Assignment Unit II:

Company Profile Case Study

Financial statements are very useful because they can be used to predict future metrics for a

company by using analysis of financial ratios. Business activities mentioned include a brief

introduction of the company (products / services provided) and net value. Several positive

baseline ratios help you gauge how well your business is, address potential problems, and see if

the business is performing better or worse over time. What is one of the bonds you choose to

issue? How does a capacity shareholder determine the financial worth and peril of a bond and the

approach of the time value of money?

Body

A brief introduction of the company

Commonwealth Bank was established by the Australian Government in 1911 and privatization

was completed in 1996 before ANZ and NAB, CBA and its subsidiary involved in providing a

wide range of banking products and services. and finance for retail businesses, small businesses,

business, and institutional customers (1). Headquarters at Darling Park Tower 1, 201 Sussex

Street, Sydney, New South Wales, Australia.

Commonwealth Bank is Australia's largest bank transactions and puts forward client extensive

variety of products and services, containing mortgages, charge cards, preservations, and

chequing accounts. It has the enormous ramify and ATM network. It also provides services for

people planning to move to Australia (2).

customers to transfer money, manage accounts, access assets and liabilities, and manage savings

and savings goals. NetBank also offers a mobile app available for iOS and Android (3).

In fiscal year 2020, the total assets of the Commonwealth Bank of Australia amounted to about

A $ 1,014 billion. CommBank is one of the largest Australian banks in the world, with presence

in New Zealand, Asia, the United States, and the UK [ CITATION LGr20 \l 1033 ]. Commonwealth

Bank of Australia's net worth as of February 19, 2021 is $ 115.07 billion (4).

How the company is doing with respect to the ratios

The use of financial ratios is a proven method of analyzing business performance over time. Wall

Street investors, bank lenders and savvy business owners all use financial ratio analysis to learn

more about their current health and financial potential. Commonwealth Bank is no exception.

To start with, Debt to Equity is a financial measure of a business's ability to use and manage

debt. Help investors have an overview of financial strength and financial structure of the

business. According to data from (Ycharts, 2020), Commonwealth Bank of Australia's debt to

equity for the quarter ended December 2020 was 2.36 (6). As might be seen, this ratio is greater

than 1, a high Debt to Equity Ratio generally means that a company has actively financed its

growth with debt. This can lead to fluctuating income due to increased interest expenses.

However, using debt also has the advantage that interest expense will be deducted from

corporate income tax.

So, the Commonwealth Bank operates effectively or not? They will go to the Return on Equity

section to evaluate the company's performance. ROE measures the profitability of the Bank. It

shows the net return generated as a percentage of equity that the shareholders have invested.
Commonwealth Bank of Australia leads the four major banks in Australia as of March 2020,

reporting the highest average return on equity of 12.7% through December 2020 Bank ROE, the

CBA for the quarter ended at 13.84% (7) while ANZ declined to 6.2% and NAB declined by

approximately 7% [ CITATION Tim20 \l 1033 ]. The ROE considered good or bad can depend on

the average ROE in the company's industry. Some industries tend to have a higher ROE than

others (or require less equity capital to operate). Hence, the ROE comparison is often the most

meaningful among companies in the same industry. And the definition of a "high" or "low" rate

should be made in this context. For example. In 2019 to now [CITATION FNo19 \l 1033 ], the

average rate of return on equity (ROE) for companies in the banking industry is 11.39%.

However, Commonwealth Bank's ROE is approximately 14%. The higher the ROE, the more it

shows that the bank is effectively managing and using its capital. When looking at calculating a

company's ROE, experts usually do not rate it on an odd year, but for a period of at least 3 years.

A company with an ROE of> 20% for 3 consecutive years is considered to have good

competitiveness.

To create profits, businesses need capital, capital can be financial resources from external loans

so what is the degree Current Ratio of CBA to be able to repay the debt? This coefficient is used

to measure the firm's ability to pay off short-term debts (such as debts and liabilities) with the

firm's short-term assets, such as cash, receivables, and goods inventory). CBA had Current

Assets which was 573.83B and Current Liabilities was 509.65B so we can get the Current Ratio

for the three months ending June 30, 2020 was 1.13 (10). Ratio larger than 1 this means the

amount of assets only paid for the other current debt is entirely possible.

Price to Earnings Ratio (P/E Ratio) is commonly known as one of the important financial

indicators used to price and evaluate the (relative) potential of a security. Commonwealth Bank
of Australia's PE Ratio for today is 20.86 for February 2021 (11). For instance, CBA stock's P/E

in February 2021 was 19.73, which means investors are willing to pay 19.73$ for every dollar of

CBA earnings. But in general, many value investors consider that lower is better. eg Australia

and New Zealand Banking Group PE Ratio (ANZ) 25.74 for February 2021(12). Compared to

CBA, ANZ’s P/E Ratio was larger, a higher number could mean no longer a bargain the earnings

per share at the same time.

