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HI5002: Finance For Business In Learning Materials

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Question:

Tasks
 
This assessment task is a written report and analysis of the financial performance of two selected listed companies 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.

1 Description of operation and comparative advantages of the two chosen companies.
 
2 Identify, analyse and compare liquidity and profitability of the two companies
 
3 Analysis of monthly share prices movements of the two companies within 3 years
 
4 Calculation of WACC of the two selected companies
 
5 Identify and compare capital structure policy of the two chosen companies

1. Description of the company: Prepare a brief description of the chosen companies, outlining the core activities, the market(s) in which they operate within and any factors in the companies’ history which you consider help present the pictures of your companies. Identify and compare their comparative advantages.
 
2. Calculation and comparison of selected performance ratios: using financial data obtained from current financial statements of your selected companies for the past 3 years. Annual reports are accessible via company websites or ASX website. Your client is strongly interested in the liquidity and profitability of the companies. Choose the relevant financial ratios for your analysis to meet your client’s requirement. Do a research to explain the trend of liquidity and profitability of the selected companies to your client. You need to provide charts and/or tables for analysis and justification.
 
3. Share price movement analysis: Using the information from the ASX website, complete the following tasks:
- Prepare graphs for movements in the monthly share price over the last three years for the companies that you are investigating. Plot them against movements in the All Ordinaries Index.
 
Write a report which compares movements in the companies’ share price index to each other and to the All Ords Index. For instance, how are the prices of the two selected moving? In the same trend or diverse trends? How closely are they correlated with the All Ords Index. Above or below? More or less volatile? What are the factors that affect share price movements?
 
 

Answer:

Introduction

The reality before speculation basic leadership, every financial specialist has played out a rundown of appraisal by utilizing diverse examination apparatuses. The point of such evaluations was to show whether the venture choice in the organization picked will be productive or not (Beatty and Liao 2014). This investigation was performed with considering Abacus Property Group (ABP), an Australian Stock Exchange recorded association as the case association and Aveo Group Ordinary additionally an Australian Stock Exchange recorded association as the contender association (AOG). While executing this investigation, the scientist has played out an inside and out execution assessment both as far as subjective viewpoints and quantitative perspectives and cost of capital examination just as Capital structure investigation (Faello 2015). The principal segment of the investigation has exhibited the execution assessment segment, when the later part has managed budgetary assessment.

Assessment of execution of an association over a particular time allotment essentially requires distinguishing proof of components that exhibits the current viewpoint of the business task in an all the more clear way. Despite the fact that budgetary execution investigation by utilizing proportion examination apparatus gives clear sign whether to put resources into the or not, the subjective investigation including the stock value developments will give certainty towards the financial specialists (Hoyle, Schaefer and Doupnik 2015). This segment of the examination therefore performs both subjective and quantitative investigation of Abacus Property Group and Aveo Group Ordinary.

It is noticed that the association, Abacus Property Group is an all-around differentiated property amass that at present considered as the standout amongst the best private value type land venture openings (Abacus Property Group 2019). The gathering worked both in the Australia and New Zealand advertise and was recorded since 2002. In the contemporary commercial centre, the gathering is one of the S&P/ASX 200 recorded association. The gathering for the most part underlined on esteem expansion viewpoints and in this way long haul absolute return and augmenting investor’s riches is its essential point. Property speculation, property adventures, subsidize the executives, and so on are the real exercises performed by the association.

Then again, for more than 25 years, Aveo has been committed to giving more seasoned Australians the best retirement living and care alternatives accessible. Their creative way to deal with consideration conveyance and network configuration mean they are ready to genuinely say that they are rethinking retirement for every single Australian way of life. Since their beginnings in 1995 they have developed to where they are today with more than 90 retirement and Aged Care people group crosswise over Australia and more than 13,000 inhabitants (Aveo 2019). The organisation have been tuning in to what their inhabitants need and have improved our agreements, put resources into better consideration and wellbeing administrations, made a world class sustenance offering, coordinated their exceptional Freedom Aged Care offering and fabricated new ace arranged networks. Most as of late, they have presented our home consideration benefit making more noteworthy help administrations accessible to our occupants and those in the neighbourhood network. Be that as it may, to us, the adventure has quite recently started as they proceed to tune in and move forward.

