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Introduction

Future of a company depends on its performance in the financial context. In order to ensure the longevity of the firm management focuses on improving the financial performance and maintaining the same for the long-run. When the level of market competition is high, maintaining a standard level of financial performance is very important for every business. In the current scenario, the level of competition in the material industry in Australia has increased and there are several companies operating within this particular industry. However, this study will focus on mainly two material companies in Australia - Jindalee Resource Limited and Bluescope Steel Limited. During this report the financial performance standards of the two companies will be analyzed to guide the investor in making investment decision. The financial performance of the companies will be analyzed from different perspectives like, financial ratios, share price movements, dividend policies and expected rate of return of the two companies. 

1. Description of operation and comparative advantages of the two chosen companies

Jindalee Resource Limited is an Australia based material company and operating under Australian Security exchange or ASX. The company was incorporated in July 2002. As per the management of Jindalee Resource Limited, the primary target of the business is to create high wealth for its shareholders by discovering the higher quality mineral deposit (Jindaleeresource.com, 2018).The company is currently operating within the Australian market only; however, higher rate of growth in the market is indicating that the company will expand its business soon in the markets of the other countries. The company has a strong and knowledgeable management team, which always keep a close eye on the market position of the company. Currently, the company has a strong customer base also (Jindaleeresource.com, 2018).

Bluescope Steel Limited is another Australian firm that is operating business under the material industry in Australia. The company is listed under the ASX and started business in 2002 (Bluescopesteel.com.au, 2018). Within very short-period of time it has expanded its business not only in Australian market, but also in the markets of New Zealand, Asia, North America and Pacific Islands. This company has a strong employee base of 16000 people and a wide customer base also. The financial performance of Bluescope Steel Limited indicates a strong market position of the business in the current market scenario (Bluescopesteel.com.au, 2018).

If the basic information of the two companies is considered, it can be identified that Bluescope Steel Limited has higher competitive advantage in the market in terms of customer base, employee base and market expansion. As the market expansion of Jindalee Resource Limited is smaller than Bluescope Steel Limited, the production level of the company is also small than Bluescope steel limited. However, in this point it must be mentioned that the Jindalee Resource Limited is expanding its business and earning the trust of the shareholders and investors by focusing more on increasing the wealth of the shareholders.

However, the overall position and long-term competitive advantage of a company depends on its performance in the financial market. Due to this analyzing the financial performance scenario of the two companies must be analyzed from different perspectives. In the following section the financial performance of the two companies has been analyzed using the financial ratios.

2. Calculation and comparison of performance ratios

Table 1: the Financial ratio of the two selected companies

Discussion

The analysis of the liquidity shows us that Jindalee resources limited keep an excessive amount of cash with them as the quick ratio, current ratio and absolute liquidity ratio of Jindalee resources is significantly higher amount than Bluescope steel limited. This show that cash management of Jindalee is inefficient. The quick ratio shows the amount of cash that a company can procure for any emergency in the company (Adhariani et al.,2017). The absolute liquidity ratio shows the amount of cash and cash equivalent in the company (Gaudens-Omer,2018). The quick ratio and the absolute liquidity ratio of Jindalee are unnecessarily higher where the Bluescope has quite low and slightly inadequate. Therefore, both the company’s cash management needs to improve but the Jindalee need to improve more urgently. The current ratio of Jindalee is also quite higher than Bluescope due to the high amount of cash available to the company. This is another bad sign for Jindalee for the long-term growth of the company as the company is wasting a lot of resources for it. In another hand, the current ratio of Bluescope is quite good and adequate.

The profitability ratio of both companies shows that profit earning ability of Bluescope is far better than Jindalee. The return on equity is the amount of profit that the company is able to earn using the amount the shareholder fund. The return on asset is the amount the company is able to earn using the total asset of the company ( Lins et al., 2017). The higher the amount of both ratio the better is its financial performance in the market. The return on equity and return on asset of Jindalee is in negative whereas the return on equity is keeping on improving and is 14% in the last year. The net profit is the amount of revenue left with the company after paying the entire financial obligation (Nagle and Müller, 2017). The net profit margin of Jindalee is in negative whereas the profitability of Bluescope is stable and growing at a good rate.

