Financial Report: Commonwealth Bank of Australia Performance Analysis

This report presents a comprehensive financial analysis of the Commonwealth Bank of Australia (CBA). It begins with an executive summary highlighting key findings, including increased net income and strong liquidity ratios. The report then delves into detailed sections covering financial health, profitability (gross profit, net profit, and ROA), liquidity (current and quick ratios), capital structure (debt-to-equity and debt ratios), asset efficiency, and market performance (EPS). The analysis includes ratio calculations and comparisons to prior years, assessing CBA's ability to generate profits, meet obligations, and manage its capital structure. Furthermore, the report examines management assessment, market capitalization, and provides an outlook/forecast on the bank's investment potential. A SWOT analysis is also included. The report concludes with an investment recommendation, suggesting that while CBA is a strong performer, its current share price may be overvalued, advocating for a 'hold' or 'sell' strategy at the present time.

ACCOUNTING FOR MANAGER

Commonwealth bank of Australia
Executive Summary
The report stresses on the evaluation of the major Australian bank that is the Commonwealth
bank of Australia. The report touches upon various tools and assessment such as ratio
analysis, valuation of the stock price and various other information from the market to
ascertain whether the company is good for the purpose of investment. The report projects that
the net income increased from $8639 million in 2016 to $8979 million in 2017 signifying an
increase in the profits. The financial health of the company was strongly followed by the
strong liquidity ratio where the current and the quick ratio rank above 1. It indicates that the
company has high liquidity. Further, the company is highly geared and the debt component is
high as compared to the equity. The share price is valued correctly and currently it should not
be purchased rather should be observed for a correction.
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Commonwealth bank of Australia
Contents
1. Introduction...................................................................................................................................3
2. Financial health..............................................................................................................................3
3. Profitability (table 3, p 16).........................................................................................................4
4. Liquidity (table 4, p 17)...............................................................................................................4
5. Capital structure............................................................................................................................5
6. Asset efficiency (table 6, p 18)......................................................................................................5
7. Market performance.....................................................................................................................7
8. Management assessment..............................................................................................................7
9. Outlook/ forecast..........................................................................................................................7
10. Liquidity and size (table 18, p31).............................................................................................9
11. Principal activities......................................................................................................................9
 SWOT of CBA.................................................................................................................................9
12. Price sensitive announcements (table 11, pg. 21)...................................................................11
13. Conclusion...............................................................................................................................12
References...........................................................................................................................................13
Appendix.............................................................................................................................................15
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Commonwealth bank of Australia
1. Introduction
Commonwealth Bank of Australia is a pioneer in providing integrated financial services. The
business of the bank pertains to retail business, institutional banking, and products that
pertain to management and services. The major chunk of the population in Australia hails the
bank as the major financial institution. Moreover, Commonwealth bank played a leading role
in securing a strong economy that enables employment opportunities, financial security, and
growth. In the year 2017, the bank served more than 16.5 million customers, gave back 75%
of cash profit and employed a whopping 51,800 people (CBA, 2017).
The report evaluates Commonwealth Bank of Australia, a leader in the banking and financial
services with eight major initiatives in hand that projects the commitment level of the
company in the creation of long-term growth that is sustainable in nature. Ratio analysis is
conducted so as to see the impact on the areas of profitability, use of the asset, liquidity and
capital structure. The management’s performance is evaluated with the help of ROA and EPS
(Ferris et. al, 2010). The process of share valuation enables to forecast on the performance of
the company. Further, the performance of share is ascertained and a comparison is done with
the index of the market. An in-depth analysis of the shares has been done followed by a
SWOT analysis. The report considers various information from external sources and
conclusion has been derived whether or not to invest in the company (Brigham & Daves,
2012).
