Answer :

HC2091: Finance for Business

Executive Summary 

The report which is presented below represents the analysis made upon the financial performance of the company Suncorp Group Limited. The purpose behind the preparation of the report is to extend advice relating to investment decision and finances to the potential investors. The financial statements that are published by the company have been used extensively to arrive at the judgements offered. The report is properly sectioned into different parts. The first part deals with the description of the company expressing the activities performed at the core level along with the market of company’s operation. The different ratios for the company are calculated to check the financial status. 

Introduction

With the ramified economic changes, each and every investors need to assess the financial performance of company. The graph depicting the movements that have happened in the share price over two years on monthly basis is also presented. The comparison then is made with the ordinary index. The factors that affected and led to these movements are also discussed. The cost of equity is computed using the capital asset pricing model. Thereon the company’s capital structure is identified. Based on all this calculation an accumulation is done which has led to the preparation of this report. The end part of the report is providing conclusions and recommendations for the places where the performance of the company can improve.

Description of company

Suncorp Group Limited is situated and operating from Brisbane in Queensland, Australia. The corporation works in the core area of finance, insurance and banking. However, the largest area of working revolves around general insurance. The insurance market is captured by the company including the life, commercial, and general insurance. The company forms up the largest banking corporation that operates in that region. 

The competitive advantage is offered to the company by the strategic assets that it owns. These are famous by the name of “4Cs”. The assets are named Capital, Cost, Customer and Culture. These elements strengthen the company’s functioning and help to attain a position that is competitive over the rest competitors. The company has been rated A+ with a strengthened positioning of capital and finances. The customers are highly satisfied by the kind of service extended. The company has also been rewarded for remarkable performance by several awards (Smith, Henderson, and Ginger, 2015).

The market captured by the group is also huge. The company has a customer base of more than 9 million customers. The number of business and retail banking outlets for the entity range around 232. Further the acquisitions of GIO and Promina had added to the number of agencies and retail branches that are operated under the group control (Smith, and Henderson, 2015).

The factors that help to make the picture that is reflected by the company on present date are several. The company has several priorities when it comes to the strategies formulated. The customers are prompted and served with various services that are completely personalised. The business is digitalised using the latest available technologies. The human resources have been focused to be well trained and updated as well (Sun crop Group Ltd., 2019). They have been trained to be technology savvy. Along with every internal fineness, the regulatory requirements are also followed appropriately. All the core activities are main areas to inspire growth through harmonisation (Johnstone, and Wilkinson, 2016). 

Calculation and analysis of financial ratios

The ratios calculated are:

1. LIQUIDITY RATIOS

The liquidity ratios calculated include the current ratio and quick ratios.

(Yahoo finance, 2018).

ANALYSIS: 

The liquidity ratios represent the current financial stability that endures the organisation. The current ratio shows the falling strength that the company has when the current position to settle claims is observed. The ratio has drastically fallen. The same is seen for the liquid position that is stated by the liquidity ratio. The cash crunch severity is sure to strike the organisation if the situation does not get better (Castiglionesi, Feriozzi, and Lorenzoni, 2017).

• OPINION: the company must start to focus on handling the cash assets well. New cash, if required must be incorporated into the business through the help of share issue or sale of unwanted or cost acquiring assets (Borio, and Gambacorta, 2017) 

. 

1. PROFITABILITY RATIOS

The profitability ratios that are computed are net margin ratio, return on assets ratio, and return on equity ratio.

• ANALYSIS: 

Same as the liquidity ratios, the profitability ratios are also showing a falling trend. The net profit margin has fallen. The assets have increased, but the profit is not compensating the rise. As far as the return on equity is observed, the rise in the equity is also not supported by a consequent rise in the profits of the organisation (Dizkirici, Topal, and Yaghi, 2016).

• OPINION: 

The company is required to focus upon increasing the profitability of business. The profit can be increased by either increasing the sales or cutting the costs. The sales could be raised by promoting the business through new marketing approach. The business must be advertised in new and positive manner. For the cost reduction, idle costs must be cut off (Ahmad, 2016).

