P1_Final_Dowe_Report_1-23-24

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2222 Project 1 Report Instructions: Answer the five questions below. They focus entirely on the financial health of Largo Global Inc. (LGI) based on the three years of income statement and balance sheet data provided in the Excel workbook. Base your analysis only on the financial statements provided in the Excel workbook. Provide support for your reasoning from the readings in Project 1, Step 1, and the discussion in Project 1, Step 3. Be sure to cite your sources. Provide a detailed response below each question. Use 12-point font and double spacing. Maintain the existing margins in this document. Your final Word document, including the questions, should not exceed 5 pages. Include a title page in addition to the five pages. Any tables and graphs you choose to include are also excluded from the five-page limit. Name your document as follows: P1_Final_lastname_Report_date. You must address all five questions and make full use of the information on tabs 2–4 as well as the competitor and industry data in the Excel workbook (ratio, common-size, and cash flow analysis). You are strongly encouraged to exceed the requirements by refining your analysis. Consider other tools and techniques that were discussed in the required and recommended reading for Project 1. This means adding an in-depth explanation of what happened in the three years for which data was provided to make precise recommendations to LGI.

011022 Title Page Dominic Dowe Financial Decision-Making MBA 620 Richard Works 1/23/2024

2222 Questions: 1. How would you assess the overall financial health of Largo Global Inc. (LGI)? You will need to provide a broad view of the main trends that emerge from your analyses of the information in tabs 2, 3, and 4. Your key findings should be synthesized and highlight a clear diagnostic of LGI's financial strength and/or weakness. [HINT: all 5 questions are interrelated and may sometimes build on each other – it is imperative that you develop a “blue- print” or an outline of what you are answering for each question. Do not answer each question independently as if they were not connected. You should not be redundant but should make sure that you are judiciously coordinating these 5 questions. Question 1 and 5 should be providing the introduction and conclusion of your analysis. Questions 2, 3, and 4 should be providing the “body” or development of your analysis – with a focus on operations, investing, and financing] In regard to overall financial health, Largo Global Inc. appears to be in decline from 2020 to 2022, with some significant points of concern. The first concern is that profitability has decreased, with the Net Income decreasing from $325 to $114 from 2020 to 2022. There has ben an increase in cash flow but the increase in accounts payable offsets this. There is a risk that LGI would be depleting too much cash and begin relying on its ability to leverage accounts receivable to address the current debts. The company's profitability ratios reflect a decline from 11.89% to 5.66% over the last few years. Not only is this a significant drop for LGI, but it is also below the industry benchmark, which would not make LGI a stronger competitor. 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 need to be addressed to strengthen LGI' s bottom line? Identify and use key indicators from all 3 analyses that provide insight about LGI's operations. [HINT: Focus of this question is the Income Statement and the Net Working Capital (NWC) as it relates to Current Assets and Current Liabilities] LGI has suffered a decline in its operating efficiency. One weakness of LGI contributing to its decline in profitability is the large stockpile in inventory. In 2022 the 'day's sales in inventory' reached its highest point in the last several years at 105.33, which is more than double

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the rest of the competition in the industry. Since the day's sales in inventory rose over the three years, the operational effectiveness and efficiencies of LGI regarding inventory should be examined further. The day’s sales in inventory has increased to a point of being inefficient. The accounts receivable turnover has also declined over 6% in three years and is greatly behind the industry benchmark. The days sales outstanding has increased beyond the industry benchmark as well which is concerning to LGI’s bottom line. It has also become more costly for LGI to sell its goods. There needs to be a focus placed on why selling, and general, and administration expenses increased 2.21% in 2022 when it was only up .67% from 2020 to 2021 . 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 3 analyses that provide insight about LGI's assets. [HINT: Focus of this question is the firm’s assets excluding current asset] There is some reason why LGI has an inventory buildup and accumulation in accounts receivable. The accumulation in accounts receivable and the inventory buildup leads to an inefficient use of assets. LGI is well behind the industry benchmark in the assets category, and it there is no indication of the main competitor. To address the left-hand side of the balance sheet, LGI would need to focus on collecting the accounts receivable in a timelier manner. LGI has made it a focus to invest in property equipment. However, a team needs to be engaged to investigate whether these assets are an investment or liabilities that should be liquidated to recover cost and strengthen cash. 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 3 analyses that provide insight about LGI's debt and equity mix. [HINT: Focus of this question is the firm’s liabilities and equity excluding current liabilities] It seems that LGI is in a solid position in its ability to use its financial leverage. Liabilities have increased from 22.99% to 24.62%, but these increases are outweighed by the increase in property, plant, and equipment assets. LGI has created a buffer with assets that can be liquidated should a financial crisis occur. Total Stockholder’s equity has also increased over the last three years, which shows that LGI’s financial leverage has been used well. This is very important as stockholders must be confident in the company as they are mainly concerned with the value of the stock and what the can expect to receive over time (4: Analyzing Financial Statements, 2022). Although LGI’s main competitor is not listed, the company is still behind on industry standards. 5. Based on the financial strengths and weaknesses of LGI, how would you prioritize actions that will ultimately satisfy LGI' s shareholders? Make specific recommendations that clearly identify the decisions LGI' s board and executives need to 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 not already used in previous questions. [HINT: Be strategic as you will revisit this question when you reach the last project of this course.] After performing a financial analysis of LGI, I would recommend LGI to lay out a strategic financial plan that contains measurable goals, objectives, and milestones to be reached within the next two to three years. A strategic plan will allow LGI to establish key performance indicators that need to be present now and ideas that help the company reach and surpass industry benchmarks. LGI should employ an outside consultant firm to investigate the company's operational effectiveness and efficiencies regarding inventory overages. The corporation should have a clear plan established for the company inventories and, possible liquidation of excess

inventory into cash. An area that should be reviewed for meeting forecasts is selling, general, and administration expenses as this eats too much into the companies profits. I also recommend that LGI review the management of company assets and address the assets that should be performing up to standards. A review of how collections of accounts receivable are controlled and maintained should also take place.

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References 4: Analyzing Financial Statements. (2022). Fundamentals of Corporate Finance, Second Edition . O’Reilly Online Learning. https://learning.oreilly.com/library/view/fundamentals-of-corporate/ 9780470876442/15_chapter04.html#ch4-sec001

P1_Final_Dowe_Report_1-23-24

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