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Present Description of Organization

Prepare Equity Research reports for two Australian listed firms.

This report reflects the key understanding on the financial performance of two companies. It is evaluated that financial tools such as ratio analysis, trend analysis and cash flow analysis reflects the true financial position of companies. However, in order to evaluate the trend of two companies from two companies from two industries have been selected. Wesfarmers and BHP Billiton Limited are two major companies which have been evaluated in this report to showcase the financial performance and trend of companies since last three years. In the starting of this report, the descriptions of these two companies have been given. After that key understanding on the financial performance of these two companies has been made by using ratio analysis, cash flow analysis and trend analysis. After that, recommendation has been given on the basis of financial figures of these two companies to investors so that they could make effective investment decisions in determined approach. In the end of this report, critical conclusion has been made to showcase the investment decisions of investors in short run and long run.

Wesfarmers plc is an Australian conglomerate company which has been running its business since very long time on international level having headquartered in Australia. In 2016, company had total 65.98 billion AUD total investments in value chain activities of organization which has increased by 20% as compared to the total revenue shown in 2015. Company has total employees 2, 20,000 in its all value chain activities (Annual report, 2016).

On the other hand, BHP Billiton Ltd is an Anglo Australian multinational mining, metals and petroleum dual listed public company having headquarter in Melbourne, Australia.  Currently, 2016 company has total revenue of 30.9 billion from its business functioning.

This analysis reflects the relation between two factors of company. There are several ratio such as liquidity ratio, efficiency ratio, solvency ratio, dividend payout ratio and profitability ratio which could be used to analysis the financial performance of two companies Wesfarmers plc and BHP Billiton (Annual report, 2016).

Current ratio analysis

This ratio provide the liquidity position of company and ability to pay off its short term and long term debts with the help of its current assets (Annual report, 2016).

Wesfarmers plc

After evaluating the annual report of company, it is observed that Wesfarmers Plc has maintained stable current ratio with slight change of .01%. However, due to the reduction in quick assets, Wesfarmers has reduced its quick ratio by .06 % and resulted to .30 points in 2016.

Computation of ratio analysis

Liquidity ratio

2014

2015

2016

Current ratio

0.9349167

0.92901

0.928002

Quick ratio

0.3697306

0.3284728

0.301142

Ratio Analysis

BHP Billiton Plc

It is evaluated that in 2014 BHP Billiton Plc was having 1.09 points current ratio which has drastically increased to 1.37 points in 2016. This has shown that company has increased its investment in operating activities. Moreover, Quick ratio of company has also increased to 1.0444 in 2016 as compared to last three year data. It reflects that company has increased its investment in quick assets to improve its liquidity position and increasing overall productivity in determined approach (Annual report, 2016).

Computation of ratio analysis

Liquidity ratio

2014

2015

2016

Current ratio

1.0944434

0.906167

1.3782

Quick ratio

0.8086589

0.573295

1.04427

Profitability ratio

This ratio reflects how well company is performing to earn the profit from its overall business functioning. It showcases company’s ability to earn money from its value chain activities.

BHP Billiton Plc

Operating profit margin- It provides the relation between BHP Billiton Plc’s operating profit and overall turnover of organization. In 2014, BHP Billiton Plc had 33% operating profit which went down to -23% in 2016. This shows that BHP Billiton Plc has faced loss from its business functioning due to the loss faced in sluggish market in Australia (Annual report, 2016).

Net profit margin- This shows relation between net profit and overall turnover of company. It provides company’s ability to draw net profit from the overall turnover of company. In 2014, BHP Billiton Plc had 20% net profit margin which has gone down to negative profit amount to -20% in 2016. However, company has faced this loss due to decreased level of total turnover and increased operating expenses.


Return on capital employed- This ratio reflects the relation between two factors such as net profit and capital employed in the business functioning of BHP Billiton Plc. It is evaluated that throughout the three years, BHP Billiton Plc has faced high amount of loss in its business functioning. In 2014, company had good amount of profit 11% which has decreased and resulted to -5.7% returns on capital employed to shareholders of organization. The main reason of going down of return on capital employed is related to the sluggish market conditions, less total turnover and increased cost of capital of company.

Return on equity- This shows the relation between availability of return to shareholders and capital investment of company. In 2014, company had return on equity of 19% which has gone down and resulted to negative 9.85% return on equity to shareholders (Gitman, Juchau, and Flanagan, 2015).

Profitability ratio

2014

2015

2016

Operating Profit Margin

0.3308633

0.1804821

-0.23483

Net Profit Margin

0.205815

0.0427906

-0.20655

Return on Capital Employed

0.1174822

0.0143233

-0.05715

Return on Equity

0.1957432

0.0270293

-0.09858

Wesfarmers Plc

Profitability ratio

This ratio establishes relation between profit earned by company and its overall total turnover.

