expense which have witnessed a decrease of 5% in FY2015 which even though lesser than lesser than corresponding decrease of 7% in FY2014 but still is a healthy trend for the company which is likely to enhance the profitability margins for the company’s operations.
The profitability of the company in FY2015 is being adversely affected by the decline of 81% in non-operating income in FY2015 while in the previous year i.e. FY2014, there was a corresponding increase of 10%. This drop may be explained on the basis of less dividend income and the various losses leaped by the company from the investments that it had made. Further, there has been a decrease in EPS in FY2015 by about 36% while the corresponding change in FY2014 was -20%. This is a worrying aspect for the company as the profitability seems to be continually reduced despite higher margins especially at the gross level..
D. Statement of Cash Flow
The cash flow statement is a pivotal elements of the annual financial statements which tend to represent the cash position of the business and is imperative since revenues need to be converted into cash and also because the company needs to prudently manage the condition of financial shortfalls. CFO or Cash flow from operating activities tends to indicate the cash that is generated from the operating activities i.e. routine business of the company (Graham & Smart, 2012). A positive CFO reflects positively from the company and infact a positive CFO by some stakeholders is considered more vital than the net profits. Further, the effect of the inventory stocks, accounts receivables is also reflected in the CFO value (Geurard, 2013). The Cash Flow from Financing or CFF is another aspect of the cash flow statement which tends to indicate the amounts of funds that the company has borrowed and the extent to which repayment has been done. Further emphasis is also on the exact mechanism of raising incremental money and paying it back. This also presents a fair idea about the underlying liquidity of the firm (Petty et. al., 2015).. Besides, Cash Flow from Investing (CFI) is indicative of the amount being invested into the business particularly fixed assets and also presents an account of the disposal of certain assets which may not central to the business and hence are disposal off. An increased outflow in the CFI may hint at a positive future for the company as the investment that is being undertaken currently would enable the company to earn superior returns in the future (Damodaran, 2008).
The table indicating the requisite balances from the cash flow statement is summarised below (Boral, 2013;2014;2015).
It is apparent from the above that there has been a decline of 18% in the operating cash flow in FY2015 which is on expected lines considering the weak economic conditions that are persisting both in Australia and also globally, However, in FY2014, the corresponding operating cash flows witnessed increase by 64% over the previous year. The net cash outflow from financing has witnessed a huge decline of about 52% in the current year i.e. FY2015 which is clearly indicative of the reduced need for financing as the new projects are being deferred, Additionally, the cash flow from investing is undergoing negative growth indicating that there has overall spending by the company on the fixed assets which augers well for the company for the future when the trading environment would improve and company would see growth (Kane & Marcus, 2013).
It may be fair to conclude based on the analysis above that the current financial position of the company seems sound as there is no liquidity crunch or insolvency fears for the company. Further, the company is acting in a prudent manner by substituting its short term liabilities with long term liabilities which is preferable in a difficult trading environment which the company is currently witnessing. However, on the profitability front, there has been a continued decline in the profits which are also being reflected in the EPS and infact this trend has worsened in FY2015 despite the company having higher gross margins in FY2015. However, with regards to the cash position, even though it has deteriorated, the concerning factor is the operational cash flow which needs to pick up going ahead.
It may be recommended that in order to reduce its short term financing need and reduce the overall working capital required, the company should take proactive measure for reducing the value of operating cycle. Also, the retained earnings which are currently essentially lying idle must be deployed in some productive use so as to enhance the returns for the shareholders especially at a time when the core business is also underperforming. In order to provide a boost to the declining profitability, emphasis should be on more prudent measure with regards to cost management as enhancing the revenue seems difficult in the current business environment where demand is lagging (Northington, 2011).
However, the company can make attempts to increase the revenue by lowering the prices ins selected products. This would effectively enable an improvement in the operational cash flow which has witnessed a significant decline. Further, the company should go ahead with its strategy of converting the short term debt into long term debt and may also raise additional funds through the equity route whenever the markets are opportune so that a fair price can be obtained through the share issue. In order to strengthen the cash position, the non-core assets of the company may also be liquidated so that money is diverted only in core business which company wants to continue in the long run (Parrino & Kidwell, 2011).
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