Financial Performance Analysis Of Two ASX Listed Companies

Tasks

The financial management process is helpful for the investors, analyst and the internal stakeholder of the business to recognize the performance of the business in terms of investment. The process of financial evaluation contains various methods which makes it easier for the business to identify and evaluate the exact market position and the return level of the business. In the report, two companies, Australian pharmaceuticals limited and ANSELL limited has taken into concern to evaluate the investment position in the Australian market.

The description of history, core activities etc of the companies, performance ratio evaluation, monthly share price, beta values, CAPM, dividend policies etc of both the companies have been identified to measure the investment level of the business. In the report, the various financial analysis and stock analysis tools have been applied on the business to make it easier for the business to reach over a better conclusion.

1. Australian pharmaceuticals limited:

“Australian pharmaceuticals industries” is a pharmaceuticals company which offers the healthy and beauty products in the Australian market. The company is involved in manufacturing and retailing the pharmaceuticals products and the health and beauty products in the Australian market. It is amongst the largest wholesale distributor pharmaceutical company in the Australian market. The company retails its products through its own retail store and the franchise, the main brands of the company includes Priceline pharmacy, Priceline, soul pattinson and pharmacists advice (Home, 2018). The company has been founded in 1971.

• ANSELL limited:

Australian limited is a pharmaceuticals company which offers the pharmaceutical solutions in the Australian market. The company is involved in manufacturing and retailing the pharmaceuticals products such as protective industrial gloves, condoms etc in the Australian market. The company retails its products through its delivering it to pharmacist and through the retail stores in the Australian market (Home, 2018). The company has been founded in 1893.

The main competitive advantage of both the companies is highest share market in their own products and the market performance of both the companies is improving rapidly.

The performance ratio study has been performed on both the companies to measure the performance and the various financial positions of both the business. Performance ratio is a financial evaluation study in which the income statement, balance sheet and cash flow statement are evaluated and the main information are collected from the financial statement to measure the various position of the business such as liquidity, long term solvency, profitability etc positions (Madura, 2014). In case of Australian pharmaceuticals industries and Ansell limited, the performance ratio calculations and the evaluation are as follows:

• Profitability ratios:

Background

Profitability ratios represent about the total profits of the business which has been generated against various financial items such as sales, assets, equity etc of the business. the return on sales, return on assets, return on equity, and DuPont analysis ratios have been calculated in the report to measure the total profit which has been generated by both the companies in order to improve the performance of the business (Gibson, 2011). The profitability analysis graph of both the companies is as follows:

 

Figure 1: Profitability ratios

(Annual report, 2017)

On the basis of the above graph, it has been found that the profitability position of Australian pharmaceutics industries has been improved from 2015 to 2016 and in 2017 a decrement has been seen. The changes have occurred into the financial profitability analysis because of the various economical and industrial factors. The changes and the evaluation on company explain that the profitability position of the company would be improved much in the near future (Annual report, 2017).

The return on sales, return on assets, return on equity and DuPont analysis, and all the ratios explains that the position of the company has been improved from 2015 in 2017. Even though, the changes in the year of 2016 were more positive and explains that the profitability position of the company would be improved in near future.

Profitability Ratios
Return on sales (ROS)	= Net income / Revenue	1.25%	1.35%	1.29%
Return on assets (ROA)	= Net income / Total assets	3.21%	3.57%	3.61%
Return on equity (ROE)	= Net income / Stockholders’ equity	8.53%	9.63%	9.45%
DuPont Analysis of ROE	= ROS x Asset turnover = ROA x Financial leverage = ROE	8.53%	9.63%	9.45%

(Morningstar, 2018)

Further, on the basis of the evaluation on the profitability position of ANSELL limited, the decrement has occurred from 2015 in 2017. The changes have occurred into the financial profitability analysis because of the lower demand of the products of the company and higher expanse on the operational activities of the business. The changes and the evaluation on company explain that the profitability position of the company would be lowered much if the proper actions would not be taken by the business.

The return on sales, return on assets, return on equity and DuPont analysis, and all the ratios explains that the position of the company has been decreased from 2015 in 2017. Even though, the changes could be controlled by the business through making few relevant changes into the performance of the business.

Profitability Ratios
Return on sales (ROS)	= Net income / Revenue	11.49%	10.29%	8.82%
Return on assets (ROA)	= Net income / Total assets	7.96%	7.07%	4.95%
Return on equity (ROE)	= Net income / Stockholders’ equity	16.42%	14.44%	10.01%
DuPont Analysis of ROE	= ROS x Asset turnover = ROA x Financial leverage = ROE	16.42%	14.44%	10.01%

(Morningstar, 2018)

• Liquidity ratios:

Liquidity ratios represent about the total short term solvency position of the business. The liquidity position of the business has been evaluated through identifying the current assets quick assets, current liabilities, cash flow etc of the business (Halili, Saleh  and Zeitun, 2015). The current ratio and quick ratios have been calculated in the report to measure the total liquidity position which has been maintained by both the companies in order to manage the position of the business. The liquidity analysis graph of both the companies is as follows:

Description of companies

 

Figure 2: Liquidity Ratios

(Morningstar, 2018)

On the basis of the above graph, it has been found that the liquidity position of Australian pharmaceutics industries has been improved from 2015 to 2016 and in 2017 a decrement has been seen. The changes have occurred into the financial liquidity position because of the various changes in the credit and financial policies. The current changes in the company are better in terms of liquidity risk and working capital cost.

