Financial Analysis And Performance Evaluation Of A Listed Company On ASX

Tasks

Financial analysis comprises of a review of an organization’s financial figures and reports to reach into a comprehensive decision regarding the financial stands and stability of the organization. This means that financial analysis is a crucial aspect when evaluating an organization financial standing. The report would present background of Carsales.com followed by ratio analysis of the company. It then presents a graphical comparison of Carsales.com and All Ordinary Index. Finally, the paper presents computation of the intrinsic value of Carsales.com to determine whether its stock are over or undervalued. It concludes with recommendations on whether the company is a better investment opportunity for potential investors.

Carsales.com is usually the online marine, motorcycle and automotive classified business. In other words, it is an online marine, motorcycle and automotive classified business operating in Australia. It is a company operating in the information technology industry listed in ASX index (Intelligent Investor 2018). Its carsales network is the online destination for selling and buying trucks, caravans, cars, machinery equipment and motorcycles. The company main segments comprises of Data and Research Services, Online Advertising Services Finance and International Related Services (Reuters.com 2018). Its Online Advertising Services division comprises online advertising offerings like display and classified advertising services (Bloomberg.com 2018). These allow customers and dealers to advertise non-automotive and automotive services and goods for sale across its network. It Data and Research division offers a wide range of products including analysis, reporting and research, software, photography services, website development as well as hosting, as well as valuation services. International division comprises of its operations in foreign nations (Reuters.com 2018). On the other hand, Finance and Related Services division comprises of operations of the company’s subsidiary, that is, Stratton Finance Ltd that offers vehicle procurement, vehicle finance arrangements as well as other related services.

Ratios are usually good parameters which organizations’ management require evaluating along with the potential and existing investors who could understand financial health of the firm overall and situations under different levels. According to Ježovita (2015) ratio analysis is crucial in tracking and showcasing the financial patterns and trend of a particular firm. Basically, ratios are useful in measuring or examining present financial performance of an organization compared to previous year. They could also be used in identifying some of the issues that required being fixed. It could even direct the attention of the analyst to the probable issues which could be evaded (Faruk & Habib 2010).  Financial ratios analysis would assists Carsales.com shareholders better understand overall health of the firm and its situation in numerous financial performance levels.  Ratios are also useful in determining the firm’s financial standing and stability. Five main categories of financial ratios exists these include the short-term leverage, profitability, long-term leverage or the solvency ratio, market value as well as efficiency ratios.

These forms of the ratios assist an organization in focusing on its capacity in settling its short-term financial obligations. They mostly focus on current assets and liabilities of an organization as showcased on the company balance sheet (Faruk & Habib 2010). In other words, the ratios measures capacity of an organization in converting its assets into liquid cash or in obtaining cash in order to meet most of its short-term commitments. The most common liquidity ratios include the current and quick ratios which are applicable in this case.

Background

This ratio would be important in evaluating Carsales.com liquidity level. The ratio would assists in assessing whether Carsales.com is having issues in settling its short-term debts using its current assets. It is computed by subdividing total current assets with its total current liabilities.

	2016	2017
Current Ratio	1.3	1.33

Table 1: Current ratio

Figure 1: Current ratio

In Table 1 and Figure 1 below, it is clear that Carsales.com current ratio increased over the years from 1.3 to 1.33 in 2017. This means that the company had sufficient current assets to be used in settling its current debts.

This ratio would be important in evaluating Carsales.com liquidity level. The ratio would assists in assessing how easier Carsales.com is able to settle its debts using its most liquid assets. The ratio is gotten through addition of all liquid assets like cash, receivables, and short-term investments and then dividing the outcome with the total current liabilities.

Table 2: Quick ratio

	2016	2017
Quick Ratio	1.22	1.28

Figure 2: Quick ratio

As from Figure 2 and Table 2 above, it can be stated that Carsales.com quick ratio increased from 1.22 to 1.28. Besides, the values are a clear view that for the past two years, Carsales.com had relatively enough liquid assets in covering its short-term debt commitments.

