Comparison Of Performance, Share Price Movements And Dividend Policy Of Xero Accounting Ltd And Carsales.com Ltd

Description of operation and comparative advantages

1. Description of operation and comparative advantages of the two chosen companies

carsales.com Ltd company is a company that provides online platform to its customers to deal in purchase and sale of automotives, marine classified and motorcycle. This company is considered as an online destination for buying and selling of motorbikes, boats, trucks, caravans, cars and machinery equipment. The different segments of the business include online advertising offerings, data and research services and the operations in overseas countries (Reuters, 2018).

Xero Accounting Ltd is an online accounting firm established in the year 2006 in New Zealand. Xero is considered as one of the fastest growing software which includes cloud based accounting software that are being offered to different clients in different countries such as New Zealand and UK. Apart from this, the company employs 2000 people and has around 1.38 million subscribers (Xero Limited, 2018).

The comparative advantage of Xero Accounting Ltd is that it is able to provide cloud based accounting software to carsales.com ltd in a cost effective manner which in turn helps them to carry out the accounting and book keeping operations in an effective manner. This can be provided in efficient manner because Xero has a technological and knowledge expertise in creation of the cloud based software which can be used in online platforms. This company has a comparative advantage over other players that offers accounting services to the customers as the company has an advantage to provide high quality and cost effect solutions to the customers to gain an advantage over other players in the market (Costinot, Donaldson Vogel and Werning, 2015).

In a similar manner, carsales.com ltd company also has a comparative advantage over other players in the automotive industry as it uses the digital platform by becoming a one stop shop to the customers to buy and sell used and new automobiles especially cars by the customers and provide them the opportunity to compare the different parameters of the used and new cars to customers in a convenient manner to make buying decision such as price and features of the cars offered by different players through an online platform (Costinot, et.al, 2015).

1. Calculation and comparison of performance ratios

Liquidity Ratios

Liquidity ratios reflect the liquidity position of the company. It refers to the ability of the firm to attain the current assets to meet out their day to day activities and obligations in an effective manner. This can be reflected by the use of evaluation of the current ratio. Current ratio provides the information related to the availability of the current assets held to meet out its current obligations. It is indicated that the current ratio of Xero Accounting Ltd is declining over the years from 9.67 in the year 2015 to 2.24 in the year 2017. In a similar manner, the current ratio of carsales.com.au has also declined from 1.38 in the year 2015 to 1.33 in the year 2017 (Carsales.com.au, 2017). From the comparison it is found out that the liquidity position of Xero Accounting Ltd is strong in comparison to carsales.com.au because its current ratio is higher than carsales.com.au in past three years.

Calculation and comparison of performance ratios

Profitability Ratio

The main aim of the company is to earn maximum profit. These ratios help in evaluation of the profitability position of the companies in the market. The profitability position of the companies has been evaluated by the help of gross profit ratio. Gross profit ratio helps in gaining information related to the profit earned by the company as a percentage of sales. The gross profit ratio of Xero Accounting Ltd has increased from 70.4% in the year 2015 to 76.5% in the year 2017 which indicates that the profitability position of the company has improved over the years (Xero Limited, 2017). In a similar manner, the gross profit ratio of carsales.com.au has declined from 49.5% in the year 2015 to 47.4% in the year 2017. The analysis indicates that the profitability position of Xero Accounting Ltd is stronger than carsales.com.au.

Capital Structure (Leverage) Ratios

Capital structure or leverage ratios help in the analysis of the level of the debt and equity used by the companies to finance its assets. It can be evaluated by estimating the debt to equity ratio. The debt to equity ratio of Xero Accounting Ltd is increased from 0.006 in the year 2015 to 0.015 in the year 2017. This shows that the company emphasizes more on utilizing the equity funds to finance its assets in comparison to debt (Xero Limited, 2017). Besides this, the debt to equity ratio of carsales.com.au has declined from 0.93 in the year 2015 to 0.70 in the year 2017 which indicates that the company focuses on the utilization of increased amount of debt to finance its assets in comparison to equity.

