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ContentsExecutive Summary ....................................................................................................................................... 2

Introduction .................................................................................................................................................. 3

SWOT Analysis: A view from Managing Directors Report ........................................................................... 4

Strength: ................................................................................................................................................... 4

Weakness .................................................................................................................................................. 4

Opportunities ............................................................................................................................................ 4

Threats ...................................................................................................................................................... 5

Financial Analysis and Discussion ................................................................................................................. 6

Profitability Ratio ...................................................................................................................................... 7

Liquidity Ratios .......................................................................................................................................... 7

Efficiency Ratio .......................................................................................................................................... 7

Gearing Ratio ............................................................................................................................................ 8

Industry Comparison ..................................................................................................................................... 9

Conclusion & Recommendations ................................................................................................................ 10

References: ................................................................................................................................................. 12

Appendix ..................................................................................................................................................... 13

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Executive Summary

The report has been prepared for analyzing the proposal for investment in the OneSteel

Company. The report provides an Introduction to the company with an in depth analysis of the

annual report and the sustainability report of the company. The report discusses the financial

analysis of the company as well as the SWOT analysis is prepared based on the managing

directors report.

The complete analysis highlights the issues in investing in the company with respect to the

financial strength and the ratio analysis. The comparison has also been made with the industry

competitor Rio Tinto.With all the aspects it is advisable that the investment is done in the

company after proper scrutinizing the future aspects.

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Introduction

The report has been prepared for Company Overview and to highlight the complete analysis of

the companys performance based on the financial analysis of the financial report and the ratio

analysis. The report has been prepared in order to identify the investment opportunities in the

company and have a future perspective of the growth of the company.

The company is into mining and has made huge investments in international as well as domestic

market in domestic mining, recycling, mining consumables, and manufacturing and distribution

businesses and thus has created a huge and diverse portfolio. The company is into export of scrap

metal and is one of the largest exporters and manufactures of mining consumable products. The

products include rail wheels and wire ropes.

With this solid financial background and huge experience in the mining sector, the company has

earned significant presence in the Australian steel industry also. The company has been able to

maintain strong presence in the distribution of the metal products in Australia and New Zealand

and has also become the most trusted and premier brand in the manufacture of the steel products.

This was the brief overview of the company highlighting its operational performance and the

position in the market. In the other sections of the report the complete analysis of the financial

performance of the company has been made and the key success points of the company have

been highlighted. It also discussed in the sections the areas where the company can improve and

also the opportunities and threat for the company.

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SWOT Analysis: A view from Managing Directors Report

Strength:

The company is having a huge presence, not only in Australia and New Zealand but across the

world with its investments in different nations. This is one of the biggest strengths of the

company. Another important point is the diverse portfolio that the company is holding. As

discussed in the introduction to the company. This provides the company with a strong base and

thus a competitive edge over the competitors in the market. The huge financial strength and the

operational expertise is one of the biggest strengths of the company. The company has shown

great potential and with an increase in the revenue of the company shows the growth curve of the

company. However the exact growth of the company can be estimated after the financial

analysis. But the overview certainly shows that the company has been strongly moving towards

the positive direction.

Weakness

The biggest weakness for the company is that although it is having a diverse portfolio, each of its

products and services that are being offered are more or less linked to each other and thus will

have a recursive effect in the case of downturn. Another biggest weakness for the company is the

inability to attract investors. More on this has been discussed in the financial analysis section.

But it is certainly the biggest issue that has been arising for the company in a sector that requires

huge investments and infrastructure.

Opportunities

Australia and New Zealand have been having huge natural reserves most of which have not been

explored yet. Thus there is a huge potential for growth. Also looking at the growth potential in

Australia a lot of investors are being attracted to invest in Australia. Thus the company has a big

opportunity to tie up with international players in the market and make movement towards other

parts of the world. This will also help in meeting the financial requirements of the company.

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Threats

The biggest threat that is arising for the company is the regulatory framework. The government

has been taking initiative to encourage the green energy and also support the small business

entities in order to increase competition in the market. This has resulted in the application of

Mineral Resource Rent Tax (MRRT) and Green tax. This has been a huge setback for the mining

companies which will certainly impact the profitability of the company.

