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MAF707-Investment Analysis And Portfolio Management

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  • Course Code: MAF707
  • University: Deakin Business School
  • Country: Australia

Question:

Prepare equity research reports for two Australian listed firms. These two firms should be from two different industries. Page 2 of 3 In general, equity analysts prepare equity research reports for the investors. These reports provide expert opinion about the investment opportunities in companies analysed. These reports also provide clear ‘buy’ or ‘sell’ recommendation to the investors. The equity research reports for the individual assessment should at least include following:

• Financial analysis-including ratio analysis to explain financial health/strength of the firms. At least past 3 years financial history needs to be analysed.
• Description of the business and analysis of its strategic position in the industry.
• Trade war effect on equity analysis Investment recommendations.
• The elementary discussion on ethical behaviour of professional fund managers
 
 

Answer:

Introduction:

Investment analysis is crucial factor for the investors to identify the best security or asset to make an investment and get higher returns from the market. Investment analysis is an approach which focuses on various related factors of an equity and other investment products such as bonds and debt to measure the best product to make investment and get higher returns. It is important for the analyst and the professionals to focus on all the related factors to make better decision about performance. Investment could be done for short term and long term by the investors (Madhura, 2014). Thus, a professional is required to evaluate the needs and nature of the investor and must apply the tools accordingly to reach over a better outcome about the investment.

Technical analysis and fundamental analysis are the most used approach to identify the investment level of a business. It evaluates that what would be the position of the business after a particular time period and with the help of this forecast, a better report is provided to the investors about the performance of the business (Lord, 2007). It is crucial for the business to maintain all the factors so that the investors find the business attractive in terms of investment.

In the report, the investment analysis and portfolio management study has been done on the JB HI FI and A2m limited to identify the performance of the businesses and the investment position of both the Australian companies. Financial analysis, strategic analysis, trade war analysis and the ethical behaviour of fund managers have been measured in the report to reach over a conclusion about the investment into the companies and sell or buy the equity stock of both the companies.   

 

Financial analysis:

Financial analysis is an approach of investment analysis. It focuses on the final financial statement (income statement, balance sheet and cash flow statement) of the business to evaluate the total performance of the business in current scenario and forecast the future changes into the financial performance of the business. Various tools are there to measure the financial performance of a business such as ratio analysis, trend analysis, cost of capital analysis, stock performance analysis etc. (Kinsky, 2011). All of these tools are used to get different result about the financial performance. In the report, ratio analysis study has been done on JB HI FI and A2m limited.

Ratio analysis is an approach which measures the various different financial position of a business such as the liquidity level, profitability position, solvency level and capital management position. Ratio analysis approach focuses on the main items of the final financial statement and makes a base for the investors to make decision about the buy or sell the securities. Ratio analysis approach has been applied on JB HI FI and A2m, both the companies to identify the financial performance and forecast their financial position. The ratio analysis of both the companies is as follows:

Profitability position:

Profitability ratios are financial metrics which is used by the companies and the financial analyst to measure the ability to make earnings relative to the expenses. It evaluates that how much profit could be made by the business against the expenses and resources. In the report, return on equity, return on assets and gross profit margin of both the businesses have been calculated to identify the profit generation ability of the companies (Lumby and Jones, 2007).

Return on assets:

Return on assets is a profitability ratio which depicts about total % of profit which has been generated by the business against the total assets if the business. It evaluates the profitability level of a business. In case of JB HI FI, the return on assets level has been lowered from 15.33% in 2016 to 9.36% in 2018. The changes have taken place due to higher resources. Further, in case of A2m limited, the return on assets level has been improved from 14.48% in 2016 to 27.08% in 2018. It explains about great changes into the performance. 

 

Return on equity:

Return on equity is a profitability ratio which depicts about total % of profit which has been generated by the business against the total equity of the business. In case of JB HI FI, the return on equity level has been lowered from 37.6% in 2016 to 24.6% in 2018. Further, in case of A2m limited, the return on equity level has been improved from 22.9% in 2016 to 35.2% in 2018. It explains about great changes into the profitability level of A2m limited.

