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Running head: PROJECT 1 Mickayla S. Collins University of Maryland Global College MBA 620 9045 Financial Decision Making (2242) Professor Sungsoo Kim 23 April 2024 Project 1 1
Running head: PROJECT 1 1. How would you assess the overall financial health of Largo Global Inc. (LGI)? You must provide a broad view of the prominent trends that emerge from your information analyses in tabs 2, 3, and 4. Your key findings should be synthesized and highlight a precise diagnostic of LGI's financial strengths and weaknesses. [HINT: all five questions are interrelated and may sometimes build on each other – it is imperative that you develop a “blueprint” or an outline of what you are answering for each question. Do not answer each question independently as if they were not connected. It would be best if you were not redundant, but you should make sure you are judiciously coordinating these five questions. Questions 1 and 5 should provide the introduction and conclusion of your analysis. Questions 2, 3, and 4 should give the “body” or development of your analysis – with a focus on operations, investing, and financing] Based off the information from Figure 1.1, Largo Global Inc. (LGI) exhibited a mixed financial health profile in addition to a mixture of strengths and weaknesses combined. This company experienced several declines within the key financial metrics, in which suggests potential changes in their efficiency and profitability. The sales and net income showed several things that occurred within three years. Within the three years, Figure 1.1 shows LGI’s net sales remaining stable and without any growth present. Even though, Figure 1.1 verifies the net income showing a slight decrease in 2022 at $203 and in 2023 at $11, it shows a 43.9% decline within their income. With this drop in net income, it could potentially be due to the reasoning of rising costs or inefficiencies, which could lead to a negative impact of profitability. Figure 1.1 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% 2021 2022 2023 Project 1 2
Running head: PROJECT 1 Profitability ratios, including profit margin showed 5.66% in 2023, compared to 8.29% in 2022, then 11.89% in 2021. The operating profit margin showed 15.60% in 2023, compared to 18.16% in 2022, then 22.61% in 2021. With the data shown, it showed a consistent decline and these trends suggest that the company alone is facing challenges within their cost control and maintaining profitability (Brealey et al., 2011, Chapter 04). On LGI’s return on equity cost, one can see that it steadily decreased over the past three years. In 2021, Figure 1.1 shows the return on equity (ROE) was 12.68%, but slightly dropped to 7.47% in 2022, then in 2023 to 3.81%. Due to the declining trend, this can certainly raise concerns about the company’s ability to generate their returns on shareholders equity as a whole (Brealey et al., 2011, Chap 03). The LGI’s liquidity ratio includes the total debt ration, debt to equity ratio, and equity multiplier, in which showing they’re higher than the industry benchmarks. With having the higher leverage, this may offer short-term advantages in which can do more harm than good to the company’s long-term financial health. The higher the levels of leverage, it can increase the risk and exposure of the company’s interest rates. In summarization, LGI’s overall financial health can be quite the concern due to the reasoning of the company’s decline in profitability, net income, and return on equity (ROE). The company should have their sole focus on strengthening these particular areas to ensure the enhancement of their financial stability and performance as a whole. 2. How is LGI doing in terms of operating efficiency? How would you assess its performance compared to its main competitor and the industry index? What are the principal areas that must be addressed to strengthen LGI's bottom line? Identify and use critical indicators from all three analyses that provide insight into LGI's operations. [HINT: The focus of this question is the Income Statement and the Net Working Capital (NWC) as it relates to Current Assets and Current Liabilities] The Largo Global Inc. (LGI) shows experiences of a decline within their operating efficiency in the duration of the last three years, leading to a negative impact in their profitability Project 1 3
Running head: PROJECT 1 and performance in comparison to the industry benchmark. Even though the LGI’s net sales remained the same, the cost of goods sold (COGS) showed an increase leading to a lower gross profit margin. From the rising selling, general, and administrative expenses, it furthers the company’s operating profit margins and suggesting the need for a better cost control overall (Brealey et al., 2011, Chap 04). The company’s net working capital declined by the reduced driven of the current assets. This trend may obstruct the company’s ability to control and manage the short-term obligations effectively and efficiently. In Figure 2.1, LGI’s inventory turnover ratio showed a decline in 2021 at 5.06% compared to 3.47% in 2023, whereas the sales in inventory made a drastic increase from 72.17% to 105.33%. Based off these trends, it indicates the inefficiencies in their managing inventory. In addition, Figure 2.1 information shows the accounts with a turnover decreasing numbers to 17.4% in 2021, 10.91% in 2023, therefore leading to the result of longer outstanding sales of 20.97% in 2021 and 33.45% in 2023. With this information, it makes the suggestion of challenges throughout the collecting customer receivables. The company’s operating profit margin shows a decrease from 22.61% in 2021 to 15.06% in 2023, falling below the company’s industry profit margin. This decline between the two-year gaps reflects the reduction in the company’s operational efficiency compared to the industry standards. With the lack of control, it can lead to the rising of production cost, inefficient allocations of resources, or increased administrative overheads. Overall, one can believe that the company must improve their operational efficiencies to strengthen the bottom line shown in Figure 2.1. A suggestion could be improving their performance and competiveness by enhancing cost control, more so in the cost of goods sold (COGS) as well as the operating expenses, and better managing tactics in inventory and accounts receivable. Project 1 4
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