Understanding and Interpreting Financial Statements: Anglo American Plc

Introduction

Anglo American Plc. is a publicly traded firm listed at the London and Johannesburg stock exchanges, and headquartered at the UK. It is one of the largest mining companies in the world with operations in North and South America, Australia, Japan, India, Brazil and other Asia and Europe. The company has a portfolio of different products including iron and manganese; metallurgical and thermal coal; precious metals and minerals (comprising of platinum and diamonds); base metals, which include copper, nickel, and niobium; and other mining and industrial products.

Ratio Analysis of Anglo American Plc

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In this report, ratio analysis is used to analyse the financial performance of Anglo-American during the period of 2008 to 2012. The analysis of Anglo American’s financial statement focuses on liquidity and profitability ratios.

Liquidity Ratios

Liquidity ratios are used to measure the capability of the firm to repay its short-term debts and meet unanticipated cash needs (Drake, 2013). There are several types of liquidity ratios. In this report, current ratio and working capital are computed.

Anglo American’s current ratio had a slight decrease in 2012 (2.05), compared to 2011 (2.36). The decrease is attributed to the decrease in assets in 2012. The lowest current ratio was recorded in 2008 (0.71). This is due to liabilities being greater than current assets caused by the global economic crisis.

The working capital of Anglo American was also slightly lower in 2012 (US$9,244 million) than in 2011 (US$11,124 million). The lower working capital is again due to lower assets. In 2008, the company had a negative working capital (US$3,819 million). The company had higher liabilities than assets in 2008 due to losses incurred from the crisis.

Profitability Ratios

Profitability ratios are used to determine the ability of a firm to generate profit for its shareholders. Profitability ratios also measure the competitive position of a firm (Robinson et al., 2009). Profitability ratios include: (a) net income, (b) net profit margin, (c) return on assets (ROA), and (d) return on equity (ROE).

Net profit is calculated by subtracting total expenses from total revenue. It shows the company’s earnings or loss within a given period. Net profit is also referred to as net income or net earnings (Elliot & Elliot, 2005; Myers & Brealey, 2007). In 2012, the net profit of Anglo American decreased compared to 2011 and was negative (US$ -1,688 million). The low net profit is due to higher total expenses/operating costs than total revenue. The mining industry suffered from higher mining production costs in 2012 and this is reflected in the higher expenses of Anglo American. Net profit income was also low in 2009 (US$ 2,740 million) as the company slowly recovered from the 2008 economic crisis.

Net profit margin measures the amount of profit that a firm generates per unit of sales (Bodie et al., 2007; Robinson et al., 2009). Net profit margin was negative in 2012 (-0.06 or -6%). This is much lower than the net profit margin in 2011 (0.31 or 31%). The lower net profit margin is also attributed to higher operating costs. Net profit margin was also in 2009 (0.13 or 13%).

ROA is a measure of the net profit created per unit of dollar invested in capital (Arnold, 2005). Anglo American recorded a negative ROA value (-0.02 or -2%). This is due to negative net profit caused by higher total expenses.

ROE serves as a measure of the net profit that is created per unit of dollar investment in shareholders’ equity. In 2012, ROE value also decreased (-0.04 or 4%). This is much lower than ROE value in 2011, which is calculated at 0.22 or 22%.

It can be observed that Anglo American witnessed an overall decline in its profitability between 2011-2012, and 2008-2009. The decline in profitability can be attributed to a number of factors. One reason is the decrease in the prices of mining products. Commodity prices witnessed an overall decline between the first half of 2011 and the first half of 2012. This decline had a negative impact on the sales revenue of Anglo American during this period. Additionally, there was a 24% decline in achieved Australian export metallurgical coal prices; a 21% decline in achieved Free on Board (FoB) iron ore prices; an 18% decline in realised South African export thermal coal prices; a 12% decline in realised copper prices; and a 13% decline in realised platinum prices between the first half of 2011 and the first half of 2012. These decreases in export prices had a negative impact on sales revenue and thus the profitability of Anglo American during this period.

