Caltex Australia limited is the convenience retailer and transport fuel supplier company based in Australia. Caltex is engaged in business of refining, purchasing, marketing, distributing the petroleum products and operating the convenience stores all over Australia. It operates through 2 segments that include Lytton and Supply and Marketing. The supply and marketing division is the integrated supply chain for transport fuel and it delivers refined products in international market and sells the lubricants, Caltex fuels and it has speciality with regard to the convenience store goods and products through national network of Caltex Woolworths, Caltex and the branded service stations of Ampol along with through non-equity and company owned resellers and through direct sales. During the year 2016, the company had 3166 employees in Australia that includes the employees from all the subsidiaries under the control of the company (Caltex 2017).
From the annual report of Caltex, it is recognized that none of the members from the board holds more than 5% or 20% of shares and therefore does not included in the substantial shareholder.
Return on Equity (ROE) = (Net profit after tax / Ordinary equity)
|
Ratio |
Formula |
2016 |
2015 |
2014 |
2013 |
|
Return on assets |
NAPT / Total asset |
0.115 |
0.102 |
0.004 |
0.088 |
|
Return on equity |
NPAT / Ordinary equity |
0.217 |
0.187 |
0.009 |
0.204 |
Debt ratio = Total liabilities / Total assets
|
Ratio |
Formula |
2016 |
2015 |
2014 |
2013 |
|
Debt ratio |
Total liabilities / Total assets |
0.470 |
0.454 |
0.506 |
0.569 |
EBIT/TA * NPAT/EBIT * TA/OE = NPAT/OE
EBIT/TA * NPAT/EBIT * TA/OE = 934,953/5,302,734 * 610,480/934,953 * 5,302,734 / 2,810,215 = 0.22
NPAT/OE = 610,480/2,810,215 = 0.22
Therefore, it is proved from the above computation that –
EBIT/TA * NPAT/EBIT * TA/OE = NPAT/OE
The phenomenon for TA/OE states the company’s total asset as compared to the ordinary equity of the company. It states the insolvency risks of the company and also reveals the risks associated with the total assets of the company that is faced by the shareholders (Akeem et al. 2014). The significance of total asset of the company in comparison to the equity depends on the revenue of the company, economic status of the company, industry to which it belongs and various other factors. When the total assets of the company increase it will decrease the company’s return on assets and vice versa (Macdonald-Smith 2015). Though no ideal value is there for total asset to ordinary equity ratio, a high ratio represents that the entity is highly leveraged. Reason for high level of leverage is the higher level of borrowed capital in the capital structure of the company (Baños-Caballero, García-Teruel and Martínez-Solano 2014). However, high asset to equity ratio represents that the company is exposed to sustainability risk as the higher level of risk will expose the company to interest risk. On the contrary, if the company has lower total asset to ordinary equity ratio, it represent that the company is lower leveraged and has strong position (Naser, Nuseibeh and Al-Hadeya 2013). However, lower ratio represents that the company is missing out on the business opportunities and is of conservative nature.
As both ROA as well as ROE measure the return of the company at 1st glance both look similar. Both measure the ability of the company to generate the earnings from investment. However, they are not exactly same and have some key differences among them. However, they both together provide clear picture of the company’s performance. When the shareholder’s equity is lower as compared to the total assets of the company, the ROE of the company becomes higher than the ROA. The fundamental equation of the balance sheet is – Assets = Shareholder’s equity + Liabilities. Therefore, the company takes on the financial leverage, its ROE will be higher as compared to ROA. In other words, if the debt increases, the equity decreases and as the equity is placed in the denominator of ROE, the ROE in turn increases. Likewise, when the company taken on the debt, the denominator of ROA that is the total asset will increase which in turn represents that the ROE will increase as compared to ROA.
