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This assessment task is a written report and analysis of the financial performance of a selected listed company on the ASX in order to provide financial and investment advice to a wealthy investor. This assignment requires your group to undertake a comprehensive examination of a firm’s financial performance based on update financial statements of the chosen companies.


This assignment must be completed IN Group. Each group can be from 2 to maximum 5 student members. Each group will choose 1 company and once the company has been chosen, the other group cannot choose the same company. First come first served rule applies here, it means you need to form your group, choose on company from the list of ASX and register them with your lecturer as soon as possible. Once your lecturer registers your chosen company, it cannot be chosen by any other group. Your lecturer then will put your group on Black Board to enable you to interact and discuss on the issues of your group assignment using Black Board environment.


However, face to face meeting, discussion and other methods of communication are needed to ensure quality of group work. Each group needs to have your own arrangement so that all the group members will contribute equally in the group work. If not, a Contribution Statement, which clearly indicated individual contribution (in terms of percentage) of each member, should be submitted as a separate item in your assignment. Your individual contribution then will be assessed based on contribution statement to avoid any free riders. 

Overview of Medibank Private Limited

The Medibank Private Limited is a national private health insurance company located in the Australia. Medibank is the second largest company in the insurance sector after Bupa Insurance Company having a market share of around 29.1%. The company is listed on the Australia Stock Exchange with the ticker symbol MPL. The Medibank Company started as a private limited company in the year 1975 with the aim of providing health services in the Australia (Cucchiella, D’Adamo and Gastaldi 2015).

 The company provides the insurance services in the various filed including health, travel, pet insurance, life insurance and various other products and services. The company has a wide range of diversified portfolio including various products and services, which makes the revenue baser of the company diversified (Vogel 2014). The company has a subsidiary company operating in the health services as Australian Health Management. The company is having a good base of employees with an all-2700 employee in the organization.

The financial statement of the company was analyzed and the relevant financial performance of the company was analyzed using the ratio analysis for evaluating the financial performance of the company from the year 2016-2018 (Al Nimer, Warrad and Al Omari 2015). The liquidity position of the company and the profitability position in the company plays an important role and the same has been evaluated using the financial year report of the company.

The market value ratio of the company was evaluated for assessing the pricing and the valuation of the company in terms of Price to Earnings Ratio and the earning per share of the company.  The expected return for a company is evaluated with the help of the Capital Asset pricing model and the same was evaluated for the company by incorporating the Return generated from the market and the risk free rate in the Australian economy. The relevant beta of the Medibank Private Ltd in order to find out the expected return of the stock.

The financial ratios for the company was evaluated using the financial year report of the company and the relevant analysis of the company was evaluated for the period 2016-2018. The financial performance of the company in terms of the profitability condition, liquidity position of the company and the market value of the company was analyses. Ratio analysis is an efficient quantitative assessment tool, which helps us analyze and evaluate the financial performance of the company and help us evaluate the trend followed by the company. The graphical analysis was conducted for the company under the trend period analyzed for the company (Waemustafa and Sukri 2016).

Financial Statement Analysis using Ratio Analysis

Liquidity Ratio

The liquidity ratio of the company shows the ability of the company’s ability to meet the short-term obligations of the company. The common liquidity ratio analyzed for the company was Current Ratio and Quick Ratio for the trend period 2016-17 and 2017-18 (Heikal, Khaddafi and Ummah 2014).

Current Ratio: (Current Assets/Current Liabilities)

The current ratio for the company shows the liquidity position of the company and the ability of the company in terms of meeting the current obligations of the company. The current assets of the company should be significant in comparison with the current liabilities of the companies so that liquidity position of the company remains stable. The current ratio for the company declined from 1.32 times in the year 2016-17 to 1.16 times in the year 2017-18.  The liquidity position of the company declined in the trend period, which may hamper the operations of the company (Katsouras et al. 2015).

