Peer-to-Peer Analysis Of Real Estate Companies Stockland And Mirvac

Background

Discuss about the Analysis of Stockland and Mirvac.

In today’s dynamic market, it is important for an investor to make his investment decisions investment manager is aimed to provide reasonable financial advices to its corporate and private clients to guide those regarding investments so that they can invest their money in the best possible manner. (Bragg, 2016)

In the current situation, being an investment manager, the institutional investor from the overseas is interested in investing in the blue chip companies of the Australian market. The following report contains the peer to peer analysis of two large companies operating under the same industry. The companies considered for this analysis are Stockland and Mirvac. The two companies are one of the largest diversified Australian companies in the real estate and property business. (Case, 2012)

Mirvac is in the field of property industry since 45 years and is recognized for its excellent capabilities of managing the assets. It owns an image of delivering products and services of superior quality across the country. Mirvac is situated in four key cities, that is, Sydney, Melbourne, Brisbane and Perth. It owns over $18 billion of assets which are managed across the industrial and retail sector. The activities of the company aims at creating a long term value for its security holders by providing high quality assets and projects for both commercial and residential purposes. Mirvac has an approach of handling all its projects whether an leasing project or property management from planning to designing, developing and constructing (Dickson, 2017). The company aims at innovations of how better it can redefine the landscape and create a lively and linked environment, so as to leave a long lasting heritage for coming generations.

Stockland, founded in 1952, is one of the largest diversified company dealing in the property and real estate business . With owning of $17.9 billions of real estate assets, the company has its own retail centres and logistics centres (Rosenfield, 2009). It owns business parks and retirement living villages.it has office assets and holds projects for both commercial and residential purposes. It aims at being one of the greatest companies dealing in real estate business alongwith making a valuable contribution to the society and the nation as a whole. It considers all the social factors equally important such as hygiene living, strong social connections, access to education opportunities in order to achieve its goal. It has created The Stockland CARE Foundation , National Partnerships and such other local communities that helps the company to spread its believes to live in a better way (Edwards, 2014).

Financial Ratios Analysis

Analyzing financial statements using various financial tools is considered as one of the best way to understand the operations of the business, its future prospects and its financial performance & position in the market. Ratio analysis is one of the most used financial analysis tools to assess various aspects of a company’s operations and performance regarding solvency, liquidity, efficiency and profitability. It helps in comparing the financial data of a company with its own previous year’s historical data, other companies financial statements and with the industry average (Schnapf, 2011).

For peer to peer analysis of Stockland and Mirvac, a ratio analysis of the said companies have been made to compare them on a common base and make the required investment decisions accordingly (Schroeder, 2014).

Ratio Analysis

Liquidity Ratio is an indicator of the liquidity position of the company ,i.e., whether the company owns adequate current assets that it can convert into cash readily and meet its current dues or obligations. It measures a company’s ability of how promptly it can meet up with its debt obligations if in case it becomes due. Usually, current ratio and quick ratio are indicators of liquidity position of a company (Edwards, 2014).

• In the current situation, the current ratio of the Stockland is 0.35 and that of Mirvac is 1.09. higher the current ratio is, the better its liquidity position is. As the ratio suggests, Mirvac shows a better position than Stockland. However, even Mirvac’s ratio is not an ideal one as the ideal ratio is 2:1. Mirvac owns current assets of $1027 millions while Stockland owns $296 millions more than the former company. In spite of owing more assets in value, it is observed that Stockland has its debt obligations almost four times of Mirvac indicating the burden of liabilities are more on Stockland.

Current ratio	STOCKLAND	MIRVAC
Current Asset	1323	1027
Current liability	3778	944
Current ratio	0.35	1.09

• The more ideal ratio than current ratio is quick ratio. Quick ratio considers those current assets that can be readily converted into cash and therefore, eliminates the inventory as it cannot be readily converted. The quick ratio of Stockhold is 0.15 and that of Mirvac is 0.39. As the ratio suggests, Mirvac shows a better ratio than Stockhold. But , if we consider the level of inventory in the current assets, in case of Mirvac, inventory is 64% of the current assets while in case of Stockhold, inventory is 57% of the current assets. Owning high levels of inventory is a negative indicator of not having speedy sales. However, the inventory levels of the above two companies shows a difference of five per cent which cannot be considered as a significant difference. (Flood, 2017)

Quick ratio	STOCKLAND	MIRVAC
Current assets	1323	1027
Inventories	756	662
Current liabilities	3778	944
Quick ratio	0.15	0.39

• We should consider the fact that it is Stockland Company that owns more current assets with 57% of inventory which is better than Mirvac that owns lesser than the former with 64% of inventory. But, still Mirvac shows a better liquidity position than Stockhold as the latter company holds huge liabilities than Mirvac indicating a pressure of short term obligations on the Stockland Company.

