Managing Finance: Analysis of Financial Information and Stock Valuation

This report focuses on managing finance, analysing the financial information of Insurance Australia and DBS Group Holdings. It covers comparative financial statement analysis, changes in capital structure, reasons for differences, cost of equity and debt, weighted average cost of capital, valuation using DDM, and investment recommendations.

Managing finance
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Contents
INTRODUCTION...........................................................................................................................1
MAIN BODY..................................................................................................................................1
(a) Comparative financial statement analysis..............................................................................1
(b) Commentary on how the capital structure has changed over the 5 years..............................2
(c) Reasons justifying why there could be differences in the capital structures of the two
companies....................................................................................................................................3
(d) (i) Cost of equity....................................................................................................................3
(d) (ii) Cost of capital or debt......................................................................................................4
(e) Weighted average cost of capital...........................................................................................4
(f) Valuation of the shares using Constant Growth Dividend Discount Valuation model
(DDM).........................................................................................................................................5
(g) Discussing the appropriateness of using this model..............................................................5
(h) Recommendation for investments..........................................................................................5
CONCLUSION................................................................................................................................6
REFERENCES................................................................................................................................7
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INTRODUCTION
Managing finance is a procedure of analysing the financials and stocks of an organisation
(Bracking, 2019). The main aim of this report is to develop an understanding and capability of
analysing the financial information of an organisation. For this two organisations are selected in
this report which are Insurance Australia that is listed at ASX and DBS Group Holdings Ltd
which is listed at SGX. In this report, the financial information of these companies will be
analysed using techniques as ratio analysis, CAOPM, WACC, DDM and more.
MAIN BODY
(a) Comparative financial statement analysis
PROFITABILITY RATIOS
Insurance Australia
2015 2016 2017 2018 2019
Gross profit margin Gross profit / Sales * 100
Gross profit 949 920 1334 1410 1332
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Sales 11923 12465 12843 12797 13529
Result 7.96% 7.38% 10.39% 11.02% 9.85%
Net profit margin Net profit / Sales * 100
Net profit 410 349 285 238 207
Sales 11923 12465 12843 12797 13529
Result 3.44% 2.80% 2.22% 1.86% 1.53%
DBS Group Holdings
2015 2016 2017 2018 2019
Gross profit margin Gross profit / Sales * 100
Gross profit 6037 6517 7069 7369 8286
Sales 10830 11440 12270 13,183 14,544
Result 55.74% 56.97% 57.61% 55.90% 56.97%
Net profit margin Net profit / Sales * 100
Net profit 4567 4360 4504 5653 6429
Sales 10830 11440 12270 13,183 14,544
Result 42.17% 38.11% 36.71% 42.88% 44.20%
INVESTMENT RATIOS
Insurance Australia
2015 2016 2017 2018 2019
Return on equity Net income / Shareholder's equity
Net income 410 349 285 238 207
Shareholder's equity 7020 6790 6790 6,941 6710
Result 0.06 0.05 0.04 0.03 0.03
Earnings per share Net income / Average outstanding shares
Net income 410 349 285 238 207
Average outstanding
shares 2370 2370 2310 2310 2310
Result 0.17 0.15 0.12 0.10 0.09
DBS Group Holdings
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2015 2016 2017 2018 2019
Return on equity Net income / Shareholder's equity
Net income 4567 4360 4504 5653 6429
Shareholder's equity 42800 46970 49800 49888 51800
Result 0.11 0.09 0.09 0.11 0.12
Earnings per share Net income / Average outstanding shares
Net income 4567 4360 4504 5653 6429
Average outstanding shares 2500 2540 2560 2550 2550
Result 1.83 1.72 1.76 2.22 2.52
(b) Commentary on how the capital structure has changed over the 5 years
In order to analyse the capital structure of an organisation, it is important to observe the
balance sheet of a company. The first company to be focus upon is Insurance Australia Group
Limited. This company has a capital structure in which higher capital is acquired from external
parties. The retained earnings which contribute in the capital of a company is consistently
negative in case of this company. Due to consistent changes and fluctuations in the capital, there
is no increasing or decreasing pattern has been seen in the capital structure of this company
(Jackson, 2018).
Second company which has been selected is DBS Group Holdings Ltd. This company has
an effective capital structure as the overall capital of this company is continuously increasing.
The elements of capital structure of this company does not include any retained earnings and not
involves common stock along with shareholder’s equity. Over the 5 years, the capital structure of
this company has changed as the ratio of debt to equity is continuously incrementing.
(c) Reasons justifying why there could be differences in the capital structures of the two
companies
By observing the capital structures of both the organisations, it has been seen that there is a
variation in both company’s capital structure as one company has retained earnings as an
important element of their capital but other company does not even consider this element if the
capital structure (Zhao and Huchzermeier, 2018). There are various reasons due to which capital
structure of two organisations in same industry varies. These reasons include the different fund
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requirements of companies and the size and scale of the companies. When two or more
companies operating in same market has different fund requirements then the capital structure
varies has the ratio of debt and equity differentiates. Similar to this, when the size, scale or scope
of two companies varies, then the capital structure of those companies various varies due to
different revenue streams and fund allocations (Drechsler and Natter, 2012).
