Principles of Financial Economics

Question: Discuss about the Principles of Financial Economics. Answer: Introduction The organizations ST Barbara Limited and Sandfire Resources NL both belong to the mineral and industrial exploration contributors that are enlisted in the Australian Stock Exchange (ASX). It has been found that within the ASX, there are various companies in this particular sector that are enlisted but this sector has enormously enriched after the certain explosion in the construction industry, which has been observed in the starting of this century (Alexander 2008). Both the mentioned organizations compete with each other in equal events through a detailed analysis of the fiscal declarations. It has been noted that the mentioned firms are performing comparatively better in the specified segment within the nation. Thus, the share price and the financial performance of both the firms have been studied in order to encourage the investors and also to direct them to invest in the appropriate firm for earning increased rate of returns. In this report, both the macro and micro economic aspe cts have been listed in order to guide both the stakeholders and the investors regarding their investment in the proper firm. Top down Analysis The growth rate of the particular firms was 2.4 % in the year 2015, whereas their falling has been compared with the value in the year 2014 to an insignificant 1.5 % rate of industrial average. Exchange Rates It has been found that in the year 2015, the value of AUD decreased and the decreasing prices of the cement and steel put an adverse effect on the export industry to a larger extent and it can be said from this that the particular trend will be similar in the year 2016 (Frank, Bernanke and Kaufman 2007). The lower demand of the Chinese for exports also implies the similar effect. Nevertheless, it has been noted that Australia is the only country that is considered as the OECD and has not been suffered from recession during the period of fiscal crisis, as the nation continuously sustained its economic position throughout the period. The particular country experienced a spontaneous growth for long 25 years and this has influenced the companies of material industry like - Sandfire Resources NL and ST Barbara Limited. As the mentioned firms are bigger in the national levels, these can be influenced by the macro-economic aspects like exchange rate of the currency. In order to revitalize the national economic condition, the Central Bank of the country decreased its rate to 2% in the last year in the month of May. It has been found that this proposal is supported by the household costs of Australia that are nonetheless indebted. Thus, the economic condition of Australia remains fortunate; the public debt of the nation is considered as one of the lowest in OECD countries. Malcolm Turnbull became the prime minister of the country in the year 2015, in the month of September and his precursor Tony Abbott suffered a lot due to the economic downturn. This resulted into increase in the public deficit at his tenure. Malcolm Turnbull intends to incorporate an economic policy for recovery by investing in the infrastructure and training along with empowerment of the service sector, whose one of the component is the banking sector (Hall and Cowles 2008). This lead to increment in the exploration of mineral by the two mentioned firms and this consequently developed the fiscal condition of the industry and this has been reflected in the fiscal declarations of Sandfire Resources NL and ST Barbara Limited. Levels of Inflation On the basis of the statistics of the Central Bank of the country Australia, it can be said that in the year 2015, the rate of inflation was 1.5 % and the interest rate was similar i.e. constant to minimum and low. These indicate that economic condition of the country has a healthy rudiment that persuades the growth rate. It has been found that the changes in the economic condition have created challenges for different countries, but the economic system of Australia sustained as it has sound macro level, especially when it comes to inflation. On the contrary, since the year 2013, the inflation rate continues to go downhill with highs of about 2.9 % in the previous two years. However, as these rates were not much low, the economic situations like the rate of inflation has been decreased from the expected rate with a falling CPI rate to 2.1 % based on its stationary, but in the last year it was 2.7 % annually. Thus, this has influenced the particular industry positively as the figures improved compared to the results of the prior year i.e. 2014 (Keim and Ziemba 2000). Inflation The inflation rate lowered dangerously as the Central Bank of Australia opposed to other countries, especially where deflation and constant looms took place by