Solvency Ratio

Operating profit margin- It reflects the relation between Wesfarmers Plc. ‘s operating profit and overall turnover of organization. In 2014 Wesfarmers Plc had 4.9% operating profit which increased to 5.4% in 2016. This reflects that Wesfarmers Plc has been running its business efficiency and increasing its overall productivity (Ozturk and Acaravci, 2013).

Net profit margin- This establish relation between net profit and overall turnover of company. After evaluating the annual report of Wesfarmers plc, it is observed that in 2014, Wesfarmers had 3.9% net profit margin which increased to 4.2% 2016. Nonetheless, company has increased its overall profit by increasing its overall total turnover of company.

Return on capital employed- This ratio establish the relation between two factors such as net profit and capital employed in the business functioning of Wesfarmers plc. In 2014, company had 7.9% returns on capital employed which has increased to 9.6% in 2016. This shows that company has been creating value on the shareholder’s investment and earning more than its cost of capital (Gitman, Juchauand Flanagan, 2015).

Return on equity- This reflects the relation between availability of return to shareholders and capital investment of company. In 2014, company had return on equity of 9.8% which has increased to12% in 2016. This shows that company has increased its profit and distributing more profit to shareholders in determined approach.

Profitability ratio

2014

2015

2016

Operating Profit Margin

0.0496602

0.0097997

0.054179

Net Profit Margin

0.0392902

0.0062126

0.042241

Return on Capital Employed

0.079541

0.0134062

0.096741

Return on Equity

0.0984625

0.017735

0.120003

 Solvency ratio

This ratio provides the relation between debt and equity of company. It is accompanied by two parts such as debt to equity ratio and interest coverage ratio (Hussey and Ong, 2017).

Debt to equity ratio- This ratio is used to measure the company’s financial leverage throughout the time. In 2014, BHP Billiton has 95 debt to equity ratio in 2014 which decreased by 3 points and resulted to 92 in 2016 which reflects that company has high financial leverage. It shows that company could increase more finance by issue of debts as it has low risk of debt in its value chain activities (Chapple and Humphrey,  2014).

Interest coverage ratio- This ratio reflects BHP Billiton ability to pay off its interest and other fixed cost amount through earnings before interest and tax. It is observed that in 2014 company had 2.7 interest coverage ratio which have went down to -11% due to its loss showing business. Company is having negative earning before interest and tax which has resulted to negative ability to pay off its interest payment to banks and financial institutions. However, company has high sustainability risk and creditors and lenders may pass resolutions to take the company into winding up if their dues are not cleared in time (Pettersson and Brolin, 2014).

Solvency Ratios

2014

2015

2016

Debt-Equity Ratio

0.9544464

1.0227273

0.923481

Interest coverage Ratio

0.0277478

0.0518868

-0.11682

Recommendations

Wesfarmers Plc

Debt to equity ratio- This ratio reflects the relation between Debt and equity of company. In 2014, Wesfarmers Plc has 63 debts to equity ratio in 2014 which increased by 3 points and resulted to 65 points debt to equity ratio in 2016. This shows that company has maintained stable debt to equity ratio throughout the time (Fodor  and Stowe, 2015).

Interest coverage ratio- This ratio reflects company’s ability to pay off its interest amount or other fixed cost charges from its earned profit. It is observed that in 2014 company had interest coverage ratio 10% which has decreased by 3% and resulted to 7.1% interest coverage ratio in 2016. However, this ratio reflects that company has stable solvency ratio and could easily pay off its interest and other fixed cost amount from its yearly earning. It shows low level of sustainability risk in organization (Dlamini and Masuku, 2014).

Solvency Ratios

2014

2015

2016

Debt-Equity Ratio

0.630362

0.7771145

0.675577

Interest coverage Ratio

0.1021401

0.4797508

0.071642

Efficiency ratio

This ratio reflects how well company is performing to draw effective result from its business functioning.

BHP Billiton plc

Inventory turnover ratio- This ratio reflects company’s ability to manage the inventory by comparing cost of goods sold with the average inventory for a period. In 2014, inventory turnover ratio is 1.044 which has gone down to .41 due to its less level of turnover and sluggish market conditions.

Debtor turnover ratio- This ratio reflects how efficiently company is using its assets in its value chain activities.  However, due to sluggish market factors and less level of turnover, BHP has decreased its debtor turnover ratio by 10% since last three years (Dokas, Giokas and Tsamis, 2014).

