Questions:
Write report on the following companies:
1. Commonwealth bank of Australia.
2. National bank of Australia.
The project report is prepared on the two companies listed in Australia stock exchange. The companies will be from the same industry. The Australian companies chosen in the project are banks:
These two banks i.e. the commonwealth bank of Australia and National bank of Australia are listed in the Australia stock exchange (ASX). The stock prices of the two banks will be obtained from the site of ASX. The stock prices will be collected from the 5 weeks i.e. from 2016 April 22nd to 2016 March 21st. The data will be analysed for the purpose of finding the movements in the prices. In addition to this ratio, analysis of the both banks will be done. By the help of ratio analysis it will be easy to examine the financial position and performance of the banks. The annual reports of the banks will be downloaded from the web site of banks. The data will be extracted from the annual reports of banks. Financial statements of banks are referred for collecting the information. Financial statements analysis will be done by taking information from the balance sheet and income statement of the company.
Overview of company
Overview of the commonwealth Australian bank and National Australia bank are given below:
National bank of Australia
National Australian bank works as the financial service organization. There are around 12,700,000 customers of the bank along with 42,000 people in the 1700 stores worldwide. The major operations of the company are undertaken in the Australia in addition to Asia, United Kingdom and New Zealand. The brands of the company are positioned uniquely. The Bank is built on a common commitment to offer quality products and services, fair charges and fees, and proper advice and guidance whenever required. The strategy of the company is to build great experience to the customers by being a most respected bank of the New Zealand and Australia (NAB, 2016).
Australian banking inclusive of business banking and personal banking offers varied range of products and services to the business customers. The personal banking products of the company can be approached by the help of UBank, NAB broker, NAB and NAB trade. The banking product of the company has specialist expertise in property, education, health and government, and in agribusiness. Australian banks include currencies and commodities, debt markets, fixed income, specialized finance and asset servicing etc. NAB wealth offers t solutions to the retail, institutional and corporate clients along with providing investment and superannuation. The company operates with the largest networks of financial advisors under Plum, JANA, MLC, and JBWere, etc. (NAB, 2016)
NZ banking is entailing the corporate, retail and insurance and business franchise in New Zealand under the brand Bank of New Zealand (BNZ). Market operations of BNZ are excluded from the same in which Australian banking is dealing (NAB, 2016).
Commonwealth Australian bank
The Commonwealth bank is one of the leading banks of Australia providing integrated financial services encompassing business, premium, institutional and retail banking. It also provides insurance, investment, funds management, superannuation, and products and services of share broking. The group of bank is one of the largest companies listed in Australian securities exchange and is also included in global index of Morgan Stanley capital. The strength of the company is around 52, 000 people. Almost 60 percent of the staff of bank consists of women (CAB, 2016).
To keep total shareholder return in top quartile of Australian listed peers over the period of five years is one of the key financial objectives of the company. Calculation of total Shareholder Return is done in the company by taking into account the growth in the value of investment in share of the group. It is done on the assumption that the dividends of the company will be reinvested in shares (CAB, 2016). Top three strategic strengths of the company are:
The brand of the company is one of the most recognized brands in the industry of integrated financial services in Australia. The group has domestic presence with the largest customer base of Australian banks (CAB, 2016).
The Commonwealth bank provides full range of retail services to the customers including personal loans, credit cards, demand deposits and term deposits, home loans and many more. Full range of commercial products is also provided by the company such as trade finance, equipment, business loan, agribusinessandruraproducts(CAB,2016).
Technical analysis is pertaining to the study of actions of financial markets. The technician is supposed to notice the changes in stock prices that occur on day to day or week to week basis (Credit Suisse, 2009).
The data related to the Commonwealth bank of Australia and National Bank of Australia is obtained from the Google finance. The data is collected for the 5 weeks. The change percent in data is calculated. The percent in change of the data is calculated for the purpose of making chart and showing the trend with the help of technical chart.
