CSL Limited and Baxter International Financial Analysis - Assignment Example

Executive Summary CSL Limited and Baxter International have been performing on similar business model and have been successful as players. Their market has grown which is reflected by the growth in sales. There is even scope for the company to move further as this sector is showing improvement. The financial analysis also highlights some important fact related to liquidity and capital structure. The findings shows the positives and negatives of both based on financial analysis. The ratios like liquidity ensures to find liquidity and the capital financed by the company are demonstrated by capital structure ratios. The efficiency ratio indicates the area where CSL Limited needs to work to stay ahead of Baxter International. The capital market ratio indicates the companies which are favoured by shareholders and also help to look into the future prospects of the company. The recommendations highlights areas where both the companies need to improve which will help them face competition and help in proper strategy execution. The analysis shows that CSL Limited performance has improved drastically in 2009. It still needs to work on certain areas to stay ahead of Baxter International as the company has shown stability and CSL Limited needs to inculcate those so that it is able to withstand competition and capture a bigger market. Content Introduction 3 Purpose of the report 3 Financial Analysis 3 Liquidity ratio 4 Capital Structure ratio 5 Profitability Ratios 6 Asset Efficiency Ratios 7 Market Performance Ratio 8 Shareholders Analysis 9 Findings 9 Conclusion 10 Recommendations 11 Limitations 11 References 12 Appendix 13 Introduction CSL Limited is a drug manufacturer. The company has a huge presence and deals in “medicines, blood plasma derivatives, anti venom and other similar products”. (CSL Limited Website, 2010) The fact that the company deals in so many products and huge reach has given a wide market. The company has a presence in many countries due to the need served by the medicine manufactured by them which is used widely. Baxter International is also a drug manufacturer. The company deals in “products to treat haemophilia, kidney, and other chronic and acute disease”. (Baxter International Website, 2010) The wide range of medicines and the ease with it relieves the patients from the pain has made it a huge success. The financial statement of both the companies reveals so. Even the share prices shows improvement. With increase in patients due to growing disease is creating a big market for both this giant to cater to. Purpose of the report To identify the key areas for CSL Limited and Baxter International and their effect on performance To compare the financial performance of CSL Limited and Baxter International and identify areas of strength and weakness To identify the investment avenues for CSL Limited and Baxter International from the point of shareholders Financial Analysis Financial analysis is very important for all business. Analyzing the statement helps in “planning, budgeting, monitoring, forecasting and improving the financial performance by taking vital decision”. (Micro Strategy, 2010) Proper analysing helps a long way to “understand the financial health”. (Micro Strategy, 2010) It helps to identify trends and compare with competitors and industry to gain advantage. The following is the ratios for CSL Limited and Baxter International. Liquidity Ratios This ratio plays an important part and helps “to identify the firms ability to meet its short term obligations and plays a huge role in the performance”. (Financial Modelling Guide, 2010) The ratios for CSL Limited and Baxter International are Current Ratio: “It measures the ability to pay the short term liabilities out of short term assets”. (Financial Modelling Guide, 2010) This ratio helps creditors, suppliers and investor to identify the liquid position. It is calculated as “Current Assets / Current Liabilities”. The current ratios for both the companies are as (appendix) The ratio shows that CSL Limited has a better liquidity position as compared to Baxter International. CSL Limited need to bring down the ratio as it is a concern as the short term assets are more than warranted. This might lead to parking of idle cash. Baxter International on the other hand is in a better position but still needs to take it slightly up. When we consider the two companies together it shows that Baxter International has better policies and strategies as compared to CSL Limited. The positive for CSL Limited is that they have improved it drastically. They need to work more and ensure that it