1. MARKET VALUE RATIOS

The market value ratios that are computed for the company include earnings per share, book value per share, and market value per share and dividend yield per share.

• ANALYSIS: 

These ratios show a mixed picture. As far as the profitability or the standing of the company in market is observed, the earning per share has shown a downward movement. This is due to the decreased net profits and at the same time increased number of outstanding shares. The book value of the company’s share has risen. This has led to an obvious rise in the book value per share. But, if the correct position has to be identified, the market value per share is required to be computed. This has fallen. It shows that the company’s market capitalisation has fallen, which is somehow due to the falling market price per share. For the dividend yield, a raise is seen. The same is due to the increased amount of dividend that is being paid per share by the company (Almumani, 2018).

• OPINION: 

The company must focus to increase the overall wealth of the shareholders. This shall incorporate a rise to be brought in the profits along with the market performance of the company’s common stock. This could be done by enhancing the brand image by incorporating changes that are favourable both to the profitability and brand image of the entity (Mule, Mukras, and Nzioka, 2015).

3. Graphs and comparison of share price movements

Source: (Yahoo finance, 2018)

ANALYSIS:

 The company’s price trend is highly volatile and is largely affected by the movements that are observed in the market. The situation is surely due to the company’s beta being closer to 1. Ignoring a few exceptions, a positive correlation is seen in the company’s share price trend and the ordinary index. However, the correlation’s closeness lies above 1. This is because the company’s change in the share price is way higher than the change that happens in the value of ordinary index.

E.g. if the data for the ending month of financial year 2018 is observed itself, the ordinary index has appreciated by a mere percentage of 2.71. However, this rise when hit the company’s stock price, the rise is as huge as 8.64%. This shows that the company is positively and at the same time with high volatility correlated with all ordinary indexes for the economy.

FACTORS THAT AFFECTED THE SHARE PRICE MOVEMENTS OF THE COMPANY IN TWO YEARS: 

A single factor is not responsible for the changes that the company has shown in the share price trend over the tenure of two years. Multiple factors have made it happen. Some factors relate to the internal processing of the company, while the others relate to the external environment which generically hits all the corporations working in the same business. The analysis is done as follows:

• INTERNAL FACTORS
• The various mergers and acquisitions that the company has entered into in this time period of two years. The major include the acquisition of Tower Insurance Limited. This was a loss affair and led to a loss of about $ 3.9 million.
• The various joint ventures, partnerships and alliances that the company has done.
• The launch of new business areas. E.g. launch of small business insurance.
• The strategic policy formation and their implementation leading to either profitable or loss returns.
• EXTERNAL FACTORS
• Political instabilities leading to an overall effect on the stock market.
• The economic condition that relate to the general economy of the country specifically and the world generally.
• The value of Australian dollars in the international currency market.

4. Calculation of cost of equity

The capital asset pricing model is used to compute the cost of equity for the Suncorp Group Limited. The formula used in the capital asset pricing model is:

Cost of equity = risk free rate + (beta x market risk premium)

The details of the required inputs for the computation of the cost of equity are:

• Risk free rate: 6 % 
• Market risk premium: 7%
• Beta, as identified: 0.91

Beta of company can also be computed 

NOTE: The beta of .91 is taken as available on yahoo finance (Yahoo finance, 2019).

The beta of 0.91 shows that the shares of the company are highly risky. Any movement in the market is able to bring upon a change in the share prices of the company. the same face is also reflected by the position of the company’s share price. Any single trend is not observed in the share price. They are increasing and decreasing depending upon the market situations. They are highly correlated to the ordinary index as well.

The cost of equity as per capital asset pricing model is: 

6% + (7 x 0.91)

= 12.37 %

The return expected by the shareholders is more than double of the risk free rate. This confirms the risk that lays around the entity’s shares. The investors while investing in such risky shares have a higher expectation in form of returns. The cost of equity in other words is what the shareholders expect out of the money that they invest in the business of the entity. this high return depicts the cost that company has to bear for its investments being too risky for the investors (Zhu, 2014).