NAB
The table showing percentage of change and technical chart is shown below:
Table 1: Table showing percentage change in stock prices of NAB
|
Date |
Change |
|
22-Apr-16 |
-0.44% |
|
21-Apr-16 |
-1.33% |
|
20-Apr-16 |
0.15% |
|
19-Apr-16 |
-2.45% |
|
18-Apr-16 |
0.78% |
|
15-Apr-16 |
-0.11% |
|
14-Apr-16 |
-2.45% |
|
13-Apr-16 |
-2.07% |
|
12-Apr-16 |
-2.53% |
|
11-Apr-16 |
0.80% |
|
08-Apr-16 |
1.53% |
|
07-Apr-16 |
-0.08% |
|
06-Apr-16 |
0.23% |
|
05-Apr-16 |
1.01% |
|
04-Apr-16 |
-0.55% |
|
01-Apr-16 |
2.13% |
|
31-Mar-16 |
-2.34% |
|
30-Mar-16 |
-0.08% |
|
29-Mar-16 |
2.44% |
|
24-Mar-16 |
3.53% |
|
23-Mar-16 |
1.98% |
|
22-Mar-16 |
1.49% |
|
21-Mar-16 |
– |
Figure 1: Technical chart showing percentage change in stock prices of NAB
Figure 2: Technical chart showing stock prices of NAB
The table is showing the percentage change in the stock prices. Figure 1 is depicting the change in the stock prices and percentage change in stock prices during the 5 weeks. Share price of the National Australia bank was down by 9.82 percent in the beginning of 2015. It was speculated that the company will be able to restore the confidence among the investors next year i.e. in 2016. The stock prices shown in the figure 1 and 2 given above are presenting that the performance of the company has fluctuated during March 2016 to April 2016. The performance of the company has gone up on 24th march and after that there is a slight decrease in the performance of the company. In the beginning of April there is a decrease in the share prices of the company and it has become negative. The table given above is showing that during this period, there is percentage change of 3.53 percent on March 24 and on 31st March the percentage change is -2.34. There are lots of fluctuations by mid-April in the performance of the NAB. The performance has gone negative on 13th April, 15th April and on 21st April.
The business survey on NAB is showing that despite of the global uncertainties in the Australian business environment the bank has maintained its performance. As per the results, the performance of March and April is showing improvement. Mining boom and regaining confidence in the investors are the causes of same (Credit Suisse, 2009).
The tables and figures showing the performance of the company are given below:
Table 2: Table showing percentage change in stock prices of CBA
|
Date |
Change |
|
22-Apr-16 |
0.58% |
|
21-Apr-16 |
-1.25% |
|
20-Apr-16 |
0.20% |
|
19-Apr-16 |
-0.70% |
|
18-Apr-16 |
1.09% |
|
15-Apr-16 |
-0.39% |
|
14-Apr-16 |
-1.33% |
|
13-Apr-16 |
-2.09% |
|
12-Apr-16 |
-2.15% |
|
11-Apr-16 |
0.08% |
|
08-Apr-16 |
0.32% |
|
07-Apr-16 |
0.22% |
|
06-Apr-16 |
0.14% |
|
05-Apr-16 |
2.29% |
|
04-Apr-16 |
0.10% |
|
01-Apr-16 |
2.58% |
|
31-Mar-16 |
-2.20% |
|
30-Mar-16 |
-0.26% |
|
29-Mar-16 |
2.27% |
|
24-Mar-16 |
2.45% |
|
23-Mar-16 |
0.27% |
|
22-Mar-16 |
0.30% |
|
21-Mar-16 |
– |
Figure 3: Technical chart showing percentage change in stock prices of CBA
Figure 4: Technical chart showing stock prices of CBA
The performance of the CBA in stock market is showing fluctuations during the given period. From 22nd march the performance is stagnant which has suddenly gone up on March 24 2016. On this date the change percentage is observed to be 2.45 percent from 0.27 percent. During the end of March i.e. on March 30 and March 31st the performance is again showing negative values. On the beginning of April there is again the increase in the stock prices of the company. Stock prices reached to the zero level after few days. On April 12 there is a drastic decrease in the stock performance. Therefore, it is observed that during March and April the performance of CBA has shown ups and down.