The leverage ratio of both companies shows that Jindalee is in a better position than Bluescope in term of the capital of both companies. The debt ratio is the amount of debt component in the company and the equity ratio is the amount of shareholder fund in the company. The debt to equity is the proportion of debt and equity in accompany. It is better for a company to have debt portion lower in a company than equity to minimize the fixed financial obligation of the company but a certain portion of the debt is required to have some tax shield advantage from it. This ratio shows that the capital structure of Jindalee is better than BlueScope as it had lower debt proportion in its capital structure. After analysis of all the ratio for both companies, it can be concluded that the financial performance of Jindalee is better than Bluescope.

3. Analysis of monthly share prices movements

The financial performance and the market position of a company highly depend on the share price movements of that company. It means in order to analyze the financial performance of the two companies analyzing the share market performances or share price movements of the two companies is very important. Here, the share price movements of Jindalee Resource Limited are smaller than Bluescope Steel Limited on monthly basis is analyzed in detailed and at the same time, the share prices of the two companies have been plotted against the movement of All Ordinary Index.

Monthly share price movement of the companies against the All Ordinary Index:

Considering the above diagram, it can be stated that the performance of Jindalee Resource Limited are smaller than Bluescope Steel Limited is needed to be improved in response to the movement of All Ordinary Index. The share price movements of the two companies are showing very low performance standard. It means the share price of these two companies is not closely related to the price of all ordinary indexes. However, the performance trend is upward moving. However, if the comparison is made between the two companies, it can be stated that the performance of Bluescope Steel Limited was better than the performance of Jindalee Resource Limited. It means the management of Jindalee Resource Limited needs to improve their financial performance so that the share price of the company can be increased.

4. Significant factors which may have influenced the share price

The factors that have influenced the share price of Jindalee are the factor like the dividend policies of the company, the profitability of the company and the cash management of the company. The dividend policy of the company is to not give an annual dividend to its shareholders. This is decreasing the share price of the company as the shareholders are not getting a return on investment in form of a dividend. The profitability of the company is also not good. Therefore, the investors are doubtful about the long-term sustainability of the company. the cash management of the company is also not adequate as there is a lot of cash and cash equivalent in the company, which is not earning adequate amount of return as they are not invested anywhere and kept for fulfilling the liability of the company. This inefficiency of the company making investors doubtful about this company. The new scheme of the company, which are increasing the number of its share in the market increase, is also decreasing the value of share price in the market. All these factors are responsible for making share price decrease in the market and the influencing the movement of share price of this company in the market (Jindalee.net.,2018).

The factors influencing the share price of Bluescope are the factor like the dividend policies of the company, the cash flow management of the company, financial result of the company and the profitability of the company. The company has given dividend in the financial year 2017 that had encouraged the investors to invest in the company as there are expectations of the investor to get return annually in term of the dividend. This is increasing the share price of the company. The profitability and the good financial result of the company are increasing the share price of the company as the investor in the market expecting high growth of the company. The cash management of the company is also better than other competitors in the market. This is increasing the confidence of the investor in Bluerscope. One minus factor of the company is the large portion of debt in its capital structure as this is increasing the fixed financial obligation of the business. This is making the share price fluctuate in the market (Annualreports.com.,2018).

5. Calculation of beta values and expected Rates of Return using the CAPM

The beta value of Bluescope Steel Limited is 1.76 and the beta value of Jindalee Resource Limited is 1.32. Considering the beta values of the two companies here, the expected return of the two companies has been calculated below:

Expected rate of return for Jindalee Resource Limited as per CAPM:-

Rate of return = 0.05 + 1.32 * (0.06 – 0.05)

= 0.05 + 1.32 * 0.01

= 0.05 + 0.0132

= 0.0632 or 6.32%

Expected rate of return for Bluescope Steel Limited as per CAPM:-

Rate of return = 0.05 + 1.76 * (0.06 – 0.05)