Particulars

2016-17

2017-18

Liquidity Ratio

Current Assets

999300

896900

Current Liabilities

758900

772900

Workings

=B26/B27

=C26/C27

Current Ratio

1.32

1.16

Quick Ratio: ((Cash+ Accounts Receivables)/Current Liabilities)

The quick ratio is the net liquidity position of the company reflecting the ability of the company for the payment of the current liabilities of the company (Khidmat and Rehman 2014). The key essence of the quick ratio is that it does not considers inventory into account for the valuation of the quick ratio. The quick ratio for the company was around 0.96 times in the year 2016-17 and was around 0.76 times in the year 2017-18 (Wolfson 2017).

Particulars

2016-17

2017-18

Cash

594600

470100

Accounts Receivable

130300

114800

Current Liabilities

758900

772900

Workings

=(B31+B32)/B33

=(C31+C32)/C33

Quick Ratio

0.96

0.76

The key profitability ratio analyzed for the company included evaluating the Return on Capital Employed, Gross profit margin ratio and the operating profit margin ratio for the company (Sari, Nurlaela and Titisari 2018).

Return on Capital Employed (ROCE): The return on capital employed shows the ability of the company in creating wealth for the shareholders of the company. The Return on Capital Employed for the company was around 37% in 2016-17 and the same has fallen to around 34% in the year 2017-18. The falling profitability condition of the company and the rising base of the capital employed by the company was the key reason behind the fall in the Return on capital employed by the company (Parsian and Shams Koloukhi 2014).

Gross Profit Margin Ratio: (Gross Profit/ Sales)*100

The Gross Profit margin for the company was around 10.04% in the year 10.07% in the year 2016-17 and the same has marginally decreased to about 9.94% in the year 2017-18. The gross profit margin has somewhat remained consistent for the company but showed be rising for the company indicating that the long-term prospects of the company remains stable (Ogiela and Ogiela 2014).

Liquidity Ratio

Net profit Margin Ratio: (Net Profit/ Sales)*100

The net profit margin of the company shows the ability of the company in generating the net margin of the company in terms of the profitability. The net profit margin of the company was around 7.20% in the year 2016-17 and the same had marginally decreased to about 7.04% in the year 2017-18. However, it is crucial for the company for maintaining a growth trend in the profitability of the company (Brédart 2014).

Particulars

2016-17

2017-18

Net Profit

449500

445100

Sales

6244900

6319500

Workings

=B20/B21

=C20/C21

Net profit margin ratio

7.20%

7.04%

The market value of the ratio were determined in order to analyze the valuation of the company. The two common market value ratio analyzed for the company was Earnings per Share Ratio and the Price to Earnings Ratio for the company (Nimtrakoon 2015).

Earnings per Share: (Net Income/ Weighted Number of Outstanding Shares)

The earning per share ratio of the company was around 0.163 times in the year 2016-17 and the same has remained same for the company in the year 2017-18 to around 0.162 times. It is recommended for the company to have a growth trend in the earnings per share of the company (Aldivitto and Rahman 2016).

Particulars

2016-17

2017-18

Market Value Ratio's

Net Income

449500

445100

No. of Outstanding Shares

2754003

2754003

Workings

=B38/B39

=C38/C39

Earnings Per Share (EPS Ratio)

0.163

0.162

Price to Earnings Ratio: (Market Value per Share/ Earning per Share)

The price to earnings ratio for the company was evaluated after assessing the market value share price of the company in contrast to the earnings per share of the company. The Price to earnings ratio for the company was around 17.83 times in the year 2016-17 and the same has increased for the year 2017-18 to around 18.13 times (Xia, Singhal and Peter Zhang 2016).

Particulars

2016-17

2017-18

Market Value Per Share

2.91

2.93

Earnings Per Share

0.163

0.162

Price to Earnings Ratio

17.83

18.13

Comparison of Share Price Movements

  The share price for the company in contrast to the price movement of the All-Ordinaries Index was evaluated for the trend period of 2016-18. The monthly share price and the year ending value was taken into consideration for the purpose of comparison. The share price movement was taken into analysis for the company by evaluating the return generated from the stocks in the trend period analyzed for the purpose of the comparison (Zameni and Yong 2017). The comparison of the share price movement between the companies was evaluated with the help of the graphical analysis of the movement of the share price of the stock and the index level (Montgomery 2017).