Reason of decrease in the stock prices is assumed to be the market conditions of markets of Australia. However, it is reported that there is improvement in the performance of the company by seeing the performance of January and February (Damodaran, 2016).
The risk and return of both the banks of Australia will be determined based on the ratio analysis. With the help of ratio analysis it is easy to analyze the position and performance of the company.
Ratio analysis of both the banks is done with the help of annual reports of the banks. Ratio analysis is a financial tools used for analyzing the performance and position of the companies. Annual reports of the national Australia bank and common wealth bank are taken for collecting the financial information. The financial statement taken into consideration while performing ratio analysis is balance sheet statements and income statements (YAL, 2016).
The ratios are classified into five parts:
All the ratios will be explained one by one.
Liquidity ratios are used to measure the short term solvency of the company. These ratios are important for ensuring the capacity of company to pay current liabilities occurring within one year. Current ratio, acid ratio and absolute liquid ratio are parts of the liquid ratio. Company should maintain liquidity in the company for paying the current liabilities (Accounting for management, 2016).
Activity ratios are used to measure the ability of company to covert the assets into sales. The ratios measure the efficiency of the company to utilize its assets. Account receivable ratio, average collection period, inventory turnover, total assets turnover, fixed asset turnover are types of activity of efficiency ratios (Accounting for management, 2016).
Profitability ratios are used to measure the profitability of company. These ratios are important from the point of view of creditors of the company. The high profitability of company ensures the company is earning high profits. Operating profit, gross profit, net profit, return on assets, return on equity, return on income, return on capital employed are some of the ratios that come under profitability ratios (Accounting for management, 2016).
Solvency ratios are used for repaying the long term debts of the company. The ratio is beneficial from the point of view of the investors as the ability of company to pay the long term dues ensures chances of survival of the business. These ratios are helpful in measuring the capital structure of the company. The ability of company to pay interest on long term borrowings is judged with the help of this ratio (Accounting for management, 2016).
Stock market ratios are intended for the investors specifically. These ratios are also known as market value ratios. The stock value ratios attract the investors when these ratios show high value of the company in market. Market value of stock market ratios indicates the value of the company in market in the eyes of investors (Accounting for management, 2016).
The ratios computed in the project will be profitability ratios, solvency ratios and activity ratios. Following ratios are calculated in the project:
Ratio analysis of the National Australia bank and commonwealth bank of Australia
Net profit margin ratio
Net profit ratio is a popular ratio showing relationship between the net profit and sales of the company. The computation of the net profit is done by dividing net profit after the tax of the company with the net sales of the company (Accounting Tools, 2016).
Formula:
Net profit ratio = Net profit / Net sales
Table 3: Net profit computation of NAB (NAB, 2015)
|
Net Profit margin |
|
|
Year |
Net Profit margin |
|
2015 |
22.65 |
Table 4: Net profit computation of CBA (CBA, 2015)
|
Net Profit margin |
|
|
Year |
Net Profit margin |
|
2015 |
33.56 |
Net profit of the NAB is 22.65 and CBA is having a net profit of 33.56. It can be observed from the given tables that net profit of CBA is more in comparison to the CBA. Net profit of the company is the indicator of the profitability of the company. It takes into account the profit of the company after deduction of expenses. Hence it is a good indicator of the profit. After observing the tables it can be stated that profitability of the CBA is more than the other banks of Australia.
