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Ratio Analysis

Instructions

All information required for this assignment is provided in the

Unit 6 Student Workbook

[Excel] for this unit.

Read the

Forge Group Ltd.

[PDF] case study (same case study from Unit 5) and complete the following requirements.

Quantitative Analysis:

For the years ending June 30, 2014, and June 30, 2011, compute:

the return on equity (ROE)
return on assets (ROA)
profit margin ratio
asset turnover ratio
current ratio
cash flow ratio
debt-to-equity ratio
interest coverage ratio
debt coverage ratio
NTAB
EPS
DPS
PER

Qualitative Analysis:

In a 2-3 page report, discuss the results of your ratio analysis and what the analysis tells you about FGL.

Deliverables

Quantitative Analysis (Excel Required): You are required to use the provided Excel workbook to complete the quantitative analysis for this assignment.
Qualitative Analysis (Word Required): Prepare a 2-3 page summary addressing the required qualitative analysis as noted in the Student Workbook. Your paper is required to be formatted according to APA requirements. Be sure to incorporate key concepts from this unit’s readings and properly cite your references according to APA requirements. Do NOT embed the results of your quantitative analysis in your Word document. You should only reference parts of your quantitative analysis in your written analysis. Your written responses to the qualitative prompts should not to be presented in a question and answer format

Adaptedfrom IMA

IMA EDUCATIONAL CASE JOURNAL VOL. 8, NO. 1, ART. 2, MARCH 2015

ISSN 1940-204X
Forge Group Ltd Case Study (A)The Revealing Nature of Numbers

Suzanne Maloney
University of Southern Queensland
Toowoomba, Australia, 4350.
Suzy.Maloney@usq.edu.au

THE FORGE GROUP LTD SUMMARY

In 2012-2013, Forge Group Limited had more than 2,000 employees working across

eight countries on four continents. The pride in the growth story is evident, as Forge

Group’s 2012 Annual Report (released in September 2013) lists accomplishments in

what is described as a groundbreaking year. The main milestones give a snapshot of

the types of projects the company was involved in (see Figure 1). At the time of listing

(June 26, 2007), Forge Group Ltd (FGL) shares traded for $0.56. (All monetary amounts

discussed herein are in Australian dollars. To convert to another currency, visit www.x-

rates.com.) The shares peaked at $6.98 on March 6, 2013, valuing the company at

$600 million. In less than a year, FGL was placed in a trading halt (February 11, 2014).

Voluntary administrators and receivers were appointed.

http://www.openbriefing.com/AsxDownload.aspx?pdfUrl=Report%2FComNews%2F201

30829%2F01438557

THE ENGINEERING AND CONSTRUCTION INDUSTRY

The engineering and construction sector provides significant economic activity in many

countries. Large-scale engineering and construction projects—including highways,

bridges, railways, airports, harbors, production facilities, and office and apartment

buildings—provide employment opportunities and attract large capital investment. The

quantum of resources employed in this industry and the profound affect they have on

society means that there are strict compliance, regulatory, environmental, and tax

requirements on those operating in the sector. The governments of many countries

publicly funded a number of large-scale infrastructure projects in the aftermath of the

Global Financial Crisis (GFC) to stimulate the economy.

Joint ventures and public/private partnerships are common in the industry to reduce the

risk of large-scale projects and to ensure adequate capital and expertise. Major

contracts generally involve a number of different companies with primary contractor and

sub-contractor status, all tendering and quoting on various stages of work in a project.

This makes the industry highly competitive, and therefore it is vital to have appropriate

costing and project management expertise.

Mining companies also took advantage of the cheaper finance post GFC and the

upswing in demand for minerals and resources. Large-scale mining projects have been

the driving force for some economies, especially in Australia. But with the construction

of a number of the large projects nearing completion (and moving into production

phase), there is a drop in engineering and construction spending. In Australia in 2013-

2014, engineering and construction spending was $128 billion, dropping $1 billion from

the previous year. This increased competition in the sector and, therefore, demand for

lower-priced contracts and shorter completion times.