In 2017, the Commonwealth earned an income of $26bn. There was a marginal increment in
the interest income. The figure stands at $33,293 million in 2017 as compared to a figure of
$33,817 million in 2016. The bank had a profit of $9.9 billion out of which three quarters is
provided to the shareholders while the rest remains reinvested. The bank returned profits to
the shareholder in the form of a dividend of $7.4 billion (CBA Dividend, 2017). The
expenses of the bank constituted to $4.8 billion and the tax amount stood at $3.9 billion.
2. Financial health
This section stresses on the profit reaping nature of the company and the potential of the
management with the liquidity factor. A company can attain the desired goal and expand
when it contains the desired liquidity and reaping good profits with a strong performance in
the market (Davies & Crawford, 2012).
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Commonwealth bank of Australia
3. Profitability (table 3, p 16)
The profitability ratio denotes the ability of the company in generating profit from its
activities. It evaluates the ability of the business to generate earnings in comparison to the
expenses and various other costs that are relevant in nature that is incurred during a period of
time. A comparison with the previous year ratio will help in answering about the
performance of the company (Berk et. al, 2015). As for Commonwealth Bank of Australia,
the ratio profitability ratio consists of the gross profit, net profit and the return on assets ratio.
The gross profit margin of the Commonwealth bank has increased from 44.70% in 2016 to
47.37% in 2017 signifying that the bank has a proper manager management of the interest
expense. It can be cited that the management of the bank has controlled the interest expense
thereby leading to gross profit (Wood & Sangster, 2005).
Secondly, the net profit margin is computed by dividing the net profit by sales.
Commonwealth bank’s net profit has shown an increment in 2017 that stands at 26.78% as
compared to 24.92% in 2016. There is a slight or a marginal increment in the ratio that can be
attributed to the better management of the operating income. The increment in the operating
income indicates a strong management and hence, be able to post higher net profit ratio
Brigham & Ehrhardt, 2011).
The ROA indicates the profitability that is linked with the assets of the company. From the
computation, it can be commented that the bank has been able to post a better figure as
compared to the year 2016 however; the increment in the ROA is marginal. Moreover, the
returns should be at the higher end as higher the ROA, the better for the company. The assets
have generated profit for the bank, however; the same can be utilized in a more efficient way
for higher profit.
4. Liquidity (table 4, p 17)
The liquid position determines the ability of the organization in meeting the obligations. The
liquid position is highly observed by various parties because organizations that are heavily
reliant on debt are vulnerable and risky in nature. Banks, suppliers and other parties who
lend to the business generally check the liquid position (Melville, 2013). The liquidity
position can be known with the help of current and quick ratio. A current ratio of more than 1
indicates that the organization has more current assets as compared to the current liabilities
and hence, the obligations will be discharged. As per the computation, it is observed that the
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Commonwealth bank of Australia
current ratio of Commonwealth bank stands at 1.28 times as compared to the ratio of 0.78 in
the year 2016.
As there is no inventory available with the company, therefore, the quick ratio will appear the
same as the current ratio. The quick ratio projects the same finding like that of the current
ratio. The increment in the ratio is a powerful indicator that the business can meet the
obligations with ease and flexibility. The trend of both the current and the quick ratio stands
positively. Both the current and the quick ratio move in the same director hence, additional
loans can be procured and will be granted by the banks and the financial institutions for the
proper ratios.
5. Capital structure (table 5, p 17)
The capital structure constitutes an important part for the company as it determines the
manner in which the company has structured the funds. It needs to be noted that the structure
must be settled in mix blend of equity and debt otherwise the company will fail to produce
the desired effect (Porter & Norton, 2014).
The debt to equity of Commonwealth Bank stands at 9.83 in 2017 as compared to 1.48 in
2016 meaning that the company is highly geared. When debt-equity ratio stands more than 1
it indicates that the company has a major reliance on debt. This ratio gives an instance that
Commonwealth bank relies more on debt and a vast increment is witnessed in 2017 (Bodie et.
al, 2014).
Further, the debt ratio remained the same. In both the year the ratio stood at 0.93 indicating a
major reliance on debt (CBA, 2017).
