Introduction

Bradken Limited (BKN) manufactures and supplies consumable and capital products for the
mining, construction, rail transit, energy and general industrial markets on a global basis. This
report aims to provide a general analysis of BKNs current and past financial performance
through the use of ratio analysis, including !u"ont analysis, on its li#uidity, solvency,
operational activity, profitability, and cash flo$s. %pecific attention $ill be focused on the
analysis of BKNs fi&ed assets, leases and pension and its impact on the performance. The
report $ill conclude by identifying current e&pectations on future performance based upon on
the aforementioned analysis of its current and past performance.
All reported figures in the following analysis are stated in $000.
Liquidity Analysis
BKNs li#uidity position improved overall from '()( to '()) and then subse#uently
$eakened in '()'. There is a favourable change in *urrent, +uick, *ash, *urrent assets to
total assets and !efensive interval ratios are ,'.-'., //./(., ))'.0,., ',.-'. and 11.2'.
respectively from '()( to '()). 3o$ever, the li#uidity position deteriorated in '()', as
evidenced by an unfavourable percentage change of )-.,(., -2.02., ,'.00., ),.)1. and
)1.40. respectively for the above ratios.
The primary reason for improvement in li#uidity in '()) compared to '()( is the incremental
increase in *ash and cash e#uivalents (500,1)) or )-1.0/.), 6eceivable (5))4,),( or
0).21.) in current assets and the reduction of borro$ing (51,('- or -/.2).) in current
liabilities. These unfavourable changes in li#uidity measures from '()) to '()' are mainly
due to the --.)0. and ),.2,. decrease in BKNs cash 7 cash e#uivalents and receivables
respectively. The fall in current receivable is largely a result of the decrease in other
receivables of 5,4,2,( (0(.4-.) that arose from unusual operating activities of BKN, $hich
includes amounts receivable for revenue recognised for contracts on a percentage of
completion basis.
8n addition the 21.2,. increase in current payables, is primarily accounted for by the 0,.'1.
increase in Trade "ayables. 8t is also noted that inventory had increased by 5)-(,244
(/-.2,.) bet$een '()) and '()' as a result of net increase in construction $ork in progress.
1
Solvency Analysis
BKNs ability to meet long term obligations such as interest and principal debt repayments
and similar obligations can be analysed using debt to asset, debt to e#uity, financial leverage
and interest coverage ratios. !ebt ratios are used to measure the amount of liabilities in a
firms capital structure. Both debt to e#uity and debt to assets ratios decreased bet$een '()(
to '()), indicating an improvement in BKNs capital structure and lo$ering its long9term risk
of insolvency. 3o$ever, both of the ratios subse#uently increased bet$een '()) and '()' as a
result of an unfavourable ,-.)/. increase in total debt, increasing the risk of insolvency.
The interest coverage ratio fell by /.,'. in '()) and increased by '(.24. in '()'. This
indicates the companys ability to meet its interest obligations had notably improved from
'()( to '()'. The '(.24. change in interest coverage ratio is primarily due to a '4.,/.
increase in sales of good from mining products (')./4.), rail (2,.4'.) and engineered
products ('(.(1.) as disclosed in Note , %egment information.
:hile financial leverage can potentially benefit BKNs shareholders in generating a higher
shareholder return on investment through leveraging debt in financing its operations, the
)2.(2. decrease in financial leverage ratio in '()) and subse#uent marginal increase of
,.'1. in '()' indicates a possible overall process of deleveraging over the past t$o financial
years by the company. ;urther analysis ho$ever notes that debt levels had increased over the
three years and that the total assets and e#uity levels had increased at a higher rate due to ne$
ac#uisitions and pro<ects, thus proving other$ise that the company is still e&panding through
the use of debt.
Activity Analysis
=perational effectiveness and productivity is key to the profitability of BKN, as it maintains
an efficient and effective management of its capital investments, evident through the
operation activity ratios over the past three financial years. %pecifically, from '()( to '()),
inventory turnover increased from ,.22 to 2.)/ ()-.4-. improvement) and the number of
days inventory on hand also decreased by 1 days, indicating an improvement in the amount of
time BKN needed to produce, hold and sell its inventories. 3o$ever, the inventory turnover
fell by 0.),. in '()', along $ith an increase of 2.0, days in the number of days of inventory
on hand. !espite the fall in efficiency in '()', BKN has improved overall during the '()( to
'()' period.
