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Section 1

Evaluate the financial standing of the allocated company by:

a.Analyse the profitability of the company by comparing current financial year’s figures with the ones from previous financial year and competitors from the same industry

b.Analyse cash flow statement to identify the company’s financing/operating/investing activities.

c.Evaluate the company’s financial position by analysing the balance sheet

Section 2

Calculate the following ratios for three financial years based on the information from annual Report. Briefly explain the results.

Return on Assets

Inventory Turnover

Quick Ratio

Price-Earnings Ratio

Section 3

Based on the directors’ report, explain how the management works for the best interest of the company. Ethical standards need to be mentioned. If you are an investor, are you going to invest on this company? Why or Why not?

## Evaluation of financial standing of the allocated company National Australian Bank (NAB)

For the purpose of the current study on analysis of organizational performance of the company National Australian Bank (NAB) is selected. NAB is a Melbourne based Australian bank that is necessarily a different financial services group, conventionally focussed on banking business with presence in segment of wealth. In essence, National Australia Bank is presently the third largest bank in terms of market capitalisation as well as benefits from a huge national branch network and enhancing market share in both home loans as well as retail deposits.

Evaluation of financial standing of the allocated company National Australian Bank (NAB)

Analysis of profitability of the company

Profitability of the company National Australia Bank (NAB) can be analysed from the income statement of the firm.  The total interest income of the corporation is recorded to be \$27403 million in the year 2017 whereas the same was recorded to be \$27629 in the year 2016 (Nab.com.au 2018). This reflects a decrease in the interest income of the firm. Again, interest expense of the firm is said to have increased to \$14699 million in 2017 in comparison to \$14221 million in 2016. Therefore, decrease in interest income along with the increase in the interest expense of the firm reflects an overall decrease in the net interest income acquired by the firm (Raki?evi? et al.  2016). The net interest income of the firm is registered to be \$13182 million in 2017 while the same is recorded to be \$12930 million in the year 2016.

Analysis of the financial statement of the firm National Australia Bank reveals the fact that the net profit of the firm is recorded to be \$5288 million in the year 2017 whereas the same was documented to be \$357 million in the year 2016. Thus, it replicates a sharp enhancement in net income of the corporation. This net income is said to enhance during the year 2017 as interest expense is said to have decreased and the net loss from different discontinued operations of the firm is said to have lessened during the current year.  Thus, based on analysis of prior year, it can be hereby mentioned that net income or in other words net profit of the firm has improved during the specified period of time, reflecting desirable financial condition (Raki?evi? et al.  2016).

However, in terms of the competitor of the firm that is the Commonwealth Bank of Australia (CBA), it can be said that during the same period of time, the net revenue of the firm was registered to be \$25089 million in 2017. This replicates the fact that net revenue of the competitor firm Commonwealth Bank was comparatively higher in the year 2017 as compared to the figure registered by the National Australia Bank (NAB).

## Analysis of profitability of the company

Essentially, the profitability of the firm can also be analysed by application of certain key profitability ratio (Omar et al. 2014)

Return on equity: As rightly indicated by Zainudin and Hashim (2016), the return on equity refers to a profitability ratio that enumerates capability of a corporation to acquire profits from particularly investments of the shareholders in the business concern. In essence, the return on equity reflects the way profit of each dollar is generated from the equity of the common shareholders of the firm (Alin-Eliodor 2014). The same is calculated by means of dividing the net income of the company by the equity contribution of the firm’s shareholders. Comparative analysis of NAB and its competitor’s profitability over the time period 2016 and 2017 is hereby presented below:

 Return on Equity NAB CBA 2017 2016 2017 2016 Net Income 5288 357 9928 9227 Shareholder's Equity 51317 51315 63170 60206 10.30458 0.695703 15.71632 15.32572

Analysis of the return on equity (%) reveals capability of a firm to generate profits from particularly the investments of the shareholders (Robinson et al. 2015).  This ratio (%) has increased sharply from 0.69 in 2016 to 10.30, reflecting a favourable financial condition for the firm. Similarly, in case of CBA as well, the return on equity has increased over the specified period of time although insignificantly. However, comparative analysis of the two different firms reflects that the CBA has better financial position in terms of profitability (return on equity on %) in the current period.

Profit Margin: As correctly mentioned by Abdullah (2016), profit margin indicates towards what percentage of overall sales is carried out from the net sales of the firm. In essence, it enumerates the total amount of profit that are generated at a certain stage.