preserving a constant rate of inflation. It provides a highly constant and also makes the banking industry able in submitting attractive and good fiscal results to its investors. Moreover, the macroeconomic situation made it much attractive to other countries who are intending for making investments. A movement might be counted as the household consumptions within the finance that moves the countrys economy to an unlimited position. Additionally, for the international investors, an individual can earn incentives by investing in the country and this has resulted into decreased and constant inflation rate that lowers the insecurity with the passage of time. Growth Domestic Product (GDP) The GDP of the country Australia per capita is found to be in the highest position across the world, thus, it can be said that the particular nation is a prosperous country. In the year 2015, the rate of unemployment was 6.2 % and it found to be comparatively lower than 2014 due to the downturn in the mining industry (Mankiw 2004). GDPs slow growth impacted the stock price of the firm ST Barbara Limited (A$6.59) and it found that its stock price did not increase as it was expected. On the other hand, the stock price of the firm Sand fire Resources NL was A$16.38. This implies that the GDP of Australia affected the firms directly. Thus, the government of the nation should develop and stabilize the macroeconomic situation of the nation. The development should take place regarding the enrichment of the economic growth of the nation, decrease in the rate of inflation and also to stabilize the exchange rates. Exchange Rate The particular country Australia is enriched in natural resources and is also considered as on one of the five biggest money markets. Therefore, based on the technical and fundamental analysis, the rate of exchange should impact the banking sector. The economy of the country does not progress as it was expected and it is the cause for depreciation and lowering of the rate of interest to 0.25 %. As per the declarations of the RBA (Reserve Bank of Australia), the main causes for the devaluation of the currency was understood. The government of the country forecasted the rate of growth to be 7.6 % in comparison to 8.5 % of the previous year. An outflow of fund was noticed from key material industries since losing in the interest of the dividend and devaluation of currency (Islam and Vos 2011). Thus, slow repatriation of the finances was noticed in the market. Moreover, the pairs of AUS / JPY and AUS / USD were impacted, thus, the returns were also affected and offered no interest. It le ads to the reduction of the attractiveness of the stocks. Additionally, it has also affected stock prices of ST Barbara Limited and Sandfire Resources NL depressingly. The Aussi suffered the hardest hit in the market of foreign exchange this year and it was not only adjacent to the U.S. dollar, rather to other pairs, such as JPY, EUR and GBP. Thus, the financial market was subsequently influenced the banking sector. Nevertheless, in recent times, the prices of the Australian stocks increased with the strong gains in the monetary sector for compensating the decline in the resources that are related to the industry of raw material. It has been identified that the stock prices of the material sector of Australia has been gained. Economic Expansion in Australia In the year 2015, the GDP of Australia increased by 2.5 % from the year 2014. This rate is considered as one tenth lower than the present time period i.e. 2.6 %. In the year 2015, the per capita of GDP was A$ 36,708, A$ 51,829, A$ 350 and A$ 9,234 which was higher than A$ 46,358 or A$ 61,063 of the year 2014. The evolution of the per capita GDP was contrasted these data along with that of the year 2005, during which the per capita GDP of Australia was $ 27,390. It can also be said that in the year 2016, the economic overview indicates a positive situation with a lesser rate. Thus, Australia will be able to highlight more on the issues that are related to growth and no healing. Moreover, the macroeconomic situation possesses scope and for this monetary policy can be implemented for fulfilling its functions. Therefore, the particular industry is considered to vibrant. Bottom-up Analysis Background of the Companies ST Barbara ltd is situated in Western Australia and it belongs to the mineral exploratory sector of Australia. This deals with oil and gold market, on the other hand, Sandfire Resources NL deals with the copper producer that regulates its business in the high grade copper sector. It determines the differences and the similarities of the different magnitudes that is constituted within the balance sheets and the other fiscal declarations for weighing the particular amount on the basis of the relative and absolute values. This was done for