2
6eceivable turnover deteriorated by )-.2,. from '()( to '()), $hich led to a marginal
increase of 0.21 days of sales outstanding. The receivable turnover ratio recovered by 2.,,.
in '()' leading to a reduction in days of sales outstanding by -.-2 days. The improvement on
accounts receivable turnover ratios indicated a shorter average time re#uired to collect on
debtors through a more effective management of credit policies. 8t is noted that both revenue
and average receivables increased over three years, in terms of percentage changes the
average receivables, $hich consists largely of other receivables, increased at a faster rate than
revenue in '()), but at a slo$er rate in '()'. !ays payable $ere -0.-0, -'./, and -,.0( days
in '()(, '()) and '()' respectively, $hich suggests that BKN maintains a relatively
consistent days payable for its $orking capital.
Profitability Analysis
>ross profit margin for '()' is '(./2., a )'.0-. decline from the '-.0(. gross profit
margin in '()). !espite revenue increasing '4. from '()), the cost of selling had increased
at a higher rate of -). from '()) leading to an unfavourable change in gross profit margin.
?nalysis over the three years suggests that there is general decline in gross profit margin in
'()' compared to the '-.)0. gross profit margin in '()(. BKN is a capital intensive
company and this analysis $ith focus on '()'9'()) years suggests that the company may
re#uire an even higher level of capital e&penditure to ensure production related processes are
run at lo$er costs to maintain competitive advantage compared to competitors. BKN may also
need to closely monitor and control material costs to maintain its gross profit margin on sales.
=perating profit margin for '()' is )).2)., the '.'2. unfavourable movement from the
)).//. operating profit margin '()) is less than the decline in gross profit margin. BKN is
able to demonstrate better control of overheads cost (compared to cost of selling) to maintain
a steady level of operating e&penses. The operating margin also sho$s a trend of general
decline from the '()( operating profit margin of )'.,0..
Net profit margin increased by )/.0-. from the 2.04. in '()) to 4.1(. in '()'. This is
primarily due to foreign e&change gains of 5',()/ and share of net profit of associates of
5',0'4 in '()'. ?s BKN has operations in other countries and $ill continue to move to$ards
overseas manufacturing facilities e.g. construction of the @uAhou foundry, foreign e&change
gains and losses $ill remain a recurring item, though fluctuations and its effect on the net
profit margins should be managed using hedging. *ompared to the '()( net profit margin of
/.('., the net profit margin of '()' is slightly less favourable.
3
"re9ta& margin is 1.2'. in '()' compared to 0.2'. in '()), sho$ing a favourable change of
))./4.. This reflects profitability effects on non9operating incomes and e&penses such as the
foreign e&change gains and share of net profit of associates. %imilar to the driver of the
favourable change in net profit margin, this change reflects BKNs strategy of e&pansion e.g.
overseas operations and ac#uisitions e.g. the ac#uisition of ?ustralian and =verseas ?lloys
(?=?) and Norcast in Buly '()). The '()' pre9ta& margin is closely in line $ith the 1.2/. in
'()(.
6eturn on total capital also increased by '.1,. from )-.)1. CB8T on all capital employed in
'()) to )-.20. return in '()'. This favourable change is also reflected through the 6eturn on
common e#uity ratios of )'.(,. in '()) to ),.4/. in '()'. The ').0) . change in return on
common e#uity is greater than the change in return on total capital is mainly due to a ,2.
increase in Borro$ings in '()'. 8n comparison $ith the return on capital of )4.'1. and the
return on common e#uity of )/.'-. in '()(, the '()' ratios display a less favourable
performance.
Du Pont Analysis
The primary driver of BKNs ),.4/. return on e#uity ratio is due to a high financial leverage
relative to the 6=? ratio. 8n '()' the 6=C had increased by ').0). from the previous '())
yearDs ratio and this is primarily attributed to the )4.0. increase in 6=?, complemented by
the marginal increase in financial leverage ratio of ,.'1..
