Caltex Limited Financial Analysis: Investment Suitability Report

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Managerial Finance
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Executive Summary:
Investment decisions are very crucial in nature and required to be made with enough caution to
ensure well earning in future and protection from capital losses. This report is based on Caltex
Limited which is a leading ASX listed company and, affianced in production and distribution
activities of petroleum and oil products. During the preparation of this assessment, different
aspects of the financial condition of the company are evaluated and it is outlined that the
company is suitable for investments. Several factors like Dividend history, current investment
portfolio, equity valuation and more are required to be considered in decision making and this
report explains the same.
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Table of Contents
Executive Summary:........................................................................................................................2
Introduction:....................................................................................................................................4
1:..................................................................................................................................................5
2:..................................................................................................................................................6
3:..................................................................................................................................................7
4:..................................................................................................................................................8
5:..................................................................................................................................................9
6:................................................................................................................................................10
7:................................................................................................................................................11
8:................................................................................................................................................12
Conclusion:....................................................................................................................................13
References:....................................................................................................................................14
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Introduction:
This report is going to be prepared to elucidate the concepts of different financial theories and
explain the application of such theories in a practical environment. Information that is going to
be provided in the report will be based on the company Caltex Limited and help to understand
the financial stability of the company. Mainly report is going to be created with the purpose of
evaluation of financial stability of Caltex so that appropriate decisions of capital investment can
be made. Different Theories of dividend, capital cost, equity structure are discussed in this
report and study of this report will be very supportive of the learner to gather the practical skills
of financial analysis.
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1:
Caltex is leading company and focused to maximise the wealth of shareholders. Analysis of
Caltex Limited is indicating that significant growth has been earned by the company in the recent
period and good profits were delivered to shareholders. For instance, P/E ratio of the company is
indicating that EPS for 2017 was 237.4 per share and market price of the share at the same time
was $ 26 per share (Annual report, 2017). From this evaluation, it can be concluded that the
stock of the company is undervalued and investment in Company will be highly suitable for the
investors.
**Price/Earnings ratio = market price per share / earning per share
= 26 / 237.4 = 10.95%.
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2:
Analysis of market share price is an attractive way to investigate the investment suitability of a
company. A company which is indicating incremental trends in security prices along with low
fluctuation will be most suitable for investors because it is delivering capital protection along
with incremental gains. Investor desires maximum return along with low leverage risk and
Caltex is providing both facilities to investors. From the above presentation, it is clear that high
increment in share prices was experienced by the Caltex during the year 2013 to 2015. In the
second quarter of 2015, the share price of Caltex was reached to an all-time high level which was
maintained for a long period. At the end of 2015, a significant reduction in share prices was
reported by the Caltex shares (Tradingeconomics, 2019). After attaining the highest price of $ 38
per share in 2016 beginning, the share price of Caltex stated decline and it reduced to $ 25 per
share in 2017. From the third quarter of 2017, share prices started rising and which was
maintained up to the year 2018. On the basis of above five-year evaluation of the company, it
can be said that shares of the company highly fluctuate in nature.
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3:
Short term investments are designed in such a way that derives return in a shorter period of time.
When investments are done for a period of less than 1 year then it will be considered as short
term investments. There are following short term investment options which are beneficial for
better returns.
Bank fixed deposit, the recurring deposit is the options which can be exercised to get better
returns. Investment can be done for 2-3 years but the amount can be withdrawn before maturity.
In this type of investment return is around 6-8% p.a (Caltex, 2017)
On the other hand, long term investments are done by such investors who can hold securities.
The risk factor in long term investment decisions is very few. While investing in any security
investor decide return % & associated risk factor. Higher the risk higher will be the return.
Return in long term investments is all around 15%. Long term investment provides a better
return over periods of 10 years (Caltex, 2017).
Main causes of volatility in return over the corresponding holding period are described as below:
-
Industry, market conditions, political environment, economic conditions, growth & risk factors
are the following major factors which cause volatility in returns. For example- In the oil sector
weather conditions & government conditions plays an important role to increase or decrease the
price of oil (Caltex, 2017).
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4:
Valuation of company equity can be done by following methods which are defined as below-
 Asset backing method- in this method the valuation is done on the basis of assets of the
company. Shares of the company are valued on the basis of revalued figures of assets.
Accordingly, this method is also known as the intrinsic value method.