The ratios assist Carsales.com management in focusing on their capacity to meet all its long-term and short-term debts which are long overdue (Faruk & Habib 2010). The ratios measure how an organization finances most of its overall growth and operations through the use of diverse sources of finances. They measure proportion between the external and internal sources of the financing with higher ratio representing higher static indebtedness of an organization. The most common solvency ratios which would help in assessing the company financial leverage include debt/equity ratio and the debt/asset ratio

The ratio helps in indicating proportion of Carsales.com total assets that is financed through external sources. Here, higher ratio represents higher financial risk and therefore weaker solvency. The ratio is gotten by dividing total debt or liabilities with the total assets.

	2016	2017
Debt/asset	2.13	1.99

Table 3: Debt/asset

Figure 3: Debt/assets

In Table 3 and Figure 3 above, Carsales.com debt/assets experienced a decreasing trend in the last two years from 2.13 to 1.99. The decrease implies that the company financial solvency has been increasing over the period which is a good thing for the company and in particular for its shareholders.

This financial ratio indicates or measures the measure in which Carsales.com finances its operations either through debt or equity. The ratio is computed by dividing the total liabilities with organization’s total equity.

	2016	2017
Debt/Equity	0.88	0.7

Table 4: Debt/equity

Figure 4: Debt/equity

From Figure 4 and Table 4 above, Carsales.com debt to equity decreased from 0.88 to 0.7. Besides, the ratio for the past two years was below 1 meaning that for this period, Carsales.com was relying on its equity to finance most of its operations rather than relying on debt financing.

The ratio helps in measuring capacity of Carsales.com to cover most of its interest expenses or its capacity in repaying the total debt commitments (Faruk & Habib 2010). It displays number of times Carsales.com’ Limited’s cash flow or income could cover its interest expenses. Here, higher ration indicates the capacity of Carsales.com in utilizing external sources of the finances more effectively. It is computed through division of the EBIT with the interest expenses.

	2016	2017
Interest Coverage	19.14	22.45

Required

Table 5: Interest coverage

Figure 5: Interest coverage

As from Table 5 and Figure 5 above, Carsales.com interest coverage increased from 19.14 in 2016 to 22.45 in 2017. The upsurge in the company interest coverage is a clear sign that for the past two years, Carsales.com has been able to cover all its interest expenses.

The ratios deal with evaluation of how efficiency an organization is in utilizing its total assets to produce revenue. It focuses mostly on income statement of the revenues or the balance sheet of the total assets. They assist in demonstrating how well an organization is being run from the dynamic view point. The ratios shows how well the company is operated, the length of the time clients take in making payments, and rate at which the products are sold. In other words, these ratios measure operating efficiency of an organization. They reflect efficient organization management of both the long-term assets and the working capital.

The most significant efficiency ratios in evaluating efficiency of Carsales.com management include inventory turnover, asset turnover and receivable turnover.

The ratio helps in evaluating how Carsales.com is efficiently or effectively employing its assets in generating revenue or sales. In this case, low asset turnover might display high investment in the total assets compared to amount of revenue generated and vice versus. It is gotten by dividing total revenue with its average total assets.

	2016	2017
Asset Turnover	0.66	0.69

Table 6: Asset turnover

Figure 6: Asset turnover

In Figure 6 and Table 6 above, Carsales.com ratio augmented from 0.66 to 0.69. With the fact that for the last two years, the company asset turnover was below 1, it means that Carsales.com had invested in assets compared to revenue generation.

This financial ratio is crucial in Carsales.com analysis since it offers number of the times it account receivables are gathered every financial year (Phillips, Volker & Anderson, 2009). The ratio is computed by dividing total revenue with its average account receivables.

	2016	2017
Receivables Turnover	9.79	9.68

Table 7: Receivable turnover

Figure 7: Receivable turnover

As per Figure 7 and Table 7 below, it is evident that Carsales.com receivable turnover decreased over the past two years from 9.78 to 9.68 in 2016. The decrease in the value means that Carsales.com has been decreasing its efficiency in collecting money owed to them by debtors. As such, it is becoming inefficient in collecting its receivables.

