ACCT3501 | Accounting | Analysis Of Financial Statements Of Companies

Introduction:

Brief introduction about Boral Limited and BCI Mineral Limited at the beginning of the document will provide a frame of reference to the readers. This would help in analysing the financial information of the two companies better. 

Founded in Australia, Boral Limited is a company that manufactures and supplies building and construction materials. Company’s headquarter is located in Sydney, Australia and has three operating divisions, these are Boral Australia, Boral North America and USG Boral. The company is a listed in the Australian Securities Exchange (ASX).

BCI Material Limited is another ASX listed entity operates in Iron and Steel industry in Australia. The company is engaged in mining activities to produce and explore iron ore, gold and base metals. The company specifically serves the agriculture and minerals industries in the country.

Comparison of financial performances:

In order to compare the financial performances of the two companies the income statements of the two companies shall be compared. The income statements of Boral and BCI Minerals from 2014 to 2017 shall be considered to compare the financial performance of the two companies (Churet and Eccles, 2014).

Boral Limited:

The extract of the income statement of Boral Limited for the 4 year periods from 2014 to 2017 is provided below:

Amounts are in AUD in millions	2014-06	2015-06	2016-06	2017-06
Revenue	4,455.00	4,298.00	4,311.00	4,258.00
Cost of goods sold	3,231.00	3,039.00	2,927.00	2,858.00
Gross profit	1,224.00	1,258.00	1,384.00	1,399.00
Operating expenses	1,318.00	2,309.00	1,369.00	1,325.00
Earnings before interest and tax	(94.00)	(1,050.00)	15.00	75.00
Interest Expense	85.00	76.00	70.00	75.00
Other income (expense)	276.00	1,415.00	339.00	301.00
Earnings before taxes	97.00	288.00	284.00	301.00
Income tax expense	(9.00)	45.00	32.00	51.00
Net income from continuing operations	106.00	243.00	252.00	250.00

Before comparing the financial performance of the two companies a brief discussion on the financial performance of Boral Limited on the basis of above information will enlighten us about the financial performance of the company over the years. The overall revenue of the company has remained almost constant at and around the mark of $4,300 million as can be seen from the above information (Storey et. al. 2016). However, due to efficient management of the company with each passing year the amount of gross profit has increased significantly. . In 2017 the company earned a gross revenue of $1,399 million. A year ago in 2016 despite higher amount of revenue the company managed to earn a gross profit of $1,384 million. The net income of the company has also increased with ever improving management of the company. In 2017 the company has earned a net income of $250 million from continuing operations as compared to $106 million in 2014. Thus, within a period of 3 years the company has managed to earn almost 150% more profit from its core business operations. Taking into consideration it can be said that the company has performed exceedingly well over the years (Revelli and Viviani, 2015).

BCI Minerals Limited:

Having the financial information about the performance of the company over the last few years would go a long way to effectively compare the financial performance of the two companies. The income statement of BCI Minerals is provided below containing the amount of revenue and expenditures of the company from 2014 to 2017.

Amounts are in AUD in millions	2014-06	2015-06	2016-06	2017-06
Revenue	466.00	278.00	150.00	63.00
Cost of goods sold	245.00	247.00	135.00	45.00
Gross profit	221.00	31.00	15.00	19.00
Operating expenses	101.00	234.00	68.00	12.00
Earnings before interest and tax	120.00	(203.00)	(53.00)	7.00
Net income from continuing operations	74.00	(158.00)	(80.00)	7.00

The fortune of BCI Minerals is almost opposite to that of Boral Limited. Where Boral has progressed year after year by earning higher amount of income BCI has struggled very badly and its revenue as well as it profits have all plummet down the bottom. In 2017 the company has merely earn a revenue of $63 million whereas the amount of revenue was almost 8 times higher even 3 years ago (Telecky and Cejka, 2017). Since 2014 the revenue as well as operating income of the company have decreased consistently without any exception. Net income of the company in 2017 is $7 million whereas in 2014 the company earned a positive income of $74 million.

Comparative analysis of financial performance:

An effective comparison between the financial performance of Boral Limited and BCI Minerals Limited is not possible without having the information containing in the income statements of the two companies. In order to compare the financial performances of the two companies, the items of revenue and expenditures of 2016-17 and 2017-18 have been considered.

