Finance for Business: Analysis of Commonwealth Bank's Financial Performance

This report provides a detailed financial analysis of Commonwealth Bank's liquidity, capital structure, non-current assets, scenario analysis, bond issuance, and share price movement. The report evaluates the performance of the company with the help of ratio analysis and scenario analysis. The report also discusses the issue of bonds and the share price movement of the company. The report is useful for students studying finance for business.

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Finance for business

Finance for business
Abstract
The report is made and in that, all of the financial aspects in relation to the company have been
considered. There has been an undertaking of the main service which is provided by the
company to its users. In that, the performance of the company is of great need and the same shall
be evaluated. This has been done with the help of the ratio analysis in which all of the required
ratios have been calculated and they provide the result about the liquidity and capital structure of
the company. The analysis has been performed and in that, all of the non-current assets are taken
into account. The changes which are taking place in that have been considered and by that
adequate decisions can be taken. The scenario analysis is performed and for that company has
undertaken all of the required procedures. There is the consideration of the worst and best
scenario and in that the calculation is made by which the most sensitive element which is
involved is identified. The company has made the issue of the bond and the same has been
identified and taken into account. The share price analysis is made and in that, all of the changes
which are taking place in the same have been taken into account.
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Finance for business
Table of Contents
Abstract............................................................................................................................................2
Introduction......................................................................................................................................4
Financial analysis.............................................................................................................................4
2.1 Service provided by the company..........................................................................................4
2.2 Performance ratios.................................................................................................................5
2.3 Non-current asset analysis.....................................................................................................7
2.4 Scenario analysis...................................................................................................................8
2.5 Share or bond issuance........................................................................................................10
2.6 PE ratio and share price movement.....................................................................................10
Recommendations..........................................................................................................................12
Conclusion.....................................................................................................................................12
References......................................................................................................................................14
Appendix........................................................................................................................................15
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Finance for business
Introduction
The financial requirements in the business are required to be met in the most effective manner
and for that, there will be need to consider all of the incorporated aspects in an effective manner.
There will be various decisions which will be made and for that there will be a collection of
information which will be made. There will be a proper analysis which will be performed with
the help of that. The analysis will be made and in that the main service of the company will be
identified which is provided by it. There will be the calculation of the ratios which will be
ascertaining the position of the company in terms of the capital structure and liquidity which is
maintained. The scenario analysis will be helping in determining the most sensitive element
which is involved in the business and also the major issue of the share or bond which is made by
the company will be ascertained. The company’s movement in the share price will be identified
and there will be a proper evaluation of the same. The share price will be used to calculate the PE
ratio which is maintained in the company and the comparison of them will be performed in an
adequate manner.
Financial analysis
2.1 Service provided by the company
The company for which the analysis is being performed is Commonwealth Company and it is
involved in providing the people with the banking services in Australia. The company is
providing the users with various services and out of them, the business loan is the major one. In
this, the company provides the businessman with a loan to carry the business in an adequate
manner. There are various formalities which will be required to be fulfilled and then the loan will
be granted (Commonwealth bank, 2019). The bank charges interest on the same and with the
help of the loan the business will be carried in an appropriate manner. The loans will be taken by
those people who do not have the sufficient funds to carry the business and who will be
performing all the businesses in an adequate manner with the help of the funds that are provided
by the bank. This will be increasing the scope for the new businesses and is beneficial for all.
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Finance for business
2.2 Performance ratios
The company needs to maintain an adequate position and for that, it is required to take the
effective decisions which will be in the interest of the company and will be providing the users
with the benefits. This will be done by making the proper evaluation and in that there will be
consideration of the information which is available with the company. The financial assets will
be used and with the help of that position which is maintained by the company in the past few
years will be evaluated (Töyli et al., 2013). There will be consideration of the factors by which
the liquidity of the business is affected and in that the current assets and current liabilities are
involved. With that, the capital structure will also be evaluated and there will be the
identification of the sources which are used. The calculation of the ratios is made and it is as
follows.
Liquidity ratios
The liquidity is the key aspects which need to be maintained otherwise the business will not be
able to maintain the position in the market. There will be consideration of the various factors
which affect this aspect. The business is required to main the liquid assets by which the
obligations which are involved can be met in an effective manner (Babalola and Abiola, 2013).
