Financial Analysis Of Webster Limited: ROA, ROE, And WACC Calculation

Overview of Webster Limited

The report includes an overall financial analysis of an Australia based company Webster Limited. The analysis consists of the calculations of ratios like ROA, ROE and Debt ratio. It also includes examination of trend in the stock prices of the company along with the estimation of WACC. A gearing ratio and dividend policy analysis is done at the end of the report. The objective of this study is to recommend the client about the reasons for including this company in an investment portfolio.

It is a leading Australia based agriculture company which functions in two segments, Agriculture and Horticulture. It operates in agriculture sector of Australia and is one of the largest producer of walnuts that accounts almost 90% of Australia’s annual walnut corp. in agriculture, the company is one of the largest irrigated farming producers having more than 40000 hectares of fertile land. It mainly focuses on the corn, cotton and other cereals and livestock. Webster also owns a diverse portfolio of more than 200,000 mega litres of water entitlement. It is listed on ASX with a symbol ASX: WBA (Webster Limited, 2018). 

Main substantial shareholders

• More than 20% shareholdings: no shareholder
• More than 5% shareholdings: AFF Properties No 1 Pty Ltd (14.41%), Verolot Limited (8.92%), Peter Robin Joy (8.43%), Belfort Investment Advisors Limited (5.89%) and Bevan David Cushing (5.60%).

Firm governance

• The Chairman: Chris Corrigan (Executive Chairman)
• Board Members: David Cushing, Chris Langdon and Mr Joe Robinson (all are non-executive directors).
• The CEO: Maurice Felizzi (Webster Limited, 2018). 

Data has been taken for the past three years only, because the annual reports available on company’s website is for the year 2017 and 2016.

Webster Limited Financial Statements for year 2015-17
Particulars	2015	2016	2017
	AUD$’000	AUD$’000	AUD$’000
EBIT	11,851	-88,481	57,035
Net profit	5,147	-80,669	58,284
Total Assets	748,954	651,593	634,300
Total Liabilities	247,863	234,737	149,523
Shareholders’ Equity	501,091	416,856	484,777

1.        Rate of Return on Assets
	2015	2016	2017
A. Net income	5,147	-80,669	58,284
B. Total assets	748,954	651,593	634,300
(A/B)	0.69%	-12%	9%

2.       Rate of Return on Equity
	2015	2016	2017
A. Net income available to equity shareholders	5,147	-80,669	58,284
B. Shareholder’s Equity	501,091	416856	484,777
(A/B)	1.03%	-19.35%	12.02%

3.    Debt Ratio
	2015	2016	2017
A. Total Liabilities	247,863	234,737	149,523
B. Total assets	748,954	651,593	634,300
(A/B)	33%	36%	24%

Proving the equation 

	2015	2016	2017
	AUD$’000	AUD$’000	AUD$’000
EBIT	11,851	-88,481	57,035
NPAT	5,147	-80,669	58,284
OE	501,091	416,856	484,777
TA	748,954	651,593	634,300
EBIT/TA (1)	0.02	–              0.14	0.09
NPAT/EBIT (2)	0.43	0.91	1.02
TA/OE (3)	1.49	1.56	1.31
1*2*3	0.01	–              0.19	0.12
1*2*3 = NPAT/OE	0.01	–              0.19	0.12

The variable TA/OE stands for Total Assets divided by Owner’s Equity. It is a formula for equity multiplier which is generally used in DuPont analysis. It measures the financial leverage of the company and do impact the relationship between return on assets and return on equity. High multiplier means high degree of financial leverage. When the total asset increases, the variable also increases resulting in decrease of ROA. When there is a growth in sales, ROA rises but the multiplier remains the same. This shows that TA/OE has no or negative relationship with ROA. On a whole it can be said that increase in multiplier led to rise in ROE and falls in ROA, whereas increase in ROA results in rise in ROE while the equity multiplier remains stable.

In 2015 and 2017, ROE is significantly higher than ROA. This implies that company is making more profits from its shareholders’ equity rather than from its assets. Having a high ROE indicates that Webster is able to manage its owner’s equity efficiently. Moreover, it has comparatively less equity in 2015 and 2017 as compare to its assets which boosts up the ROE. In year 2016, company has made losses which make both the ratios negative. Still a negative ROA is higher than negative ROE. 

Financial Statements Analysis

The above graphs prepared shows the historical prices of both company and market index. Monthly prices are taken for the past two years and the trend is shown in form of graphs. The fluctuations in the share prices of Webster Limited (Figure 1) are compared to all ordinaries index (Figure 2). In starting months of January 2016, the price was almost same and in the mid of the year it increase to $1.205 and $1.22 in month of September. After that there is minute fall in the prices in subsequent months but a rise was noticed at the end of the year. In December 2016, the share price of Webster was $1.32. During the same year, the market index keeps on rising till June2016 but after that a fall has been noticed in months from July to October. The prices rose in last two months of 2016 and were reported at $5620.89 in the end. In 2017, fewer fluctuations were there in Webster’s prices except the month of February, where it was $1.404. In August and September, the stock prices fell but the trend got reversed in following months. The market index continues to rise from the start of 2017 and at the end of it the price was $6050. The above analysis concludes that movements in ordinaries Index are comparatively less than that of in Webster’s stock prices. This means that company’s share prices are not purely impacted by market index.

