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Financial Statement Analysis

Group 1 – Team 4
Instructor: Oanh Nguyen
Agata Kocia, Ph.D.,MBA Minh Tai
Chen Yajing
Ivo

Agenda

Objective and Overview

Qualitative Analysis

Quantitative Analysis

Conclusion

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Objective and Overview

• Objective:
Analysis to make invest decisions in:
- FERREXPO stocks (USD)
- LKAB corporate bond (SEK)
• Overview:
– Iron ore pellet producers
– The world’s second and third largest exporter
– Main operation: Ukraine >< Sweden

Qualitative Analysis
Macro external factors
Government Policy:
• Legislation
FXPO: LKAB:
- Shareholder’s ownership (PLC). - State Own Company (SOE).
- Corporate governance is as per - Corporate governance at
the Board of directors. LKAB is Swedish legislation.
- All permits available for - Many permits still pending
exploitation. approval.

• Environmental and Energy Policy

FXPO: LKAB:
- Usage of Fossil fuel - Electric intensity (158 kWh/t
- 0.232 emissions per tonne product)
- Carbon dioxide (26.0kg/tonne
of product)

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Qualitative Analysis
Macro external factors
Political and Conflicts situation:
FXPO: LKAB:
- Ongoing conflict in Eastern - Little or no conflict
Ukraine
- Annexation of Crimea
 Unstable economy/banking system

Foreign Currency exchange:

- Reporting currency in USD - Reporting currency in SEK

- The decreases in Hryvnia/US - Trade in local currency or in a
Dollar exchange rate major currency like USD or EUR

Qualitative Analysis
Micro external factors
Phase of sector economic:

2014 – 2015:
• Global steel output decrease  iron ore consumption & iron
ore price went down
• Oversupply of iron ore of the three major iron ore producer
 decrease in price

2016:
• Samarco, previous second largest producer, stopped their
operation  Price increases
• Demand of China grew due to restrictions on domestics
output  Price increases

Optimistic sector outlook

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Qualitative Analysis
Micro external factors
Supplier/Buyer power:
FXPO:
- Supplier’s bargaining power is low.
- Buyer's bargaining power is high –
2 clients accounts for > 40% sales
Competition and Barriers to Entry/Exit:
FXPO:
- Iron ore pellets have high
capital costs barriers to entry.
- Iron ore pellet projects require
several years to implement.
Qualitative Analysis
Internal factors
Company size:
FXPO:
- The world’s 3rd largest supplier
of iron ore pellets.
- Revenue: 921 million USD
- Has 9,625 staff and 1,547
contractors
Management capacity:
- The Board is chaired by 8
senior managers in mining
industry
- Fully compliant with the UK
Corporate Governance Code
22/11/2017
LKAB:
- LKAB supplier's power is low.
- LKAB buyer's bargaining
power is high.
LKAB:
- Iron ore pellets have high
capital costs barriers to entry.
- Iron ore pellet projects require
several years to implement.
- Underground mining methods
=> open-pit mines.
LKAB:
- The world’s 2nd largest
supplier of iron ore pellets.
- Revenue: 2 billion USD
- Has 4,200 employees
- The Board is chaired by 8
senior managers with long
management experience
- Fully compliant with Swedish
Corporate Governance Code
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Qualitative Analysis
Internal factors
PRODUCTION PROCESS

LKAB:

Qualitative Analysis
Internal factors
PRODUCTION
PROCESS
FERREXPO:

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Qualitative Analysis
Market region:
FXPO: LKAB:

Qualitative Analysis
Sales structure:

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Qualitative Analysis
Market share:

2015 2016

No. Company Export. Mt No. Company Export. Mt

1 VALE 23.9 1 VALE 33

2 LKAB 13.7 2 LKAB 17

3 SAMARCO 12.1 3 FERREXPO 11

4 FERREXPO 11.7
4 IOC 10
5 METTALLOINVEST 7.4
5 CLIFFS 7

Qualitative Analysis
Logistics infrastructure:

FERREXPO LKAB
• Use both in-house and
outsource service
• Over one third of
purchasing consists of
transport and logistics.
• Transported along Ore
Railways to the shipping
ports in Luleå and Narvik.
• However, Ore Railway
starts to reach its upper
limit -> need to build a
double track => huge
cost, long term solution

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Qualitative Analysis
Resource base:
FERREXPO
Resource base is situated along a 50
kilometre mineral deposit, which allows
to efficiently expand production through
brownfield developments. The ore body
has been classified into nine deposits of
which the first three have been
developed into two open pit mines:
• Polvata mining: Capacity: 30 Mtpa of
crude ore, a long-life production
profile beyond 2040
• Yeristovo mining: capacity: 28 Mtpa
of crude ore, a long-life production
profile beyond 2055
• Other deposits: having mining
licenses
LKAB
• Kiruna mining: 26.9 Mt
• Malmberget: 16.4 Mt
• Svappavaara: 6.1 Mt
• Extracting underground
over 120 years -> impact
on people and communities
-> For mining to continue,
LKAB must make urban
transformation which is
really costly( account for
big amount of provisions
over 3 years)

Qualitative Analysis
Economics of scale:

Value fixed assets of FERREXPO Value fixed assets of LKAB

• 581 Mil USD ~ 15 Bil. Ukrainian • 4,102 Mil USD ~ 32 Bil. SEK
Hryvnia

Both companies are large scale producers with sufficient

infrastructure which provide them a great potential to
compete and gain advantages in iron ore pellet market

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Quantitative Analysis
ANALYSIS FLOW
Vertical Analysis
Assets Notes
Capital : Bad
Income : Neutral
Horizontal Analysis : Good
Assets
Capital
Income
Sign Analysis
Operate - Invest - Finance
Income - Cashflow
Ratios Analysis
Activity ratios
Liquidity ratios
Solvency ratios
Profitability ratios

Quantitative Analysis
1. Vertical analysis: a) Assets (% on Total Assets):
FXPO LKAB Both:
A.CURRENT ASSETS 30.87% 38.46% - Most assets in non-current tangible PP&E
I. Cash 12.45% 4.55% - Low Receivables and Inventories relative
II. Short-term financial investment 0.00% 19.56% to Assets
III. Accounts Receivable 7.03% 8.02%
Typical manufacturers
-Trade receivable 7.03% 3.63%
assets position
-Other receivables 0.00% 4.38%
IV. Inventories 6.79% 4.92% FXPO
V. Other current assets 4.60% 1.41% - Have high cash to meet their short-
B. LONG-TERM ASSETS 69.13% 61.54% term obligation
I. Long-term inventory 12.14% 0.00% - Have a high long-term inventory
II. Long-term Assets (PP&E) 49.96% 59.52% which is raw materials
-Tangible assets for operation 49.43% 55.66% LKAB
-Tangible assets for urban transformation 0.00% 3.49% - Have high short-term investment in
-Intangible assets 0.53% 0.37% subsidiary  Not liquid
IV. Financial long-term Investment 0.00% 1.90% - Most receivables are Other
V. Other long-term assets 4.54% 0.12% receivables which come from
VI. Goodwill 2.50% 0.00% financial instrument receivables
TOTAL ASSETS 100% 100% Both are Neutral

