Financial Analysis of Caltex Australia: Profitability, Efficiency, and Cash Management

This report analyzes the financial performance of Caltex Australia through ratio analysis, cash management, sensitivity, dividend payout, systematic and unsystematic risks. It provides recommendations for institutional investors based on the findings.

Finance for business - Masters
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Abstract
This report has been undertaken to examine the financial performance of selected ASX
listed entity, that is, Caltex Australia. The financial performance as examined through the use of
analysis of ratios, cash management, sensitivity, dividend payout, systematic and unsystematic
risks ahs reflected that the company is presently not in a high state of growth and development, It
has weak profitability, cash management and efficiency position and therefore an investor need
to examine the future financial performance before taking any significant investment decision.
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Contents
Abstract............................................................................................................................................2
1. Introduction..................................................................................................................................4
2. Financial Analysis of Caltex Australia........................................................................................4
2.1: Description of the Company.................................................................................................4
2.2: Use of Ratio Analysis to evaluate the financial performance of Caltex Australia...............5
2.3: Cash Management Analysis...............................................................................................10
Part 2.4: Application of capital budgeting and sensitivity analysis...........................................11
2.5 Identification and Discussion of Systematic and Un-systematic Risk Impacting the
Performance of Caltex Australia...............................................................................................16
Unsystematic Risk.....................................................................................................................16
Systematic Risks........................................................................................................................17
Part 2.6: Calculation of dividend payout ratio and identification of dividend policy of Caltex
Australia Limited.......................................................................................................................19
3. Recommendation Letter.............................................................................................................21
4. Conclusion.................................................................................................................................22
References......................................................................................................................................23
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1. Introduction
The purpose of the present report is to develop an understanding of the methods used in
conducting financial analysis of a selected listed company within ASX. The financial analysis
has been performed through evaluation of the financial statements of the selected company. The
overall financial evaluation of the selected company is done for proving suggestions to
institutional investors for investing within the Australian market. The recommendations provided
through report will assist the investors to take correct investment decision based on the financial
outcomes of the company.
The ASX listed entity selected for financial evaluation purpose is Caltex Australia, a
transport based fuel supplier and convenience retailer of Australia. The report, in this context,
has performed financial analysis of the selected company through the use of ratio analysis,
evaluation of its cash management, performing sensitivity analysis, identifications of the
systematic and unsystematic risks and examination of its dividend policy. The recommendation
letter is provided to the institutional investors on the basis of overall evaluation conducted and
lastly the findings obtained are summarized in the conclusion section of the report.
2. Financial Analysis of Caltex Australia
2.1: Description of the Company
Caltex Australia Limited is a recognized Australian based Transport Company involved
in providing fuel and operates convenience stores across Australia. The core activities of the
company consist of purchasing, distributing and marketing of petroleum based products and also
operating its convenience stories. It is an ASX listed entity that has attained a leading position in
meeting the fuel needs within Australia. It has developed a flexible supply chain that has enabled
it to develop high quality fuel products to its diverse number of customer segments such as retail,
mining, agriculture, aviation, marine and automotive sector. In addition to this, it is also
recognized to be prominent convenience retailers within the country. It is only fuel and
convenience retailing company of Australia that is listed on the ASX. It has attained a unique
position among the refiner and marketers in Australia on the basis of carrying out its operations
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in an independent manner and all the decision-taking is with management and the Board (Caltex
Australia: Our Company, 2019).
