HC1010 Analysis of the Financial Statements

Analysis of the financial statements is the very important part of the financing function. The analysis shall be done by each and every company operating in the countries irrespective of the form of the industry to which the company belongs. It may be of financing industry or from real estate. It is because only through the analysis of the financial statements, the company came to know about the financial health and performance of the company. Through this report the financial statements of the company – Insurance Australia Group Limited has been done with the help of the accounting ratios and that too for the consecutive period of two years so as to provide the trend analysis also.

Secondly the analysis of the corporate governance of the company has been made with respect to the necessary disclosures made by the company in the statement of the corporate governance. Corporate governance provides an insight about the proper functioning of the management of the company. The competitors of the companies have also been considered in the analysis which has equipped the users of the financial statements and the stakeholders about the strategies adopted by the company to grow the company in the future. The report has then ended up with the conclusion stating the fact and the results that has been gathered in the whole of the report.

With these considerations, the report has prepared and presented for the stakeholders of the company.       

For the purpose of the calculation of the financial ratios, the annual report of the company for the last two years ending 2017 and 2016 have been considered (Insurance Australia Official Website, 2017). The liquidity ratios and the profitability ratios have been calculated as under:

Financial ratios are the best ways through which the financial condition of any company and individuals can be analysed. In case of the chosen company the aforementioned ratios have been calculated and analysed below:

1. Net Profit margin ratio is the ratio which determines the net earnings in relation to the turnover made by the company. It has been increased from 12.22% in the year of 2016 to 15.76% in the year of 2017. It depicts that the company is performing will in relation to earlier year.
2. Rate of Return on total assets provides the figure as to how efficiently the assets are being utilized in the generation of profits. It is clear that the assets are being utilized in an efficient manner by having the increased ratio from 3.06% in the year of 2016 to 4.51% in the year of 2017.
3. Rate of Return on shareholder equity provides the figure as to how the per dollar investment of the shareholder helps in achieving the higher generation of profits. The observation is positive with the increased ratio from 13.56% in the year of 2016 to 19.64% in the year of 2017 (Anastasia, 2015).
4. Gross Profit margin has been increased by 0.29% only irrespective of the 8.03% increase in the figure of the revenue. It entails that the trading pattern of the company has been changed due to which the company’s gross profit has been improved by small amount.
5. Earnings per share provide the amount that is attributable to the shareholders and the amount they will earn on the amount they have invested per share. The earnings per share have been tremendously increased from 25.79 in the year of 2016 to 39.03 in the year of 2017 (Lusardi, 2017).
6. Current ratio helps in analyzing the short term liquidity of the company and the same has been decreased from 7.48 in the year of 2017 to 6.45 in the year of 2016, it depicts that the company is not managing their working in an efficient manner.
7. Quick ratio is equivalent to the current ratio because of non presence of prepaid expenses and inventories.
8. Cash flow ratios have also been calculated and each of the five cash flow ratios there is separate significance. First ratio is operating cash flow ratio which describes the amount of cash required to generate every dollar amount of the revenue. In the year ending 2016, the cash flows has been negative 1946 dollars and in 2017 it has been positive 636 dollars which shows that the company has been able to improve its cash management procedures and the cash flow conditions (Edwards, 2015). Second ratio is the asset efficiency ratio which ascertains the effective utilization of the assets to generate the cash flows. The analysis has been same because the operating cash flow is the numerator in the equation. Similar analysis has been made in the current liability and long term debt coverage ratio which helps in understanding as to whether the company would be able to pay the current liability and long term debt in time. The last ratio which is very important is the cash generating power ratio which helps in ascertaining the ability of the company to generate the operating cash flows as compared to the total cash flows. Again the analysis is the same and in the current year, there has been tremendous change from negative 5.7 to positive 1.6.

With the help of the ratios and the figures, the trend analysis has also been made in the following major items:

1. Increase in Net Profit in relation to Revenue – The revenue of the company has been increased by 8% approximately in 2017 as compared to the year of 2016. But the net profit has been increased by 3.54% only which exhibits that the expenses have also been increased as compared to the earlier year.
2. Decrease in Current Assets – The value of the current assets has been decreased in relation to the increase in revenue. It exhibits that the cash flows of the company has been increased and the same is very clear from the cash flow statement read with the cash flow ratios.
3. Decrease in Long Term Debt – There has been decrease in the long term debt which ensures that the company has paid the debt from the cash flows generated during the year and hence it is the positive indication for the growth of the company.

