Fundamental Analysis of Carsales.com Limited

This paper presents a fundamental analysis of Carsales.com Limited, including ratio analysis, evaluation of share price movement, and share valuation. The analysis shows that the company is financially stable and healthy, with high profitability ratios, relatively high liquidity ratios, and relatively low solvency ratios. The company is also efficient in managing its resources to generate revenue. The paper concludes that Carsales.com Limited is fundamentally stable and healthy.

Fundamental Analysis of Carsales.com Limited 1
FUNDAMENTAL ANALYSIS OF CARSALES.COM LIMITED
Author
Course
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Fundamental Analysis of Carsales.com Limited 2
Executive Summary
The paper presented fundamental analysis of Carsales.com Limited over the past two years.
This was done through ratio analysis, evaluation of share price movement as well as share
valuation. It was found out that Carsales.com was financially stable and healthy. This was
due to its high profitability ratios, relatively high liquidity ratios as well as relatively low
solvency ratios. In addition, the company was found to be efficient enough in managing most
of its resources to generate revenue. On overall, it was found out that Carsales.com Limited
was fundamentally stable and healthy.
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Fundamental Analysis of Carsales.com Limited 3
Table of Content
s
Executive Summary...................................................................................................................2
Introduction................................................................................................................................4
Description of Carsales.com Limited.........................................................................................4
Evaluation of Carsales.Com Limited Performance Ratios........................................................5
Liquidity Ratios......................................................................................................................5
Current ratio........................................................................................................................5
Quick Ratio.........................................................................................................................6
Long-Term or Solvency Ratios..............................................................................................7
Debt/asset ratio...................................................................................................................7
Debt/equity..........................................................................................................................8
Interest Coverage................................................................................................................9
Efficiency Ratios..................................................................................................................10
Asset turnover...................................................................................................................10
Receivable turnover..........................................................................................................11
Inventory turnover............................................................................................................12
Profitability Ratios................................................................................................................13
Net margin........................................................................................................................13
ROE..................................................................................................................................14
ROA..................................................................................................................................15
Market value ratios...............................................................................................................16
EPS....................................................................................................................................16
Comparison of Carsales.com Limited and All Ordinary Index share price movements.........17
Share Valuation........................................................................................................................18
Conclusion................................................................................................................................19
Recommendation......................................................................................................................19
Reference Lists.........................................................................................................................21

Fundamental Analysis of Carsales.com Limited 4
Introduction
Financial analysis comprises of a review of an organization’s financial figures and reports to
reach into a comprehensive decision regarding the financial stands and stability of the
organization. This means that financial analysis is a crucial aspect when evaluating an
organization financial standing. The report would present background of Carsales.com
followed by ratio analysis of the company. It then presents a graphical comparison of
Carsales.com and All Ordinary Index. Finally, the paper presents computation of the intrinsic
value of Carsales.com to determine whether its stock are over or undervalued. It concludes
with recommendations on whether the company is a better investment opportunity for
potential investors.
Description of Carsales.com Limited
Carsales.com is usually the online marine, motorcycle and automotive classified business. In
other words, it is an online marine, motorcycle and automotive classified business operating
in Australia. It is a company operating in the information technology industry listed in ASX
index (Intelligent Investor 2018). Its carsales network is the online destination for selling and
buying trucks, caravans, cars, machinery equipment and motorcycles. The company main
segments comprises of Data and Research Services, Online Advertising Services Finance and
International Related Services (Reuters.com 2018). Its Online Advertising Services division
comprises online advertising offerings like display and classified advertising services
(Bloomberg.com 2018). These allow customers and dealers to advertise non-automotive and
automotive services and goods for sale across its network. It Data and Research division
offers a wide range of products including analysis, reporting and research, software,
photography services, website development as well as hosting, as well as valuation services.
International division comprises of its operations in foreign nations (Reuters.com 2018). On
the other hand, Finance and Related Services division comprises of operations of the