diagnosing, variations and mutations. Both of these firms are enlisted in the ASX, though in the ASX there are several material industries and financial segments, the mentioned companies mainly compete with each other and this can be better understood based on the fiscal declarations. Fiscal Declarations Analysis Assets Sandfire Resources NL has assets of A$ 95.65 Billion that is more than September 2015 by 10.19 %. The portfolio of loan is the key item of the assets of the firm having a share of 55.4 %, followed by 24.6 % investments and 14.5 /5 availability. Thus, increase in both investments and portfolio took place. In the year 2016, ST Barbara Limited has assets over A$ 933.06 Billion that is the value increased by 11 %. The availability was increased by 12.68 % to AUSD 33.859 million on year to year basis in case of ST Barbara Limited at a rate of 25.74 % and ST Barbara Limited at a rate of 33.01 %. An increase in the loan portfolio took place annually based on the historical data and this helps to maintain an upward trend that reflected in the graph. In the local currency, the portfolio is identified as 62.82 %. In the particular sector, the equity portfolio increased due to increased placements of the mineral sectors. A certain increase in the portfolio percentage also increases the percentage to 10.23 % for ST Barbara Limited and this intended to service sector and strongly entered the market of Australia in the field of mineral exploration. Liabilities The total liabilities of the firm increased by 9.86 % from Q /. 18981.44 million to Q /. 211,430.84 million, additionally, the depository compulsions accounted as 80.70% of the total liabilities and this increased by 8.42 % to Q/. 13247.48 million. Money and time deposits are comprised of 37.68 % and 41.27 % respectively and the remaining 20.65 % are considered as savings. Moreover, in the national currency, 82.06 % are considered as depository compulsions and the funding is counted as comparatively diversified (Mishkin and Eakins 2009). The increase in the various resources of funding is analyzed as the indicators that imply a growth that is similar to the balanced percentage (Wise 2004). The increment in the cost financing implies a benefit regarding requirement of lesser liquidity. On the other hand, the increase in the monetary deposits includes higher exploratory activities. in 2015, liability of ST Barbara Limited increased by 21.24 % to Q /. 130.25 million. The current system of industry is considered as the second source for funding pertinent to the loans that are achieved as 94.26% from the foreign fiscal organizations. As a portion of liability, the total credits that are earned increase the share price from 13.27 % in September 2013 to 14.37 % in September 2015. It can also be said that the total credits increased from Q /. 30,384.08 million to Q /. 4850.98 million by 18.99 %. Paid up Capital and Equity The primary capital increased by 14.42 % to Q /. 2.272 million and it is represented as 81.74% of total assets. From this it can be said that the firm has a better rate of solvency. The supplementary capital increased by 9.21 % to Q 1 /. 290 million and this is related to rise in exercise results. In Australia, the mineral companies indicated an increase in growth of paid-in capital. In the firms, the assets were equivalent to Q /. 22,604.20 billion and it raised to Q /. 2912.87 billion by 13.43 % in the next year. This fluctuation took place as the behavior of the paid-in capital contributes permanently and it can be said based on the results of the previous years that growth too place by 23.12 % and 53.20 % respectively. In 2015, the capital paid increased by Q /. 451.60 million and Q /. 846.64 million for the firms Sandfire Resources NL Limited and ST Barbara Limited respectively by 63.07 % and 60 %. On the other hand, the credits earned and deposits evolution remained comparatively same. Liquidity and Solvency In 2014, the liquidity indicator was equivalent to 21.81 %, whereas in 2013, it also remained comparatively stable. The mineral industry had largest immediate liquidity and it was 68.66 % for Sandfire Resources NL and 31.47 % for ST Barbara Limited. The reason behind this is the strength in the exploratory capabilities. The net income was equivalent to Q 2,579,100 that is 1.01 % lower i.e. Q. 83.04 million and as a percentage value of the fiscal amount it was recorded as 2.07 p.p for contraction and 17.63 % score. This implies both the mentioned firms have a downward trend from March 2015. Additionally, the administrative and funding expenses also increased that implies a downward trend. Profit levels in Companies and Industries It has been found that Sandfire Resources NL and ST Barbara Limited have the best position in case of equity sector that is 22.54 % and 14.08 % respectively that exhibit the