Business Finance: Analysis of Performance Ratios for Commonwealth Bank

This article provides an analysis of performance ratios for Commonwealth Bank, including liquidity ratio, solvency ratio, asset utilization, and profitability ratios. The article also includes a brief description of the company, its core activities, competitive advantages, and the banking industry in Australia.

Running head: BUSINESS FINANCE
Business Finance
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Table of Contents
1. Description of the companies......................................................................................................3
Brief Description of the Company...............................................................................................3
Core Activities.............................................................................................................................3
Competitive Advantages..............................................................................................................3
Banking Industry.........................................................................................................................4
2. Calculation and analysis of performance ratios...........................................................................5
Short term solvency.....................................................................................................................5
Current Ratio...........................................................................................................................6
Times interest earned...............................................................................................................7
Long term solvency.....................................................................................................................7
Total Debt to Total Assets.......................................................................................................8
Debt Equity Ratio....................................................................................................................9
Asset utilization.........................................................................................................................10
Assets Turnover.....................................................................................................................11
Receivables Collection Period...............................................................................................12
Profitability Ratios.....................................................................................................................12
Cash return on sales...............................................................................................................13
Gross Profit Margin...............................................................................................................14

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Net Profit Margin...................................................................................................................15
Return on assets.....................................................................................................................16
Market Value Ratios..................................................................................................................16
Price Earnings Ratio..............................................................................................................17
Payout Ratio...........................................................................................................................18
Earning Price Per Share.........................................................................................................19
3. Graphs and comparison of share price movements...................................................................19
References......................................................................................................................................23

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1. Description of the companies
Brief Description of the Company
Commonwealth of Australia was established in accordance to the Commonwealth Bank
Act 1911. Commonwealth Bank is considered to be having sufficient savings pertaining to the
general business in the bank. The initiation of the bank was further depicted in terms of
receiving a federal government guarantee. The earliest and strenuous proponent is further seen to
be flamboyant among the American-Australian politician, King O'Malley (Commbank.com.au
2018).
Core Activities
The key financial activities of the bank are seen to be based on various types of the
financial services. This is seen to be included in terms of the financial services including the
retail, funds management, institutional banking and broking services. The bank is also
recognized as one of the largest listed Australian company including the several types of the
brands pertaining to Commonwealth Insurance, Bankwest, Colonial First State Investments,
ASB Bank (New Zealand) and Commonwealth Securities (CommSec) (Commbank.com.au
2018).
Competitive Advantages
The important factors associated to the competitive advantage for the company needs to
be identified with the visionary, creative and agile initiatives. The disruptors of the company are
also considered with fresh thinking and appetite for growth. The proactive and positive change
has been also seen to be major facilitator of the competitive advantage. It needs to be also seen

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that the harnessers are able to improve the overall business and also pus the optimization process.
The competitive advantages need to be also considered with the approach taken by the policy
adopters. These strategies are evident with a cautious focus on the innovation and the changes.
The reluctant nature of the adopters has been further seen with reluctant need for the reassurance
and evidence. The maintenance of the complacent resistors is also depicted with competitive
advantage (Commbank.com.au 2018).
Banking Industry
It needs to be discerned that banking in Australia mainly dominated by four major banks
includes National Australia Bank (NAB), Westpac Banking Corporation, Australia and New
Zealand Banking Group and Commonwealth Bank of Australia. In addition to this, there are very
small and medium players were associated to financial services such as providing limited
banking type services including mutual banks, unions of credit and building of society. These
types of service are often identified as deposit taking institutions. Moreover, several foreign
banks have been also depicted with presence of having retail banking experience. In general, the
banks are required to adhere to the Banking Act 1959 in order to get the license for banking.
Moreover, the foreign banks need to maintain the license through several branches in Australia
which are incorporated as foreign subsidiary banks and complying with religious charitable
development funds and several types of other requirement for license. It needs to be also
understood that Australia is comprised of a sophisticated, profitable and competitive financial
sector along with the strong regulatory system. In the last decade, Commonwealth Bank was
ranked first by Bloomberg with a total riskless adjusted ratio of 18%. Westpac bank on the other

