Essay: Financial Statement Analysis Of CSL Limited.

To evaluate the performance of a firm and its share’s value a financial analyst must be able to analyse the firm’s financial statements.  When analysing these statements, the analyst must focus on cash flows of the firm because ultimately it is changes in the cash flows of the firm that determines its value. This is also a market consensus. Hence understanding how and why cash flows change is an indispensable component of valuation of securities.  
The objectives of this assignment are: 
1.To equip you with a good understanding of the financial statements of the firm;  
2.To build up your analytical skills in the area of cash flows analysis; 
3. To apply the methods of valuation to value a real-world company.

Brief description of CSL

The report includes an overall analysis of CSL Limited, providing insights into its financial performance for the past years. The historical financial data is collected for the years 2008 to 2017 including the income statement, balance sheet and cash flow statement of the company. The report commences with a brief introduction about the company and its core activities. It provides a brief introduction about the CSL’s operations and describes the segments through which the firm operates. In the later part, the objectives of conducting a financial statement analysis are explained along with the evaluation of current operations of CSL.

In order to analyse the financial statements of the company, various categories of ratios are calculated which measures the profitability, liquidity, efficiency and solvency of CSL for the past two years. Also, the supply and demand factors are taken into consideration while evaluating the current operations of the company.  The report also calculates the value of stock by using dividend valuation model and notifies the changes in company’s share price and returns over the past ten years. The fluctuations are then compared to the movements in the market return for the same period of time. All the calculations done are properly analysed in the later part of the report where the areas of the cash flow are identified that are needed to be improved. In the last, the report suggests some relevant strategies for CSL in respect of financing and investments that will help in improving the cash flow position. Also, a conclusion has been provided including all the findings of the report.

CSL Limited is an Australia based biotechnology company involved in the business of developing and delivering biotherapies. The core activities of the company involve research, manufacture, development, marketing and distribution of biopharmaceutical and related products. It operates through segments named as CSL Behring, CSL Intellectual Property and Seqirus. The Behring segment is involved in manufacturing and marketing of plasma therapies including plasma products. The CSL Intellectual Property division is engaged in the business of licensing the property owned or generated by the company to the third parties which are not related to the company. Seqirus deals with the distribution, selling and manufacturing of wide range of vaccines, antivenoms and other pharmaceutical products across Australia and New Zealand. The segment also develops vitro diagnostic products through Seqirus immunohematology.

Overall, the company has performed well in terms of revenue as it increased from $5902.34 million to $6590.60 million in 2017. Also the net profit of the firm was up to $1332.31 million from $1240.89 million. The company is listed on ASX and is traded with a ticker symbol CSL.AX. The market capitalization of the firm is $59,929.89 million with a share price of $197.12.

The procedure of analysing and evaluating the financial statements of the company for the purpose of decision making is known as financial statement analysis. The main objective of conducting such evaluation is to help the managers, directors and other stakeholders to take proper and relevant decisions for the company. Analysing all the three statements will help the users to properly understand company’s financial position, profitability, liquidity and solvency. The cash flow statement helps in understanding the investing, operating and financing activities of the firm. Following are the objectives of financial statement analysis:

• The objective is to assess the past performance of the firm in order to predict the future performance. The analysis provides trend in pat sales, cash flow, net profit so as to assist the investors and creditors to judge the overall performance of the firm.
• The analysis helps in predicting the growth rates and earning prospects for the firm that are very much helpful for the investors while comparing the various investment alternatives. It helps in judging the earning potential of the organization.
• Another motive is to predict the insolvency and bankruptcy circumstances of the company. The analysis of statements assists the managers and investors to take suitable precautions before time and avoid the maximum losses.
• The analysis is also used by banks and financial institutions for providing credit to the firms. They can take suitable decisions and can make proper allocation of credit among different borrowers. The balance sheet of the company shows the liquidity and solvency position of the firm which will be very much useful for the lenders.

Purpose of financial statement analysis

Ratio analysis has been used to measure and evaluate the income statement and balance sheet of CSL Limited. Considering the current operations of the company, various categories of ratios are calculated which assess the performance and position of CSL Limited for 2016 and 2017 from each and every aspect.

Liquidity ratios: they measure the financial health of the company by comparing all the current assets against its short term obligations.

• Current ratio: It shows how efficiently and effectively a company pays off its current liabilities with its current assets.
• Quick ratio: Another liquidity ratio which also evaluates the financial strength of the organization bay taking into account the most liquid assets of the firm against its short term liabilities.

