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HC2091 Working Concepts of Westpac Banking Corporation Listed on ASX Assessment Answer

Assessment Details and Submission Guidelines
Trimester
T3 2019
Unit Code
HC2091
Unit Title
Business Finance
Assessment Type
3
Assessment Title
Group Assignment
Purpose of the assessment (with ULO Mapping)
Students are required to form a group of 3 to 4 members (Minimum of 3 and Maximum of 4) to study, undertake research, analyse and conduct academic work within the areas of business finance covered in learning materials Topics 1 to 10 inclusive. The assignment should examine the main issues, including underlying theories, implement performance measures used and explain the firm financial performance. Your group is strongly advised to reference professional websites, journal articles and text books in this assignment (case study).
Weight
25 % of the total assessments
Total Marks
25
Word limit
Not more than 2500 words

ASSIGNMENT TASK

ASSIGNMENT SPECIFICATIONS

This assignment task is a written report and analysis of the financial performance of one selected listed company on the ASX in order to provide financial and investment advice to a prospective investor (No restriction to choose one of the company which you used for your individual assignment).

This assignment requires to undertake an examination of a firm’s financial performance based on most recent financial statements of the selected company mainly focusing on

  • Liquidity (based on liquidity ratios)
  • Capital Structure (based on capital structure ratios)

You are required to obtain the relevant information from chosen company annual reports and company web site. You can access the company web site via  www.asx.com .au.

To download the relevant please referee the Company code in ASX (see the following examples)

ABP
Abacus Property Group
APZ
Aspen Group Limited
AGL
AGL Energy Limited
WES
Wesfarmers Ltd
WOW
Woolworths Group Ltd


Note: The above table gives you only examples and you are not asked to choose them for the analysis.

ASSIGNMENT STRUCTURE

Assignment structure should be as follows:

Title of the assignment

Example: Analysis of ABX Company Financial Performance

Group details and the contribution of each group member

You need to give full details of all the group members in your group including their names and student IDs. Please make sure all the names written in the assignment are matched with the group created in Blackboard.

To ensure that all students participate equitably in the group assignment and that students are responsible for the academic integrity of all components of the assignment. You need to complete the following table which identifies which student/students are responsible for the various sections of the assignment.

The above table needs to be completed and submitted with the assignment as it is a compulsory component required before any grading is undertaken.

CONTENT OF THE ASSIGNMENT

INTRODUCTION

The introduction should briefly explain the purpose of the assignment, the selected company for analysis and the type of analysis.

FINANCIAL PERFORMANCE ANALYSIS OF THE SELECTED COMPANY

Description of the company

Prepare a brief description of the selected company (when they started, key milestones etc.), outlining the core activities (major business, key products) competitive advantages, and the market in which it operates (in which industry sector they are in ASZX, do they export their products and services or whether they serve only the local market).

Analysis of company net working capital position

Based on balance sheet information and the notes to the financial statements,

  • Analyse the working capital position of the company over minimum of past 2 years (composition of current assets and current liabilities, changes in CA and CL, any significant decision about working capital management etc.)
  • Calculate the networking capital and give your opinion on the net working capital position of the company.

Calculation of cost of equity of the firm

Based on the data of just paid dividend (D0), current share price (collect this information from the annual report) and assumption that the company will maintain a constant dividend growth rate of 3% from now on, calculate the cost of equity of your selected company, using constant dividend growth model.

Analysis of company liquidity and capital structure using liquidity and capital structure ratios

Using data from financial statements of your selected company, calculate the following ratios for past 4 years and present them using suitable charts. Discuss the implications of the identified trends for company performance.

  • Liquidity ratio (calculate minimum of 2 liquidity ratios over 4 years and analyse them using suitable charts)
  • Capital Structure ratio (calculate minimum of 2 capital structure ratios over 4 years and analyse them using suitable charts)

Conclusion

Based on the analysis in section 2, provide brief conclusion on the company financial performance and make a recommendation for prospective investors.