Creditor turnover ratio- It is observed that if company wants to reduce its overall cost of capital then it will have to keep efficient creditor turnover ratio. In 2014, company had 3.55 creditor turnover ratios which decreased to 2.48. This level of reduction in creditor turnover ratio has occurred due to less efficient business and company’s strategy to keep its financial risk low.

Efficiency  Ratios

2014

2015

2016

Inventory turnover ratio

1.0441597

0.6294466

0.419748

Debtor turnover ratio

15.96342

6.3250673

5.135737

Creditor turnover ratio

3.5563835

2.044039

2.481285

 Wesfarmers plc

Efficiency  Ratios

2014

2015

2016

Inventory turnover ratio

1.984043

1.9360806

1.812314

Debtor turnover ratio

43.919378

42.388871

41.7142

Creditor turnover ratio

7.6315557

7.4314398

7.07447

Efficiency ratio

After evaluating the efficiency ratio of Wesfarmers plc, it is observed that company has maintained effective inventory turnover ratio throughout the time. In 2014, company has 1.98 inventory turnover ratio which went down by .12 points and resulted to 1.81 inventory turnover ratio. This reflects company has very low level of stock margin in its working channel. In addition to this, debtor turnover ratio of company is also 43.919 which went down to 41.71 in 2016. This shows that company has reduced its overall credit sales as compared to last three years credit sales. Nonetheless, company has maintained stable creditor turnover ratio since last three years for creating shield against stability risk of company (Aye, et al. 2016).

Efficiency  Ratios

2014

2015

2016

Inventory turnover ratio

1.984043

1.9360806

1.812314

Debtor turnover ratio

43.919378

42.388871

41.7142

Creditor turnover ratio

7.6315557

7.4314398

7.07447

Investment ratios

BHP Billiton plc

This company has increased its dividend yield ratio to .064 in 2016 which has shown that company may have decreased its overall turnover but it has increased its comparable profit and distributed more dividends to shareholders.

Investment Ratios

2014

2015

2016

Dividend Yield Ratio

0.0386424

0.0508558

0.064635

Wesfarmers plc

With the increasing ramification of economic changes and business functioning of Wesfarmers plc, it has reduced the overall dividend yield ratio and plugged back most of its earnings in its business functioning (Lee and Shin, 2016).

Investment Ratios

2014

2015

2016

Dividend Yield Ratio

0.0418183

0.0346501

0.029376

It is observed that if investors wants to create value on their investment then they should invest their money in Wesfarmers plc. Wesfarmers plc is showing more return to investors if they invest their money value chain activities of Wesfarmers plc as compared to BP Billiton (Gitman, Juchau and Flanagan, 2015).

Wesfarmers plc

Wesfarmers plc is supermarket industry company which has covered at least 25% market share around the globe with more than 2,20,000 employees. However, with the increasing ramification of economic changes, company has increased its overall turnover. The latest strategic position of Wesfarmers is related using enterprises resources planning accompanied by cyber computing system in its business functioning. It helps company to establish automation in its all the working value chain activities and increase overall client’s satisfactions. However, company has also adopted loyalty card approach and monkey survey to boost its marketing strategic plans for the betterment of client’s satisfactions and company’s welfare. This helps company to come up in the supermarket industry with differentiation in products and services. It will not only enhance the overall brand image of company but also increase the overall turnover of company (Vernimmen, et al. 2014).

BHP Billiton plc

It is dual listed public company which has more than 65,000 employees. However, company has adopted strategic plan to send its experienced employees in its different business units. This will help company to increase the efficiency of its business and increase the overall productivity. This strategic plan has helped company to supervise its non-experienced employees in efficient manner for the better result of their functioning. In addition to this, company has also adopted employees oriented business culture which enables all the employees to work accordingly in determined approach.

This equity analysis investment will help shareholders to evaluate the business performance of company in determined approach.  However, changes in total turnover and profit of company throughout the years could be used to make effective level changes in the business functioning of organization. Trend analysis could reflect the future value of company’s result. In addition to this, trend analysis and forecast errors could define the possible changes in the result shown in determined approach. For instance, as per the trend analysis of Wesfarmers plc, Total turnover of company has been increasing by average 5%. This shows that company could have possible ups and down in its total turnover. Forecast error could be used to measure the changes of 2% each and every year (Li, et al. 2016).

Particulars

2014

2015

2016

AUD$ '000

AUD$ '000

AUD$ '000

Total Revenue

62,102

65,512

68,015

Forecasted data of total turnover of Wesfarmers

Particulars

2014

2015

2016

2017

2018

2019

AUD$ '000

AUD$ '000

AUD$ '000

AUD$ '000

AUD$ '000

AUD$ '000

Total Revenue

62,102

65,512

68,015

72587

75845

80562

In this result, it is shown that company has been increasing its overall turnover by 5% each and every year. However, as per the forecasted error, company could have possible error of 2% in its all financial years (Loughran and McDonald, 2016).