appropriate return regarding assets i.e. 3.20 % and 2.9 % respectively (Piros and Pinto 2013). On the other hand, great development has been identified in the material industry in both returns on equity and performance of the assets i.e. ROE increased by 1.78 % and ROA increased by 0.35 %. It has been found that the profitability indicators of the particular firm represent a slowdown trend from the year 2014 (September). The ROE was 6.29% that is 1.75 p.p. lesser than the value in May and ROA was lower by 1.53 % i.e. 0.21 p.p. lesser than the value in September of the year 2013 (Mishkin and Eakins 2009). It has found to be consistent with lower operating efficiency that is registered by the specified sector. The profits for the present fiscal time period that ends at 31st June, the firm ST Barbara Limited has profit over A$ 27 Billion and Sandfire Resources NL Ltd has a profit of A$ 9.227 Billion. Risks Present in Industry and Company In 2014, in the month of September, the equity portfolio was analyzed that implies five primary economic activities, where most of the resources are placed as transfers, various destinations and consumption. The annual behavior analysis of the components of loan portfolio is possible to scrutinize the electricity, water and gas credit risk that increased by 17.50 %, on the other hand, the services portfolio decreased by 11.77 %. Therefore, it can be said that both the mentioned firms are considered as key constituents of the GDP of Australia. The rate of delinquency showed that an annual increase took place by 0.08 p.p. (Rashid 2000). The performing loans increased by 14.52 % that is borrowed by the average of industry in comparison to the growth of the present portfolio by about 7.89 %. It has been noted that 98.59 % of the total gross portfolio acts as performing loans and the remaining 1.41 % is considered as the debt of the firm. Ratios The macro and micro economic factors of the companies have been enlisted here in a summarized form for helping the shareholders and investors to obtain the best form from the company as well as industry through ratio analysis. Ratios are considered as quantity or value that relates the economic units and the technical units i.e. monetary and physical respectively. The pilot ratios are generally restored by the medium-ratio that expresses the financial condition of these companies (Rashid 2000). Moreover, arithmetic mean and median can be utilized for better determination and also for avoiding the arbitrary leveling. Additionally, consideration analysis is also important for understanding the balance between the capital requirements and the equity constituents. Nevertheless, a too high value for a funding ratio might create various issues from the view point of the profitability of the firm. The analysis presumes financing of fixed assets through upper permanent capital of 100 %. This generally occurs when an organization uses some external resources for a long-term than their requirement. Furthermore, it is assumed that expenses for long-term financing are more than short-term. Recommendations The mineral industry has measured the market share along with their penetration by several organizations that have size and several executives who work there. All these are prepared on the basis of the model that is followed by the consumers for going to a close by place and have minimum of single executive who might fulfill the needs. The increment in the need of minerals like gold and copper leads to an increase in the difficulty for meeting operating expenses. The two mentioned firms have already propagated the canals self-care that splits the prior premise for raising their productivity. For improving the performance of the mineral sector, the mineral industry and the government of the nation should implement propel of measure on the mentioned firms - NL Limited Australia and ST Barbara Limited. The governments should develop and make the macroeconomic situation of the nation constant i.e. the government should stabilize the rate of exchange, reduce the inflation rate and should look over the economic growth of the nation. These would develop the banking industry performance and thus spill over can be understood in the mineral industry. Conclusions Therefore, it can be concluded that in present day, the demand of the customers towards the products varies as per their behavior and needs. Moreover, on the basis of the historical information, the problems are anticipated such that the mineral industry incorporates during the time of production. Additionally, it can also be said that the mineral industry is prepared for serving in any facilitated layouts. Thus, it can be said that the material industry should provide developed services to the consumers of the firm. 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