Fortescue Metals Group (FMG) Investment Analysis: Financial and Non-Financial Performance Insights

Fortescue Metals Group (FMG) Investment Analysis: Financial and Non-Financial Performance Insights

Summary of Fortescue Metals Group Ltd

The corporation, often abbreviated as FMG, is an Australian iron ore organization. The corporation is recognized as the fourth biggest iron ore manufacturer globally, behind Rio Tinto, BHP, and Vale SA. The company's wholly owned and integrated businesses in the Pilbara area include the Chichester Hub, Solomon Hub, and the Western mining hubs (Reuters, 2022). FMG is the biggest tenement holder in Western Australia, with about 87,000 km² in the Pilbara region. The corporation is a publicly traded entity listed on the Australian Stock Exchange. The company’s main headquarters is situated in Perth, Western Australia.  The corporation is recognized for exporting its iron ore to countries globally, including Japan, China, South Korea, and India. (Bloomberg.com, 2022)

This report is directed at the interests of a prospective investment. The primary objective of this report is to evaluate the financial and non-financial performance of FMG over the last three fiscal years and to provide recommendations to stakeholders about investment decision-making. The company's financial performance will be assessed through financial ratio analysis, while non-financial performance will be evaluated using relevant key performance indicators reported in the annual reports, aimed at demonstrating sustainability in operations.

The performance study of FMG, using pertinent financial key performance indicators, has been assessed as good and favorable, demonstrating a significant increase across almost all dimensions, including non-financial performance. Consequently, a perception of the firm may emerge indicating favorable future growth possibilities, thereby recommending prospective investors to consider investing in FMG stocks.

1. Financial Key Performance Metrics

The annual report of FMG for the three most recent financial years, 2019-2021, has been analyzed, and relevant financial ratios have been calculated using data extracted from the financial statements. The appendix portion of the report contains the financial information extracts and formulae for computing financial ratios. The computed financial ratios are reported as follows:

                                                                       (Source: Author)

2. Non-Financial Key Performance Indicators for Sustainability in Operations

The pertinent non-financial KPIs have been thoroughly extracted from the company's annual report for the last three fiscal years. The following presentations have been made:

(Source: Author)

1. Financial Performance of Profitability

The profitability of a company may be assessed by analyzing its profitability ratios. The chosen profitability measures are the gross profit margin and the net profit margin. The gross profit margin ratio is a prevalent metric of profitability that assesses a company's revenue potential in relation to its direct expenses (Brigham and Houston 2021). The number may alternatively be understood as the percentage of revenue remaining after accounting for the cost of sales. The gross profit margin of FMG has shown a year-on-year increase, rising from 48.67% in 2019 to 55.21% in 2020, and reaching 69.51% in 2021. The primary source of the elevated gross profit margin ratios is a substantial rise in the company's total operating revenue, which has shown remarkable growth over the years when evaluated in terms of sales dollar value.

Analysis of Financial Performance

FMG has two primary geographical segments: China and Other Nations. Both categories have seen a significant rise in operating revenue. income from China rose from 12,126 million USD in 2020 to 20,164 million USD in 2021, while income from other countries climbed from 694 million USD in 2020 to 2,318 million USD in 2021. Finally, the net profit margin is a popular profitability statistic among investors, since it assesses a company's capacity to make profits from sales after accounting for all costs spent throughout the fiscal year. The net profit margin ratio is the percentage of revenue remaining after accounting for direct, operational, and financial expenditures paid during a fiscal year (Block, Hirt, and Danielsen 2018). The company's net profit margin ratio has steadily risen from 31.98% in 2019 to 36.93% in 2020, reaching 46.20% in 2021. FMG is a very lucrative corporation, and its elevated net profit margin results from a rise in operating revenue. The company's interest expenditure dropped in 2021 relative to 2020; nevertheless, this fall is negligible when evaluated in absolute monetary terms.

2. Liquidity and Financial Performance

The liquidity status of a business may be assessed by liquidity financial ratios. The chosen liquidity ratios are the current ratio and the quick ratio. The current ratio of an organization reflects the short-term resources available to satisfy immediate debts and commitments (Brigham and Daves 2018). This refers to the dependence a firm might have on its total current assets to fulfill its entire current obligations. The current ratio of FMG has risen markedly from 1.37 in 2019 to 2.25 in 2020, and further to 2.31 in 2021. The quick ratio is a more conservative liquidity metric, since it excludes inventories from liquid assets due to the time required to liquidate them and convert them into cash (Titman and Keown 2018). Consequently, inventories are omitted and deducted from total current assets to evaluate the capacity to fulfill total current obligations. The quick ratio has risen throughout the years and is at 2.0 times in 2021.