Anglo American’s profitability has also been negatively affected by high mining costs. This also had a negative impact on the industry as a whole. Moreover, Anglo American witnessed an increase in its overall unit production costs owning to an increase in mining costs between the first half of 2011 and the first half of 2012. This increase in unit costs helped in increasing costs of sales which in turn led to lower gross profit margins in 2012.

There was also a 57% increase in exploration costs between the first half of 2011 and the first half of 2012. This increase was driven mainly by increased metres drilled owning to favourable weather conditions in Australia and Chile as well as a ramp-up in drilling activities at the Sakatti polymetallic project in Finland (Anglo American, 2012).

Meanwhile, the decline in 2009 from 2008 can be attributed to the effects of the global financial crisis. The crisis had a significant negative impact on prices of commodities during the crisis period covering 2007-2009.

Comparative Ratio Analysis Anglo-American vs. Rio Tinto

The comparative analysis of the ratios of Anglo American vis-a-vis Rio Tinto is presented in Appendix 2. This presents the performance of Anglo American and Rio Tinto in 2012. Rio Tinto is one of the largest mining companies in the world. Its main business activity is the extraction of minerals and refining operations. The financial analysis ratios used are current ratio, working capital, net profit/income, net profit margin, ROA and ROE.

In terms of current ratio, Anglo American has a higher ratio than Rio Tinto for both 2012 and 2011. Having a higher current ratio indicates that Anglo American has lower current liabilities than Rio Tinto. Similarly, the comparison of working capital between the two companies shows that Anglo American has higher working capital than Rio Tinto. This is attributed to the lower current liabilities of Anglo American.

In terms of net profit/income, Rio Tinto had higher values than Anglo American. In 2012, Anglo American had negative net profit; while Rio Tinto had achieved high net profit. This is due to the fact that Anglo American incurred losses in 2012 due to higher operating expenses. Additionally, Rio Tinto’s total revenue is nearly double than that of Anglo American.

In terms of net profit margin, Anglo American had a negative value in 2012 due to total expenses exceeding total revenues; whereas, Rio Tinto had a higher value. This is due to the higher total revenue achieved by Rio Tinto.

In analysing ROA, it appears that Rio Tinto performed better due to its higher total assets; while Anglo American had a negative ROA. Similarly, in terms of ROE, Rio Tinto had a better performance; while Anglo American had negative value in 2012. This is due to the higher shareholder equity and high net profit achieved by Rio Tinto.

Overall, it can be said that the Rio Tinto had a better performance than Anglo American in terms of profitability; while Anglo American performed better in terms of liquidity. Rio Tinto is also bigger than Anglo American in terms of assets, revenues, and expenses. However, Anglo American had smaller liabilities than Rio Tinto.

Recommendations

The company can improve its performance by focusing on emerging markets. The four largest mining companies in the world in terms of market capitalisation have focused the bulk of their operations in emerging markets. By increasing its market and operations in emerging markets, Anglo American would be able to compete with other large mining companies.

Additionally, Anglo American should focus its sales and expansion plans on China, which currently accounts for the use of about 40% of global metal production. It is expected that China will remain as the mining industry’s most important customer in the years to come. The company should consider engaging in merger and acquisitions deals with firms based in China. These will provide Anglo American with the means of gaining direct access to the Chinese market. Other expansion strategies such as joint ventures with Chinese companies should also be considered.

The company should also implement strategies to fund its projects with other financial sources such as retained earnings (internally generated funds). In order to achieve this, the level of dividends and share repurchases will need to be reduced. The non-payment of dividends can be justified by the opportunities for growth currently available to the company, such as market expansion and growth opportunities in China.

Conclusion

The objective of this paper was to provide an analysis of the performance of Anglo-American Plc. Financial statement analysis using liquidity and profitability ratios were used in analysing the performance of Anglo American. The same ratios were used in the comparative analysis between Anglo American and Rio Tinto.

