Financial Analysis Of Cochlear Limited And Sonic Healthcare Limited Essay.

1. Demonstrate understanding of the main accounting and finance concepts used in financial decision making.

2 Discuss the relationships between costs, volume and profit in decision making.
3.Describe the importance, role and main techniques of financial management within an organisation.
4. Analyse and interpret financial reports.

5. Evaluate quantitative and qualitative information to assess risk in business decisions.

Overview of Cochlear Limited and Sonic Healthcare Limited

The two companies whose financial performance and position is being analysed in the reports are listed on the Australian stock exchange. Both Cochlear Limited and Sonic Healthcare Limited are operating in the healthcare industry where they primarily deal in the healthcare equipment and services. Cochlear Limited manufactures and sells the implantable hearing systems across the world in almost 80 countries. The main products the company includes implants as well as Baha that aids impaired hearing capacity of patients. Cochlear has certain qualities that makes its unique and competitive in the Australian and international market as well. These are its lifelong commitment, technical production innovation and the world-class design. The company dominates the global market of implantable hearing devices by controlling almost around 70% portion of the market

Sonic Health care Limited is also one of the giant companies that are providing the general medical services along with radiology and occupational medical services in Australia. The company has achieved the 3^rd position across the world for being the largest pathology company which is operating in 8 countries. Also, the company is recognised as the top 50 Australian companies. Sonic functions as the parent company of various healthcare practicing units around the world and is commonly known as Sonic Healthcare Group. The corporate culture of the medical leadership of the company enables it to deliver the best medical services.

Ratio analysis is the important financial management tool that helps the managers and other users to assess the financial health of the business of the company with which they are associated. Under ratio analysis, various financial ratios of the company are calculated and then they are interpreted and critically analysed to evaluate the true picture of company’s financial performance and position. The rations may be individually analysed by comparing them with the industry benchmarks or by comparing the results of current year with that of previous year(s). This comparison on various financial grounds such as liquidity, profitability, solvency, gearing, capital structure of the company helps the managers in identifying the market position of the company.

Liquidity is the position where the company is capable of managing its short term debt obligations by effectively and efficiently utilising its current assets without requiring the disposal of non-current assets i.e. fixed assets. The short-term debt obligations of the company are those financial liabilities that become due in less than one year. The liquidity position of the company is determined by various ratios and current ratio is among those liquidity ratios. Current ratio is the ratio of current assets to current liabilities. It helps the managers in knowing whether their business will be able to pay off its current liabilities using its current assets balance within one year (Higgins, 2012). The ideal current ratio of the company is 2:1 which means any company must maintain a current asset balance of 2 times of its current liabilities balance to secure a sound liquidity position of its business. In the present case, the current ratio of the Cochlear Limited is 1.69: 1 which shows that the company’s liquidity position is nearly good. It can be said that the company is effectively managing its current assets and current liabilities and hence it is able to square off its current liabilities in one year with the help of its current assets. However, the current ratio of previous year 2016 was 2.16:1 which is better than the current ratio of year 2017. Therefore, the company must strive to improve its liquidity position in the coming years. Profitability is another position that determines the financial performance of the company. It is the situation where business is capable of generating more revenues than its expenses and costs. There is wide range of ratios that determines the profitability position of the company. In the present case, the return on equity of the company ratio will be used as the basis of evaluating the company’s profitability position. Return on equity is the ratio that measures the percentage of profit or returns generated by the business by utilising the funds of its shareholders. In case of Cochlear Limited the ROE is 45.07% which is considerably good. However, the ROE of the previous year was 47%. Therefore the company must make efforts to enhance the same in the further period. The debt ratio is the financial ratio that determines the capital structure of the company. It measures the ability of the company to meet its total financial obligations with the use of total assets held by it in the business. In the case of Cochlear Limited, the debt ratio is 52% which is good enough as it shows that company owns total assets almost twice of its total liabilities and hence it will be able to pay off its total debt without raising funds from other sources. The price-earnings ratio is the ratio of company’s current market price per share to its earnings per share. Higher market price earnings ratio is preferred over the lower one. The price earnings ratio of Cochlear Limited is 44.2 which is quite good as it is indicating that the company’s current market price of the share is sufficient enough in relation to its earnings per share. Also, the PE ratio of the company for year 2016 was 37.2 which is lower than that of current year. It shows that the market worth of company is enhancing.