The equity ratio of the company stands at 6.52% in 2017 as compared to 6.49% in 2016
indicating that a marginal increment has happened. Higher the equity ratio, the better is for
the company. The capital structure is more infused with debt and hence, prone to more risks
(Bodie et. al, 2014).
6. Asset efficiency (table 6, p 18)
For Commonwealth bank, the asset turnover was 3.48 in 2017 as compared to 3.67 in 2016.
This indicates that for each dollar in assets, the company generated $3.48 in sales (CBA,
2017).
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Commonwealth bank of Australia
On the other hand, the Commonwealth bank posted a higher equity ratio in both the years.
Though there was a drop in the equity ratio in 2017 yet the percentage was higher indicating
the efficient use of the bank’s equity management. It implies that the shareholder equity has
been utilized to the optimum level but of a lower extent as compared to the year 2016.
Further, this ratio can be compared with other competitors that belong to the same industry
(Wahlen et. al, 2010).
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Commonwealth bank of Australia
7. Market performance
The Earnings per share of Commonwealth bank has increased in 2017 that stands at 577.6 as
compared to 542.3 in 2016 (CBA, 2017). It augurs a strong signal because a higher EPS is
always required as it projects that the company is highly profitable and contains more profit
for the purpose of distribution to the shareholders. Moreover, a higher EPS ensures an
increment of the stock price (Shah, 2013). Hence, going by the structure of the EPS it can be
commented that the market structure of Commonwealth bank is strong.
8. Management assessment
As at 5th October 2017, the market capitalization of Commonwealth Bank stood at $1,30.45
billion and the current stock price of the company stands at $75.40. The market
capitalization of the company stands strong and as the market capitalization of the company
exceeds $10 billion it is a large-cap company (CBA, 2017). Hence, the size of
Commonwealth Bank provides ample advantages to the organization in terms of less
volatility of the shares while the small caps are exposed to huge volatility. Further, the
stability of the company remains intact and the large-cap companies provide more dividends.
The ROA of the company is positive and the EPS of the company has undergone a strong
change in a positive manner (Subramanyam & Wild, 2014). It signifies a positive trend and
stress that the management of the company is strong and is performing the duty in an
effective manner. Growth in the EPS is one of the vital factors because an organization with a
higher EPS is always vouched for as compared to the company with a lower or a declining
EPS (Albrecht et.al, 2011).
9. Outlook/ forecast
CBA has ensured a strong position in the market with high profits and by regular payment of
dividend. It is a good investment for the long-term perspective. Banks always have a
formidable business and being regulated in nature it helps them to make an immense profit.
CBA stands among the Australia’s big four banks.
At the current scenario, the shares of CBA are not a good buy and must be sold because the
price of CBA is priced to perfection. The company has reached a peak in terms of growth and
going by the trend it can be either hold for a price target of $83.91 or to sell at this juncture to
book profits.
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Commonwealth bank of Australia
Moreover, the banks are always under a cyclical nature of banking and the risks can pull it
downwards. Moreover, valuation plays a significant part in the process of investment for the
blue chips companies until availed at prices that are bargained. In this process, the investors
lock themselves into returns that are mediocre (Choi & Meek, 2011). Moreover, after
reaching a significant height, it is difficult to assume that the prices of the share will move in
the same rapidity as was seen in the past. The growth prospects are not diminished, however,
at the current juncture it is important that the shares should not be purchased. The shares can
be sold currently to book profits and later can be repurchased if any corrections take place
(Libby et. al, 2011).
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Commonwealth bank of Australia
10. Liquidity and size (table 18, p31)
The stock of CBA is liquid in nature as the shares that are traded that are 2,117,817 shares.
The average volume indicates that the company shares are having a high exposure. CBA fall
under the large-cap and hence is able to enjoy the confidence of the investors. Since the
volatility factor is less owing to the strength it is able to get a strong exposure (Deegan,
2011).