Stock movement of Caltex Australia Limited
|
Caltex Australia Limited |
||
|
Date |
Adj Close |
Changes |
|
12/31/2015 |
33.429485 |
|
|
1/31/2016 |
32.880577 |
-0.016 |
|
2/29/2016 |
30.612947 |
-0.069 |
|
3/31/2016 |
30.175068 |
-0.014 |
|
4/30/2016 |
30.37933 |
0.007 |
|
5/31/2016 |
29.617989 |
-0.025 |
|
6/30/2016 |
30.787851 |
0.039 |
|
7/31/2016 |
31.521343 |
0.024 |
|
8/31/2016 |
31.799879 |
0.009 |
|
9/30/2016 |
29.145987 |
-0.083 |
|
10/31/2016 |
28.501038 |
-0.022 |
|
11/30/2016 |
28.889902 |
0.014 |
|
12/31/2016 |
27.125778 |
-0.061 |
|
1/31/2017 |
26.689491 |
-0.016 |
|
2/28/2017 |
27.969902 |
0.048 |
|
3/31/2017 |
29.076153 |
0.040 |
|
4/30/2017 |
32.181374 |
0.107 |
|
5/31/2017 |
30.769909 |
-0.044 |
|
6/30/2017 |
30.312399 |
-0.015 |
|
7/31/2017 |
32.502602 |
0.072 |
|
8/31/2017 |
31.246885 |
-0.039 |
|
9/30/2017 |
34.259998 |
0.096 |
|
10/31/2017 |
34.060001 |
-0.006 |
|
11/30/2017 |
34.049999 |
0.000 |
Stock movement of All Ordinary Index
|
All Ordinary Index |
||
|
Date |
Adj Close |
Changes |
|
12/31/2015 |
5005.5 |
|
|
1/31/2016 |
4880.899902 |
-0.025 |
|
2/29/2016 |
5082.799805 |
0.041 |
|
3/31/2016 |
5252.200195 |
0.033 |
|
4/30/2016 |
5378.600098 |
0.024 |
|
5/31/2016 |
5233.399902 |
-0.027 |
|
6/30/2016 |
5562.299805 |
0.063 |
|
7/31/2016 |
5433 |
-0.023 |
|
8/31/2016 |
5435.899902 |
0.001 |
|
9/30/2016 |
5317.700195 |
-0.022 |
|
10/31/2016 |
5440.5 |
0.023 |
|
11/30/2016 |
5665.799805 |
0.041 |
|
12/31/2016 |
5620.899902 |
-0.008 |
|
1/31/2017 |
5712.200195 |
0.016 |
|
2/28/2017 |
5864.899902 |
0.027 |
|
3/31/2017 |
5924.100098 |
0.010 |
|
4/30/2017 |
5724.600098 |
-0.034 |
|
5/31/2017 |
5721.5 |
-0.001 |
|
6/30/2017 |
5720.600098 |
0.000 |
|
7/31/2017 |
5714.5 |
-0.001 |
|
8/31/2017 |
5681.600098 |
-0.006 |
|
9/30/2017 |
5909 |
0.040 |
|
10/31/2017 |
5969.899902 |
0.010 |
|
11/30/2017 |
6065.100098 |
0.016 |
Stock movement graph
As it can be seen from the above table and graphs that both the stocks have moved upward, it can be stated that both the stocks have increased. However, the stock of Caltex fluctuated more as compared to the stock of All ordinary index. Therefore, the stock of Caltex is more volatile and exposed to higher level of risk as compared to All Ordinary Index. The correlation among two stocks calculated as 0.028. Thus, both the stocks are uncorrelated.
Therefore, required rate of return of the company’s share =
R = Rf + β ( Rm – Rf )
R = 4% + 0.05* (6% – 4%) = 4.1%
It is the investment approach under which the value of the investment portfolio is preserved through investment in the lower risks associated securities. An investment option with regular income and fixed market securities are considered as conservative investment. a conservative investment is also associated with higher return, lower beta and regular payment for dividend (Heikal, Khaddafi and Ummah 2014). It is recognized from the above details that the company’s beta is 0.05 which can be considered as low. Further, the company’s ROE is better than the ROA. Further, the target payout ratio for dividend is 40 to 60% of RCOP NPAT. To match this target it declared final dividend of 52 cents per share for 2nd half of 2016 in addition to 50 cents per share for 1st half. This made the total dividend of 102 cents of dividend per share for the year 2016 as compared to 117 cents dividend per share for the year 2015. Therefore, it can be stated that the company is regular in paying the dividend. Therefore, Caltex Australia Limited will be regarded as conservative investment.