5. Capital structure

• The capital structure of the company is represented as follows: 

 The capital structure has changed in the financial year 2018 as compared to the financial year 2019. The proportion of debt has risen in the financial year 2018 over the previous financial year (Nicholson, & Kiel, 2007).

• The book value weights based upon the capital structure are shows as follows:

Due to the rise of the proportion of debt in the capital structure, the company has witness that the book value weights have also reversed. The percentage of debt that was in the capital structure in the financial year 2017 was 42% approximately has risen to reach around 51% approximately. While the share of equity has fallen by same percentage with which debt raise (Yahoo finance, 2018).

• The capital structure ratio used to analyse the capital structure for past two years in the debt equity ratio. This ratio represents the proportion of debt in comparison to the company’s equity. Only long term debt is considered while computing this ratio. However, when the equity is taken, it comprises of equity as well as the retained earnings of the company Yahoo finance, 2018

The debt equity ratio depicts the same picture as shown by the capital structure. In financial year 2017, the debt was only just 0.72 times the equity of the company. But, in financial year 2018 the same has become 1.03 times of the equity. 

ANALYSIS: 

The company has tried to trade on equity. But one thing that company completely has ignored might be the weighted average cost of capital. With the introduction of more debt in the capital structure, there is a chance that it has promoted the fall in the net profit margin and the return on equity. The financing cost may be higher. This high financing cost has to the overall fall in the returns that is expected and generated by the company on its ordinary shares. The company is in the need to change the capital structure. New shares are required to be issued, or the debt has to be repaid. But there might lay certain problem in repayment of debt without new share issue because of the cash crunch that the company is already facing. This analysis has shown the financing cost and business changes which has impacted the weighted average cost of capital of company (Brealey, et. Al. 2012).

CONCLUSION

The company’s analytical analysis has shown that the company’s performance is not improving. The ratios computed in the range of liquidity, profitability as well as for market value have all fallen. The company is at the alarming position to improve its working to sustain in the market, as far as the risks are concerned, the stocks of the company are highly risky. The beta of 0.91 depicts high volatility in the share performance. The same is observed from the share price chart of the company. The company has to work proper in line to improvise its current position. All the recommendations that have been mentioned ahead are important for the company to follow, if it wants to bridge the gap of expectations and reality. Now in the end, it could be inferred that financial performance of company is stable if company wants to sustain its business then it needs to lower down the debt capital. It will not only lower down its business financial leverage but also strengthen the corporate finance of company. 

RECOMMENDATIONS

The scope of improvement is huge. Some little steps can help to cement the gaps and attain fulfilment. The certain recommendations that can enlighten the current position to a favourable peak are:

• The company must start to revamp the capital structure position. The debt is highly used and incorporated every year on a fresh basis. If reliance on debt has to be continued than the financing has to be done from the debt sources that are cost effective. Costly debt financing is negatively affecting the company’s returns. However, the best alternative could be to switch into share issuance. This would provide the company with new funds and at the same time shall not raise the working average cost of capital (King, & Levine, 2013).
• The profitability must be taken good care of. Falling profits even after raised revenues is a negative signal. This represents that the company is unable to channel profits because of increasing costs. One reason is debt cost. The other reasons must be identified on a rapid rate and must be eliminated or minimised. This shall help to add into the profitability of the company.
• The company is representing one of the highly risky share profiles. The volatility is high. Depending upon the high volatility, the return demanded by the shareholders is also higher. To maintain shareholder trust, the return that they expect must be paid to them. And this could only be done by adding to the profits and brand image. Both could be achieved by positive promotion tactics. If required, a separate marketing team must be created and entrusted with the task to deal with the different operational zones with different agendas to grab the target customer groups (Brooks, 2014).