= 0.05 + 1.76 * 0.01

= 0.05 + 0.0176

= 0.0676 or 6.76%

Considering the above calculations, it can be stated that the expected return of Bluescope Steel Limited is higher than Jindalee Resource Limited. This is also indicating though the expected rate of return of Jindalee Resource Limited is lower than the other company that is Bluescope Steel Limited, the level of risk of the business is also lower than the Bluescope Steel Limited. At the same time, it is also notable that the beta values of the two firms are indicating the market is highly volatile and due to that the associated risk level of the businesses is also much high.

6. Dividend policies

Dividend policy plays a vital role in deciding the financial position and financial performance of a company. Considering the business cases of the above mentioned two companies, here, the dividend policies of those two companies are analyzed below:

Dividend policy of Jindalee Resource Limited:

If the last year’s annual report and the annual reports of previous two years of Jindalee Resource Limited are considered, it will be noted that the company has not paid any dividend to its shareholders. This is also indicating that the company could not earn enough profit that could be used for paying dividend to the shareholders. In the other words, it can be mentioned that the financial performance of the company was not up to the standard so that the dividend can be paid to the shareholders. The annual reports of the company do not provide much data and information about their dividend policy (Jindaleeresource.com, 2018).

On the other hand, if the annual reports of Bluescope Steel Limited are considered, it will be identified that the company has provided 100% franking dividend to its shareholders. Providing the 100% franking dividend the company has reduced the tax burden of its shareholders, which is a strategy of attracting more investment in the business (Bluescopesteel.com.au, 2018).

Therefore, if the dividend policies of the two companies are considered, it can be stated that the dividend policy of Bluescope Steel Limited is definitely better than the other company that is Jindalee Resource Limited because Jindalee Resource Limited has not provided any dividend to its shareholders.

7. Recommendation letter

To

The Client

Date:______________

Subject: Recommendation regarding the investment decision

Considering the overall financial performance analysis of the two companies, it can be stated that the performance of Bluescope Steel Limited in the last three years was much better than the performance of Jindalee Resource Limited. If the general information of the two companies is considered, it will be understood that the market position of Bluescope Steel Limited is better than the market position of Jindalee Resource Limited. Considering the financial ratios of the two companies, it must be noted that the financial performance needs to be improved in the contexts of both the businesses; however, the performance standard of Jindalee Resource Limited is bit lower than the performance standard of Bluescope Steel Limited.

On the other hand, if the financial performance of the two companies is analyzed and compared considering the share price movements, it can be identified that the share price movement was better in Bluescope Steel Limited than Jindalee Resource Limited. However, during the analysis, it has also been noted that the share p[rice movements of the two companies were much lower in comparison to the all ordinary index. However, comparing the performances of the two companies from the share price perspective, it can be stated that the investment in the share of Bluescope Steel Limited will be more profitable for the investor.

Calculating the expected return by using CAPM formula it has been again identified that if the investment is made in Bluescope Steel Limited the return percentage will be higher. Hence, it will be more profitable to the investor.

The analysis has also been made from the perspective of dividend payment and in the analysis it has been identified that the Bluescope Steel Limited has paid 100% franking dividend to its shareholders; whereas, the Jindalee Resource Limited has not provided any dividend to the shareholders. It is clearly indicating that investment in the share of Jindalee Resource Limited will not be viable for the investor.

Therefore, considering the overall performance analysis of the two companies, it must be stated that the performance of Bluescope Steel Limited is better and so the investment must be made in this company only.

Conclusion

This study has clearly indicated the fact that the performance standard of Bluescope Steel Limited is better than the other company. In the analysis of the performance standard from different perspectives like, financial ratios, dividend policies and share price movements, return percentage, it has been noted that Bluescope Steel Limited is performing in more profitable manner. Hence, the study has suggested that making investment in the shares of Bluescope Steel Limited will be more viable for the investor.

