HI5002 Finance for Business Assignments Solution

HI5002 Finance for Business Assignments Solution

HI5002 Finance for Business Assignments Solution

Introduction

In the modern way financial decision, making process evaluation of invest in securities market is very important. It can be stated that the evaluation of company is financial and market position is very important to check the viability of the investment that is to be made in the company for future operational activities. It can be said that investing in capital markets is full of uncertainty and risk hence proper evaluation of the marketing standards of the company is very important to look out for effective measure that can be taken before investing into a firm. The liquidity, efficiency and stability of the company have to be analyzed before making a decision regarding investment of the monetary funds into the company. Historical movement of share price regarding the firm has also to be shared and analyzed in order to make an affect business invent decision. As analyst, it is the responsibility to assets both the financial and marketing standards of the company compare two options and make a better investment decision. In this project management, there will be evaluation over two firm namely GWA Limited and Downer Group Limited which are listed on the ASX in order choose a better company for further investment. Both financial and marketing aspect of the company will be analyzed to generate an effective understanding on whether the investor should invest in either of these companies and which is the better company to invest in which will increase the profitability of the investor through the investment process.

Description of operation and comparative advantages of the two chosen companies

The study is conducted in the aspects and factors of the two selected companies form the ASX listings which are part of materials industry. In this context, it can be said that the research has been conducted on the GWA group and the Downer group in order to get the requirements of the study according to the needs. In order to get the accurate and suitable information for the study it can be said that the research must be conducted on the information knowledge gathered from the websites and reports of the companies during the year. Not only that the several statements and reports published by the companies also to be identified and observed for the conduction of the study. Hence the discussion is as follows

Description of the companies

GWA Group

The GWA group is considered as the Australia's largest company that supplies the required building fixtures and fittings during the year. Over the years the company has been providing several solutions regarding the building and household matters. In the recent surveys and statements provided by the company it can be said that the company is focusing on the aspects of the Bathrooms and kitchen business along with stable concentration of the supreme solutions to the water problems during the year. Not only that the company also owns and distributes an extensive range of market leading brands such as Caroma, Dorf, Clark, Fowler and Stylus. Thus it can be stated that the GWA group is one of the greatest and versatile company in the Australian market that provides several solutions to the household and building problems over the years. The Australian market and the customers have developed a strong believe in the services if the company and thus the market valuations of the company has been increasing over the years (Vogel, 2014). The sustainability and the market preferences of the company has also been enhanced over the years along with several supports from the Australian Government.

Downer group

Downer group is one of the most oldest companies that are operating in the Australian market as well as the overseas market over the years. In this context it is also to be added that the Downer group has the reputation of a company that provides various designs for household accessories along with the requirements for buildings and fixtures and infrastructure for several economical solutions over the years. The Downer group has been operating in the Australian market as well as the New Zealand market over more than 150 years and is listed in the stock exchange of both of the countries. The Downer group is ASX 100 listed company that owns over 88 percent of shares in the Spotless Group Holdings Limited. Not the Downer group establishes firm market profitability but also the company has focused on developing the relationships between the marketing outlets and the customers over the years. In this manner the Downer group also employs approximately 56000 people in over 300 sites between Australia and New Zealand market (Kallala et al.2015).

Calculation and comparison of performance ratios of the two companies

Ratio

Formulas

 

GWA

Downer Group

 

Year

 

Year

 
   

2017

2016

2015

2017

2016

2015

Liquidity Ratios

        

Current Ratio

(Current Assets / Current Liabilities)

 

2.35505176

2.320131138

2.33761746

0.964514667

1.535055886

1.616064257

Quick Ratio

(Current Assets - Inventories)/ Current Liabilities

 

1.394014697

1.254827009

1.257653834

0.866832869

1.297575846

1.374859438

Cash Ratio

Cash and Cash equivalent / Current Liabilities

 

0.483182948

0.497991071

0.473688997

0.27345723

0.413267528

0.075180723

         

Efficiency

Days

       

Days of Sales Outstanding (DSO)

(Average Receivables /Net Revenue)x365

 

54

43

43

5

1

7

Days of Inventory on Hand (DOI)

(Average Inventory /Cost of Sales)x 365

 

101

107

108

16

18

27

Days of Payables (DOP)

(Average Payables /Cost of Sales)x 365

 

71

57

60

91

56

88

Cash Conversion Cycle (CCC)

DSO + DOI - DOP

 

84

93

91

-70

-37

-54

         

Profitability Ratios

%

       