The SWOT analysis of the company clearly identify the key areas for the company and thus

show that there are mixed future prospects for the company and thus it depends largely on the

company how it manages its funds, attracts investors, handles the obligations arising out of the

regulatory framework.

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Financial Analysis and Discussion

In this section the financial analysis of the company is done. The financial reports of the

company from 2007 to 2011 have been analyzed and the financial statements including incomestatement and the balance sheet have been studied in detail. Based on the data that is collected

the various ratios have been calculated. These have been divided under profitability ratio,

liquidity ratio, efficiency ratio and gearing ratio. These ratios have been shown below.

2011 2010 2009 2008 2007

Profitability Ratio

Gross Profit /Operational profit 19.34% 19.89% 21.92% 22.61% 19.47%

Net Profit 3.34% 4.20% 3.31% 3.43% 5.09%

Return on Shareholder funds 5.27% 5.80% 5.53% 7.43% 13.27%

Return on Capital Employed 19.99% 22.12% 29.85% 30.59% 31.45%

Liquidity Ratio

Current Ratio 1.89 1.59 3.63 1.45 1.70

Acid Ratio 0.77 0.63 1.61 0.74 0.78

Efficiency Ratio

stock days 82.34 84.30 62.50 63.33 70.98

Debtor days 47.47 48.79 41.69 58.19 54.39

Creditor days 51.69 50.77 30.93 49.82 53.90

Gearing Ratio

Loans: Capital Employed 0.26 0.13 0.20 0.29 0.29

Interest Cover 0.07 0.07 0.11 0.09 0.07

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Profitability Ratio

Four ratios have been calculated under profitability ratios. These are gross profit ratio, net profit

ratio return on shareholders fund and return on capital employed. It has been seen that the

company had huge increase in gross profit in 2008 and 2009 which has again reduced in 2010

and 2011. Another important point is that the company has very low net profit. This is to say that

the company may be having liability in terms of loans for which interest payments have to be

done. The second important point is that the company has very low return to shareholders equity.

The return on Capital employed is quite appreciable for the company but the value for this ratio

is also having decreasing trend (Milling, 2003). Thus these ratios do not highlight the strength of

the company in terms of profitability it is able to generate for the investors. This is not a very

good sign for the investment in this company.

Liquidity Ratios

This ratio identifies the level of liquidity in the company. The two most important ratios that

have been calculated are current ratio and acid ratio. These are very important ratios as the value

to these ratios provide an insight into whether the company will be able to meet its short term

obligations or not. Looking at the current ratio of the company which is the ratio of current assets

of the company to the current liabilities of the company (Vandyck,2006), it can be very well

said that the company has signs of movement in the current ratio and the current ratio of 2011

has been very strong. This is to say that the value of current ratio is in the range of 2 whichmeans that the current assets are double the current liabilities which shows that the company

does not face the issue of liquidity. The acid ratio, which is in a way provide a more dynamic

outlook to the liquidity position of the company (Helfert, 2001), is calculated by deducting

inventory from current assets. Thus this ratio shows the ready cash available with the company.

The value to this ratio are not quite encouraging as the values are much lesser than 1. This shows

that the inventory is quite high which contribute to the current assets and thus might impact the

liquidity of the company.

Efficiency Ratio

The efficiency ratios include, stock days, debtor days and creditor days. The stock days ratio

shows that the stock available with the company will be utilized in how many days. It has been

seen that the value to this ratio has been increasing and thus means that the inventories have been

increasing (Needles & Powers, 2010). This may be due to increased inventory levels as the

http://www.amazon.com/s/ref=ntt_athr_dp_sr_1?_encoding=UTF8&sort=relevancerank&search-alias=books&ie=UTF8&field-author=Charles%20K.%20Vandyckhttp://www.amazon.com/s/ref=ntt_athr_dp_sr_1?_encoding=UTF8&sort=relevancerank&search-alias=books&ie=UTF8&field-author=Charles%20K.%20Vandyck

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demand of products is not there in the market or the company has a view that it may benefit in

future. But the high and increasing value of stock days is not favorable. The important point is

that the debtor days ratio, which shows the days in which debts will be repaid is less than

creditor days, which is the days in which the credit to the company will be paid. This difference

in debtor days and the creditor days is not too high to encourage investors. Thus it is to say that

the company will have to reduce the inventory level in order to increase the liquidity of the

company, as discussed in the previous section and at the same time improve the efficiency of the

company in utilizing the funds.