Gross profit margin:

Gross profit is a profitability ratio which depicts about gross profit of the business against the total turnover of the business. In case of JB HI FI, the gross profit level has been lowered from 21.9% in 2016 to 21.4% in 2018. The changes are minor. Further, in case of A2m limited, the return on equity level has been improved from 42.8% in 2016 to 50.3% in 2018 (Yahoo Finance, 2018).

The profitability analysis on both the companies explains that the performance of JB HI FI is quite competitive and the position of A2m is also improving with great level.

Liquidity position:

Liquidity ratios are financial metrics which is used by the companies and the financial analyst to measure the ability to repay all the current debt against the current assets of the business. It evaluates that how much amount of current debt could be paid by the business against the available quick assets and total current assets (Lee and Lee, 2006). In the report, current liquidity ratio and quick liquidity ratio of both the businesses have been calculated to identify the liquidity risk and working capital management position of the companies.

Current ratio:

Current ratio is a liquidity ratio which depicts about total current assets which has been managed by the business against the total current debt of the business. It evaluates the liquidity level of a business. In case of JB HI FI, the liquidity position of the company is quite compatible. Company could easily pay off the current debt of the business. Further, in case of A2m limited, the liquidity level is even higher than JB HI FI and thus it explains that high working capital is required by the business.

Quick ratio:

Quick ratio is a liquidity ratio which depicts about total quick assets which has been managed by the business against the total current debt of the business. In case of JB HI FI, the liquidity position of the company is quite lower (Kruth, 2013). It would be tough for the business to repay the debt amount. Further, in case of A2m limited, the liquidity level is even higher than JB HI FI and thus it explains that high working capital is required by the business.

The liquidity analysis on both the companies explains that the performance of JB HI FI is quite competitive and the position of A2m is required to be improved. However, the A2m is required to reduce the level of assets at great level to manage the cost.

Financial gearing position:

Financial gearing ratios are capital ratios which are used by the companies and the financial analyst to measure the optimal capital structure position of the business. It evaluates that how much funds have been generated by the business and through which sources, it have been generated (Gapenski, 2008). In the report, debt to assets ratio and asset turnover of both the businesses has been calculated to identify the capital structure position of the companies.

Debt to assets ratio:

Debt to assets ratio is a financial gearing ratio which depicts about total debt amount which has been managed by the business against the total assets of the business. It evaluates the gearing level of a business. In case of JB HI FI, the gearing position of the company has been lowered. Company could improve the debt level to raise the funds (Krantz, 2016). Further, in case of A2m limited, the gearing level is lower and thus it becomes important for the business to manage the gearing level.

Asset turnover ratio:

Asset turnover ratio is a financial gearing ratio which depicts about net sales amount which has been generated by the business against the total assets of the business. It evaluates the overall turnover level of a business. In case of JB HI FI, the asset turnover position of the company has been lowered. Further, in case of A2m limited, the sales of the business are average against the assets of the business.

To conclude, both the companies are required to measure the capital level and make new strategies to improve the capital structure and gearing level.

Asset efficiency ratios:

Efficiency ratios are financial metrics which is used by the companies and the financial analyst to measure the ability of the business to manage the cash level and working capital of the business. It evaluates that how much time would it take for the business to convert the current assets into cash (Kinsky, 2011). In the report, inventory turnover days and receivable turnover days of the businesses have been calculated to identify the efficiency level of the companies. 

 

Inventory turnover and receivable turnover days:

The evaluation of the efficiency level on both the companies depict about improvement in the performance. The inventory days and the debtor’s days have been reduced by JB HI FI to reduce the total cash conversion days of the business. However, the level of A2m is average. It briefs both the companies are quite efficient in order to manage the asset level of the business.

Investment and market ratios:

Investment ratios are financial metrics which is used by the investors and the financial analyst to measure the ability to manage the funds of the business. It evaluates the investment level of the business. In the report, earnings per share and price earnings ratio of both the businesses have been calculated to identify the investment level.

Earnings per share and price earnings ratio:

The EPS level and PE ratio measure the investment level of the business. In case of JB HI FI, the EPS level has been improved as well as the PE ratio also offer positive result about the investment position of the company. Further, the analysis on the A2m limited, the EPS and PE level is more improved (Yahoo Finance, 2018). It leads to the conclusion that the investment level of both the companies is quite competitive.

The overall ratio analysis study explains that both the companies are operating and managing the financial performance at better level in the industry. Both the companies would offer good return to the investors and the stockholders of the business.

