Financial analysis and performance of Anglo American plc

Financial Reporting & Analysis

This particular assignment is about financial research assignment in which shares analysis of a company has been conducted through different angles. The assignment has been divided into 5 different sections and every section has been related to the end result of the research. It is prerequisite for this particular assignment to select a company which has been listed on the Financial Times Stock Exchange (FTSE-100). The company which has been chosen for this particular work is Anglo American. The first part of the assignment is to define about the primary business activities of the company, let's now start the same.

A Helicopter View Anglo American Company

Anglo American has been counted among one of the largest mining companies of the world which merely focuses on the platinum group, metals, copper, diamond, nickel, iron and thermal coal. The company has its headquartering located in London, United Kingdom, with 7 different subsidies in seven countries worldwide.

The company was formed in the year 1917 to explode the global mining scene. After that period the company emerged remarkably well as a leading global mining company. The merger with Luxembourg-based Minorco gave a real boost to the operations to the company and helped the company to form Anglo American Plc.

At the start of this century, the company has been registered with the FTSE-100 with total market capitalization of U.S.$21.6 billion which is enough to know that the company is now the leading mining company of the world. The company not only worked for itself but it also indulged itself in the social works like the company supported the first HIV testing campaign with the Chamber of Mines in South Africa in the year 1986 (Value Line Investment Survey, 2010).

The company is committed towards its services and is keen to deliver the operational excellence in a well defined and responsible way which not only adding values for the portfolio of the company itself but also for the employees and investors. The company has been engaged in the process of mining, melt and manufacturing different things from gold, copper and platinum (Value Line Investment Survey, 2010). The company earned net revenue of U.S.$32,929 million in the year 2010 which is a clear indication of the remarkable financial health of the company. The major competitor of the company is UK Coal, but the operations of Anglo American are more sophisticated than its major competitor. Let's now move towards the second part of the assignment which is all about ten-year's market analysis of the financial statements.

Part-2

Ratio Analysis

In this part industry ratios will be analyzed. There are so many types of ratios but for this assignment, ratios related to investment will be consider like Net Profit Margin (NPM), Current Ratio (CR), Terminal value and Operating Cash Flow to Sales (OCF/S). An investor always concerned with the amount of profitability of the company that is why selecting these ratios will certainly fulfill the appetite of this assignment.

Profitability Ratio

Net Profit Margin (NPM)

NPM is one of the largest used profitability ratios in the literature of finance (Cinnamon & Larsen, 2007). It apprises the analysts that how much the company has earned by investing a certain amount of money. It usually measured in percentage, so a NPM of 10% means that the company is generating 10$ by investing 100$. Below mentioned table and graph will reveal the rest.

NPM

Sales

Net income

Year

24.753

24,991

6,186

2006

28.677

25,470

7,304

2007

19.821

26,311

5,215

2008

11.626

20,858

2,425

2009

23.405

27,960

6,544

2010

21.656

Mean NPM

18.56

Industry Average

NPM is one of the most widely used tools to assess the financial health of an organization. With the help of the above mentioned table and graph it can be said that the company is indeed in a good financial position. The NPM of Anglo American increased for two consecutive years (2006 & 2007) is reasonable percentages. The NPM of the company decreased for by 8.85% and 8.194% in the year 2008 and 2009 respectively due to the pressure of the current economic slump. Though the NPM of the company decreased in that period but the company managed to cut off its position in positive node that is the main reason why the company's NPM reached again on a good level in the year 2010. The average NPM of Anglo American is 21.65% which shows that the company is able to generate 22$ by investing 100$ which is good as compared to the industry average.

Liquidity & Management Ratio

Current Ratio (CR)

Liquidity in finance means a thing which has the propensity to sell and buy instantaneously (Christopher, 2008). Current ratio is the most important liquidity ratio which measures the compatibility of a company to pay its short-term financial obligations through in hand cash, inventory and receivables. The computed result is mentioned below

CR

Current Liabilities

Current Assets

Year

1.346

8,799

11,844

2006

0.849

11,354

9,643

2007

0.709

13,124

9,305

2008

1.544

6,745

10,411

2009

1.820

7,882

14,348

2010

1.254

Mean NPM

1

Industry Average

According to the finance theory, Current Ratio should be more than 1 which shows that the company is able to fulfill its short-term financial obligations. Fulfilling the financial obligations increases the morale and confidence of the investors on the company's operations. From the above mentioned table, it can be said that the company is in a good position in fulfilling its short-term financial promises as the CR of the company has been more or less above the psychological level of 1. The average CR of Anglo American is 1:25 which shows that the company is able to fulfill its short-term obligations. The CR of the company is well above the industry average which is a clear indication of the company's well going. Let's now move towards the next ratio.

