Question

Financial ratios are used to analyze a company’s strengths and weaknesses by looking at the ratio of various financial data to each other by financial and business analysts and investors. Ratios thus estimated convert financial information of companies to a standardized format enabling them to be used to compare different companies to the industry average ratios before making investment decisions. Company practices sometimes differ, which can produce different results so it is best to analyze a number of different ratios to get the most accurate overall picture of the company and comparison (Ross et al, 2019).

It may be a challenging task for capital market participants to determine a company’s financial health by looking at financial ratios because it is time consuming, and requires financial and accounting knowledge. However, it is argued that it doesn’t require special training or countless hours of research. Even the investor who does not have good knowledge about capital market can make sense of a listed company’s balance sheet, profit and loss and cash flow statement by using financial ratios (Australian Shareholders Association, 2010).

Required:

1. Calculate the followings for two companies in the same industry of one of the three industry segments of Consumer staples, materials and energy listed on the Australian Securities Exchange (ASX Top 200). Each group is required to analyse 2018/2019 FY annual reports. (List is uploaded in Moodle).

1. Liquidity ratios

1. Current ratio
2. Profit before depreciation and amortisation to current liabilities
3. Operating cash flow to current liabilities (OCFCL)
4. Cash balance to total liabilities (CBTL)

2. Leverage ratios

1. Debt to equity ratio (DE ratio)
2. Total liabilities to total tangible assets (TLTAI)
3. Interest cover ratio

3. Profitability ratios

1. Earnings per share (EPS )
2. Gross profit margin
3. Net profit margin
4. Return on assets (ROA )
5. Return on equity (ROE )

4. Valuation ratios

1. Price to earnings ratio (PE )
2. Price/earnings to growth ratio
3. Dividend yield

2. Compare the performance of one company with other by using liquidity, leverage, profitability and valuation ratios and evaluate the financial health of two companies.

Answer 1

Companies taken from Australian Securities Exchange (ASX Top 200).

Sector - Energy Sector

Company 1 - Beach Energy Ltd
Company 2 - AGL Energy Ltd

Ratios for 2018 /2019 are as follows -

Profitability analysis

Given the financial performance standard, it should be observed that if an enterprise has better profitability than the other companies in the industry, it can be considered as a stronger player. If the focus has been on the company's profitability over the last five years, it is noticeable that the company has no performance level stability.

It can therefore be assumed that the management team of Beach Energy Limited must be more careful in the assets management in the business by assessing the profitability performance of Beach Energy Limited from different perspectives.

Liquidity analysis

In addition to profitability, liquidity is another essential element of a company's financial health. The term liquidity indicates the company's short-term financial efficiency or solvency. To ensure systematic business growth, it is very important to maintain the company's liquidity at the standard level. If the company maintains its liquidity at standard level, its sustainability can be guaranteed in the short term. However, it is important to mention in this context that the company liquidity requirement may vary according to the company type or nature of the company

The conclusions of this financial analysis showed that Beach Energy Limited operates for a long time in Australia. This is one of Australia's largest energy companies. Gas and oil products are the subject of the company. The financial analysis assignment has found that there are fluctuations in the company's profitability, liquidity and solvencies, based on the critical assessment of the various financial elements of the company.

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