Strategic analysis:

JB HI FI:

JB HI FI is a retail company which manages and operates the business in the Australian market. It retails in consumer goods such as video games, DVDs, CDs, electronic products etc. JB HI FI has been founded 44 years back at Keilor East, Victoria, Australia. The main subsidiary of the business is “Good guys” which has helped the business to grab more market share and consumers (Home, 2018). Currently, 244 “JB HI FI stores” and 59 “JB HI FI homes” stores are operating by the business.

The strategically performance of the business has been evaluated and the following results have been found:

Industry rivalry:

The rivalry among the industry is quite higher however the JBH is playing safe in the industry due to which the long term profitability of the business could not be hampered.

Bargaining power of suppliers:

The bargaining power of suppliers is quite lower because huge suppliers are available in the industry as well as a good connection has been maintained with the suppliers. 

 

Threat of substitute:

The threat from substitute products is quite higher because various companies are operating in the industry with the same products. JBH could offer new tools and techniques to reduce the level of threats (Higgins, 2012).  

Bargaining power of buyers:

The bargaining power of buyers is quite higher because huge suppliers are available in the industry and the buyers are few so they can manipulate the prices of products and services.

Threat of new entrants:

The threat from new entrants is quite higher because it is easier to enter into the retail industry and the new entry could pressure the JB HI FI through the lower pricing strategy, new value propositions and reduced cost. It is required for JBH to overcome these threats through applying new strategies.

A2m Limited:

A2m group limited is an Australian company which produces the cow milk. The company claims that the milk is free of a protein which is called beta casein A1. The main operational area of the company is in New Zealand and Australia. The company has been founded 18 years back in New Zeeland market. The other operations of the company are related to the milk and dairy products (Bloomberg, 2018). It falls under the category of ASX top 200 companies. The total number of employees is quite lower but the revenue of the business is improving day by day.

Industry rivalry:

The rivalry among the industry is quite lower as well as the A2M is playing safe in the industry due to which the long term profitability of the business could not be hampered.

Bargaining power of suppliers:

The bargaining power of suppliers is quite higher because few suppliers are available in the industry so that they could manipulate the prices.

Threat of substitute:

The threat from substitute product is quite lower because the value propositions of the company are better in the industry.

Bargaining power of buyers:

The bargaining power of buyers is quite lower because few suppliers are available in the industry so that they could not manipulate the prices.

Threat of new entrants:

The threat from new entrants is quite higher because the entry is simple in the industry (Jiashu, 2009).

It explains that the strategically performance of both the companies are quite better in the industry and it will lead to the investment into the company towards a better way.

Trade war effect:

Trade war is an economical conflict which results from extreme protection. It creates the trade barriers in one state which impacts on the global position and economical performance of the state at great level (AFR, 2018). Due to the new policies of the Donald trump, a trade war has taken place among the Australia market. The trade of the Australian market has been affected at great level.

In case of Australian retail industry, a huge decrement has been seen. Many retailers have already been started struggling to maintain the sales level and improve the sales performance of the business. A trade war could be a disastrous result for the Australian economy. Further, in case of Food, Beverage & Tobacco industry, the trade has not been affected at higher level (SMH, 2018). The industry has managed the sales and the external factors of the business could not impact much on the industry because the main market of the industry in Australian and New Zealand market only.

The Forbes (2018) briefs the retail market of Australia is at edge. The trade war would affect the retail industry at the most and thus, the industry and the companies which are operating in the industry are required to maintain the better strategies to enhance the overall performance of the business. However, in case of Food, Beverage & Tobacco industry, it is recommended to the industry to make better strategy to save itself from the trade war.

Ethical behavior:

It is crucial for the Professional fund managers to follow the ethical approach while preparing the investment reports and recommend the investors about the better investment assets. Ethical rules have been set in the fund management industry for the professionals to evaluate and follow so that the trust and transparency could be improved in the industry (Horngren, 2009). It is the main principle of the industry for the professionals to act in the interest of the customers so that their amount could be invested at better place and it lead to them towards higher return (Hillier, Grinblatt and Titman, 2011).