Solvency ratios are the indicators of how frequently a company can meet up with its long term debts. It measures the financial strength of a company. a higher solvency ratio indicates a stronger position while a lower solvency ratio indicates a weak position. It defines a business’s financial abilities. (Freeman, 2011)

• Debt to equity ratio defines the amount of leverage the company is using, that is, the amount of debts used to finance the assets relative to the shareholders funds. A high debt ratio indicates the aggressive practices of a company of financing its growth with the debts. This indicates the higher risk on a company. In the current situation, the debt to equity ratio of the Stockland is 0.38 and that of Mirvac is 0.40. Though the former company has taken more debts by $598 millions, the latter has a higher ratio in comparison to Stockland also because Stockland owns more equity funds that exceed Mirvac by $1,955 million. Thus, we can also see that the funding by equity and debts in the Stockland Company is more than Mirvac by $ 2,553 million, which is a significant difference as it indicates the nature of the operations or investments where such funds have been used.

Debt to equity ratio	STOCKLAND	MIRVAC
Total debt	3790	3192
Total Equity	9927	7972
Debt Equity ratio	0.38	0.40

• Total debts to total assets are a closely related ratio that measures the leverage of the company in the balance sheet. It tells the percentage of assets financed by such debts. In the current situation, the said ratio of the Stockland is 0.22 and that of Mirvac is 0.26. There is not much significant differences that are to be considered except the fact that Stockhold owns assets more by $5,387 millions while the funding of such assets by debts is 4% less than Mirvac. However, the burden of debts is more in first case.

Total debt to asset ratio	STOCKLAND	MIRVAC
Total debt	3790	3192
Total assets	17495	12108
Total debt to assets ratio	0.22	0.26

• There are a lot of other factors that should be considered for analysis. For example, it depends on the cash flows of the company that means if it has stable cash flows, it won’t face much pressure from its debts obligations. However, in situation of volatile cash flows, a company cannot afford a high debt ratio. Also,it depends on the cost of the debts that determines the interest payment obligations. It also depends on the operations of the company and the environment within which it is working that would determine how frequently the company earns profits which in turn would define the strength of the company to bear the interest expenses. Owning to absence of such non financial factors, it is difficult to tell which firm owns a better position. However, considering the financial values, Stockland shows a better position as there is a significant investments in assets by the company.

Activity ratios determines the credit terms of the company with its suppliers and debtors both. It helps in calculating the average time period related to activities like payments to be made to its creditors, receipts of payments made by its debtors, the interval of time period after which the order for raw materials is to be made, etc. (Hubig, 2013)

• Accounts receivable ratio measures the efficiency of the company to use its assets. It calculates that how frequently the company can collect its funds. In the current situation, the accounts receivable ratio of the Stockland is 20.41 times and that of Mirvac is 21.98 times. If we divide 365 days with the ratios calculated,on an average Stockland’s credit terms to its debtors extend to 17 days while credit terms of Mirvac extends to 16 days approximately. Thus, not much difference can be observed as both the companies have similar credit terms.

Accounts receivable turnover ratio	STOCKLAND	MIRVAC
Turnover	2744	2275
Average accounts receivable	136.5	103.5
Accounts receivable turnover ratio	20.10	21.98

• Total assets turnover is an indication of how efficiently the company is using its fixed assets to generate sales. Generally, a high asset turnover ratio indicates that the firm has utilized its investments in assets more effectively to generate revenue. In the current situation, the total asset turnover ratio of the Stockland is 0.16 and that of Mirvac is 0.19. On comparison basis, Mirvac has used its assets more effectively to generate sale revenue. Stockland that owns more assets and has sales more than Mirvac, yet the latter company shows a better efficient use of its assets.