1. Analysis of monthly share prices movements

Figure 1: XERO Comparison with All Ordinaries

The share price of Xero limited was $14.690 as on 30 January 2015 which has increased to $23.820 on Feb 27 2015 but again later in the year as on 30 April 2015 the share price was declined to $19.020. Again, as on 31 July 2015 the share price of Xero was declined to 15.980. The volume of shares traded as on date were 45363. The share price continuous to fall ad reached an all time low of the assessment period to $12.500 as on 31 August 2015. There after the company share show some recovery and there were several corrections in the share prices which lead the share price to reach 19.080 as on 31 August 2016. The share price of the company again increases to 23.920 as on 31 May 2017. There is sharp recovery in the share price of XERO and it lead to $30.900 as on 31 October 2017 (Xero Accounting Ltd ASX, 2018).

Analysis of monthly share prices movements

Figure 2: CAR share price for year 2015, 2016 and 2017 (ASX, 2018)

The share price of Carsales.com.au was 10.285 as on January 30 2015 which has declined to 9.426 on 30 April 2015. There after there were several fluctuations in the share prices and the share price recovered and reaches to 11.680 on 31 December 2015. Later in the year the share prices shows correction and reached to 12.860 on 31 August 2016 but there was decline in the share price in the next few months and the share price of the company fall to 10.440 on 31 January 2017 (Carsales.com.au ASX, 2018).  

Figure 3: Monthly share price comparison of XERO and CAR

It is analyzed that the share prices of both the companies are moving in a same direction and they are closely related with each other but it is also found out that the share prices of carsales.com has decline deeply and the share prices of Zero accounting has shown an increasing trend over the years. It is also identified that the share prices of Zero accounting is highly volatile in comparison to Carsale.com (Xero Accounting Ltd ASX, 2018; Carsales.com.au ASX, 2018).

1. Factors influencing  the share prices of both the companies

The share prices of the companies fluctuates due to changes occurred in the management structure, occurrence of the business expansion and so on. The share price of Xero as on 17 June 2015 was $17.290. The Notice of Annual meeting has influenced the share price of the company and it has fallen to $15.900 as on 29 July 2015. There were corrections in the share price with the Appointment of CFO that lead to increase in share price to $16.460. As on 5 August 2018 the share price of the company declined to $15.00 from $15.600 at the announcement of organizational change. There is decline in the share prices to $13.510 on announcement of change of directors interest Notice in February 2016. The appointment of new secretary lead to increase in the share prices of the company as on 19 October 2016 to $16.800.  The share price of Xero shows various corrections due to positive news in management and the share price reached to $17.620 on appointment of independent director (Xero Accounting Ltd Investsmart, 2018).

Occurrence of the appointment of new chairman by carsales.com has a positive impact on its share prices which has increased to $9.920 on 27 August 2015. the strategy of reinvesting the dividend by the company has also resulted in an increase in the share prices on 8 October 2015 to $9.860. there is also a significant improvement in the share prices of the company in the year 2017 due to occurrence of the acquisition of Demotores in February which has resulted in the record of the share prices at $11.190 (Carsales.com Ltd. Investsmart, 2018).

1. Calculation of beta values and expected Rates of Return using the CAPM

Identify significant factors influencing share price

The calculated beta for Xero Accounting Ltd is 1.54. Besides this, the calculated beta for carsales.com.au is 1.10.

The required rate of return for Xero Accounting Ltd and carsales.com.au is being calculated by the use of CAPM model and following formula:

Risk free rate = 5%

Expected market return = 6%

Beta of Xero Accounting Ltd = 1.54

Beta of carsales.com.au = 1.10

Required rate of return for Xero Accounting Ltd = 0.05 + 1.54 * (0.06 – 0.05)

= 0.05 +1.54 * 0.01 = 0.05 + 0.0154 = 0.0654 = 6.54%

Required rate of return for carsales.com.au = 0.05 + 1.10 * (0.06 – 0.05)

= 0.05 + 1.10 * 0.01 = 0.05 + 0.011 = 0.061 = 6.1%

1. Dividend policies

Carsales has adopted the dividend policy of provision of franked dividend to its investors and offers an opportunity to shareholders to acquire ordinary shares at not at discount by the use of dividend reinvestment plan. Besides this the price of the share is calculated by the use of daily volume weighted average sale price. The reason behind the selection of this policy is that it helps in provision of the dividend to the share holders by taking into consideration the occurrence of volatility in the share prices (Carsales.com.au, 2016).