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hand is determined to be having 11% of riskless return. Similarly, Australia and New Zealand
bank is identified with 8.7% of riskless return ranking (Rebello 2016).
2. Calculation and analysis of performance ratios
Short term solvency
Liquidity ratio or short-term solvency ratio acts as a financial metrics for the ability of the
debtor to pay off the debt obligations by ensuring no withdrawal of external capital. This ratio is
able to quantify the debt obligations of the company along with its margin of safety by including
measures such as current ratio, operating cash ratio and quick ratio (Accounting Management
2015). The computation of short-term analysis for Commonwealth Bank has been considered
with identifying the current assets, liabilities, EBIT and interest expense which is conducive for
competition of current ratio and Times interest earned. The current assets of the company are
seen as cash and liquid assets which amounted to $ 45,850m in $ 2017m in 2016. The current
liabilities have included items such as payables due to other financial institutions and deferred
tax liabilities (Paramasivan and Subramaniam 2014).
Liquidity Ratio Analysis: -
Commonwealth
Bank
2017 2016
Total Current Assets (A) 45850 23372
Total Current Liabilities (F) 29882 29793
EBIT (D) 13944 12849
Interest Expense (E) 15693 16882
Current Ratio (A/F) 1.53 0.78
Times interest earned (D/E) 0.89 0.76

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Table 1: Liquidity Ratio Analysis of Commonwealth Bank
(Source: Commbank.com.au. 2018)
Current Ratio
The total current ratio for the bank was computed to be 1.53 in 2017 and 0.78 in 2016.
This shows that there is a significant improvement in the cash reserves and liquid assets of the
company in 2017 when compared to 2016. This is also evident with decreasing amount of
payables due from other financial institution. This is clearly evident from the annual report states
that payables due to other financial institutions was $ 28,771m in 2016 and it reduced to
28,432m in 2017 (Australian Office of Financial Management 2016).
2017 2016
0.00
0.20
0.40
0.60
0.80
1.00
1.20
1.40
1.60
1.80
1.53
0.78
Current Ratio
Commonwealth Bank
Figure 1: Current Ratio of Commonwealth Bank
(Source: Commbank.com.au. 2018)
Times interest earned
The times interest earned is computed by dividing the EBIT amount by interest expense.
The increasing times interest earned ratio clearly shows increasing ability of the bank to honor its

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debt payments. This is evident with times interest earned ratio of 0.76 in 2016 which increased to
0.89 2017.
2017 2016
0.65
0.70
0.75
0.80
0.85
0.90
0.95
0.89
0.76
Times interest earned
Commonwealth Bank
Figure 2: Times interest earned ratio of Commonwealth Bank
(Source: Commbank.com.au. 2018)
Long term solvency
The solvency ratio of the company acts as the key metrics to check whether a it is able to
meet the debt and other types of obligations associated to payments. The main indications under
the solvency ratio states whether cash flow is sufficient in nature to adhere to the long-term and
short-term liabilities. In general, the lesser is the solvency ratio of the company, the better are the
chances to reduce the defaults associated to debt obligations. The computation of solvency ratio
for Commonwealth Bank is depicted with shareholders equity, total debt and total assets (Office
of Financial Management 2016).
Solvency Ratio Analysis: -

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Commonwealth
Bank
2017 2016
Shareholder's Equity (B) 63716 60564
Total Debt (D) 912658 872437
Total Assets (E) 976374 933001
Debt Equity Ratio (D/B) 14.32 14.41
Total Debt To Total Assets (D/E) 0.93 0.94
Table 2: Solvency Ratio Analysis of Commonwealth Bank
(Source: Commbank.com.au. 2018)
Total Debt to Total Assets
The total debt to total assets is the percentage of total assets it was actually financed by
the creditors of the bank. The total debt for the company in 2016 is noted as $ 872,437m which
increased to $ 912,658m in 2017. However, the significant rise in the total liabilities was backed
up by increasing total assets which was evident with $ 933,001m in 2016 which increased to $
976,374 in 2017. Therefore, the computation of total debt to total assets has shown a decrease of
0.94 in 2016 to 0.93 in 2017 which clearly indicates a better long-term solvency prospects for
Commonwealth Bank (Paramasivan and Subramaniam 2014).

