Whether the ROCE ratios are favourable or unfavourable? Why?
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Dr. Feng wants to invest in the Australian mining sector. The following list of companies has been provided to you for your analysis of their performance and position in order to evaluate whether these companies appear to be in financial difficulties and which company is the best investment option (use the 2016, 2017, 2018, 2019, 2020 data).
We know that:
BHP Group Ltd
ROCE in 6/2016 = 21.2%
ROCE in 6/2017 = 26.7%
ROCE in 6/2018 = 40.4%
ROCE in 6/2019 = 42.1%
ROCE in 6/2020 = 37.6%
Rio Tinto Ltd
ROCE in 12/2016 = 14.8%
ROCE in 12/2017 = 23.9%
ROCE in 12/2018 = 27.2%
ROCE in 12/2019 = 32.3%
ROCE in 12/2020 = 32.4%
Fortescue Metals Group Ltd
ROCE in 6/2016 = 18.9%
ROCE in 6/2017 = 40.6%
ROCE in 6/2018 = 22.8%
ROCE in 6/2019 = 62.9%
ROCE in 6/2020 = 80.5%
Required:
• Whether the ROCE ratios are favourable or unfavourable? Why?
• Whether the MDA approach will be useful in predicting financial failure in terms of the trends shown? Why?
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