It is quite essential for the professionals to offer the best advices after evaluating all the factors to the investors about the investment. An ethical approach is required to be followed by the professionals (Kaplan and Atkinson, 2015). The ethical approaches and the strictness in the industry have improved the transparency level of the business. Due to which, the investors have shown more interest in the professionals report. According to a current survey of CFA institute, 61% people have agreed that the reports of the professionals are quite efficiency and it could be trusted (Fund Europe, 2018).  

It explains that an investors must not be involved in any unethical factors and must not involved in any particular company to manipulate the investment decision of a business. It is important for the business to offer better suggestions to the investors about the investment.

Conclusion:

Through the evaluation on JB HI FI, A2 Milk Company and the respected industries of both the companies, it has been measured that both the companies are performing at good level in the Australian market. The overall ratio analysis study explains that both the companies are operating and managing the financial performance at better level in the industry. Both the companies would offer good return to the investors and the stockholders of the business. Further, the evaluation on the strategic analysis of both the company leads to the conclusion that better strategies are maintained by both the companies to save it from the industrial factors.

Along with that, the evaluation of trade war lead to the conclusion that the performance of A2 milk company is better because the impact of trade war would be lower at food and tobacco industry. Through the study, it is concluded that the investors should hold the JBH stock for few time as the strategies of retail industry and Australian government would reduce the impact f trade war and the investors should buy more shares of A2 Milk Company for the long term investment to get higher return. 

 

References:

AFR. 2018. Trump’s trade war. [online]. Available at: https://www.afr.com/news/economy/trump-administrations-trade-war-claims-first-australian-victim-20180304-h0wylv (accessed 3/9/18).

Bloomberg. 2018. A2 milk company limited. [online]. Available at: https://www.bloomberg.com/profiles/companies/ATM:NZ-a2-milk-co-ltd (accessed 3/9/18).

Forbes. 2018. Trade war on retail industry of Australia. [online]. Available at: https://www.forbes.com/sites/gregpetro/2018/07/22/the-trade-war-are-retailers-and-brands-holiday-season-at-risk/#5890b65f5172 (accessed 3/9/18).

Funds Europe. 2018. Fund management rules. [online]. Available at: https://www.funds-europe.com/march-2016/17822-ethics-in-fund-management-there-s-more-to-good-behaviour-than-rules (accessed 3/9/18).

Gapenski, L.C., 2008. Healthcare finance: an introduction to accounting and financial management. Health Administration Press.

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

Hillier, D., Grinblatt, M. and Titman, S., 2011. Financial markets and corporate strategy. McGraw Hill.

Home. 2018. JB HI FI. [online]. Available at: https://www.jbhifi.com.au/ (accessed 3/9/18).

Horngren, C.T., 2009. Cost accounting: A managerial emphasis, 13/e. Pearson Education India.

Jiashu, G., 2009. Study on Fair Value Accounting——on the essential characteristics of financial accounting [J]. Accounting Research, 5, p.003.

Kaplan, R.S. and Atkinson, A.A., 2015. Advanced management accounting. PHI Learning.

Kinsky, R. 2011. Charting Made Simple: A Beginner's Guide to Technical Analysis. John Wiley & Sons.

Krantz, M. 2016. Fundamental Analysis for Dummies. London: John Wiley & Sons.

Kurth, S. 2013. Critical Review about Implications of the Efficient Market Hypothesis. GRIN Verlag.

Lee.C.F and Lee, A, C,.2006. Encyclopedia of finance, Springer science, new York

Lord, B.R., 2007. Strategic management accounting. Issues in Management Accounting, 3.

Lumby,S and Jones,C,.2007. Corporate finance theory & practice, 7th edition, Thomson, London

Madura, J. 2014. Financial Markets and Institutions. Cengage Learning.

SMH. 2018. Trade war of australia. [online]. Available at: https://www.smh.com.au/business/markets/how-trade-war-with-us-can-hurt-china-and-economies-including-australia-20180706-p4zpv2.html (accessed 3/9/18).

Yahoo Finance. 2018. A2 milk company limited. [online]. Available at: https://au.finance.yahoo.com/quote/A2M.AX/ (accessed 3/9/18).

Yahoo Finance. 2018. JB HI FI. [online]. Available at: https://finance.yahoo.com/quote/JBH.AX/history?p=JBH.AX (accessed 3/9/18).

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