Analysis of Financial Performance and Investment Decision Introduction

Analysis of Financial Performance and Investment Decision
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Introduction
The equity investors need variety of information to make investment decisions which are
provided through different financial reports. Primarily, it is required to analyze the financial performance
of the company which is done through ratio analysis. The ratio analysis report provides insight into the
profitability, l1iquidity, and solvency of the business (Schmidlin, 2014). Further, the ratio analysis also
provides a suitable basis for comparison with the industry peers. Apart from analyzing the financial
performance, it is also important to analyze the stock’s performance on the market index. For this purpose
security analysis report is produced. In this context, a report has been prepared presenting the financial
analysis of two companies namely CapitaLand Limited and JB Hi-Fi Limited. Further, the report also
provides recommendations to the investor in regards to investment in the stocks of these two companies.
Company-1: CapitaLand Limited
Description of Business and Analysis of Strategic Position
CapitaLand Limited having registered office in Singapore was founded in the year 1989. The
company is listed on the Singapore Stock Exchange. It is one of the biggest Asian companies engaged in
the business of managing real estate properties. The company develops and maintains real estate
properties in Singapore, China and other Asian countries. The product portfolio of the company includes
shopping malls, offices, complexes, and residential units. Further, the company also engages in the
investment activities through investment trusts and funds. The company was known as Pidemco Land
Limited Prior to the year 2000 when it changed its name (Capitaland, 2016).
The company gets an edge over its competitors due to quality management and availability of
resources in sufficient quantity. Further, the company is looking to expand the business which indicates a
great opportunity for the investors to earn money. The company is working on the mission of building
people and building communities. However, there is intense competition on the construction industry but
the company looks quite capable of beating the competitors with its strong strategies (Capitaland, 2016).
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Analysis of Financial Performance
The trend in profitability of the company could be observed to be declining over the period of
three years. The net margin which is one of the prominent ratios of profitability has declined from 44.84%
in 2014 to 28.64%. Further, the return on equity has declined from 7.58% in 2014 to 6.19% in 2016
(Appendix-1). The downfall in the net margins clearly indicates that the cost and expenses have increased
significantly over the period. Further, the declined return on equity shows that the company is not
performing well (Tracy, 2012). It has been observed that the profits of the company have declined despite
there been increase in the revenues over the period. The net profits of the company were $1,760 million in
2014 on the revenues of $3,925 million while these were $1,504 million on the revenues of $5,252
million (Appendix-1). The position of revenues and profits is presented in the chart shown below:
Figure 1: Revenues and Net Profit
In regards to liquidity, it has been observed that the current ratio increased in the year
2015 to 1.82 times from 1.65 times in 2014. The increase in the current ratio shows improvement
in the liquidity position. However, the company could not sustain increase in the current ratio in
year 2016; the ratio fell to 1.52 times (Appendix-1). The decrease in the current ratio indicates
that company’s liquidity deteriorated in the year 2016. The primary reason for decrease in the
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current ratio appears to be constant increase in the current liabilities. The current liabilities of the
company have increased constantly over the period of three years. The position as regards
current asset and current liabilities has been shown in the chart given below:
Figure 2: Current Assets and Current Liabilities
However, the quick ratio which indicates sufficiency of highly liquid assets has been
observed to be improving. The quick ratio was 0.56 times in 2014 which increased to 0.90 times
in 2016. The increase in quick ratio has been due to decrease in the inventories. The inventories
decreased from $7,674 million in 2014 to $4,837 million in 2016 (Appendix-1).
Further, the receivable days, payable days and asset turnover ratio have been analyzed to
assess the management’s efficiency in regards to utilization of the resources. The assets turnover
ratio has been observed to be increasing from 0.09 times in 2014 to 0.11 times in 2016 which
indicates improvement in the utilization of assets. The receivable days have increased from 89 in
2014 to 129 in 2016 (Appendix-1). The increase in the receivable days shows that the
management has been liberal in relation to receivables credit policy. The payable days have also
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