Financial Management Policies and Strategic Planning

Question: Describe about the Fortescue Metals Group Limited. Answer: The Objective of working capital management is to ensure that the day to day operations of the firm are running smoothly and to ensure that the firm has the sufficient cash to meet the short term obligations and cash requirements for day to day operations, but to avoid excessive amount of the firm's resources tied up in working capital management which may hamper profitability. Proper management of working capital ensures that the production targets are achieved smoothly. Current Assets Cash and cash equivalents 2,38,10,00,000 Trade and other receivables 291000000 Inventories 773000000 Current tax receivable 35000000 Other current assets 49000000 Total Current Assets 3,52,90,00,000 Current liabilities Trade and other payables 739000000 Deferred income 620000000 Borrowings and finance lease liabilities 155000000 Provisions 174000000 Current tax payable 0 Total Current Liabilities 1,68,80,00,000 Gross Working Capital = Total Current Assets = 3,52,90,00,000 Total Current Assets (CA) 3,52,90,00,000 Total Current liabilities (CL) 1,68,80,00,000 Net Working Capital (CA - CL) 1,84,10,00,000 Net Operating Woking Capital = Cash Cash Equivalents + Trade Other Receivables + Inventories)- (Trade and other payables) 2,70,60,00,000 Current Ratio = Current Assets/Current Liabilities Current Ratio = 2.09 Quick Ratio = (Current Assets - Inventories)/Current Liabilities Quick Ratio = 1.63 The firm has reasonably well structured working management as reflected by the current ratio of 2.09 The firm has sufficient investment in cash and cash equivalents to meet up the liquidity requirement (as and when they arrive) in the short term. Cash Cash Equivalents represents 67% (approx.) of total current assets. The firm has sufficient investment in inventories to meet up the increased sales. Inventories represents 22% (approx.) of total current assets. Net Profit Margin = 0.03686 Asset Turnover = 0.40140 leverage Ratio = 2.83402 Du Pont Analysis = Return On Equity = (Net Income/Sales)*(Sales/Assets)*(Assets/Equity) Return On Equity = (316/8,574)*(8,574/21,360)*(21,360/7,537) Return On Equity = 4.193% There are three types of current asset investment policy that is relaxed fat cat policy, restricted (or lean and mean) policy and moderate policy. The Du Pont equation of ROE, assist in defining and analysing the policy followed by the firm. The Du Pont equation is (Profit Margin) X (Total asset turnover)X (Leverage Factor). If the firm has high asset turnover (low assets) means that the firm has high ROE and also implies the firm follows restricted (lean-and-mean) policy. If the firm has low asset turnover (high assets) means that the firm has low ROE and also implies the firm follows relaxed (fat cat) policy. The Moderate policy falls between the two extremes. Per the analysis the firm follows the moderate policy. Since the firm has Asset turnover ratio of 0.40140 it appears that the firm has the moderate current asset investment policy (that is it falls between restricted policy and relaxed policy). Accounts Payable Turnover (Ending Inventory + Cost of goods Sold - Beginning Inventory)/(Accounts Payable) Accounts Payable Turnover 9.11 Days Payable = 365/Accounts Payable Turnover Days Payable = 40.062 Days payable represents after how many days creditors are paid. Since in this scenario we make the payment (cash out flow) to the creditors higher the days payable the better it is for the firm. Accounts Receivables Turnover Sales/Receivables Accounts Receivables Turnover 29.4639 Days Receivables = 365/Accounts Receivable Turnover Days Receivables = 12.388 Days receivables represents after how many days debtors pay to firm. Since in this scenario we get payment (cash inflow) from the debtor lower the days receivables the better it is for the firm. Inventory Turnover = Cost Of Goods Sold/Inventory Inventory Turnover = 9.6080 Day's Inventory = 365/Inventory Turnover Day's Inventory = 37.99 Days inventory represents after how many days firm's inventory is converted into cash. The lower the days of inventory in hand the better it is for the firm. Also higher days of inventory on hand means that the firm has sufficient inventory in hand to meet the increased demand. References: Rajan, raghuram G., and Luigi Zingales. 1995. What do we know about capital structure?Some evidence from International Data. Journal of Finance, vol. 50, no. 5: 1421-1460. Myers, Stewart, and Nicholas S. 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