Great Northern Iron Ore Properties

Great Northern Iron Ore Properties made Business Sustainable

December 21st, 2012 Posted by Company Research Report No Comment yet

Great Northern Iron Ore Balance Sheet

Financial Liquidity

Liquidity is a firm’s ability to pay its short-term debt obligations. Its financial ratios, this will help us determine how liquid the firm is or how successful it will be in meeting its short-term obligations.

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The table relays the following:

  • The current ratio is the result of dividing current assets by current liabilities. This showed a downward trend in 2008 and 2011, with a growth ratio of -17.3 percent, 7.5, consistent at 2.0 times but in 2011 it decrease again to -22 percent and has an average of 1.93 times.
  • The quick ratio, on the other hand, is the result of dividing quick asset (current asset minus inventory) over current liabilities. GNI don’t hold any inventory on iron ore.
  • And their net working capital ratio, the result of working capital over the total asset. This indicated an up and down trend with a growth ratio of 7.1 percent, -20, 45.8, -31.4 and an average of 0.28.

Great Northern Iron Ore has the same good current and quick ratios results because they don’t hold any inventory but only a  trust leases land to major mining corporations. This indicated that they had sufficient funds or current asset to pay off their current debts and liabilities meaning they are financially liquid. Looking into their net working capital, they depicted sufficient funds needed to run the business thus, they have operational liquidity. And with their total asset, it resulted to a favorable and average ratio of 28 percent for the continuity of their business.

Efficiency

The concept of efficiency ratios is to analyze how well a company uses its assets and liabilities internally. These ratios are meaningful when compared to peers in the same industry and can identify a business that is better managed relative to the others. They are important because any improvement in ratios usually translate to improved profitability.

Wondering if the result is in favor of Great Northern Iron Ore Properties? Nelly wrapped up things for us.

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  • The receivable turnover ratio measures the number of times average receivables are collected during the period. This was computed as net sales over average receivable and resulted in an up and down trend with a growth ratio of -10 percent, -35, 54, -8 and an average of 3.93 times.
  • The payable turnover ratio is a short-term liquidity measure used to quantify the rate at which a company pays off its suppliers. This is calculated by taking the total purchases made from suppliers and dividing it by the average accounts payable amount during the same period. They don’t maintain payables and showed only payable turnover ratio in 2007 and 2008 which was decreasing trend of -3.89 percent in growth.
  • Fixed asset turnover ratio measures a company’s ability to generate net sales from fixed-asset investments — specifically property, plant and equipment (PP&E) – net of depreciation. This showed an increasing trend but a slight dipped happened in 2009 with a growth ratio of 41 percent, -16.7, 40, and 92.9, with an average of 7.15.
  • Asset turnover ratio was a number of sales generated for every dollar’s worth of assets. Wherein this showed an up and down trend with a growth ratio of 16.8 percent, -27, 50.6, 14.8 and average of 1.10 for GNI.

The company as a trust leases properties to major mining corporation does not hold much receivable nor payables and they do not have any inventories to maintain in their operations. Therefore they have a low receivable turnover which averages 4 times a year. And it has a payable turnover that averages 6 times a year which is not bad for this kind of firm. They also had a higher and increasing trend fixed-asset turnover ratio which dips 16.7 percent in 2009 due to US financial crisis that had greatly affected mining companies.

GNI had been more effective in using the investment in fixed assets to generate revenues. Same as to the result of their asset turnover which was up and down too in 2009. The higher the number, the better for this will indicates pricing strategy.

Cash Conversion Period

Cash conversion cycle or CCC measures how long a firm will be deprived of cash if it increases its investment in resources in order to expand business revenues. Thus, it is a measure of the liquidity risk entailed by growth.

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  • Receivable conversion period measures the number of days it takes a company to collect its credit accounts from its customers. GNI showed at least two to three months average except for 2009 wherein it reach more than 4 months to collect.
  • While payable conversion period measures how the company pays its suppliers in relation to the sales volume being transacted.  The company only have credit in 2007 to 2009 which averages one to two months before it was paid
  • Cash conversion period or cycle refers to the time span between a firm’s disbursing and collecting cash. GNI showed an average of two months.