All of the ratios which will be calculated in this category will be determining the position of the
company to repay its liabilities. In this, there will be the identification of all the liabilities which
are involved and with that, the assets that are available will also be taken into account.
Particulars Formula 2017 2018 2019
Current ratio Current assets/current
liabilities
3.06 3.16 3.32
Quick ratio Quick assets/Current
liabilities
2.40 2.63 2.71
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Finance for business
2017 2018 2019
0.00
0.50
1.00
1.50
2.00
2.50
3.00
3.50
Current ratio
Linear (Current ratio)
Quick ratio
Linear (Quick ratio)
The calculation has been made and in that it is ascertained that the company is maintaining the
liquidity position. There is an increase which is made in the ratio in all the years and this shows
that an upward trend is maintained in the company. The standard ratio which shall be maintained
for the current ratio is 2 and the company is maintaining the level above this. There is the scope
for the company to cover more of the liabilities and it will be able to pay all of the liabilities in a
proper manner (Commonwealth bank, 2019). This will be building a good image of the company
in the market and it will be able to maintain the position of the business in long run.
Capital structure ratios
The funding in any business is the main decision which is to be taken and it shall be made in the
best manner. There are various sources and out of the ones which will be in the interest of the
company shall be selected. All of the sources together comprise the capital structure which shall
be maintained in an adequate manner (Foster, Kasznik and Sidhu, 2012). The accuracy of the
structure will be identified with the help of the ratios which can be calculated in this respect.
There will be ascertainment of the position of the debt and equity which is maintained in the
company. The calculation of the ratios is made and it is shown below.
Particulars Formula 2016 2017 2018
Debt ratio Total liabilities/total
assets
0.93 0.93 0.93
Debt to equity Total liabilities/total 14.34 13.37 13.02
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Finance for business
equity
2017 2018 2019
0.00
2.00
4.00
6.00
8.00
10.00
12.00
14.00
16.00
Debt ratio
Linear (Debt ratio)
Debt to equity
Linear (Debt to equity)
The evaluation of the capital structure is made and in that it is identified that there is a downward
trend which is maintained in the business. The position of the debt is declining and this shows
that the amount which is taken the debt by the company is reducing in comparison to the equity
which is maintained (Commonwealth bank, 2018). There will be taking of the future decision
with the help of this and the company will be having the opportunity to raise the funds with the
help of debt in the coming period. There will be a saving of the interest which is made and that
amount can be used by the company in any other use.
2.3 Non-current asset analysis
The operations in the business need to be carried in the best manner and for that, there will be
consideration of the non-current assets which are maintained in the business. It is highly required
that the business shall be maintained and the assets which are involved in the same shall also be
managed in a proper manner (Jana and Thakur, 2015). This requires that there shall be a proper
analysis which shall be performed and for that company will be using the information that is
provided in the financial statements. There are various changes which are made in the assets of
the company with the time and all of them need to be analyzed in an effective manner.
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Finance for business
On the basis of the discussion, it is identified that there is the need for the proper evaluation of
the assets. The commonwealth bank also involves various assets which are used for the
undertaking of the effective operations in the business. In this, the analysis is made and it is
identified that there are various modifications which have been made and the business is required
to take a note on them. The main non-current asset which is involved in the company is the plant
which is held and there is a decrease which is noted in the same. The balance which was
maintained earlier by the company was $2576 but the same has changed and declined to $2383
(Commonwealth bank, 2018). The company has reduced the balance and it is required that the
old balance shall be adopted. This will be done with the help of the taking of the decisions and
making the appropriate investments in the business. The evaluation is made and with the help of
the results which are obtained, there will be a decision which will be made and that will be in the
interest of the company.
2.4 Scenario analysis
In the business, there is a various analysis which is made and out of them, one is the scenario
analysis. This is a technique which is used in the business for the evaluation of the various
options which are available. In this, all of the options which are involved for the investment are
taken into account and then the one which is best is taken for the business. The company will be
using this and with the help of this, the investment which will yield the business with the best
results will be taken into consideration (Ruiz et al., 2012). It is the process in which the net
present value is calculated and then the decisions are made by taking that into consideration. The
calculation will be made and in that, all of the changes which are taking place in the situations
and the variables will be used. The changes will be identified and with that calculations will be
made so that the net present value of all is determined. They will then be used to make the
comparison and by that, the decision will be undertaken. The best care a worst cases both will be
considered in this and that will be helping in the making of the best decisions.
