RELIANCE STEEL AND ALUMINIUM CO.

TASK-1 ANALYSIS OF THE FINANCIAL STATEMENTS Financial statement analysis is demarcated as the process of identifying the fortes and flaws of any organization by careful study of firm s financial tools such as profit and loss account, balance sheet, and comparative income statement. However certain methods are used to analyze financial statement, these methods can be ratio analysis, trend analysis, funds analysis or study of schedule of working capital. Financial statements are primed to make the external and internal sources aware about the fact what work the firm is carrying on. It also helps in decision making through careful analysis and interpretation of financial statements. Although these statements have a asserting effect on decisions taken by the management, but on the basis of these statements only the conclusion cannot be drawn, better explanation regarding this, we would take an example of Reliance Steel And Aluminum co. for the year 2008-09. Very first thing that came to our mind is that the gross profit of the company has declined from $216mn to 139mn in 2009, which means about 19.3% decline in the gross profits of the company. However the net income available for shareholders of the company is $148mn as compared to $482mn in year 2008, counting to 69.29 % decrease. The year 2009 was the company s 15th year as a public company listed on New York stock exchange. The company generated record cash flow from operations i.e. worth $943mn and helped that to pay about $830mn of debt. The company s net debt to equity ratio was 25% on 31st December, 2011 which was brought down from 41.4% on 31st December, 2008. The company was also able to reduce its same-store operating expenses by $258mn or 22% in 2009. Coping with one of the worst economic downturns of 2009, the company was able to get the earnings per diluted share of $2.01 in year 2009, as compared to the record earnings of $6.56 per diluted share in 2008. Sales of the company were $8.72bn in 2008, which fell down to $5.32bn or 39%. The gross profit margin in 2009 was 26.3% of sales, as compared to 24.8% in 2008. The sales included a LIFO (last in first out) credit, or income, of $305mn against the LIFOcredit expense, of $109.2 million in 2008. The company aggressively began to reduce their operating expenses in the form of personnel and reduced its workforce by about 2500, means 22%. However the management team of the company did an excellent job producing a record cash flow and paying an outstanding amount of $115mn on $i.1bn credit debt availed in previous years. The board of directors declared a dividend of $.10 per share of common stock. The company has been successfully paying quarterly dividend payment for 50 consecutive years, with a total increase in 15 times as compared to 1994 IPO. Also the revenues have increased from $447mn in 1994 to $5.32bn in 2009. And the stock price has increased at a rate of 18% since 1994.

On analyzing the balance sheet data, we found that the current assets of the company were reduced from $2.3mn in 2008 to $1.3 in 2009, which means 43.47 % fall in just 1 year. Also the working capital of the company has been reduced to .93mn from 1.6mn of 2008, leading to a downfall of approx. 41.8%. The main reason behind this entire downfall was the challenging times of economic recession, which made it difficult for survival for a lot of companies but the company not only survived but became smarter and stronger along the way. The key to success has been customer service and quality of product. KEY RATIOS: 1. CURRENT RATIO The standard current ratio should be 2:1, but the Reliance steel and aluminum has maintained a current ratio of 3.3:1, which implies that for every $1 of current liability, the company holds $3.3 of current assets, which is exceptionally well. CURRENT RATIO= CURRENT ASSETS/ CURRENT LIABILITIES =3.3 2. NET DEBT-TO-EQUITY RATIO The net debt-to-equity ratio of a company shows the amount of shareholders equity of a company as compared to the outsiders borrowed funds. The greater the percentage, greater is the position of the company in totality. NET DEBT-TO-EQUITY RATIO= TOTAL DEBTS\TOTAL EQUITY*100 =25.6% 3. GROSS PROFIT RATIO The gross profit ratio shows the gross profit percentage as compared to the sales of the company. GROSS PROFIT RATIO= GROSS PROFIT/NET SALES*100 = 26.3% HOW TO IMPROVE THE FINANCIAL STATEMENT Till now what we have studied shows that the company has been doing fair affair in the recent years. They only Problem Company has faced is of the lessening of profits which is the reason of global recession only. And to overcome this problem the company had also issued equity shares to the public in year 2009 itself. However the company has reduced the total assets to a little extent maybe so as to cover the expenses of the business. The net income per share has come down to $2.01 from last year s $6.56, which is a thing of concern for the company. The company needs to pay attention on this thing seriously, as it would affect the company s goodwill in the stock market

because the shareholders would not be willing to buy shares of the company at times of recession. In the year 2009, the best thing company did was to reduce the long term debts at a rate of almost 50% , which not only led the people s faith in company but also saved a lot of interest which is to be paid on those debts.

TASK 2 WHEHTER RELIANCE STEEL AND ALUMINIUM SHOULD MAKE A NEW INVESTMENT OR NOT To answer the question that whether the company should invest in future or not largely depends upon the working of the company and also on the capabilities of the managers. But before any company invests in the long term assets, it needs to do a full analysis of that investment, how much is it beneficial for the company and also which one plan is the best among all. For investment purposes every company has a lot of options in front of it, they may invest in plant and machinery, land and building, new technology, or may be a new acquisitions. However, it is not an easy thing to decide between all these, as the company wants to maximize its profits. From the above mentioned list of assets, the cost involved in each of the assets is calculated by professional financial investors. Then a technical feasibility survey is done and a feasibility report is prepared. This report contains the issues like amount of investment involved, expected life of the project or investment, expected rate of return, the time period within which the cost implied will be returned. This report is important to prepare before investing anywhere because the investment require a lot of money involved in it. And this money will be blocked for a lot of time till the company gets to earn after achieving the break-even point. Also to find out the utility of the asset we used FIXED ASSETS TURNOVER RATIO. This ratio gives us an idea of the how many times the fixed assets are utilized to reach the required sales of the company. In case of Reliance Steel & Aluminum, the ratio is 18.41 times of sales, which implies that the company is using 18.41 times of its fixed assets to achieve the sales of the company. It also tells us the relation between total assets and the proprietary fund. It tells us that how much is the values of proprietor s funds that is put into the company for the purpose of financing the total assets in the company. However it is imperative to know all these things. On analysis of these terms it is decided that that the expected rate of return on this investment has to be at least 20-25%, in order to prosper in future. However, it is upon the management to decide whether company should choose equity financing or debt financing, in further the long term debts or short term debts or equity is to be decided upon. Here, it s important to mention that short term debts means those debts which are for less than one year and long term debts are those which are for a period of more than one year, it may be of ten to thirty years. However both these inputs of finance have their own pros and cons, on debts the company has to pay certain interest, which can be a severe headache, and on issue of equity, the company has to loose, its ownership in form of owners. Also, both these measures depend upon the company s goodwill in the market.

Next, the normal return has to be planned using the arithmetical weighted average method. In which the likelihood of return is acting as weight.to decide upon the total cost of project and ordinary return of each asset, we can weight against all the substitutes of assets. And then the asset needs to be selected which can give us the maximum encouraging income and also employ a sensible total cost. That thus the best asset can be chosen by the management.