Total asset turnover
The asset turnover ratio is an efficiency ratio. It measures the ability of company to produce sales from the assets. The ratio indicates the efficiency of the company in using assets for generating sales. The ratio is calculated by dividing net sales from the average total assets of the company. Computation of average total asset is done by taking assets of the beginning and ending of the company. The amount is divided by 2 (My accounting course, 2016).
Formula:
Return on assets = Net sales / Average total assets
Average total assets = opening total assets + closing total assets /2
Table 5: Total asset turnover computation of NAB (NAB, 2015)
|
Total Assets turnover |
|
|
Year |
Total Assets turnover |
|
2015 |
0.03 |
Table 6: Total asset turnover computation of CBA (CBA, 2015)
|
Total Assets turnover |
|
|
Year |
Total Assets turnover |
|
2015 |
0.03 |
Total asset turnover of the company NAB and CBA is 0.03. Both the company are having same total asset turnover ratio. Total asset turnover ratio of 1 indicates that net sales of the company are equivalent to the average total assets of the company. The ratio of 0.03 is showing that for every Australian dollar the company is earning 0.03 cents. The total asset turnover ratio of both the companies is very low. It is clear that for every Australian dollar company is earning very less amount.
Return on total assets (ROA)
Return on asset ratio is also known as the return on total assets. The ratio is profitable in measuring the amount of net income generated by the total assets of the company. The ratio is calculated by dividing the net income from the average total assets. Average total assets are computed by taking ending assets and opening assets of the year and dividing by 2. This ratio helps the management in taking decision related to the investment as the main aim of the business is to earn profits (Drake, 2016).
Formula:
Return on assets = Net income / Average total assets
Average total assets = opening total assets + closing total assets /2
Table 7: Computation of Return on total assets (ROA) of NAB (NAB, 2015)
|
Return on Total Assets |
|
|
Year |
Return on total assets |
|
2015 |
0.67 |
Table 8: Computation of Return on total assets (ROA) of CBA (CBA, 2015)
|
Return on total assets |
|
|
Year |
Return on total assets |
|
2015 |
1.09 |
Return on total assets is obtained by dividing the net income from the average total assets. The return on total asset of NAB is 0.67 in 2015. In the same year, return on total assets of the CBA is more than the NAB. The Return on total assets of the CBA is 1.09. The Return on total asset ratio shows the amount generated by the company over the amounts invested in assets. The return on total assets of the CBA bank is showing that CBA is able to generate around 1.09 of net income on the every Australian dollar spent on assets. On the other Side, NAB bank is getting very less profit on the every Australian dollar invested in assets.
Return on common equity (ROE)
Return on equity is a ratio measuring the profitability of company. It measures the ability of company to produce the profits from investment made by the shareholders in the company. In other words the ratio shows profit generated by each dollar of equity of common stakeholder (Drake, 2016). Formula is given below:
Formula:
Return on equity = Net income / Shareholder’s equity
Table 9: Computation of Return on common equity (ROE) of NAB (NAB, 2015)
|
Return on Common Equity |
|
|
Year |
Return on common equity |
|
2015 |
12.87 |
Table 10: Computation of Return on common equity (ROE) of CBA (CBA, 2015)
|
Return On Common Equity |
|
|
Year |
Return on common equity |
|
2015 |
17.9 |
Return on equity of the CBA is 17.9 in the year 2015. In the same year NAB bank has return on equity of 12.87. It can be observed from the table given above that Return on equity of the CBA is more in comparison to the NAB. The difference of around 5 percent is noticed. NAB has earned 12.87 dollar on every Australian dollar of common shareholders equity. On the other side CBA has earned net income of 17.9 dollar on every dollar of common shareholders equity.
Earnings per share (EPS)
Earnings per share are also known as income per share. The ratio is very important from the point of view of stock performance of the company. The earnings per share states the amount of share received by each share of the company in case profits will be allocated to the outstanding shares at the end of financial year. It shows the profitability of the company (Drake, 2016).