Gross Profit Margin (GPM)

(Gross Profit / Revenue)

 

42%

41%

40%

9%

4%

5%

Operating Profit Margin (OPM)

(Operating Profit / Revenue)

 

42%

41%

40%

9%

4%

5%

Net Profit Margin (NPM)

(Net Income / Revenue)

 

12%

12%

12%

2%

3%

4%

Return on Capital Employed (ROCE)

(operating profit/ Average Total Capital employed)

 

42%

41%

39%

16%

10%

8%

Return on Equity (ROE)

(Net Income / Average Equity)

 

17%

17%

18%

5%

9%

9%

Return on Assets

(Net profit / Total Assets)

 

10%

11%

10%

2%

4%

4%

         

Leverage Ratios

        

Debt-to-Equity Ratio (D/E)

(Total Debt / Total Equity)

 

0.35

0.39

0.37

0.16

0.29

0.30

Debt-to-Assets Ratio

(Total Debt / Total Assets)

 

0.22

0.23

0.22

0.08

0.14

0.15

Gearing

(Total debt / (Total debt+Total Equity)

 

0.26

0.28

0.27

0.14

0.22

0.23

Interest Coverage

(EBIT / Interest)

 

31.45

25.65

81.26

16.45

6.89

7.17

         

Investor Ratios

        

EPS

Net profit attributable to ordinary shareholders / WANS

 

2749.43

2589.47

2723.59

4.96

4.94

4.54

Dividend Yield

Dividend per share / share price

 

20.22

19.58

18.13

35.00

35.90

34.00

Dividend Payout

Dividend per share / EPS

 

0.01

0.01

0.01

7.06

7.27

7.49

Price-Earnings

Share price / EPS

 

0.00

0.00

0.00

0.20

0.20

0.22

         
         
         

Notes

Current Assets

 

$ 177,220.00

$ 166,307.00

$ 154,236.00

$ 2,979.00

$ 2,115.00

$ 2,012.00

 

Current Liabilities

 

$ 75,251.00

$ 71,680.00

$ 65,980.00

$ 3,088.60

$ 1,377.80

$ 1,245.00

 

Inventories

 

$ 72,319.00

$ 76,361.00

$ 71,256.00

$ 301.70

$ 327.20

$ 300.30

 

Cash

 

$ 36,360.00

$ 35,696.00

$ 31,254.00

$ 844.60

$ 569.40

$ 93.60

 

Accounts Receivables

 

$ 65,862.00

$ 51,983.00

$ 51,234.00

$ 105.60

$ 17.30

$ 93.60

 

Net Revenue

 

$ 446,332.00

$ 439,666.00

$ 430,255.00

$ 7,287.40

$ 6,850.00

$ 5,012.00

 

Cost of Sales

 

$ 260,361.00

$ 259,924.00

$ 241,569.00

$ 7,032.00

$ 6,590.00

$ 4,100.00

 

Accounts Payables

 

$ 50,783.00

$ 40,510.00

$ 39,564.00

$ 1,761.00

$ 1,010.90

$ 983.60

 

Gross Profit

 

$ 185,971.00

$ 179,742.00

$ 173,564.00

$ 677.80

$ 276.90

$ 233.60

 

Net Profit

 

$ 53,671.00

$ 53,681.00

$ 53,216.00

$ 181.50

$ 180.60

$ 176.35

 

Capital Employed(Total Assets - Current Liabilities)

 

$ 443,013.00

$ 439,179.00

$ 443,256.00

$ 4,366.80

$ 2,822.50

$ 2,861.50

 

Equity

 

$ 320,603.00

$ 307,698.00

$ 302,564.00

$ 3,586.50

$ 2,088.50

$ 1,985.30

 

Debt

 

$ 112,000.00

$ 120,000.00

$ 112,457.00

$ 581.80

$ 604.50

$ 601.20

 

Total Assets

 

$ 518,264.00

$ 510,859.00

$ 509,236.00

$ 7,455.40

$ 4,200.30

$ 4,106.50

 

Interest

 

$ 5,913.00

$ 7,008.00

$ 2,136.00

$ 41.20

$ 40.20

$ 32.60

 

Distributable Profit

 

$ 55,896.00

$ 50,909.00

$ 49,651.00

$ 177.50

$ 187.70

$ 163.50

 

Shares

 

$ 20.33

$ 19.66

$ 18.23

$ 35.80

$ 38.00

$ 36.00

 

DPS

 

