Evaluation of Business

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Following by the shift to the explosives market, US operation of explosives has been largely invested. Having expanded considerably in size over the past 10 year, explosives segment has brought great deal of revenue for Incitec that compensate the decrease in fertiliser market. Recently, the announcement of non-processing Dampier Nitrogen plans has further approved that under this unstable environment, the continued investment in asset or expansion would incur unwise cost and lower the profit which is conflict to the cost leadership strategy.

4.0 Accounting Analysis

4.1 Key Accounting Polices and Its Flexibility

4.1.1 Management Manipulation

The Group chooses to consolidate financial statements conforming to the IFRS. Thus, there are some comparative results have been adjusted on the disclose items in financial year. In 30 September 2014, the Group’s current liabilities had exceeded current assets that reached to $ 156.5 million. In Group’s 2019’s forecast, cash balance will meet the current liabilities in twelve months. The financial statements are combined based on the historical cost convention, derivative financial instruments is exceptional. All the value has been measured at fair value and in the fair value hedges. Hence, the change in the fair value will merge with the risk in hedging fair value for the derivative financial instruments. However, the management does not adopt the standard because it will result in expanded Group’s disclosure and a large change in the hedging arrangements. Overall, the flexibility of management is quite high. (Appendix 4)

4.1.2 Inventories

The annual report shows that the value of inventory is calculated at the lowers of cost and net realisable value. In order to determine cost, the management uses weighted average method. The total value is the sum up of manufactured good that includes direct material and labour costs, also the appropriate fixed and variable overheads. And it is based on the usual capacity of production. Hence, the turnover of engineering spares held in inventory and expensed when used is really high. (Appendix 5)

4.1.3 Property, Plant and Equipment and Depreciation

The value of PPE is distracting of the original cost and less accumulated depreciation and impairment. The original cost includes acquisition cost, cost of materials, direct labour and an appropriate amount of overheads. Besides freehold, the Group uses straight-line method to determine depreciation using depreciation rate over an estimated life. The management normally determines the useful life of building and machinery, plant for 20 – 40 years and 3-40 years respectively. When the circumstances change, the management can make change to useful life of assets and its residual values. Thus, the flexibility of PPE is high in the Group. (Appendix 6)

4.2 Accounting Strategy

4.2.1 Evaluating Accounting Strategy

According to the annual reports, the Group presents a fairly reliable and adequacy of disclosure which reflect the nature of business, how it operates, its financial position and its own business strategies. All the information disclosed by the Group is corresponding to the AASB and Corporations Act, and conforming with IFRS as well. Annual report discloses the details of Board of Directors. It gives assist for users to clarify the situation of company’s management department and they are details of remuneration.

4.2.2 Potential “Red Flag”

The closing of net book amount of PPE had been increased since 2012. The management disposal the old tangible assets and revalue in reclassification from construction in progress and identifies new useful lives of PPE. The annual report does not show details of how the Group determines new lives and makes adjustments. The management might identify useful lives which is favourable to the Group.

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(Appendix 7)

5.1 Financial Analysis

5.1.1 Return on Equity (ROE)

The ratio of ROE shows how efficiency a company makes a return for shareholders at net profit after tax. It also means that how good is the Group to make investment and make return. In the range of 2010 to 2014, on the first 3 years, the rate is quite stable, however, on 2014, the rate is dropped dramatically. The reason could be the profit on that year is lower than the other years’. (Appendix 8)

5.1.2 Profit Margin (PM)

The simplest way to explain PM is the measurement of profitability. Because year 2014 is the worst year for the Group, thus the ratio of PM dropped suddenly to 7%. According to RONA, using assets is not that efficiency as other 4 years; hence, the net profit will go down, so directly influence the PM ratio. (Appendix 8)

5.1.3 Assets Turnover (ATO)

ATO is a financial ratio to measure the entity’s function to use its assets in generating its sales revenue. The lower the rate which may indicates the entity is not using its assets efficiently and the likely reason is management’s problem. For Incitec Pivot Ltd, the PM ratio is quite close of these 5 years. The lowest rate is on 2014 that is 55%. (Appendix 8)

5.1.4 Financial Leverage (Debt/ Equity)

The financial leverage can be described as how an entity uses borrowed money in the investment. The business with high financial leverage includes high risk of liquidation and unable to repay the debt. During the period of 2010 to 2014, the rate of financial leverage has been decreased slightly to 34%. (Appendix 8)

6.1 Forecast

The current performance of Incitec Pivot is showed visibly by analysing the accounting and financial performance. However, the prediction of the firm’s future performance is also important for management and investors by using the historical data. As a company that established 1919 and has stable ratios in the recent years, the type 1 forecasting model has been selected to identify the company’s future performance.

6.1.1 Sales Growth

The first step of forecasting for Incitec Pivot Ltd is to forecast the sales in a period. As shown below, the sales revenue of the firm has a dramatic increase from FY2010 to FY2011