Financial analysis of Westpac Banking Corporation as an investment opportunity

Financial Statement Analysis

Westpac (WBC)

Westpac banking corporation is one of the largest banking organizations in Australia, and the largest bank in New Zealand. Westpac provides arrays of banking and financial services in Austria, which include institutional banking, retail banking, and wealth management services. Established in 1817, Westpac is the first bank established in Australia. Since its formation, Westpac has increased in its strength, and at present Westpac has the market capitalisations that reach $69.5 billions and total assets worth 618.3 billions. (Westpac Annual Report, 2010).

The objective of this paper is to analyze whether Westpac could be a potential company to invest my $50,000.

With the present economic crisis where many companies have suffered financial losses, it is critical to subject a company to financial analysis since I have decided to invest my $50,000 on the medium-term investment; there is a need to make thorough analysis on the company before making an investment decision. I will use several financial tools to analyze the financial performances of Westpac before making an investment decision.

Financial Analysis of Westpac

Ratio analysis is one of the methods to evaluate the financial performances of an organization. Salmi and Martikainen (1994) argue that ratio analysis is very useful to forecast future success of a company. One of the commonly accepted ratios analysis is profitability. The profitability reveals the extent an organization has been able to manage its resources efficiently. The profitability could also be used to reveal the weakness and strength of an organization. By analyzing the profitability of Westpac, the paper will evaluate the strength and weakness of the company, and the paper reveals the extent the company has been able to provide values to the shareholders. Methods to analyze the profitability of Westpac are as follows:

Profitability ratio or Net profit margin

Return on assets (ROE)

Return on equity (ROA)

Basic earning per share

Profitability

To analyze the profitability of Westpac, the paper uses the last three years financial data. Analyzing the financial data of the company enhances the investment decisions toward the company.

Using the financial data of Westpac between 2008 and 2010, the profitability of the company during the period is as follows:

Table 1: Profitability Ratio of Westpac

Profitability Ratios in %

2010

2009

2008

Profitability Ratio

11.4%

7.2%

Return on Assets (ROA)

1.04%

0 .60%

0 .96%

Return on Equity (ROE)

17.4%

10.8%

23.1%

Basic earning per shares

$214.2

$125.3

$20.6

Cash earnings to equity (%)

16.1%

14.0%

22.30%

Formulas to calculate the profitability of Westpac are as follows:

Profitability ratio is calculated by dividing net income by total sales.

ROA is calculated by dividing net profits by total assets.

ROE is calculated by dividing net profits by total equity

Basic earning is based on the weighted number of paid ordinary shares

From table 1, it is revealed that the Westpac demonstrates sound improvement in the financial performances between 2009 and 2010. Based on the findings in the company profitability ratios, ROE, and ROA, Westpac has demonstrated a strong improvement in the financial performances during the period. Between 2009 and 2010, Westpac recorded high improvement on return on equity. In 2009, the ROE was 10.8% and in 2010, the ROE increased to 17.4% revealing 61.1% increase. In 2008, Westpac recorded 23.1% in ROE demonstrating high performances during the period. However, between 2008 and 2009, there was a decline in the Westpac in the ROE performance revealing 132.8% decline in performances. However, the company recovered in 2010 with increase of 61% in ROE between 2009 and 2010. (Westpac Annual Report 2010).

In addition, the company basic earning per shares improved from 2008 to 2010. The basic earning per shares was $20.6 in 2008, and the basic earning per share increased to $125.3 in 2009. Similarly, the basic earning per shares increased to $214.2 in 2010. In addition, Westpac recorded strong performance on cash earning to equity in 2008 with 22.3% ratio. However, there was a decline in cash earning to equity between 2008 and 2009. The company recorded 14.0% in 2009 compared to its performance of 22.3% in 2008. However, the company recovered in 2010 by recoding 16.1% in 2010 in cash earning per share demonstrating 15% increase.

To provide greater understanding on the financial performances of the Westpac, the paper also provides the market-based ratios.

Market-Based Ratio

The Westpac market performances were impressive between 2009 and 2010. The net profits attributed to the equity between 2009 and 2010 shows 84% increase. In 2010, Westpac recorded $6,346 millions in the net profits attributed to equity compared to $3,446 million in 2009. Moreover, the dividends declared by the company between 2009 and 2010 represent an increase of 20%. Based on the company profitability and market-based ratios, the paper examines the changes that have occurred in the company financial data over the last three years and the reason for the changes.

Significant Changes in the Westpac Financial Data

The financial data of Westpac shows that the company recorded high performances in the net income in 2008. However, Westpac recorded decline in the financial performances in 2009. The reason is due to the global financial crisis that affects many financial institutions in all advanced countries. With the credit crunch, that affects many financial institutions across the world, many banks are unable to meet their financial obligations. The credit crunch that affects many banks across the world also affected the performances of Westpac in 2009. For Example, there was a decline of 132.8% in the company ROE in 2009. In addition, there was 60% decline in the ROA in 2009. Although, the company recovered in 2009, and revealing high performances in both ROA and ROE. (Westpac, 2011).

Despite the decline in the company performances in 2009, there is strong indication that Westpac is able meet its short-term, medium term and long-term obligations.

Amcor (AMC)

Amcor is global company dealing with packaging and supplying broad range of products such as plastic, metal fibre and glass packaging. Amcor has more than 300 sites scattered across 43 countries. Amcor could also boast of 71,161 shareholders, and the company annual sales in 2011 are approximately $12.2 billions. This paper also analyzes the financial health of Amcor, the analysis reveals the extent Amcor could be chosen as a potential company to invest my $50,000.