Ratio Analysis of Cochlear Limited and Sonic Healthcare Limited

The current ratio of Sonic Health care is 0.81: 1 which is quite less than the ideal ratio of 2:1. This indicates the Sonic has no sufficient current assets to pay off its current liabilities which will become due in the coming year. The company must make adequate efforts to improve its current ratio to improve its liquidity position which is adverse in year 2017. The return on equity of the company in year 2017 is 11.5% which is lesser than that of year 2016 (12.4%). This shows that the company is not able to manage its shareholders invested funds appropriately to generate higher returns from the business. Sonic must improve it. The debt ratio of the company is 50% which can be said to be good as the company is able to maintain the total asset balance of twice of its total debt. The PE ratio of the company in year 2017 is 20.8% which is higher than that of year 2016 (17.8%). Therefore, it can be said that the market price of company’s share is enhancing in the market due to its improving financial performance.

The ratios of both the companies are extracted from the following sources:

Cochlear Limited: Morningstar

Sonic Healthcare Limited: Invest SMART 

The liquidity position of Cochlear Limited is better than that of Sonic Limited as the former company has higher current ratio than latter company. The profitability position of Cochlear Limited is also far better than that of Sonic Limited as the Cochlear is able to generate higher profits by utilising the funds of its shareholders. The capital structure of Cochlear Limited is slightly better than that of Sonic Limited. However, it can be said that both the companies are able to pay off its total debt with the use of their respective total assets. The PE ratio of Cochlear is better than that of Sonic Limited which as Cochlear is able to maintain higher PE ratio. This shows that the former company’s share worth in the market is more than latter company and investors are willing to invest in Cochlear limited as it is offering higher earnings per shares to its shareholders.

Therefore, from the overall ratio analysis it can be concluded that Cochlear Limited is performing better than Sonic Health Limited.

The company that is selected after the above ratio analysis is Cochlear Limited. Return on equity of the company is calculated using three financial components. That are: Net Margin (net income/ sales) and asset turnover ratio (sales/assets) and the financial leverage (assets/equity). In the present case of Cochlear Limited the superior component is the assets of the company and its inferior components are its profits.

Liquidity Position

In this part, the company that is selected from the above discussed two companies is Sonic Healthcare Limited. The current share price of the company as on today is AUD 23.66 (as extracted from the yahoo finance site). However, the ideal price of the share as per the dividend discount model will be calculated as follows:

As per Capital Asset Pricing Model, the cost of equity is calculated using following formula:

Ke = Risk free rate + Beta (Market Risk Premium)

      = 2% + 1.285 (7%)

      = 11%

Dividend growth model =

Price at year 0 = Dividend at year 0 *(100 + Growth Rate)

                                    Cost of equity – Growth Rate

P0 = 2.2 (100+4%)

         11% -4% 

P0 = 2.288

           7% 

    =$32.71

Therefore the ideal current market price of Sonic Healthcare Limited is AUD 32.15. This is the value determined through the incorporation of all the necessary data and information that is available with the insiders of the company (Lacerda & Santa-Clara, 2010). However, actual market price of the company as of today is AUD 23.66. Hence, it can be said that the company’s stock is being undervalued in the market. Actual market price of the share is the price which is currently being paid by the investors to purchase the share of the company in the market.