This will also be helping in the determination of the most sensitive element which is involved as
the calculation will be made by considering all of the variables which are available and involved
in the decision making (Spitz et al., 2012). The calculations are made and have been shown in
the appendix. The results which are obtained are presented here for further analysis.
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Finance for business
Worst case options:
Particulars Original Option
1
Option 2 Option 3 Option
4
NPV 6592661 4679131 1808836 3722366 6380047
% Change in NPV (A) -29.025 -72.563 -43.538 -3.225
Input which is changing Sales
units
selling
price
variable
cost
fixed
cost
% change in Input (B) 20 20 20 22.22
Sensitivity (A/B) -1.4513 -3.6281 -2.1769 -0.1451
Best case options
Particulars Original Option
1
Option 2 Option 3 Option 4
NPV 6592661 8506191 11376487 9462956 6805275.76
% Change in NPV (A) 29.0252 72.56288 43.5377 3.2250171
Input which is changing Sales
units
selling
price
variable
cost
fixed cost
% change in Input (B) 20 20 20 22.22
Sensitivity (A/B) 1.4513 3.6281 2.1769 0.1451
With the help of the results which are obtained by the help of the calculation, it can be said that
all of the variables will be affecting the business in an adverse or favorable manner. The worst-
case scenarios will be making a negative impact and the positive impact will be made by the best
case options. All of the results have been identified and with the help of them the level of the
sensitivity which is involved has been identified. There is the consideration of all the results and
with the help of them it is found that the selling price is the variable which will be affecting the
decisions at the highest level and the business will have to keep the control on them. For this,
there will be various steps which will be taken and if there is any change which is noted in the
selling price then the decision will be taken accordingly.
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Finance for business
2.5 Share or bond issuance
The funds are needed and for that, there are various issuances which are made by the company.
In that, either there is the issue of the bond or the share. The issue which is made by the company
shall be considered so that all of the related aspects to that are in the knowledge. In the current
case, it has been identified that there is an issue of the bonds which is made by the bank. The
issue has been made in 2019 for an amount of $750 million (Cbonds, 2019). The rate at which
the issue is made is 3.35% and this considered as the coupon rate of the company. The bonds
have been issued and the amount of the selling price has been collected by the company. The sale
is made at the price of $99.94 and the bonds will be maturing in 2024. There is the collection of
the funds which is made and they will be used by the company in other activities.
2.6 PE ratio and share price movement
In the market, there are various fluctuations which take place and they affect the share price of
the company. This is the attribute by which the value of the business is ascertained and so proper
analysis of the same shall be made. All of the changes which are involved in this will have to be
evaluated and for that, the collection of the data is to be made. The data will be used and by that
the increase and decrease which is taking place will be identified (Shen, 2000). That will help the
company to decide for the future and ascertain the position of the company in the market. All of
the decisions in relation to the coming period will be made on the basis of this and that will be
taken in such manner that best of the results are availed.
The identification of the share price is an important aspect and then the movements which are
taking place in the same will be compared with the price-earnings ratio which is calculated with
the help of the share price. In that ratio, the earnings which are made are compared with the share
price and all of the changes are taken into account. The calculation for the same will be made
and with that, the change which is taking place will be accounted for. Both the ratio and the share
price will be compared to ascertain the direction in which they are moving and this will be
helping the company for the coming period.
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Finance for business
Share price movement
(Source: Market index, 2019)
Particulars 2017 2018 2019
MPS 83.73 74.79 82.3
EPS 549.9 518.8 473.7
Price-earnings
ratio
0.15 0.14 0.17
2017 2018 2019
0.00
0.02
0.04
0.06
0.08
0.10
0.12
0.14
0.16
0.18
0.20
Price earnings ratio
Price earnings ratio
Linear (Price earnings
ratio)
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Finance for business
The representation of the results which are obtained is made with the help of the graph and from
that, it is noted that there is a change which is taking place in both of them. There are several
fluctuations which are noted in the share price of the company (Yahoo finance, 2019). There are
certain declines and increments which are noted and the value of the company is also getting
affected in a similar manner. If the ratio is taken into consideration then it can be noted that the
decline is made and then again the increase is attained by the company. From the analysis, it is
noted that there is the same movement which is taking place in the share price of the company
and the ratio that is ascertained. This shows that there is the convergent relation which is existing
among both of them. This will be used and the decisions for the coming period will be made in
the most appropriate manner.