The market value of engineering and construction companies are based partly on their

future secured order book. “Order book” is a term used in the engineering and

construction sector to capture the company’s future work and the dollar value of the

work. The future work is contracted through the normal selling of services and through

“tendering” for large-scale works needed by governments and large private companies.

If a project is very large, it may be divided into segments with a separate tender process

for each segment. Companies have to carefully consider the risk attached to each

segment of the larger project and the interrelationship of each of the segments. A

company can be held liable to another company if their segment completion is delayed

and the other company cannot complete its work on time, as per their contract, because

of the delay. For example, when building a tunnel, the riskier segment may be blasting

the rock and strengthening the actual tunnel. Excavating the ground and surfacing the

http://www.openbriefing.com/AsxDownload.aspx?pdfUrl=Report%2FComNews%2F20130829%2F01438557

road may not carry the same risk but could be held up if the blasting and strengthening

is not completed on time.

In comparison to a retail or manufacturing concern, the products being sold are large

capital works that tend not to be completed within a neat 12-month period. This means

that there needs to be payment points built into the contracts. These are called

“milestones.” Once a project milestone is reached, it triggers a point when the

engineering and construction company can invoice the purchaser and recognize the

revenue in its accounts. The product cost (Cost-of-Goods-Sold) expensed against this

revenue will contain material, labor, equipment costs, and sub-contractor costs. These

costs are all capitalized into inventory at the time they are incurred but not expensed

until they reach a milestone. A lot of dollars, long-term time horizons, subjective

milestones, and the application of large capital equipment costs contribute to the overall

business risk in the sector. Many companies have suffered as a result of stalled

projects, unforeseen circumstances or problems, poor costing of the work, and

mismanaged cash flow.

Within the industry, there is usually significant take-over activity. This is driven in part by

companies not performing well and/or insolvency and also by normal merger and

acquisition activity. Smaller companies find it difficult to compete with larger companies

for the larger projects and generally need to combine or merge in some way or stay

small. This adds further risk and places the financial statements and the order book

under increased scrutiny as business valuations rely on this information.

THE FORGE GROUP LTD (FGL)

The company was a success story. It listed on the Australian stock exchange on June

26, 2007, from a private construction company called AiConstruction. It was a well-run

company that needed access to more capital if it was to continue to grow. Within a year,

it made its first acquisition by taking over Abesque Engineering. The company survived

the Global Financial Crisis and leveraged to the subsequent mining and construction

boom led by China’s appetite for minerals and resources. Over the next few years, the

company grew organically and in April 2010 another construction company called

Clough bought 13% (10.5 million shares) of FGL ordinary shares, thus becoming the

largest shareholder. Clough continued to purchase shares in FGL until it divested its

total holding of 35% in March 2013. Clough management explained its divestment by

indicating that expectations of joint ventures between the two companies did not

eventuate, and, therefore, the equity holding was cashed in to allow the pursuit of other

objectives.

In January 2012, FGL undertook a major acquisition by purchasing CTEC Pty Ltd. In
essence, the acquisition meant taking over two major projects. The Diamantina Power
Station (DPS) Project in Queensland, Australia, and the West Angelas Power Station
(WAPS) Project in the Pilbara region of Western Australia. It was expected that these

major projects would add $7.5 million and $10.8 million to earnings before interest, tax,
depreciation, and amortization (EBITDA) in 2012 and 2013, respectively. The purchase
price was $16 million up-front with further payments due on the meeting of specified
performance targets (total paid was $32.26 million). This increased FGL’s order book
significantly, and FGL’s share price rose in response. In June 2013, FGL acquired
Taggart Global for $43 million. This purchase meant that FGL was now diversifying into
asset management and into other economies.

SHARE MARKET INFORMATION

The historical share price chart since listing is shown in Figure 2.

The market closing prices, major announcements, and significant shareholding changes
are listed in chronological order in Table 1.

