The report aims to present financial performance analysis of two Australian listed companies. It presents comparison of the two companies and provides recommendation to different potential investors on which of the two firms is more superior to the other. With these considerations, the report would present comparison of the financial performance of QBE Insurance and NRMA Insurance in order to provided recommendation on which between the two firms offer the best investment opportunity for potential investors. The comparison would be based on financial ratio analysis of the two companies where the company with favourable ratios is considered to offer the best investment opportunity.
QBE insurance is one of the Australian largest insurers across the world. It offers insurance services mostly to the America, Asia Pacific, Australia and Europe region. The company has over 14,226 staffs working across 37 nations across the globe. The company was ranked as the top general insurers in 2012 (QBE Insurance 2017). On the other hand, NRMA insurance is the largest non-government contents and home insurers. It is the most diversified insurance companies operating throughout Asia, New Zealand and Australia. The company has continued to focus on its strategic intent of creating portfolio of customer-focused, high performing as well as diverse operations which offer general insurance in a way that delivers superior experience for its stockholders as well as create value for its shareholders (NRMA Insurance 2017). In other words, NRMA Insurance is one of the Australian firms providing roadside assistance, car servicing, motoring advice, travel, international driving permits as well as other insurance services in Australian Capital Territory and New South Wales. The NRMA Insurance makes the car insurance easier with broad range of numerous levels of the insurance cover.
Ratio analysis entails relationship which are determined from an organization’s financial data and utilized for comparison purposes (Beaver, Correia and McNichols 2011). Besides, ratio analysis give or offer small business operators with valuable tools used in measuring an organization’s progress against the predetermined internal objectives, the overall sector or specific competitor. Additionally, ratio analysis is a powerful tool in identifying the financial trends in its early levels. Ratios are also utilized by investors, business analysts and bankers in evaluating and examining an organization’s financial status (Megginson and Smart 2008). They also enable business operators to assess relationship between different financial items and examine that relationship. They are usually simple to compute, easy to utilize and offer business operators with some insights into what has been happening in the firm, insights which are not mostly apparent upon the review of financial information alone. Ratio analysis could assist in pinpointing some of the areas that require greater attention before looming issues in the area is readily visible.
Liquidity Ratios
These ratios usually demonstrate an organization’s capacity in settling all its current debt commitments. They usually relate to availability of money as well as other liquid assets available in covering short-term debts, account payables as well as other current liabilities (Delen, Kuzey and Uyar 2013). Different organizations need specific level of the liquidity in settling their bills, although the start-up and existing by young firms are usually not very liquid in terms of their assets. In mature firms, low liquidity shoes poor management or need for extra capital. As such liquidity ratios are crucial in providing business operators or managers with important limits to assist them regulate spending and borrowing (Velnampy and Niresh 2012). In this case, some of the best measures in evaluating financial liquidity of the two companies include current ratio, cash to assets ratio as well as quick ratio.
Current ratio
This is a form of liquidity ratio which is useful in measuring the capacity of the organization in settling its near or short-term debts. Although ideals current ratios rely to some level on type of the business, the general rule is that is has to be around 2:1 (Delen, Kuzey and Uyar 2013). Lower ratio implies that an organization might be unable to settle its debts on time, while higher ratio implies that an organization has sufficient cash at hand which could be placed to better use.
QBE Current Ratio
2016 = 36,767 / 27,584 = 1.33
2017 = 39,852 / 31,229 = 1.28
NRMA Current Ratio
2016 = 78,495 / 300,801 = 0.26
2017 = 117,021 / 269,621 = 0.43
The figures above indicate that QBE Insurance has been doing relatively good in settling its debts without any form of struggle. Nonetheless, it can be stated that NRMA has been struggling for the last two years in settling its debt using some of its assets.
Cash to assets
This ratio is useful in measuring or examining portion of the organizations’ total assets which is held in marketable securities or in cash (Niemann, Schmidt and Neukirchen 2008). Though high cash to asset ratio might show some level of safety from creditor’s viewpoint, excessive amount of money might be inefficient.
2016 = 847 / 41,583 = 0.02
2017 = 572 / 43,862 = 0.01
NRMA Cash to asset Ratio
2016 = 38,006 / 1,332,894 = 0.03
2017 = 80,524 / 1,476,976 = 0.05
As from the above results, it is evident that NRMA and QBE Insurance cash to asset ratios for the past two years were relatively lower. The ratio shows low level of safety from the creditor’s viewpoint or implies excessive amount of the cash might be inefficient.
Quick ratio
The ratio offers stricter description of an organization’s capacity to settle its current or short-term debts. Basically, the best quick ratio should be at least 1:1 (Almazari 2012). In case the quick ratio is higher, an organization might keep or maintain too much money or have poor collection procedure for the account receivables. In case it is lower, it might show that an organization depends on inventories in settling its short- or near-term debts.