 

Position in the market

It has turned out to be certain that like the previous year’s activities the gathering proceeded with its speculation activities considering the blended monetary signs both in the residential just as worldwide commercial centre (Nobes 2014). The association constantly worried about their liquidity perspectives, which makes it pioneer in this land venture industry. On the other hand Aveo stays focused on giving the most noteworthy nature of administration to its occupants. With 91 towns claimed or oversaw, Aveo keeps up its driving position as a standout amongst the most experienced administrators and biggest proprietors of retirement towns in Australia.

While evaluating the speculation portfolio planned by the gathering, the positive perspectives recognized here is that the gathering principally centres on inhabitant maintenance to diminish the opportunities extent, which at last keeps up the income level (Baker and Wurgler 2015). On the off chance that the rent lapse profile (by pay) of ABP is considered here, it very well may be said that the gathering will ready to keep up an equalization level over the period FY 2015 to FY 2019. Be that as it may, consequent to FY 2018, the rent expiry level (by pay) will essentially increment.

Aveo has achieved all its strategic goals over the period FY14-FY18 and has a demonstrated track record of innovation and understanding and addressing consumer expectations.

As per the last quarter execution report, the solid exchanging execution just as augmentations of new portfolio expands both the rental salary just as occupancy rate. It is noticed that when the normal occupancy rate of its investment property in Australia was 83.1%, this was 87.9% in New Zealand. By and large, the normal occupancy rate confirm by the gathering amid the most recent FY was 84.3%. Not just has that, the ongoing year's execution report likewise uncovered that the income per accessible SQM was additionally expanded.

Being one of the best land speculation openings, the association like Abacus should be centered around pipeline ventures. The private advancement extends under the gathering name emphatically impact the long haul return perspectives and in this way financial specialists are searching for such pipeline ventures. Like different associations that worked in this industry, there is requiring thought of tasks that are either idea arranging stage or endorsement stage or being developed stage. The underneath referenced figure portrays the pipeline ventures embraced by Abacus gathering:

The above figure indicates that in the coming two years period, the group will work on numerous numbers of projects, which will ultimately augments the portfolio volume and consequently the chances of long term return will enhance. So, from that point of view, it can be said that the investor can invest their money in the company.

 

Quantitative Analysis

This section of the study performed quantitative analysis of the performance of Abacus. Here, the last five years performances [FY 2015 to FY 2018] have been taken into consideration. The ratio analysis tool mainly utilized to assess these last five year’s performances. The details of the calculation have shown in the appendix section.  

The analysis of the debt to equity ratio of Abacus properties reveals that the value for the three years has been 0.57, 0.34 and 0.46. On the other hand, the debt to equity ratio for Aveo Group Company has been found to be 1.47, 2.01 and 1.92. In this manner it can be explained that the level of risk associated to Aveo Group Company has been higher by comparing with Abacus Property Company. 

Equity ratio refers to the amount of money that is taken from equities (Lee and Parker 2014). It is seen that by assessing the ratio of Abacus Property Limited the values that are attained are 0.64,.074 and 0.69. On the other hand the equity ratio for Aveo Group has been found to be 0.41, 0.33 and 0.34. It is clearly evident that Abacus undertakes most of their finance with the help of equity financing and therefore their extent is relatively lower.

The interest coverage ratio of Abacus Properties is showing that capabilities of the company to pay off the interest gained by the organization (Weygandt, Kimmel and Kieso 2015). The interest gained by the companies and their proper allocation provides better returns for the organization through their stakeholders at a specified period of time. Here, company Abacus properties is also generating higher amount of returns from this ratio during the financial year 2015 to 2018 respectively. There is 5.70 9.44 and 9.82 respectively between the financial years 2015 to 2018. The overall analysis is showing that company is continuously enhancing their investment activities by efficiently using their interest during the mentioned financial periods. On the other hand by assessing the interest coverage ratio of Aveo Group Company it can be said interest coverage has been 152.58 and 96.44 thereby explaining that this company has higher burden to pay interest and therefore the company has higher probabilities of being a defaulter. It can therefore be said that Abacus Property Company has much better interest coverage ratio with respect to the Aveo and they have better ability to pay interests to their stakeholders and thereby maintaining satisfied investors. 