The profit margin of NAB is seen to have increased significantly during the year 2017 in comparison to the year 2016. The company attaining higher ratios reflects a desirable financial condition for the corporation (Dalnial et al. 2014). Similarly, in case of CBA as well, the profit margin has increased over the specified period of time although insignificantly. However, comparative analysis of the two different firms reflects that the NAB has better financial position in terms of profitability (Profit Margin) in the current period.

 NAB CBA Profit Margin 2017 2016 2017 2016 Net Income 5288 357 9928 9227 Net Sales 8661 8978 25089 24225 0.610553 0.039764 0.395711 0.380888

The cash flow statement of the firm National Australia Bank presents cash used in three different segments namely cash flow from operating activities, investing activities as well as cash flow from financing activities (Grant 2016).

The cash flow from operating activities of the firm is observed to have increased to \$3714 million in the year 2017 as compared to \$1414 million in the year 2016. This reflects an increase in inflow of cash from different operational actions of the firm.

## Return on Equity

The cash flow from investing activities of the firm National Australia Bank is documented to be (\$313 million) in the year 2017 in comparison to (\$9970 million) in the year 2016. This shows an increase in outflow of cash for diverse purchases.

The cash outflow of (\$331 million) from financing activities of the corporation can be noticed during the period 2017 in comparison to the year ago period that registered an inflow of \$9496 million. This replicates outflow of cash stream in comparison to the inflow stream of cash.

 Particulars 2017 2016 % change Cash Flow from Operating activities 3714 1414 162.6591 Cash flow from Investing Activities -313 -9970 -96.8606 Cash Flow from Financing Activities -331 9496 -103.486

Critical analysis of the balance sheet statement of the firm NAB reveals that total assets of firm increased to \$788325 million in the year 2017 in comparison to \$776710 million registered during the year 2016. The increase in total assets of the firm is mainly due to relative increase in quick assets, loans as well as advances, goodwill along with different intangible assets (Sridharan 2015). The increase in assets of the firm during the current period in comparison to the year ago period cam be considered to be a desirable financial condition of the corporation (Titman et al. 2017).

 2017 2016 % change Assets 788325 776710 1.49541 Liabilities 737008 725395 1.600921 Net Assets 51317 51315 0.003897 Cash and Liquid Assets 43826 30630 43.08195 Total Equity 51306 51292 0.027295 Current Ratio 1.06963 1.07074 Quick Ratio 0.059465 0.042225

Again, liabilities of the firm are also observed to have increased during the period 2017 as compared to the year ago period. In essence, the liabilities of the firm reflecting an upward moving trajectory showcase an unfavourable financial condition of the corporation (Bekaert and Hodrick 2017).

Evaluation of the balance sheet also replicates the fact that the net assets of the firm also enhanced although very insignificantly. So, the net assets of the firm is said to have remained almost the same (Zietlow et al.  2018).

Current Ratio: Current ratio is a balance sheet ration that shows capability of the firm to pay off the liabilities possessed by the firm in the short term period using the assets possessed by the firm (Moutinho and Vargas-Sanchez 2018). Current ratio of the firm has decreased even though insignificantly during the period 2017 in comparison to the period 2016. The decrease in current ratio is said to be an undesirable financial condition as lower ratio indicates an unfavourable condition. Also, the standard conventional current ratio is said to be 2:1 that reflects assets of the firm is double to that of liabilities of the firm (Brigham et al. 2016). Therefore, based on the industry standard it can be said that NAB has comparatively lower current as well as quick ratio, reflecting undesirable financial condition.

## Profit Margin

Quick Ratio is a balance sheet ratio that where liquid assets of the firm are used for repaying current assets of the firm. The quick ratio of the firm has increased in 2017 in comparison to year ago period, replicating comparatively better financial condition of the corporation (Brigham et al. 2016).

Calculation of ratios for three years based in information provided in the annual report

 Return On Assets 2017 2016 2015 Net Income 5288 357 6392 Average Total Assets 788325 777622 955052 Ratio 0.670789 0.045909 0.669283 Inventory Turnover Cost of Goods Sold 14221 14699 15885 Average Inventory 0 0 0 Ratio Quick Ratio Quick Assets 43826 30630 30934 Current Liabilities 737008 725395 899539 Ratio 0.059465 0.042225 0.034389 Price Earning Ratio 2017 2016 Stock Price 20.95 27.57 21.14 Earnings Per Share 1.94 0.88 2.52 10.79897 31.32955 8.388889

Return on assets: Return on Assets also indicated as return on firm’s total assets is necessarily a profitability ratio that enumerates overall net earnings manufactured by total assets during a specified time period by comparing net earnings to the mean total assets (Baños-Caballero et al. 2014). The return on assets is calculated to be 0.67 in 2017, 0.045 in 2016 and 0.66 in 2015. This shows that return on assets enumerating level of efficiency of the firm can is observed to have declined in 2016 in comparison to 2015. However, this can be observed to have enhanced in 2017 in comparison to 2016.