Gearing Ratio

This ratio is associated with the liabilities in terms of loan of the company. The two ratios that

have been calculated are loans to capital employed ratio and the interest coverage ratio. The loan

to capital employed ratio is the ratio of loans taken up by the company to the capital employed. It

has been seen that this ratio has increased and thus shows that the loans of the company has

increased as percentage of the capital employed (Fridson, & Alvarez, 2011). This is to say that

the company is not able to generate interest in the investors to invest in the company and to meet

the obligations loans have been increased. The point that is to be noted is that the loans comprise

more than 25% of the capital employed by the company. This can be due to the reduced return

on shareholders capital and the gross profit that have been analyzed in the profitability ratio.

Thus the impact of the reduced investments in terms of equity is a great setback for the company.

However the interest coverage ratio which is the ratio of interest paid to the net profit of the

company shows how much impact interest has on the gross profit of the company or in other

words what is the percentage of costs associated with interest of the gross profit of the company

(Troy, 2012). This figure is quite low and thus shows that the obligation to pay the interest is not

impacting the net profit of the company as much the operational activities. Thus the company is

very well off in meeting the costs associated with the liability.

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Industry Comparison

In order to develop an understanding of the performance of the industry leaders, a comparison

has been made with the performance of Rio Tinto for the last two years.

Rio Tinto One Steel

2011 2010 2011 2010

Gross Profit /Operational profit 35.97% 35.68%19.34% 19.89%

Net Profit 8.87% 24.04%3.34% 4.20%

Return on Shareholder funds 59.25% 207.70%5.27% 5.80%

Return on Capital Employed 188.03% 187.45%

19.99% 22.12%

Current Ratio 1.46 1.851.89 1.59

Loans: Capital Employed 0.03 0.030.07 0.07

The above ratios clearly show that the performance of Rio Tinto has been much better in

comparison to that of the One Steel. However the data that is available for Rio Tinto may be at

the group level and not only for the mining company. But the current ratio of the company is

stronger than the Rio Tinto. However the profitability of the company is much lesser in absolute

terms as well as the percentage terms. Thus the company Onesteel needs to show improvement

in terms of the gross profit and the net profit. Reducing the effect of the cost associated with

business and increasing the profit will have a positive impact on the other ratios as well.

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Conclusion & Recommendations

The below points highlight the summary of the above analysis:

The company has very low net profit.

The company has very low return to shareholders equity. The return on Capital employed

is quite appreciable for the company but the value for this ratio is also having decreasing

trend.

The current ratio of the company is very strong and thus is biggest strengths of the

company.

The company is having a high inventory level which is impacting the returns on capital

employed and the return on shareholders equity.

The inventory level is also resulting in the reduced liquidity of the company.

The SWOT analysis highlights the tax laws as the biggest threat to the company.

The company is having huge opportunity in terms of growth opportunities in Australia.

There is huge potential for the company to attract investors from outside Australia and

invest in the company.

The above points which basically summarize the complete analysis of the report clearly show

that in the current scenario it might not be advisable to invest in the company. This is to say that

from the SWOT analysis it is quite clear that the opportunities are there for the company which

may be applicable to the other players in the market as well. Thus it can be said that it may be

advisable not to invest the company as the financial analysis clearly highlights that the acid ratio,

which is in a way provide a more dynamic outlook to the liquidity position of the company, is

calculated by deducting inventory from current assets. Thus this ratio shows the ready cash

available with the company. Also although the return on Capital employed is quite appreciable

for the company but the value for this ratio is also having decreasing trend. Thus these ratios do

not highlight the strength of the company in terms of profitability it is able to generate for the

investors. This is not a very good sign for the investment in this company.