CTEC PURCHASE

In the wash up of the demise of FGL is the attention being paid to two main contracts:

The Diamantina Power Station (DPS) Project in Queensland, Australia, and the West

Angelas Power Station (WAPS) Project in the Pilbara region of Western Australia. Both

projects were acquired after FGL took over CTEC Pty Ltd on January 13, 2012. The

purchase of CTEC was to change the business model by bringing sub-contracting work

in-house with the intended consequence of taking out the “middle man” and thereby

increasing earnings (by negating sub-contractor margins). The CTEC purchase

payment terms required an up-front payment of $16 million with subsequent payments

conditional on meeting performance criteria (possible further payment of $40 million in

total). CTEC’s prior year (June 30, 2011) EBIT was $2 million, with expected EBITDA at

year end 2012 and 2013 to be $18.4 million and $24.8 million, respectively. The DPS

and WAPS projects were to increase this expected EBITDA by $7.5 million in 2012 and

$10.8 million in 2013.

Instead cost overruns and poor budgeting meant that the projects’ revised 2013
estimates showed a $61 million project margin loss for the DPS project and a $41.7
million project margin loss on the WAPS project. The cost overruns on these two
projects lead to the profit downgrade and contributed to the resulting shortage of cash.

Added to that was the discovery of an early payment to the vendors of CTEC Pty Ltd

before its performance conditions were met. Further, the payment of bonuses to the

previous Managing Director, Peter Hutchinson, of $375,000 was made for a successful

acquisition and integration. These payments are the subject of further investigations by

the liquidator.

DPS AND WAPS COSTING AND BUDGETING
In any business the costing and budgeting systems are critical to success. The FGL
administrator report for 2013/2014 (year ending January 2014) shows that the:

• Actual work-in-progress income for the period was $126 million below
management forecast.
• Labor costs were $70 million over budget.
• Material costs were $55 million over budget.
• Work-in-progress overheads were $22 million over budget.

FINANCIAL INFORMATION

The financial statements for 2010-2014 are presented in Tables 2-5 in your Excel

workbook.

CaseStudy

FGL_Table 1

Forge Group Ltd Table 1. Timeline of Forge Group Ltd (FGL) Date Closing

Market Major Announcement/Change June 27, 2007 $0.56 FGL listed on Australian Stock Exchange June 30, 2008 $0.78 June 30, 2009 $0.43 Global Financial Crisis impact April 6,

2010 $2.96 Clough purchases 10.5 million shares for 13% ownership June 30, 2010 $

2.66 June 30,

2012 $

5.46 June 30, 2012

4.37 January 13, 2012 $5.25 FGL purchases 100% of CTEC Pty Ltd for $32.26 million March 6,

2013 $6.98 Peak share price March 26, 2013 $6.05 Clough sells FGL shares at $6.05 ($187 million, 35% of FGL) May 17, 2013 FGL awarded major contract (Dugald Rover) June 3, 2013 FGL acquires Taggart Global (U.S. company) at $43 million July 2, 2013 FGL awarded major contract (TAN Burrup plant) June 30, 2013 $4.09 August 29, 2013 Annual Report released NPAT at $63 million, equity at $213.5 million, dividend at $0.14 per share September 2, 2013 $1.47 billion joint venture with Duro Felguera announced (value to Forge is $830 million – order book now at $2.1 billion) September 12, 2013 FGL awarded major contract (Yandicooogina for Rio Tinto – $100 million contract) September 19, 2013 FGL major contract terminated (Dugald River) October 7, 2013 FGL declares $50 million in major contracts in U.S. and Australia since June 1, 2013 November 4, 2013 $4.18 Trading halt November 5, 2013 ANZ Bank (major financier) appoints KordaMentha to review books November 28, 2013 FGL Market Announcement: –ANZ Bank supports and negotiates new finance facilities –Considering equity capital raising –Identifies underperforming assets (i.e., CTEC projects) –Negotiates agreements with customers and sub-contractors –Normal operations for other parts of business November 28, 2013

$0.69

FGL Market Announcement:
-$127 profit write down on two large contracts (Diamantina Power Station and West Angelas Power Station; $45 million to complete both projects) –Challenging liquidity period (net cash flow Nov. and Dec.) –ANZ Bank continued support with some adjustment to finance facilities –Business as usual November 28, 2013 $0.69