This ratio helps in measuring or examining number of times inventories were sold. The ratio is calculated by dividing COGs by its average inventories.

	2016	2017
Inventory Turnover	20.25	34.99

Table 8: inventory turnover

Figure 8: Inventory turnover

As per the Table 8 and Figure 8 above, it is clear that Carsales.com inventory turnover increased as from 20.25 times in 2016 to 34.99 times in 2017. The increase in the ratio is a clear picture that Carsales.com is increasing the number of times it sells its inventories over a year which is a good progress for the shareholders and potential investors willing to invest.

The ratios showcase the capacity of Carsales.com in generating income. They show how well the company utilizes its assets and how well it manages its daily operations. They showcase the efficiency in utilizing equity and assets in generating income and its effectiveness in managing operations (Phillips, Volker & Anderson, 2009). They also assist in measuring capacity of an organization in generating profitable sales or revenue from most of its resources. The most significant ratios useful in measuring profitability level of Carsales.com include the ROE, the net margin as well as the ROA.

Description of Carsales.com Limited 

The ratio helps Carsales.com Limited management in measuring how well the firm is capable of controlling its direct expenses. The ratio indicates capacity of an organization in controlling its COGS and its expenses to generate income. A higher net margin is considered better for the firm since it indicates that the firm is able to control its costs. The ratio is computed by dividing net income by the company’s total revenue.

	2016	2017
Net Margin	31.76	29.42

Table 9: Net Margin

Figure 9: Net margin

Based on the above computations, it is evident that Carsales.com net margin decreased in the past two years from 31.76% in the year 2016 to around 29.42% in the financial year 2017. Despite the decrease, the ratio is a clear view that Carsales.com is able to control all its operating costs to generate some income.

This ratio measures Carsales.com efficiency in utilizing or managing its equity in generating some income. The ratio is computed by dividing the organization’s net income with its shareholder’s equity.

	2016	2017
Return on Equity %	45.2	41.48

Table 10: ROE

Figure 10: ROE

As from Table 10 above, it is clear that Carsales.com was doing relatively good in terms of equity management. This is evident by the fact that the company ROE was relatively high over the past two years.

The ratio is used in evaluating overall efficiency of Carsales.com in managing its investment in total assets and in producing income. The ratio is computed by dividing the company net income with its average total assets.

	2016	2017
Return on Assets %	21.05	20.18

Table 11: ROA

Figure 11: ROA

From the Table 11 above, it can be stated that Carsales.com was profitable and efficient in managing its assets to generate some net income (Phillips, Volker & Anderson, 2009). This is due to the fact that the company ROA ratio was relatively high despite the decrease recorded within the period.

Such financial ratios are used in showcasing market value of an organization that also relate to the stock prices. The most significant ratios in this case include P EPS ratio.

This financial ratio would be used in measuring portion of Carsales.com Limited’s profit allocated to every outstanding share (Phillips, Volker & Anderson, 2009). This is the single most significant variable used in determining share value of the company. The ratio is computed through division of the net income with number of the outstanding shares.

	2016	2017
Earnings Per Share	0.45	0.45

Table 12: EPS

As per Table 13 above, it is evident that the company EPS remained constant for the last two years. This means that the company shares are doing relatively good.

Based on Figure 1 below, it is evident that Carsales.com Limited share prices experienced asymmetrical trends in the past two years. This is evident with the luxurious price encountered in 2016 where the price is found to have decrease significantly since mid-July 2016 to November same year where the price is then said to have increased for three months till February 2017. By early February, Carsales.com Limited share price experienced a drastic decrease for few days where the share then regained. In essence, since March 2017, the share price has been experiencing significant increase in spite of the slight decrease experienced in some period though not bad. This means that for the last two years, Carsales.com share price has not been badly off for any potential investor willing to invest in a viable investment opportunity.