• On June 2017, the company announced that it has made an agreement with Commonwealth Government in respect of neutralizing the Lake Tandou irrigation system. The receipts from this transaction will be $78 million which will be used to repay the debt. A net profit will also be recorded by the company regarding the same.
• For the purpose of Executive Long Term Incentive Plan, the company issued 1,500,000 Ordinary shares on September 25, 2017.
• The company declared about the expansion of its Walnut orchad portfolio by acquiring 250 hectare walnut orchad in Tabbita. This announcement was made on March 2017. This acquisition was done as per the Webster’s strategy. 

• The value of beta is not given, so it is calculated on the basis of average return on its share prices.

SUMMARY OUTPUT
Regression Statistics
Multiple R	0.2154368
R Square	0.046413
Adjusted R Square	0.0010041
Standard Error	0.0550515
Observations	23
ANOVA
	df	SS	MS	F	Significance F
Regression	1	0.003097685	0.0030977	1.0221131	0.323526016
Residual	21	0.063644012	0.0030307
Total	22	0.066741696
	Coefficients	Standard Error	t Stat	P-value	Lower 95%	Upper 95%	Lower 95.0%	Upper 95.0%
Intercept	0.0071263	0.012361295	0.5765029	0.5704037	-0.0185804	0.032833	-0.0185804	0.03283304
X Variable 1	0.4795292	0.474313659	1.0109961	0.323526	-0.50686	1.4659185	-0.50686	1.46591849

Here the calculated value of beta is 0.4795292

• CAPM Model

Formula for calculating required rate of return is E(R) =.

E (R) = Expected rate of return

 = Risk free rate of return

β = Beta

= Market Risk Premium

Calculation of Required rate of return
Risk free rate (A)	4%
Beta (B)	0.479529245
Market Risk premium (C)	6%
Required rate of return [A+(B*C)]	6.88%

Conservative investment means an investment associated with low risk and low return. A company who has a very small standard deviation and whose ROE is less than 12% is generally considered to be a conservative investment. Webster Limited has ROE less than 12% in the past three years and its S.V. is also very low that is 0.05%. This implies that making investment in this company will be conservative as it has low return and low standard deviation

• WACC = Cost of Equity + Cost of Debt

Cost of Debt = Interest rate (1-Tax rate). Interest rate is been taken from company’s annual report. A variable interest rate of 2.97% is applied on the bank loan (Static1.squarespace.com, 2017). 

WACC
Cost of equity (A)	6.88
Interest rate	2.97
tax rate	30.00%
Cost of Debt (B)	2.079
WACC (A+B)	8.96

High weighted average cost of capital can impact the management decision regarding the evaluation of an investment proposal. Increase in WACC will increase the risk associated in a project. WACC rises because of an increase in beta and ROE. The more WACC, the high will be the risk and to assume such risk, investors will demand high return. As a result, the management’s evaluation with respect to a particular project can be affected by the increased WACC (Frank and Shen, 2016).

• Webster’s debt ratio does not appear to be stable as it has reduced from 365 to 24% in year 2017, whereas in 2016 it was more than that of in 2015 by 3%. This reduction implies that the debt financing was low in 2017 as compare to other years. It is a good indication as the degree of leverage has decreased which means low financial risk is there. The debt ratio of Webster keeps on fluctuating and does not appear to be stable.
• The gearing ratio usually includes long term debt that is loans or borrowings.  In order to maintain its gearing ratio, the company has repaid its long term borrowings which results in the reduction of same in year 2017. Moreover in past year, Webster’s issued capital has also increased from $462,844 to $ 477,865. The company has issued 361,245,163 fully paid ordinary shares in 2017. All these adjustments are done to amend its gearing ratio.

Dividend is generally paid out of the retained earnings of a company. There are four types of policies named as regular, irregular, and stable and no dividend policy. The company is paying a regular dividend from the past five years but not at a fixed rate. In 2016, it declares a dividend of 1 cent per share (cps) and in 2017 it was 3 cps. The rate of dividend varies according to the profits and earnings of the company. As in last year company has made profits compare to 2016, the dividend declared were higher.

From the above analysis, it can be said that company is performing pretty well on financial grounds. Its debt ratio has decreased, equity return has increased and moreover it follows a regular dividend policy. Apart from that, it also considered as a conservative investment. It will be favourable for the investors to invest in such company especially for the ones who are not ready to take high risk. So, on a whole, Webster Limited can be included in the investment portfolio. 

References

Frank, M.Z. and Shen, T., 2016. Investment and the weighted average cost of capital. Journal of Financial Economics, 119(2), pp.300-315.

Static1.squarespace.com. (2017). Annual Report 2017. [online] Available at: https://static1.squarespace.com/static/5770b8d4b8a79bc1087f2cfc/t/5a0e600dec212d62c91ee242/1510891602830/Webster_AR_LR-links.pdf [Accessed 29 Jan. 2018].

Webster Limited. (2018). Welcome. [online] Available at: https://www.websterltd.com.au/ [Accessed 29 Jan. 2018].