A current ratio of 2.31 and a quick ratio of 2 indicate that the firm has sufficient cash to fulfill its short-term obligations. The rise in liquidity ratios is attributed to an increase in cash and cash equivalents, which escalated from 4,855 million USD in 2020 to 6,930 million USD in 2021. The corporation could contemplate profitably investing idle and excess capital to generate more profits. The robust liquidity position of FMG may be attributed to their stringent capital management practices. The financial risk management framework of FMG recognizes the company's vulnerability to liquidity risk, which has been exacerbated across almost all sectors due to the Covid-19 epidemic. Maintaining enough cash helps in addressing risk exposure.

Analysis of Non-Financial Performance

3. Financial Performance Efficiency

The operational effectiveness of a company is most accurately assessed by financial efficiency ratios. The chosen financial ratios are the asset turnover ratio and the days sales outstanding ratio. The asset turnover ratio is best understood as the efficiency with which a business utilizes its overall resources, both short-term and long-term, to generate income (Banerjee 2015). FMG's asset turnover ratio has risen annually from 0.53 times in 2019 to 0.60 times in 2020, and further to 0.86 times in 2021. An increase is inevitable due to the substantial rise in income in Chinese markets and other countries. Moreover, an annual rise in average total resources is contributing to the company's revenue growth, indicating enhanced asset use efficiency. A prevalent metric for assessing efficiency performance is the analysis of the days sales outstanding ratio. This measure represents the overall duration required for a company to get payment for its credit sales. The statistic has favorably decreased from 20.87 days in 2020 to 10.29 days in 2021. Due to the company's failure to disclose the credit and cash segmentation of total income, total revenue has been presumed to consist entirely of credit revenue. The improvement in the measure results from the administration of accounts receivable and the effectiveness of the credit collection procedure.

4. Solvency and Financial Performance

The solvency performance of a business may be assessed by analyzing the solvency financial ratios. The chosen financial metrics are the gearing ratio and the interest coverage ratio. The gearing ratio is defined as the proportion of total debt in an organization's overall capital structure (Easton et al. 2018). The company's gearing has favorably decreased from 46.17% to 43.40% to 37.52% between 2019 and 2021, attributed to loan repayments and a deliberate attempt to reduce net indebtedness. The company's gearing is a mere 37.52%, indicating a favorable solvency position that substantially mitigates financial leverage. The problem with elevated leverage and reliance on debt is that it heightens exposure to financial risk, potentially leading to default and liquidation. Conversely, this is not applicable to FMG, which has modest debts, hence facilitating the firm in obtaining favorable terms for future capital projects and expansion. The interest coverage ratio of an organization quantifies the frequency with which it can satisfy its interest obligations using profits before interest and taxes (Fazzini 2018). The interest coverage ratio rose markedly from 25.41 times in 2020 to 62.28 times in 2021, attributed to an increase in operational profit and a reduction in interest expenditure due to low gearing.

5. Performance of Market Value

The analysis of these financial ratio groupings is crucial for evaluating the financial performance of publicly traded firms and is significant for investors when making investment choices. The chosen financial ratios are earnings per share and dividend per share. Earnings per share represent the entire net profit allocated to each outstanding share (Robinson 2020). The company's profits per share have constantly risen over the previous three financial years, almost tripling from 103.12 cents in 2019 to 334.57 cents in 2021. This demonstrates the growth potential of the company's shares. The dividend per share rose from A$1.14 in 2019 to A$1.76 in 2021, indicating favorable growth prospects for prospective investors.

The pertinent non-financial performance indicators derived from the company's annual report have been analyzed and discussed as follows:

The Total Recordable Injury Frequency Rate (TRIFR) has enhanced throughout the years, with a 17% improvement in 2021, reflecting the overall safety of workers.
The proportion of females in senior leadership positions has been stable over the last three financial years, with a little decline from 26% to 25% in 2021.
The indigenous employment rate within core business has consistently stayed around 14% over the last two fiscal years.
The rising gross carbon emissions are alarming, escalating from 1.85 million tonnes to 2.22 million tons in 2021.

Recommendations and Conclusions

This report, designed to answer the requirements of a prospective investor, recommends that the stakeholder invest in the company's stocks. FMG had robust financial success in 2021, indicating potential development in subsequent years. The firm has seen a substantial rise in overall sales, leading to an improvement in its profitability position. This has also augmented profits per share, hence enhancing dividends per share. Consequently, the investor may profit from both dividend income and capital appreciation, given the indications of elevated trade prices in the future. It is noteworthy that FMG has minimal leverage, significantly reducing the danger of default. The benefit of low gearing is that investors may be assured due to the company's reduced financial risk exposure.

Finally, the firm has a robust cash and liquidity position that prospective investors should acknowledge. Non-financial considerations favor FMG, since the firm prioritizes employee health and safety while emphasizing diversity and effective people management. Consequently, a prospective investor is unlikely to make an erroneous decision by investing in the company's shares. This paper suggests that financial ratios are very useful for assessing and understanding financial performance to facilitate informed decision-making. Finally, this analysis indicates the increasing significance of organizations prioritizing non-financial performance to meet the diverse requirements of many stakeholders.

References

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