QBE Quick Ratio
2016 = 36,767 / 27,584 =1.33
2017 = 39,852 / 31,229 = 1.28
NRMA Quick Ratio
2016 = (78,495 – 1,025) / 300,801 = 0.26
2017 = (117,021 – 1,069) / 269,621 = 0.43
From the above figures, it is evident NRMA quick ratio for the past two years increased from 0.26 in 2016 to 0.43 in 2017. On the other hand, QBE quick ratio decreased from 1.33 to 1.28. In this case, it can be stated that QBE maintain much cash or have poor collection tactics for its account receivables. It can also be stated that NRMA depends on more inventories in settling its short-term debts.
Leverage ratios usually look at extent to which an organization has relied upon borrowing in financing its major operations. Most of the financial leverage ratios compare the assets with liabilities (Almazari 2012). High financial leverage might increase an organization’s exposure to the risk and the organization downturns, but alongside with the higher risk also comes probability of higher returns. The most important measurements of the leverage in evaluating QBE Insurance and NRMA Insurance include debt ratio, debt/equity as well as interest coverage.
Debt ratio
This ratio is used in measuring the proportion of an organization’s capital which is offered by borrowing (Shin, Ennis and Spurlin, 2015). Debt ratio higher than one implies an organization is technically bankrupt is has a negative net worth.
QBE debt ratio
2016 = 31,249 / 41,583 = 0.75
2017 =34,961 / 43,862 = 0.80
NRMA debt ratio
2016 = 448,860 / 1,332,894 = 0.34
2017 = 493,134 / 1,476,976 = 0.33
From the calculations, it is evident that NRMA Insurance debt ratio declined with a slight margin from 0.34 in 2016 to 0.33 in 2017. Contrary, QBE Insurance debt ratio increased from 0.75 to 0.80 in 2017. Therefore, from the above analysis, it can be stated that NRMA had more positive net worth in comparison to QBE Insurance.
The ratio is used in examining relative mix of an organization’s investor-supplied capital. An organization is considered safe in case it has low debt to the equity ratio since higher ratio indicates excessive caution (Almazari 2012).
QBE debt to equity
2016 = 31,249 / 10,334 = 3.02
2017 = 34,961 / 8,901 = 3.93
NRMA debt to equity
2016 = 448,860 / 884,034 = 0.51
2017 = 493,134 / 983,842 = 0.50
The above figures show that QBE has been overreliance on debt finance in financing its operations in comparison to NRMA, which is viewed to rely on equity financing. This is evidenced by the fact that NRMA Insurance debt to equity ratio for the past two years was relatively below 1 ranging from 0.51 in 2016 to 0.50 in 2017 while QBE Insurance ratio was above 1 ranging between 3.02 in 2016 to 3.93 in 2017.
The ratio is also referred to earnings before interest and shows how comfortably an organization could handle all its interest payments. Generally, higher interest coverage implies that small firms are able to make on extra debt (Fridson and Alvarez 2011). The ratio is closely evaluated by creditors and financiers. In other words, the ratio is utilized in determining how easily an organization could settle interest expenses.
QBE Insurance interest coverage
2016 = 1,075/294 = 3.66
2017 = -98/305 = -0.32
NRMA Insurance interest coverage
2016 = (35,162 + 6,534) / 6,534 = 6.38
2017 = (110,993 + 5,322) / 5,322 = 21.86
As from the above results, it is clear that NRMA Insurance interest coverage increased from 6.38 in 2016 to 21.86 in 2017. On the contrary, interest coverage for QBE Insurance interest coverage over the same period decreased as from 3.66 in 2016 to 0.32 in 2017. The results are a clear sign that NRMA has been able to make on extra debt payments in comparison to QBE Insurance.
These are financial ratios used in assessing an organization’s utilization of assets, inventories and credit (Velnampy and Niresh 2012). These ratios can assist an organization’s managers in conducting business better. They can assist the management make decision on whether a specific entity’s credit structures are fit as well as whether the organization’s purchasing power are held in a more competent and effective style (Fridson and Alvarez 2011). In this case, the most important efficiency ratios used in assessing QBE insurance and NRMA Insurance financial efficiency include inventory turnover, asset turnover and account receivable turnover.
Inventory Turnover
The ratio shows how efficient an organization management is managing its production into consideration of its sales (Velnampy and Niresh, 2012). A higher inventory turnover is considered better though extremely high ratio might shows narrow selection and probably lost sales. On the other hand, low ratio implies that an organization is paying in order to keep significantly high inventories and might be overstocking.
