Paper On Analysis Of Financial Performance Of Commonwealth Bank
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Added on 2019-09-30
Paper On Analysis Of Financial Performance Of Commonwealth Bank
Added on 2019-09-30
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Student name: Kate BickfordSubject name:Financial management (FMGT)Word count: 2750Title: Financial analyses of the Commonwealth Bank over a five year period. Background: Financial literacy helps you to become a better manager. Understanding the financialside of the business will make you more effective on the job and will make your work life more meaningful. The two core activities of financial management are to manageprofitability and manage liquidity. If either of these two activities is neglected it can lead to the demise of an organisation. Hence, these two aspects guide the decision making for any manager. Issuing bonds (debt) and/or issuing stocks (shares), enables the corporation to manage the money it needs to finance the assets of the business. Therefore, being able to value these financial securities is also an important skill to have.Requirement: Your task is to analyse the historical (for the last five years) performance of a listed company and present your findings in the form of a report, which will cover both qualitative and quantitative performance elements in a logical cohesive format.Please note: If you are working for a company listed on the stock exchange, use this opportunity to complete the exercise on that company. Otherwise, feel free to value acompetitor or a company that interests you. However, note that the company you select must be listed on a stock exchange and have a history of paying dividends.The qualitative component of your discussion should include brief background information on the company including how they are placed within the industry, and a brief overview of the recent stock price movements for the company. The quantitative component should include an initial analysis of trends in the major items 1
contained in the profit and loss statements and balance sheets, followed by an analysis of the following important ratios measuring liquidity, profitability, capital structure and market-value aspects of the company performance:oLiquidity: Current ratiooProfitability: Net profit margin ratio and Return on total assetsoCapital structure: Debt ratio and Interest cover ratiooMarket value: Price-earning (P/E) ratio.Your analysis should highlight the important changes within these ratios over this period and identify the reasons for significant changes. Since these financial ratios are limited to the particular organisation, it is also useful to compare these ratios to other businesses in the same industry or by using industry averages.You are also required to calculate the value of a stock (share) of the listed company selected above, using the Constant Dividend Growth Rate model. Go to your relevant stock exchange site (e.g. www.asx.com.au if using an Australian listed company) and find the latest share price. Assume the company chosen above has a 4% dividend growth rate and the requiredrate of return is 9%. Compare that stock value with the current stock market price. Are there any differences? You are required to explain these differences.Analyse and interpret the ratios and the other data with reference to the theoretical concepts introduced in this subject to evaluate the company’s operations and performance. Discuss limitations if any. Taking into account the quantitative and qualitative analysis, you are then required to make a recommendation on whether to:1.Invest in the company2.Do not invest in the company.2
Executive SummaryThis paper analyses the financial performance of one of Australia big four banks; the Commonwealth Bank over a period of five years. The commonwealth Bank is one of Australia’s leading financial institutions offering general banking and business banking needs as well as many other services such as insurance and superannuation and has been in operation since 1911. During the five year period the Commonwealth Bank has seen steady revenue growth and is operating on par orabove expected industry averages. The CBA services over 800,000 shareholders. This paper will look at the performance to date of the firm over the five year period; demonstrating that the firm has proven management strategies, a solid share dividend history and are adaptable to economic and fiscal changes. The report firstly looks at the qualitative analyse through an overview of the firm and historical stock movements. The paper with then look at the quantitative component through analyses of liquidity, profitability, capital structure and market value ratios and benchmarking to show business and profit trends in the industry. These ratios will demonstrate strong performance of the firm. The paper will use the constant dividend growth rate model to look at the value of the share. And in conclusion the paper will look at some recommendations for investors. Please acknowledge limitations of analyses within the restricted word count limit. 3
Table of Contents1. Introduction...............................................................................................................62. Qualitative Analysis.................................................................................................63. Company Overview..................................................................................................64. Stock Movements.....................................................................................................7Table 1: Average CBA share price............................................................................8Table 2: The big four banks stock price over the past three months........................95. Quantitative Analysis................................................................................................96. Ratios......................................................................................................................106.1 Liquidity: Current Ratio......................................................................................10Table 3: Current ratio: CBA.....................................................................................116.2 Profitability: Net profit Margin ratio....................................................................11Table 4: Net profit margin ratio for CBA..................................................................11Table 5: Net profit margin; CBA vs NAB.................................................................126.3 Profitability: Return on total assets...................................................................12Table 6: Return on Assets for CBA.........................................................................126.4 Capital Structure: Debt and interest ratio..........................................................12Table 7: Debt ratio CBA vs NAB.............................................................................13Table 8: Interest ratio CBA......................................................................................136.5 Market value: Price Earnings ratio (P/E Ratio).................................................13Table 9: PE ratio for CBA and WBC.......................................................................147. Stock valuation.......................................................................................................14Table 10: Growth rate of CBA shares over 5years.................................................158. Conclusion..............................................................................................................15Table 11: The Big Four onwards and upwards.......................................................169. Recommendations..................................................................................................16References.................................................................................................................184
Appendix 1: CBA 2011 - 2015....................................................................................19Appendix 2: CBA Growth and ratios 2011 – 2015.....................................................22Appendix 3: CBA industry average............................................................................24Appendix 4: CBA historical current ratio (Quarterly data)..........................................255
1. IntroductionBy analysing the qualitative and quantitative aspects of a business’s past performance investors can be guided in making decisions on how a firm performs overall and how profitable and risky the investment may be. This paper will look at the financial performance of the Commonwealth Bank (CBA) apublic listed company listed on the ASX in 1991. This paper will look at the last five years of performance for the firm and conduct analyse of the firm’s overall performance. The paper will look at the qualitative component firstly through the firm’s background and historical stock price to see how the firm performs in the market place. The paper will then look at quantitative measures of the CBA by analysing financial trends and ratio on liquidity, profitability, capital structure and market value whilst benchmarking this analysis against the firm’s performance over the five years. The paper will additionally look at a stock valuation exercise using the share valuation dividend discount model and in conclusion will summarise the analyses of the firm and recommendation as to if the CBA is a sound investment. Firms need to take in to account the five basic principles of finance; money has a time value, there is a risk-return trade-off, cash flows are the source of value, market prices and individual response to incentives, the analyses will tie to some of these key principles. 2. Qualitative AnalysisQualitative analysis looks at things that cannot be measured from the financial statements of a firm but more relate to the management quality, corporate governance and environmental factors affecting the business. 3. Company OverviewThe Commonwealth Banks is one of Australia’s big four banks, the bank has serviced personal and business customers for general banking and business 6
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