Reference

Follow the Holmes reference guideline and give your reference details

Answer

Financial analysis 

Introduction:

The report reveals the working concepts of the companies which are listed on the ASX. The Westpac Banking Corporation is has been considered for the detailed discussion about the key financial factors of these companies. The report consist some descriptions of the Westpac Banking Corporation is such as incorporation year, core activity, competitive advantage, operating industry sector, target market and objectives achieved by the company. In the further part of report the analysis regarding the working capital position of the company has been done and the equity cost for the company has also been calculated. Several other financial tools are assessed to find the fair financial performance of the company. In the same report the financial measures of the company are calculated and represented in the graphical format for establishing better understanding. In the end of report, the conclusive summary of all the relevant financial discussion about the company has been mentioned and relevant recommendations are revealed in the interest of investors. The report meets a significant purpose for the investors to make them know with the financial facts of the company which may help them in the decision making regarding their investment in the company.

a) Description of Westpac Banking Corporation is

This is the recognised registered on the ASX. The company offer banking and finance service to its client and having its headquarters at Sydney in Australia. The company has its business and subsidiaries all over the world offering banking and finance services (Azeem, Baker, Villano, Mounter, & Griffith, 2018). The company has the largest banking and finance service providers in Australia.  With the current share price of AUD A$25.19 -0.12 (-0.47%) the company has faced high downfall in its business financial leverage (Westpack Banking Corporation s, 2019).

· Competitive Advantage:

Westpac Banking Corporation is one of the biggest Australian company offering banking and finance services to clients. It provides the excellent quality of banking and finance services to its customers with the freshness (Cramer, 2019). The company offers the low costing banking and commercial financial services to clients that are focused on a wide range of customers and also put efforts to make its product different by their uniqueness. The company has some strategies to win over the competitive advantage which includes the strategies regarding pricing, performance, growth and efficiency (Westpack Banking Corporation, 2019).

· Core activities:

The Westpack Banking Corporation indulged under various business activities such as offering bank loan, overdraft, offering commercial loans to the clients at the cheap bank rate. The company is serving since 1924 and has more than 28 million customers nationwide. Westpack Banking Corporation has focused on aligning its banking services through the  M app and strengthen technologies to set up more connected and more convenient ways to its clients. 

· Vision and mission:

The major purpose of Westpac Banking Corporation is to a “To be the best banking companies and prosper client through its banking and finance services” which they as the company wants to provide the best experience to its customers. (Baños-Caballero, García-Teruel, & Martínez-Solano, 2016). To achieve its vision, the company has set up some values to meet the expectations of the customers which include the commitment towards the quality of product. 

b) Working Capital Position of Company:

The working capital of a company denotes the capital involved in the company which is used in its daily operations and functions of business. It is the main different amount of current assets reduced by current liabilities. An adequate working capital is must for the company’s better business operations. The working capital position of the company can be positive, neutral or negative (Westpac Banking Corporation 2019). If the capital assets of the company are higher than its current liabilities then the working capital position of the company shall be considered as positive and in adverse situation it shall be called as negative. Similarly, if both the current assets and liabilities of the company are equal then the working capital position shall be taken as neutral (Ramiah, Zhao, Moosa, & Graham, 2016).

Net Working capital
Particulars 
2019
2018
2017
2016
Current assets
22,201,000
91,237,000
82,158,000
80,932,000
Current liability
3,944,000
4,674,000
4,295,000
4,419,000
Working capital
18,257,000
86,563,000
77,863,000
76,513,000

 In Westpac Banking Corporation, it has higher current assets in comparison to the current liabilities which results into a higher working capital position of the company. Also the proportion of current assets have increased over years. The company is having higher positive WC since last 4 years but due to the decrease in its current assets and i.e. the current liabilities in the company were higher than the current assets in last 4 years, it has decreased by average more than 70%  (Westpac Banking Corporation, 2019). However, the negative working capital is considered bad if it affects the business operating cycle of the company. Otherwise it might be regarded as good if it does not disturb the operating cycle of business in the company. 

The current assets of Westpac Banking Corporation have decreased by average 45% in year 2019 in comparison of the current asset in year 2016. Such decrease is the result of reduction due to the zero inventory, cash, receivables and other current assets of the company. The major fall in the current assets has been shown in year 2019 in comparison to year 2018 when the current assets of company has decreased by 12%. 

The company also has seen an increase in its current liabilities over the years. In year 2018, the current liabilities of company has increased by average 33% which results into the negative working capital of the company. The current liabilities increased with the increase in accounts payable and other current liabilities (Westpac Banking Corporation, 2019).