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Quantitative Analysis
1. Vertical analysis: b) Resources (% on total Resources):
FXPO LKAB FXPO
A. LIABILITIES 72.20% 46.98% - High leverage (Liabilities/Equity ~ 3)
I. Current liabilities 27.25% 16.20% - Most of liabilities are interest incurred
-Short-term borrowings (interest incurred) 18.39% 3.25%
 High interest expense
-Trade payables 2.34% 2.23%
- Abnormal high Other reserve which
-Accrual expenses and deferred income 0.00% 2.71%
-Provison for urban transformation 0.32% 5.46% comes from differences on translating
-Other payables 6.20% 2.33% foreign operations (Comprehensive
II. Long term liabilities 44.95% 30.78% income)
-Long-term borrowings (interest incurred) 43.48% 5.61%
-Long-term internal payable 0.09% 2.08% Bad
-Other long-term payable 0.00% 2.63%
-Provision for unemployment 1.33% 3.26% LKAB
-Urban transformation provision 0.05% 17.20% - Low leverage (Liabilities/Equity ~ 1)
B. OWNER’S EQUITY 27.87% 53.02% - Most of liabilities are non-interest
I. Capital sources and funds 27.87% 53.02% incurred  Low interest expense
-Chartered capital 10.46% 1.21%
-Surplus on share selling 15.92% 0.00% Good
-Other reserves -170.66% -0.65%
-Undistributed earnings 172.16% 52.45%
TOTAL RESOURCES 100.00% 100.00%

Quantitative Analysis
1. Vertical analysis: c) Income (% on total Net Sales):
FXPO LKAB
Net sales 100% 100%
Cost of goods sold 40.6% 104.7%
Gross Income 59.4% -4.7%
Financial Gain/Loss 7.8% -3.8%
Selling expenses 21.2% 0.9%
Gen. admin expenses & R&D 3.9% 4.3%
Operating profit/loss 26.4% -6.2%
Other profit -3.0% -0.3%
Profit before tax 23.5% -6.5%
Business Income tax 4.3% -0.5%
Profit after tax 19.2% -6.0%
• FXPO: • LKAB:
- Low COGS (Even when account - Abnormal high COGS. This comes
for transportation cost is in Selling from impairment of fixed assets
expense) (Lower price of iron pellets)
- High Operating profit margin - Negative Operating Income
Good Bad

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Quantitative Analysis
2. Horizontal analysis (Dynamic fixed base): a) Assets:
FXPO LKAB
2014 2015 2016 2014 2015 2016
A.CURRENT ASSETS 100% 32% 39% 100% 92% 99%
I. Cash 100% 6% 23% 100% 81% 49%
II. Short-term financial investment 100% 89% 98%
III. Accounts Receivable 100% 96% 94% 100% 97% 166%
IV. Inventories 100% 77% 63% 100% 114% 111%
V. Other current assets 100% 88% 58% 100% 178% 516%
B. LONG-TERM ASSETS 100% 77% 67% 100% 87% 87%
II. Non-Current Assets (PP&E) 100% 71% 62% 100% 88% 86%
-Tangible assets for operation 100% 71% 62% 100% 90% 89%
-Tangible for urban transformation 100% 67% 60%
-Intangible assets 100% 68% 59% 100% 94% 93%
IV.Financial long-term Investment 100% 64% 120%
V. Other long-term assets 100% 108% 90% 100% 61% 64%
VI. Goodwill 100% 66% 58%
TOTAL ASSETS 100% 57% 54% 100% 89% 91%

Quantitative Analysis
2. Horizontal analysis (Dynamic fixed base):
a) Assets:
FXPO
- Unstable
- High decrease in 2015
- The decrease of FX cash in
2015 comes from the insolvency
of F&C Bank in Ukraine where
FX have deposit account.
- The decrease of FX long-term
assets comes from Foreign
exchange translation loss.
LKAB
- Stable
- Have a decrease in non-current
assets due to impairment
- Have high increase in
receivables in 2016 due to
increase in receivables of
financial instruments
- High % increase in Other
current assets but this is small
in absolute value.

