Financial Analysis and Investment Recommendation for Caltex Australia Limited

The financial report for 2016 shows a share value of $16.60, calculated on October 5, 2016. The share value is higher than the estimated value and does not support the expected growth rate of four percent with a return rate of nine percent. This indicates that the share is overvalued based on given parameters, recommending against investing. Additionally, the dividend growth of the company is less than the industry average, further supporting this recommendation.

Running head: FINANCIAL ANALYSIS
Caltex Australia limited
Financial Analysis

FINANCIAL ANALYSIS 1
Table of Contents
Executive Summary.........................................................................................................................2
Introduction......................................................................................................................................3
Financial Analysis...........................................................................................................................3
1. Liquidity: Current ratio.........................................................................................................3
2. Profitability: Net profit margin and return on total assets....................................................4
3. Capital structure: Debt ratio and interest coverage ratio......................................................4
Market value: Price-Earnings ratio..................................................................................................5
Share valuation- Constant Dividend Discount Model.....................................................................6
Recommendations............................................................................................................................7
Conclusion.......................................................................................................................................8
References........................................................................................................................................9
Appendix........................................................................................................................................10

FINANCIAL ANALYSIS 2
Executive Summary
The Caltex Australia limited is the Australian public company. The financial analysis of the
company is done on the past five year financial data of the company. The liquidity of the
company is higher than the financial industry average which shows that the liquidity of the
company is satisfactory which enhance the investment decision of the company. The capital
structure of the company is identified through debt-equity ratio and interest coverage ratio. The
capital structure bias equity and the debt are majorly contributed to the structure. The price-
earnings ratio of the company is high which shows the company can make the investment
decision. The dividend decision model shows analysis shows that the investment is not
profitable.

FINANCIAL ANALYSIS 3
Introduction
In this present paper, we will analyze the financials of Caltex Australia limited. The financial
analysis is done on the basis of financial ratios, price-earnings ratio for analyzing the market
value and analyzing the share valuation through constant dividend discount model. After
analyzing the data recommendation and conclusion has been made.
The Caltex Australia limited is the public company which is ranked 13 out of 2,000 top
companies in Australia. The company deals in supplying and marketing of petroleum and fuel
related products in Australia. The company sources crude oils to the global market. The
marketing activities of the company include service station operations and convenience stores.
The chief executive of the company is Mr. Julian Segal who is also the managing director of
company. The revenue of the company in 2015 is $20,056,420,000. The total employees of the
company are 3,080. The other directors are eight apart from the managing director. The company
was incorporated in 1900 as the Australian agent and in 2015 the company sold its fifty percent
shares in Caltex Australia for $4.62 Billion. The company operates in Australia and Singapore
and it's headquarter is in Sydney. The company is listed on Australian stock exchange under the
ticker CTX. The high prices of fuels and increase in the volume the increase the revenue of the
company in the past five years.
Financial Analysis
The financial analysis of the company is done on the previous five-year data which is taken from
the report IBIS World 2015. The financial analysis is done through analyzing the ratios from
2011-15.

FINANCIAL ANALYSIS 4
Quantitative Analysis
The Caltex Australia Limited qualitative is comes under petroleum refining and petroleum fuel
manufacturing in the industry of Australia. The company is placed thirteen out of the top two
thousand companies of Australia. The company is outright leader of the nation with supplying
one third of fuel needs of the country. The company is having flexible supply chain which
provides safe and reliable fuel of high quality across the nation into various segments such as
mining, retail, automotive, agriculture, marine and others. The 85% of the stores are operated by
franchisees. The stock price of the company currently is 34.90 and the previous price is 34.71.
The change in stock price is increases by 5.12% due to market fluctuations. The Caltex Australia
Limited has market capitalization of 9.01 Billion. The share issue is 260.81 Million. The historic
share price of the company is between $530 Million and $550 Million. In the previous year 2015,
the company has achieved $132 Million which shows the effect of rise and fall in the price of oil
and related product prices. The HCOP of the company in 2015 was between $560 Million and
$580 Million.
1. Liquidity: Current ratio
The current ratio is defined as the liquidity ratio which is calculated by dividing current assets by
current liabilities. The ideal current ratio is 2:1 (Nissim et al., 2001). The current ratio of the
company in 2012 is increased by 28.5% from the previous year 2011. The current ratio in 2013 is
decreased by 12.5% from the previous year 2012. The current ratio in 2014 is decreased by
14.28% from the previous year 2013. The current ratio in 2015 is increased by 21.4% from the
previous year 2014.