In case of CSL Limited, both the ratios have shown fluctuating trends in the past ten years. in 2010, the CR of the company was 4.24 which reduced to 2.92 in 2011 due to the significant reduction in assets and increase in liabilities. However, after that the ratio increased till 2014 because of the constant reduction in liabilities and because of the same reason, it has been declined in 2017 also.

The QR also shows the same trend as it was high in 2010 but it further reduced because of the low amount of cash and increased inventory in the business. However, the ratio increased in 2017 because of the significant rise in its cash balance.  

Profitability ratios: They asses the overall profit and net income of the company from various point of views. In other words, the ratios reflect the overall profitability position of the firm.

• Net profit ratio:It measures the amount of profit earned by the company against its total revenue.
• Return on equity:It evaluate the amount of return offered by the company to its investors and shareholders out of the profit earned by it.
• Return on assets:The ratio measures the income made by the firm out of its total assets during a particular year.

In 2009, the NPR of CSL was 24.79% which reduced to 22.16% in 2012 and after that an upward trend has been noticed in the ratio till 2015. This fluctuation was due to the fact that increase in sales during the years was less than the upsurge in company’s profits. In the last year, the ratio reduced to 20.22% due to the proportionate increase in both sales and profit. The ROE of the firm increased after 2012 as and when CSL started making high profits and providing high returns to its shareholders. It had the highest ROE of 50.20% in 2015 which fall to 42.27% last year.

The ROA showed an increasing trend after 2009 where the ratio was 12.51% that rose to 21.54% in 2015 due to the proportionate increase in both assets and profit. However, it reduced in 2017 to 14.66% due to the significant increase in CSL’s total assets.  

Efficiency ratios: They are also known as turnover ratios which measures how efficiently a firm manages its assets or resources in order to generate high revenue.

• Inventory turnover ratio: It shows how many times and how quickly a company convert its inventory into cash. The ratio reflects the efficiency of the firm in managing the amount of its inventory.
• Asset turnover ratio: It measures the value of company’s sales that is generated from its average total assets. Generally, a high ATR represent effective and efficient use of resources in order to make high revenue.
• Receivable turnover ratio: Another metric which reflects the amount of time taken by the company to collect its receivables.

The ITR of the firm was 1.76 in 2009 which reduced to 1.60 times in 2014. This was due to the increased COGS of CSL. However, the ratio further reduced to 1.41 times in last year because of the increased inventory. The ATR of the company has shown an upward trend after 2010 where it was 0.68 that increased to 0.88 in 2014. Further, it reduced to 0.79 in 2017 due to the increased average total assets. The DTR of CSL has shown constant upsurge over the past 10 years reflecting the efficient collection from debtors.

Solvency ratios: These ratios measure the long term solvency of the company by evaluating its debt and equity structure for the past two years.

• Debt to equity ratio: It reflects the proportion of total debt and total equity of the firm to measure the solvency.
• Debt ratio: It also measures the degree of financial leverage taken by the company by measuring its total liabilities against its total assets. It shows the amount of assets that are financed through debt.

Analysis of current operations

The debt equity ratio of the firm increased in past 10 years due to the upsurge in CSL’s debt component as compare to its equity. Also, its debt ratio has reported an upward trend reflecting increased borrowings and high financial risk for the company.

Supply and demand factors

Looking at the revenue growth over the period of CSL Limited, it can be interpreted that the demand of company’s products has increased constantly which boosted up its sales in the past years. In addition, the facts and figures of the past ten years reflected that CSL’s revenue increased constantly from 2008 to 2017. In 2008, company reported the sales of $3419.73 million which reached to $6590.60 million in the last year. This constant upsurge reflected the increased demand of pharmaceuticals products in Australia. Being a biotechnology company, CSL’s products have always been in demand due to the needs of individuals. The increased sales boosted up the earnings of the company and also increased its dividend growth. According to the annual report of 2017, the Immune Globulin Subcutaneous increased at 10% due to the strong demand noted in US and Europe.

On global level the CSL Limited’s plasma products covers 22.6% of the total market of plasma proteins worth 15,222.4 million in 2012. 

According to the report generated by National Blood Authority of Australia, it is observed that the supply of plasma products has constantly increased from 2012 to 2017. The plasma related products are been purchased from CSL Behring (Australia) Pty Ltd in order to meet the increasing clinical demand and to manage the supply risk effectively. According to the report, in 2012 the CSL supplied products worth $222.02 million which increased to $351.83 million. This shows that the supply and demand of plasma products have been constantly increased and the company is able to meet all the demands by making appropriate supply.

Apart from this, CSL Behring has almost more than 190 plasma collection centres across USA and Europe. The company has improved the industry dynamics by making a significant consolidation with the three companies and covering 80% of the total market. In addition, the underlying demand for plasma products has grown and exceeded the future supply infrastructure. The increase in GDP per capita has also contributed to the increased demand.

