ACCT2005 Module 4: Financial Analysis of Commonwealth Bank Report

This report presents a financial analysis of the Commonwealth Bank, examining its performance through various financial ratios and cash flow analysis. The analysis includes an evaluation of key ratios such as operating profit ratio, net profit ratio, debt-equity ratio, and dividend-related ratios, comparing data from 2017 and 2018. The report also assesses the bank's cash flow activities, including operating, investing, and financing activities, highlighting trends and potential areas of concern. Furthermore, the report analyzes the bank's financial position, offering recommendations for improvement, such as investing in current assets to strengthen liquidity. The analysis also considers the interrelationship between the bank's financial policies and its strategies, providing a comprehensive overview of the bank's financial health and strategic direction.

FINANCIAL ANALYSIS

FINANCIAL ANALYSIS 1
Contents
Introduction.................................................................................................................................................2
Key Ratios...................................................................................................................................................2
Cash Flow Analysis.....................................................................................................................................6
Analysis of Financial Position.....................................................................................................................8
Recommendation.........................................................................................................................................9
Interrelationship between financial policies and its strategy........................................................................9
Conclusion.................................................................................................................................................10
References.................................................................................................................................................11

FINANCIAL ANALYSIS 2
Introduction
Financial analysis is the process of evaluation of businesses, budgets, projects and the other
finance related entities in order to determine their performance and suitability. The process of
financial analysis is used to evaluated the organization stability, solvent, liquidity and profitable
to warrant a monetary investment. The financial analysis of an organization has been done on the
basis of income statement, balance sheet and cash flow statement. It is essential for an
organization to evaluate the financial performance for the future survival. The report is based on
the financial analysis of the organization by evaluating the financial ratios. Common wealth bank
has been selected to analyze the financial performance. The Commonwealth Bank is an
Australian multinational bank with the businesses across New Zealand, Asia, United Kingdom,
and Union States. The company provides the various financial services that include fund
management, superannuation, investment, insurance and broking services (The common wealth,
2019a).
In the beginning of this report, key ratios of the organization will be evaluated to analyze the
financial performance. After that, cash flow analysis will also analyze to evaluate the liquidity
and operation activities of the company. At the end, the strategies are also recommended for any
bad reasons.
Key Ratios

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Financial Ratio
Analysis

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2017 2018
Operation
Management
Operating Profit Operating Profit 13665 13420
Revenue From Operation(Net
Sales)*100 23,227
58.8
3 23,731
56.5
5
Net Profit Ratio Profit After Tax 9,786 9,394
Sales (revenue)*100 17,543
55.7
8 18,341
51.2
2
Dividend Policy
Dividend Payout Ratio Dividends Paid 6084 5364
Net Income 17,543 0.35 18,341 0.29
Dividend yield Annual dividend 6084 5364
stock price
74.98
81.1
4
68.72
78.0
6
Financing Strategy
Debt Equity Ratio Total Liabilities
912,65
8
907,30
5
Total shareholders’ Equity 63,114 14.4 67,306 13.4

FINANCIAL ANALYSIS 5
6 8
Interest Coverage EBIT 25,386 26,132
Interest Expenses 15,758 1.61 16,202 1.61
Investment
Management
Total Asset Turnover Sales 17,543 18,341
Total Asset
976,31
8 0.02
975,16
5 0.02
Receivable turnover Sales 17,543 18,341
Account Receivable 13395 1.31 14648 1.25
(Source: Common Wealth Bank, 2018b)
In the operation management ration, operating profit ratio and net profit ratio has been selected.
Operating profit ratio- It helps to evaluate the profit of the organization after paying variable
cost of production such as wages, raw material and the others. It is required for the company to
evaluate the benefits after paying the wages due to which this ratio is selected for evaluation
(Wilkinson, 2013).
Net Profit Ratio- This ratio reveals the remaining profit after the cost of production,
administration, financing. It is one of the best measures that help to evaluate the overall

FINANCIAL ANALYSIS 6
performance of the organization. This ratio is selecting to evaluate the overall performance of the
company (Greco, Figueira, & Ehrgott, 2016).
Under the Investment Management, Total Asset Turnover and Receivable turnover has been
selected.
Total Asset Turnover- The asset turnover ratio measure the values of sales and revenue relative
to the value of its assets. It helps to measure the liquidity which is required to measure for future
investments.
Receivable turnover- It states the company effectiveness in collecting its receivables amount by
debtors. This is also necessary to evaluate for improvement in the process of organization.
In Dividend Policy, Dividend Payout Ratio and Dividend yield has been selected.
Dividend Payout Ratio- It states the amount of net income that an organization has to pay to its
stockholders in terms of stockholders in terms of dividend. It is required to measure the dividend
paid amount to evaluate the strong financial situation.
Dividend yield- It also helps to evaluate the financial position of the company.
Under Financing Strategy, Debt Equity Ratio and Interest Coverage have been selected to use it
for evaluation.
Debt Equity Ratio- It is required to evaluate the debt in terms of evaluation of company stability
in the market.