The debt ratio is showing that capabilities of the company to collect monetary abilities from the financial institution and market creditors to support the operational activities of the organization (Islam 2014). The debt ratio is always essential to understand the financial capabilities of the company to support their business obligations in the future period of time. The debt ratio of the company Abacus is 0.49%, 0.39 and 0.34% respectively during financial year 2015 to 2018. The overall analysis is showing that company is raising lots of debt funds from market for their business capital but also equally capable enough to enhance the business stability of the organization with their equity share generated funds of the company. It is fluctuating for the company during mentioned financial year 2015 to 2018. By assessing the debt ratio of Aveo Group Company it is seen that the values are 0.59, 0.67 and 0.66. It is therefore seen that extent of debt taken by this company is even higher than that of Abacus and it is seen that their debt taking capability is risky as their ability of pay off is lower than that of Abacus

 

Share Price Movement Analysis 

The figure that has been depicted above is helpful in addressing the movements in the share price on a monthly basis of Abacus and Aveo Company. By looking at the figures it can be stated that stock price movement for Abacus Property has been lower with respect to the ordinary index. The graph has been low and at a point has surpassed the ordinary index after which the graph has again fallen.

On the other hand, by looking at the stock price of movement of Aveo Group Company, it is seen that the stock prices have been higher than that of ordinary period in the initial period after which the stock prices has fallen by a significant margin. This indicates that the performance of the company has deteriorated.

The assessment of the companies signifies the fact that stock price movement of Abacus has been much better in accordance to stock price movement of Aveo Group Company.  

Calculation and Analysis of Weighted Average Cost of Capital (WACC) 

The weighted average cost of capital analysis has been undertaken for both the companies. This is known to be the rate that any organization looks to pay on an aggregate to all their stakeholders in order to finance their assets. It is even known to be the cost of capital of a company.

The computation of WACC for Abacus reveals that the value has been 11.33%, 12.42% and 11.82%. On the other hand the WACC for Aveo Group has been 9%, 8.26% and 8.36%. By assessing the overall financial report, it can be determined that Abacus has been keeping their profits idle and thereby has increased their WACC. Both the companies have similar WACC but the overall analysis states that Abacus has better financial performance in relation to Aveo.

It is seen that during the scenario when the WACC of an organization is high, it is found that the company has increased level of risk related to their operations of business. () explained that investors always look to attain higher amount of returns during the time they undertake risky investments. It is seen that WACC has an essential role to perform in ascertaining the estimated cost associated to finance all the resources associated to the business. The key factors comprise of the payments associated to the obligations of debt or the money that is related to debt financing and with the rate of returns. This found to be essential for the management ownership and the cost related to equity funding.

Capital Structure Policy 

The policy of capital structure of Abacus Property Group can be discovered by looking into the long term section of liquidity and this indicates that the company has been able to create sufficient amount of profit that assists in taking care of the expenses related to interest. By analysing the financial ratios with the help of ratio analysis, it can be said that the company has increased their debt composition by taking increased amount of debt from the market. Hence, the debt ratio of the company has been found to be high and therefore the weighted average cost of capital has been high as well. The company is seen to have an effective capital position and the payment of interests will be lower as well.

Aveo Company Group the other company that has been selected is seen to have traits that are positive as well as negative. The capital structure of this company has not been as effective as Abacus Properties as the company is not making enough profits and furthermore has not been able to increase their capital structure in an effective manner.

 

Recommendation Letter

By assessing the financial performance of the companies that have been taken into consideration and evaluating the performance of stock price, capital structure and weighted average cost of capital various attributes have been highlighted. It can be said that Abacus Property Group is more viable for all the investors. The real estate industry of Australia has been attaining effective amount of profits for the past few years and thereby investment in these companies would generate high amount of returns from such investments. Abacus Property Group has been chosen as this company has shown better financial performance in comparison to Aveo Group Company. Abacus Property Group has more positive features with respect to Aveo Group Company as their profitability and liquidity position has been better. This has been possible due to financial development of Abacus Property Group during the financial period that has been taken into consideration. In this manner, it has been useful in undertaking effective investment decisions of selecting the ideal investment plan and thereby attaining better long term returns. The stock price movement of Abacus Property Group has not been effective in comparison to all the ordinary indexes. Similar scenario has been observed for Aveo Group Company as their stock index has been low in accordance to ordinary share indexes.

The capital structure that has been observed for both the companies is seen to comprise of debt and hence it can be conferred that the financial risk for the two companies are respectively high. In this manner, it can be stated Abacus Property Group is an effective substitute from the point of view of the investors as in this case it would enhance the precise returns for the portfolio associated to investment of the investors that have been taken into consideration.

