International Accounting & Finance
Performance, profitability and growth Rio Tinto plc Looking at the financial statement for the company from the year 2005 to year 2007 you will realize it is performing well. In this analysis I have gone through the financial statement and I have come up with the following conclusion. On profitability I have used gross margin and net profit margin, also I will consider return on equity and return on assets, it can be noted that Rio Tinto is performing well in the international market without considering segment performance as the gross margin grew from 62% to 63.
4% from year 2005 to year 2006. This is a positive growth it shows that the revenues grew at the higher rate as compared to the cost generating the revenue. The gross profit margin also grew from 15. 5% to 18% in the year 2005 to the year 2006, which means that their was efficiency in reducing the cost associated with the expenses that were used to generate the gross profit. In the year 2007 it increased to 20% which is a show of continue growth, however this can be attributed to some factors which contributed to the increase of profits.
Even though profitability of the company has been increasing in terms of gross profit and net profit, it is slightly below the industrial average (company website). The return on equity also shows a slight change although not positive, from the year 2005 to the year 2007 it is above the industrial average but it is in a downward trend. The ratio was 12. 8% in the year 2005 while it was 12. 2% in the year 2006. The return on assets as also gone down with a slight margin, it has come from 20. 5% to 16. 2% from the year 2005 to the year 2006.
However I was not able to trace the industrial average for this ratio(company website). On performance the company is not doing so well but they are above the industrial average, this is shown by low stock turn over ratios. In the year 2005 the stock turn over ration stood at 24% and it reduced further to 22% while in the year 2007 it was 23 times, this further means that the goods stayed in the where house longer than expected and the management was not able to efficiently utilize its resources to generate revenue as expected.
On the number of days the goods were in store for 20days in the year 2005 and 18days in the year 2006, this is a poor show off on the side of the management. Looking at the death ratio, the company reduced external borrowing but increasing internal borrowing showing the management improved in reducing the risk of default thus reducing chances of liquidation (White G. I. , Sondhi A. C. and Fried D. , 1997). On growth we can realize that the company grew in all aspects as sales grew return on equity and many other areas grew.
There was growth in assets also growth in capital which shows that there was steady growth of the company. However there is a number of variability in terms of growth which is as a result of unstable or insufficient financial resources to finance the resources of the company. Using DuPont analysis the company is growing in terms of return on asset and equity and it shows that the capital structure or the financial reference of the asset is decreasing. In the year 2005 it is on the upwards trend and it is calculated as Profitability x Activity x Solvency (White G. I. , Sondhi A. C. and Fried D. , 1997).
2. Treasury management There are many factors which affect the management of companies especially the shares for a company operating in a global perspective. One of the factors that is considered for companies operating in a global stock exchanges is the exchange and hedging against changes in currencies. This is because every time there is constant changes in the price of the share in different markets which is due to change in the currency (Navroz D. and Daljit S. , 2005). Treasury management is involved in analyzing the risk and return of the shares which are being traded in different market.
Each stock exchange has different returns for the same shares therefore the treasury management will try to harmonize this differences in risk and returns in order to ensure the investor in a different country has the correct information. They behave as portfolio managers for the same shares of the company, in portfolio management different shares from different companies are analyzed but in this case they analyze the shares from the same company being traded in different stock exchanges with the aim of harmonizing the shares through hedging.
They give an estimate of the return in each market at the same time express the risk as the probable downward price expectation during time of appreciation of depreciation. They end up with a rough estimate of each return from each market for the security (Navroz D. and Daljit S. , 2005) Unlike portfolio management the combining effect of the security from different currencies produces a less risk or a more risk investment. For example some countries will have more risk than others i. e.
the case Zimbabwe where the inflation rate is 10,000 times and there is a company trading in Zimbabwe stock exchange at the same time trading in London stock exchange. The effects need to be harmonized to allow proper recording in the books of the company. In a nutshell treasury management is important to a company trading in various stock exchange because different markets represent different risks which needs to be harmonized to help the company have a clear consolidated financial statement.