Fundamental Analysis of Carsales.com Limited 5
company’s subsidiary, that is, Stratton Finance Ltd that offers vehicle procurement, vehicle
finance arrangements as well as other related services.
Evaluation of Carsales.Com Limited Performance Ratios
Ratios are usually good parameters which organizations’ management require evaluating
along with the potential and existing investors who could understand financial health of the
firm overall and situations under different levels. According to Ježovita (2015) ratio analysis
is crucial in tracking and showcasing the financial patterns and trend of a particular firm.
Basically, ratios are useful in measuring or examining present financial performance of an
organization compared to previous year. They could also be used in identifying some of the
issues that required being fixed. It could even direct the attention of the analyst to the
probable issues which could be evaded (Faruk & Habib 2010). Financial ratios analysis
would assists Carsales.com shareholders better understand overall health of the firm and its
situation in numerous financial performance levels. Ratios are also useful in determining the
firm’s financial standing and stability. Five main categories of financial ratios exists these
include the short-term leverage, profitability, long-term leverage or the solvency ratio, market
value as well as efficiency ratios.
Liquidity Ratios
These forms of the ratios assist an organization in focusing on its capacity in settling its short-
term financial obligations. They mostly focus on current assets and liabilities of an
organization as showcased on the company balance sheet (Faruk & Habib 2010). In other
words, the ratios measures capacity of an organization in converting its assets into liquid cash
or in obtaining cash in order to meet most of its short-term commitments. The most common
liquidity ratios include the current and quick ratios which are applicable in this case.
Current ratio

Fundamental Analysis of Carsales.com Limited 6
This ratio would be important in evaluating Carsales.com liquidity level. The ratio would
assists in assessing whether Carsales.com is having issues in settling its short-term debts
using its current assets. It is computed by subdividing total current assets with its total current
liabilities.
2016 2017
Current Ratio 1.3 1.33
Table 1: Current ratio
2016 2017
1.285
1.29
1.295
1.3
1.305
1.31
1.315
1.32
1.325
1.33
1.3
1.33
Current Ratio
Current Ratio
Figure 1: Current ratio
In Table 1 and Figure 1 below, it is clear that Carsales.com current ratio increased over the
years from 1.3 to 1.33 in 2017. This means that the company had sufficient current assets to
be used in settling its current debts.
Quick Ratio
This ratio would be important in evaluating Carsales.com liquidity level. The ratio would
assists in assessing how easier Carsales.com is able to settle its debts using its most liquid
assets. The ratio is gotten through addition of all liquid assets like cash, receivables, and
short-term investments and then dividing the outcome with the total current liabilities.
Table 2: Quick ratio

Fundamental Analysis of Carsales.com Limited 7
2016 2017
Quick Ratio 1.22 1.28
2016 2017
1.18
1.19
1.2
1.21
1.22
1.23
1.24
1.25
1.26
1.27
1.28
1.22
1.28
Quick Ratio
Quick Ratio
Figure 2: Quick ratio
As from Figure 2 and Table 2 above, it can be stated that Carsales.com quick ratio increased
from 1.22 to 1.28. Besides, the values are a clear view that for the past two years,
Carsales.com had relatively enough liquid assets in covering its short-term debt
commitments.
Long-Term or Solvency Ratios
The ratios assist Carsales.com management in focusing on their capacity to meet all its long-
term and short-term debts which are long overdue (Faruk & Habib 2010). The ratios measure
how an organization finances most of its overall growth and operations through the use of
diverse sources of finances. They measure proportion between the external and internal
sources of the financing with higher ratio representing higher static indebtedness of an
organization. The most common solvency ratios which would help in assessing the company
financial leverage include debt/equity ratio and the debt/asset ratio
Debt/asset ratio

Fundamental Analysis of Carsales.com Limited 8
The ratio helps in indicating proportion of Carsales.com total assets that is financed through
external sources. Here, higher ratio represents higher financial risk and therefore weaker
solvency. The ratio is gotten by dividing total debt or liabilities with the total assets.
2016 2017
Debt/asset 2.13 1.99
Table 3: Debt/asset
2016 2017
1.9
1.95
2
2.05
2.1
2.15
2.13
1.99
Debt/assets
Debt/assets
Figure 3: Debt/assets
In Table 3 and Figure 3 above, Carsales.com debt/assets experienced a decreasing trend in the
last two years from 2.13 to 1.99. The decrease implies that the company financial solvency
has been increasing over the period which is a good thing for the company and in particular
for its shareholders.
Debt/equity
This financial ratio indicates or measures the measure in which Carsales.com finances its
operations either through debt or equity. The ratio is computed by dividing the total liabilities
with organization’s total equity.
2016 2017
Debt/Equity 0.88 0.7