Liquidity Ratios
Current ratio	= Current assets / Current liabilities	1.278	1.335	1.317
Quick ratio	= Current assets- Inventory / Current liabilities	0.810	0.846	0.848

(Morningstar, 2018)

The below table of Ansell limited’s liquidity position explains that the changes have been seen in the liquidity analysis of the company. The table represent that the position has been improved in 2017. Though, the current changes in the company are higher in terms of working capital cost and company lower it to improve the position.

Liquidity Ratios
Current ratio	= Current assets / Current liabilities	2.727	2.690	2.924
Quick ratio	= Current assets- Inventory / Current liabilities	1.695	1.664	2.009

(Morningstar, 2018)

• Capital structure ratios:

Capital structure ratios represent about the total long term solvency position of the business. The capital structure position of the business has been evaluated through identifying the debt, equity and interest level etc of the business. The debt ratio and financial leverage have been calculated in the report to measure the total solvency position which has been maintained by both the companies in order to manage the financial gearing level of the business (Kurth, 2013). The capital structure analysis graph of both the companies is as follows:

 

Figure 3: Capital structure ratios

(Morningstar, 2018)

On the basis of the above graph, it has been found that the solvency position of Australian pharmaceutics industries has been improved from 2015 to 2016 and in 2017 a decrement has been seen (Morningstar, 2018). The changes have occurred into the solvency position because of the various changes in the credit and financial policies. The current changes in the company are better in terms of financial gearing level and cost.

Long-term Solvency ratios
Debt ratio	= Total liabilities / Total assets	0.624	0.630	0.618
Financial leverage	= Total assets / Total equity	2.656	2.700	2.618

(Morningstar, 2018)

Further, on the basis of the above graph, it has been found that the solvency position of Ansell limited has been lowered from 2015 to 2017.  A decrement has been seen into the solvency position because of the various changes in the credit and financial policies. The current changes in the company are required to become better in terms of financial gearing level and cost.

Long-term Solvency ratios
Debt ratio	= Total liabilities / Total assets	0.515	0.511	0.506
Financial leverage	= Total assets / Total equity	2.063	2.043	2.024

(Morningstar, 2018)

The monthly stock price of both the companies has been measured against the AORD stock.

 

Figure 4: Stock price changes

(Yahoo Finance, 2018)

Report:

On the basis of the above chart, it has been found that the return from API and ANN are 1.04% and 0.79% whereas the 0.34%% return are offered by the AORD stock. It explains that the changes in the API stock are more attractive further, the volatility of both the stock has been measured and it has been found that the volatility of API is higher than ANN (Yahoo finance, 2018). Though, both the stock represent that the stock prices are not affecting the AORD stocks. And all the stocks are individually fluctuating in the market.

Performance ratio evaluation and comparison

The correlation among both the stock has been identified and it has been evaluated that the correlation among the API and AORD are 0.38 whereas the correlation among the ANN and AORD are 0.53. It represents that the relations among the stock are positive and depict that the same changes could be taken place in both the companies (Reuters, 2018). The trend among both the stock explains that the stock of API is more diverse and the volatility of API is also higher. On the basis of the evaluation, it has been concluded that performance of both the stocks are better. Though, the API stock is more attractive. 

On the basis of API stock, it has been found that the stock price of the company has been improved on 30/06/2016, by 14.29%. It represents a higher increment in the stock price, the changes have occurred due to the dividend announcement (AFR, 2018). Further, on 31/05/2018, the stock position of the company has been improved by 28.70% due to the announcement of the new project of the company (Yahoo finance, 2018).

In case of ANN stock, it has been found that the stock price of the company has been lowered on 31/01/2017, by 10.47% (Annual report, 2017). It represents a higher reduction in the stock price, the changes have occurred due to the better credit rating and sudden demand of the stock (AFR, 2018). Further, on 28/02/2017, the stock position of the company has been improved by 14.45% due to the announcement about the new corporate governance policies of the business (Yahoo Finance, 2018).

The beta value of both the companies is as follows:

	API	ANN
Beta	1.31	0.72

(Reuters, 2018)

On the basis of the beta factors and the given risk free rate and market premium, the CAPM method has been applied on both the stock to measure the required rate of return from the business:

CAPM (Cost of equity)
	API	ANN
Risk free rate	5.00%	5.00%
RM	6.00%	6.00%
Beta	1.310	0.720
Required rate of return	12.86%	9.32%

(Reuters, 2018)

On the basis of the below calculations, it has been found that the required rate of return of API is 12.86% and the required rate of return of ANN is 9.32%. It explains that the stock of API would offer more return to the shareholders of the business, though, the associated risk with the API stock is also higher than the stock of ANN (Kurth, 2013).