FINANCIAL ANALYSIS 7
Interest Coverage- It measures the ability of the company to meets its interest payments. This
ratio is necessary to evaluate for the bank that is why it is selected under financing strategy
(Ready ratios, 2018).
Cash Flow Analysis
(Source: Common Wealth Bank, 2018b)
Operating Activities

FINANCIAL ANALYSIS 8
In the year 2017, the operating activity of Commonwealth Bank is $807 in negative and in the
year 2018, it is increases with the amount of $1109. It reflects that the operating efficiency of the
company is decreases. The income of the company is increases but not that much in which the
expenses is increases. It has been evaluated that the company has the income of 35801 in the
year 2018 but it also has the large number of expenses that has to be paid such as interest paid,
expenses paid, incomes tax paid due to which the operating profit of the company is decreases.
In the year 2017, the income of the company is $33,536 which is less than the income from
2018. It states that the company is improving with the income but the expense also increases in
the year 2018 due to which the profit of the company is reduces.
Investing Activities
The investing activities of the company reflect the company purchases or sales of capital assets.
The net cash from investing activities is $1002 in the year 2018 which is increases in the year
2017 with the amount $677. The investing activities of the company reflect that the company
invests in plant, properties and equipment’s due to which the liquidity position of the company is
decreases. It is observed that the liquidity position of the company will strong when the company
invests in current assets instead of fixed asset (Williams, & Dobelman, 2017). But the company
invests in fixed asset due to which its liquidity is decreases.
Financing Activities
The financing activities of the company states the net amount of funding a company generates in
the given period of time. In the year 2017, the amount of financing activities is $934 in negative
but it is increases in the year 10,472 in positive. The financing activity reflects that the company
financial position is decreases. It has been evaluated that the company dividend paid amount is

FINANCIAL ANALYSIS 9
decreases from 2017 to 2018 as 6084 to 5366 respectively. The main reason of decreasing the
financial activities of the company is its redemption amount. The redemption amount of the
company is deducted from cash received which is also a reason of declining the financing
activities. It also has been seen that the proceeds from insurance of debt securities is also reduces
which is considered as the cash inflow from the year 2017 to 2018 $94560 to 68273 respectively.
Analysis of Financial Position
As per the above evaluation of ratio, it has been seen that the operating efficiency of the
company is decreases as the operating profit ratio is decreases with the percentage of 58.8. to
56.5 in the year 2017 to 2018 respectively. The reason behind of declining the efficiency is
increasing operating expenses. Dividend ratio of the company states that the company paid high
amount in dividend from the year 2017 to 2018 as 0.35 to 0.29 (Common Wealth Bank, 2018b).
It has been evaluated that the total liabilities of the company is decreases from 14.46 to 13.48 in
the year 2017 and 2018 respectively. The total asset turnover ratio reflects that the sale of the
company is constant in both years such as 0.2 to 0.2. This ratio states that the liquidity situation
of the company is not too strong as they invest in its fixed asset instead of current assets
(Robinson, Henry, Pirie, & Broihahn, 2015).
Recommendation
According to the news, the lot of small businesses will be disappointed in the near future just
because of its financial services (9news, 2018). The interim report of the company does not
address many of the issues and the liquidity position is also not good. It is recommending that the
company has to invest in current asset instead of fixed asset so that it is able to provide the
financial services to small business.

FINANCIAL ANALYSIS 10
According to the news, the Common Wealth Bank of Australia is well known for their high
dividend yields (Harrison, 2019). It is good that the company paid high amount of dividend to
shareholders because as it encourages the shareholders to invest in it. It has been found that the
company can face the challenges in the near future just because of its current financial situation.
It is recommending that the company has to improve its financial position by earning high
interest.
Interrelationship between financial policies and its strategy
As per the financial policy of the company, it has been seen that the bank did not recognize the
deferred tax on the bank west brand to carrying value. And as per the strategies of the company
which was found in report I is the company implementing the sustainable strategy which aims is
to support the group or develop the network with the clients, and investors. Both aims are to
develop the value or maintain the relations with the shareholders.
The other strategy of the company is its competitive strategy that is implemented to gain the
competitive advantage by providing customers services, technology, business banking, and
operational excellence. The financial policy of the company is to critical evaluating the cost in
order to reduce the chances of fraud. It also helps to reduce the cost of services and provide the
quality of services to consumers that mean it helps to gain the higher level of competitive
advantage.
Conclusion
From the above analysis, it has been concluded that the financial position of the common wealth
bank is reduces not too strong. In the coming future, the company faces the challenges just

FINANCIAL ANALYSIS 11
because of financial crises. As per the analysis, it is recommending that the company has to
invest in current asset to improve its position of liquidity to survive for long time in the market.

FINANCIAL ANALYSIS 12
References
9news. (2018) 'They got the royal commission into the banks going - and now it's letting them
down'. Retrieved from: https://www.9news.com.au/national/royal-commission-bank-bankwest-
commonwealth-bank-kate-carnell/c74593db-82ae-4eb2-a423-21cc6947b244
Common Wealth Bank. (2018b) Annual Report 2018. Retrieved from:
https://www.commbank.com.au/content/dam/commbank/about-us/shareholders/pdfs/results/
fy18/cba-annual-report-2018.pdf
Greco, S., Figueira, J., & Ehrgott, M. (2016). Multiple criteria decision analysis. New York:
Springer.
Harrison, T. (2019). Could ASX banking shares like CBA deliver an average income of over
$1,000 a month?. Retrieved from: https://au.finance.yahoo.com/news/could-asx-banking-shares-
cba-035544870.html
Ready ratios. (2018) Interest Coverage Ratio (ICR). Retrieved from:
https://www.readyratios.com/reference/debt/interest_coverage_ratio_icr.html
Robinson, T. R., Henry, E., Pirie, W. L., & Broihahn, M. A. (2015). International financial
statement analysis. John Wiley & Sons.
The common wealth. (2019a) About us. Retrieved from: http://thecommonwealth.org/about-us
Wilkinson, J. (2013). Operating Profit Margin Ratio. Retrieved from:
https://strategiccfo.com/operating-profit-margin-ratio/