Their receivable conversion period has an average of 96 number of days implies the company should re-assess its credit policies in order to ensure the timely collection of impart credit that is not earning interest for the firm, especially trust leases, are bounded by lease contract. While payable conversion, they have minimal to nil business transaction done in credit only in 2007 to 2009 which averages one to two months before it was paid. And total conversion period takes more than two months to turn credit to cash needed in the business.

Leverage

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  • Debt ratio indicates what proportion of debt a company has relative to its assets. This showed an up and down trend and it has an average of 41.2 percent.
  • The debt-to-equity ratio is a measure of the relationship between the capital contributed by creditors and the capital contributed by shareholders. This showed an upward trend with an abrupt dip of 33.5 percent in 2009 and has an average of 73.3.
  • Solvency ratio determines how well the GNI is able to meet its debts as well as obligations, both long-term and short-term. This attributed that in 2007 and 2008, it has a long-term debt wherein it was 1400 and 950 percent more than its obligations.

Great Northern Iron Ore Properties showed that it has more assets than liabilities. This means the company was not highly leveraged or financed by debts, since ratio it less than 50 percent except in 2011. Debt to equity indicated that it has high ratios meaning they were taking advantage of the increased profits that financial leverage may bring. And solvency ratio depicted how solvent and financially sound the company is.

Major Control of the Company Based on Total Assets

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  • Current liabilities to total assets identifies how much will be claimed by the creditor against total assets. This showed an up and down trend with an average of 31.8 percent.
  •  While long-term debt to total assets is to make out how much claim has the banks or the bond holder against its total assets. The banks and bondholders have claimed on their total assets the first two years but three years after they don’t have any long-term debt.
  • Then, stockholders equity to total assets is to know how much the owner can claim in its total assets. This showed an average of 58.8 percent.

Based on their total five years of operation, the majority in control of their total asset are their stockholders at 58.8 percent, then their creditors of 31.8 and last to their bank/bond holders at 3.1 percent average.

Plant, Property & Equipment

The idea of analyzing this is to look through its fixed assets, plant, property & equipment and see if it still have a useful life in their business operations.

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  • Gross plant, property, and equipment is the gross total of fixed assets cost, this shows a trend that was constant for the first four years and a slight increase in 2011.
  • Accumulated depreciation is to reduce the carrying value of an assets to reflect the loss of value due to wear,  tear and usage. This showed a trend of gradual increase every two years.
  • The net plant, property, and equipment is the result after deducting the accumulated depreciation from gross PPE, wherein it indicated a lesser value left in their PPE.

Based on the above data, the remaining book value of the PPE of Great Norther Iron Ore Properties was 7.65 percent, using the percentage method of depreciation. This means it has 0.38 useful years remaining which is very much lower and may often increase in value depending on local real-estate conditions.

Great Northern Iron Ore Income Statement

Great Northern Iron Ore Properties income statement shows whether the company made or lost money from  2007 to 2011.

Profitability

Every firm is most concerned with its profitability. One of the most frequently used tools of financial ratio analysis is profitability ratios which are used to determine the company’s bottom line and its return to its investors. 

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  • Their net margins which simply is the after-tax profit a company generated for each dollar of sales. This has a growth ratio of 1 percent, -9, 8.4, 2.9 and an average of 83.21.
  • Their asset turnover which measures the effectiveness of the company to convert its assets into revenues. This showed an upward trend with a slight dip in 2009. It has a growth ratio of 16.8 percent, -27, 50.6, 14.8 and an average of 1.10.
  • The return on assets, this tells us how much profit the company generated for each dollar of total assets. This indicated an upward trend except for 2009, with growth ratios of 17.4 percent, -33.6, 64, 17.4 and an average of 91.9.
  • The company’s financial leverage this measures the financial structure ratio of the company base on total assets against total stockholders equity. This showed an increasing trend with a growth ratio of 23.2 percent, -16.1, 13.9, 18 and an average of 1.70.
  •  Their return on equity the company could return such profit percent for every dollar of equity. Still, this showed increasing results with a growth ratio of 33.19 percent, -32.3, 59.4, 36.8 and as the average of 153.28.
  • Their return on invested capital, this is the financial measure that quantifies how well a company generates cash flow relative to the capital it has invested in its business. This has generated returns same as their return on equity.