Fundamental Analysis of Carsales.com Limited 9
Table 4: Debt/equity
2016 2017
0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
0.88
0.7
Debt/Equity
Debt/Equity
Figure 4: Debt/equity
From Figure 4 and Table 4 above, Carsales.com debt to equity decreased from 0.88 to 0.7.
Besides, the ratio for the past two years was below 1 meaning that for this period,
Carsales.com was relying on its equity to finance most of its operations rather than relying on
debt financing.
Interest Coverage
The ratio helps in measuring capacity of Carsales.com to cover most of its interest expenses
or its capacity in repaying the total debt commitments (Faruk & Habib 2010). It displays
number of times Carsales.com’ Limited’s cash flow or income could cover its interest
expenses. Here, higher ration indicates the capacity of Carsales.com in utilizing external
sources of the finances more effectively. It is computed through division of the EBIT with the
interest expenses.
2016 2017
Interest Coverage 19.14 22.45
Table 5: Interest coverage

Fundamental Analysis of Carsales.com Limited 10
2016 2017
17
18
19
20
21
22
23
19.14
22.45
Interest Coverage
Interest Coverage
Figure 5: Interest coverage
As from Table 5 and Figure 5 above, Carsales.com interest coverage increased from 19.14 in
2016 to 22.45 in 2017. The upsurge in the company interest coverage is a clear sign that for
the past two years, Carsales.com has been able to cover all its interest expenses.
Efficiency Ratios
The ratios deal with evaluation of how efficiency an organization is in utilizing its total assets
to produce revenue. It focuses mostly on income statement of the revenues or the balance
sheet of the total assets. They assist in demonstrating how well an organization is being run
from the dynamic view point. The ratios shows how well the company is operated, the length
of the time clients take in making payments, and rate at which the products are sold. In other
words, these ratios measure operating efficiency of an organization. They reflect efficient
organization management of both the long-term assets and the working capital.
The most significant efficiency ratios in evaluating efficiency of Carsales.com management
include inventory turnover, asset turnover and receivable turnover.
Asset turnover
The ratio helps in evaluating how Carsales.com is efficiently or effectively employing its
assets in generating revenue or sales. In this case, low asset turnover might display high

Fundamental Analysis of Carsales.com Limited 11
investment in the total assets compared to amount of revenue generated and vice versus. It is
gotten by dividing total revenue with its average total assets.
2016 2017
Asset Turnover 0.66 0.69
Table 6: Asset turnover
2016 2017
0.645
0.65
0.655
0.66
0.665
0.67
0.675
0.68
0.685
0.69
0.66
0.69
Asset Turnover
Asset Turnover
Figure 6: Asset turnover
In Figure 6 and Table 6 above, Carsales.com ratio augmented from 0.66 to 0.69. With the fact
that for the last two years, the company asset turnover was below 1, it means that
Carsales.com had invested in assets compared to revenue generation.
Receivable turnover
This financial ratio is crucial in Carsales.com analysis since it offers number of the times it
account receivables are gathered every financial year (Phillips, Volker & Anderson, 2009).
The ratio is computed by dividing total revenue with its average account receivables.
2016 2017
Receivables Turnover 9.79 9.68
Table 7: Receivable turnover

Fundamental Analysis of Carsales.com Limited 12
2016 2017
9.62
9.64
9.66
9.68
9.7
9.72
9.74
9.76
9.78
9.8
9.79
9.68
Receivables Turnover
Receivables Turnover
Figure 7: Receivable turnover
As per Figure 7 and Table 7 below, it is evident that Carsales.com receivable turnover
decreased over the past two years from 9.78 to 9.68 in 2016. The decrease in the value means
that Carsales.com has been decreasing its efficiency in collecting money owed to them by
debtors. As such, it is becoming inefficient in collecting its receivables.
Inventory turnover
This ratio helps in measuring or examining number of times inventories were sold. The ratio
is calculated by dividing COGs by its average inventories.
2016 2017
Inventory Turnover 20.25 34.99
Table 8: inventory turnover