Cash flow statement analysis

Cash flow from operating activities	2008	2009	2010	2011	2012	2013	2014	2015	2016	2017
Net cash used/provided	689.25	1024.82	1168.49	1018.11	1205.8	1311.7	1360.7	1363.6	1178.6	1246.6
Cash flow from Investing activities
Net cash used/provided	-239.21	-449.52	-292.95	-209.64	-449.5	-$    442.62	-$    401.24	-$ 411.95	-$ 809.12	-$ 859.61
Cash flow from financing activities
Net cash used/provided	-225.11	1054.12	-2352.54	-1288.5	-194.7	-$ 1,199.84	-$ 1,136.38	-$ 825.40	-$ 361.96	-$ 103.11

The cash flow from operating has increased constantly from $689.25 million in 2008 to $1363.6 million in 2015. This was due to the huge amount of cash collected from the customers during those years. However, the same reduced to $1246.6 million in 2017 due to the high amount of taxes paid and payment made to suppliers during the year.  

From the above graph, it can be interpreted that the cash used in company’s investing activities has constantly increased from $442.62 in 2013 to $859.61 million in 2017. The amount was lower in previous years. The figures increased because of the increase in the investments made by CSL in the property. Its announcement of new investment at Liverpool site has contributed to the outflow of cash from the business. However, these investments eventually help CSL to have control over its global chain. 

Supply and demand factors

From the above graph, it can be interpreted that the cash used in financing activities has reduced from $119.84 million to $103.11 million from the period 2013-2017. However, the activities reported cash inflow of $1054.12 million in 2009 because of the high proceeds from the issuance of shares. Later, the figure became negative but reduced due to the high amount of debt issued by the company in the past years which make the inflow of cash in the business. The payments of dividend and debt are comparatively less than the issuance of debt. This eventually reduced the cash outflow from financing activities. Also the payment made for stock repurchase has been reduced which effected the overall cash used in financing activities.

Valuation of shares
Calculation of required rate of return (CAPM model)
Market premium (Rm-Rf)	6%
Risk free rate (Rf)	2.76%
Beta (B)	0.89
Required rate = Rf + B*(Rm-Rf)	8.10%
Dividend discount model
Estimated dividend per share	1.43
Required rate of return	8.10%
Growth rate	0.57%
Value of stock	$                                                         18.97

The above chart compares the share price of CSL Limited with the market return of ordinaries indices. It can be observed that both the trend lines are pretty much close to each other. It can be observed that the company offer negative returns when the market was negative and offer positive returns when it was increasing. Overall the returns and share price of the company has increased over the past ten years. However, the same has been affected by the fluctuations in demand.

When compared with the value of stock derived from DDM model, it can be interpreted that the current stock price of CSL is $197.12 and the future value estimated is $18.97. This means the company’s share price will fall in future and the investors has the opportunity to book high profits by selling the shares today and purchasing the same later. Also the increased supply and demand has boosted up the share price of the CSL. However, its weaker profitability position does not allow CSL to generate high returns to its shareholders. Moreover, company focuses more on investing in properties which has also affected its share price to some extent.

From the above analysis, it can be interpreted that CSL need to improve its cash flow position so as to improve its profits and increase its turnover. One of the areas identified is that CSL must focus on increasing its proceeds from the sale of property, plant and equipment. This will eventually bring the cash in business and helps in setting off the cash used in purchase of PPE. Also, the company must issue high number of shares along with the issue of debt. Moreover, CSL should improvise its changes in working capital by collecting its receivables and converting its inventory into cash quickly. Improvement in these areas will eventually improve the cash position of the company.

Following strategies can be used by CSL to improve its cash flow position:

• Increase the sale of its non-current asset such as PPE which will bring cash in the business and reduce their storage cost.
• CSL should formulate such sort of strategies which will cut down the cost of acquiring a new property or making investment in the new venture.
• Issuance of shares and proceeds from borrowings are the financing strategies which can stimulate the flow of cash in the business.

CSL Limited needs to follows such strategies as it will automatically improve its cash flow position and enhances its liquidity and profitability situation.

Conclusion 

From the view point of shareholders’ wealth maximization, the company has performed well in the past years as its stock price has experienced an upsurge during the time. It is said that increase in the stock price will increase the wealth of shareholders. CSL Limited’s stock price has shown a hike in the past few years. Moreover, the firm has strong liquidity position but need to work upon its profitability, efficiency and solvency situation. Also, it needs to improve its cash flow so as to make high revenue and high profits.

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