Another forecast result could be related to the change in total turnover of BHP Billiton plc. It is given that if BHP Billiton plc has decreased its overall total turnover by very drastic amount. Since last three years there is downward slope in its total turnover which reflects more than 70% negative result in its total turnover (Annual report, 2016).

It is evaluated that professional fund managers should be ethical and should not disclose confidential information of company to other persons. However, they could use several documents such as annual report, online sites, websites and other details for determining their strategic decisions for the betterment of organizations. Professional fund manager should use their critical understanding while evaluating the financial data of company to make effective level of changes in the existing business functioning and understanding annual reports and documents in determined approach. In addition to this, Professional fund manager needs to adhere with their code of conducts and professional behavior while giving advice to their clients. Furthermore, fund manager has to evaluate whether the information they are sharing with the clients are not confidential and has no negative impact on the particular company. They should be integrated towards their professional services and not be indulged in insider trading transactions with any of the companies (Cheng, Ioannou, and Serafeim, 2014)

Conclusion

This report has shown various key figures of two companies which could be used by investors to make effective investment. However, after evaluating these two companies, it could be inferred that investors should invest their money in the business functioning of Wesfarmers plc. However, BP Billiton may showcase the profitable business but for that it needs long span of time. Investors who wants to earn short term profit or value creation on their investment in shorter span of time, may invest their money in Wesfarmers. Nonetheless, investors who could keep their money invested for more than 10 years should invest their money invested in, BP Billiton for the value creation on their investment

Annual report, 2016, BP billition, retierived on 29th August 2017 from https://www.bhp.com/investor-centre/annual-reporting-2016

Annual report, 2016, Wesfarmer plc, Retierved on 29th August 2017 from https://www.wesfarmers.com.au/docs/default-source/reports/2016-annual-report.pdf?sfvrsn=4

Aye, G.C., Miller, S.M., Gupta, R. and Balcilar, M., 2016. Forecasting US real private residential fixed investment using a large number of predictors. Empirical Economics, 51(4), pp.1557-1580.

Chapple, L. and Humphrey, J.E., 2014. Does board gender diversity have a financial impact? Evidence using stock portfolio performance. Journal of Business Ethics, 122(4), pp.709-723.

Cheng, B., Ioannou, I. and Serafeim, G., 2014. Corporate social responsibility and access to finance. Strategic Management Journal, 35(1), pp.1-23.

Dlamini, B.P. and Masuku, M.B., 2014. Factors affecting the competitiveness of the agribusiness sector in Swaziland.

Dokas, I., Giokas, D. and Tsamis, A., 2014. Liquidity efficiency in the Greek listed firms: a financial ratio based on data envelopment analysis. International Journal of Corporate Finance and Accounting (IJCFA), 1(1), pp.40-59.

Fodor, A. and Stowe, J.D., 2015. Financial market reactions to a company disaster: the BP case.

Gitman, L.J., Juchau, R. and Flanagan, J., 2015. Principles of managerial finance. Pearson Higher Education AU.

Gitman, L.J., Juchau, R. and Flanagan, J., 2015. Principles of managerial finance. Pearson Higher Education AU.

Hussey, R. and Ong, A., 2017. Corporate Financial Reporting. Springer.

Lee, H. and Shin, S., 2016. A proposal and analysis of finance evaluation indicators for actuarial review of the national pension. Journal of the Korean Data and Information Science Society, 27(1), pp.75-89.

Li, Y., Wang, F., Sun, R. and Li, R., 2016, October. A novel model for stock market forecasting. In Image and Signal Processing, BioMedical Engineering and Informatics (CISP-BMEI), International Congress on (pp. 1995-1999). IEEE.

Loughran, T. and McDonald, B., 2016. Textual analysis in accounting and finance: A survey. Journal of Accounting Research, 54(4), pp.1187-1230.

Ozturk, I. and Acaravci, A., 2013. The long-run and causal analysis of energy, growth, openness and financial development on carbon emissions in Turkey. Energy Economics, 36, pp.262-267.

Pettersson, S. and Brolin, D., 2014. Proposed new lease standard-Do investors adjust for capitalized operating leases in their assessment on market value of equity?.

Vernimmen, P., Quiry, P., Dallocchio, M., Le Fur, Y. and Salvi, A., 2014. Corporate finance: theory and practice. John Wiley & Sons.

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