CIMIC Group Ltd †Free Samples to Students

Question: Discuss about the CIMIC Group Ltd. Answer: Introduction: The company CIMIC Group was formed in Australia in 1949. The company is one of the worlds leading international contractors and the worlds largest contract miner. The company provides construction, mining, mineral processing etc. services to the property markets. One should have good eye on the financials of the company before investing. Following are the assets which should be deeply investigated while investing in CIMIC Group Ltd: Inventory: The inventory level of the company is getting lower YOY as in 2014 it was 362 AUS Million where as in 2015 264 AUD million and in 2016 it dropped to 213 AUD million. There can be various reasons behind that either the demand of the products has got lowered or company is not having production capacity to manufacture goods as some machines gets destroyed. There can be chances that company might be having orders in hand and due to less stock in hand some order does not converted into actual sales. On positive note, there can be situation that the companys sales have increased and there was less Stock in Hand because of more orders in hand. More of inventory should not be kept in hand as that will be blockage of capital of company. So, one should also judge the average reorder level of the company so that right level of closing stock can be known. Inventory is a current asset, it has also impact on return on assets. Goodwill: This is very sensitive asset as it does not have cost of its own because it cant be purchased. It can only be valued. So, one should closely monitor the method which company has adopted in valuation of goodwill as there has been continuous increase in goodwill YoY basis as in 2014 goodwill valuation was 364 AUD million and it increased to 370 AUD million and whereas in 2016 it again increased to 914. There is such a steep jump in 2016 in the valuation. Goodwill has increased by 147% which is too high. Normally such type of change is abnormal. There can be chances that the company has increased the value of goodwill to increase the return on total assets. Creation of goodwill creates lot of years to develop. It does not arise with in few years. One more thing to consider is that, the sales of the company is declining YOY then how the goodwill of the company can increase 147% in 2016. It seems that the valuation is not correct. The valuation is done to increase the ROA so that more and more shares can be issued. Otherwise there is no reason of increasing goodwill. Intangible assets: Intangible assets are those assets which are not tangible asset. For example trademark, brand name. Again the same issue is there, some of intangibles can be purchased some cannot be like brand name cannot be purchased, it can only be developed with the passage of time. Valuation has to be done to record in books of accounts. So which valuation method has been adopted by the company has to be taken care of because if valuation has been done on higher side, then the assets will be higher and the return on assets will be higher. Normally intangible assets are not purchased, they are created. Some of the assets can be purchased like of trademark etc. but majority like of brand names can be created and its valuation is very difficult. As the companys position is not stable, then intangible assets like brand name, trademark will be of no value in the market. One should also have an eye on the income statement of the company to know the graph of expenses: Revenue: Revenue means sales. The sales of the company is in declining trend which can be evident from the figures that in 2014 it was 16818 million AUD and in 2015 it dropped to 13818 million AUD and in last 2016 it dropped to 10847 million AUD. So, as the company sales is declining then how can ROA can be increased. Definitely ROA will be in declining trend. If it would be in increasing trend then there might be chance that the company has revalued its assets. Declining in sales means that either the business is getting dropped because of decrease in demand of the product or the company is not able to manufacture products which are as per market standards. So, before investing in this company, one should consider this factor of declining sales because is sale is there, everything is there. If sale is not there then nothing is there. Profit comes out of sales and if sales are in declining trend then profit would be in declining trend because there would be some expenses which are of fixed nature and that cannot be reduced. Contribution can be stable or in increasing trend because formula to calculate contribution is Sales minus Variable cost and variable cost can increase or decrease with the production but profit whose formula is Contribution Fixed cost and fixed is always fixed. It will keep on incurring irrespective of production. So Sales should be in increasing trend. Return on Assets: This means the income which company is earning by investing in total assets. Formula of ROA is Net Profit/ Total assets. Higher the ratio better it is because higher the return better it is. If we see the ROA of the above discussed company then it is not very good as in 2007 it was approx. 10% which has dropped to 5.89 % in 2016 which is not good. Every company invests in assets with a mindset that it will give return in the form of profit. Without profit nobody invests in assets. Even when we have to invest in new project, we calculate NPV just to see the net cash inflow so that this project attains profitability till the end of the project period. We also calculate payback period to know by how much years the investment in assets will turned back into profit. Asset Turnover: This shows how much time is the sales of the company as compared with assets invested in the company. Higher the ratio better it is because higher ratio defines that the companys turnover is that much times of the companys assets. In 2012 it was 1.93% which has dropped to 1.10 % in 2016 which is not good. This is also an indication of higher profitability of the company. Formula: Turnover/ Assets Profitability: Profitability ratios denote the profit earning capacity of the company. In other words it defines the ability of the company to earn profit. With this ratio an investor may come to know the return he can expect by investing in the company. As if we calculate return on asset, with this one may come to know the return which the company is earning by investing in assets or by computing the return on equity, one can come to know the return which an investor can earn by investing in equity of the company. The profitability ratio is calculated considering the assets and equity investment in the company. The profitability ratios of the company are not very good as the same are lower than 1. This shows that the assets which have been invested in the company are not giving good return which can be evidenced from the ratio which is below 1. As all the shareholders are concerned with the return on assets of the company because if the company will not earn then how it will distrib ute the earnings to the shareholders. Moreover if we also see the return on equity, its also not very good as it in declining trend. Formula : Net Profit/ Net Sales Conclusion: For Return on assets, profit has to be good and on the other side assets have to be good. Profit can only be because of sales and if profit is not there assets cannot be created or purchased. If assets cannot be created or purchased, return on assets cannot be good of that company. So, one should not invest in this company as it seems that the company has increased its assets with intangible assets like of goodwill etc. References: CIMIC, viewed 29 April, 2017, https://www.cimic.com.au/our-business/profile.