11. Principal activities
Since it is the banking industry, the organization is faced with innumerable challenges and
opportunities. Therefore, a SWOT analysis of CBA is done that will stress upon the various
aspect and provide a brief description of its strength, weakness, opportunities, and threats.
 SWOT of CBA
Strengths
1. Leading Australian Bank according to Main Financial Institutions (MFI) rankings: Customer care
has been a bonus point of the CBA. It has maintained the no.1 spot for many customer-related services
with award achievements. Attention is paid more towards an increase in customer satisfaction.
2. Higher quality and well-diversified credit portfolio: CBA invests 58% of its received loans in
property and mortgage while only 13% is used for international trading. Master Netting Arrangements
helps it in the reduction of risks (CBA, 2017).
3. Continues emphasis on technology with new offerings: A whole lot of apps and other associative
projects have been launched by the bank to expand its area and dominance.
4. Robust financial position with high credential ratings: CBA’s profit increased by 7% in 2017 as
compared to 2016. It also provided a huge unexpected dividend. Average net profit seemed to increase
by 7% also.
5. Continually improving work environment: The company posses strong beneficial training programs
so as to increase the skills and ability of its employees. According to the Australian Workplace
Equality Index Awards 2016 the company acquires the second place.
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Commonwealth bank of Australia
Weakness
1. High dependence on off-shore borrowings: CBA to survive through indiscriminate subsidy. This
increases the risk n\and makes it vulnerable in the marketing environment. CBA pays stress ion
eliminating it but some of it still afloat.
2. Embroilment in money laundering scandals: In 2017 the company was found guilty of breaking
53,700 anti-money rules and involvement in a scandal. This was a threat to the company’s image and
as a result, the bonus of senior employees was eliminated (CBA, 2017).
3. Limited geographical diversity: CBA associates its working with New Zealand, China and Vietnam.
The company has no roots in Asia or Europe which deprives it’s of chances to expand.
4. Increasing operating expenses: Expenses of the bank have risen by 4% which is due to the alteration
in technologies and market, but this reason is not satisfactory and the bank seems to now take control
over the personnel costs and currency disorders.
Opportunities
1. Expansion into emerging markets: CBA’s working in China has brought it dominance and
expansion chances on a large scale. Free Trade Agreement between India and Australia will be
finalized soon and this will take the company’s dominance to another level (CBA, 2017).
2. Indigenous Costumer Assistance Line (ICAL): Indigenous and Aboriginal Torres Straits Island get
CBA’s services through telephones. The bank has got some dominating chances by its association
with this section by providing loans.
Threats
1. Phasing out of government guarantees to banks: The deposits and debt of CBA have been depriving
of protection after the sale of the government shares which posses as a serious threat to the company.
2. Higher Capital Requirement by APRA: The new rules set up by APRA and RBA will put pressure
on CBA to push up their tier one ratios and this will affect and potentially increase the interest rates of
the bank (Damodaran, 2010).
3. Fragile business environment and slowdown in China: Lower rates have attracted retail loans but
the field of corporate loan is empty, which is a threat to the bank is. Also, any effect in the Chinese
market will affect the bank as it is its main associative (CBA, 2017).
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Commonwealth bank of Australia
12. Price sensitive announcements (table 11, pg. 21)
The share price of the company underwent a huge volatility in the past few months where the
price of the share surged to a high of $85.05 and fell to the low of $73.24 (CBA, 2017). It
needs to be noted that the high level of volatility provides investors the opportunity to select
the stock and enter into the stock. Further, it can be purchased at a low price. From the
financial statements, it can be commented that the CBA contains a strong management and is
fundamentally strong but certain information has made the share price to fall. The price of the
shares dropped to $76.60 because the Australian Prudential Regulatory Authority is
concerned investigated a deep look into the company (CBA share graph, 2017). Further, a
steep decline in August 2017 has been observed even considering the fact that the bank
reported a $9.93 billion profit. The main reason for the decline can be cited due to the fall in
the bank’s net interest margin that measures profitability and fell by 3 basis points to 2.11%.