Xero has not implemented any dividend policy as it does not believe in making the payment of dividends to its shareholders and emphasizes on the reinvestment of the profit in the business for the purpose of expansion in other market to exploit the opportunities available in the market (Xero Limited, 2016).

1. Recommendation letter

From the above analysis, it is found out that Xero Accounting Ltd is a company that has a better financial position and performance in comparison to carsales.com.au. This indicates that the investor should make investment in Xero Accounting Ltd as it has better profitability and liquidity position. However, the other factor from the perspective of dividend policy, the investors should make an investment in carsales.com.au as the company is paying the dividend to its shareholders. It is also found out that the company has also made acquisitions with different companies that help in the exploitation of the available opportunities in the market (Carsales.com.au, 2016). Although the share prices of both the companies are moving in the same direction from past three years, but there is a possibility in the growth and development of the carsales.com.au in comparison to Xero Accounting Ltd in an effective manner. However, the required rate of return of Xero Accounting Ltd is higher than that of carsales.com.au, which shows that the investor should make an investment in Xero Accounting Ltd (Xero Limited, 2017).

References

Carsales.com Ltd. Investsmart. (2018) Company Announcements. [Online]. Available at:

Carsales.com.au ASX. (2018) Charting. [Online]. Available at: https://www.asx.com.au/prices/charting/?code=CAR&compareCode=ALL%20ORDIANRIES&chartType=COMMONBASE&priceMovingAverage1=&priceMovingAverage2=&volumeIndicator=BAR&volumeMovingAverage=&timeframe=monthly [Accessed on: 28 September 2018].

Carsales.com.au. (2016) Annual Report. [Online]. Available at: https://shareholder.carsales.com.au/FormBuilder/_Resource/_module/NwbnH0pKFk-uPGxM7cmTrw/docs/reports/annual/Annual_Report_2016.pdf [Accessed on: 28 September 2018].

Carsales.com.au. (2017) Annual Report. [Online]. Available at: https://shareholder.carsales.com.au/FormBuilder/_Resource/_module/NwbnH0pKFk-uPGxM7cmTrw/docs/reports/annual/Annual_Report_June_2017.pdf [Accessed on: 28 September 2018].

Costinot, A., Donaldson, D., Vogel, J. and Werning, I. (2015) Comparative advantage and optimal trade policy. The Quarterly Journal of Economics, 130(2), pp.659-702.

https://www.investsmart.com.au/shares/asx-car/carssales-limited/announcements?page=4 [Accessed on: 28 September 2018].

Reuters. (2018) Carsales.com.au. [Online]. Available at: https://www.reuters.com/finance/stocks/overview/CAR.AX [Accessed on: 28 September 2018].

Xero Accounting Ltd ASX. (2018) Charting. [Online]. Available at: https://www.asx.com.au/prices/charting/?code=XRO&compareCode=CAR&chartType=COMMONBASE&priceMovingAverage1=&priceMovingAverage2=&volumeIndicator=BAR&volumeMovingAverage=&timeframe=monthly [Accessed on: 28 September 2018].

Xero Accounting Ltd Investsmart. (2018) Company Announcements. [Online]. Available at: https://www.investsmart.com.au/shares/asx-xro/xero-limited/announcements?page=9 [Accessed on: 28 September 2018].

Xero Limited. (2016) Annual Report. [Online]. Available at: https://www.xero.com/media/9883890/xro_2016_annual_report.pdf [Accessed on: 28 September 2018].

Xero Limited. (2017) Annual Report. [Online]. Available at: https://www.xero.com/content/dam/xero/pdf/Xero%20Annual%20Report%20FY17.pdf [Accessed on: 28 September 2018].

Xero Limited. (2018) About us. [Online]. Available at: https://www.xero.com/au/about/ [Accessed on: 28 September 2018].

Order an Essay Now & Get These Features For Free:

Turnitin Report

Formatting

Title Page

Citation

Outline

Place an Order