Trading halt lifted December 4, 2013

FGL Market Announcement:
– In response to ASX query, indicated became aware of problems with Diamantina Power Station and West Angelas Power Station projects in late Sept. with margin erosions due to cost overruns and delays causing the profit downgrade. Costing analysis during Oct. and Nov. led to requested trading halt and profit downgrade in Nov. December 17, 2013 FGL awarded major $40 million contract in North American coal sector January 10, 2014 $1.25 Trading halt until

January 14, 2014 January 14, 2014

$1.02 Trading halt until

January 28, 2014 January 24, 2014 January 28, 2014

$0.90 February 10, 2014 $0.92 Trading ceases February 11, 2014 Board appoints administrators, and secured creditors appoint receivers.

FGL_Table 2

Forge Group Ltd

June 30, 2010

June 30, 2012 June 30, 2013

6,8

)

,502)

)

Table 2. Comprehensive Income Statement (in thousands of Australian dollars)
	June 30,		2011		Unaudited January 31, 2014
Revenue	$246,169	$421,595	$774,879	$1,054,100	$520,041
Cost of sales	(711,430)
Changes in inventories of finished goods and WIP	9,696	15,000
Materials, plant, and contractor costs	(125,171)	(211,000)	(	51	67	(656,334)
Employee benefits expense	(79,194)	(157,191)	(	1		64	(256,515)
	Depreciation and amortization	(3,218)	(	5,159	(	16,292	(	21,361
Consulting fees	(582)	(5,380)
Provision for impairment losses	(1,628)	(304)
Other expenses	(7,132)	(8,043)	(12,711)	(21,033)
Other gains and losses	537	257	188
Expenses
Results from Operating Activities	40,059	54,898	64,182	93,665
Finance income		1,023		3,079	5,698	6,939
Finance costs	(716)	(711)		(2,850)	(4,816)
Net finance income	307	2,368	2,848	2,123
Share of profit/(loss) of associates and jointly controlled entities	(513)	3,052	(5,679)
Net Profit Before Tax	40,366	56,753	70,082	90,109	(324,162)
Income tax expense	(10,915)	(17,920)	(20,780)	(27,190)	(2,301)
Net Profit After Tax	29,451	38,833	49,302		62,919	(326,463)
Foreign exchange differences (net of tax)	(346)	(1,946)	(310)	1,826
Total Comprehensive Income	29,105	36,887	48,992	64,745

FGL_Table 3

Forge Group Ltd

June 30, 2010 June 30, 2011 June 30, 2012 June 30, 2013 Unaudited January 31, 2014

Trade and other receivables

Other assets

,556

Trade and other payables

Borrowings

Provisions 164 299 489 493
Other liabilities

45,430

62,919

93,376 124,462 163,325 213,426 (116,268)

,169,014

86,169,014 86,169,014

2.66 5.46 4.37

Table 3. Balance Sheet (in thousands of Australian dollars)
Current	Asset
Cash and cash equivalents		51,921			78,285		51,091	90,728	15,316
Short-term deposits	72,	500	2,748
	Trade and other receivables	42,162	49,542	196,884	83,254	103,279
Inventories and WIP	14,621	29,622	11,331	150,491	40,616
Current tax assets	2,535
	Other assets	2,246	1,574	2,487	1,560	(23,415)
Noncurrent assets classified as held for sale	6,900
Total Current Assets	117,850	159,023	334,293	331,316	135,796
Noncurrent Assets
7,051	1,424	73,293
Term deposits	14,	260	10,468
Property, plant, and equipment	26,789	36,577	67,736	71,546
Deferred tax assets	1,827	2,043	4,273	9,124
Investments accounted for using equity method	2,545
Intangibles	15,621	15,637	48,243	40,332
90,467
Total Noncurrent Assets	44,237	54,257	144,108	132,894	163,760
Total Assets	162,087	213,280	478,401	464,210		299
Current Liabilities
	Trade and other payables	52,968	72,845	267,169	219,568	299,909
	Borrowings	2,789	3,272	8,734	11,139
Current tax liabilities	8,644	6,387	8,367
	Provisions	525	755	825	3,970
	Other liabilities	63,731
Total Current Liabilities	64,926	83,259	285,095	234,677	363,640
Noncurrent Liabilities
9,246	1,517
4,901	17,453	14,547
Deferred tax liabilities	2,793	1,067
Investments accounted for using the equity method	308		489		493
50,667
Total Noncurrent Liabilities	3,785	5,559	29,981	16,107	52,184
Total Liabilities	68,711	88,818	315,076	250,784	415,824
Net Assets		93,376		124,462		163,325	213,426	(116,268)
Equity
Issued capital	42,839	44,294		45,430	42,768
Profit reserve
Reserves	1,034	(912)	(1,221)	1,471	(159,036)
Retained earnings	49,505	81,080	119,116	103,606
Total Equity
Number of shares	70,699,487	81,541,569				86
Share price	4.20