FINANCIAL ANALYSIS 5
The industry financial average current ratio is 0.93 and the company has 1.65 times (Please refer
Figure 1) which means the company has higher current ratio than industry financial average. The
trade debtors and inventory in 2015 is decreased from the previous that decreases the current
assets of the company (Please refer Figure 3). The current liabilities are decreased by reducing
the provisions and increases in the trade creditors and interest bearing debts. The interest bearing
debt is reduced in past five years majorly. The cash at bank increases in the year 2015 majorly
from the past five years. It shows the liquidity of the company in 2015 as comparison to industry
financial average is high so the company is capable pay its debts. The limitation of current ratio
is that it can be manipulated to show the favorable outcomes. For the current ratios of past five
years Please refer Figure 2.
2. Profitability: Net profit margin and return on total assets
The net profit margin is defined as the profitability ratio which shows the percentage of net profit
from the revenue of an organization. It shows the percentage of net profit earned on the in the
particular period of time (Amir et al., 2013). The formula for calculating the net profit margin is
net profit divided by revenue. It is the indicator of financial health of an organization in the
specific period of time. It also helps to forecast the profit of the company from the revenue
generation. It also helps to compare the profitability of two or three organization in the particular
accounting period. The net profit margin of the company in 2015 is 3.69 percent and the industry
financial average has 3.01 percent (Please refer Figure 1). It shows the company has higher profit
margin capacity than industry. The net profit margin of the company changes in 2015 due to
decrease in cost of goods sold, interest paid which increases the EBITDA and similarly the net
profit after tax increases due to which ratio increases.

FINANCIAL ANALYSIS 6
The return on total assets is defined as the financial ratio which is calculated by dividing earnings
before interest and taxes upon total net assets. It is used to identify that how much the assets of
the company is used in an effective manner. Higher earnings before interest and taxes in
proportion to total assets show that the asset of the company is using in a more efficient and
effective manner. The return on total assets in 2015 is 10.2 whereas the industry financial
average is 1.85 percent (Please refer Figure 1) so the company is having higher return on total
assets than the industry financial average which shows that the company is utilizing its assets in
the more efficient and effective manner. The earnings before interest and tax after depreciation
of the company in 2015 are 991,072 whereas in the industry financial average has 738,158
(Please refer Figure 1) which show that the company is utilizing its total assets efficiently. The
return on assets significantly increases due to increase in earnings before interest and tax by
decreasing in the cost of goods sold and interest expense.
Both measures are higher than the industry financial average which shows that the company is
earning profits from the utilization of total assets and profit against the sales of the company in
most efficient and effective manner. It reflects that the company is capable to manage the cost
which helps to generate profits from the utilizing the assets appropriately. The net profit margin
of the company in past five years from 2011 to 2014 is decreasing but in 2015 the profit margin
is increased.
3. Capital structure: Debt ratio and interest coverage ratio
Debt equity ratio is defined as the ratio which shows the debt of the company in proportion to its
equity. It is calculated by dividing the total debt upon total equity (Horrigan et al., 1965). It
shows the number of times the company can pay its interest from their earnings. It measures the
leverage of the company. The debt equity ratio in 2015 is 83.10% it shows the company is taking

FINANCIAL ANALYSIS 7
high debts for financing the total assets of the company due to which the company bears high
risk (Antoncyzk et al., 2014). Although high ratio shows that the company is using debts for
financing its operations which helps to generate higher earnings.
The Interest coverage ratio is defined as the ratio which shows the ability of the company to pay
the interest on the outstanding debts of the company in the particular period of time. The formula
for calculating the interest coverage ratio is earning before interest and tax divided by the interest
expense (Machfoedz et al., 1994).
The interest coverage of the company in 2015 is 12.49 times whereas the industry financial
average has 3.85 (Please refer Figure 1). It shows that the interest coverage of company is far
higher than the industry financial average which reflects the ability of the company to pay its
current interest from the available earnings is higher than the industry financial average. The
interest coverage ratio of the company significantly increases due to increase in earnings before
interest and tax which is due to decrease in cost of goods sold and interest expense in 2015.
Both the above measures shows that the capital structure of the company is having high
contribution of debt due to which company is bearing higher risk and the interest coverage ratio
shows that the company is having higher capability of paying its current interest as comparison
to the industry financial average (Bahng et al., 2012).
Market value: Price-Earnings ratio
The price-earnings ratio is defined as the ratio which is used to measure the current share price in
the context of price per earnings. It is also called as price multiple (Lev et al., 1974). It indicates
the amount to be invested by the investor in order to receive one dollar from the earnings of the

