With the ramified financial market factors, each and every investor needs to use financial analysis tools before investing their capital in the particular stocks and shares. In this report, financial analysis of Medibank private limited and NIB Holding Limited has been take into consideration to analyses and compare the financial performance, share valuation and capital structure of these two companies. In the starting of this report, description of both companies, their competitive advantages and core activities have been discussed. After that financial ratio analysis has been used to identify the ups and down in the financial performance of company. Afterward, share price valuation analysis has been done by using the dividend growth models so that the share price value of company could be assessed. In the end , share price comparison of the company with another and all ordinary stock exchange have been done so that it could be determined whether investing capital in organization would be beneficial for the investors to create value on its investment or not. There are several financial analysis tools have been used such as Du pont analysis, capital budgeting, dividend growth model, ratio analysis and share price valuation methods to determine whether company has been creating value on the invested capital of the investors or not.
The Medibank Private limited is the Australian national private health insurer which has been offering its banking and insurance services to its clients throughout the time. It is the second largest health insurance service provider after BUPA. It has covered at least 29.1% market share in the insurance industry of the Australia. This company has created value on its investment by offering insurance services to its clients. Currently, all the shares of company are traded at AUD $ 3.3 which is 12% higher as compared to last year data.
On the other hand, NIB holding Limited is also one of the health insurer which offers health insurance and financial services to clients. It has increased its capital investment by 20% with a view to cover more market share in the insurance sector of the Australia.
The core activity of Medibank is to provide insurance services to clients so that they could their health insurance from the most trusted brands.
The main competitive advantage of Medibank Organizaiton is related to its health insurance services. it has been providing unique health insurance services at very low cost which will help clients to avail these health services at very least cost. It will assist company to grab more market share.
Industry
The Medibank is indulged in offering its health insurance to its clients in insurance and financial sectors with the increase in the GDP rate of the Australia; it would be positive factor for the Medibank to strengthen its overall turnover and market share.
The financial analysis of Medibank private Limited is used to evaluate the liquidity, profitability, efficiency and market ratio of company and how well it has performed throughout the time.
The liquidity ratio is used to measure how well company could pay off its long term and short term liabilities out of its available current assets investment. This ratio has been divided into two main parts.
The current
|
Description |
Formula |
MEDIBANK PRIVATE LTD (Ratio Analysis ) |
|||
|
|
|
2015` |
2016 |
2017 |
NIB Holding Company |
|
Current ratio |
Current assets/current liabilities |
0.62 |
0.32 |
0.34 |
0.42 |
|
Quick Ratio |
Current assets-Inventory/current liabilities |
0.62 |
0.32 |
0.34 |
0.39 |
Current ratio
The current ratio of Medibank private Limited has decreased by .32 points in 2017 which is very low as compared to last three year data. Medibank private Limited might face issue in managing its busienss if the demand of the market increases. On the other hand, NIB Holding has kept .42 current ratio which is .12 points higher as compared to Medibank private Limited. It reflects that NIB Holding has kept higher liquidity in its capital which might be positive for the company in case of sluggish market condition.
The Medibank private Limited does not have inventory in its books of account therefore; the quick ratio would be equal to its current ratio. ON the other hand, NIB Holding has kept .30 points quick ratio as it has blocked some of its current asset investment in its inventory.
The profitability ratio divulges the performance ability of company in terms of the earning made by company.
The net profit margin ratio of company reflects the net profit earing of company out of its available turnover. The Medibank private Limited has kept stable net profit margin in all the last three years. However, as compared to NIB Holding, Medibank private Limited has 2% higher net profit margin ratio. This shows that Medibank has been performing well in market than its competitors.
|
Description |
Formula |
MEDIBANK PRIVATE LTD (Ratio Analysis ) |
|||
|
|
|
2015` |
2016 |
2017 |
NIB Holding Company |
|
Net margin |
Net profit/revenues |
6.27% |
6.62% |
6.43% |
4% |
|
Return on equity |
Net profit/Equity |
28.99% |
28.50% |
25.87% |
24% |
|
Return on assets |
Net profit/ Total assets |
13.31% |
13.78% |
12.85% |
12.4 |
The return on equity reflects the net profit earned by company available to distribute to its equity shareholders. It reflects how well company has performed throughout the time. The return on euqtiy of company is way too higher in case of Medibank private limited and it shows how well company has created value on its investment. However, NIB HOldign is havig return on equity 4% lower if it is compared with the Medibank.
The return on assets of company has increased by 1% since last one year in case of Medibank private limited. However, still as compared to NIB holding, return on assets of Medibank is higher. It reflects that company is consistently increasing its profitability and performing well in market as compared to others.
