The Financial Performance of Fresnillo PLC (Essay Sample)

FINANCIAL REPORTING AND ANALYSIS
ASSESSMENT OF THE FINANCIAL PERFORMANCE OF FRESNILLO PLC
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EXECUTIVE SUMMARY
The analyses were undertaken to assess the financial performance of FRESNILLO PLC, where data from the years 2019 and 2018 were retrieved from the company financial statements. Ratio analysis was conducted, and significant findings indicated that the current ratio of the firm was above the industry average though it had declined over the years. Similarly, the debt ratio was within an acceptable range, and the firm was efficiently able to allocate its assets and resources. In addition, the market price of the company was high compared to its competitors. However, for the two periods, the ratios indicated a decline in performance. The main issue that led to the declining performance was a lawsuit pressed against the company that destroyed its public image reducing sales and overall performance. Thus the analysis recommended the company as an investment option since it has good performance, but environmental regulations have to be adhered to to reduce the risk of insolvency.
INTRODUCTION
Its historical performance explains company sustainability and future ability. It is essential to evaluate the historical data of a company to be able to assess its future sustainability (Zábojníková, 2016). Most investors rely on the historical performance of firms to be able to assess the level of risk involved with investing in a said company. Different key performance indicators can be used to assess a firm performance, including; financial ratios, risk, and profitability, and the management of the internal and external business environments (Vargas-Hernandez & Dan, 2015). Evaluation of the competitive strategy of the firm is also crucial to assess firm performance. The current analyses will assess the financial performance of Fresnillo plc over 2018 and 2019 to assess its financial sustainability.
ANALYSIS
Financial ratios are a significant measure of financial performance. Different ratios can be used to assess the financial state based on firm financial statements. The analysis is majorly meant to make evidence-based decisions. External users can assess financial health through its performance and value (Wisniewski & Yekini, 2015). There are five major types of ratios used, including liquidity ratios, profitability ratios, leverage ratios, efficiency, and market value ratios.
Liquidity ratio analysis
Beginning with the liquidity ratios, these are ratios that measure a firm's ability to settling its short-term obligations. Primary ratios in this category include current ratios, acid-test ratios, and cash ratios. Presenting the current ratio analyses for 2018 and 2019, the results, as shown in Table 1, indicate that the current ratio is declining from 2018 to 2019. Research has shown that a current ratio of more than 1 indicates that the firm is able to pay off its obligations smoothly, thus over the two years, Fresnillo plc has not been straggling to the bay off its debts. In the mining industry, a current ratio of 0.5 is acceptable, which means that Fresnillo plc is having an excellent liquidity status (Fresnillo, 2019). However, the level of the ratio is very high compared to the industry average. It could be meaning that the firm is holding too many liquid assets and should consider investing some into fixed form to allow for more asset accumulation and overall growth of the firm.
Table 1: current ratio
Variable

Formula


Figures

Ratio

Current ration

C.A/C,L

2019

864476/135722

6.37



2018

1021017/125860

8.11

From the analysis done in 2019, the Fresnillo plc managers reported 2019 to have been a challenging year for the firm. Being in the mining industry, the firm was facing severe ethical, social, and environmental issues, which led to further commitments. Over the two years, the firm also decided to have some of its assets fixed, thus reducing the liquid assets, but was involved in more short-term borrowing, which shocks its liquidity performance.
Leverage ratio analysis
Next are the leverage ratios, which measure the amount of financing a firm does on its assets making use of debt. This helps evaluate the firm's level of debt. Some of the ratios in this category include the debt ratio, debt to equity ratio, and interest coverage ratio.
As shown in Table 2 below, the debt ratio has declined from 0.36 to 0.35 between 2018 and 2019. This is an indication that the overall reliance on debt by the firm has reduced. Relatively, they have financed the firm using lesser debt in 2019 than they did in the year 2018. This was mainly because the firm reduced its long-term liabilities and maintained low current liabilities. This moved towards improving its equity finance as more funds were raised for equity over the period.
Table 2: debt ratio
variable

Formula


Figures

Ratio

Debt ration

Total liability/total assets

2019

1,271,096/3,641,204

0.35



2018

1,337,658/3,727,380

0.36

A good debt ratio in a mining industry benchmark is at a ratio of 0.3 to 0.6. At this ratio, the firm is considered to have been able to balance its equity and debt financing. For Fresnillo plc, the firm has maintained a low debt ratio, an indication that it uses more equity to finance the business than debt. This, in other words, indicated a high controlling power by the firm through its shareholders. This is evidence of strong sustainability and a low risk of insolvency.
Efficiency ratio analysis
Efficiency ratios, on the other hand, are used as a measure of how well a firm can utilize its assets and resources. Primary ratios include; asset turnover, inventory turnover, receivables turnover, and days sale in inventory. Looking at the assets turnover ratio, which measures a firm's ability to generate sales from its assets, the firm overall has maintained the same ratio over the two periods. However, the sales for the year 2019 slightly declined relative to the level of assets. The managers of the firm, through the financial report, confirm that in the year 2019, there was damage to their corporate image. It was due to a significant lawsuit that had been pressed on them based on negative environmental impacts. This affected the level of sales negatively and its assets turnover ratio.
Table 3: assets turnover
Variable

Formula


Figures

Ratio

Assets turnover ration

Net sales/total assets

2019

1,597,559/3,641,204

0.439



2018

1,648,734/3,727,380

0.442

However, a good asset turnover ratio of 0.34 has been consid3ered good in the mining industry. This is an indication that Fresnillo plc is operating above the industry minimum. Hence it has relatively good sales, and its ability to generate sales from its assets is adequate.
Profitability ratio analysis
Profitability ratios are used to measure the ability of a firm to generate income relative to its revenue. Primary ratios include gross margin ratios, operating margin ratios, return on assets, and equity return.
The operating margin, as shown in the table below, declines over the two periods as well as the return on equity. This was an indication that over the two years, the firm was not able to generate income to generate profits efficient