Profitability, based on the ratio that showed returns representing the firm’s ability to measure the overall efficiency in generating earnings for its shareholders, marked a favorable result for five years. But due to US financial crisis, there was a slight declined in 2009.

Dupont Model is used to summarize above ratios and to show where the component parts of the return on asset (ROA) comes from as well as the return on equity (ROE). This is very helpful in determining where financial adjustments need to be made. In Great Northern Iron Ore Properties, they have higher net margins and low volume of asset turnover, this tends to be inversely related. This means they earned more from converting revenue to earnings than assets itself. Return on assets depicted satisfactory earnings for every dollar of total assets due to their net income upward trend except in 2009. Thus, the higher the percentage, the better, because that means the company is doing a good job using its assets to generate sales.

With regards to their return on equity, it shows high increasing returns except in 2009 declined. And financial leverage showed likewise an increasing trend and a dip in 2009. But the bulk of the returns comes from profit margin and sales.

Income

Of course, we all know that income plays a vital role in running a business. This will help sustain the company in long run. For Great Northern Iron Ore Properties, the table will reflect us their earnings generated from 2007 to 2011 business operations.

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  • Their revenue is how much money a company has brought in yearly. This showed a growth ratio of 23.5 percent, -28.6, 40, 28.6 and an average of 20.
  • Operating income is the best indicator of a company’s true performance in their operations. This showed a growth ratio 28.6 percent, -38.8, 54.5, 35.2 and average 16.6.
  • Net income is what’s left over for a company after all expenses have been accounted for, and this amounted just the same with their operating income.

The company’s income growth ratio indicated that business was doing good, in 2009 decreased in revenue due to US financial crisis was compensated in 2010 increase in revenues of 40 percent. This was caused by delayed in lease collections from mining companies affected by the crises. Their operating and net income were both the same because this means that they don’t have any transactions on non-operating income or expense. In addition, the two showed good results because they have minimal total cost and expenses to gain a favorable profit.

Expenses

This is the cost and expenses incurred during the course of their business.

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  • The cost of revenue was the amount the company paid for the goods that were sold during the year. This showed that they only have cost from 2007 and 2008. Last three years no cost was incurred.
  • Total operating expense was the expenses incurred in conducting their regular operations of the business. This composed sales, general and administrative and the depreciation expense involving their properties. Overall total expenses showed a growth ratio of 33 percent, -25, and remain consistent at 3 percent with an average of 3.4.

Great Northern Iron Ore total expenses account an average of 17 percent of revenue. Wherein cost of revenue was 2 percent, sales, general and administrative was 10 percent and depreciation expense was 5 percent. This showed a minimal percentage of total expenses.

 Modified Income Statement

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The company deals in property lease to mining companies and as indicated in the graph revenue was increasing except for 2009. And total expenses which were only 17 percent of average revenue indicated that they had minimal expenses incurred. So, net income leftover was good at a higher margin of 83 percent.

Margins

Ratios that show margins represent the firm’s ability to translate sales dollars into profits at various stages of measurement. 

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The overall margins showed how efficient GNI’s management was. They were able to sustain their profits despite the decline in 2009 since they were able to recover in 2010. This reflected an impressive operating and net margins which were very high and profitable as well as their returns.

Great Northern Iron Ore Cash Flow Statement

 Cash from Operating Activities

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Cash flow from operating activities comes from their net income adding back depreciation and amortization, other working capital and other noncash items to get the net cash provided by operations. This showed a growth ratio of -12.5, 14.2, -6.3, 40 and an average of 16.4 percent for GNI. They had a good cash flow from operations except for declined in 2008 and 2010 due to other working capital.