The gross profit margin of Medibank private limited has increased with the increase in its overall turnover. However, the gross profit margin has increased to 12% which is 2% higher as compared to last three year data. On the other hand, NIB Holding has also increased its earning and kept gross profit margin to 11% in 2017. It reveals that Medibank private limited has performed well and kept higher profitability as compared to others (Medibank private limited, 2015).
This ratio divulges the capital structure and interest coverage ratio of company. the
|
Description |
Formula |
MEDIBANK PRIVATE LTD (Ratio Analysis ) |
|||
|
|
|
2015` |
2016 |
2017 |
NIB Holding Company |
|
Debt to Equity Ratio |
Debt/ Equity |
1.18 |
1.07 |
1.01 |
2.2 |
|
Gearing ratio |
Interest/ EBIT |
– |
– |
– |
2 |
The debt to equity ratio reveals the relation between the debt and equity part of the company in its capital structure. Medibank private limited has kept 1.01 debts to equity ratio which is very low as compared to others in market. It is analyzed that as compared to NIB Holding, Medibank private limited has kept lower debt to equity which may be risky in terms of cost of caaptial. It is considered that due to the low debt capital portion in its business, Medibank private limited may have high cost of capital and it will eventually decrease the overall return on capital employed of company.
It is analyzed that gearing ratio reflects how well company could meet its financial interest payment out of its available earning. It shows its interest coverage capacity in its busienss. It might negatively impact the business sustainability if company has low interest coverage. In case of Medibank private limited, it is analyzed that it has kept zero interest coverage or gearing ratio as it has no amount to pay as its interest payment. On the other hand, NIB Holding company has kept low interest payment which is positive indicator and higher debt portion will also be helpful for the Organizaiton to lower down its cost of capital. The interest payment will also be used by company as tax deduction expenses to lower down the tax expenses (Yahoo Finance, 2017).
This ratio divulges how Medibank private limited could effectively deploy its capital in its busienss process.
The creditor’s turnover ratio reflects times which will be required to pay to its creditors for their debts. In case of Medibank private limited¸ the creditor’s turnover ratio of company is zero as it has not kept creditors. On the other hand NIB Holding has kept 51 times creditors which will assist it to lower down its cost of capital (Medibank private limited, 2016).
The receivable turnover ratio of Medibank private limited is zero as it has kept zero debts in its balance sheet. However, it would be beneficial for the organization as there would be no credit sales and no amount of capital would be blocked. On the other hand, NIB Holding has kept 45 times debtor’s turnover which may negatively impact the business (NIB Holding, 2015).
|
Description |
Formula |
MEDIBANK PRIVATE LTD (Ratio Analysis ) |
|||
|
|
|
2015` |
2016 |
2017 |
NIB Holding Company |
|
Creditors payable period |
creditors / Total sales*365 |
– |
– |
– |
51 |
|
Inventory Turnover ratio |
COGS/ Sales*365 |
– |
– |
– |
245 |
|
Asset turnover ratio |
Total sales/ Total assets |
2.12 |
2.08 |
2.00 |
4 |
The inventory turnover ratio Medibank private limited is zero as it has not kept capital in its inventory. It would be beneficial for the organization as there would be no amount of capital blocked in its inventory. On the other hand, NIB Holding has kept 245 times inventory’s turnover which may result to increased cost of capital and may also negatively impact the busienss (Talebnia, Jaberzadeh, and Salehi, (2015).
The assets turnover ratio of Medibank private limited has been stable since last three years. Company has not been performing well but the assets turnover ratio of company is also not that high. NIB Holding company has kept 4 times assets turnover which is positive indicator for the future growth of the organization.
The market ratio of company has shown how well company has increased the amount of profit available to its equity shareholders. It is analyzed that company has the dividend payout ratio of company has increased effectively with the increase in its profit. It has followed profit based dividend policy.
|
Description |
Formula |
MEDIBANK PRIVATE LTD (Ratio Analysis ) |
|||
|
|
|
2015` |
2016 |
2017 |
NIB Holding Company |
|
PE Ratio |
MPS/EPS |
18.97 |
23.16 |
25.12 |
32 |
|
Dividend Payout |
dividend payment/ Earning *100 |
-0.571770335 |
-0.631111111 |
-0.696629213 |
-0.823 |
The Medibank has increased its dividend payment to its equity shareholders which may be positive indicator for the future growth of the organization. However, as compared to NIB holding, it has decreased their PE ratios which reflect the negative outcomes for Medibank. On the other hand, NIB Holding has kept dividend payout 80% of its earning which is 10% higher as compared to Medibank Private limited (Tayeh, Al-Jarrah, and Tarhini, (2015).