Bad Neutral

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Quantitative Analysis
2. Horizontal analysis (Dynamic fixed base): b) Resources:
FXPO LKAB
2014 2015 2016 2014 2015 2016
A.LIABILITIES 100% 69% 59% 100% 94% 107%
I. Current liabilities 100% 80% 96% 100% 86% 133%
-Short-term borrowings 100% 86% 92% 100% 125% 234%
-Trade payables 100% 87% 102% 100% 93% 76%
-Accrual expenses 100% 129% 129%
-Provison for urban transformation 100% 74% 79% 100% 63% 154%
-Other payables 100% 56% 111% 100% 40% 120%
II. Long term liabilities 100% 66% 48% 100% 97% 96%
-Long-term internal payable 100% 42% 46% 100% 101% 103%
-Long-term borrowings 100% 66% 48% 100% 100% 162%
-Provision for unemployment 100% 60% 54% 100% 86% 87%
-Urban transformation provision 100% 45% 70% 100% 114% 103%
B.OWNER’S EQUITY 100% 34% 46% 100% 85% 81%
I. Capital sources and funds 100% 34% 46% 100% 85% 81%
-Chartered capital 100% 100% 100% 100% 100% 100%
-Other reserve 100% 129% 137% 100% 152% -373%
-Undistributed earnings 100% 98% 108% 100% 85% 82%
TOTAL RESOURCES 100% 57% 54% 100% 89% 91%

Quantitative Analysis
2. Horizontal analysis (Dynamic fixed base):
b) Resources:
FXPO LKAB
- Unstable - Liabilities (especially borrowings)
- Total resources decreasing are increasing
- Negative Other reserve is - Owner’s equity on decreasing
increasing much trend
- High % increase in Negative
Bad Other reserve but this is small in
absolute value.

Bad

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Quantitative Analysis
2. Horizontal analysis (Dynamic fixed base): c) Income:
FXPO LKAB
2014 2015 2016 2014 2015 2016
Net sales 100% 69% 71% 100% 79% 79%
Cost of goods sold 100% 69% 62% 100% 119% 91%
Gross Income 100% 69% 79% 100% -332% -42%
Financial gain/ loss 100% 136% 121% 100% -479% 2554%
Selling expenses 100% 73% 67% 100% 109% 95%
Gen. admin expenses & R&D 100% 76% 79% 100% 84% 68%
Operating profit/loss 100% 52% 82% 100% -1097% -153%
Other profit/loss 100% 224% 47% 100% 55% 79%
Profit/loss before tax 100% 10% 91% 100% -1224% -179%
Profit/loss after tax 100% 17% 103% 100% -1639% -282%
FXPO LKAB
- Income structure stable - Income structure unstable
- High net sales decreases in 2015. - COGS high and fluctuate, leads to
However, still have positive profit. extremely fluctuate profit margin
- Have recovered in 2016. - Incurred loss last 2 year

Good Bad

Quantitative Analysis
3. Sign analysis:
a) Operating – Investing – Financing CF:
FX LKAB
2014 2015 2016 2014 2015 2016
Net cash flow operating activities + + + + + +
Net cash flow investing activities - - - - - -
Net cash flow financing activities + - - - - +
Net increase in cash and cash equivalent + - + + - -
• FXPO: • LKAB:
- In 2016, Operating CF inflow - In 2016, Investing CF Outflow
higher than Investing + > Operating + Financing CF
Financing CF outflow inflow  Investment places
 The firm operated well and pressure on the firm CF.
saved money for the future. - The Operating CF inflow also is
on decreasing trend which
Good makes the situation worse.
Bad

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Quantitative Analysis
3. Sign analysis:
b) Income – Cashflow:
FXPO LKAB
2014 2015 2016 2014 2015 2016
Income + + + + - -
Net cash flow operating activities + + + + + +

FXPO LKAB
- FX firm have positive income - Income in the 2 recent year have
and operating cash flow in the large deficit (Loss of over 800
3 recent year million in 2015 and 100 million in
- FX operation stable and 2016).
promising. - Although their operating cash flow
is positive, it is on decreasing trend.
Good Bad

Quantitative Analysis
4. Ratio analysis:
a) Activity ratio:
FXPO LKAB
2014 2015 2016 2014 2015 2016
Days of Receivables 23 31 30 33 29 46
Days of Trade payables 15 19 23 32 25 30
Days of Inventory 69 77 79 49 47 60
Fixed assets turnover ratio 1.48 1.45 1.70 0.52 0.46 0.48
Total assets turnover ratio 0.65 0.78 0.85 0.33 0.29 0.28
FXPO LKAB
- Stable and decent activities - In 2016, receivables and
ratios inventory increases sharply
- High assets optimization - Low assets optimization