2.2: Use of Ratio Analysis to evaluate the financial performance of Caltex Australia
Profitability Ratios of Caltex Australia
Financial Data of Caltex Australia for calculation of Profitability Ratio
Financial Items 2015 2016 2017 2018
Amount in $ Thousands
Operating profit
$
811,350.00
$
934,953.00
$
930,497.00
$
819,969.00
Net profit after tax
$
522,621.00
$
610,480.00
$
620,752.00
$
561,590.00
Net Sales
$
19,926,546.00
$
17,933,201.00
$
16,285,810.00
$
21,731,342.00
Shareholder's equity
$
2,787,805.00
$
2,810,215.00
$
3,107,901.00
$
3,389,064.00
Average shareholder's
equity
$
2,799,010.00
$
2,959,058.00
$
3,248,482.50
Total Assets
$
5,104,741.00
$
5,302,734.00
$
6,355,220.00
$
6,727,623.00
Average total assets
$
5,203,737.50
$
5,828,977.00
$
6,541,421.50
Profitability Ratio of Caltex Australia
Ratios Formula 2016 2017 2018
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Operating Profit Ratio
Operating
Profit/Sales 5.21% 5.71% 3.77%
Net profit ratio Net profit/Sales 3.40% 3.81% 2.58%
Return on equity
Net profit after
tax/Average
shareholder's equity
21.81% 20.98% 17.29%
(Source: Caltex Australia: Annual Report, 2016, Caltex Australia: Annual Report, 2017; &Caltex
Australia: Annual Report, 2018)
2016 2017 2018
0.00%
5.00%
10.00%
15.00%
20.00%
25.00%
5.21% 5.71%
3.77%3.40% 3.81%
2.58%
21.81% 20.98%
17.29%
Profitability Ratio of Caltex Australia
Percentage
(Source: Caltex Australia: Annual Report, 2016, Caltex Australia: Annual Report, 2017; &Caltex
Australia: Annual Report, 2018)
The profitability position of Caltex Australia can be analyzed by the use of following ratios:
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 Operating Profit Ratio: The Operating Profit ratio indicates the profit from operating
Activities attributable towards per $ of net Sales. Caltex Australia’s operating Profit has
an upward trend from 2016 to 2017 but in 2018 it has a downward trend as operating
profit ratio comes to 3.77% from 5.71%. If we analyses the data the reason behind a low
operating profit as compared to 2017’s operating profit is increase in selling and
distribution expenses. Net sales in 2018 is increased as compared to previous years so as
other expenses, but Caltex Australia had to spent a higher amount on selling and
distribution expenses. It may be due to new competitors in market, or availability of
substitutes in market resulting in a low operating profit (Krantz, 2016).
 Net Profit Ratio: Net Profit Ratio Measures the net profit attributable towards per $ of
Net Sales. However Net profit ratio is also increased from 3.40% (2016) to 3.81 %( 2017)
but then it went down to 2.58% in 2018. The reason behind the downward trend in year
2017 to year 2018 is the same as of the operating profit ratio. Because Caltex Australia
has a low finance cost and a high share of profit/loss from other entities as compared to
2017. Company had to spend money on Selling and distribution of its products due to
competitors and substitutes available in market (Reilly and Brown, 2011).
 Return on Equity: ROE states the rate of return realized by company on its equity
investment. Here also an upward trend is noticed in year 2016 to year 2017 but then there
is a downward trend in year 2017 to 2018. However the downward trend is not because
of increase in equity (Moles and Kidwekk, 2011). But it can be said that Caltex Australia
has lower finance cost as compared to 2017 that shows that it has repaid its debt resulting
in a lower profit as well as company has created reserves in 2018 which was not there in
2017 or can say has a negative balance in 2017. Thus Caltex Australia has a low return on
equity 17.29% as compared to 2017 of 20.98%.
Operating Efficiency Ratios
Financial Data of Caltex Australia for calculation of Operating Efficiency Ratio
Financial Items 2015 2016 2017 2018
Amount in $ Thousands
Net Sales $ $ $ $
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19,926,546.00 17,933,201.00 16,285,810.00 21,731,342.00
Account Receivables
$
681,542.00
$
747,585.00
$
922,420.00
$
1,184,025.00
Average account
receivable
$
714,563.50
$
835,002.50
$
1,053,222.50
Total Assets
$
5,104,741.00
$
5,302,734.00
$
6,355,220.00
$
6,727,623.00
Average total assets
$
5,203,737.50
$
5,828,977.00
$
6,541,421.50
Cost of Goods Sold
$
12,903,682.00
$
11,154,208.00
$
14,125,384.00
$
19,606,994.00
Inventory
$
969,885.00
$
1,080,920.00
$
1,694,915.00
$
1,616,125.00
Average Inventory
$
1,025,402.50
$
1,387,917.50
$
1,655,520.00
Operating Efficiency Ratios of Caltex Australia
Ratios Formula 2016 2017 2018
Inventory Turnover ratio
Cost of goods
sold/Average
inventory
10.88 10.18 11.84
Account Receivable
turnover ratio
Net
sales/Average
account
receivables
25.10 19.50 20.63
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Asset Turnover ratio
Net
Sales/Average
total assets
3.45 2.79 3.32
2016
2017
2018
0.00
5.00
10.00
15.00
20.00
25.00
30.00
10.88
10.18 11.84
25.10
19.50 20.63
3.45
2.79 3.32
Operating Effeciency Ratio
Axis Title
Times
(Source: Caltex Australia: Annual Report, 2016, Caltex Australia: Annual Report, 2017 &Caltex
Australia: Annual Report, 2018)
The operational efficiency of Caltex Australia has been analyzed with calculation of following
ratios:
 Inventory Turnover Ratio: This ratio depicts how many times a company has sold or
replaced its inventory during a period. Caltex Australia has an overall upward trend in
inventory turnover ratio from 2016 to 2018 which is 10.88 to 11.84. It implies that
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company is very good at replacing its inventory regularly which will result in low cost of
holding and storage and improve its profitability in long run (Bragg, 2010).