Recommendations
The complete analysis of the company is made and in that, all of the areas have been evaluated.
It has been ascertained that the company is involving the sources of the funds and they are
maintained in an effective manner. The liquidity of the company is also adequate and there is the
scope by which the funds can be used for other purposes. The capital structure is maintained and
the company can take the loans if the need for the fund is there as there is some scope by which
the position will be covered and the liquidity will also be maintained. All of the decisions will be
made after considering the results which are made and that will be helping in improving the
overall position of the business.
Conclusion
The report has been prepared and in that, all of the necessary elements have been taken into
account. There is the evaluation of the service which is provided by the company and with that,
the consideration of the elements involved in it has been undertaken. The performance of the
company is maintained in an adequate manner and that is determined with the help of the ratios
which have been calculated. The position of the liquidity is maintained and also the capital
structure is in a good position. The company if needs the additional funds then it has the scope to
take the money with the help of the external sources. This can be said as with the current
liquidity it will be able to maintain the position of the interest which will be added. The changes
have been identified in the non-current assets and the manner in which they will be improved has
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Finance for business
also been taken into account. There is the determination of the selling price as the most sensitive
element and that will be used by the business in the coming period so that all the decisions are
made accordingly. The bond issue is made and all of the information about them has been
collected and provided in the report. The manner in which fluctuations are taking place in the
share price have been identified and with the help of that calculation of the price to earnings ratio
is made. The comparison has been made among them and that is helpful for the valuation of the
business and ascertains the position of the same in the market.
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Finance for business
References
Babalola, Y.A. and Abiola, F.R. (2013) Financial ratio analysis of firms: A tool for decision
making. International journal of management sciences, 1(4), pp.132-137.
Cbonds. (2019) New bond issue. [Online] Available at: http://cbonds.com/news/item/1087121
[Accessed 27 September 2019]
Commonwealth bank. (2018) Annual report. [Online] Available at:
https://www.commbank.com.au/content/dam/commbank/about-us/shareholders/pdfs/results/
fy18/cba-annual-report-2018.pdf [Accessed 27 September 2019]
Commonwealth bank. (2019) Annual report. [Online] Available at:
https://www.commbank.com.au/content/dam/commbank-assets/about-us/2019-09/cba-annual-
report-2019-spreads.pdf [Accessed 27 September 2019]
Commonwealth bank. (2019) business loans. [Online] Available at:
https://www.commbank.com.au/personal-loans.html?ei=anch_pl [Accessed 27 September 2019]
Foster, G., Kasznik, R. and Sidhu, B.K. (2012) International equity valuation: the relative
importance of country and industry factors versus company‐specific financial reporting
information. Accounting & Finance, 52(3), pp.767-814.
Jana, M.M. and Thakur, M.K. (2015) An Overview of Non-Performing Assets Management and
Banking Performance-An Empirical Analysis. The Management Accountant Journal, 50(1),
pp.42-50.
Market index. (2019) Commonwealth Bank (CBA). [Online] Available at:
https://www.marketindex.com.au/asx/cba [Accessed 27 September 2019]
Ruiz, P.A., Foster, J.M., Rudkevich, A. and Caramanis, M.C. (2012). Tractable transmission
topology control using sensitivity analysis. IEEE Transactions on Power Systems, 27(3),
pp.1550-1559.
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Shen, P. (2000) The P/E ratio and stock market performance. Economic Review-Federal Reserve
Bank of Kansas City, 85(4), pp.23-36.
Spitz, C., Mora, L., Wurtz, E. and Jay, A. (2012) Practical application of uncertainty analysis and
sensitivity analysis on an experimental house. Energy and Buildings, 55, pp.459-470.
Töyli, J., Lorentz, H., Ojala, L., Hofmann, E. and Lampe, K. (2013) Financial statement analysis
of logistics service providers: ways of enhancing performance. International Journal of Physical
Distribution & Logistics Management.
Yahoo finance. (2019) Commonwealth Bank of Australia (CBA.AX). [Online] Available at:
https://au.finance.yahoo.com/quote/CBA.AX/history?
period1=1411151400&period2=1568917800&interval=1mo&filter=history&frequency=1mo
[Accessed 27 September 2019]
Appendix
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