The price at which the stock is traded in the stock market is the maximum price that the potential buyer is ready to pay to purchase the stock and the minimum price which the potential seller is willing to accept in order to sell the stock possessed by him in the market. Therefore, the stock price is determined on the basis of demand and supply forces prevalent in the stock market for that particular stock in the short run. If there are more number of buyers than the sellers of stock, the price of the stock automatically increases. Whereas, in the situations where there are more sellers of stock but limited number of potential buyers are available in the market, the price of the stock automatically declines. The availability of number of buyers and sellers in the market depends on various factors such as overall market trends, the stock value information, the economy, the level of confidence of investors in the economy or various news and information about the company whether good or bad. The ideal price of stock of the company does not get affected by the change in these factors. Rather, it remains constant and is based on the risk free rate of the securities and the risk rate of market along with the Beta value applicable on the company. Beta is dependent on the risk involved in the stock of the company.

Profitability Position

The stock market traders are more concerned about the stock prices but the investors of the company are concerned about the value of company’s stock in long run. As the value of the stock helps them to make an assessment regarding holding or selling the security with the change in the stock price of the company. Therefore, it can be concluded that the intrinsic value of the share depends on company’s private and internal opinions and expectations. However, the market price of the stock is driven by the external or public expectations and opinions about the company. 

Part 3

Since the interest on bond will be given on semi-annual basis, the coupon rate and yield to maturity will be reduced to half of their original rates and the number of terms will be doubled as interest will be received twice a year.

YTM = 230 basis points + 2.35%

           2.30 % + 2.35%

          = 4.65% p.a.

Current market price of the bond is the sum of present value of all the interest payments on the bond and the present value of redeemable value of bond.

Therefore, the current market price of the bond will be $ 1087.17.  

Introduction

I am currently running an ice cream parlour. The parlour is being run by me as a sole manager of business where I have to perform all the business activities on my own. I purchase various kinds of ice creams from the wholesale market then I sell them to the customers on retail basis. From this business I earn a considerable good amount of net profit by managing my business in a systematic manner. During my college period I have learned some fundamental principles of financial management. From my academic learnings I have understood the fact that financial management is the one of the important key to achieve success and growth in any business whether such business is conducted at the small or large scale. 

In the conduct of business of retail sale of ice creams purchased from various manufacturers and wholesalers I have applied various concepts of finance to manage my financial resources adequately so that I do not have to face the situations like cash crunch etc. At the start of every year and month as well I prepare the business budget for the concerned period. This budgeting approach helps me to identify the availability of funds and their appropriate distribution to various business activities that helps my business to perform well. Throughout the budgeted period I keep on monitoring my budget plans so as to make sure that the actual business operations and performance is in line with the budgeted plans. At the start of every year, firstly I check the quantum of funds that are available with me by examining the closing cash balance record of the last year’s balance sheet. Then I verify the cash balance recorded in the books with the amount of business cash that is hand or in bank account held by me for my ice cream business. If there comes any deviation between the actual cash balance and recorded cash balance while reconciling them, I try to figure out the reasons of such deviations in order to understand the real situation of cash balance of the business. Once the availability of cash is examined, I move on distribution of these funds to activities like purchases, operating and administrative expenses etc. keeping into mind the rough estimate of total expected sales on the basis of past trends of the business and other factors such as seasonality of ice cream business. These budget plans also helps in identifying the financial goals and targets my business must achieve for its success. At the end of every month I determine the percentage of total profits achieved by the business by far so that any improvements, if required, are made promptly to ultimately reach at the desired level of profitability of business. At the year-end I compare the actual results with the budgets so as determine whether the business has successfully attained the desired profitability or not. 

Therefore, the process of budgeting is the most important part of the financial planning of my business. The practical implementation of financial management concepts has actually helped by business to achieve growth over past 5 years, to a great extent. 

References:

Cochlear Limited, 2017. Annual Report of Cochlear Limited- 2017. Available on: < https://member.afraccess.com/media?id=CMN://2A1029797&filename=20170817/COH_01884665.pdf> Accessed on 04-02-2018.

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

Lacerda, F. and Santa-Clara, P., 2010. Forecasting dividend growth to better predict returns. Manuscript Universidade Nova de Lisboa.

Sonic Healthcare Limited, 2017. Annual Report of Sonic Healthcare Limited- 201. Available on: < https://member.afraccess.com/media?id=CMN://2A1036798&filename=20170918/SHL_01897223.pdf> Accessed on 04-02-2018.