It may say that as per the analysis and the current scenario the investment in the company may

not be the decision. However the company stock may be tracked and the financial strength of the

company may be analyzed periodically. The comparison with the industry also shows that the

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profitability of the company is on the lower side. Thus the investment in the competitors may

result in more value of the stock.

This is to say that it may be too early to comment on the investment decision. But as per the

above discussion it may be favorable to make investments in other companies or to hold the

decision after more tracking of the analysis of the company and then making a decision.

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References:

Leo Troy, (2012), Almanac of Business & Industrial Financial Ratios

Fridson, M.S. & Alvarez, F. (2011). Financial Statement Analysis: A Practitioner's Guide. (4th

ed.). USA: John Wiley & Sons.

Charles K. Vandyck,(2006), Financial Ratio Analysis: A Handy Guidebook, Trafford Publishing

Helfert, E.H. (2001). Financial analysis: tools and techniques: a guide for managers. New York:

McGraw-Hill Professional.

Milling, B.E. (2003). The Basics of Finance: Financial Tools for Non-Financial Managers. USA:

iUniverse.

Needles, B.E.& Powers, M. (2010). Financial Accounting. (11th ed.). USA: Cengage Learning.

http://www.amazon.com/s/ref=ntt_athr_dp_sr_1?_encoding=UTF8&sort=relevancerank&search-alias=books&ie=UTF8&field-author=Charles%20K.%20Vandyckhttp://www.amazon.com/s/ref=ntt_athr_dp_sr_1?_encoding=UTF8&sort=relevancerank&search-alias=books&ie=UTF8&field-author=Charles%20K.%20Vandyck

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Appendix

Financial Results of the company

2011 2010 2009 2008 2007

Sales $7,113.00 $6,204.60 $7,241.50 $7,434.30 $4,300.60

Gross Profit $1,375.80 $1,234.00 $1,587.50 $1,681.20 $837.20

Net Profit $237.50 $260.70 $239.60 $255.10 $218.90

Current Assets $2,707.60 $2,364.30 $2,229.10 $2,652.40 $1,545.30

Fixed Assets $5,607.50 $4,703.40 $4,704.00 $4,675.40 $2,024.20

Total Assets $8,315.10 $7,067.70 $6,933.10 $7,327.80 $3,569.50

Current Liabilities $1,431.10 $1,488.60 $1,614.20 $1,832.30 $907.90

Total Liabilities $3,809.40 $2,575.00 $2,596.80 $3,894.90 $1,919.50

Total Equity $4,505.70 $4,492.70 $4,336.30 $3,432.90 $1,650.00

Total Liabilities+Equity $8,315.10 $7,067.70 $6,933.10 $7,327.80 $3,569.50

Capital employed $6,884.00 $5,579.10 $5,318.90 $5,495.50 $2,661.60Inventory $1,604.70 $1,433.00 $1,239.90 $1,289.90 $836.30

Loans/ Non Current Liability $1,809.50 $715.20 $1,078.00 $1,614.80 $759.40

Interest Paid $101.10 $89.20 $172.20 $159.60 $55.80

Debtors $925.00 $829.30 $827.10 $1,185.30 $640.90

Creditors $1,007.30 $863.10 $613.70 $1,014.80 $635.10

Ratio Formula

Ratio FormulaGross Profit /Operational profit Gross Profit/ Sales

Net Profit Net Profit/ Sales

Return on Shareholder funds Net Profit/ Total Equity

Return on Capital Employed Gross Profit/ (Total AssetsCurrent Liabilities)

Current Ratio Current Assets/ Current Liabilities

Acid Ratio (Current Assets- Inventory)/ Current Liabilities

stock days (Inventory/ Sales) X 365

Debtor days (Account Receivable/ Sales) X 365

Creditor days (Account Payable/ Sales) X 365

Loans: Capital Employed Loans/ (Total AssetsCurrent Liabilities)

Interest Cover Interest Paid / Gross Profit