	2016-06		2017-06
Amounts are in AUD in millions	Boral	BCI Minerals	Boral	BCI Minerals
Revenue	4,311.00	150.00	4,258.00	63.00
Cost of goods sold	2,927.00	135.00	2,858.00	45.00
Gross profit	1,384.00	15.00	1,399.00	19.00
Operating expenses	1,369.00	-	1,325.00	-
Earnings before interest and tax	15.00	(53.00)	75.00	7.00
Interest Expense	70.00		75.00
Other income (expense)	339.00		301.00
Earnings before taxes	284.00		301.00
Income tax expense	32.00		51.00
Net income from continuing operations	252.00	(80.00)	250.00	7.00

The extracts of income statements of the two companies clearly showing the differences between the scale of operations and financial performances of two companies. The contrast in financial performance is very much visible in the above comparative table (Naranjo-Valencia, Jiménez-Jiménez and Sanz-Valle, 2016).

In 2017 Boral Limited has effected a sales of $4,258 million as opposed to sales of merely $63 million by BCI Minerals. With each passing year the ability of Boral Limited to earn higher revenue and profit from business operations have increased as the company earned a net income of $252 million from continuing operations. However, in case of BCI Minerals the struggle of the company to earn profit from its business operations have been there since last 4 years (Saeidi et. al. 2015). Each year the performance of the company is declining with its dwindling sales figures and resultant net income and losses from business operations. BCI Minerals incurred a net loss of $80 million from its business operations in 2017 however, the only positive in between the ever deteriorating financial performance of the company is that in 2017 the company has earned a positive net income of $7 million. The reason for such deterioration in financial performance of BCI Minerals is the sharp decline in the ability of the company to sale its products in the market. Boral Limited on the other hand has managed to improve its efficiency as the company’s gross and net profit both have increased each year despite maintaining a relatively stagnant revenue figures over the last four years (Weygandt, Kimmel and Kieso, 2015).

Thus, comparatively the financial performance of Boral Limited has been far better and is on the right track. The only exception to the above observation is the stagnating amount of revenue that suggests that the company is struggling to maintain a sustainable growth in its overall revenue as it has stayed within $4,300 million for last three years and more. The BCI Minerals on the other hand has experienced huge downslide in its performance with its revenue declining sharply. In addition the ability of the company to earn revenue from it business operations have also deteriorated with the company struggling to earn any profit in last three years (Ehrhardt and Brigham, 2016).

The comparison of the profitability ratios of the two companies would further highlight the performance differences between the two companies. The gross profit ratio and net profit ratio of the two companies are calculated below to further analyze the performance of the two companies in recent years.

Amounts are in AUD in millions	Boral	BCI Minerals	Boral	BCI Minerals
Revenue	4,311.00	150.00	4,258.00	63.00
Cost of goods sold	2,927.00	135.00	2,858.00	45.00
Gross profit	1,384.00	15.00	1,399.00	19.00
Gross profit ratio (Gross profit x 100/ Revenue)	32.10	10.00	32.86	30.16
Net income from continuing operations	252	-80	250	7
Net profit ratio (Net profit x 100//Revenue)	5.85	(53.33)	5.87	11.11

The ratio analysis of the two companies clearly indicate that the management of Boral has done a great job with the available resources of the company as the company has earned a gross profit margin of 32.10% and 32.86% respectively in 2016 and 2017. Comparing that with 10% and 30.16% of BCI Minerals in the corresponding periods (Campopiano and De Massis, 2015). The net profit ratio difference is even more contrasting between the two companies as Boral has earned a net profit margin of 5.85% and 5.87% in 2016 and 2017 respectively as opposed to negative net profit margin of 53.33% and 11.11% in the corresponding periods earned by BCI Minerals (Robinson et. al. 2015).

Observation:

Considering the financial information of the two companies provided in the income statements of the companies, it is clearly visible that Boral is performing exceptionally well with its revenue and profit both going upward. On the other hand BCI Minerals downward slide has continued since 2014 as the company now even struggles to earn any profit from its business operations. In fact the company incurred huge mount losses from business operations in both 2015 and 2016. From the performance perspective Boral Limited has performed exceedingly well unlike BCI Minerals (Gill and Visnjic, 2015). 