It is like an investment portfolio managers for the company but the fortunate or unfortunate thing they deal with the shares of the same company thus reducing the risk. The risk in international market include; political risk, foreign exchange risk, business risk and financial risk (Brick, J. R… Baker H. K, and Haslem J. A.. 1986); . 3. The shareholders of Rio Tinto may not wish to be taken over by another company to create a large multinational because of a number of factors. To begin with during take over if proper negotiations does not take place, the share prices of the two companies can be underestimated and the prices maybe lower.
The minority shareholders will loose some of the profit. Another problem is the incompatibility of the investors of Rio Tinto to be acquainted with the policies and rules of the new company since reconciling them will bring a problem (Latane H, 1959). The best way to overcome this form of takeover is true mergers acquisition to create economic of scale and have synergy effects. They will have an increased market share a great performance in the stock market and customer satisfaction. During merges and acquisition a number of opportunities and benefit arise for both parties (Nyemira, M.
P and Fredman G. 1991). However mergers and acquisitions have there challenges which both they must be ready to bare with, the benefit maybe a dominate market and synergies like reduced waste management; it may result to loss of employment and an ethical practices which are associated with mergers and acquisitions (Nyemira, M. P and Fredman G. , 1991);. Another viable method that can be used by the shareholders is the method of strategic alliances and joined ventures. In strategic alliances and joined ventures both partners agree on the formula of sharing of profits arising for a joined venture.
Strategic alliances at the same time will lead to the best partner carrying out the best job. Using this method the shareholder of Rio Tinto will be successful and they will avoid hostile takeovers (Nyemira, M. P and Fredman G. , 1991). 4. In preparation of financial statements for a company like BHP Belington and Rio Tinto requires either partners or the management for the company to prepare consolidated financial statements. Consolidated financial statements require a department like treasury management department which consolidates various currencies.
Consolidation of financial statements is the best way of uniting various currencies and minority shareholders accounting policies are followed and various methods of accounting for international transactions are use. One of the methods that is used in conversion is the net realizable value for the currencies different from the mother country. Take the above Zimbabwe example where there is high inflation rate the best methods that can be used in the harmonization of the financial statements (Nyemira, M. P and Fredman G. ,1991). Conclusion
The company should think of investing in projects that will continue increasing the market share. Mergers and acquisitions results in economies of scale and synergies effects for the companies that are involved such as increased market share, greater performance in the stock market and customer satisfaction are just but some of the benefits of such combinations(Navroz D. and Daljit S. ,2005). However challenges are also associated with mergers and acquisitions. For instance when Rio Tinto merges with BHP Belington the benefit will be domination of the market and other synergies like in waste management.
However the merger leads to jobs being lost. The firms should also focus on the importance of ethical and cultural fits between them as this may either make the acquisition/ merger successful or a complete failure.
Brick, J. R… Baker H. K, and Haslem J. A.. (1986); Financial Markets Instruments and concepts, Redston Publishing. Latane H, (1959) “Criteria for choice among risk ventures,” J. Politic. Economy. Navroz D. and Daljit S. (2005) ‘Of Rocks and Hard Places: A Critical Overview of Recent Global Experience with Electricity Restructuring’, Economic and Political Weekly, Vol XL No 50, December 10-16,
Nyemira, M. P and Fredman G. (1991); “An evaluation of the composite index of leading indicators for signaling turning points in business and growth cycles. “ business economics. Sprinkel,B. (1971); Money and Markets: A Monetarists view, Homewood, III. : Richard D. Irwin. Van Horne, J. C. (1983); financial market rates and flows. 4th ed. Englewood cliffs, N. J. : Prentice Hall. White G. I. , Sondhi A. C. and Fried D. , (1997): l Analysis and Use of Finanacial Statements, Wiley, U. S. A.
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