NRMA inventory turnover
2016 = 29,358 / 1,025 = 28.64
2017 = 32,192 / 1,069 = 30.11
This ratio is used in measuring how quickly or fast credit sales or receivables are collected. In other words, it indicates the proportion of credit sales which are outstanding at a specific time (Higgins 2012).
QBE Insurance account receivable turnover
2016 = 14,276/4,831= 2.96
2017 = 14,446/4,906 = 2.94
NRMA account receivable turnover
2016 = 511,040 / 27,634 = 18.49
2017 =527,458 / 24,430 = 21.59
From the above calculations, it is evident that NRMA receivable turnover increased from 18.49 times to 21.59 times. On the other hand, QBE Insurance receivable turnover decreased from 2.96 times to 2.94 times. This is a clear sign that NRMA was more efficient in collecting amount owed by debtors in comparison to QBE Insurance.
The ratio is used in measuring management efficiency in utilizing assets to generate sales (Velnampy and Niresh 2012). It is gotten by dividing sales by the total assets.
QBE asset turnover
2016 = 14,276/41,583 = 0.34
2017 = 14,446/ 43,862 = 0.33
NRMA asset turnover
2016 = 511,040 / 1,332,894 = 0.38
2017 =527,458 / 1,476,976 = 0.36
As from the asset turnover ratio above, it is clear that both companies experienced decreasing trend in their asset turnover. Such shows that both firms have been struggling to manage their assets. In other words, the figures show that both companies’ management were inefficient in utilizing their assets to generate sales or revenues.
These ratios offer information on management’s performance in utilizing resources of different firms (McCue and Nayar 2009). A good number of the organization starts their businesses to earn better income. If profitability ratios show that this is not taking place, especially once organization has moved beyond start-up phase, the organization for whom return on the money is the primary concern might wish to sell shares or reinvest their cash elsewhere (Huang, Tsai, Yen & Cheng, 2008). Nonetheless, it is crucial that various aspects could include profitability ratios. Some of the most specific profitability ratios useful in evaluating QBE and NRMA Insurance profitability include gross profit margin, the ROA, the profit margin as well as the ROE.
Gross margin
This ratio is used in measuring margin on the total sales within an organization. It could be used as a signal of marketing effectiveness or manufacturing efficiency (Kumbirai 2010). This is computed by dividing gross profit by total revenue.
QBE gross margin
2016 = 11,066/14,276 * 100% = 77.51%
2017 = 12,041/14,446 * 100% = 83.35%
NRMA gross margin
2016 = 163,186/511,040 * 100% = 31.93%
2017 = 170,906/527,458 * 100% = 32.40%
As from the above results, it is evident that QBE Insurance had significant high gross profit margin over the last two years. This was contrary to its counterpart which was having relatively lower gross margin in comparison to QBE Insurance. The results are clear indication that QBE Insurance and NRMA were more profitable over the two years since they had relatively high gross margin and their gross margin over the past two years increased over time.
The ratio shows how efficient an organization is utilizing its assets in generating income. A low ROA shows inefficient management while high ROA implies efficient management in generating income (Gibson 2011).
QBE Insurance ROA
2016 = 844/41,583 * 100% = 2.03%
2017 = -1,253/43,862 * 100% = -2.86%
NRMA ROA
2016 = 34,111/1,332,894 * 100% = 2.56%
2017 = 92,990/1,476,976 * 100% = 6.30%
Based on the above calculations, it is evident that NRMA Insurance ROA over the past two years increased from 2.56% in 2016 to 6.30% in 2017. Contrary, QBE Insurance ROA decreased over the same period moving from 2.03% in 2016 to -2.86% in 2017. This is a clear sign that NRMA Insurance management was more efficient in utilizing its assets in generating income or net profit.
The ratio is used in measuring overall profitability of an organization or how much the organization is bringing to bottom line (Megginson & Smart 2008). A strong profitability in collaboration with a weak profitability might show some issues with the indirect operating expenses such as the interest expenses. Generally, the net profit margin indicates effectiveness of the organization’s management. It is usually gotten by dividing net income by the total revenue.
QBE Insurance Net profit margin
2016 = 844/14,276 * 100% = 5.91%
2017 = -1,253/14,446 * 100% = – 8.67%
NRMA Net profit margin
2016 = 34,111/511,040 * 100% = 6.67%
2017 = 92,990/527,458 * 100% = 17.63%
From the above figures, it is clear that NRMA Insurance net profit margin increased over the past two years from 6.67% in 2016 to 17.63%. On the other hand, the net profit margin for QBE experienced a significant decrease in its net profit margin over the last two years. The figures is a clear signal that NRMA was more profitable and more efficient in generating income from its sales.