Financial position comparative analysis:

For the stakeholders including investors and prospective investors the most important considerations include financial performance of an organization and its financial position. The financial reports that an organization prepare not only contains information about financial performance of an organization but also contains statement of assets and liabilities containing balances of assets and liabilities (Gill and Visnjic, 2015). In order to compare the financial position of Boral Limited and BCI Minerals lets have the extract of Balance sheet of two companies.

	2016		2017
Current assets	Boral Limited	BCI Minerals	Boral Limited	BCI Minerals
Cash	452.00	9.00	238.00	36.00
Investments (short-term)	19.00	14.00	4.00	10.00
Accounts receivable	589.00	-	866.00
Inventories in hand	557.00		607.00
Other current assets	67.00		49.00
Total current assets	1,684.00	23.00	1,764.00	46.00
Property, plant and equipment net of depreciation	2,518.00	57.00	2,756.00	50.00
Total non-current assets including PPE	4,116.00	87.00	7,550.00	78.00
Liabilities and equity
Total current liabilities	1,182.00	22.00	1,469.00	12.00
Total non-current liabilities	1,112.00	11.00	2,405.00	5.00
Owners' equity	3,506.00	77.00	5,440.00	107.00

The ordinary Balance sheet containing the balances of assets and liabilities would be helpful to a large extent in ascertaining the financial position of the companies. As can be made out from the brief statement of financial position of two companies that Boral Limited has significantly high amount of assets and liabilities as compared to BCI Minerals (Benn, Edwards and Williams, 2014). The total amount of non-current assets of Boral Limited as on June 30^th, 2017 is $7,550 million to mere $78 million of net assets of BCI Minerals (Qiu, Shaukat and Tharyan, 2016). The net assets of Boral is almost hundred times of net assets of BCI Minerals. Similarly with current assets of the company, Boral Limited totaling to $1,764 million as on June 30, 2017 BCI has only $46 million of total current assets as on the same date. Thus, from the above it is clear that the scale of the two companies are significantly different (Boyd et. al. 2017). The amount of equity shareholders’ fund as on June 30, 2017 for Boral Limited is $5,440 million as against $107 million of BCI Minerals. This clearly indicate that the size of two companies are sharply contrasting. BCI is a small and medium sized enterprise whereas Boral is a large corporation. However, both are listed in ASX (Davidson, Dey and Smith, 2015).

In order to further dwell on the financial position of the two companies, comparison of important ratios such as liquidity and solvency ratios will be very helpful. Taking into consideration the statement of financial position of the two companies a detailed discussion on the financial ratios of two companies and comparative financial position are provided here (Welford, 2016).

In the table below the liquidity and solvency ratios of the two companies are calculated to proceed with the discussion on the financial position of the two companies.

Liquidity position comparison of two companies:

In order to evaluate the liquidity position of the two companies the current ratios and acid test ratios of the companies shall be calculated.

	2016		2017
	Boral Limited	BCI Minerals	Boral Limited	BCI Minerals
Total current assets	1,684.00	23.00	1,764.00	46.00
Total current liabilities	1,182.00	22.00	1,469.00	12.00
Current ratio (Current assets / Current liabilities)	1.42	1.05	1.20	3.83
Acid test ratio / quick ratio
Total current assets	1,684.00	23.00	1,764.00	46.00
Less: Inventories	557.00		607.00
	1,127.00	23.00	1,157.00	46.00
Total current liabilities	1,182.00	22.00	1,469.00	12.00
Acid test ratio (Current assets less inventories / current liabilities)	0.95	1.05	0.79	3.83

Current ratio: Current ratio is calculated by dividing the amount of total current assets of the company with the amount of total current liabilities. This shows the ability of an organization to repay it current liabilities and obligations by using its current assets only.The current ratio of Boral Limited as on June 30, 2017 is 1.20: 1. This has deteriorated a bit s it was 1.42: 1 in 2016. The company thus, has $1.20 current asset for repayment of each $1 of current liabilities (Crowther, 2018). Surprisingly, the current ratio of BCI Minerals has improved exceedingly in 2017 as it stands at 3.83: 1 compared to 1.05: 1 of 2016. Thus, as on 30^th June, 2017 BCI Minerals has $3.83 for payment of each $1 current liabilities. Thus, the ability of the company to repay its current liabilities and obligations is much better than Boral (Storey et. al. 2016).