It is calculated by the following formula:
Formula:
Earnings per share = net income – preferred dividends / outstanding shares at the end
Table 11: computation of Earnings per share (EPS) of NAB (NAB, 2015)
|
Earnings per share |
|
|
Year |
Earnings per share |
|
2015 |
2.45 |
Table 12: computation of Earnings per share (EPS) of CBA (CBA, 2015)
|
Earnings per share |
|
|
Year |
Earnings per share |
|
2015 |
5.29 |
Earnings per share of NAB are 2.45 and CBA is having earnings per share of 5.29. As it is clear from the figures itself that Earnings per share of the CBA are higher from that of NAB. There is twice the difference in the earnings per share of CAN from the NAB. It is clear that stock performance of CBA is better while comparing with the NAB. If NAB will be distributing the every Australian dollar of income to the shareholders than the portion of each share would be 2.45. Similarly, portion of each share of shareholder of CBA would be 5.29.
Pay-out ratio
Payout ratio is sometimes called as dividend payout ratio. The dividend payout ratio is used to measure the percentage of net income allocated among the shareholders as the dividends. The ratio shows how much Profit the Company is willing to retain and the portion distributed among the shareholders. The following formula is used to calculate the payout ratio (Drake, 2016).
Formula:
Dividend payout ratio = total dividends / net income
The ratio can also be calculated by dividing the dividends per share by the earnings per share.
Table 13: computation of Pay-out ratio of NAB (NAB, 2015)
|
Payout ratio |
|
|
Year |
Pay Out ratio |
|
2015 |
117.5 |
Table 14: computation of Pay-out ratio of CBA (CBA, 2015)
|
Payout ratio |
|
|
Year |
Pay Out ratio |
|
2015 |
71.5 |
Dividend payout ratio of CBA is 71.5 in the year 2015. On the flip side, NAB is having dividend payout ratio of 117.5. The dividend payout ratio of the NAB is very much higher in comparison to the CBA. The ratio of CBA is showing that CBA is dividing around 71.5 percent of the profits among the shareholders as the part of dividend. NAB is distributing very high percent of dividends to the shareholders.
Financial leverage
Financial leverage is a ratio used to find out the debt in the capital structure of company. These ratios are also known as equity ratios or debt ratios. The ratios are helpful in measuring the value of equity in the company by analyzing debt portion. In other words, these ratios measure the debt of the company and compare the same with the equity of asset of the company. It includes debt ratio, debt to equity ratio and equity ratio (Drake, 2016).
Table 15: Computation of financial leverage of NAB (NAB, 2015)
|
Financial Leverage |
|
|
Year |
Financial Leverage |
|
2015 |
18.3 |
Table 16: Computation of financial leverage of CBA (CBA, 2015)
|
Financial Leverage |
|
|
Year |
Financial Leverage |
|
2015 |
16.66 |
Financial leverage of the NAB is 18.3 in the year 2015. On the flip side, financial leverage of the CBA is 16.66. It can be observed from the tables given above that financial leverage of the CBA is high in comparison to NAB. There is more debt in CBA in comparison to NAB. High financial leverage is not good from the perspective of company. High financial leverage shows that there is more financial risk in the company. There is more debt burden on the company. Therefore, it can be inferred that NAB is more exposed to the risk in comparison to CBA.