Total asset turnover ratio	STOCKLAND	MIRVAC
Turnover	2744	2275
Total asset	17495	12108
Total asset turnover ratio	0.16	0.19

• Inventory turnover ratio measures the ability of the company of how frequently it can convert its inventory into cash. It measures the liquidity of the inventory. Usually, a lower inventory ratio is not considered favorable as it means that the company is holding more inventory and too much of inventory blocks the cash of the company for a longer time. In the current situation, the inventory turnover ratio of the Stockland is 3.52 times and that of Mirvac is 3.22 times. On dividing 365 days with the above ratios, we get an average time period of holding inventory after which it gets replaced. In case of Stockland, it is 104 days while in case of Mirvac it is 113 days approximately. It is obvious that Mirvac takes 9 days more than the former company to replace its inventory showing that the credit terms of Stockland is better than Mirvac. (Kieso, 2014)

Inventory turnover ratio	STOCKLAND	MIRVAC
Turnover	2744	2275
Average inventory	779	706
Inventory turnover ratio	3.52	3.22

• To conclude on the basis of above information, not much significant differences are noticed. However, the efficient use of assets exceeds by 3% in case of Mirvac than Stockland meaning that there is better efficiency speed and utilizing capability in the former company.(Scott, 2014)

Profitability ratios are the measures of company’s ability to generate earnings after considering all the relevant expenses and costs during that period. For most of these ratios, the higher the ratio is, the more well the company is doing. (Mattessich, 2016)

• Net profit ratio is the ratio of actual earnings gained by the company after considering all types of costs and after tax. It is expressed as a percentage of sales revenue to understand how much able the company is to translate its sales into profits. In the current situation, the net profit ratio of the Stockland is 44% and that of Mirvac is 51%. Though the net profit of Stockland is $31 millions more than Mirvac, yet in comparison to its sales, the former company has generated less profits than the later company.

Net profit Ratio	STOCKLAND	MIRVAC
Net profit	1195	1164
Sales	2744	2275
Net profit ratio	0.44	0.51

• Return on equity is a measurement of efficiency more than profitability. It measures the ability of the company to generate profits from the money the shareholders have invested in. It provides a value to its shareholders in terms of how well their monies are used. The higher the ROE, the better it is. In the current situation, the return on equity of Stockland is 12% and that of Mirvac is 15%. Stockland holds more shareholder’s funds than Mirvac but in comparison with the other company, the profits earned are less in relation to shareholders funds.

Return on equity ratio	STOCKLAND	MIRVAC
Net income	1195	1164
Shareholders equity	9927	7972
Return on equity ratio	0.12	0.15

• Return on assets measures how well the company is earning profits by utilizing its overall assets. Where the ROE helps a company to understand how well the shareholders funds are utilized, ROA helps in understanding how well the company is utilizing its assets. The higher the ROA, the more efficiently the assets are used. In the current situation, the return on assets of Stockland is 7% and that of Mirvac is 10%. Although Stockland owns more assets and generates more profits, however the profits earned are less than what could have been earned from its assets. On the other hand, Mirvac owns less assets in value but the efficiency of using its assets is better than Stockland.

Return on asset ratio	STOCKLAND	MIRVAC
Net income	1195	1164
Total Assets	17495	12108
Return on asset ratio	0.07	0.10

• The above three calculations shows that instead of owning more assets, more shareholders funds, generating more sales and more net profits, Stockland doesn’t show a better position than Mirvac. It may be the case that the Stock land earnings and practices are appropriate for the company but on comparison, Mirvac shows a better efficiency and utilizing abilities.(Wahlen, 2012)

Market value ratios analyze the current share price of the publicly held stocks of companies. These ratios are used by the investors to determine the company’s price in the market whether it is overpriced or underpriced. (Paul, 2014)

• The book value per share is an important measure calculated by dividing the shareholders funds by the number of share outstanding. It is important as it helps an investor in comparing it with the market value of the same share. In the current situation, the book value per share of Stockland is $4.12 and that of Mirvac is $2.15. In the absence of market value of each stock, it is difficult to interpret whether the share price of the company is overpriced or underpriced in the market. To interpret the above results, the higher the book value, the more is the company willing to pay during liquidation which means Stockland would give a better value to its shareholders than Mirvac (Wahlen, 2012). However, it is irrelevant to think of the liquidity of such companies as these companies are one of the largest Australian companies dealing in real estate business.

Book value per share	STOCKLAND	MIRVAC
Total shareholder equity	9927	7972
Total number of shares outstanding	2412	3703
Book value per share	4.12	2.15

• Earnings per share are an indication of earnings from profits by each of the shareholders of the company. It indicates the potential of the investments made by indicating the capability of the company of paying dividend to its investors. The higher the ratio is, the better value is to the shareholders. In the current situation, the earnings per share of Stockland is $0.50 and that of Mirvac is $0.31. Stockland shows a better value than Mirvac.