The favourable )4.0(. increase in '()' 6=? $as primarily due to a greater net profit
margin, $hich $as favourably higher in '()' by )/.0-., being offset marginally by a
decrease in asset turnover of 9(.0/.. The t$o drivers for the higher net profit margin increase
net profit margin as there $ere increased ta& and interest burden ratios $hich had increased
by of 2.,-.. and )).)'. respectively. This indicates that in '()' there $ere more ta& and
interest savings resulting in higher net margin profitability.
!espite the favourable increase in ratio in '()', it should be noted that BKN '()'
performance is still belo$ its position in '()( $here the 6=C $as at )/.'-.. Like '()' and
'()), the 6=C is mainly driven by a high financial leverage relative to 6=?. The -(.)).
drop in 6=C from '()( to '()) is a result of a fall in financial leverage ratio by )2.(-. and
lo$er 6=? ratio, by )/./,.. The decrease in financial leverage $as a result of decreasing
debt levels and the fall in 6=?, $hich $as driven by lo$er ta& and interest burden, 4.'(. 7
4
,./1., indicating a fall in interest and ta& savings, as $ell as a fall in CB8T margin of 4.2).,
denoting decreasing profitability.
Coverage analysis
=verall, the coverage ratios e&perienced a decrease in '()) and subse#uently increased in
'()'. ;or '()', this indicated that BKN improved its ability to meet short term obligations.
The only ratio that declined from '()( to '()' is the debt payment ratio, $hich indicates the
cash generated by BKN operation is lo$er compared to cash outflo$ for payment long9term
debt, indicative of the company paying off higher level of debt.
The interest coverage ratio increased by '(. from ,.,/ in '()) to 2.-1 in '()' demonstrating
BKNs increasing sufficiency in being able to meet its interest obligations via its earnings.
!ividend payment ratio fluctuated significantly, as denoted by a -((. increase in '()' and
04. decrease in '()). This $as the result of significant fluctuations in cash flo$ from
operations during the years, $hilst the dividend amount paid $as relatively stable.
The ratios for debt coverage, reinvestment, investing 7 financing had all increased
significantly in '()', $ith increases of )4)., 1-. and 2). respectively. ?lthough this is a
positive sign of the increased ability to meet its debt and capital investment obligations, the
overall ratios are still belo$ ), indicating the company does not have sufficient operational
generated cash flo$s to meet these obligations and $ould still re#uire e&ternal financing.
?s most of the coverage ratios are driven by operating cash flo$, the fluctuations in ratios
correlated to the decrease in operating cash flo$ from '()( to '()) and subse#uent increase
from '()) to '()'. Bet$een '()( and '()), the rate of increase for cash receipts from
customers $as ,.//., $hich is lo$er than the corresponding increase of )4.0/. in payments
to suppliers. 3o$ever, in '()' the rate of increase in receipts from customers is -2.('.
compared to '()) $hilst the increase of payments to suppliers is '/.2).. This $ould be a
factor contributing to operating cash flo$ reducing in '()) and then increasing in '()'.
Cash Flow Analysis
8n '()), cash flo$ from operating activities dropped by /0.(,. from 5),/,,'1 to 5-',-//,
mainly due to a 5)2',1,0 increase of cash payments to suppliers and employees. ?s a result,
cash flo$ from operations to net revenue, assets, e#uity 7 operating income ratios decrease
significantly by 0(.0)., 0).(1., 0-.1-. and /1.44. respectively from '()( to '()). This
5
suggests that BKN may not have the ability to translate earnings and investment into cash and
sends a negative signal to the companys current and potential investors. 8t is also important to
note that the company is currently constructing a foundry in @uEhou *hina, in addition to ne$
business ac#uisitions of ?lmac(*anada) and :ear "rotect %ystems (?ustralia) in '()).
;urthermore, BKN has completed a successful capital raising placement to fund the
companys significant capital e&penditure pro<ects and thereby retaining financial fle&ibility
to pursue other value enhancing ac#uisitions and gro$th opportunities that $ould generate
further cash flo$s for the company.