Conclusion 

The financial analysis of both the companies state that Abacus Property Group is much more effective in accordance to Aveo Group Company. By looking into the solvency and long term liquidity position, Abacus Property Group is ideally positioned as well. The capital structure of Abacus Property Group has altered as well within the three year period, which has been considered and the debt exposure has been lower with respect to Aveo Group Company. The valuation indicates that cost of debt has been higher and this has enhanced the cost of capital for the company. Aveo Group Company signifies that they have positive as well as negative elements within their capital structure. Being real estate companies, the risk associated with them are high and hence the investment process needs to be undertaken in a precise manner. The fall in the debt to equity ratio has been considered to be a positive element and the increase in the interest coverage ratio is thought to be a better scenario for the company as well. Hence, it is suggested to the investor that they undertake investment in the shares that are issued by Abacus Property Group so that the investors would be able to maximise their total return on investment.

 

Reference List and Bibliography 

Abacus Property Group. (2019). Abacus Property Group. [online] Available at: https://www.abacusproperty.com.au/ [Accessed 29 Jan. 2019].

Aveo. (2019). Aveo Retirement Villages - Independent Living & Aged Care. [online] Available at: https://www.aveo.com.au/ [Accessed 29 Jan. 2019].

Baker, M. and Wurgler, J., 2015. Do strict capital requirements raise the cost of capital? Bank regulation, capital structure, and the low-risk anomaly. American Economic Review, 105(5), pp.315-20.

Baños-Caballero, S., García-Teruel, P.J. and Martínez-Solano, P., 2014. Working capital management, corporate performance, and financial constraints. Journal of Business Research, 67(3), pp.332-338.

Beatty, A. and Liao, S., 2014. Financial accounting in the banking industry: A review of the empirical literature. Journal of Accounting and Economics, 58(2-3), pp.339-383.

Brigham, E.F., Ehrhardt, M.C., Nason, R.R. and Gessaroli, J., 2016. Financial Managment: Theory And Practice, Canadian Edition. Nelson Education.

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.

Faello, J., 2015. UNDERSTANDING THE LIMITATIONS OF FINANCIAL RATIOS. Academy of Accounting & Financial Studies Journal, 19(3).

Feng, M., Li, C., McVay, S.E. and Skaife, H., 2014. Does ineffective internal control over financial reporting affect a firm's operations? Evidence from firms' inventory management. The Accounting Review, 90(2), pp.529-557.

Fernández, A. and Gulan, A., 2015. Interest rates, leverage, and business cycles in emerging economies: The role of financial frictions. American Economic Journal: Macroeconomics, 7(3), pp.153-88.

Henderson, S., Peirson, G., Herbohn, K. and Howieson, B., 2015. Issues in financial accounting. Pearson Higher Education AU.

Hoyle, J.B., Schaefer, T. and Doupnik, T., 2015. Advanced accounting. McGraw Hill.

Islam, M.A., 2014. An analysis of the financial performance of national bank limited using financial ratio. Journal of Behavioural Economics, Finance, Entrepreneurship, Accounting and Transport, 2(5), pp.121-129.

Khan, M., 2015. Accounting: Financial. In Encyclopedia of Public Administration and Public Policy, Third Edition-5 Volume Set (pp. 1-6). Routledge.

Lee, T.A. and Parker, R.H., 2014. Company financial statements: an essay in business history 1830–1950. In Evolution of Corporate Financial Reporting (RLE Accounting)(pp. 27-51). Routledge.

McLaney, E.J. and Atrill, P., 2014. Accounting and finance: an introduction. Pearson.

Narayanaswamy, R., 2017. Financial Accounting: A Managerial Perspective. PHI Learning Pvt. Ltd.

Nobes, C., 2014. International classification of financial reporting. Routledge.

Robb, A.M. and Robinson, D.T., 2014. The capital structure decisions of new firms. The Review of Financial Studies, 27(1), pp.153-179.

Wahlen, J., Baginski, S. and Bradshaw, M., 2014. Financial reporting, financial statement analysis and valuation. Nelson Education.

Weygandt, J.J., Kimmel, P.D. and Kieso, D.E., 2015. Financial & managerial accounting. John Wiley & Sons.

Yegon, C., Cheruiyot, J. and Sang, J., 2014. Effects of dividend policy on firm’s financial performance: Econometric analysis of listed manufacturing firms in Kenya. Research Journal of Finance and Accounting, 5(12), pp.136-144.

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