(PDF) An Assignment on Ratio Analysis

Ratio analysis
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Contents
Introduction......................................................................................................................................3
The Australia and New Zealand Banking Group Limited...............................................................4
Long term solvency.....................................................................................................................4
Short term solvency (Liquidity ratio)..........................................................................................4
Asset utilization ratio...................................................................................................................5
Profitability ratio..........................................................................................................................6
Market value ratios......................................................................................................................7
Commonwealth Bank of Australia..................................................................................................8
Short term solvency (Liquidity ratios).........................................................................................8
Long term solvency ratio (Financial leverage ratio)..................................................................10
Asset utilization ratio.................................................................................................................12
Profitability ratio........................................................................................................................14
Market value ratios-...................................................................................................................15
Comparison between ratios of two banking companies................................................................16
Conclusion.....................................................................................................................................18
References......................................................................................................................................19
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Introduction
Main objective of this report is to analyze financial statement of two companies with the help of
ratio analysis. Ratio analysis helps in giving a sense of understandability to the financial
information provided in financial statements of a company (David, 2011). Analysis of financial
statement is one of the very important function that can help in determining actual progress of
company as comparison can be made with its past year performances and other companies
working in similar industry (). This ratio analysis and comparison with other organization helps
in making plans related to business finance, operation and other strategic business areas. The role
of financial statement analysis increases where the level of competition among various
companies is very high. In such scenarios, a company can gain competitive advantage over other
companies with the help of financial statement analysis (Wheelen et.al, 2017). Here ratio
analysis has been used to analyze financial position of two major banking sector companies in
Australia that are Commonwealth Bank of Australia and The Australia and New Zealand
Banking Group Limited. Ratio analysis has been done in two parts. Firstly each of the two
companies are analyzed on individual basis and then comparison has been made between ratios
of these companies.
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The Australia and New Zealand Banking Group Limited
The Australia and New Zealand Banking Group Limited
This analysis has been sub categories into four subjective analysis of company that are
profitability, efficiency, liquidity and market analysis.
Long term solvency
Ratio Formula 2016 2017
Debt to Equity Ratio Debt/ Equity 14.82 14.22
Interest coverage
ratio EBIT/ interest expense 21129.00 21738.00
Debt to equity ratio- debt to equity ratio is ratio that represents the weightage of debt and equity
component in capital structure of an organization. It is important to maintain a balance between
these two components. Industry average debt to equity ratio is considered as 2:1 (Pratheepkanth,
2011). Here the ratio of 14.82 and 14.22 for year 2016 and 2017. Hence it can be said that debt
component in ANZ banking group is very high. It can be very harmful for company as expenses
in relation to debt component would be very high as compared to equity.
Interest coverage ratio- it is the ratio that determines the availability of funds with the company
to pay off its interest expenses for a particular year. The availability of profits to pay off interest
is very important as interest are mandatory to be paid on long term and short term loans and
borrowings. The interest coverage ratio of ANZ bank is very high. It can be said that company
would not have any problem in paying its interest expense in future.
Short term solvency (Liquidity ratio)
In addition to long term loan and borrowings, company also requires money for working capital
to manage day to day business. Hence there is a requirement to assess whether such short term
borrowing can be paid within given time or not.
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