FINANCIAL ANALYSIS 8
company. It shows the amount which is willing to invest by an investor (Jones et al., 2008). The
changes in the price earnings ratio are attributable to the expected growth and risk bear by the
individual company.
30/12/2011 30/12/2012 30/12/2013 30/12/2014 30/12/2015
Share Price
(SP)
84.9 52.0 49.87 29.23 26.52
Earnings per
Share (EPS)
(Appendix 1) -264.3 21.0 196.3 7.4 193.2
P/E Ratio
PE= SP
EPS
-0.32 2.47 0.25 3.95 0.137
The above table shows the price-earnings ratio of the company from 2011-2015. The ratio in
2011 is negative due to negative earnings per share which show the investors are not willing to
invest in 2011. In 2012 the price-earnings ratio was 2.47 which show the investors are willing to
invest 24.7% for one dollar from the earnings. The price-earnings ratio in 2015 is 13.7% which
shows the percentage of investors are willing to invest for one dollar in present earnings. The
dividend payout ratio of the company in 2015 is 50.22 percent whereas the financial industry
average has 63.05 (Please refer Figure 1). It shows the company is paying fewer dividends to the
shareholders as the comparison the financial industry average and retaining more amounts into

FINANCIAL ANALYSIS 9
the business (Kothari et al., 2015). The dividend growth rate of the company is 162.20 percent
whereas the financial industry average has 162.90 which are approximately equal and growth of
the company’s dividend is same. The growth of the dividend contributes to the higher price ratio
of the company. In 2015 the dividend of the company was 261,900 which are highest in the past
five years, and it contributes to the higher dividend earnings ratio ((Caltex Australia Limited
Premium Report et al., 2015).
Share valuation- Constant Dividend Discount Model
The dividend discount model is defined as the method which is used to determine the price of the
stock based on the theory. It is also known as Gordon growth model (Lazzatiet al., 2015). The
constant dividend model is used to calculate the price of the stock. The formula for calculating
the stock price is divided by dividend upon expected return less dividend growth rate (Payne et
al., 1999). The model assumes that the stock price increases with the constant growth rate. The
CDDM is represented using the formula:
V E= ¿1
RE−g
VE = Ordinary share value
Div1 = Dividend after 1 year (Most recent dividend increased by growth rate)
RE = required rate of return
G = Growth rate
The recent dividend of the company is $1.20 per share, the rate of return is 9%, and the expected
growth rate is 4% (Dividends News et al., 2016).

FINANCIAL ANALYSIS 10
V E= 1.20(1+4 %)
9 %−4 % =2.49
Thus the share value is $2.49 and current market share according to the financial report 2016 is
16.60. The share value is calculated on 5 October 2016. The share is traded more than the
estimated value. The share value is 2.49 which do not support the expected growth rate of four
percent and rate of return is nine percent. Thus the value of the share is overvalued on the given
parameters, so it is recommended not to go for investing. The dividend growth of the company is
less than the industry average which also supports the recommendation that not to invest
(Hurleyet al., 2013).
Recommendations
The financial analysis helps to predict the financial position of the company on the basis of
which recommendations has been made. The interest coverage ratio of the company is higher
than the industry average which shows that the company is capable of paying current interest
from the present earnings. The capital structure of the company is sufficient which supports the