WACC of the company calculated through proportionately weighting each category of capital under the capital structure. For this purpose, all types of capital like equity capital, preferred capital, common stock, bonds and long-term liabilities are taken into consideration (Zabarankin, Pavlikov and Uryasev 2014). The weighted average cost of the capital for any company increases with the increase in the beta as well as the return on equity rate. However, if the WACC of the company goes up, the valuation of the company goes down and at the same time the capital risk of the company increases. The WACC is computed as follows –
WACC = E/V * Re +D/V * Rd * (1-Tc), Where,
E/V = Equity percentage in the capital structure
D/V = Debt percentage in the capital structure
Re = Cost of equity = 4.10%
Rd = Rate of debt = 13.9%
Tc = corporate tax rate = 30%
The given information for computation of WACC are as follows –
|
Amount in $’000 |
|
|
Amount of Debt |
4,53,617.00 |
|
Amount of Equity |
28,10,215.00 |
|
Total |
32,63,832.00 |
|
Percentage of debt |
14% |
|
Percentage of equity |
86% |
Thus, WACC = 86*4.10% + 14*13.9% (1- 0.30)
= 3.526 + 1.362 = 4.89%
Weighted average cost of the capital that is known as WACC, is the rate at which the entity projects to pay on average to their shareholders for the purpose of asset financing. In other words, it is the cost of capital for the company. It represents the firm’s cost for financing the projects that may acquire by the firm for the purpose of growth. The WACC is subjective to the external market condition and it is not decided by the management of the company (Zhang 2014). Finance is raised either through debt or through equity and both the sources are raised in exchange of costs. For instance, if the finance is raised through debt the cost is the interest and on the contrary if the finance is raised through equity the cost is the dividend or the share of the company. If the WACC of the company is higher, it represents that the company is exposed to higher capital risk and the management try to raise fund from cheaper source. It further indicates that the company is losing its worth and shall find for more profitable and lower risk associated projects for investment.
|
Debt ratio |
Total liabilities / Total assets |
Year 2016 = 0.470 |
Year 2015 = 0.454 |
The optimal capital structure is the one at which the company can maximise its value. It is stated as the one that can maintain the balance among the debt and equity of the firm and can minimize the capital cost of the company (Albul, Jaffee and Tchistyi 2015.). Generally, the cost of debt is regarded as low cost source of fund as the cost for debts are deductible expense under tax whereas the cost of equity is not tax deductible. However, the debt comes in exchange of interest cost and it increases the company’s risk associated with interest rate (Harris and Mazibas 2013). The debt ratio of 0.4 or lower is generally regarded as ideal from the perspective of pure risk. It is recognized from the above calculation of Caltex Limited that the debt ratio for the year 2016 was 0.57 as compared to 0.45 for the year 2015. Therefore, it can be stated that the company is maintaining the ideal and stable debt ratio (Renneboog and Szilagyi 2015).
The gearing ratio is the financial ratio that measures the shareholder’s equity as compared to the debt of the company. It is used for analyzing the company’s capital structure and is calculated through dividing the owner’s equity by the interest bearing liabilities (Bodie, Kane and Marcus 2014). The company is considered to be highly geared if the debt is higher in the capital structure. On the contrary it is considered as low geared if the capital structure is composed of more equity. as the capital structure of the company composed of 14% debt and 86% equity, to adjust the gearing ration the company increased its long-term borrowings from $ 695,238 in 2015 to $ 698,340 in 2016. Further, the company made buyback of shares amounting to $ 18,471 in the year 2016. However, nothing is mentioned in the director’s report regarding the adjustments (Halili, Saleh and Zeitun 2015).