The operating cash flo$ significantly increased by 500,04, or '/,.,/. in '()', $hich is
primarily a result of a 5,(-,14- (-2.) increase in receipts from customers, follo$ed by
)14./,., )1,.)2., '(4./0. and '(-.2/. increase in the above cash flo$ ratios. !espite this
incremental increase in net cash flo$ from operation, it is still insufficient to cover off the
re#uired cash flo$s needed for financing activities during '()'.
Fixed Assets Analysis
BKN is a capital intensive manufacturer $ith F"roperty, "lant and C#uipmentG (""C) being
the largest component of Total ?ssets on the *onsolidated Balance %heet. Hsing common siEe
analysis, ""C accounted for --. of total assets in '()', $hich is an increase from -'. in
'()).
The estimated total useful life, estimated age, estimated remaining life of ""C increased from
'()) by 0.,2., ,.-). and )2./'. respectively. Notably, BKN is using its ""C for a longer
period of time (depreciating over a longer period) demonstrated by the 0.,2. increase in
average useful life as $ell as using older ""C demonstrated by the average age of the asset
base in '()' increasing by )2./'. from '()). -1. of the life of the ""C have passed in '()'
(4 years used up divided by )4 years of total useful life) compared to -4. used up ""C in
'()).
=ther asset ratios calculation using capital e&penditure is also performed as BKN depreciates
on straight9line basis and has no revaluation surplus. ?ssuming no residual values, as it is not
disclosed other$ise, the rate of ""C replacement has increased by /4. from )4/. in '()) to
'1,. in '()'. This suggests that BKN is replacing their ""C at a faster significantly faster
rate than it is being depreciated and this trend has increased since '()).
6
The rate of ""C rene$al increased by 4'. from )).'2. in '()) to )0.'-. in '()', this
sho$s that BKN is increasing its e&penditure on ne$ ""C at a higher rate in '()' compared
to '()). 3o$ever, due to a relatively large increase in ""C disposed from 51, in '()) to
5,,,)0 in '()', the gro$th of asset base e&perienced an unfavourable change of 14..
The *apital :ork 8n "rogress (*apital :8") included in ""C increased by )/-./-. from
5'1,--/ to 50(,-(- in '()'. *apital :8" does not have any related capitalised interest
component and, similar to freehold land, is not depreciated. Therefore it has been e&cluded
from the above fi&ed assets analysis.
Leases Analysis
"er ??%B ))/, at the commencement of lease term, finance leases are recogniEed as assets
and liabilities in the balance sheet $hile operating leases are often treated as off9balance9sheet
obligations. The amount of operating leases given in '()' is 5'-,40/ $hich is '.)2 times of
finance leases compared to ).// times in '()), indicating further analysis is re#uired to
identify the impact of the off9balance9sheet lease obligations.
?fter capitalising the operating leases, both BKNs assets and liabilities increased by
5)0,//,.44, $hich resulted in the deterioration of the debt to e#uity ratio and interest
coverage ratio by '.. The financial leverage ratio also increased by )., thus making BKN
more leveraged and less solvent.
The income statement ad<ustments for these off9balance9sheet lease obligations primarily
impact the 6=? and 6=C ratios. ?fter ad<usting for these lease payments, the net income
increased by '.-4., $hich corresponded to the same increase in both the 6=? and 6=C.
The increase in profitability after ad<usting for the operating leases indicates that these leases
are at a period $here operating leases are no longer generating the e&pense savings that it
$ould have, had it been accounted for as a finance lease, simply due to the fact it is
approaching the end of the lease period.
;or cash flo$ effects, the ad<ustment for operating cash flo$ is 52,/(. 8t is resulting from
adding back the operating lease payments for the current year 5/,(, and less interest paid on
the ne$ capitaliEed lease asset 5)2//. :e assume here the interest paid is treated as cash flo$
from operating. 8n contrast, the cash flo$ for financing decreases by the same amount 52,/(
because the principle payments of the current year for the ne$ly capitaliEed lease should be
treated as financing cash outflo$.