As being discussed previously, the profitability ratio, ROE, and ROA are used to assess the financial performances of the company over the three years. The financial data over the three years between 2009 and 2011 are used to access the financial health of the company.

ROE between 2009 and 2011

ROE in 2009: 218 / 3,013*100= 7.2%

ROE in 2010: 202 / 4,068*100= 4.69%

ROE in 2011: 380 / 3,688*100= 10.30

ROA between 2009 and 2011

ROA in 2009: 218/8,446*100 =2.5%

ROA in 2010: 202/11,117*100=1.8%

ROA in 2011: 380/10,924*100=3.5%

Profitability Ratio

Profitability ratio in 2010: 202 / 2,809*100= 7.19%

Profitability ratio in 2011: 380 / 6,310*100= 6.022%

Table 3: Profitability of AMCOR between 2009 and 2011

Profitability Ratios in %

2011

2010

2009

Profitability Ratio

6.2.%

7.19%

Return on Assets (ROA)

3.5%

1.8%

2.5%

Return on Equity (ROE)

10.3%

4.6%

7.2%

Based on the financial data from 2009 and 2011, it is revealed that the company has been to add values to the shareholders between 2009 and 2011. The company ROE was 7.2% in 2009. Although, the ROE declined in 2010 because the company recorded 4.6% in ROE, hHowever, in 2011 the ROE of Amcor improves significantly, and the company records 10.3% revealing 123% increase on the return on equity between 2010 and 2011.(See Table 3).

Similarly, Amcor has been able to increase its asset base between 2009 and 2011. The company ROA was 2.5% in 2009. However, in 2010, the ROA deteriorated, and the ROA of Amcor was 1.8%. In 2011, the company is able to increase the value of its assets because the ROA increases to 3.5%. Between 2010 and 2011, Amcor has been able to increase in total assets by 94.4%.

Moreover, the company growth rate increases over the 3-year period. The company is able to increase its revenue yearly. Between 2009 and 2011, there is average of 26.02% in revenue increase. The company income also improves by 94.92%, compare to the industry average, which is 55.20%.

Based on the company financial data, there is an increase in the dividends over the three-year period. For example, the dividends per share increases by 18.64% while earning per share increases by 83.57%. Typically, the company ranks in line with the industry average in dividend per share and earning per share. Over the three-year period, the dividends growth rate is 1.93%, and earning per share growth rate is 4.05%. The growth rate of earning per share between 2010 and 2011 is 82.61%.

There is also an increase in the company market performances between 2009 and 211.During the period, there is 26% increase in the company market performances. (Financial Times, 2011).

During the period, the inventory turnover is 6.7x while account receivable turnover is 8.6x. Inventory is 7.91%. The company long-term solvency is 91.2x while the fixed assets turnover is 2.7x. (Business Week, 2011).

Analysis of the company market ratio reveals that Amcor performs better than the industry average. Amcor records 1.52 compare to the sector with 0.69. The price earning (P/E) ratio is also higher than the industry average. Amcor recorded 14.2 compare to the industry average that records 11.4. The ratio in P/E growth rate is also higher than the industry average. Amcor records 1.19 in P/E growth compares to the industry average that records 0.47. Amcor also increases Price-To-Book Ratio (P/B Ratio) during the period. The company P/B is 2.28 while industry records 0.47. (See Table 4).

Table 4: Market Ratio

Market Comparison

Earnings

P/E Ratio

P/B Ratio

P/E Growth

P/S Ratio

AMC

1.52

14.2

2.28

1.19

0.68

Market

0.86

12.1

1.41

1.04

1.98

Sector

0.69

11.4

1.40

0.47

23.8

Amcor was able to record significant increase in revenue between, 2009 and 2011. The company revenues were $9.5 billions in 2009. In 2010, the company revenue increased to $9.8 billions in 2010. In 2011, Amcor records $12.4 billions in revenue. The company was able to record significant growth in revenue between 2009 and 2011 because the company focuses on potential acquisitions to grow business. Moreover, Amcor focuses on the geographic expansion in Central and Eastern Europe.

The company is also attempting to leverage strong regional position to enhance market position.

Based on the Amcor financial performances between 2009 and 2011, this paper recommends that Amcor is a good company to invest $50,000 as being revealed in Fig 3 and Fig 4 and 5

Fig 3: Analysts Forecast on Amcor for the Next 12 months

Source: Financial Times.

The analysts support the recommendation of this paper as being revealed in the Financial Times (2011)

"As of Oct 14, 2011, the consensus forecast amongst 12 polled investment analysts covering Amcor Limited advises investors to purchase equity in the company. This has been the consensus forecast since the sentiment of investment analysts improved on Aug 23, 2011. The previous consensus forecast advised that Amcor Limited would outperform the market" (P 1).

Fig 4: Amcor Shares Performances

Fig 5: Amcor Earning per Share

Source: Amcor Annual Report 2011.

Conclusion

The paper analyzes the financial performances of Westpac and Amcor over the last three years. The financial ratios, market performances and other financial analysis tools have been used to evaluate the financial health of the two companies. Based on the findings, the paper recommends that the investor could invest $50,000 for the medium-term investment in the two companies stock and shares as being revealed in fig 5.

Fig 6: Westpac share performances