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2017 2016
0.93
0.94
0.94
0.93
0.94
Total Debt To Total Assets
Commonwealth Bank
Figure 3: Total Debt to Total Assets of Commonwealth Bank
(Source: Commbank.com.au. 2018)
Debt Equity Ratio
The debt to equity ratio identifies the appropriate proportion of debt used as per the
shareholders equity in order to finance the assets of the company. The total amount of
shareholders’ equity is noted as $ 60,564m in 2016 which increased to $ 63,716m in 2017.
However, the increasing amount of total debt is a major concern for future prospect. Therefore,
despite of decreasing debt equity ratio in compared to 2016, a high proportion of 14.32 needs to
be brought down to a significantly lower level (Inclusion 2014).

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2017 2016
14.28
14.30
14.32
14.34
14.36
14.38
14.40
14.42
14.32
14.41
Debt Equity Ratio
Commonwealth Bank
Figure 4: Debt Equity Ratio of Commonwealth Bank
(Source: Commbank.com.au. 2018)
Asset utilization
The typical categorization of efficiency ratio is comprised of elements such as
repayments of liability, receivables turnover, usage of equity and general use of machinery or
inventory. In case of Commonwealth Bank the efficiency, ratio elements are comprised of
revenue, average total assets and Receivables due from other financial institutions. The main
computation of efficiency ratio includes asset turnover ratio and receivables collection period
(Healthcare, Management and Global 2015).
Efficiency Ratio Analysis: -
Commonwealth
Bank
2017 2016
$m $m
Revenue (A) 23120 21795
Receivables due from other financial institutions
(B) 10037 11591
Average Total Assets (F) 976374 933001

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Assets turnover (A/F) 0.024 0.023
Receivables Collection Period (365/(A/B)) 158 194
Table 3: Efficiency Ratio Analysis of Commonwealth Bank
(Source: Commbank.com.au. 2018)
Assets Turnover
The asset turnover for Commonwealth Bank has been identified with use of company’s
assets in generating its revenue. Based on the findings from the annual report it is clearly seen
that the asset turnover ratio has increased from 2016 to 2017. This shows that companies in a
better position to use its assets such as deposits and use them in an efficient manner in revenue
generating tools such as disbursing loans to reliable parties (Fernandes, Lynch and Netemeyer
2014).
2017 2016
0.023
0.024
0.024
0.024
0.023
Assets turnover
Commonwealth Bank
Figure 5: Assets turnover Ratio of Commonwealth Bank
(Source: Commbank.com.au. 2018)

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Receivables Collection Period
The receivables collection period or the average collection period is the average number
of dayson which credit sale is made or monies received from a customer. The important nature
of receivables for the bank needs to be identified with the receivables which are due from other
financial institutions. The decreasing amount of time for receiving the debt obligations in 2017 is
depicted as a positive sign (Singapore Management University 2016).
2017 2016
0
50
100
150
200
250
158
194
Receivables Collection Period
Commonwealth Bank
Figure 6: Receivables Collection Period of Commonwealth Bank
(Source: Commbank.com.au. 2018)
Profitability Ratios
Profitability ratio is considered as an important financial tool to assess earning capability
of the business in compared to expenses.
Profitability Ratio Analysis: -
Commonwealth
Bank
Particulars 2017 2016

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$m $m
Revenue (A) 23120 21795
Net Profit/Loss (D) 9928 9228
Avg. ordinary shareholders
equity(H) 63716 60564
Gross Profit (B) 13832 13057
Net cash from operating activities
(E) 25940 24606
Average Total Assets (F) 976374 933001
Net Profit Margin (D/A)
42.94
% 42.34%
Return on Equity (A/H) 16% 15%
Gross Profit Margin (B/A) 60% 60%
Cash return on sales (E/A) 112%
112.90
%
Return on assets (D/F) 0.010 0.010
Table 4: Profitability Ratio Analysis of Commonwealth Bank
(Source: Commbank.com.au. 2018)
Cash return on sales
The cash return on sales ratio indicates the amount of money a business is able to
generate in terms of sales revenue. It can be clearly seen that there has been a slight decrease in
this ratio in 2017 when compared to 2017.