Fixed asset turnover
Fixed asset ratio is activity or efficiency ratio. The ratio is helpful in measuring the efficiency of company to use its fixed assets for generating revenue. The ratio compute the revenue earned in comparison to investment made in fixed assets (Drake, 2016). The formula of fixed asset turnover is as follows:
Formula:
Fixed assets turnover = net revenue / average fixed assets
Average fixed assets = Opening fixed assets + closing fixed assets / 2
Table 17: Computation of fixed asset turnover of NAB (NAB, 2015)
|
Fixed asset Turnover |
|
|
Year |
Fixed Asset Turnover |
|
2015 |
14.74 |
Table 18: Computation of fixed asset turnover of CBA (CBA, 2015)
|
Fixed asset Turnover |
|
|
Year |
Fixed Asset Turnover |
|
2015 |
9.56 |
Fixed asset turnover of the NAB is 14.74 and CBA has fixed asset turnover of 9.56. The fixed assets turnover ratio of the CBA is lower in comparison to NAB. It is indicating that NAB is using its fixed assets efficiently in comparison to the CBA. The net revenue earned by the NAB is higher as a result of using fixed assets efficiently. The NAB is generating 14.74 Australian dollars on each and every dollar spent on the fixed assets of the company. On the other side, CBA is producing 9.76 dollars on the every Australian dollar invested in fixed assets of the company.
Operating profit
The operating profit is known as operating margin ratio of the company. It is a profitability ratio. It measures percentage of total revenue made up by the operating income. In other words, the ratio is helpful in letting the company know about the amount left after meeting all the variable expenses. It is important from the creditors as well as from the investor’s point of view as it reflects the profitability of company (My Accounting Course, 2016).
Formula:
Operating margin ratio = operating income / net sales
Table 19: Computation of operating profit of NAB (NAB, 2015)
|
Operating Profit margin |
|
|
Year |
Operating Profit margin |
|
2015 |
33.4 |
Table 20: Computation of operating profit of CBA (CBA, 2015)
|
Operating Profit margin |
|
|
Year |
Operating Profit margin |
|
2015 |
46.7 |
Operating profit of CBA is 46.7 which are quite higher. Operating profit of NAB is 33.4. CBA is having higher operating profits in comparison to the NAB. It is indicating that profits left with the CBA after meeting all the variable expenses are more than the NAB. The operating profit ratio of CBA is showing that it is using around 53 cent on the dollar for paying variable expenses. On contrary to it, NAB is paying more part as the variable expenses hence its profit is reduced.
Performance of the CBA is better as per the results of ratio analysis of the banks.
Based on the analysis of the top leading banks of Australia it is found that CBA is having good performance and position in comparison to NAB. Following recommendations can be given to the investors after analyzing the financial statements of the company:
Considering the performance of both banks, company should invest in the CBA as it would be more beneficial to invest in CBA. CBA has higher profits, lower debts, high earnings per share and average efficiency. There is high financial risk in NAB as the debt is high.
Conclusion
The project report was aimed to examine the performance and position of the two banks of Australia, for the purpose of advising investors to invest in one of the banks. Ratio analysis was chosen to analyze the performance and position of the financial reports of the National Australia Bank and Commonwealth Bank of Australia. The analysis of 2015 was done computing ratios of the banks. In addition to that stock prices of both the banks were analyzed for the duration of 5 weeks taking from March 21st to 22nd April 2016. Technical chart analysis and change in percentage of stock prices of both the banks is shown.
The stock prices of both the companies are highly fluctuating during the month of March and April. The performance was going up and down for many days. It was reported that there is improvement in the performance of both the banks during March and April in comparison to the performance of 2015 and initial months of the year 2016. Performance of CBA was found to be better in comparison to the NAB. Profitability of the CBA is higher than that of the NAB. Higher profitability is representing higher profits of the CBA.
The investor should invest in CBA as risk in CBA is less in comparison to NAB and profits are higher. Less risk and high return will be a good combination for the investors of banks.
Reference
Accounting for management, 2016. Classification of financial ratios on the basis of function.
Accounting Tools, 2016. Net Profit Ratio.
CAB, 2016. Commonwealth Bank overview.
Credit Suisse, 2009. Technical Analysis – Explained. Global Technical Research and Behavioral Finance.
Damodaran, A., 2016. Smoke and Mirrors: Price patterns, charts and technical analysis. Stern.
Drake, P.P., 2016. Financial ratio analysis.
My Accounting Course, 2016. Operating Margin Ratio.
NAB, 2015. Annual report. NAB.
Conclusion
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