comes down to around 2. Both the companies are showing that they have sufficient funds to meet short term obligations Quick Ratio: It is also known as acid test ratio. “It measures the ability of the firm to meet its short term obligation when inventories are removed as inventories take some time to be converted into cash”. (Financial Modelling Guide, 2010) It is calculated as “(Current Assets – Inventories) / Current Liabilities”. The ratios for both the companies are as The ratio also indicates that CSL Limited is better positioned as compared to Baxter International. The ratio indicates the efficiency of the company to meet its immediate debt. CSL Limited need to bring down this as it is a concern and presenting a bleak picture as more short term assets have been acquired. The ratio when compared to current ratio also indicates huge inventories. Since, both the companies deal in products where the inventory has to be high so having a low ratio is predictable. Still, both the companies especially CSL Limited need to improve it so that it presents a better picture. Capital Structure Ratio This ratio is of prime importance and provides relevant information about the company. “It identifies how much of the firm’s assets are financed through debt and includes long term debt”. (Transtutor, 2010) The ratios which help to determine it are as Debt to Equity Ratio: “It determines the proportion of long term debt in relation to the shareholders fund and long term debt”. (Transtutor, 2010) This ratio helps to identify the financial soundness. It is calculated as “Long Term Debts / Equity X 100”. The ratios for both the companies are as The ratio indicates soundness on the part of Baxter International. It shows that the company has a scope for more investment through debts. This is a good sign and shows the company has a space for future projects. CSL Limited has reduced its debt a lot by paying off is a worry and needs to raise it so that it can save on taxes. CSL Limited needs to ensure that it keeps with the industry standard. As both the companies work in a type of market where to grow large debt is needed so the ratio seems to be sound for Baxter International and CSL Limited needs to improve it drastically. Profitability Ratios Profitability ratios form a very vital part of financial analysis. This ratios help to understand the profit which can be attributed to the different factors which work in tandem to achieve the desired results. Comparing it with the previous years and the competitors’ helps to evaluate the shortcomings, and shows area which needs to be improved. The profitability ratios are as follows Net Profit Margin: “It is defined as the profit generated per dollar of sales and is calculated after all the direct and indirect expense has been considered”. (Kennon, 2010) Organisations prefer this to be high. It is calculated as “Earning before Interest and taxes (EBIT) / Sales X 100”. The ratios for both the companies are as The ratio indicates similarity between CSL Limited and Baxter International. It is seen that the net profit has grown for both the companies. This is a good sign and shows efficiency in maintaining the indirect expense. The ratio for Baxter International has improved slightly as compared to CSL Limited signifying better management and control of cost by CSL Limited. When we look at the broader picture, it shows that CSL Limited have ensured better management policies and reduced expenses to earn a higher return. Return on Assets: “It is defined as the amount of profit generated for per dollar of asset”. (Joseph, 2010) It helps to identify whether the assets are utilized properly or underutilized. It is calculated as “Earning before Interest and Taxes (EBIT) / Average assets X 100). The ratios for both the companies are as Here we see that the return on assets for both CSL Limited and Baxter International have improved in 2009 as compared to 2008. The good sign for CSL Limited and Baxter International is that their assets are utilized efficiently. This has resulted in having a correct mix of assets. CSL Limited when compared to Baxter International has a better return showing proper utilization of assets. The other important part to note is that such industries have huge assets which results in the ratio being lower. Still, on an overall basis we see that their return is good signifying proper management and sound policies. Return on Equity: “It is defined as the profit earned as compared to the equity shareholders i.e. earning per dollar of equity”. (Joseph, 2010) It is calculated as “Net Profit available to ordinary shareholders / Average Equity (excluding minority interest and preference