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2017 2016
111%
112%
113%
112.20%
112.90%
Cash return on sales
Commonwealth Bank
Figure 7: Cash return on sales of Commonwealth Bank
(Source: Commbank.com.au. 2018)
Gross Profit Margin
This ratio is conducive in assessment of financial health as per the proportion of money
left from the revenues pertaining to cost of goods sold. The gross profit margin is seen to
decrease slightly from 59.91% in 2016 to 59.83% in 2017.

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2017 2016
59.78%
59.80%
59.82%
59.84%
59.86%
59.88%
59.90%
59.92%
59.83%
59.91%
Gross Profit Margin
Commonwealth
Bank
Figure 8: Gross Profit Margin ratio of Commonwealth Bank
(Source: Commbank.com.au. 2018)
Net Profit Margin
the net profit generated after deduction of interest and tax however seem to increase from
2016 to 2017. This is identified as a major positive aspect for the bank.
2017 2016
42.00%
42.10%
42.20%
42.30%
42.40%
42.50%
42.60%
42.70%
42.80%
42.90%
43.00% 42.94%
42.34%
Net Profit Margin
Commonwealth Bank

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Figure 9: Net Profit Margin ratio of Commonwealth Bank
(Source: Commbank.com.au. 2018)
Return on assets
The return asset is depicted as the net profit which accompanies the book to generate in
terms of its total assets. There has been a slight increase in this category which shows
Commonwealth Bank has better utilised its assets in 2017 in compared to 2016.
2017 2016
0.010
0.010
0.011
0.010
0.010
Return on assets
Commonwealth Bank
Figure 10: Return on assets of Commonwealth Bank
(Source: Commbank.com.au. 2018)
Market Value Ratios
The market Value ratio for the bank has been completed with price-earnings ratio, payout
ratio and earnings per share ratio.
Share Market Performance Ratio
Commonwealth Bank
2017 2016

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Market price per share
(A) 82.81 74.37
Earnings per shares
(B) 574.4 554.8
Proposed Dividend
Per share (F) 429 420
Price Earnings Ratio
(A/B) 0.14 0.13
Earning Price Per
Share 574.40 554.80
Pay-out Ratio 74.69 75.70
Table 5: Share Market Performance Ratio of Commonwealth Bank
(Source: Commbank.com.au. 2018)
Price Earnings Ratio
The increasing amount of price-earnings ratio clearly suggests that the bank is able to
generate better earning in terms of share price prevailing in the market.

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2017 2016
0.12
0.14
0.16
0.14
0.13
Price Earning Ratio
Commonwealth Bank
Figure 11: Price Earnings Ratio of Commonwealth Bank
(Source: Commbank.com.au. 2018)
Payout Ratio
The decreasing amount of payout ratio suggests that Commonwealth Bank has paid out
higher amount of dividend in 2017 when compared to 2016.
2017 2016
74.00
74.20
74.40
74.60
74.80
75.00
75.20
75.40
75.60
75.80
74.69
75.70
Payout Ratio
Commonwealth Bank

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Figure 12: Payout Ratio of Commonwealth Bank
(Source: Commbank.com.au. 2018)
Earning Price Per Share
It can be clearly depicted that the bank is in a better position in generating higher
earnings from shares. This indicates growing share market performance in 2017.
2017 2016
545.00
550.00
555.00
560.00
565.00
570.00
575.00
580.00
574.40
554.80
Earning Price Per Share
Commonwealth Bank
Figure 13: Earning Price Per Share of Commonwealth Bank
(Source: Commbank.com.au. 2018)
3. Graphs and comparison of share price movements
The comparison of share price movement for Commonwealth Bank has been depicted
with information available in ASX website for the closing price of shares in last two years.
According to this information it can be seen that the change in price trend for Commonwealth
Bank is slightly volatile compared to All Ordinaries index. This is evident when comparing the