(d) (i) Cost of equity
The daily stock prices of two selected companies are collected and recorded in Excel
document. Using the stock prices and additional information cost of equity is determined below:
Cost of equity Risk free rate + Beta * Risk premium
Insurance Australia DBS Group Holdings
Risk free rate 5.84% 6.20%
Beta 0.65 1.18
Risk premium 4% 4%
Result 8.44% 10.92%
(d) (ii) Cost of capital or debt
Cost of capital Interest expense / Total debt (1 -t)
Insurance Australia DBS Group Holdings
Interest expense 94,000 59,67,000
Total debt 2,25,76,000 52,71,47,000
Tax rate for year 2019 3.66% 6.57%
Result 0.40% 7.43%
(e) Weighted average cost of capital
The Weighted average cost of capital for both the companies are calculated using the cost
of equity and debt which were calculated in above sections:
WACC Formula [E / (D + E)] re + [D / (D + E)] rd (1 -t)
E Market value of equity
D Market value of debt
re Cost of equity
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rd Cost of debt
t Corporate tax rate
Insurance Australia
E 64,04,000
D 2,25,76,000
re 8.44%
rd 0.40%
t 3.66
Result 2.02%
DBS Group Holdings
E 5,09,81,000
D 52,71,47,000
re 10.92%
rd 7.43%
t 6.57%
Result 95%
(f) Valuation of the shares using Constant Growth Dividend Discount Valuation model (DDM)
DDM formula
Dividend per share / (Required Rate of Return –
Dividend Growth Rate)
Insurance Australia
Dividend per share 1.6
Required Rate of Return 1
Dividend Growth Rate 0.3
Result 2.285714286
DBS Group Holdings
Dividend per share 3.93
Required Rate of Return 1
Dividend Growth Rate 1.23
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Result -17.08695652
(g) Discussing the appropriateness of using this model
Constant Growth Dividend Discount Valuation model is often considered as Dividend
discount model. This model is appropriate for the valuation of two selected companies as this
model is highly suitable for mature organisations which are stable in nature and are at the stage
where they can afford to pay dividend to their shareholders (Massingham, 2014). There are some
organisations which are difficult to value such as banks and financial institutions. This model of
dividend discount is appropriate for such organisation and as both the organisations selected are
a part of finance and insurance industry, it can be said that this model is appropriate for both the
companies.
Besides DDM, there are few others models as well that can be used by an organisation to
value their stocks; such models or methods include FCFE. This model of FCFE is considered as
appropriate for large business organisations which has a stable capital structure and as the capital
structure of both the organisations is already analysed in above sections, it can be said that DDM
is more effective model of valuation than FCFE for both the organisations as not only these
organisations pay dividend or operate in finance industry, both of these organisations experience
fluctuations and yearly variations in their capital structure (Maskell, Baggaley and Grasso,
2016).
(h) Recommendation for investments
All other above quantitative and qualitative analysis which are conducted above has helped
in developing a familiarity with both the organisations stock valuations (Malmström, Wincent
and Johansson, 2013). Considering all the observations, it is considered suitable to recommend to
invest in DBS Group Holdings. There are various reasons which can justify this
recommendation; these reasons are:
The investment amount of 15 million dollars is a large amount which must not be invested
by taking a huge risk due to which it is viable to invest in an organisation which is constantly
providing positive and generous return un per share.
Earnings per share and return on equity are two investment ratios which were calculated for
both the organisations. These ratios clearly reflect that the investment performance of DBS
Group Holdings is better than Insurance Australia Group.
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Another reason that can justify the recommendation is the high beta value and risk premium
rate of DBS Group Holdings which implies that with increasing risk on the investment, the
chances of earning high earnings by the investors will also increase.
Another reason for justification is the capital structure of DBS Group Holdings. The capital
structure of this company is observed to be more stable than Insurance Australia Group as even
after having an increasing capital in every year, the capital is increasing with an enhancing and
stable rate.
CONCLUSION
From the above report, it has been concluded that the concept of managing finance does not
only helps in analysing the financial statements of an organisation but also helps in analysing the
stock process of an organisation in order to make an effective investment decision. It has also
concluded that DBS Group Holdings is a better choice for investment.
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REFERENCES
Books and Journals
Bracking, S., 2019. Financialisation, climate finance, and the calculative challenges of managing
environmental change. Antipode, 51(3), pp.709-729.
Drechsler, W. and Natter, M., 2012. Understanding a firm's openness decisions in innovation.
Journal of business research. 65(3). pp.438-445.
Jackson, D., 2018. Accounting and finance graduate employment outcomes: Underemployment,
self‐employment and managing diversity. Australian Accounting Review.
Malmström, M., Wincent, J. and Johansson, J., 2013. Managing competence acquisition and
financial performance: An empirical study of how small firms use competence
acquisition strategies. Journal of engineering and technology management. 30(4).
pp.327-349.
Maskell, B. H., Baggaley, B. and Grasso, L., 2016. Practical lean accounting: a proven system
for measuring and managing the lean enterprise. Productivity Press.
Massingham, P., 2014. An evaluation of knowledge management tools: Part 1–managing
knowledge resources. Journal of Knowledge Management. 18(6). pp.1075-1100.
Zhao, L. and Huchzermeier, A., 2018. Managing Supplier Financial Risk with Pre-shipment
Finance Instruments. In Supply Chain Finance (pp. 121-142). Springer, Cham.
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