Good Bad

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Quantitative Analysis
4. Ratio analysis:
b) Liquidity ratio:
FX LKAB LKAB (Adjusted)
Liquidity ratios 2014 2015 2016 2014 2015 2016 2014 2015 2016
Current ratio 2.83 1.13 1.13 3.20 3.41 2.37 1.55 1.70 1.17
Quick ratio 2.45 0.76 0.88 2.83 2.92 2.07 1.19 1.22 0.86

Both have:
- Low current ratio (<1.2)
- Low quick ratio (<1)

Both are bad

Quantitative Analysis
4. Ratio analysis:
c) Solvency ratio:
FXPO LKAB
2014 2015 2016 2014 2015 2016
Liabilities to total resources 66.4% 80.1% 72.2% 40.2% 42.7% 47.0%
Total loans to total resources 60.4% 73.5% 61.9% 4.4% 5.3% 8.9%

Liabilities to equity (times) 2.00 4.01 2.59 0.67 0.74 0.89

Negative Negative
Interest coverage 4.96 1.37 4.56 1.84 EBIT EBIT
FXPO LKAB
- High leverage  Risky - Low leverage  Not risky
- Negative earning  Low
interest coverage
Bad Neutral

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Quantitative Analysis
4. Ratio analysis:
d) Profitability ratio:
FX LKAB
Profitability ratios 2014 2015 2016 2014 2015 2016
Gross profit margin 53.33% 53.51% 59.41% 8.90% -37.53% -4.73%
Net profit margin 13.24% 3.27% 19.18% 1.68% -35.11% -5.99%
Return on assets (ROA) 8.61% 2.57% 16.27% 0.55% -10.15% -1.70%
Return on equity (ROE) 25.91% 12.86% 58.37% 0.92% -17.71% -3.20%
FXPO LKAB
- FX have excellent profitability - Low profitability ratios. Have
ratios loss the past 2 years.
- The decrease in 2015 is not a
continuous factor

Good Bad

Quantitative Analysis
5. Overview:
FXPO LKAB
Vertical Analysis
Notes
Assets
: Bad
Capital : Neutral
Income ***** : Good
Horizontal Analysis ***** : Care
Assets
Capital
Income
Sign Analysis
Operate - Invest - Finance
Income - Cashflow
Ratio Analysis
Activity ratios
Liquidity ratios
Solvency ratios
Profitability ratios *****

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Conclusion

- Good operating activities - Have profitability problems

- Optimistic sector outlook
- Risky financial position
- Political risk
- Affected significantly by
Ukraine currency exchange
- Company situation is becoming
worse over recent years.
- Reporting not transparent
- Optimistic sector outlook
- Stable financial position

Invest in FXPO stocks if and

Investment in LKAB corporate
only if have currency hedge
bond is not recommended
and aware of political risk
(High risk low return)
(High risk high return)

BIBLIOGRAPHY
1. FERREXPO (2014,2015,2016). Company annual report
2. LKAB (2014,2015,2016). Company annual report
3. LKAB (Q3.2015). Interim report
4. UNCTAD (2015,2016,2017). The Iron Ore Market
5. http://ukrainetrek.com/about-ukraine-nature/ukraine-natural-
resources
6. Shatokha, V. J. Sustain. Metall. (2016) 2: 106
7. U.S. GEOLOGICAL SURVEY, Minerals Yearbook ukraine (2013)
[AdvanCe reLeaSe]
8. Worldsteel Association; interviews; WBMS World Metal
9. A vision of growth for the Swedish mining industry, Svemin (2012)
10. Sweden’s Minerals Strategy. For sustainable use of Sweden’s mineral
resources that creates growth throughout the country. Article no
N2013.06

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THANK YOU

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