capital) X 100”. The ratios for both the companies are as follows We see that Baxter International has a very high return on equity as compared to CSL Limited. The returns for both CSL Limited and Baxter International have decreased. This is a worrying factor and shows the strategies and policies implemented hasn’t been successful. The return for CSL Limited is very low as compared to Baxter International which might lead to shareholders moving out to other companies or investing in risk free securities. CSL Limited needs to take urgent steps to improve it. Asset Efficiency Ratios Operating ratios forms a very important part as it helps to “show the efficiency of the management and also indicates the company’s efficiency to manage its capital”. (Joseph, 2010) this ratios help to find the efficiency when it comes to turnover. The following ratio helps to calculate the operating efficiency. They are as Asset Turnover Ratio: It is defined as “the total sales generated per revenue of assets”. (Joseph, 2010) It is calculated as “Sales Revenue / Average Total Assets”. The ratios for both the companies are as follows The ratio indicates decrease in turnover for both CSL Limited and Baxter International in 2009. Baxter International has been able to use its assets better in 2009 as compared to CSL Limited. CSL and Baxter both needs to improve their turnover. It is a concern for CSL Limited as their turnover ratio has fallen continuously over a period of time and is a concern. Inventory Turnover Ratio: “It is defined as the number of times inventory is rolled over during a year”. (Joseph, 2010) Companies prefer it to be high. It is calculated as “Cost of Goods Sold / Average Inventory”. The ratios for both the companies are as The above ratio indicates that Baxter International has revolved its inventory more compared to CSL Limited. CSL Limited has also been consistent and shows proper management but needs to improve. Baxter International on the other hand has decreased their turnover ratio in 2009 as compared to 2008. Both the companies need to improve it but still the ratio seems sound and consistent. This will ensure less money in inventory and help to ensure that the funds are not blocked. CSL Limited needs to improve it and match Baxter International. Market Performance Ratio This ratios help to find the shareholders confidence in the company. This ratio helps to find the prediction the shareholders have and company’s performance is also reflected here. A company having sound capital market ratios ensures that people prefer this companies and this is seen by the growth in share prices. The ratios which will help to find the capital market are as follows Earnings per Share: “It is defined as the profit attributed to the equity shareholders”. (Joseph, 2010) It is calculated as “Net profit available to ordinary shareholders / weighted number of ordinary shares on issue”. The ratios for both the companies are as follows The above ratio indicates soundness on the part of both the companies. CSL Limited has a higher earning per share indicating that the shareholders are getting a good return. The return for CSL Limited and Baxter International has increased in 2009 as compared to 2008 which shows that the profit has grown. CSL Limited on the other hand has improved their earnings and it reflected on the well being of the shareholders. The overall result for both the giants seems sound and is a good prospect to invest. Baxter International needs to further improve their return so that more people invest in the company. Shareholder Analysis The performance of CSL Limited and Baxter International shows an avenue of investment for the shareholders. CSL Limited is a better company to invest as the returns per share is better compared to Baxter International. The performance and safety of funds as seen from the quick and current ratio shows a good company to invest in. CSL Limited seems as a good company to invest as the company has scope for growth due to low loans and with similar profits and growth shown by the company it is a good venture to invest in. Overall both the companies seem sound but CSL Limited is better placed than Baxter International and is a better avenue to invest in for the shareholders. Findings The liquidity position especially the current ratio is sound for CSL Limited and Baxter International and CSL Limited needs to take steps to bring it down as the assets are more than warranted. Both the companies due to the nature of business have a huge inventory which are affecting the quick ratio but is according to industry standards. The long term debt ratios is sound for Baxter International and have the scope to