 Account Receivable Ratio: Account Receivable ratio depicts number of times a
company can realize payment from its average debtors in a year. If we look into the chart
we notice a downward trend but actually company is improving its efficiency. In 2016
this ratio was 25.10 times which comes to 19.50 times in 2017 but in 2018 company has
efficiently collected its debtors and it comes to 20.63. In 2017 the downward trend is
noticed because of loss of $14 million and in 2018 its $12 million.
 Asset Turnover Ratio: This ratio shows company’s ability to best use of its assets to
generate revenue. A downward trend is noticed in past three years (2016-2018) which
may be due to the abnormal loss company has faced in 2017 and 2018. But overall
company is improving its efficiency and using its resources at its best to generate revenue
(Feldman and Libman, 2011).
2.3: Cash Management Analysis
Marketable securities are regarded as the liquid instruments of the company that can be
quickly transferred into cash for meeting the current financial obligations. The liquidity of
marketable securities is due to the fact that they possess the maturity of less than a year and
therefore can be quickly transferred into cash for meeting the financial obligations (Gibson,
2011). As analyzed form the balance sheet of Caltex Australia, the current assets of the company
includes cash and cash equivalents and receivables as marketable securities that presents the
assets that can be quickly transferred into cash. The cash and cash equivalents of the company
has depicted a decline over the past three financial years from 2016-2018 as analyzed from the
financial reports of the company over the selected time period. The cash and cash equivalents
have decreased from 116,606 to 6,142 over the selected financial period. On the other hand, its
account receivables have depicted a large increase over the selected time period as reflected in
the current assets of the company within its balance sheet. It has largely increased from 554,769
to 1,184,025 over the selected financial period (Caltex Australia: Annual Reports, 2019). These
means that the company need to quickly realize its accounts receivable for improving the future
cash flow position as it is holding less cash equivalents. The decrease in the cash equivalents can
results in causing a liquidity risk within the company due to its inability to meet the current
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obligations. The cash realized from its accounts receivables can provide large assistance to the
company in meeting its future financial obligations (Brigham and Michael, 2013).
Part 2.4: Application of capital budgeting and sensitivity analysis
Project Life 4 Years
Cost of Equipment 2,000,000.00$
Reisdual Value 200,000.00$
Depreciation Method Straight Line
Life of Equipment 4 years
Depreciation of Equipment per
year 450,000.00$
Initial Working Capital 600,000.00$
Recovery of working capital 600,000.00$
Selling Units per year 300000 per year
Selling Price 20.00$
Variable Cost 12.00$
Fixed Cost 300,000.00$
Discount Rate 10%
Tax Rate 30%
Data Given
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Particulars Year 0 Year 1 Year 2 Year 3 Year 4
Cash Inflows
Selling Units 300000 300000 300000 300000
Selling price 20.00$ 20.00$ 20.00$ 20.00$
Net Cash Inflows 6,000,000.00$ 6,000,000.00$ 6,000,000.00$ 6,000,000.00$
Cash Outflows
Variable Cost 3,600,000.00$ 3,600,000.00$ 3,600,000.00$ 3,600,000.00$
Fixed Cost 300,000.00$ 300,000.00$ 300,000.00$ 300,000.00$
Depreciation 450,000.00$ 450,000.00$ 450,000.00$ 450,000.00$
Total Cash outflows 4,350,000.00$ 4,350,000.00$ 4,350,000.00$ 4,350,000.00$
Cash flows before tax 1,650,000.00$ 1,650,000.00$ 1,650,000.00$ 1,650,000.00$