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percentage daily change of share price movement for Commonwealth Bank and percentage daily
change of share price movement for All Ordinaries index. Therefore, it can be stated that there is
a high correlation of Closing Price of Commonwealth Bank with All Ordinaries index.
Share Price Movements
Date
Closing Price
of
Commonwea
lth Bank
Percentage
daily change
of
Commonwea
lth Bank
Closing
Price of
All
Ordinari
es
(^AORD
)
Percenta
ge
change
of All
Ordinari
es
(^AORD
)
8/31/201
6 null 0% null 0%
9/30/201
6 73.39 0% 5402.40 0%
10/31/20
16 78.65 7% 5502.40 2%
11/30/20
16 82.41 5% 5719.10 4%
12/31/20
16 81.66 -1% 5675.00 -1%
1/31/201
7 82.32 1% 5761.00 2%
2/28/201
7 85.91 4% 5903.80 2%
3/31/201
7 87.40 2% 5947.60 1%
4/30/201
7 79.65 -9% 5761.30 -3%
5/31/201
7 82.81 4% 5764.00 0%
6/30/201
7 83.73 1% 5773.90 0%
7/31/201
7 75.80 -9% 5776.30 0%
8/31/201
7 75.25 -1% 5744.90 -1%
9/30/201 77.63 3% 5976.40 4%

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7
10/31/20
17 79.43 2% 6057.20 1%
11/30/20
17 80.34 1% 6167.30 2%
12/31/20
17 78.87 -2% 6146.50 0%
1/31/201
8 76.39 -3% 6117.30 0%
2/28/201
8 72.31 -5% 5868.90 -4%
3/31/201
8 71.82 -1% 6071.60 3%
4/30/201
8 69.30 -4% 6123.50 1%
5/31/201
8 72.87 5% 6289.70 3%
6/30/201
8 74.79 3% 6366.20 1%
7/31/201
8 71.24 -5% 6427.80 1%
8/31/201
8 71.21 0% 6416.50 0%
Table 6: Closing Share Price Movements of Commonwealth Bank and ^AORD
(Source: Au.finance.yahoo.com. 2018)
Date
Percentage
daily change of
Commonwealth
Bank
Percentage
change of All
Ordinaries
(^AORD)
10/31/201
6 7% 2%
11/30/201
6 5% 4%
12/31/201
6 -1% -1%
1/31/2017 1% 2%
2/28/2017 4% 2%

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3/31/2017 2% 1%
4/30/2017 -9% -3%
5/31/2017 4% 0%
6/30/2017 1% 0%
7/31/2017 -9% 0%
8/31/2017 -1% -1%
9/30/2017 3% 4%
10/31/201
7 2% 1%
11/30/201
7 1% 2%
12/31/201
7 -2% 0%
1/31/2018 -3% 0%
2/28/2018 -5% -4%
3/31/2018 -1% 3%
4/30/2018 -4% 1%
5/31/2018 5% 3%
6/30/2018 3% 1%
7/31/2018 -5% 1%
8/31/2018 0% 0%
Table 7: Share Price Movements of Commonwealth Bank and ^AORD in Percentage
(Source: Au.finance.yahoo.com. 2018)
As per the comparison of share price movement it can be seen that Commonwealth Bank
is in a better position with an increasing position in the share market. It needs to be also
discerned that in most of the month is over the past two years the trend line for Commonwealth
Bank is higher than All Ordinaries index. However, in the month of April 2017 and July 2017
there is huge fluctuations with the market index which indicates high amount of volatility and
inconsistent performance for share price.

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10/1/2016
11/1/2016
12/1/2016
1/1/2017
2/1/2017
3/1/2017
4/1/2017
5/1/2017
6/1/2017
7/1/2017
8/1/2017
9/1/2017
10/1/2017
11/1/2017
12/1/2017
1/1/2018
2/1/2018
3/1/2018
4/1/2018
5/1/2018
6/1/2018
7/1/2018
8/1/2018
-15%
-10%
-5%
0%
5%
10%
Graphical comparison of share price movements
Percentage daily change of Commonwealth Bank Percentage change of All Ordinaries (^AORD)
Figure 1: Graphical comparison of share price movements
(Source: Au.finance.yahoo.com. 2018)

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MANAGEMENT RESEARCH.
Office of Financial Management 2016. Population Density and Land Area Criteria Used for
Rural Area Assistance and Other Programs, State of Washington. Available at:

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263.
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