take loan for further development but CSL Limited needs to improve it drastically so that it is able to save on taxes The companies have used their short term debt to finance long term assets is a worrying factor and steps needs to be taken. CSL Limited and Baxter International profit has improved in 2009 as compared to 2008 and it needs to continue similarly so that it stays ahead of Baxter International The capital market analysis ratio shows wide improvement for Baxter International in 2009 and when we compare it to CSL Limited it shows better performance highlighting that Baxter International have better projects and this can help them but CSL by virtue of low loans have scope for more future projects and needs to improve those. The financial analysis shows that CSL Limited and Baxter International performance has improved in 2009 as compared to 2008. CSL Limited need to improve its strategies and management so that it can stand better than Baxter International who have been performing on a consistent basis. Conclusion CSL Limited and Baxter International both have been performing on similar lines and have been successful. The financial statement even highlights similar facts. Both the companies can improve with better strategy. The financial ratios of both the companies show some demarcating things and also highlight the different strategies taken by each. This even highlights that companies similar in nature use different strategies and improve their performance. Both this companies have room for improvement and with the growth this sector is showing it gives them opportunity to capture a good market and grow. Recommendations CSL Limited needs to improve its current ratio so that it reflects soundness in its policies and strategies Both the companies need to reduce the amount held in inventories as it is high leading to a lot of money being invested Both the companies need to take more debt especially long term so that they are able to save on the taxes and is a serious concern for CSL Limited CSL Limited needs to reduce its indirect cost, improve efficiency, bring down assets and improve their management CSL Limited and Baxter International need to improve the inventory turnover ratio CSL Limited need to ensure that to stay ahead of competition it comes with new projects which helps them to utilize their assets properly and ensure better efficiency Limitations Inflation and changes in price has not been accounted for which might be misleading Historical cost has been considered which might not be true in the present scenario as value changes with time Changes in technology for production, distribution, marketing has not been accounted for which might give different result References Financial Modelling Guide, 2010, “Liquidity ratios”, retrieved on August 29, 2010 from http://www.financialmodelingguide.com/financial-ratios/liquidity-ratios/ Joseph K, 2010, “Analyzing an income statement: Return on Assets”, about.com guide, The New York Times Company Joseph K, 2010, “Analyzing an income statement: Return on Equity”, about.com guide, The New York Times Company Joseph K, 2010, “Analyzing an income statement: Inventory Turnover”, about.com guide, The New York Times Company Kennon J, 2010, “Analyzing an income statement: Gross Profit”, about.com guide, The New York Times Company Kennon J, 2010, “Analyzing an income statement: Net Profit Margin”, about.com guide, The New York Times Company Micro Strategy, 2010, “Financial Analysis”, retrieved on August 29, 2010 from http://www.microstrategy.com/financial-analysis/ Transtutor, 2010, “Capital Structure Ratios”, retrieved on August 29, 2010 from http://www.transtutors.com/finance-homework-help/dividend-decisions-and-tools-of-financial-planning/Capital-Structure-Ratios.aspx CSL Limited Website, 2010, retrieved on August 29, 2010 from http://www.csl.com.au/s1/cs/auhq/1182280826145/content/1182280826258/home.htm Baxter International Website, 2010, retrieved on August 29, 2010 from http://www.baxter.com/ Appendix 1. Calculation of Current Ratio for CSL Limited Current Ratio for 2007 = Current Assets / Current Liabilities = 2226092 / 797666 = 2.79 Current Ratio for 2008 = Current Assets / Current Liabilities = 2610626 / 835954 = 3.12 Current Ratio for 2009 = Current Assets / Current Liabilities = 4949048 / 1225650 = 4.03 2. Calculation of Current Ratio for Baxter International Current Ratio for 2008 = Current Assets / Current Liabilities = 7148 / 3635 = 1.97 Current Ratio for 2009 = Current Assets / Current Liabilities = 8271 / 4464 = 1.85 3. Calculation of Quick Ratio for CSL Limited Quick ratio for 2007 = (Current Assets – Inventories) / Current Liabilities = (2226092– 