Less: Tax @ 30% 495,000.00$ 495,000.00$ 495,000.00$ 495,000.00$
Cash Flows after tax 1,155,000.00$ 1,155,000.00$ 1,155,000.00$ 1,155,000.00$
Add: Depreciation 450,000.00$ 450,000.00$ 450,000.00$ 450,000.00$
Cash Flows before
depreciation after tax 1,605,000.00$ 1,605,000.00$ 1,605,000.00$ 1,605,000.00$
Initial Equiment Cost (2,000,000.00)$
Salvage Value 200,000.00$
Working Capital
Initial Requirement (600,000.00)$
Recovery 600,000.00$
Net Cash Flows (2,600,000.00)$ 1,605,000.00$ 1,605,000.00$ 1,605,000.00$ 2,405,000.00$
Statement of Cash flows
Years Cash flows PVF @ 10% PV @ 10%
0 (2,600,000.00)$ 1.000 (2,600,000.000)$
1 1,605,000.00$ 0.909 1,459,090.909$
2 1,605,000.00$ 0.826 1,326,446.281$
3 1,605,000.00$ 0.751 1,205,860.255$
4 2,405,000.00$ 0.683 1,642,647.360$
NPV 3,034,044.806$
Project NPV when there is no change in value drivers
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Particulars Year 0 Year 1 Year 2 Year 3 Year 4
Cash Inflows
Selling Units 270000 270000 270000 270000
Selling price 20.00$ 20.00$ 20.00$ 20.00$
Net Cash Inflows 5,400,000.00$ 5,400,000.00$ 5,400,000.00$ 5,400,000.00$
Cash Outflows
Variable Cost 3,240,000.00$ 3,240,000.00$ 3,240,000.00$ 3,240,000.00$
Fixed Cost 300,000.00$ 300,000.00$ 300,000.00$ 300,000.00$
Depreciation 450,000.00$ 450,000.00$ 450,000.00$ 450,000.00$
Total Cash outflows 3,990,000.00$ 3,990,000.00$ 3,990,000.00$ 3,990,000.00$
Cash flows before tax 1,410,000.00$ 1,410,000.00$ 1,410,000.00$ 1,410,000.00$
Less: Tax @ 30% 423,000.00$ 423,000.00$ 423,000.00$ 423,000.00$
Cash Flows after tax 987,000.00$ 987,000.00$ 987,000.00$ 987,000.00$
Add: Depreciation 450,000.00$ 450,000.00$ 450,000.00$ 450,000.00$
Cash Flows before
depreciation after tax 1,437,000.00$ 1,437,000.00$ 1,437,000.00$ 1,437,000.00$
Initial Equiment Cost (2,000,000.00)$
Salvage Value 200,000.00$
Working Capital
Initial Requirement (600,000.00)$
Recovery 600,000.00$
Net Cash Flows (2,600,000.00)$ 1,437,000.00$ 1,437,000.00$ 1,437,000.00$ 2,237,000.00$
Statement of Cash flows when Unit sales decrease by 10%
Years Cash flows PVF @ 10% PV @ 10%
0 (2,600,000.00)$ 1.000 (2,600,000.000)$
1 1,437,000.00$ 0.909 1,306,363.636$
2 1,437,000.00$ 0.826 1,187,603.306$
3 1,437,000.00$ 0.751 1,079,639.369$
4 2,237,000.00$ 0.683 1,527,901.100$
NPV 2,501,507.411$
Project NPV when Unit sales decrease by 10%
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Particulars Year 0 Year 1 Year 2 Year 3 Year 4
Cash Inflows
Selling Units 300000 300000 300000 300000
Selling price 18.00$ 18.00$ 18.00$ 18.00$
Net Cash Inflows 5,400,000.00$ 5,400,000.00$ 5,400,000.00$ 5,400,000.00$
Cash Outflows
Variable Cost 3,600,000.00$ 3,600,000.00$ 3,600,000.00$ 3,600,000.00$
Fixed Cost 300,000.00$ 300,000.00$ 300,000.00$ 300,000.00$
Depreciation 450,000.00$ 450,000.00$ 450,000.00$ 450,000.00$
Total Cash outflows 4,350,000.00$ 4,350,000.00$ 4,350,000.00$ 4,350,000.00$
Cash flows before tax 1,050,000.00$ 1,050,000.00$ 1,050,000.00$ 1,050,000.00$
Less: Tax @ 30% 315,000.00$ 315,000.00$ 315,000.00$ 315,000.00$
Cash Flows after tax 735,000.00$ 735,000.00$ 735,000.00$ 735,000.00$
Add: Depreciation 450,000.00$ 450,000.00$ 450,000.00$ 450,000.00$
Cash Flows before
depreciation after tax 1,185,000.00$ 1,185,000.00$ 1,185,000.00$ 1,185,000.00$
Initial Equiment Cost (2,000,000.00)$
Salvage Value 200,000.00$
Working Capital
Initial Requirement (600,000.00)$
Recovery 600,000.00$
Net Cash Flows (2,600,000.00)$ 1,185,000.00$ 1,185,000.00$ 1,185,000.00$ 1,985,000.00$
Statement of Cash flows when Price per unit decreases by 10%
Years Cash flows PVF @ 10% PV @ 10%
0 (2,600,000.00)$ 1.000 (2,600,000.000)$
1 1,185,000.00$ 0.909 1,077,272.727$
2 1,185,000.00$ 0.826 979,338.843$
3 1,185,000.00$ 0.751 890,308.039$
4 1,985,000.00$ 0.683 1,355,781.709$
NPV 1,702,701.318$