Reference list and bibliography

Adhariani, D., Sciulli, N. and Clift, R., 2017. Quantitative Optimisation Model, Results and Discussion. In Financial Management and Corporate Governance from the Feminist Ethics of Care Perspective (pp. 209-284). Palgrave Macmillan, Cham.

Annualreports.com. (2018). Annualreports.com. [online] Available at: http://www.annualreports.com/HostedData/AnnualReports/PDF/ASX_BSL_2017.pdf [Accessed 27 Sep. 2018].

Bluescopesteel.com.au. 2018. Home - Bluescope Steel. [online] Available at: http://www. bluescopesteel.com.au/ [Accessed 17 Sep. 2018].

Chen, C.W., Collins, D.W., Kravet, T.D. and Mergenthaler, R.D., 2018. Financial statement comparability and the efficiency of acquisition decisions. Contemporary Accounting Research, 35(1), pp.164-202.

Di Giuli, A., Karmaziene, E. and Sekerci, N., 2018. Common Ownership and Firm Dividend Policies.

Gaudens-Omer, K.T., 2018. A Model of Optimal Excess Banking Liquidity. Journal of Finance, 6(1), pp.1-10.

Goldmann, K., 2017. Financial liquidity and profitability management in practice of polish business. In Financial Environment and Business Development (pp. 103-112). Springer, Cham.

Jindalee.net. (2018). Jindalee.net. [online] Available at: http://jindalee.net/jrl/wp-content/uploads/austocks/jrl/2017_10_12_JRL_1507808280.pdf [Accessed 27 Sep. 2018].

Jindaleeresource.com. 2018.Home - Jindalee Resource. [online] Available at: https://www. jindaleeresource.com / [Accessed 17 Sep. 2018].

Klačmer Čalopa, M., 2017. Business owner and manager’s attitudes towards financial decision-making and strategic planning: Evidence from Croatian SMEs. Management: journal of contemporary management issues, 22(1), pp.103-116.

Lins, K.V., Servaes, H. and Tamayo, A., 2017. Social capital, trust, and firm performance: The value of corporate social responsibility during the financial crisis. The Journal of Finance, 72(4), pp.1785-1824.

Lins, K.V., Servaes, H. and Tamayo, A., 2017. Social capital, trust, and firm performance: The value of corporate social responsibility during the financial crisis. The Journal of Finance, 72(4), pp.1785-1824.

Marketindex.com.au. 2018. All Ordinaries - Shares Prices & Charts. [online] Available at: https://www.marketindex.com.au/all-ordinaries [Accessed 17 Sep. 2018].

Mechelli, A., Cimini, R. and Mazzocchetti, F., 2017. The usefulness of the business model disclosure for investors’ judgements in financial entities. A European study. Revista de Contabilidad, 20(1), pp.1-12.

Mete Soner, H., Reppen, M. and Rochet, J.C., 2018. Optimal dividend policies with random profitability (No. 882). Institut d'Économie Industrielle (IDEI), Toulouse.

Nagle, T.T. and Müller, G., 2017. The strategy and tactics of pricing: A guide to growing more profitably. Routledge.

Reppen, M., Rochet, J.C. and Soner, H.M., 2017. Optimal dividend policies with random profitability.

Reuters.com. 2018. Banks | Reuters.com. [online] U.S. Available at: https://www.reuters.com/subjects/banks [Accessed 17 Sep. 2018].

Rubin, G.D. and Patel, B.N., 2017. Financial forecasting and stochastic modeling: predicting the impact of business decisions. Radiology, 283(2), pp.342-358.

Sahut, J.M. and Teulon, F., 2017. What are the determinants of dividend policies? A new perspective in Emerging Markets. Economics Bulletin, 37(3), pp.2234-2246.

Yurttadur, M., Altintas, Z.I., Gokce, H., Kurt, Y., Yildirim, Y.E., Celebi, I. and Kayar, V., 2017. A RESEARCH ON DIVIDEND POLICIES OF THE COMPANIES IN LOGISTICS SECTOR IN TURKEY. Journal of Management Marketing and Logistics, 4(3), pp.310-319.

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