This ratio is useful in measuring how well an organization is using its equity or shareholders’ equity in generating income (Watkins 2000). The ROE is the best signal of profitability and is the best figure in comparing against rivals or sector average. A high ROE implies that an organization management is doing better or the company is undercapitalized whole low ratio shows poor management or highly conservative business technique. It is gotten by dividing net income by total equity.
QBE Insurance ROE
2016 = 844/10,334 * 100% = 8.17%
2017 = -1,253/8,901* 100% = -14.08%
NRMA ROE
2016 = 34,111/884,034 * 100% = 3.86%
2017 = 92,990/983,842 * 100% = 9.45%
Based on the above computations, it is evident that QBE insurance was doing relatively poor in comparison to it counterpart NRMA which seems to be doing relatively good in utilizing its shareholders’ equity to generate income. Basically, from the above figures, it is clear that for the past two years, NRMA has been profitable enough in comparison to QBE Insurance.
These are financial ratios used by investors, organization’s management and other financial information users in making decision on whether valuation of an organization’s shares are undervalued, overvalued or at par with marketplace (Megginson & Smart 2008). In essence, the ratios are utilized for making decision in the stocks of the organization. In this case, some of the market value ratios used in assessing QBE and NRMA Insurance financial status includes EPS and price per earnings ratios.
The ratio indicates amount of earning an organization earned in a specific period against number of an organization’s shares that are outstanding (Shardeo 2015). In other words, the ratio is utilized in understanding whether investing in the firm is worth. It is computed by dividing net profit earnings less dividends by total shareholders outstanding.
QBE Insurance EPS
2016 = 0.62
2017 = – 0. 92
NRMA Insurance EPS
2016 = 0.277
2017 = 0.377
Based on the above results, it is evident that NRMA Insurance EPS over the last two years increased as from 0.277 in 2016 to 0.377 in 2017. On the contrary, QBE Insurance EPS declined from 0.62 in 2016 to -0.92 in 2017. This is a sign that QBE Insurance is not worth investing in comparison to NRMA Insurance.
The ratio is most significant and is utilized for evaluating whether shares of a particular organization are under or overpriced in comparison to the earnings probability. In other words, P/E ratio is measured as price of shares in current period against earnings an organization recorded for financial year on the per share basis (Avkiran 2011). The ratio is gotten by dividing market price by the EPS.
QBE Insurance P/E ratio
2016 = 14.7
2017 = -9.10
NRMA Insurance P/E ratio
2016 = 19.8%
2017 = 15.6%
As from the above calculations, it can be stated that NRMA Insurance P/E ratio were relatively higher in comparison to QBE Insurance P/E ratio over the past two years. This is a clear sign that NRMA shares are neither under or overpriced in comparison to QBE Insurance shares which appear to be undervalued.
The ratio is said to assist in measuring amount of the dividend distributed within a year against several share outstanding (Elsayed and Wahba 2016). The ratio provide insight to an organization’s earnings and potential investors could make decision on whether they wish to invest in shares which pay specific level of the dividend against current price within the market. It is gotten by dividing dividend per share by the stock price per the share (Huang et al. 2008).
QBE Insurance dividend yield
2016 = 4.48%
2017 = 2.39%
NRMA Insurance dividend yield
2016 = 6.6%
2017 = 4.9%
The above figures are clear sign that NRMA Insurance dividend yield over the last two years has been higher in comparison to QBE Insurance despite the decreasing trend within the period. Besides, the figures show that NRMA Insurance pay relatively high amount of dividends compared to QBE Insurance.
Conclusion
To sum it up, it is clear that NRMA Insurance is more financially stable in comparison to QBE. This is evidenced by relatively high market value ratios, profitability ratios, and efficiency ratios. For instance, NRMA Insurance has relatively high ROE and ROA meaning that its management is more efficient in utilizing its shareholders’ equity and its assets in producing income. Besides, NRMA is more profitable than QBE due to significantly high net profit and gross margin over the last two years. Furthermore, it can be stated that NRMA is more efficient than QBE Insurance due to relatively attractive efficiency ratios over the past two years. Additionally, the long-term solvency ratios indicate that NRMA Insurance was more reliance on equity finance other than debts finance, hence, exposing the company to less risks of being bankrupt.
Based on the above conclusion, it can be recommended that NRMA is a more viable investment opportunity than QBE. This is based on the fact that NRMA has relatively higher and attractive profitability ratios with significantly attractive market value ratios. In addition, the company had quite attractive leverage ratios, hence, less risks of being exposed to liquidity dangers. With such notion, the potential investors should opt to invest in NRMA Insurance instead of QBE Insurance.
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