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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

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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

Running head: PROJECT 1 Figure 2.1 Inventory Turnover Ratio Accounts Receiveable Operating Profit Margins Days Sales in Inventory Days Outstanding Sales 0 20 40 60 80 100 120 3. How is LGI doing in terms of using assets efficiently? How would you assess it compared to its main competitor and the industry index? What are the principal areas that need to be addressed to strengthen the left-hand side of its balance sheet? Identify and use key indicators from all three analyses that provide insight into LGI's assets. [HINT: The focus of this question is the firm’s assets, excluding current assets] The Largo Global Inc. (LGI) endures and faces concerns regarding their asset efficiency compared to the main competitor and industry index. The company’s asset utilization and Project 1 5

Running head: PROJECT 1 efficiency metrics suggest that there are areas of improvements that can align their standards and overall performance. The total asset turnover (TAT) and fixed asset turnover ratios are significantly lower than the industry benchmarks. With these lower ratios, it can indicate that the company needs to generate more of their sales in which can be relative to its asset base (Brealey et al., 2011, Chapt 04). For the course of three years, Largo Global Inc. (LGI), their total asset and fixed asset turnover ratio showed a decline, showed an indication of their asset efficiency in comparison to the main competitor and industries’ index. Based off the information shown in Figure 3.1, it shows the total asset’s turnover decreasing from 0.82% in 2021 to 0.51% in 2023, showing it way below the industries’ benchmark of 0.09%. With these numbers, from Figure 3.1, its clearly states the decline could implement that there were less efficient use of assets in the generating sales. Figure 3.1 Total Asst PP&E Cash 0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 Large Global Inc. (LGI) should optimize the use of their fixed assets and increase sales efficiency to better their improvement of asset efficiency. In addition, the company should have Project 1 6

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Running head: PROJECT 1 their focus on enhancing the management of PP&E and exploring new investment opportunities to enhance asset returns significantly. In 2021, Figure 3.1 shows the proportion of net property, plant, and equipment to their total assets increasing to 41.11% and in 2023 to 48.57%. Due to this shift, the higher the investment within the PP&E, it could ideally lead to an increase in efficiency. Decreasing the total asset turnover can imply that this may need improvement in their performance. The company should take the time to really review the fixed assets utilization to enhance the efficiency and venture into new investment opportunities that can generate high assets returns. With addressing these areas, it can strengthen the left side of the balance sheet and improve the overall performance. 4. How is LGI doing in terms of financial leverage? How would you assess it compared to its main competitor and the industry index? What are the principal areas that need to be addressed to strengthen the right-hand side of its balance sheet? Identify and use key indicators from all three analyses that provide insight into LGI's debt and equity mix. [HINT: The focus of this question is the firm’s liabilities and equity, excluding current liabilities] Largo Global Inc. (LGI) endures and faces financial leverage that’s significantly higher than its main competitor in addition to its industry index. This leverage indicates a greater reliance on the debt financing. Based off the information shown in Figure 4.1 shows that the company’s total debt ratio, debt-to-equity ratio, and equity multiplier are higher than the industries benchmarks. With these metrics, it points to an increased reliance on the debt financing over equity, therefore may unfold the Largo Global Inc. (LGI) to a greater financial risk (Brealey et al., 2011, Chap 04). In Figure 4.1, it shows the companies debt-to-equity ratio went up slightly from 0.30% in 2021 to 0.33% in 2023, therefore surpassing the industries benchmark of 0.27%. With the information in Figure 4.1, indications show that there’s an increase use of debt to finance within the operations. The equity multiplier clearly shows it is higher compared to the industry average, Project 1 7

Running head: PROJECT 1 in which makes a suggestion that the company employs higher financial leverage. In addition, Largo Global Inc. (LGI) could manage their debts more effectively and optimize the debt-to- equity mixture in coherence to lower the financial risks within the company. A suggestion could be made that of improving the debt-to-equity ratio on the right-hand side of the balance and ensure a better enhancement for the improvements of the companies economic stability. In conclusion, the company should mainly focus on better managing their debt levels and improve the debt-to-equity ratio. Hypothetically, if no improvements are being made this could potentially impact the company significantly. Figure 4.1 2023 2022 2021 0 1 2 3 4 5 6 Project 1 8

Running head: PROJECT 1 5. Based on LGI's financial strengths and weaknesses, how would you prioritize actions that will ultimately satisfy LGI's shareholders? Make specific recommendations that identify the decisions LGI's board and executives must make. What actions do they need to take? Set quantifiable targets and objectives for LGI. Your answers must be supported by all arguments developed in questions 2, 3, and 4. In addition, make sure you use data that has not been used in previous questions. [HINT: Be strategic, as you will revisit this question when you reach the last project of this course. Based on the data from LGI’s financial strengths and weaknesses, there comes to show several strategic actions that could be recommended to accommodate LGI’s shareholders and improve the overall company health. Largo Global Inc. (LGI) should show their strategies to control the cost of goods sold (COGS) and their operating expenses. With this action it could improve the cost management by enhancing the profitability and address the declining profit margins. The company can enhance their asset utilization, which could essentially improve and strengthen the left-hand side of the balance sheet. By slowly lowering the debt levels and improve the debt-to-equity ratio it will help the decrease of financial risk and increase stability within LGI. It is best to ensure to focus solely on debt management in which this could strengthen the right-hand side of the balance sheet. Largo Global Inc. (LGI) should improve their sole focus on capital management and increase their short-term assets to enhance their liquidity. By improving the current ratio within the company, it will be an achievable goal to the industry benchmark levels. For short-term improvements, LGI could improve their current ratio to industry benchmark levels of 1.92% within a year and increase their profit margin at most of 8% within the fiscal year. Extending the short-term improvements can be beneficial to enhance and improve inventory as well as the industry benchmark levels by 5.37% in about two years, at most. Long- term improvements for the company could lead to a reduction of debt-to-equity ratio to about 0.25% within the next three years so it can match up with the industries’ standards. Project 1 9

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Running head: PROJECT 1 In summarization, if everything falls into place, these actions and goals will ensure the strengthening of the companies’ financial health and match up with the shareholders interests. With these reports, it provides extensive and adequate information including data that shows an analysis of the companies’ health while focusing on the areas that are deemed critical. The areas include operating efficiency, asset efficiency, and financial leverage; which are considered crucial within this type of manner. With focusing on these particular areas of recommendations for LGI, one can ensure such an improvement within the economic perspective as well as increasing numbers of shareholders. References Brealey, R. A., Myers, S. C., & Marcus, A. J. (2011). Fundamentals of Corporate Finance Chapt 04 (8th ed.). Retrieved from https://learning.oreilly.com/library/view/fundamentals-of- corporate/9780470876442/15_chapter04.html#ch4-sec038 Brealey, R. A., Myers, S. C., & Marcus, A. J. (2011). Fundamentals of Corporate Finance, Chapt 03 (8th ed.). Retrieved from https://learning.oreilly.com/library/view/fundamentals-of-corporate/ 9780470876442/14_chapter03.html#ch3-sec001 Project 1 10

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