Analysis Of Financial Reports Of Challenger Ltd: Ratio Analysis Of Financial Performance

Scope and Limitation

Analyze the financial statement of Challenger ltd and also comment on the performance of the business.

Purpose

The main purpose of the assignment is to analyze the financial reports of Challenger ltd for the purpose of evaluating financial performance of the company. In addition to this, the assignment will be containing ratio which are to be computed and then analysis the performance of the company in comparison with other similar companies belonging to similar industry (Luo et al., 2015).

Scop

The scope of this assignment is compute the key financial ratios which are associated with the business. The ratios which are computed have some significance and are considered to be financial indicators of performance in a business. The assignment will be conducting a comparative study between Challenger ltd and BBVA Group ltd and Alliance Trust which operates in the same industry as Challenger ltd.

Limitation

The limitation which the assignment faces is that the ratio which are considered for this assignment are limited for comparison purposes and it makes the scope of the assignment a bit narrow. The ratios which are computed is for the last two years for which the analysis is to b e undertaken.

Challenger ltd is a company which operates in Australia and is engaged in managing investments for its customers. The company has its headquarters in Sydney, Australia. In other words, the company provides financial security to individuals when they are unable to earn income or when such individuals retire. The various plans of the management of the company is to provide a platform where individual can save their incomes and when such persons retire they can have a steady flow of income as per their requirement. Challenger has been developing over the years and the business of the company has expanded. In addition to this, the company is considered to be one of the largest fund managing companies in Australia as per current year’s estimates. The total assets of the company which is generated is shown in the annual reports of the business which comes to about $ 70 billion. This shows that the company is improving its business performances in order to expand the market further and gain competitive advantage for the business.

Ratio analysis is a popular technique which is used by businesses to analyze the performance of the company in terms of profitability, solvency, Efficiency. Various decision-making process are based on the analysis and findings which are obtained from this analysis (Al Karim & Alam, 2013). The ratios which are considered for this analysis are considered to financial indicators of the performance of the business (Nirajini & Priya, 2013). A figure below shows the table in which the computation of different ratios is calculated below:

				2017	2016
Particulars	Formulas	Challenger	BBVA Group	Alliance Trust	Challenger	BBVA Group	Alliance Trust
Revenue	A	2140.3	29630	1130	1104.4	28175	357
Net Profit	B	384.9	3218	472	354.4	3215	629
Total Assets	C	23011	690059	2979	20978	731856	3541
Total Equity	D	2901	46344	2700	2684	47364	3284
Current Assets	E	11532	631516	137	10756	689158	62
Current Liabilities	F	6083	605327	158	5810	658985	138
Inventories	G	0	0	0	0	0	0
Current Ratio	E/F	1.896	1.043	0.867	1.851	1.046	0.449
Quick Ratio	(E-G)/F	1.896	1.043	0.867	1.851	1.046	0.449
Net Profit Margin	B/A	17.98%	10.86%	41.77%	32.09%	11.41%	176.19%
Return on Equity	B/D	13.27%	6.94%	17.48%	13.20%	6.79%	19.15%
Return on Assets	B/C	1.67%	0.47%	15.84%	1.69%	0.44%	17.76%

Ratio Analysis

Figure 1: (Figure showing the computation of different kinds of ratio for the business)

The current ratio is one of the ratio which falls under liquidity ratios of the company. The current ratio of the company depicts the financial performance of the business in terms of current assets and current liabilities of the business (Delen, Kuzey & Uyar, 2013). The current ratio depicts the liquidity position which the business faces and helps businesses to analyze whether the company has adequate funds to finance the activities of the business. Current ratio which are greater than one is considered to have favorable results and also shows that the liquidity position of the business is better (Lartey, Antwi & Boadi, 2013). The current ratio which is computed for Challenger ltd is shown in the above table as 1,896 which has increased from previous year’s estimate. The formula which is used for the purpose of calculation is given below:

Quick ratio of a company also falls under the purview of liquidity ratio of the business. This ratio is similar to current ratio which is computed by the company. The quick ratio considers quick assets which are cash balance, debtors and similar other assets and quick liabilities for the purpose of computation. The quick ratio of the business depicts the liquidity position of the business as to whether the business is able to meet the short-term financing requirements of the business or not. In other words, the ratio is a measure of the ability of the company to meet its current short-term obligations. The quick ratio of Challenger ltd which is shown in the above table comes to 1.896 which is same as the current ratio of the company. The formula which is used for the purpose of calculation is shown below:

Net Profit Margin

The net profit margin ratio shows the relationship between net profit which is generated by the company and the sales revenue which is generated by the business. The main purpose of the ratio is to analyze how much net profit can be earned for a particular level of sale (Rehman, 2013). This is considered to be an important ratio as it is an important financial indicator of the performance of the business. The net profit margin for Challenger ltd which is shown in the table above table which is 17.98% % which has significantly reduced from previous years estimate. The formula which is used is given below:

