Income Statement Analysis

The company on which we will be presenting our analysis or report is Westpac Banking Corporation or more commonly known as WESTPAC. It is a bank and also provides various sorts of financial services. It has its headquarters in Sydney Westpac Place. It has the largest number of branches with respect to any other bank carrying out operation within Australia. The bank has around 1429 branches and 3850 ATMs all around Australia. In terms of assets held by the banks of Australia it is the second largest bank operating within the country (Louis et al., 2014). It is not only operating in Australia but also has its business footprints in New Zealand. In New Zealand too it is the second largest bank in terms of assets held. In our report we will be analysing various key financial indicators to determine the real and accurate picture of the company’s financial position and performance. In addition to current year data we will be taking the data of past to financial years and will try to draw up a trend analysis which will enable us to decide whether the company is capable enough to create wealth for its shareholders. Finally, based on our analysis we will be drawing conclusion in respect of the company’s financial position and performance.

One of the many reasons that influence the decisions of the shareholders is profit earned by the company in a specific period of time and the capability of the organisation to earn profits in the future. Information regarding the amount of profit earned by the organisation is contained in the income statement of the company. The income statement also enables the shareholders to get a picture of the ways in which the company earned its profit and about the reliability that can be placed upon the company regarding its future viability and profitability (Zeff, 2016). The profit of an organisation is arrived at by deducting the expenses from the income of the company. Owner’s equity increases with financial profits and it decreases with financial losses.

Figure 1: Income Statement

(Source: created by Author)

The comparison between the profits earned by the entity gives out a clear picture of its profitability. We can very clearly observe that there was a dip in the profits of the company in the year 2016. However, the company finally recorded a in the profit but it could not catch up to the profit of the year 2015. This indicates that the company will have to work on improving its profitability if it has to earn the trust of its shareholders.

Balance Sheet Analysis

The balance sheet of the company also known as the statement of financial position is that part of the financial statements that reflects the true financial position of the entity at a particular point of time. It lays down the list of resources that are within the control of the entity and also the various legal and contractual obligation of the company.

Figure 2: Assets liabilities comparison

(Source: created by Author)

From the analysis of statement of financial position we can analyse that the companies Total Assets have been growing consistently year to year basis. That is from the year 2015 the assets of the company have grown form $812156 million to $851875 million in the year 2017. The liabilities of the company are also growing every year i.e. from $758241 million in the year 2015 they grew to $790533 million in the year 2017. Similar trend can be observed in case of the equities of the company that grew steadily from $53915 million in the year 2015 to $61342 million in the year 2017 (Warren & Jones, 2018). The company is increasing its equity every year that is a good sign for the shareholders, as they will not have to worry that the entity will dilute their holding by taking loans and borrowings.

The cash flow statement acts as a summary statement that shows us the movement of cash that is in or out of the entity over a specified period of time. The cash flow analysis of every entity becomes very important along with the accrual system of accounting because of the fact the organisation will not able to function properly without having cash in hand and it might threaten its solvency in the long run (Grant, 2016). The organisations often in pursuit of over-trading and managing their losses in some part of the year tend to forget to cater to needs of proper cash flow management. Our company that is WESTPAC as we have seen was facing or recording fluctuating profits and at the same time it was able to increase its assets and liabilities along with it. Hence we are concerned regarding any mismanagement or serious issues in the cash flow of the company.

Figure 3: cash flow Statement analysis

(Source: Created by Author)

Cash flow from Operating Activities:

The cash flow from operating activities shows that how much cash an entity is able to recover from its principle revenue generating source of income. From the analysis we can find the company had increased its revenue from operating activities in the year 2016 but again fell back to $2820 million though greater than that of year 2015 but very low than year 2016.

Cash Flow Analysis

The investment pattern as reflected by the cash flow of the company shows how considerably it has reduced its investment over the years. From ($18715million) in the year 2015 it has reduced to ($1698) in the year 2017.

Cash flow from Financing Activities:

This segment of the cash flow statement allows us to get the true picture of the way in which the company is able to arrange its financial resources for carrying out its business operations (Weygandt et al., 2015).

The analysis of the cash flow from financial activities shows that the company is facing difficulty in arranging funds lately as the cash flow from financing activities have reduced from $5513million in the year 2015 to $552million in the year 2017.