Earnings per share	STOCKLAND	MIRVAC
Net income	1195	1164
Total number of shares outstanding	2412	3703
Earning oper share	0.50	0.31

• The above two calculations cannot be interpreted in a better way due to absence of market value of such stocks. All that can be observed is Stockland has raised more funds from its shareholders that are less in number in comparison to Mirvac (Warren, 2017). This could mean that the market price of Stockland is high in the market while that of Mirvac is low in the market due to which more shareholders have subscribed to Mirvac. Also, in spite of having more shareholders, the shareholders funds are less than Stockland. However, such an interpretation is hypothetical in nature and it highly depends on the practices of the business and at what market price, the stock of such companies is trading.

Considering the financial values stated in the first two points, Stockland shows better ratios than Mirvac. (Pratt, 2009)

Limitations of the Analysis

The analysis made above is restricted to a number of factors due to the absence of which more clarity couldn’t be obtained. Let us enumerate the limitations of the above analysis :

1. Absence of Non-Financial Factors : It is important to understand the practices of the company according to which it sets its terms with the third party. For example, a 20 days period of collecting debts may be considered unfavorable for a company having rapid sales but it may be favorable in case of economic contraction.(Rayman, 2009)
2. Absence of more data : In case of debt equity ratio analysis, there are a lot factors that matters such as cost of debts, the stability of the cash flows, the rapidity of the environment it is working and the risk the company is willing to take. Cost of debts is an important data as it is compared with the return on equity. For example,in the above case, Stockhold is owning high debentures but the cost of such debentures is maybe low due to which the burden of interest is not as much as it is assumed.(Wink, 2011)
3. Point in time: All the above values are the balances on the balance sheet as on the last date of the accounting year. If there is an unusual activity that took place during the accounting year, the social or economic effects of it aren’t considered. Also, if an unusual transaction takes place on the last day itself, such declines in values would impact the results of the ratio analysis.
4. Absence of market value of the stock : In the above analysis, the book value per share and the earnings per share could have been analyzed better if the market value of such stock was known due to which it is difficult to analyze whether the stock is overpriced or underpriced and the earnings the company is willing to pay in comparison to its market value in the form of dividends.(Rogers, 2015)
5. No consideration of future plans: Ratio analysis doesn’t consider the future plans of a company. Such future plans are important to be known by the investors as it makes the raising of funds reasonable and also, indicate the vision of the company it is aiming to earn which in the future will fetch high values to all the stakeholders of the company as well as the company itself.(Rosenfield, 2009)

Conclusion

Both of the companies are diversified in the Australian markets and operate within the same industry. Therefore, to suggest one company, a detailed analysis has to be made. Let us enumerate the analysis at a glance. (Wink, 2011)

Mirvac shows a better liquidity position than Stockland as the burden of short term obligations is more on the latter company than the former company. Also, Mirvac has more ability to convert its current assets into cash to pay such short term obligations if it becomes due.

In case of solvency, Stockland shows a better position than Mirvac as it has more investments in its fixed assets. Also, the former company owns more debts indicating higher risk on the company.

 In case of other two ratios related to debtor’s collection and inventory, not much significant difference can be concluded except that Mirvac takes 9 days more than Stockland to replace its inventory. (Wolk, 2013)

In case of profitability, we observe that Mirvac shows a better net profit and better return on equity. In spite of having more funds and more investments in the assets, Stockland isn’t providing a value as good as Mirvac to its shareholders.

In case of market value ratios, Stockland has a better position as I provide better earnings per share than Mirvac and also has a higher book value. However, the absence of market value is restricting such an analysis and therefore, a more clear conclusion cannot be withdrawn. (Zack, 2009)

Being an investment manager, it is my duty to guide the investor in the best possible manner and fetch him the maximum value from his investments. The above two companies seems to be very close competitors and therefore, a detailed analysis is required to suggest one company. In spite of a number of restrictions or limitations in data availability, financial aspects can also derive meaningful conclusions for making investment decisions. 

Based on the analysis report and the conclusions withdrawn, it is observed that the burden or the risk taken in nature of both short term and long term debts by Stockland doesn’t match with the profits it earns. Also, Stockland doesn’t make a better utilization of assets in spite of owning more assets in comparison to Mirvac. Although, Stockland gives better earnings per share to its shareholders, it is important for an investor to consider the long term perspective and takes his decisions accordingly.

Conclusion

It would be recommended to the investor to make investment in Mirvac after considering the long term perception. The favorable reasons for making such a recommendation is that its effective and efficient use of assets, generation of more revenue and so more profits from its investments and therefore, providing a better return on shareholders’ equity and assets. The operations of Mirvac show that a better value will be fetched to the shareholders in the future.

Thus, based on the entire report, Mirvac is more superior fundamentally than Stockland.

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