The provision for dividend payable is accounted for the total undistributed amount in the reporting period during which the dividends are declared (Ajanthan 2013). The company follows the target payout ratio for paying the dividend from 40 to 60% of RCOP NPAT. To match this target it declared final dividend of 52 cents per share for 2nd half of 2016 in addition to 50 cents per share for 1st half. This made the total dividend of 102 cents of dividend per share for the year 2016 as compared to 117 cents dividend per share for the year 2015. Therefore, it can be stated that the company is regular in paying the dividend (He and Krishnamurthy 2013).
It can be recommended from the above analysis that the client must include Caltex Australia Limited in his investment portfolio. The reason in support of this is that the company improved its ROA as well as ROE in 2016 as compared to the year 2015. Further, the beta of the company is as low as 0.05 that indicates that the company is exposed to low level of risk. Moreover, if the dividend policy of the company considered, it is found that the company is regular in paying dividend and therefore for the investor, the stock of Caltex will be regular source of income. In addition, it is recognized that the debt ratio of the company over the last 4 years are stable and balanced. Therefore, as the stock of Caltex fulfils all the basic criteria of an investor for considering a sock for investment, it shall be included in the investment portfolio of the client.
Reference
Ajanthan, A., 2013. The relationship between dividend payout and firm profitability: A study of listed hotels and restaurant companies in Sri Lanka. International Journal of Scientific and Research Publications, 3(6), pp.1-6.
Akeem, L.B., Terer, E.K., Kiyanjui, M.W. and Kayode, A.M., 2014. Effects of capital structure on firm’s performance: Empirical study of manufacturing companies in Nigeria. Journal of Finance and Investment Analysis, 3(4), pp.39-57.
Albul, B., Jaffee, D.M. and Tchistyi, A., 2015. Contingent convertible bonds and capital structure decisions.
Baños-Caballero, S., García-Teruel, P.J. and Martínez-Solano, P., 2014. Working capital management, corporate performance, and financial constraints. Journal of Business Research, 67(3), pp.332-338.
Bodie, Z., Kane, A. and Marcus, A.J., 2014. Investments, 10e. McGraw-Hill Education.
Caltex., 2017. Home – Caltex. [online] Available at: https://caltex.com.au/ [Accessed 17 Jan. 2018].
Halili, E, Saleh, A and Zeitun, R., 2015. ‘Governance and Long-Term Operating Performance of Family and Non-Family Firms in Australia’, Studies in Economics and Finance, vol.32, no.4, pp.398-421.
Harris, R.D. and Mazibas, M., 2013. Dynamic hedge fund portfolio construction: A semi-parametric approach. Journal of Banking & Finance, 37(1), pp.139-149.
He, Z. and Krishnamurthy, A., 2013. Intermediary asset pricing. The American Economic Review, 103(2), pp.732-770.
Heikal, M., Khaddafi, M. and 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), p.101.
Macdonald-Smith, A., 2015. Caltex profit benefits from supply chain.
Naser, K.A.M.A.L., Nuseibeh, R.A.N.A. and Al-Hadeya, A.H.M.E.D., 2013. Factors influencing Corporate working capital management: Evidence from an Emerging Economy. Journal of Contemporary Issues in Business Research, 2(1), pp.11-30.
Renneboog, L. and Szilagyi, P.G., 2015. How relevant is dividend policy under low shareholder protection?. Journal of International Financial Markets, Institutions and Money.
Zabarankin, M., Pavlikov, K. and Uryasev, S., 2014. Capital asset pricing model (CAPM) with drawdown measure. European Journal of Operational Research, 234(2), pp.508-517.
Zhang, Z., 2014. On a risk model with randomized dividend-decision times. Journal of Industrial & Management Optimization, 10(4), pp.1041-1058.
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