Inventory turnover is not presented in the annual report of the firm National Australia Bank.

Quick Ratio: Quick ratio is necessarily a liquidity ratio that enumerates potential of the company to disburse current liabilities when they necessarily become due with particularly using quick assets (Raki?evi? et al. 2016).  This ratio enumerates overall capability of a particular business concern to pay off all its current liabilities at the time when they become overdue. In essence, a higher quick ratio is said to be  more desirable for firms as it reflects that there are additional quick assets in comparison to current liabilities. A business concern having a quick ratio of approximately 1 reflects that quick assets as well as current assets are equal (Raki?evi? et al. 2016). Also, this also represents the fact that the business concern has the need to recompense its current liabilities not including selling any sort of long-term assets of the firm. Acid ratio of 2 reflects that the business concern has double or else twice as much quick asset in comparison to current liabilities of the firm.

Particularly, the quick ratio is enumerated to be 0.03 in 2015, 0.04 in 2016 and 0.05 in 2017. The quick ratio increased even though insignificantly during 2017, representing favourable financial condition.

Price Earnings Ratio: The price earnings ratio refers to the amount of dollar that a specific financier can anticipate in a corporation in a bid to accept one dollar of the total earnings of the company (Raki?evi? et al. 2016). The price earnings ratio is recorded to be 8.38 in 2015, 31.32 in 2016 and 10.79 in 2017. The price earnings ratio has increased in 2017 in comparison to the figure of 2015.

## Calculation of ratios for three years based in information provided in the annual report

Explanation of the way and management works for the best interest of the company

Analysis of corporate governance statement

The company NAB is essentially committed to the highest standards of particularly corporate governance. This has prepared a governance framework that delivers a basis for effectual process of decision making as well as accountability, upholding generation of value for different stakeholders (Nab.com.au 2018). The statement presents composition of board as well as diversity and engagement of stakeholder (Brigham et al. 2016).

The corporate governance framework necessarily plays an important role and delivers a guidance for effectual decision making in different areas throughout the entire group by means of strategic as well as operational planning, management of risk  and compliance, proper financial management together with external reporting, appropriate succession planning along with culture.

Management’s Approach towards handling risks

The entire group engaged a wide range of particularly NAB Board sanctioned dimensions to institute the risk appetite and enumerate strength of the balance sheet. In essence, the key structural dimension utilized is necessarily Stable Funding, which is consisted of The Customer Funding Index, Term Funding Index (Nab.com.au 2018). In essence, there are also specific disclosures on various risk facets.  Also, analysis of financial statement also reveals the fact that Group functions within a risk management structure that is founded on a Three Lines of Defence model. Particularly, this specific model is the totality of the entire systems, frameworks, policies, procedures along with people that can handle different material internal along with external sources of recognized material risk (Zietlow et al. 2018).

Attitudes and actions towards financial reporting

The attitudes along with actions towards financial reporting can be analysed from the operations of the firm. The outlook for the financial performance of the entire group as well as outcomes is closely associated to varied levels of economic actions in each segment.  The directors of NAB necessarily have the accountability with regard to integrity of particularly external reporting (Nab.com.au 2018). In essence, this engages review and assessment with assistance of the overall board audit committee as well as management, overall procedures, different controls along with procedures that are chiefly in place to preserve overall integrity of financial statements of the entire group(Zietlow et al. 2018).

Information processing and accounting functions as well as personnel

Analysis of yearly report of the firm suggests that the report consists of information that is necessarily prepared based on the Banking Act of 1959, Corporations Act of the year 2001, different Accounting Standards as well as Interpretations issued by particularly the Australian Accounting Standards Board (Nab.com.au 2018).  Also, specific information are presented in terms of disclosure policy of the firm.