Cash Flow and Investment Ratios

Operating Cash Flow to Sales

The amount of net income is not the actual amount which a company earns because lots of items and income has been recorded in the financial statements on accrual bases. Operating Cash Flow to sales ratio is one of the best measures to judge the actual financial performance of the company.

OCF/S

Sales

Operating Cash Flow

Year

33.252

24,991

8,310

2006

28.520

25,470

7,264

2007

30.653

26,311

8,065

2008

19.594

20,858

4,087

2009

27.636

27,960

7,727

2010

27.931

Mean NPM

23.54

Industry Average

Operating Cash flow shows how much the company received on Sales. The OCF of Anglo American is in a very good position according to the above mentioned computed result. The OCF/S of the company was 33.25% in the year 2006 which then decreased for three consecutive years by 4.73%, 2.133%, 11.08% respectively. The average OCF/Sales ratio of the company is 27.93% which shows that the company earn 28$ on average on its sales which is above the industry average of 23.54$. Let's now move towards the terminal value section.

Terminal Value (TV)

Terminal Value is also called terminal value and in this section, the same has been computed with the help of dividend discount model (DDM).

The dividend discount model's equation is mentioned below,

P = D (1+g)/Re -- g - (a)

D = 0.50 $

G = 0.56*5.5% = 3.5%

Re = 3%

= 0.50 (1+3.5%) / 3.8% - 3.5%

= 3,250 $

The computed intrinsic value is $3,250 while the company's shares are trading on 3,015 $, it means that the shares are currently trading below its terminal value so it can be referred as undervalue and should be bought as an effective investment decision.

Part-4

Trend Analysis

In this section, revenue analysis of the company will be analyzed. In this section the revenue of the company has been analyzed. The below mentioned table of the company's revenue will reveal the story.

Sales

Year

24,991

2006

25,470

2007

26,311

2008

20,858

2009

27,960

2010

25,118

Mean Sales

From the above mentioned table, it can be seen that the company's sales were continuously increasing with a reasonable percentage except for one year of 2009 in which the sales of the company decreased by 20.72% as compared to the same period of last year. The overall trend of the company's revenue is quite attractive from the standpoint of an investor and an investor should think to park his money in the stocks of the company.

Vertical Analysis

Vertical analysis is a name of matching the performance against an element of the financial statement like in the income statement, the benchmark would be the sales and in the balance sheet it will be total assets (Masom & Zaigham, 2007).

Vertical Analysis of Income Statement

Cost of goods sold is basically the cost which has been incurred to have a definite amount of sales (Masom & Zaigham, 2009). The companies which are able to control this particular cost are more productive as compared to those companies which do not.

According to this result the company is not proactive in controlling the cost of goods sold. The S/COGS ratio of the company is very high. The average ratio of Anglo is 72.48% showing that the company usually spends a large proportion of their income on the cost of goods sold. That is the main thing why the NPM of the company was not so high.

Balance Sheet Vertical Analysis

Like the analysis of the income statement in which the vertical analysis has been performed by comparing the items with the total revenue while in the balance sheet all the items of the balance sheet will be computed against the total assets of the company.

The company has cash percentage against the total assets of around 10% which shows that Anglo is not very efficient in gaining the Cash percentage against the total assets. Anglo American spent large amount of money on the long-term assets (Property Plan and Equipment) as compared to its major competitors, which can be measured from the percentages of both of the companies.

Part-5

Conclusion/Recommendations

Organization is basically referred to a place wherein hundreds of people work together just to achieve a specific goal. The goal may be of two fold, like the goal can be economical or can be non-economical (Rachev, & Fabozi, 2008). According to the organizational officials and analysts, investment decisions are always tough to take as far as an organization is concerned. The economic decisions include ad hoc research, analysis and lots of study as well. The current corporate environment is very challenging indeed because of the continuous change in this particular field. Organizations have to take numerous actions merely to direct its performance. The main mantra of every organization is to increase its surplus but to do the same effective strategies must be undertaken by the organizations. This particular assignment is all about analyzing the financial position of a company from the standpoint of an investor. All the computed ratios are in the favor of the investment in the company's stocks. The intrinsic value computation clearly indicated that investment should be parked in the stocks of the company in order to get reasonable amount of profit. So I would recommend a buy strategy of the company's stocks for the new investors and a hold strategy for the existing investors. There are three significant points on which I would like to initiate the buy strategy

The Net Profit and Profit Margin of the company is increasing continuously year on year (YOY) which is a clear indication of the company's long-term profitability

The Terminal Value of the company is higher than its actual traded value which highlights that the company's shares are currently trading lower than its terminal value

The company is proactive in meeting its short- and long-term financial obligations which are supportive for the investors indeed.