$ 20.22

$ 19.58

$ 18.13

$ 35.00

$ 35.90

$ 34.00

 

Share Price

 

$ 1.00

$ 1.00

$ 1.00

$ 1.00

$ 1.00

$ 1.00

According to the above table it is observed that the companies has been competing in the Australian market in terms of their profitability margins along with the returns generated from the market over the years. There are several aspects and factors in the market that has been the mode of their competition over the years and they have provided quality services to the customers and in the market over the years. The ratios of the companies reflects the marketing operations along with the financial stability and the revenue margins over the years. The table is provided in such a way that would provide a detailed competitive analysis between the financial liquidity positions of the company during the year. Thus on order to conduct a detailed and brief analysis it is important to have the ratios and their values observed and compared with the brief. The analysis is as follows

Efficiency ratios

The efficiency ratios has been the sole indicators of the company's financial efficiency in generating market profits and returns over the years with the accurate utilisation of their assets. The efficiency ratios has positive public relations with the company as the increase in the ratios values indicates positive efficiency margins for the companies in the year (Nesticò and Pipolo, 2015). According to the table it can observed that the GWA has efficiencies ratios that are well passed in comparison with the Downer group. This shows that the GWA has been the dominators in regards with market efficiencies during the current financial years, as they are able to generate accurate figures positive valuations in their market payables and cash cycles during the period.

Liquidity ratios

The liquidity ratios are considered as ratios that indicates the company's financial liquidity and the ability to minimize their market debt in short term period along with their liabilities with the usage of the company assets and resources during the year. In this context it is to be added that the liquidity ratios in postive figure indicates the higher liquidity abilities of the firm during the year (Blum and Dacorogna, 2014). In this context it can be added that the GWA groups has the upper hand in respect of the liquidity ratios as the company has higher liquidity margins and valuations in comparison with the Downer Group for the past three years. Hence this proves that the GWA has been able to generate higher margins of market profitability along with their revenues with slight increase in marketing expenses which are compensated against the extra revenues. Thus, the company has better and higher net profitability that helped them to minimize their short term liabilities and market debt better than the Downer group during the year.

Profitability ratios

The profitability ratios has been the sole indicators of the company's profitability margins along with the core financial strengths in generating market profits and returns over the years with the accurate utilization of their marketing strategies and operating plans. The profitability ratios has a positive relations with the company as the increase in the ratios values indicates positive profit margins for the companies in the year. According to the table it can observed that the GWA has profitability ratios that are well passed in comparison with the Downer group. This shows that the GWA has been the dominators in regards with market efficiencies during the current financial years, as they are able to generate accurate figures positive valuations in their market payables and cash cycles during the period

Analysis of monthly share prices movements of the two companies within 3 years

GWA limited

The image above depicts the share trend of GWA Limited from the year 2016 to 2018 which 3 years. It can be seen in the image that share prices of the firm has been going up and down with low uncertainty and steady growth rate. It can be seen that the Share prices of the firm are currently in a good position. As in the month of April 2018 the company reached its highest share price of 3.73 USD which is the highest from the past 3 years. This is positive sign for the company. The P/E ratio of the company in the last few years has been 16.52 which is also formidable. The company although was in depression in the year 2016 in the month of February in which the share price of the company was valued at 1.12 AUD. In January 2016 the share price was valued at 1.98 AUD and currently the share price of the company has been rated at 3.12 AUD which shows that the company’s share price have grown over last 3 years. It can be said that The dividend yield of the company is 5.77 % which is also formidable according to irs share price (Stone et al.2016).

The image above shows the share price trend of Downer Group Limited which has been on rise. It can be seen that share price trend of the company from the year 2016 to 2018 has been on a rising trend. This shows that the company's share prices are growing at fair and good rate which is positive sign for its investors. In January 2016 the value of share of Downer Group Limted in the ASX was valued at 3.40 AUD which is higher than GWA where as the current value of the company’s share price is 7.89 which shows the rapid rate of the company’s share price growth. It can be said that the current value of the share is is highest ever in the last 3 years. This shows that currently the position of the company in the market is string and that the company is growing strong in the market. The Price earnings ratio of the company is 82.25 that is very high and shows the share price effect that the company has. The dividend yield of the company is although lower which is 3.42% which shows that the company has low dividend yield in respect to GWA (Vogel, 2016).