FGL_Table 4

Forge Group Ltd

2010 2011 2012 2013

500

1,023 3,079

(2,850)

51,921 78,285 51,091

78,285 51,091 90,728

Table 4. Statement of Cash Flows (in thousands of Australian dollars)
Cash Flows from Operating Activities
Receipts from customers	245,418	431,399	744,720	1,176,226
Payments to suppliers and employees	(215,240)	(373,464)	(631,924)	(1,113,073)
Other revenue	943	638
Income taxes paid	(670)	(20,390)	(21,537)	(45,231)
Net cash flows provided by operating activities		$30,451		$38,183	$91,259	$17,922
Cash Flows from Investing Activities
Payments for property, plant, and equipment	(8,371)	(11,257)	(39,737)	(19,521)
Proceeds from disposal of property, plan, and equipment	224	6,485	869
Interest received	5,649	7,379
Term deposits matured/expired	(86,760)	73,545
Amount received from joint ventures	130
Acquisition of investments or associates	(205)	(3,439)
Payment of deferred consideration	(19,798)
Net cash flows provided by/used in financing activities	(7,124)	(1,898)	(123,787)	42,604
Cash Flows from Financing Activities
Proceeds from issue of share capital	18,	907	1,458	1,136
Proceeds from borrowings	23,011	9,152
Repayment of borrowings	(4,131)	(3,464)	(4,698)	(9,654)
Interest paid	(271)	(658)	(4,877)
Dividends paid	(3,419)	(7,257)	(11,265)	(15,510)
Net cash provided by/used in financing activities	$11,086	-$9,921	$5,334	-$20,889
Net increase/decrease in cash and equivalents	34,413	26,364	(27,194)	39,637
Cash and equivalents at beginning of year	17,440
Effect of exchange rate changes
Cash and equivalents at end of year	51,920

FGL_Table 5

Forge Group Ltd

2010 2011 2012 2013

Depreciation and amortization

5,159 16,292 21,361

907

260 86

$30,451 $38,183 $91,259

Table 5. Reconciliation (in thousands of Australian dollars)
Profit for the year after tax	$29,450	$38,832	$49,302	$62,919
3,217
Other noncash differences	(1,815)	(43,488)	28,409
Decrease/Increase in trade debtors and receivables	(25,202)	(7,380)	(154,393)	119,258
Decrease/Increase in inventories and WIP	(9,696)	(15,000)	18,291	(139,160)
Decrease/Increase in other current assets	(104)	671	(913)	927
Increase in deferred tax assets	(779)	(215)	(2,231)	(4,851)
Decrease/Increase in trade and payables	21,881	19,877	203,417	(37,123)
Decrease/Increase in current tax liabilities	10,649	(2,311)	1,980	(10,903)
Decrease/Increase in deferred tax liabilities	2,742	(1,727)
Increase in other provisions	365
Net cash inflow from operating activities	$39,196

Unit 6
_Student Template

Unit 6

Forge Group

Case Study

Measure Formula
(Words) 2014
(Calculation – substitute words in formula with numbers from the financial statements) Final Answer Profitability ROE ROA Profit Margin Ratio Efficiency Asset
Turnover Liquidity Current Ratio Cash Flow Ratio Gearing Debt to Equity Ratio Interest Coverage Debt Coverage NTAB Market
EPS DPS PER

Adapted from IMA