Dividend policy mainly represent about the dividend payout ratio of the business, if the dividend about ratio of a business is higher that means the business is following the relevant dividend policies or if the dividend payout ratio is lower than it lead to the conclusion that the dividend policies of the company are irrelevant. Relevant and irrelevant are two main dividend policies of the business which explains about different dividend payment to the shareholders of the business (Kaplan and Atkinson, 2015).

Relevant dividend policies explains that the dividend are the major attractive factor to impress and attract the shareholders towards the company, the better the dividend payout ratio of the business, the better the investors would invest into the company. Whereas, irrelevant dividend policy explains that business should not distribute the profit as dividend and must retain it for future (Higgins, 2012). The return could be achieved by the shareholders through selling the stock in the market.

In case of API stock, it has been earners that the dividend of the business has been improved from 2015 and the dividend payout ratio of the business is 70% (Annual report, 2017). It expresses that most of the profits are distributed by the company as dividend to impress the shareholders; the company is following the relevant dividend policies.

API
	2015-06	2016-06	2017-06
Dividends AUD	0.05	0.07	0.07
Payout Ratio % *	62.50%	70.00%	70.00%

(Annual report, 2017)

Further, in case of ANN stock, it has been measured that the dividend of the business has been lowered from 2015 and the dividend payout ratio of the business is 42.64%. It expresses that most of the profits are not distributed by the company as dividend. The company believed that the return could be generated by shareholders through selling the stock in the market (Annual report, 2017). The company is following the irrelevant dividend policies.

ANN
	2015-06	2016-06	2017-06
Dividends AUD	0.59	0.61	0.55
Payout Ratio % *	37.34%	43.26%	42.64%

(Annual report, 2017)

To,

Client,

Address.

Subject: Recommendation letter.

Dear Client,

According to your interest on two Australian companies and their investment position, a financial study has been conducted on both the companies to measure the investment level. description of history, core activities etc of the companies, performance ratio evaluation, monthly share price, beta values, CAPM, dividend policies etc of both the companies have been identified to measure the investment level of the business.

On the basis of the company description, main competitive advantage of both the companies is highest share market in their own products and the market performance of both the companies is improving rapidly. Further, on the basis of the ratio analysis on both the companies, it has been measured that the position of API stock are better in terms of profitability, liquidity and solvency all the position.

On the basis of the evaluation on stock price movement, it has been concluded that performance of both the stocks are better. Though, the API stock is more attractive in terms of return and the fluctuations. Further, in terms of required rate of return, the return from API stock are higher, though, the associated risk with the API stock is also higher than the stock of ANN. The API is following the relevant dividend policies as well to offer the dividend to the shareholders of the business.

It recommends you to invest into the Australian pharmaceuticals industries in order to get higher return from the Australian stock exchange.

References:

AFR, 2018, Ansell Limited. Viewed September 2018, https://www.afr.com/research-tools/ANN/company-profile/operational-history

AFR, 2018, Australian pharmaceuticals limited. Viewed September 2018, https://www.afr.com/companies/australian-pharmaceutical-industries-limited-api-30406823

Annual report, 2017, Ansell Limited. Viewed September 2018, https://www.ansell.com/en/About/Investor-Center/Annual-Reports.aspx

Annual report, 2017, Australian pharmaceuticals limited. Viewed September 2018, https://www.api.net.au/investor/annual-reports/

Gibson, C.H., 2011. Financial reporting and analysis. South-Western Cengage Learning.

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, 32 (4), pp.398-421.

Higgins, R. C., 2012. Analysis for financial management. McGraw-Hill/Irwin.

Home, 2018, Ansell Limited. Viewed September 2018, https://www.ansell.com/en-US

Home, 2018, Australian pharmaceuticals limited. Viewed September 2018, https://www.api.net.au/

Kaplan, R.S. and Atkinson, A.A., 2015. Advanced management accounting. PHI Learning.

Kurth, S. 2013. Critical Review about Implications of the Efficient Market Hypothesis. GRIN Verlag.

Madura, J. 2014. Financial Markets and Institutions. Cengage Learning.

Morningstar, 2018, Ansell Limited. Viewed September 2018, https://www.morningstar.com/stocks/XASX/ANN/quote.html

Morningstar, 2018, Australian pharmaceuticals limited. Viewed September 2018, https://www.morningstar.com/stocks/XASX/API/quote.html

Reuters, 2018, Ansell Limited. Viewed September 2018, https://www.reuters.com/finance/stocks/overview/ANN.AX

Reuters, 2018, Australian pharmaceuticals limited. Viewed September 2018, https://www.reuters.com/finance/stocks/overview/API.AX

Yahoo finance, 2018, Ansell Limited. Viewed September 2018, https://finance.yahoo.com/quote/ANN.AX/history?p=ANN.AX

Yahoo Finance, 2018, Australian pharmaceuticals limited. Viewed September 2018, https://finance.yahoo.com/quote/API.AX/history?p=API.AX&.tdata-src=fin-srch