Hence the net working capital of the company has decreased by a higher proportion. The major difference in the current assets and liabilities of the company has been seen in year 2019 when the negative working capital of company has increased by average 42%. Hence for previous four years the company has negative working capital which was at its highest in year 2019. Also the negative working capital shows that the company has low blocked capital and getting better results from lower funds (Parker, 2016). The increased current liability of the company which has a huge proportion of accounts payable shows the good creditability of the company among its creditors (Westpac Banking Corporation, 2019).Working Capital Position of Company

c) Cost of Equity of company

The cost of equity defines the return which a company pays to its equity shareholders or investors. Such return is paid by the company to the equity investors against the risk undertaken by them by deploying their capital in the company. Generally it is used by the company to decide whether an investment matches the requirements of capital return. Every company or firm needs the funds to operate its business activities and functions for which they invite the shareholders to invest their capital in the company (Westpac Bank Company, 2019). The cost of equity of a company represents the return the market requires for bearing the risk of ownership. Hence it is the return expectations of the shareholders which they expect from the company in exchange of the risk of capital investment (Tahir, & Anuar, 2016)

Cost of equity
Current market price (P0)
25.14
Growth rate
3%
dividend paid during the year(D0)
0.8
expected future dividend (D1)
0.48
Cost of equity
4.9%

 The cost of equity is 4.9% for the Westpac Banking Corporation which shows a potential growth in return of the company. The share price of Westpac Banking Corporation is $ 25.15 and the last paid dividend was $ 0.80, on the basis of which the expected dividend can be ascertained. The cost of equity is a significant measure for both investor and company (Westpac Banking Company, 2019). To an investor, the cost of equity helps to assess the rate of return required on his equity investment and for the company it evaluates the rate of return from a particular investment or project relevant to the business. However to introduce better returns on equity the company should deploy the adequate portion of equity and debt capital in the business (Westpac Banking Corporation, 2019).

d) Analysis of company liquidity and capital structure

To evaluate the capital liquidity of the company, there are several financial measures can be used which includes several types of liquidity and quick ratio. The given ratio shows the evaluation of liquidity of company (Westpac Banking Company, 2019).

· Liquidity Ratio:

The liquidity ratio is used to evaluate the ability of business to meet its short-term obligations. The liquidity ratio is usually used by the company to make decision-making regarding the extent of credit and debts. This ratio represents the equations between several liquid assets and current liabilities (El-Geneidy, Levinson, Diab, Boisjoly, Verbich, & Loong, 2016). A high liquidity ratio shows the better ability of company to meet its obligations on time. The liquidity ratio of Westpac Banking Corporation will define that how the company manages it short-term obligations with its liquid assets and whether the company pay off its obligations on time. There are several measures which are used under the term liquidity ratio which are detailed in the following part of report (Westpac Banking Company, 2019).

Current Ratio: 

The current ratio refers to the ratio which evaluates the ability of a company to pay off its current obligations which are due within a year (Westpac Banking Corporation, 2019). Hence the ability of company to meet the current liabilities which are of short-tern nature and become due within one year can be shown by the current ratio. An ideal current ratio which is advisable for the companies to maintain is 2:1. This ratio shows that how efficiently the company increased its current assets to meet its short and long run obligations (Westpac Banking Corporation, 2019).

Current ratio
Particulars 
2019
2018
2017
2016
Current assets
22,201,000
91,237,000
82,158,000
80,932,000
Current liability
3,944,000
4,674,000
4,295,000
4,419,000
Current ratio
5.63 t
19.52 t
19.13 t
18.31 t

The Westpac Banking Corporation has reduced its current ratio since last 4 Years which shows the reduction in the current assets capital blockage. However, it has been evaluated that the company has higher liquid assets i.e. with this current ratio; the company could easily be able to meet the current obligations on time and other future uncertainties and higher current assets will also negatively impact the cost of capital (Mackaya, & Haque, 2016).  Current Ratio

Quick Ratio: 

This ratio is also known as acid-test ratio which establishes a comparison between the quick assets and current liabilities of the company. For the purpose to calculate the quick ratio, the quick assets involve the cash, cash equivalents, accounts receivables and marketable securities etc. An ideal quick ratio for the business of any company is 1:1 which varies as per the industry (Westpac Banking Corporation, 2019).