With this the analysis of the ratios and the trends have been made and have been found positive about the future certainty of the company keeping in consideration of the financial crisis that has happened in the last decades. 

The chosen company is Insurance Australia Group Limited and is into the financing sector of Insurance and is registered in Sydney, Australia and is in existence for 90 plus years. The company is providing not only the insurance of businesses but also for the individuals and also includes the motor vehicle and compensation to workers insurance. The company operates its functions through online mode under the brand name of Buzz (Insurance Australia Official Website, 2017). There are three chief competitors of the company. One is Westpac Banking Corporation, second is Commonwealth Bank Limited and the third one is Suncorp – Metway Limited. Each of these companies has different strategies of operations and are working edge to edge basis for each other.  

Westpac Company is founded in the year of eighteen hundred and seventeen and has been found as one of the top rival of the company and as on that the company is employing 20000 more employees than the chosen company. The company has celebrated its 200^th century in the year of 2017 and serving more than 12 million customers. But recently the company has been fined for having the ineffective and bad mortgage system.

Common Wealth bank is also founded in Australia in the year of 1911 and has 38000 more employees than the chosen company and accordingly the company has the roots in the banking industry with the larger effect. Suncorp Company has been founded in Queensland having employees nearer to the chosen company but has been able to generate the revenues equal to the approximately 6.42% of the revenue of the chosen company. Thus, in this manner each of the competitors has its own significance with regard to the chosen company.

Corporate Governance is the code of conduct along with the policies, procedures and rules and regulations which are required to be ensure that the interest of the stakeholders and the shareholders of the company have been considered with completeness (Dandino, 2014).

As per the statement of corporate governance as hosted on the website of the company, it has been observed that the necessary compliance has been made with the third edition of Principles and Recommendation of Australia Securities Exchange Corporate Governance Council. Also, the board of director has the full responsibility to ensure the compliance with the corporate governance framework which is accordance with the provisions of the Corporations Act 2001. Following are the facts observed from the statement of corporate governance and is worth mentioning as it shows the negative as well as positive side of the effective management of the company.

Board’s Role

As per the first principle of the laying foundations for management and oversight, the responsibility has been given totally to the board of director for protecting the various interests of the shareholders as well as the stakeholders and for the effective running of the functions of the company. Following are the areas where there attention is required:

• Strategies of the group towards the organizational objectives.
• Maintaining the integrity and faithfulness of the financial information and reporting system of the company

The statement has laid down the responsibilities for Chief Executive Officer also (Insurance Australia Official Website, 2017). As per the provisions of Corporations Act 2001, he shall make all the endeavors to manage the routine affairs of the company and if any regularity comes under observation then the same shall be brought by him to the notice of the management of the company in order to have the correction there from (Cameron, 2014). 

Ethical and Responsible decision making

The third principle makes the company to mention all the ethical requirements that every employee and officers shall follow. The same has been done and to mention it better the company has bring on its roll the well known ethicist - Dr Simon Longstaff (Insurance Australia Official Website, 2017) .

Conclusion

The report has been prepared with the objective of providing the detailed information about the company and its working. The working has been analysed not only in the form of the financial but also through the performance of the competitors and more important through the effectiveness of the corporate governance. Each of the analysis is very important for understanding the function of the company and the same has been depicted from and exhibited in the report. The report has taught that the financial ratios have the important role in getting the detailed degree of the performance of the company as each of the ratios have its own significance and each of them has different linkage to different concepts. Second lesson that has been concluded from the report is that the competitor’s analysis is required before taking any necessary step.

References

Anastasia, (2015), “Financial Statement Analysis : An Introduction” available on https://www.cleverism.com/financial-statement-analysis-introduction/   accessed on 05/09/2018

Cameron A, (2014), “Corporate Governance Principles and Recommendations”

Dandino P. (2014), “Corporate Governance : Something for everyone”, Franchising World, pages 40-41.

Edwards, A., (2015),  “Financial constraints and cash tax savings”. The Accounting Review, 91(3), pp.859-881. 

Insurance Australia Official Website, “Annual Report 2017”

Lusardi, A.,  (2017), “Optimal financial knowledge and wealth inequality”. Journal of Political Economy, 125(2), pp.431-477.