It can be observed that Anglo American has performed relatively well from 2008 to 2011. However, 2012 was not a good year for the company owing to declining commodity prices and rising mining costs. The company performed poorly compared to its industry and sector.

The performance of Anglo American was also compared to Rio Tinto, one of its major competitors and one of the biggest mining companies in the world. The analysis of the two companies’ financial statements for the period of 2011-2012 suggests that the Anglo American performed better than Rio Tinto in terms of liquidity; whereas Rio Tinto appears to have performed better in terms of profitability.

Appendices

Liquidity Ratios

Current Ratio

20122011201020092008
Current Assets18,047.0019,302.0014,348.0010,411.00 9,305.00
Current Liabilities 8,803.00 8,178.00 7,882.00 6,745.0013,124.00
Current Ratio 2.05 2.36 1.82 1.54 0.71

Working Capital

20122011201020092008
Current Assets18,047.0019,302.0014,348.0010,411.00 9,305.00
Current Liabilities 8,803.00 8,178.00 7,882.00 6,745.0013,124.00
Working Capital 9,244.0011,124.00 6,466.00 3,666.00(3,819.00)

Profitability Ratios

Net Profit/Income

20122011201020092008
Total Revenue28,761.0030,580.0027,960.0020,858.0026,311.00
Total Expenses30,449.0021,141.0019,294.0018,118.0019,461.00
Net Profit/Income(1,688.00)9,439.008,666.002,740.006,850.00

Net Profit Margin

20122011201020092008
Net Profit/Income(1,688.00)9,439.008,666.002,740.006,850.00
Total Revenue28,761.0030,580.0027,960.0020,858.0026,311.00
Net Profit Margin(0.06)0.310.310.130.26

Return on Assets (ROA)

20122011201020092008
Net Income(1,688.00)9,439.008,666.002,740.006,850.00
Total Assets79,369.0072,442.0066,656.0056,308.0049,738.00
Return on Assets(0.02)0.130.130.050.14

Return on Equity (ROE)

20122011201020092008
Net Profit/Income(1,688.00)9,439.008,666.002,740.006,850.00
Shareholder Equity43,787.0043,189.0037,971.0028,069.0021,756.00
Return on Equity(0.04)0.220.230.100.31

Appendix 2: Comparative Analysis of Anglo American vs. Rio Tinto

Anglo AmericanRio Tinto
Ratio2012201120122011
Current ratio2.052.361.391.46
Working capital9,244.0011,124.005,402.006,932.00
Net profit/income(1,688.00)9,439.0013,611.0024,277.00
Net profit margin(0.06)0.310.270.40
ROA(0.02)0.130.120.20
ROE(0.04)0.220.230.41

References

Google Finance (2013) Anglo American plc (LON:AAL) available online at:

http://www.google.com/finance?q=LON%3AAAL&ei=tQdgUrDRM6TCwAOdXQ [accessed: 17th October 2013].

Anglo American (2012) HALF YEAR FINANCIAL REPORT for the six months ended 30 June 2012 , available online at: http://www.angloamerican.com/~/media/Files/A/Anglo-American-Plc/media/releases/2012pr/interim-results-2012.pdf [accessed: 17th October 2013].

Brealey R. A., Myers S. C. (2002) Principles of Corporate Finance. 7th Edition. McGraw-Hill Irwin.

Elliot B., Elliot J. (2005). Financial Accounting and Reporting. 9th Edition. Prentice Hall Financial Times.

Penman, S. H. (2007) Financial Statement Analysis and Security Valuation, 3rd ed. Irwin: McGraw-Hill.

Robinson, T. R., Greuning, J. H., Henry, E., Broihahn, M. A. (2009), “Financial Analysis Techniques” in Financial Reporting and Analysis, CFA Program Curriculum, vol. 3, Pearson Custom Publishing.

Bodie, Z., Kane, A., Marcus, A., . 2007., Investments, 7th ed. Irwin: McGraw-Hill.

Arnold, G. (2005). Corporate Financial Management. 3rd Edition. Prentice Hall, Financial Times

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