 Yield basis method- Yield simply means an effective rate of interest at which investors earn
income. Under this method return in always calculated in % form.
 Fair value method- According to this method of valuation there is required to calculate
intrinsic value & yield value first.
 Return on capital employed method- Under this method valuation is done by applying the
rate of return (after tax) on capital employed. The rate of return is the desired rate of return
expected by an investor to earn on capital (Haque, 2015).
 Price-earnings ratio method- Price earnings ratio is the calculated market price per share
divided by earning per share of the company. By applying price earnings ratio evaluation of
equity can be done in an effective manner (Haque, 2015).
Equity valuation of Caltex limited is increases from the last years. The market price of the share
is at a stable price. Hence investors of the company are advised to hold the shares.
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5:
Caltex is in a process to the development of Lubricants & oil, which has an efficient capacity to
deliver a flexible new source of oil supply to the southern states of Australia. This investment
project is a long term project which required a huge amount of investment to continue. Caltex is
considering taking the final decision to run this project in the year 2019. Caltex is also
considering investing in new technologies solutions. Over & above 300 million customers will
get benefited. Caltex faces the problem of the increased prices in recent years. In the year 2018
Caltex introduces 12-month low & fixed rate offers. The project considers being very typical for
Caltex because it required huge time & investment. Management of the Caltex is required to take
appropriate decision on time. One wrong decision of management can become the reason for the
failure of this project.
Management of Caltex is required to set proper plans, policies & procedures in such a manner to
achieve organizational goals & objectives. Employees of the company required to strictly follow
the plans & policies set by the top level management of Caltex. Management is also considering
the time value of money concepts to estimate the required amount of investments with estimated
discounted benefits.
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6:
Dividend policy in any business organization simply means the set of guidelines which is used
by the company in order to decide how much part of the earning will be distributed to the
investors of the company. Out of total earning company have two options whether to retain
earning for investment projects or to distribute earning in form of a dividend to investors (Caltex,
2017).
Caltex presented their half-yearly results for the financial year 2018. As per financials presented
by Caltex interim dividend is down by 5%. The payout ratio of Caltex is approx. 50.3% during
the year. The dividend payout ratio of Caltex is not certain. Sometimes it increases or decreases
at the same time.
Progressive dividend policy simply means dividend paid by the company is always in an
increasing mode. In case if earning per share falls then it is required that dividend per share will
not be reduced (Caltex, 2017). Dividend payout history of Caltex clearly shows it does not
follow the progressive dividend policy because it does not follow the constant dividend payout
policy.
Following are the factors which affect corporate dividend policy are as follows-
The first factor is the nature of the industry to which the company belongs. The ownership
structure of the company also affects corporate dividend policy. Shareholders expectation is also
the factor impacts the dividend payout policy.
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7:
Current capital structure simply means how a company by using different sources of funds
finances their complete operations for the purpose of growth. Debt to equity ratio of the company
also describes the capital structure of the company balances of both the items is listed in the
balance sheet. Such companies which use more of the debts in comparison to equity to finance
their assets having a higher leverage ratio (Merritt, 2019). This will show the aggressiveness of
the company. The company is able to take risks to achieve higher profit goals.
In the case of Caltex limited the debt-equity ratio is 0.312. It is calculated by using the formula
of debt/equity. In any corporation, the idle debt to equity ratio is 1. In the case of Caltex limited,
it is below the optimal ratio. Hence it can be said that the capital structure of the Caltex limited is
not effective & good (Merritt, 2019).
As per the perspective of investors of the company they will look how strong the capital structure
of the company is. In case of Caltex limited capital structure not so good hence this will affect
the decision making power relating to the investment of the investors.
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8:
Recommendations:
From the above analysis, it is understandable that Caltex is a leading company and doing well in
the relevant sector. From an income analysis of a company, it is found that the earnings of the
company are increasing every year and conditions of profitability are solid. Evaluation of share
prices is indicating that share prices highly variable so the capital risk is also associated with the
company. From the investment analysis, it is outlined that the company is focused on increasing
the assets-base and business so many expansion plans are going to be operated. Analysis of
dividend history is indicating that hybrid dividend policy is going to be followed. From all the
above findings, it can be said that Caltex is suitable for investors. It is required to be considered
that the above recommendations are based on evaluation results and the real situation may be
different due to market uncertainty.
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