The assessment of correlation of returns generated between the companies for the trend period was taken into consideration for the company and the relevant analysis helped us in determining the correlation of the assets of the company. The correlation between the Medibank and All Ordinaries Share Index was found to be at a significant level and the same was around 0.52 times which is at a moderate level. The volatility of the share price of the company was not found to be at a high level and was around 5.27% for the trend period analyzed for the company.  There are various factors, which influence the movement of the share price of a company and the same needs to be analyzed and taken into consideration for the analysis of the same (Bakar and Rosbi 2017).

Profitability Ratio

The level of inflation and the interest rate were some of the macro-economic factors, which influences the share price movement of the company and the index. The falling profitability condition of the company and the worsening liquidity position of the company were some of the key reason behind the decline in the share price of the company. The operating margin for the company has fallen significantly for the company and was the key reason indicating that the company might not have a sustainable or growth trend of profitability in the long-term. Thus, the business factors and the macro-economic factors under which the company operates should be analyzed and examined after taking into various factors (Barth et al. 2017).

Cost of Equity

The cost of equity for the company shows the net expected return from a stock and the same can be evaluated with the help of the Capital Asset Pricing Model. The CAPM model takes into account the risk free rate prevailing in the economy, the return on market and the relevant beta of the stock was taken into consideration for the stock. The expected return on the stock was calculated using the Capital Asset Pricing Model and the relevant analysis for the company was conducted with the help of the same (Dhaliwal et al. 2016). The capital structure of the company was analyzed and the relevant analysis for the company was conducted for the company for the trend period of 2016-18.The formula applied for evaluating the cost of equity was:

Expected Rate of Return (Re) = ((Risk Free Rate of Return + (Return on Market-Risk Free Rate of Return)*Beta)

The expected rate of return for the stock was calculated with the help of the Capital Asset Pricing Model and the relevant return was evaluated for the stock (Lui, Ngai and Lo 2016). The return on market was evaluated for the stock and the prevailing risk free rate in the economy was taken into consideration for the stock.  The beta for the stock was calculated with the help of regressing the return of the stock with return generated on the All-Ordinary Share and the relevant beta for the stock was analyzed and applied in determining the required rate of return on the stock. The respected return on the stock was around 7.12%, the same was evaluated with the help of the risk free rate, and the return generated on the market (Goh et al. 2016).

Capital Asset Pricing Model

Risk Free Rate of Return

6%

Return on Market

7%

Beta

1.12

Expected Rate of Return (Re)

7.12%

Market Value Ratio

The capital structure of the company shows the various sources of capital applied by the company in funding the various sources of the finance available for the company. The two common sources of capital available for the company are primarily debt financing and equity financing for the company. It is necessary for the companies to have an optimal source of capital or level of debt in accompany so that the operations of the company stays stable in the long run. Companies should have an optimal mix of debt and equity so that the same do not affect the operations of the business (DeAngelo and Stulz 2015).

The debt to equity ratio for the company was evaluated by incorporating the level of debt in a company in contrast to the equity level of the company. The debt to equity level of the company was evaluated by incorporating the level of each of the capital source and the implication of the same in the financials of the company. The debt to equity ratio for the company was around 101% in the year 2016-17 and was around 94% in the year 2017-18 (Zeitun and Tian 2014). The company debt to equity ratio over the period has fallen, which signifies that the level of debt in a company has fallen and the corresponding weightage of equity in the company has increased at the same time. The reduction in the debt of the company signifies that the financial risk of the company has fallen in the trend period analyzed for the company.

The debt to equity ratio for the company was around 101% in the year 2016-17 and was around 94% in the year 2017-18. The company has consistently reduced the level of debt in the company and the company has done the same in order to reduce the level of interest rate paid by the company on the borrowed amount. The reduction of debt level in the company at the same time has reduced the financial risk of the company (Graham, Leary and Roberts 2015). The company operates in a condition where the business risk of the company is generally high and the increase of debt exposure at the same time may increase the financial risk of the company. Thus, it is essential for the company for analyzing the financial condition and the influence of the debt on the financial statement of the company.