7
Pension Analysis
8n '()' BKNs pension net liability had increased by 5)),14',((( ('-/.,0.), $hich $as
attributed to a 5'/,,2/,((( ())).-/.) increase in the present value of the defined benefit
obligation and a relatively lo$er increase of 5)2,,12,((( (/0.11.) in the fair value of the
defined benefit plan assets.
The primary cause for increases in both these balances is due to the business ac#uisition of the
*anadian subsidiary DNorcast :ear solutionsD in Buly '()) by BKN. ?s the *anadian business
had defined benefits retirement plan for its employees, $hich is currently still open to ne$
hourly employees to be on the plan, it had increased the defined benefits plan of the e&isting
H% subsidiary.
The direct amount of increase to both defined benefit obligation and planned assets as a result
of the business combination is 5)/,-2),((( (/(.-0. of opening defined obligation balance)
and 5)2,4-),((( (/1.40. of opening planned asset balance) respectively. The remaining
movements to these t$o balances are a result of the changes in actuarial gainsIloss, foreign
translation, interest cost and current service costs.
?ctuarial losses increased the defined benefit obligation balance by 5/,-0),((( ('1.1,.)
during the year, $hilst the planned assets $ere reduced by 5',4)2,((( ()-.--.) as a result of
a fall in actual return on assets. This increase in benefit obligation and decrease in planned
assets by the actuarial gainsIloss 7 e&pected returns further $idened the gap bet$een the t$o
balances, thus increasing the net liability balance. *ontributions by group companies had also
increased the fair value of the plan assets by 5-,,11,((( ()/.0,.).
The reported pension e&pense has decreased by )-.-4. ()2-,((() compared to '()),
ho$ever the calculated economic pension e&pense reveals a different result as in the '()' the
economic pension e&pense amounted to 5)),-,),(((. :hen compared to the '()) economic
income of 5-,)'/,(((, this represents a significant shift in the result and is primarily
attributed to the '()'I)) ;J ac#uisition of the *anadian subsidiary and its underlying defined
benefit pension obligations. 8n addition the actuarial losses on defined benefits obligations,
lo$er actual returns on planned assets and unfavourable ;@ translation (the stronger ?H! to
both the H%! and *?!) in '()) further contributed to this large e&pense.
8
The ad<usted net income for the year from the economic pension e&pense $ould decrease the
Net 8ncome from 5)((,2--,((( to 51(,)0,,(((. This $ould cause unfavourable impact to all
the profitability ratios such as 6=C 7 6=? as they $ould decrease significantly.
Conclusion
!uring the three years from '()( to '()', BKN has successfully e&panded its business
through ac#uisitions, foundry construction and e&panding manufacturing functions. BKN
supported its e&pansion via debt capital raising, $hich impacted its ability to #uickly generate
cash to meet its short9term obligations and impacted on solvency and coverage ratios. The
increased debt obligations may limit the fle&ibility for BKN to pursue other value enhancing
ac#uisitions and e&pansion opportunities due to debt repayment constraints on BKNs future
operational cash flo$s.
?lthough maintaining a steady increase in sales over the past three years, the profitability
ratios, specifically its gross profit margins, sho$ BKN appearing to be less profitable due to
higher selling costs. %ources of non operating income such as foreign currency gains and
profit share from associate are contributing to the profit results, $hich not sustainable for the
future. 3o$ever BKNs profitability has also been decreasing at a decreasing rate over three
years and operating cash flo$ has a significantly improved in '()' compared to '()),
providing some confidence that BKNs financial performance $ill improve in the ne&t fe$
years, provided the successful completion and operation of its ne$ foundry.
>oing for$ard, BKN should be e&pected to reap the re$ards of the significant capital
investment and e&pansions that it has undertaken in the past three years. ? steady increase in
future profitability $ould be e&pected as there $ould be no more earnings volatility attached
$ith business ac#uisitions and e&pansions that $as undertaken in the past three years. 8n
addition, $ith the e&pected completion of the ne$ production capacities such as the @uEhou
foundry, profit margins on its capital products $ould be e&pected to improve due to lo$er
production costs.
9