1) PROFITABILITY RATIO:

1. a) Return on Assets ratio (ROA):

RETURN ON ASSETS	YEAR 2015	YEAR 2016	YEAR 2017
Total Assets	$ 8,12,156.00	$ 8,39,202.00	$ 8,51,875.00
Net Income	$       8,012.00	$       7,445.00	$       7,990.00
ROA (%)	0.99	0.89	0.94

In the banking, industry an asset turnover ratio of around 1 % is considered good. As we can see from the analysis or comparison of the different year’s ratio the company has been able to keep the return on asset close to 1%.

1. b) Return on Equity ratio (ROE):

RETURN ON EQUITY	YEAR 2015	YEAR 2016	YEAR 2017
Total Equity	$     53,915.00	$     58,181.00	$     61,342.00
Net Income	$       8,012.00	$       7,445.00	$       7,990.00
ROE (%)	14.86	12.80	13.03

For the banking industry the companies earning a return of 10% on equity are considered to be performing well. As we can decipher from the comparison of ROEs of last three years the company has been able to earn a return of more than 10 % every year which means that the company is performing really well (Pratt, 2016). However, the company must endeavour to earn a better return as its returns are decreasing year on year.

2) PERFORMANCE RATIO 

1. a) Operating expense to operating income ratio:

Figure 4: operating ratio

(Source: created by Author)

It can be seen from the above chart that the company has been able to reduce its amount of operating expense in respect of its operating income. The operating expense in respect of the operating income is lowest in the year 2017 which is a good indicator of the financial performance of the company (Wang, 2014).

1. b) NET INTEREST MARGIN:

Figure 5: Net interest margin

(Source: created by Author)

 It is quite evident that the amount of net interest margin (interest income – interest expense) with respect to the assets of the company is hovering around 2%. The company must focus on the trend that has been found and not on the amount or percentage of the interest margin. The company should take steps to improve its net interest margin as soon as possible (Kraft, 2014).

3) CAPITAL ADEQUACY RATIO:

 Total Equity to Total Assets:

Figure 6: Total Equity to total assets

Financial Ratio Analysis

(Source: Created by Author)

  The trend shows the increasing contribution of equity in the increasing assets of the company.  It is a very healthy sign from the perspective of the shareholders as the increasing Total Equity to Total Asset ratio signifies that the shareholders are holding more part of the assets as the years are going past (Edmonds et al., 2016).

4) SHAREHOLDERS VALUE:

1. a) Dividend Pay-Out ratio:

Figure 7: Dividend Payout ratio

(Source: created by Author)

The company is maintaining a very decent dividend pay-out ratio i.e. above 70 %. However, the trend analysis will not be very satisfactory for the shareholders. The shareholders expect a uniform dividend pay-out ratio unless the market is very slow or adverse with respect to the business (Cao et al., 2015). The company must endeavour to improve its dividend pay-out ratio.

1. b) Basic Earnings Per share:

Figure 8: earning per share

(Source: Created by Author)

 The earning per share of the company:

It is observable that the EPS of the company has been fluctuating and in fact the company has been able to achieve the lowest EPS in the current year. This sort of fluctuating EPS will never be appreciated by the shareholders. Even if the EPS is fluctuating it should be creating value for the shareholders and not reducing their wealth (Drake et al., 2014).   

Income Statement:

From the analysis, it is evident that the net profit of the company has come down in respect of FY2016. In 2016 the net profit grew by 7% whereas in year 2017 it grew only by 0.88%

Balance Sheet:

The assets and liabilities of the company is growing every year along with the growth of the equity shareholders contribution. This suggest that the equity shareholders own most part of the assets. This is a good indicator for the shareholders (Collier, 2015). 

Conclusion:

The analysis has been started by comparing the income statement of the company and we found that the profit of the company though fluctuating has increased significantly in the year 2017. Then we started analysing the profitability ratios of the company and found that the company is performing as per the industry standards and delivering an ROA of around 1% and ROE of more than 10% at all times. In case of banking sector 1% and 10% respectively are considered parameters on which the company is assessed. After assessing, it based on industry parameters we found that it is going to give better returns to the shareholders in the near future too. Some of the areas in which the company needs to deliver is improving its NET INTEREST MARGIN, DIVIDEND PAY-OUT RATIO and EPS as the trend analysis showed that the company is lagging in these three matters. Other than that we found that the company has good Asset to Equity ratio as well as Operating expense to Operating Income ratio. Considering all these factors, we conclude that the company in the long run is going to create value for its shareholders.

Reference

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