Fundamental Analysis of Carsales.com Limited 13
2016 2017
0
5
10
15
20
25
30
35
20.25
34.99
Inventory Turnover
Inventory Turnover
Figure 8: Inventory turnover
As per the Table 8 and Figure 8 above, it is clear that Carsales.com inventory turnover
increased as from 20.25 times in 2016 to 34.99 times in 2017. The increase in the ratio is a
clear picture that Carsales.com is increasing the number of times it sells its inventories over a
year which is a good progress for the shareholders and potential investors willing to invest.
Profitability Ratios
The ratios showcase the capacity of Carsales.com in generating income. They show how well
the company utilizes its assets and how well it manages its daily operations. They showcase
the efficiency in utilizing equity and assets in generating income and its effectiveness in
managing operations (Phillips, Volker & Anderson, 2009). They also assist in measuring
capacity of an organization in generating profitable sales or revenue from most of its
resources. The most significant ratios useful in measuring profitability level of Carsales.com
include the ROE, the net margin as well as the ROA.
Net margin
The ratio helps Carsales.com Limited management in measuring how well the firm is capable
of controlling its direct expenses. The ratio indicates capacity of an organization in
controlling its COGS and its expenses to generate income. A higher net margin is considered

Fundamental Analysis of Carsales.com Limited 14
better for the firm since it indicates that the firm is able to control its costs. The ratio is
computed by dividing net income by the company’s total revenue.
2016 2017
Net Margin 31.76 29.42
Table 9: Net Margin
2016 2017
28
28.5
29
29.5
30
30.5
31
31.5
32
31.76
29.42
Net Margin %
Net Margin %
Figure 9: Net margin
Based on the above computations, it is evident that Carsales.com net margin decreased in the
past two years from 31.76% in the year 2016 to around 29.42% in the financial year 2017.
Despite the decrease, the ratio is a clear view that Carsales.com is able to control all its
operating costs to generate some income.
ROE
This ratio measures Carsales.com efficiency in utilizing or managing its equity in generating
some income. The ratio is computed by dividing the organization’s net income with its
shareholder’s equity.
2016 2017
Return on Equity % 45.2 41.48
Table 10: ROE

Fundamental Analysis of Carsales.com Limited 15
2016 2017
39
40
41
42
43
44
45
46
45.2
41.48
Return on Equity %
Return on Equity %
Figure 10: ROE
As from Table 10 above, it is clear that Carsales.com was doing relatively good in terms of
equity management. This is evident by the fact that the company ROE was relatively high
over the past two years.
ROA
The ratio is used in evaluating overall efficiency of Carsales.com in managing its investment
in total assets and in producing income. The ratio is computed by dividing the company net
income with its average total assets.
2016 2017
Return on Assets % 21.05 20.18
Table 11: ROA

Fundamental Analysis of Carsales.com Limited 16
2016 2017
19.6
19.8
20
20.2
20.4
20.6
20.8
21
21.2
21.05
20.18
Return on Assets %
Return on Assets %
Figure 11: ROA
From the Table 11 above, it can be stated that Carsales.com was profitable and efficient in
managing its assets to generate some net income (Phillips, Volker & Anderson, 2009). This is
due to the fact that the company ROA ratio was relatively high despite the decrease recorded
within the period.
Market value ratios
Such financial ratios are used in showcasing market value of an organization that also relate
to the stock prices. The most significant ratios in this case include P EPS ratio.
EPS
This financial ratio would be used in measuring portion of Carsales.com Limited’s profit
allocated to every outstanding share (Phillips, Volker & Anderson, 2009). This is the single
most significant variable used in determining share value of the company. The ratio is
computed through division of the net income with number of the outstanding shares.
2016 2017
Earnings Per Share 0.45 0.45
Table 12: EPS

Fundamental Analysis of Carsales.com Limited 17
As per Table 13 above, it is evident that the company EPS remained constant for the last two
years. This means that the company shares are doing relatively good.
Comparison of Carsales.com Limited and All Ordinary Index share price movements
Based on Figure 1 below, it is evident that Carsales.com Limited share prices experienced
asymmetrical trends in the past two years. This is evident with the luxurious price
encountered in 2016 where the price is found to have decrease significantly since mid-July
2016 to November same year where the price is then said to have increased for three months
till February 2017. By early February, Carsales.com Limited share price experienced a drastic
decrease for few days where the share then regained. In essence, since March 2017, the share
price has been experiencing significant increase in spite of the slight decrease experienced in
some period though not bad. This means that for the last two years, Carsales.com share price
has not been badly off for any potential investor willing to invest in a viable investment
opportunity.
Figure 1: Carsales.com Limited historical share price movement