1128281) / 797666 = 1.38 Quick ratio for 2008 = (Current Assets – Inventories) / Current Liabilities = (2610626 – 1198133) / 835954 = 1.69 Quick ratio for 2009 = (Current Assets – Inventories) / Current Liabilities = (4949048 – 1522039) / 1225650 = 2.8 4. Calculation of Quick Ratio for Baxter International Quick ratio for 2008 = (Current Assets – Inventories) / Current Liabilities = (7148 – 2361) / 3635 = 1.32 Quick ratio for 2009 = (Current Assets – Inventories) / Current Liabilities = (8271 – 2557) / 4464 = 1.28 5. Calculation of Debt to Equity for CSL Limited Debt to Equity Ratio for 2007 = Long Term Debts / Equity = 1139179 / 2268849 = 0.5 Debt to Equity Ratio for 2008 = Long Term Debts / Equity = 1052885 / 2806125 = 0.38 Debt to Equity Ratio for 2009 = Long Term Debts / Equity = 678270 / 5462895 = 0.13 6. Calculation of Debt to Equity for Baxter International Debt to Equity Ratio for 2008 = Long Term Debts / Equity = 3362 / 6291 = 0.53 Debt to Equity Ratio for 2009 = Long Term Debts / Equity = 3440 / 7420 = 0.46 7. Calculation of Net Profit Margin for CSL Limited Net Profit Margin for 2007 = Net Profit / Sales * 100 = 539299 / 3172397 *100 = 17% Net Profit Margin for 2008 = Net Profit / Sales * 100 = 701802 / 355662 *100 = 19.73% Net Profit Margin for 2009 = Net Profit / Sales * 100 = 1145932 / 4622387 * 100 = 24.79% 8. Calculation of Net Profit Margin for Baxter International Net Profit Margin for 2007 = Net Profit / Sales * 100 = 1721 / 11263 *100 = 15.28% Net Profit Margin for 2008 = Net Profit / Sales * 100 = 2014 / 12348 *100 = 16.31% Net Profit Margin for 2009 = Net Profit / Sales * 100 = 2205 / 12562 * 100 = 17.55% 9. Calculation of Return on Assets for CSL Limited Return on Assets for 2007 = Net Income / Total Assets * 100 = 539299 / 4199694 * 100 = 12.84% Return on Assets for 2008 = Net Income / Total Assets * 100 = 701802 / 4694964 * 100 = 14.95% Return on Assets for 2009 = Net Income / Total Assets * 100 = 1145932 / 7366815 * 100 = 15.55% 10. Calculation of Return on Assets for Baxter International Return on Assets for 2008 = Net Income / Total Assets * 100 = 2014 / 15405 * 100 = 11.6% Return on Assets for 2009 = Net Income / Total Assets * 100 = 2205 / 17354 * 100 = 12.7% 11. Calculation of Return on Equity for CSL Limited Return on Equity for 2007 = Net Income / Equity * 100 = 539299 / 2268849 * 100 = 23.8% Return on Equity for 2008 = Net Income / Equity * 100 = 701802 / 2806125 * 100 = 25% Return on Equity for 2009 = Net Income / Equity * 100 = 1145932 / 5462895 * 100 = 20.97% 12. Calculation of Return on Equity for Baxter International Return on Equity for 2008 = Net Income / Equity * 100 = 2104 / 6291 * 100 = 32.01% Return on Equity for 2009 = Net Income / Equity * 100 = 2205 / 7420 * 100 = 29.72% 13. Calculation of Inventory Turnover Ratio for CSL Limited Inventory Turnover Ratio for 2007 = Cost of Goods Sold / Average Inventory = 1737543 / 1128281 = 1.54 Inventory Turnover Ratio for 2008 = Cost of Goods Sold / Average Inventory = 1928683 / 1198133 = 1.61 Inventory Turnover Ratio for 2009 = Cost of Goods Sold / Average Inventory = 2399720 / 1522039 = 1.58 14. Calculation of Inventory Turnover Ratio for Baxter International Inventory Turnover Ratio for 2008 = Cost of Goods Sold / Average Inventory = 6218 / 2361 = 2.63 Inventory Turnover Ratio for 2009 = Cost of Goods Sold / Average Inventory = 6037 / 2557 = 2.36 15. Calculation of Earning Per Share for CSL Limited Earning per Share for 2007 = Net Income / Outstanding shares = 98.46 (given in financial statement) Earning per Share for 2008 = Net Income / Outstanding shares = 127.85 (given in financial statement) Earning per Share for 2009 = Net Income / Outstanding shares = 192.51 (given in financial statement) 16. Calculation of Earning Per Share for Baxter International Earning per Share for 2007 = Net Income / Outstanding shares = 2.65 (given in financial statement) Earning per Share for 2008 = Net Income / Outstanding shares = 3.22 (given in financial statement) Earning per Share for 2009 = Net Income / Outstanding shares = 3.63 (given in financial statement) 17. Calculation of Asset Turnover Ratio for CSL Limited Asset Turnover Ratio for 2007 = Sales Revenue / Average Total Assets = 3172397 / 2268849 = 1.4 Asset Turnover Ratio for 2008 = Sales Revenue / Average Total Assets = 3556662 / 2806125 = 1.28 Asset Turnover Ratio for 2009 = Sales Revenue / Average Total Assets = 4622387 / 7366815 = 0.63 18. Calculation of Asset Turnover Ratio for Baxter International Asset Turnover Ratio for 2008 = Sales Revenue / Average Total Assets = 12348 / 15405 = 0.8 Asset Turnover Ratio for 2009 = Sales Revenue / Average Total Assets = 12562 / 17354 = 0.72 Read More