Evaluation of Carsales.Com Limited Performance Ratios

Figure 12: Carsales.com Limited historical share price movement

Based on Figure 2 on comparison between Carsales.com share price movement and All Ordinary Index, it is evident that Carsales.com share price for the past two years was relatively less volatile than All Ordinary Index. In essence, except the high volatility recorded between October 2016 and October 2017, the company share price has regained and in now relatively promising. Furthermore, it is evident that since October 2017, Carsales.com share price were closely correlated to All Ordinary Index. Besides, since this period, Carsales.com share price has been relatively above All Ordinary Index share price. This is a good thing for investors and shareholders since it means that the company is relatively competitive in the market.

Figure 13: Comparison of Carsales.com Limited with All Ordinaries Index : Source: INVESTSMART (2018).

Share valuation can be conducted through a number of formulae. In this case, constant dividend growth rate approach is applied evaluating the intrinsic value of Carsales.com Limited. Constant Dividend growth model it the technique of assessing organization’s stock price on the basis of theoretical perception that the stocks is worth sum, then discounted to PV (Faruk & Habib 2010). The model is utilized in valuing stocks on the basis of NPV of future dividends. The formula in computing the value is as follows:

Stock value = dividend/ (rate of return – growth)

In this case, given that the current dividend value for Carsales.com Limited was 0.237 which is growing at 4% constant rate with projected rate of return of around 9%, the company intrinsic value would be computed as follows;

Carsales.com value = Dividend / (rate of return – growth) = 0.237/ (0.09 – 0.04) = 0.237/0.05 = 0.474

The value computed above means the company value ought to be 0.474 rather than 0.237. Therefore, the current value of 0.237 is relatively below the expected value of the company share; hence it is undervalued. In other word, the value found through the constant dividend growth model is above the current market price by 0.237, meaning the value double the current value. The difference means that the stock is currently undervalued.

Conclusion

In conclusion, the paper carried out a fundamental analysis of Carsales.com. Based on the ratio analysis, it is evident that Carsales.com was profitable. This is based on the fact that its profitability ratios were relatively high indicated the management efficiency in generating income. Further, the company is financial stable and healthy since it relies heavily on equity financing putting it at lesser risk. Moreover, based on the efficiency and market value ratios, it is evident that the company is financially healthy. It can also be concluded that the company shares are currently undervalued. This is due to the fact that the calculated value is relatively higher than the current value. On overall, it can be concluded that Carsales.com Limited is fundamentally stable and healthy.

Given that the company shares are undervalued, there is need for the company management to do everything possible to ensure that the shares are properly priced. In addition, based on the fact that the company is financially stable, it is recommendable for the potential and existing investors to venture more in this company due to the high probability of getting high returns.

References

Bloomberg.com (2018), Company Overview of carsales.com Ltd: Viewed from:https://www.bloomberg.com/research/stocks/private/snapshot.asp?privcapId=24404490

Faruk, H & Habib, A (2010), Performance evaluation and ratio analysis of Pharmaceutical Company in Bangladesh.

Intelligent Investor (2018), Carsales.com Limited (CAR): Viewed from:https://www.intelligentinvestor.com.au/company/Carsalescom-Limited-CAR-917179

INVESTSMART (2018), Carsales.com Limited (CAR): Viewed from:https://www.investsmart.com.au/shares/asx-car/carsalescom-limited

Ježovita, A. (2015), ‘Variations between financial ratios for evaluating inancial position related to the size of a company,’ Review of Innovation and Competitiveness: A Journal of Economic and Social Research, 1(1), 115-136.

Market Index (2018),Carsales.com Limited (CAR): Viewed from:https://www.marketindex.com.au/asx/car

Phillips, MD, Volker, JX, & Anderson, S (2009), ‘A Behavioral Comparison of Financial Ratios for Different Size Privately-held retail and Service Businesses,; Journal of Behavioral Studies in Business, 1, 1.

Reuters.com (2018), Carsales.Com Ltd (CAR.AX): Viewed from:https://www.reuters.com/finance/stocks/company-profile/CAR.AX