Project NPV when Price per unit decreases by 10%
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Particulars Year 0 Year 1 Year 2 Year 3 Year 4
Cash Inflows
Selling Units 300000 300000 300000 300000
Selling price 18.00$ 18.00$ 18.00$ 18.00$
Net Cash Inflows 5,400,000.00$ 5,400,000.00$ 5,400,000.00$ 5,400,000.00$
Cash Outflows
Variable Cost 3,960,000.00$ 3,960,000.00$ 3,960,000.00$ 3,960,000.00$
Fixed Cost 300,000.00$ 300,000.00$ 300,000.00$ 300,000.00$
Depreciation 450,000.00$ 450,000.00$ 450,000.00$ 450,000.00$
Total Cash outflows 4,710,000.00$ 4,710,000.00$ 4,710,000.00$ 4,710,000.00$
Cash flows before tax 690,000.00$ 690,000.00$ 690,000.00$ 690,000.00$
Less: Tax @ 30% 207,000.00$ 207,000.00$ 207,000.00$ 207,000.00$
Cash Flows after tax 483,000.00$ 483,000.00$ 483,000.00$ 483,000.00$
Add: Depreciation 450,000.00$ 450,000.00$ 450,000.00$ 450,000.00$
Cash Flows before
depreciation after tax 933,000.00$ 933,000.00$ 933,000.00$ 933,000.00$
Initial Equiment Cost (2,000,000.00)$
Salvage Value 200,000.00$
Working Capital
Initial Requirement (600,000.00)$
Recovery 600,000.00$
Net Cash Flows (2,600,000.00)$ 933,000.00$ 933,000.00$ 933,000.00$ 1,733,000.00$
Statement of Cash flows when Variable cost per unit increases 10%
Years Cash flows PVF @ 10% PV @ 10%
0 (2,600,000.00)$ 1.000 (2,600,000.000)$
1 933,000.00$ 0.909 848,181.818$
2 933,000.00$ 0.826 771,074.380$
3 933,000.00$ 0.751 700,976.709$
4 1,733,000.00$ 0.683 1,183,662.318$
NPV 903,895.226$
Project NPV when Variable cost per unit increases 10%
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Particulars Year 0 Year 1 Year 2 Year 3 Year 4
Cash Inflows
Selling Units 300000 300000 300000 300000
Selling price 18.00$ 18.00$ 18.00$ 18.00$
Net Cash Inflows 5,400,000.00$ 5,400,000.00$ 5,400,000.00$ 5,400,000.00$
Cash Outflows
Variable Cost 3,960,000.00$ 3,960,000.00$ 3,960,000.00$ 3,960,000.00$
Fixed Cost 330,000.00$ 330,000.00$ 330,000.00$ 330,000.00$
Depreciation 450,000.00$ 450,000.00$ 450,000.00$ 450,000.00$
Total Cash outflows 4,740,000.00$ 4,740,000.00$ 4,740,000.00$ 4,740,000.00$
Cash flows before tax 660,000.00$ 660,000.00$ 660,000.00$ 660,000.00$
Less: Tax @ 30% 198,000.00$ 198,000.00$ 198,000.00$ 198,000.00$
Cash Flows after tax 462,000.00$ 462,000.00$ 462,000.00$ 462,000.00$
Add: Depreciation 450,000.00$ 450,000.00$ 450,000.00$ 450,000.00$
Cash Flows before
depreciation after tax 912,000.00$ 912,000.00$ 912,000.00$ 912,000.00$
Initial Equiment Cost (2,000,000.00)$
Salvage Value 200,000.00$
Working Capital
Initial Requirement (600,000.00)$
Recovery 600,000.00$
Net Cash Flows (2,600,000.00)$ 912,000.00$ 912,000.00$ 912,000.00$ 1,712,000.00$
Statement of Cash flows when Cash fixed cost per year increases by 10%
Years Cash flows PVF @ 10% PV @ 10%
0 (2,600,000.00)$ 1.000 (2,600,000.000)$
1 912,000.00$ 0.909 829,090.909$
2 912,000.00$ 0.826 753,719.008$
3 912,000.00$ 0.751 685,199.098$
4 1,712,000.00$ 0.683 1,169,319.036$
NPV 837,328.051$
Project NPV when Cash fixed cost per year increases by 10%
2.5 Identification and Discussion of Systematic and Un-systematic Risk Impacting the
Performance of Caltex Australia
Unsystematic Risk
The unsystematic risks are regarded as the risks that are inherent within a company due to
nature of its operations or industry sector. It is known as diversifiable risk as it can be reduced
through diversification. The unsystematic risks that are associated with the operational activities
of Caltex Australia are described below:
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Operational Risk
The business operations of Caltex are associated with the risks of external threat that can
result in disrupting the information technology system of the company. The company operations
