Business Finance: Analysis of Performance Ratios for Commonwealth Bank

Running head: BUSINESS FINANCE
Business Finance
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BUSINESS FINANCE
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