Identify any significant factors which may have influenced the share price of your chosen companies during the time frame

GWA has not be able to keep a high growth rate. This is because of some event which has effect the market price positioning of the company in the recent years. It can be said that vGA recently tried to expands its division of operation but failed to doi so due lack of effect commercial roots. This lead to a financial setback to the company although the company was not healy damaged through this but the share prices were affected in the year 206 which why the share price were under depression from the 2016 to mid 2017. On the other hand Downer Group Limited was also expanding it roots and was successfully doing so and the company opted some new major project which increased the financial value of the company which are project related to Sydney Growth trains, Clare Solar Farm development and Newcastle Light Rail. All of these helped the company to do financial good in the market and further helped the company to increase their share prices in the market (Cucchiella and Rosa, 2015).

Calculation of Beta values and expected Rates of Return using the CAPM of the two chosen companies

Beta = Covariance / Variance

Downer Limited

Covariance = 1.04

Variance = 0.36

Beta = 1.04 / 0.36

= 2.88

GWA Limited

Covariance = 1.65

Variance = 0.64

Beta = 1.65 / .64

= 2.57

Expected rate of return using CAPM

Ra= rr– Ba( rm– rr)

In which,

Ra = Risk Free Rate

Ba= Beta

rm= Expected Rate of return

Downer

The risk free rate is 5%

The expected return over the next period is 11%

The beta is 2.88

Market risk premium will be 11 -5 = 6%

0.05 + [5 x (0.11 -0.06)]

Or, 0.3

The company revives 30 % return over the stock

GWA

The risk free rate is 5%

The expected return over the next period is 11%

The beta is 2.57

Market risk premium will be 11 -5 = 6%

0.05 + [5 x (0.11 -0.7)]

Or, 0.2

The company revives20% return over the stock

In the above CAPM calculation, it can be seen that return over stick is higher of Downer Limited where the GWA limited incurs lower amount of return on the stock. The beta value of Downer is also higher which mean the risks related to the stock are higher in comparison to GWA. The risk is lower so as the return. This states that if the investor will ant invest in Downer they will have to take little but of high risk for higher return on the invested amount of capital (Cucchiella et al.2015).

Identify and comparedividendpolicy of the two chosen companies

It is observed that the companies has been competing in the Australian market in terms of their profitability margins along with the returns generated from the market over the years. There are several aspects and factors in the market that has been the mode of their competition over the years and they have provided quality services to the customers and in the market over the years. The dividend policies of the companies has been observed to be quite interesting in regards with their other ratio valuations during the year. It is observed that GWA group has been the market dominator in terms of their market returns and liquidity and profitability efficiencies(Johnson et al.2015)

GWA group

The company has been observed to be not a positive provider of its dividends and share returns during the year. In this context it can be said that the share prices and the dividends rates of the company in regards with its profitability margins are quite low and hence the net payable in terms of dividends and price earnings are low.

Downer group

The company in comparison with the GWA group has higher rates for their share prices and market dividends as it is observed in the ratios table that the company has way more values than the downer.

Letter Recommendation

Looking at the above marketing and financial analysis it can be stated that GWA is financially stronger than Dinner although the downer is also financially strong but nots as huge as GWA. The GWA is financially strong and stay financially which gives it an edge over Downer if we compare both the firm on financial grounds. On the other hand it can be said that in marketing dimension Downer is way ahead of GWA. It can be said that where GWA is suffering from uncertain and low rate of growth Downer is constantly growing at a high speed. The marketing terms are in favor of Downer that is way in share price girth and current share valuation. On the basis of return on stock validation throu8gh CAPM method it is seen that the return on stock is higher or Downer Limited which against takes its ahead of GWA. it can be said that although the risk is little bit higher the retina is 10% higher than that of GWA (Chu et al.2017). In the market analysis the only factor which was in favor of GWA was the Dividend yield percentage as it was higher than that of Downer. Although the PE ratio of Downer was way higher than That of GWA. Overall, it can be said that although GWA is financially strong and stable Downer is no less financially strong but is small in size although the market performance of the company is greater and growth is on the horizon of the company which is why it is preferable to invest in Downer to get high and profitable return in future.

Conclusion

Concluding in the light of above it can be said that through financial and market analysis of both the selected companies for investment the most profitable one has been selected which is why its is important to invest after proper analysis to get high profitable results which will be very beneficial for the company. Through the current analysis one this become clear that Owner is small in financial size in comparison to GWA but in term of financial and market growth the company is better the GWA which is why the company is considered to be better than GWA. As the company is Growing it is very probable that the investor should invest in it as the market share price growth will be faster than That of GWA. In this sense, it will be better for the investor to invest in GWA.

References

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