Acid test ratio: The ratio is calculated to assess the extreme liquidity position of an organization. It is calculated by using the following formula:

Current assets less inventories / Current liabilities.

BCI Minerals limited does not have inventories so the acid test ratio of the company is no different from its current ratio. However, Boral has inventories hence, the acid test ratio of the company is different from its current ratios (Bryman and Bell, 2015).

Acid test ratio of Boral Limited is 0.95: 1 in 2016 and 0.79: 1 in 2017. The ratios indicate that the company has not enough liquid assets to repay its current liabilities. For each $1 of current liability Boral has $0.79 liquid asset in 2017. The acid test ratio of BCI is 3.83: 1 in 2017 suggesting that the company has $3.83 of liquid assets to repay current liability of $1 each (Edwards, 2014).

From the above liquidity ratios it would be safe to say that the liquidity position of the BCI Minerals is significantly better than the liquidity position of Boral Limited. However, the size differences between the two organizations shall also be considered while evaluating the liquidity ratios of the two companies (Mathuva, 2015). Even if Boral Limited is much bigger in size and operations however, its liquidity ratios, both current as well as quick ratios, are not as per the industrial standards. Generally in Iron and Steel industry a current ratio of 2: 1 and acid test ratio of 1:1 are considered appropriate (Etiennot, Preve and Sarria-Allende, 2015).

Comparative analysis of long term solvency position of the two companies:

In order to compare the long term solvency position of the two companies generally analysts use debt to equity and capital gearing ratios of an organization. It is desirable for any organization to have higher proportion of equity fund in the overall capital employed in business to have long term solvency (Enqvist, Graham and Nikkinen, 2014). The calculations of solvency ratios of the two companies, Boral and BCI Minerals, are provided in the form of a table below:

	2016		2017
Amounts are in AUD’ million	Boral Limited	BCI Minerals	Boral Limited	BCI Minerals
Debt to equity ratio
Owners' equity	3,506.00	77.00	5,440.00	107.00
Long-term debt	1,317.00	-	2,168.00	-
Debt to equity ratio (debt funds / owners' equity)	0.38	-	0.40	-
Capital gearing ratio
Owners' equity	3,506.00	77.00	5,440.00	107.00
Long-term debt	1,317.00	-	2,168.00	-
Capital gearing ratio (Equity funds / Fixed interest bearing funds)	2.66		2.51

It is quite difficult to compare organizations that are contrastingly different in size and scale of its operations. However, in case of Boral and BCI Minerals, the two companies are completely different in sizes thus, one have no long term debt and the other have significantly large amount of debt. Debt to equity ratio of Boral in 2017 is 0.40 whereas it was 0.38 in 2016. Thus, change is relatively minor and the debt to equity position of the company is quite favorable for a large company like Boral Limited (Mun and Jang, 2015). The capital gearing ratio is almost opposite to debt to equity ratio. 2.51 is the capital gearing ratio of Boral at the end of 2017. Since BCI Minerals has no long term debt hence, the entire capital of the company is represented by owners’ fund.

Conclusion:

The comparison between the two companies, Boral and BCI Minerals, clearly explains that the two companies are sharply different in terms of their size and scale of operations. Boral is significantly large corporation whereas BCI Minerals is quite small in comparison to Boral. The financial performance of Boral has been upward since 2014 as the revenue and amount of profits of the company both has increased sharply over the years. In contrast BCI Minerals is struggling to even earn profits from its business operations. The sharp reduction in the amount of revenue of the company over the years is a clear indication of company’s deteriorating financial performance since 2014. The liquidity position of two companies are quite surprisingly favorable toward BCI Minerals but considering the huge difference in size of the two companies it is truly difficult to evaluate the benefits of having better liquidity position, i.e. in case of BCI Minerals Limited. But one thing is certain and it is the need for the management of Boral Limited to improve its liquidity and solvency position.

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