Comparison with Competitors

Return on Equity

The return on equity refers to the return which is expected by the shareholders as returns they will be getting for the investments made by them. Return on Equity (ROE) is considered to be one of the financial indicators which are used by potential investors for taking investment decisions in the shares and securities of the company (Heikal et al., 2014). In addition to this, the level of ROE is also a system which can display that the company is performing well. the return of equity which is computed is shown in the table which is given above is 13.27 % which has slightly fallen from the previous year’s estimate. The formula which is used is given below:

Return on Assets

The return on assets ratio shows the relationship between total assets of the business with the returns which are earned by the business. In other words, it shows the revenue which the business can earn while employing the assets of the business (Baños-Caballero, García-Teruel & Martínez-Solano, 2014). This is also noted by the potential stakeholders as such ratio provides information about the different activities of the business. Return on assets ratio signifies whether the assets which are possessed by the business are applied in a favorable manner or not. The formula which is used is given below:

The companies which are selected for the purpose of conducting an analysis and comparison with Challenger ltd are BBVA Group and Alliance Trust. As per figure 1, which shows the significant ratios which are calculated for the analysis part for 2017 and 2016. The current ratio as shown in figure 1, is much better of Challenger ltd than its rival companies which suggest that the liquidity position of the company is secure and the company can effectively finance any projects. The current ratio for the year 2017 for challengers ltd, BBVA Group and Alliance Trust are computed to be 1.896, 1.043 and 0.876 respectively. The current ratio is most adverse in case of Alliance trust which signifies that the company is facing certain liquidity crisis. In comparison with 2016 estimates as calculated the current ratio has reduced slightly for BBVA Group and slightly improved for Alliance trust as well as Challenger ltd. The quick ratio of all three companies show similar results as current which suggest that the current ratio estimates are also quick ratio estimates for all the three companies. This also suggested that all the businesses does not have any inventories therefore the quick assets of the business does not changes as current assets which are taken into consideration for calculation of quick assets does not change. The net profit margin of Challenger ltd, BBVA Group and Alliance Trust for the year 2017 show results as 17.98%, 10.86% and 41.77% respectively. The net profit margin of Alliance Trust shows abnormal amounts of profits for both 2016 and 2017 which is more than Challenger ltd and BBVA Group. The net profit margin of Challenger ltd has reduced from previous year which was 32.8% which suggest that the cost which is associated with production has increased and therefore the profits of the company has fallen (Ongore & Kusa, 2013). The net profit margin for both BBVA Group and Alliance trust has reduced from previous year. The profits of Alliance trust still stand out in the figure 1 as shown above. The return on equity shows that the estimate has increased slightly from previous year’s results for Challenger ltd and BBVA Group. The return on equity for Alliance trust has however reduced from previous year. As the profitability of Alliance Trust is significantly more than Challenger ltd and BBVA Group, it is quite natural that the return on equity for the company is much better than its competitors which shows that the company is meeting the needs of the shareholders of the company effectively.  The return on assets estimates show that Alliance Trust has the best estimates in the comparative study and the estimates of Challenger ltd and BBVA Group is no where near the results of Alliance trust which shows that the company has a better return on assets.

Reference

Al Karim, R., & Alam, T. (2013). An evaluation of financial performance of private commercial banks in Bangladesh: Ratio analysis. Journal of Business Studies Quarterly, 5(2), 65.

Baños-Caballero, S., García-Teruel, P. J., & Martínez-Solano, P. (2014). Working capital management, corporate performance, and financial constraints. Journal of Business Research, 67(3), 332-338.

Delen, D., Kuzey, C., & Uyar, A. (2013). Measuring firm performance using financial ratios: A decision tree approach. Expert Systems with Applications, 40(10), 3970-3983.

Heikal, M., Khaddafi, M., & Ummah, A. (2014). Influence analysis of return on assets (ROA), return on equity (ROE), net profit margin (NPM), debt to equity ratio (DER), and current ratio (CR), against corporate profit growth in automotive in Indonesia Stock Exchange. International Journal of Academic Research in Business and Social Sciences, 4(12), 101.

Lartey, V. C., Antwi, S., & Boadi, E. K. (2013). The relationship between liquidity and profitability of listed banks in Ghana. International Journal of Business and Social Science, 4(3).

Luo, D., Dong, H., Luo, H., Xian, Y., Wan, J., Guo, X., & Wu, Y. (2015). The application of stable isotope ratio analysis to determine the geographical origin of wheat. Food chemistry, 174, 197-201.

Nirajini, A., & Priya, K. B. (2013). Impact of capital structure on financial performance of the listed trading companies in Sri Lanka. International Journal of Scientific and Research Publications, 3(5), 35-43.

Ongore, V. O., & Kusa, G. B. (2013). Determinants of financial performance of commercial banks in Kenya. International Journal of Economics and Financial Issues, 3(1), 237.

Rehman, S. S. F. U. (2013). Relationship between financial leverage and financial performance: Empirical evidence of listed sugar companies of Pakistan. Global Journal of Management and Business Research