Quick ratio
Particulars 
2019
2018
2017
2016
Current assets
22,201,000
91,237,000
82,158,000
80,932,000
Inventory
0
0
0
0
Quick assets
22,201,000
91,237,000
82,158,000
80,932,000
Current liability
3,944,000
4,674,000
4,295,000
4,419,000
Quick ratio
5.63 t
19.52 t
19.13 t
18.31 t

A higher quick ratio refers to the high liquidity of company which enables the company to meet its current liabilities by using the liquid assets (Surianti, Yadiati, & No, 2017). The Westpac Banking Corporation has not maintained the adequate liquid assets in the business hence the quick ratio of company has been decreased with the same rate as decreased witht eh liquidity ratiosince last 4 years (Westpac Banking Corporation, 2019).Quick Ratio

Capital Structure Ratio

The capital structure of a company defines its long run financing which can be for of debt and equity and preference share. The capital is working as a fuel for any business and for appropriate operating of business; it is required for the company to deploy an adequate combination of different capital options. The mix of capital affects the profitability, business credit rating and other relevant factors of the company. An optimal capital structure represents an adequate proportion of debt and equity capital in the business which reduces the cost of capital of the company. To evaluate the capital structure ratio of Westpac Banking Company, the debt-to-Equity ratio and gearing ratio (Atoom, Malkawi, & Al Share, 2017)

Debt-to-Equity Ratio: The debt-to-Equity ratio is evaluated by considering the total liabilities and shareholder’s equity involved in the company. This ratio is an important ratio which is usually considered in the corporate finance. It is a measure which defines that the company is financing its business operations by debt or by owned funds. For the purpose to calculate the debt-to-Equity ratio revealing the total debt and equity inn term liabilities and the equity capital covers the paid up equity capital and retained earnings. A good debt-to-Equity ratio is around 1 to 1.5 which varies according to the industries (Ali, Liu, & Su, 2017)

Debt to equity Ratio
Particulars 
2019
2018
2017
2016
Debt
217,155,000
194,951,000
189,137,000
188,417,000
Total Equity
65,454,000
64,521,000
61,288,000
58,120,000
Debt-to-Equity Ratio
3.32 t
3.02 t
3.09 t
3.24 t

The Westpac Banking Company has an average debt-to-Equity ratio which is less than an ideal debt-to-Equity ratio and the company has a continuous lower trend in the debt-to-Equity ratio. This ratio defines that the company maintained lower debt in comparison to the equity capital which can be converted into a risk related to the rise in its cost of capital (Kythreotis, Bagher, & Milad, 2018). The low involvement of debt in the business of the company indicates a negative impact on the growth of business. However the high proportion of equity is also beneficial for the company as there is no payback liability on the company towards its equity shareholder. Debt-to-Equity Ratio

Gearing Ratio: 

The gearing ratio represent the company’s ability to meet the current interest liabilities on its profitability. It reveals that how efficiently the company has managed to pay the interest charges from the available profits before the deduction of tax and interest (Westpac Banking company, 2019). An adequate gearing ratio is in between 25% to 50% and the companies having an ideal gearing ratio is considered as fine to finance its business operations with debts (Fargher, Sidhu, Tarca, & Van Zyl, 2019)

Gearing Ratio
Particulars 
2019
2018
2017
2016
Interest
16,315,000
16,066,000
15,716,000
16,674,000
EBIT
1,294,949
1,945,235
1,861,721
10,644,000
Gearing Ratio
12.60 t
0.12 t
0.12 t
0.64 t

A higher gearing ratio defined the large proportion of debt over equity. The gearing ratio also depicts the financial health of a company. The Westpac Banking Company has a ratio less than the ideal ratio in year 2016 which has been improved in year 2018; it shows an improvement in the financial position of the company (Westpac Banking Company, 2019). However in year 2019, again there is increase in the gearing ratio which has shown that company has increased its profitability and interest rate is also comparatively low. 

Conclusion

The Westpac Banking Company has been performing efficiently with sound results since a very long time. It is one of the most trusted and celebrated brand in Australia and holding more than 40% share of overall food industry nationwide. The Westpac Banking Company is the second highest revenue earning company of Australia and other countries which is working on some core principles and values. The company has a negative working capital for last 4 years and high current liabilities in comparison to the current assets. Also the company has the current ratio and quick ratio which are less than the ideal ratios which shows that the company does not have the adequate liquid assets to meet the current obligations of business. The analysis of capital structure of Westpac Banking Company denotes that company has low debt over the equity capital hence the company has lower pay back liabilities on debts. It is a better option for the lenders and creditors because the company don’t have more debts which show less risk in the company (Lacinka, Fathoni, & Gagah, 2018). However the company has an increasing trend in the profits in past 4 years. From the perspective of an investor, the company would be an appropriate option for making the investments. In year 2019, the company has managed to secure a net income available to equity holders of $ 26, 93, 000 which is 36% more than the profits available for equity holders in year 2018. Hence the profitability of company is constantly increasing which is an attractive indicator for the investors who are looking for investing in equity capital of company. 

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