are heavily reliant on IT systems and therefore systems error can result in causing a threat to
continuing of its operations. In addition to this, the occurrence of any type of hazard can result in
causing injury or damage to its property result in ceasing of its operations or causing financial
losses. Caltex in this context has implemented the use of an integrated management system for
mitigating the risks related to safety and environmental threats (Caltex Australia: Annual
Reports, 2019).
Competitive Risk
Caltex conducts its operations in a highly competitive environment and therefore its
continued growth can be negatively impacted by new entrants and inability to meet the customer
expectations of quality and price. The company has implemented the use of various strategies for
mitigating the competitive risks such as reducing costs for increasing its profitability margin and
enhancing the operational efficiency to foster its sustainable growth.
Environmental Risks
The environmental risks can occur due to the exposure of the company to spillover and
other such incidents that can occur during transportations of its petroleum products. As such, the
company has implemented the use of rigid operating standards and policies for ensuring
compliance with the environmental laws and regulations to prevent the occurrence of any such
incident (Caltex Australia: Annual Reports, 2019).
Systematic Risks
These are the market risks that can impact the performance of a company due to volatility
within the marketplace. The risks are un-diversifiable and cannot be reduced by a company by
the use of diversification strategy (Zimmerman and Yahya-Zadeh, 2011). The systematic risks
associated with Caltex Australia have been described as follows:
Commodity Price Risk
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The company is highly exposed to the risks of adverse price movement in the sector of
crude oil and finished product which can influence its sales and purchasing financial
transactions. As such, this type of risk can have a direct impact on the cash flows and earning
potential of the company. The company has implemented the use of derivative contracts for
managing its exposure towards commodity price risks.
Foreign Exchange Risk
The company is also highly exposed to the risks associated with the fluctuations in the
foreign exchange rates. The company purchases its crude oil products in USD and sells them at
AUD and therefore the changes within the exchange rate between AUD and USD can have a
direct impact on the earning potential and cash flows of the company. The company seeks to
manage the foreign exchange risk with the use of financial instruments such as forwards, swaps
and options that can be used to manage the foreign currency exposure.
Liquidity Risk
The company is also exposed to high liquidity risk due to its credit sales and use of debt
facilities. It is essential for the company adequately manage its liquidity risk through maintaining
sufficient cash flows by adequate management of its capital structure. The cash flow forecasts
done by the finance managers help in accessing the degree of access to debt and equity markets.
This helps in estimating the position of future cash flows and therefore managing the liquidity
risk.
Credit Risk
The credit risk represents to the loss that could be faced by the company in the condition of
counterparty failing to meet the contractual terms. The primary credit risk is related with the
trade receivables’ of the company. Caltex Board has developed and implemented an adequate
policy for managing and diversification of the credit risk related with Caltex by conducting
financial transactions with large number of customers across variety of industries (Caltex
Australia: Annual Reports, 2019).