Fundamental Analysis of Carsales.com Limited 18
Based on Figure 2 on comparison between Carsales.com share price movement and All
Ordinary Index, it is evident that Carsales.com share price for the past two years was
relatively less volatile than All Ordinary Index. In essence, except the high volatility recorded
between October 2016 and October 2017, the company share price has regained and in now
relatively promising. Furthermore, it is evident that since October 2017, Carsales.com share
price were closely correlated to All Ordinary Index. Besides, since this period, Carsales.com
share price has been relatively above All Ordinary Index share price. This is a good thing for
investors and shareholders since it means that the company is relatively competitive in the
market.
Figure 2: Comparison of Carsales.com Limited with All Ordinaries Index : Source:
INVESTSMART (2018).
Share Valuation
Share valuation can be conducted through a number of formulae. In this case, constant
dividend growth rate approach is applied evaluating the intrinsic value of Carsales.com

Fundamental Analysis of Carsales.com Limited 19
Limited. Constant Dividend growth model it the technique of assessing organization’s stock
price on the basis of theoretical perception that the stocks is worth sum, then discounted to
PV (Faruk & Habib 2010). The model is utilized in valuing stocks on the basis of NPV of
future dividends. The formula in computing the value is as follows:
Stock value = dividend/ (rate of return - growth)
In this case, given that the current dividend value for Carsales.com Limited was 0.237 which
is growing at 4% constant rate with projected rate of return of around 9%, the company
intrinsic value would be computed as follows;
Carsales.com value = Dividend / (rate of return – growth) = 0.237/ (0.09 – 0.04) = 0.237/0.05
= 0.474
The value computed above means the company value ought to be 0.474 rather than 0.237.
Therefore, the current value of 0.237 is relatively below the expected value of the company
share; hence it is undervalued. In other word, the value found through the constant dividend
growth model is above the current market price by 0.237, meaning the value double the
current value. The difference means that the stock is currently undervalued.
Conclusion
In conclusion, the paper carried out a fundamental analysis of Carsales.com. Based on the
ratio analysis, it is evident that Carsales.com was profitable. This is based on the fact that its
profitability ratios were relatively high indicated the management efficiency in generating
income. Further, the company is financial stable and healthy since it relies heavily on equity
financing putting it at lesser risk. Moreover, based on the efficiency and market value ratios,
it is evident that the company is financially healthy. It can also be concluded that the
company shares are currently undervalued. This is due to the fact that the calculated value is
relatively higher than the current value. On overall, it can be concluded that Carsales.com
Limited is fundamentally stable and healthy.

Fundamental Analysis of Carsales.com Limited 20
Recommendation
Given that the company shares are undervalued, there is need for the company management
to do everything possible to ensure that the shares are properly priced. In addition, based on
the fact that the company is financially stable, it is recommendable for the potential and
existing investors to venture more in this company due to the high probability of getting high
returns.

Fundamental Analysis of Carsales.com Limited 21
Reference Lists
Bloomberg.com (2018), Company Overview of carsales.com Ltd: Viewed
from:https://www.bloomberg.com/research/stocks/private/snapshot.asp?privcapId=24404490
Faruk, H & Habib, A (2010), Performance evaluation and ratio analysis of Pharmaceutical
Company in Bangladesh.
Intelligent Investor (2018), Carsales.com Limited (CAR): Viewed
from:https://www.intelligentinvestor.com.au/company/Carsalescom-Limited-CAR-917179
INVESTSMART (2018), Carsales.com Limited (CAR): Viewed
from:https://www.investsmart.com.au/shares/asx-car/carsalescom-limited
Ježovita, A. (2015), ‘Variations between financial ratios for evaluating inancial position
related to the size of a company,’ Review of Innovation and Competitiveness: A Journal of
Economic and Social Research, 1(1), 115-136.
Market Index (2018),Carsales.com Limited (CAR): Viewed
from:https://www.marketindex.com.au/asx/car
Phillips, MD, Volker, JX, & Anderson, S (2009), ‘A Behavioral Comparison of Financial
Ratios for Different Size Privately-held retail and Service Businesses,; Journal of Behavioral
Studies in Business, 1, 1.
Reuters.com (2018), Carsales.Com Ltd (CAR.AX): Viewed
from:https://www.reuters.com/finance/stocks/company-profile/CAR.AX