Medibank Ratio Analysis

Particulars

2016-17

2017-18

Capital Structure Ratio

 

 

Debt

1742700

1715700

Equity

1719800

1829200

Workings

=(B4/B5)

=(C4/C5)

Debt to Equity Ratio

101%

94%

Conclusion

The financial analysis of the company was evaluated for the company using the financial statements of the company and the trend taken for the consideration was for the period of 2016-2018. The financial analysis of the company was performed using the ratio analysis of the company and the relevant recommendation for the company was made. The company is having a wide range of product portfolio in the varied products it serves to the consumers. The share movement of the company was analyzed for the two-year time and the relevant correlation between the stocks and index was analyzed for the company.

The market value ratio of the company was evaluated for assessing the pricing and the valuation of the company in terms of Price to Earnings Ratio and the earning per share of the company. The capital structure of the company was also analyzed and the implication of the debt on the financials of the company was analyzed during the trend period. The macro-economic environment and the business factors plays an important role in the operations of the company and the same was evaluated for the company. The debt to equity ratio for the company was seen to decreasing which shows a positive indication about the company thereby reducing the financial risk of the company in the long-term.

The financial performance of the company in terms of the profitability of the company was seen to be decreasing from the year 2016-18 and the relevant liquidity position for the company also had decreased for the trend year which shows that in the long term the performance of the company would remain volatile. The beta of the company was evaluated for the stock in corresponding to the All-Ordinary Share Index and the correlation was evaluated. The company is having a wide range of portfolio of products, which can help increase the revenue base of the company and sustain the profitability of the company.

Reference

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Aldivitto, D. and Rahman, A.F., 2016. The Impact of Working Capital Components Turnover Period Towards Market Value Ratio. Jurnal Ilmiah Mahasiswa FEB, 3(2).

Bakar, N.A. and Rosbi, S., 2017. Data modeling diagnostics for share price performance of Islamic Bank in Malaysia using Computational Islamic Finance approach. International Journal of Advanced Engineering Research and Science, 4(7).

Barth, M.E., Gee, K.H., Israeli, D. and Kasznik, R., 2017. Stock Price Management and Share Issuance: Evidence from Equity Warrants.

Brédart, X., 2014. Bankruptcy prediction model using neural networks. Accounting and Finance Research, 3(2), p.124.

Cucchiella, F., D’Adamo, I. and Gastaldi, M., 2015. Financial analysis for investment and policy decisions in the renewable energy sector. Clean Technologies and Environmental Policy, 17(4), pp.887-904.

DeAngelo, H. and Stulz, R.M., 2015. Liquid-claim production, risk management, and bank capital structure: Why high leverage is optimal for banks. Journal of Financial Economics, 116(2), pp.219-236.

Dhaliwal, D., Judd, J.S., Serfling, M. and Shaikh, S., 2016. Customer concentration risk and the cost of equity capital. Journal of Accounting and Economics, 61(1), pp.23-48.

Goh, B.W., Lee, J., Lim, C.Y. and Shevlin, T., 2016. The effect of corporate tax avoidance on the cost of equity. The Accounting Review, 91(6), pp.1647-1670.

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Heikal, M., Khaddafi, M. and Ummah, A., 2014. Influence analysis of return on assets (ROA), return on equity (ROE), net profit margin (NPM), debt to equity ratio (DER), and current ratio (CR), against corporate profit growth in automotive in Indonesia Stock Exchange. International Journal of Academic Research in Business and Social Sciences, 4(12), p.101.

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Sari, R.K., Nurlaela, S. and Titisari, K.H., 2018, August. The Effect of Liquidity Ratio, Profitability Ratio, Company Size, and Leverage on Bond Rating in Construction and Real Estate Company. In PROCEEDING ICTESS (Internasional Conference on Technology, Education and Social Sciences).

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