Cash from Investing Activities

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Cash flow from investing activities comes from their purchases of investments, sales/maturities of investments and other investing activities to get the net cash used in investing activities. Wherein this showed a growth ratio of 600 percent, -50, 300, -100 and an average of -.40. They don’t have purchases transaction in investments for the first two years only other investing activities. And it purchases average a -4.4 percent, sales, and maturities of investments average 4.0 percent and other investing activities of 0.20 thus, leaving a net cash used for investments average of -0.40.

Cash from Financing Activities

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Cash flow from financing activities comes from cash dividend paid to get net cash used for financing activities. Wherein this depicted a growth ratio of -6.25 percent, 0, 13, 17.6 and an average of -16.6. This means they had used cash flow in financing activities to pay off cash dividend and they don’t have financing activities from other sources.

Net Change in Cash

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The cash flow of Great Northern Iron Ore Properties had a good operating cash flow with slight decreases in 2008 and 2010 due to US financial crisis. And in their investing activities resulting from gains (losses) from investments in the financial markets and operating subsidiaries, and changes from amounts spent on investments in capital assets showed minimal change. While financing activities measure the flow of cash between the company, its owners, and creditors. This indicated negative numbers meaning the company is servicing debt, but it can also mean the company is making dividend payments which investors might be glad to see.

Free Cash Flow

Free cash flow (FCF) represents the cash that a company is able to generate after laying out the money required to maintain or expand its asset base. Free cash flow is important because it allows a company to pursue opportunities that enhance shareholder value.

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The table above showed that Great Northern Ore Properties was not investing much on capital expenditure thus indicating an operating cash flow equivalent to its free cash flow. While free cash flow doesn’t receive as much media coverage as earnings do, it is considered by some experts to be a better indicator of a company’s financial health.

Cash Flow Efficiency

Cash flow efficiency is a cash flow metrics in variations of the results from its sales, liabilities,  available capital expenditures, free cash flow and the results of operating. In view thereof, the following formula shows how the resulting percentage come out for GNI.

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Cash flow analysis uses ratios that focuses on cash flow and how solvent, liquid, and viable the company is. Here are the most important cash flow ratios as well as the results after analyzing Great Northern Iron Ore Properties:

  • Operating cash flow to sales ratio measures how much cash generated from its revenue for the period and gives investors an idea of the company’s ability to turn sales into cash. This had an up and down trend for GNI’s  past five years and a growth ratio of -28.7 percent, 58.2, -33, 9.85 with an average of 83. This is an important indicator of its creditworthiness and productivity, wherein a high percentage means the company will be able to grow for it has sufficient cash flow to finance additional production and a lower ratio indicates the opposite.
  • Operating cash flow ratio measures how much cash left after considering short debt by using the result of operating cash flow from operations over current liabilities. This showed an up and down trend with a growth ratio of -50 percent, 100, -37.5, -8 and an average of 290 for five years. This indicated how liquid GNI was despite the declining growth, so they still have the ability to meet current liabilities without having to sell assets.
  • Free cash ratio helps us conclude if the company will grow in the future. GNI had no capital expenditure for the five years of operations, therefore they had a free cash flow ratio of 100 percent of operating cash flow. A Higher value of free cash flow to operating cash flow indicates a better financial strength.
  • Capital expenditure ratio measures company sustainability in maintaining their assets. The company does not have expenditures creating future benefits or to add to the value of an existing fixed asset with a useful life extending beyond the taxable year.
  • Total debt ratio measures company efficiency, the result of operating cash flow over total liabilities. This showed an up and down trend with growth of -42 percent, 72, -19.8, -11.2 with an average of 218. This means the company has sufficient operating cash flow to pay off total liabilities.
  • And current coverage ratio measures how much cash available after paying all its current debt. In this case, the company experienced a varied changes year after year with the growth ratio -78 percent, 705, -99, 25.8 and an average of 103 for five years. These changes were caused by a number of cash dividend payments made to shareholders.

Written by Nelly
Edited by Cris

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