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Commonwealth bank of Australia
13. Conclusion
The assessment and evaluation of CBA indicate that the financial health of the company is
strong. When it comes to profitability, the bank has reported strong number. Both the gross
profit margin and the net profit margin have shown an increment. The ROA is even positive.
This signifies that the fundamental of the bank is intact and the assets are utilized in an
effective manner. The liquidity of the CBA is strong because the current and the quick ratio
stands above 1 meaning the bank won’t face any problem while discharging the obligations.
The two-year trend indicates a positive scenario of the company. Further, for a big
organization like CBA, the ratio indicates that the company has a major reliance on the debt
component. However, going by the size of CBA it can be said that for large cap companies
the ratios are a little high. Further, the increment in the EPS as compared to 2016 is a major
highlight that the management is performing in an effective manner.
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References
Albrecht, W, Stice, E & Stice, J. (2011). Financial accounting. Mason, OH:
Thomson/South-Western.
Berk, J, DeMarzo, P. & Stangeland, D. (2015). Corporate Finance. Canadian Toronto:
Pearson Canada.
Bodie, Z, Kane, A & Marcus, A. J. (2014). Investments. McGraw Hill
Brigham, E. & Daves, P. (2012). Intermediate Financial Management. USA: Cengage
Brigham, E.F. & Ehrhardt, M.C. (2011). Financial Management: Theory and Practice. USA:
Cengage Learning.
CBA. (2017). Commonwealth Bank of Australia 2017 annual report and accounts. Accessed
October 5, 2017 from https://www.commbank.com.au/content/dam/commbank/about-
us/shareholders/pdfs/annual-reports/annual_report_2017_14_aug_2017.pdf
CBA share graph. (2017). Commonwealth Bank (CBA) Summary. Accessed October 5, 2017
https://www.commbank.com.au/about-us/shareholders/managing-your-shares/share-
price-graph.html
CBA Dividend. (2017). 2017 Final Dividend, Accessed October 5, 2017
https://www.commbank.com.au/about-us/shareholders/managing-your-shares/
dividend.html
Choi, R.D. & Meek, G.K. (2011). International accounting. Pearson.
Davies, T. & Crawford, I. (2012). Financial accounting. Harlow, England: Pearson.
Damodaran, A. (2010). Applied Corporate Finance: A User’s Manual. New York: John
Wiley
Damodaran, A. (2012). Investment Valuation. New York: John Wiley & Sons.
Deegan, C. M., (2011). In Financial accounting theory. North Ryde, N.S.W: McGraw-Hill
Fields, E. (2011). The essentials of finance and accounting for nonfinancial managers, New
York: American Management Association.
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Ferris, S.P., Noronha, G. & Unlu, E. (2010). The more, merrier: an international analysis of
the frequency of dividend payment. Journal of Business Finance and Accounting, 37(1),
148–70.
Libby, R., Libby, P. & Short, D. (2011) Financial accounting. New York:
McGraw-Hill/Irwin.
Melville, A (2013). International Financial Reporting – A Practical Guide. Pearson,
Education Limited, UK
Porter, G & Norton, C. (2014). Financial Accounting: The Impact on Decision Maker.
Texas: Cengage Learning
Shah, P. (2013). Financial Accounting. London: Oxford University Press
Subramanyam, K & Wild, J. (2014). Financial Statement Analysis. McGraw Hill
Wahlen, J, M, Baginski, S, P, Bradshaw, M, T. (2010). Financial reporting, financial,
Statement analysis and valuation: A strategic Perspective. Ohio: Cengage learning
Wood, F & Sangster, A. (2005). Business accounting 2. New York: Pearson education ltd.