Preparation and arrangement of financial pronouncement of the entire Group require the management to undertake approximations and suppositions (Nab.com.au 2018). In a bid to undertake judgement in implementing pertinent accounting policies, every one of which might openly influence overall reported figures on assets/resources, liabilities, proceeds as well as expenses. Certain areas concerning a elevated degree of judgement, or in cases where suppositions are noteworthy to the financial assertions, take account of the approximations utilized in the computation of provisions (counting the ones relating to conduct-associated matters), goodwill valuation and valuation of intangible assets, ascertainment of fair value of various financial instruments (Zietlow et al. 2018).

The chief activities of the NAB during the year includes banking services, facilities related to credit as well as access card, various leasing along with housing actions together with general finance, global banking, services of investment banking, various services related to wealth management, management of funds and custodian, varied services related to trustee along with nominee (Nab.com.au 2018).

Investment as well as investment activities

The directors of the bank on regular basis invest in different debentures, listed schemes along with securities delivered by NAB and definite subsidiaries of the bank NAB. Together with this, the Group also keeps on pursuing business procedures enhancement initiatives and invest in different technology to attain strategic aims, satisfy altering customer prospects and act in response to different pressures of competition (Nab.com.au 2018). However, these procedure changes might perhaps enhance operational as well as compliance risks that might adversely influence reputation of the Group, along with financial performance plus position.

Financing as well as financing activities

The Group intends to play an important role in financing transition to low carbon as well as growth of green, and in undertaking the same; the company provides a contribution to overall environmental sustainability of entire communities in which the firm functions. The firm also intends to finance clean technology for lowering carbon footprint, help in lower transition of carbon, developing adaptation and building resilience to different physical influences.  For this purpose, the group has enhanced its financing commitment for current environmental factors from the level of \$18 billion by the year 2022 to approximately \$55 billion by the year 2025 to aid the low transition of carbon (Nab.com.au 2018). Analysis of pecuniary statement of the firm also reflects the fact that financing actions include Repayments of particularly bonds‚ notes as well as subordinated debt, pay offs of diverse other contributed equity and repayments of various other issues of debt (Nab.com.au 2018).  In addition to this, it can also be observed from the financial statement of the firm that there are varied non-cash financing as well as investing actions that include issue of new shares, dividend for different reinvestment plan, varied new debt issue along with subordinated reinvestment offer of varied medium term notes.

Industry Size

National Australia Bank has a huge industry size. NAB is essentially the largest bank in terms of capitalisation of market. Again, this company has 41st largest bank in the entire world as enumerated by essentially total assets in the year 2014, decreasing to essentially 49th largest bank in the year 2016. Particularly, the company operates across 1590 branches, service centres as well as 4412 ATMS running across the entire nation Australia, New Zealand as well as Asia doling out 12.7 million consumers (Nab.com.au 2018).

Major Players or competitors

The banking market of Australia is primarily dominated by four different large banks, now including for approximately ¾ of the entire market (Nab.com.au 2018).

The major players otherwise competitors in this segment include Commonwealth Bank of Australia (CBA), Westpac Banking Corporation (Westpac), Australia and New Zealand Banking Group (ANZ) and the National Australia Bank (NAB).

In terms of Market capitalisation, the four players can be ranked as below:

Market Shares of industry players

Analysis of market share of industry players reveal that NAB has the highest market share in comparison to the four big players in the Australian banking market (Nab.com.au 2018).  The market share of NAB stands at 15.79% while, Westapac has a market share of 11.93%, ANZ has 8.8% and CBA possesses 13.81%.

Conclusion

The above mentioned study helps in gaining deep understanding regarding financial standing of the firm by means of thorough comparative analysis of profitability of the company, analysis of financial assertions of the firm and financial position from analysis of balance sheet statement. Furthermore, analysis of key ratio of three financial years also helps in analysing financial health and soundness of organizational position. Finally, based on report published by the firm, this current study elucidates in detail about the way management works for the best interest of the entire corporation. Results of the study suggest that liquidity position of the company has improved significantly during the current year (2017) as compared to the year ago period.  This is evident from the improvement of quick ratio and current ratio calculated for the firm. Similarly, profitability position has improved as well as is evident from the key ratio such as return on equity and return on assets calculated in this study. However, in terms of return on equity, the competitor CBA has performed better than the selected firm NAB.

References

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Dalnial, H., Kamaluddin, A., Sanusi, Z.M. and Khairuddin, K.S., 2014. Detecting fraudulent financial reporting through financial statement analysis. Journal of Advanced Management Science, 2(1).

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Robinson, T.R., Henry, E., Pirie, W.L. and Broihahn, M.A., 2015. International financial statement analysis. John Wiley & Sons.

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