There are several main key points that have been found after implementing the financial analysis
As compared to NIB Holding, Medibank Private limited has low financial performance in terms of profitability and solvency.
It is analyzed that the share price movement of Medibank is having high fluctuation. It is analyzed that the share price movement of Medibank private holding is having increase and decrease in its share price. It is analyzed that in 2016 company had good amount of increment in its share price. On the other hand, NIB holding faced high downfall in its share price in 2016 due to its legal compliance issues. It is analyzed that both companies are facing high fluctuation and when the share price of both companies are compared with the all ordinary stock then it reflects that these companies are not performing well in market and negatively impacting the busienss in long run (Uechi, et al. (2015).
The high share price fluctuation of NIB Holding is stable in 2017 and 2018. However, in case of Medibank Company, the share price went up in the December 2017 and after that the share price was stable in 2017 and 2018. This shows that due to the stable profitability and low amount of busienss loss the share price movement of Medibank is reflecting the positive indicator. It is inferred that the share price movement of all ordinary index is very lost and reflecting the positive indicator. If investors invest their capital in all ordinary index share companies then they will have higher return on capital employed (Delen, Kuzey, and Uyar, (2013).
The dividend growth model is the model which is used to compute the share value of company. It uses the divided paid to shareholders, growth rate and cost of capital of company (Ehiedu, 2014).
Formula:
Value of the stock = D1/ KE-G
Computation of the dividend growth rate of Medibank Private limited
The return on equity of company has been computed in ratio analysis
ROE= 25.97%
Retention ratio=20%
Growth= 90%*8.8=5.5%
Growth rate would be= 5.5%
But as per the question dividend growth rate is 14%
So we will take 14% growth rate.
Cost of capital = 9%
Last year dividend is =.27
Value of the stock = D1/ KE-G
P1= .27/9%-25.97%
AUD $ -1.66
The market price of Medibank Private limited would be AUD $ -1.66 on the other hand, the future share price of NIB Holding will also be AUD $ -1.933.
Conclusion
These both companies have been facing profitability, solvency and busienss efficiency issue in its busienss. It is analyzed that if investors want to invest their capital in these two companies then they should invest their capital for the long term basis. It is analyzed that due to the low profitability and less efficient busienss ratio divulged that investors might face issue in creating value on its investment if they invest their capital in these two companies. However, if investors want to choose one company to invest their capital out of these both companies then they should invest their capital in NIB holding company as it has good efficiency ratio.
References
Delen, Kuzey, and Uyar, (2013). Measuring firm performance using financial ratios: A decision tree approach. Expert Systems with Applications, 40(10), pp.3970-3983.
Ehiedu, V.C., (2014). The impact of liquidity on profitability of some selected companies: The financial statement analysis (FSA) approach. Research Journal of Finance and Accounting, 5(5), pp.81-90.
Medibank private limited, (2015), Annual report, Available at https://www.medibank.com.au/about/investor-centre/results-reports/annual-reports/., ., Accessed on 19th September, 2018,
Medibank private limited, (2016), Annual report, Available at https://www.medibank.com.au/about/investor-centre/results-reports/annual-reports/., ., Accessed on 19th September, 2018,
Mwangi, M. and Murigu, J.W., (2015). The determinants of financial performance in general insurance companies in Kenya. European Scientific Journal, ESJ, 11(1). pp.81-90.
NIB Holding , (2016), Annual report, Available at https://www.nib.com.au/shareholders/financial-results., ., Accessed on 19th September, 2018,
NIB Holding, (2015), Annual report, Available at https://www.nib.com.au/shareholders/financial-results., , , Accessed on 19th September, 2018,
Talebnia, G., Jaberzadeh, F. and Salehi, M., (2015) Study Information Content of Comprehensive income by Focusing on Firm Size. Asian Journal of Research in Banking and Finance, 5(1), pp.111-118.
Tayeh, M., Al-Jarrah, I.M. and Tarhini, A., (2015). Accounting vs. market-based measures of firm performance related 2nd ed, Australia: Pearson.
Uechi, L., Akutsu, T., Stanley, H.E., Marcus, A.J. and Kenett, D.Y., (2015). Sector dominance ratio analysis of financial markets. Physica A: Statistical Mechanics and its Applications, 421, pp.488-509.
Yahoo Finance, 2017, ‘Medibank Limied, Available at https://in.finance.yahoo.com/quote/DEB.L/., , Accessed on 19th September, 2018,
Yahoo Finance, 2017, ‘NIB Holding, Available at https://in.finance.yahoo.com/quote/DEB.L/., , Accessed on 19th September, 2018,
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