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Commonwealth bank of Australia
Appendix
Table – 1
Statement of Comprehensive income
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
FOR THE YEAR ENDED 30 JUNE 2017
Commonwealth bank of Australia
2017 2016 Horizontal Analysis
$ 000 0 Dollar
Change
Percentage
Change
Revenue 33,634 34,660 -1,026 -2.96%
Profit before income tax 12,126 11,459 667 5.82%
Income tax expense -3,146 -2,820 -326 11.56%
Profit for the period 8,980 8,639 341 3.95%
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Commonwealth bank of Australia
Table 2
Balance sheet
Table 3
Profitability ratio
Return on Assets
2017 2016
Net Income 8979.00 8639.00
Average Assets (968409+958852)/2
=963630.50
(968409/920167)/2
9,44,288.00
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Commonwealth bank of Australia
Return on Assets [(Net Income/Average Assets)*100] (8979.00/963630.50)
*100
=0.93
(8639.00/9,44,288)
*100
=0.91
Net profit Margin
Net Income 8979.00 8639.00
Sales Revenue 33534 34660
Net Profit Margin [(Net Profit after tax/Sales Revenue)*100] (8979/33534)*100
26.78
(8639/34660)*100
24.92
Gross profit Margin
Gross Income 15770 15115
Sales Revenue 33293 33817
Gross Profit Margin [(Gross Profit /Sales Revenue)*100] (15770/33293)*100
47.37
(15115/33817)*10
0
44.70
Table 4
Liquidity ratio
Current Ratio
2017 2016
Current Assets 51492 31764
Current Liabilities 40225 40862
Current Ratio (Current Assets/Current Liabilities) (51492/40225)
1.280099441
(31764/40862)
0.777348147
Quick ratio
2017 2016
Current Assets 51492 31764
Inventory 0 0
Current Liabilities 40225 40862
Acid Test [(Current Assets-Inventory)/Current Liabilities)] (51492-
0/40225
1.280099441
(31764-
0/40862)
0.777348147
Table 5
Solvency Ratio
Debt Equity Ratio
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Commonwealth bank of Australia
2017 2016
Total Debt 571353 536086
Total Equity 60130 58076
Debt Equity Ratio = total debt/ total equity (571353/60310)
9.501962
(536086/58076)
9.230767
Debt Ratio
2017 2016
Total liabilities 898722 910333
Total Assets 958852 968409
Debt Ratio = Total liabilities/ total assets (898722/958852)
0.93729
(910333/
968409)
0.940029
Equity Ratio
2017 2016
Total Equity 60130 58076
Total Assets 976374 933001
Equity Ratio =Total Equity / Total Assets (60130/ 976374)
6.158501
(58076/933001)
6.224645
Table 6
Efficiency ratio
Total Asset Turnover
2017 2016
Net sales 33534 34660
Average total assets 963630.50 9,44,288.00
Total Asset Turnover [(Net sales/Average total
assets) × 100]
(
33534/963630.50)*10
0
3.48
(
34660/9,44,288)*10
0
3.67
Equity Turnover
2017 2016
Net sales 33534 34660
Average total equity 55,939 54,912
Equity Turnover [(Net sales/Average total Equity) ×
100]
(33534/55,939*100)
59.95
(34660/54,912)*100
63.12
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Table 7
Share market performance
Table 8
Earnings per share and ROE
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Table 9
5 year summary
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Table 10
Share price movement
Table 11
Analyst growth expectation
Table 12
Ratios used in the computation
Return on assets (ROA) = (EBIT / Average assets ) x 100
Profit margin = (EBIT / Sales revenue ) x 100
Gross profit margin = (Gross profit / Sales revenue ) x 100
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Commonwealth bank of Australia
Asset turnover ratio = Sales revenue / Average total assets
Days inventory = (Average inventory / Cost of sales ) x 365
Current ratio = Current assets / Current liabilities
Quick asset ratio = (Current assets – inventory) / Current liabilities
Debt to equity ratio = (Total liabilities / Total equity ) x 100
Debt ratio = (Total liabilities / Total assets ) x 100
Equity ratio = (Total equity / Total assets ) x 100
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