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Part 2.6: Calculation of dividend payout ratio and identification of dividend policy of
Caltex Australia Limited
Dividend policy refers to the policy that guides management to decide on the dividend
payout ratio. Management has to strictly follow the dividend policy of the company for deciding
the dividend payout ratio. Dividend distributed to the shareholder’s plays an important role to
predicting the market value of the company share (Schlichting, 2013). In this section dividend
payout ratio has been calculated of Caltex Limited for last three years and using that dividend
policy used by the company has been identified and discussed.
Formula to calculate the dividend payout ratio (in %) = Dividend per share/Earnings per share
Caltex Limited
Items 2016 2017 2018
EPS $ 2.32 $ 2.37 $ 2.15
DPS $ 1.20 $ 1.12 $ 1.18
Dividend Payout ratio 51.81% 47.18% 54.91%
2016 2017 2018
$-
$0.50
$1.00
$1.50
$2.00
$2.50
$2.32 $2.37
$2.15
$1.20 $1.12 $1.18
EPS and DPS of Caltex
In AUD$
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2016 2017 2018
42.00%
44.00%
46.00%
48.00%
50.00%
52.00%
54.00%
56.00%
Dividend Payout ratio
In %
The Board of Caltex Australia has developed a policy of increasing the dividend payout
of 50% to 70% till the financial year 2018. As such, it has achieved success as reflected from the
dividend payout ratio of the company of 54.91% that is maintained between 505 to 70% (Caltex
Australia: Annual Reports, 2019). The dividend per share has also depicted an increase in the
financial year 2018 as compared with that of the year 2017 due to increase in the dividend
payout. Also, the increase in dividend paid to the shareholders’ ahs reflected a decrease in the
earning available to the investors in the financial year 2018 as compared with that of the previous
year. It can also be stated that the Board has developed and implemented a fixed dividend
payout policy which refers to maintaining a structure of paying the fixed dividend over the years.
As reflected in the dividend payout ratio of Caltex Australia, the company has maintained a
stable dividend over the financial years of 2016-2018 of 50% to 70% as planned by its Board of
Directors. There are not large fluctuations within the dividend payout ratio of the company and
therefore it can be said that is providing a stable dividend to its shareholders’ over the time
(Arnold, 2013).
3. Recommendation Letter
It can be recommended to the investors on the basis of analyzing the financial
performance of Caltex Australia that its profitability position is not that great as reflected form
the performance of its ROE, operating and net profit ratio. The profitability position has
depicted negative trend in the financial year 2018 as compared with that of previous financial
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years of 2016 and 2017. The efficiency of the company has improved in the year 2018 as
compared to the previous years due to its improvement in the efficiency to collect cash from the
debtors and also converting the inventory to sales. However, the company is still improving its
operational efficiency and its profitability position also and therefore there exists some doubt
regarding its future growth prospects of the company (Damodaran, 2011).
The dividend payout ratio has also reflected an increase over the selected time period of
2016-2018 which depicts that it is emphasizing on increasing the dividend provided to the
owners as per its policy of achieving the dividends to come within the range of 50
% to 70%. The increase in divided per share of the company is consequently leading to decline in
the earning per share mainly due to less available earnings to the investors. This also reflects that
the company financial position is not so attractive for the investors to realize larger returns from
the company (Davies and Crawford, 2011). It is taking measures to improve its operational
performance and profitability position but yet a potential investor is recommended to hold back
the shares for some period of time. This is because the analysis of the financial performance of
the company in subsequent years should be undertaken before taking financial decision of
investment (Baker and Powell, 2009).
4. Conclusion
The above report has inferred that the use of ratio analysis and other method such as cash
management, sensitivity analysis and examination of dividend policy and the associated business
risk can help in determining the future growth prospects of a company. The financial
performance evaluated of the company Caltex Australia through the use of above technique has
proved to be largely effective in providing recommendation to an institutional investor regarding
investing within the company. The ratio analysis has examined the profitability and operational
efficiency of the company which depicts that it is profit position and efficiency position need to
be improved in the coming years. Also, it needs to improve its cash management and earnings
per share to provide large returns to the investors and marinating an adequate flow of cash within
the company. The investors are recommended to hold back the shares within the company and
examine it future financial performance before taking any significant investment decision.
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