FINANCIAL ANALYSIS 11
investment decision of the company and on the basis of it long term investment is recommended.
The share value shows the performance of the company, and it also reflects the willingness of
investors to invest in the company with one dollar on the present earnings. The liquidity ratio of
the company is higher than the industry financial average. The liquidity condition of the
company is positive which shows that the company is capable make an investment so it is
recommended to make long term investments. The profitability ratios of the company show that
the return on total assets and net profit margin of the company is higher than the industry average
which shows the company has enough profit to make an investment (Dolvin et al., 2012) so the
investment in long term is recommended. The price-earnings ratio in 2015 is 13.7% which shows
that the company is able to make long-term investments thus long term investments is
recommended. The constant dividend discount model shows the value of the share with the
required rate of return and expected growth rate (Fernandez et al., 2015). The current market
price is 16.60. Thus it is recommended not to invest in the company. Thus from the above
analysis, it is recommended that the long-term investment strategy would be supported with the
monitoring of the financial performance of the company (Frank et al., 2016).
Conclusion
From the above analysis it can be concluded that the financial position of the company is
satisfactory. The financial analysis is done on the from the past five year financial data of the
company. The current ratio of the company in 2015 is higher than the industry average so it can
be concluded that liquidity of the company is satisfactory. The profitability of the company is
measured by net profit margin and return on total assets. Both the measures are higher than the
industry average which concludes that the performance of the company is satisfactory and the

FINANCIAL ANALYSIS 12
company is generating higher profits. The market value of the company is measured by price-
earnings ratio. The price-earnings ratio in 2015 is 13.7% which can be concluded that the
percentage of investors is willing to invest for one dollar in present earnings. The share value is
$2.49 which is calculated from the constant dividend growth model, and the current market value
is 16.60, so it can be concluded that not to make an investment is recommended.

FINANCIAL ANALYSIS 13
References
Amir, E., Einhorn, E. & Kama, I., 2013, 'Extracting Sustainable Earnings from Profit Margins',
European Accounting Review, 22(4), pp.685-718.
Antoncyzk, R.C. & Salzman, A.J., 2014, 'Overconfidence and optimism: The effect of national
culture on capital structure', Research in International Business and Finance, 21, pp.132-51.
Bahng, J.s. & Jeong, H.-C., 2012, 'Nonlinear behaviours in capital structure decisions in
Australian firms', Review of Pacific Basin Financial Markets & Policies, 15(3), pp.1-19.
Caltex Australia Limited Premium Report Balance Date: December 2015. (2015) (1st ed.).
Australia.
Dividends News. (2016). The Sydney Morning Herald. Retrieved 5 October 2016, from
http://www.smh.com.au/business/markets/quotes/dividends/CTX/caltex-australia-limited
Dolvin, S. D., Jordan, B. D., & Miller Jr, T. W. (2012). Fundamentals of investments: valuation
and management.
Fernandez, P. (2015). Valuation using multiples: How do analysts reach their
conclusions?. Available at SSRN 274972.
Frank, J. F., & Pamela, P. P. (2016). Financial Management and Analysis.
Horrigan, J. O. (1965). Some empirical bases of financial ratio analysis. The Accounting
Review, 40(3), 558-568.

FINANCIAL ANALYSIS 14
Hurley, W. J. (2013). Calculating first moments and confidence intervals for generalized
stochastic dividend discount models.
Jones, C.P., 2008, 'How important is the P/E ratio in determining market returns?', Journal of
investing, 17(2), pp.7-14.
Kothari, S. P., Mizik, N., & Roychowdhury, S. (2015). Managing for the moment: The role of
earnings management via real activities versus accruals in SEO valuation. The Accounting
Review, 91(2), 559-586.
Lazzati, N., & Menichini, A. A. (2015). A dynamic approach to the dividend discount
model. Review of Pacific Basin Financial Markets and Policies,18(03), 1550018.
Lev, B. (1974). Financial statement analysis: A new approach. Prentice Hall.
Machfoedz, M. U. (1994). Financial ratio analysis and the prediction of earnings changes in
Indonesia. kelola, 7(3), 114-134.
Nissim, D., & Penman, S. H. (2001). Ratio analysis and equity valuation: From research to
practice. Review of accounting studies, 6(1), 109-154.
Payne, T.H. & Finch, H.J., 1999, 'Effective teaching and use of the constant growth dividend
discount model', Financial Services Review, 8(4), pp.283-92.

FINANCIAL ANALYSIS 15
Appendix
Figure 1: Industry Financial Averages

FINANCIAL ANALYSIS 16
Figure 2: Financial Ratios

FINANCIAL ANALYSIS 17
Figure 3: Financials-1

FINANCIAL ANALYSIS 18
Figure 4: Financials-2
Figure 5: Industry Statistics

FINANCIAL ANALYSIS 19
Figure 6: Industry segment performance