This is the portion of the profit the company allocates for each common share that is circulating

in the market. Earnings Per Share is used as an index showing the profitability of the business.

Current Commonwealth Bank Earnings Per Share was 4.50 times in 2021 (13). If the net value is

higher than the market price, Commonwealth Bank of is considered undervalued and we

recommend buying. If not, we give a sell signal. However, there is no range for healthy EPS.

You should always use other metrics accompanied by the EPS to value a company. For a more

realistic example, let's consider Apple (AAPL) and Goldman Sachs (GS). Apple's EPS in 2014

was $ 6.45, while Goldman Sach's was $ 17.07. However, Apple's net profit was $ 39.51 Billion,

but Goldman Sach's total revenue was $ 34.528 Billion. So, Apple made $ 5 billion more than

Goldman even after paying all their account despite having a lower EPS.

What are the key features of one of the bonds issued by your chosen company? Discuss

how the bond’s terms and collateral can affect the bond’s interest rate.

Commonwealth of Australia issues bonds known as Commonwealth Government Securities,

which tend to pay lower interest rates than corporate bonds. This is because the Australian

Government is generally perceived to be less risky than bond issuers and earnings are predictable

due to the issuer's creditworthiness and almost certain money the original will be returned to the

investor upon maturity. Australian Government bonds currently have an AAA long-term credit
rating from Standard & Poor's (S&P), indicating an extremely strong ability of the issuer to meet

financial commitments (14). The Australian Government has never defaulted on the interest

payments on issued bonds or on the repayment of principal invested in them. Therefore,

government bonds are considered a highly safe investment product, second only to cash at the

end of the risk spectrum.

The yield on a Government Bond is the rate at which the government borrows. Because they are

safe, tend to have lower yields because investors do not require the government to pay a high

interest rate. The maturity term of a bond is the period during which the issuing company

borrows money. When a bond matures, the borrower will repay the original loan amount.

Maturity is another important aspect of a bond. From a technical perspective, the term definition

is the amount of time it takes you to get your initial loan back through the different cash flows of

the bond. It is preconceived by year.

Collateral affect interest rates like? The power of the federal or state government to increase

revenue through taxes is considered safer than collateral. As a result, unsecured government

bonds may have a higher rating than collateralized government bonds. This is mainly an issue for

municipal bonds. For example, municipal bonds are not secured by collateral secured by the

government's power to increase taxes and generate the capital required to pay bonds. Because

government mortgage securities are not backed by government tax powers, they are more risky

than other government bonds and may therefore have higher interest rates on bonds.

How would a potential investor determine the value and risk of the bond?

When evaluating a bond's potential performance, the investor needs to consider certain variables.

The most important aspects are: The bond's current price relative to its par value is one. The
bond reaches maturity is another changeable. The nominal interest rate and yield - the bond's

efficacious yield, based upon its cost and value. Rearmost is redeeming - whether the emitter

can call back the bond prior.

What are the foremost risks of devoting in Corporate Bonds? Legitimate risk is associated to

whether bonds are illicitly issued or not and bond transactions are rational or not. Risk of non-

repayment is connected to the potentiality of a bond issuer to pay debts or to redeem bonds of a

dealer under pledge. Liquidity risk is linked to whether investors can re-sell bonds before

maturity in the case that crisis capital withdrawal.

Explain the concept of the time value of money (TVM) as it applies to the company’s bond

offerings.

The time value of money is the level to which cash is now more precious than similar money at

some point henceforth, owing to its prospective for widening. Interest is a main quantifiable

depiction of the time value of money. When enduing in bonds, to illustrate, interest shoots up the

value of a deposit extra-time if reinvested. Nevertheless, an innocuous bond does not constantly

give an investor the awaited return on investment from an asset's valuing over time, because of

numerous risk factors fundamental in interest, like inflation.

The concept of the time value of money can be described in two different, but somewhat the

same perspectives. On the one hand, it be the purchasing power of money over time. For

example, with 10$, I could buy many goods, but for the same amount of money, five years from

now, I will not be able to buy the same goods. Then, if I need 11$ to buy the same goods, we can

say that 10$ today equates to 11$ over a 5-year period. This concept, according to predictions, is

fundamentally related to the notion that inflation leads to price increases over time. Another way
to look at the concept of the time value of money is to see it to increase the total amount invested

through interest accumulation (invest money today to make a profit), to get a price. higher value

in the future (or, alternatively, borrow today an amount that allows me to buy something I want,

and I will pay in the future, then need a higher amount on the interest of the loan borrow).

Suppose to put it simply, a similar rate of investment or borrowing will represent the driving

force that creates the value of money over time.

Conclusion

In short, Commonwealth Bank has a secure financial position. All 4 major banks are quite

similar in terms of services and standards but if you want to choose one bank and do all your

banking activities with that one then CBA is fine. They are far ahead in terms of technology

compared to any other bank in Australia. Their trading system is better, and their portfolios are

better integrated. They have more branches, more ATMs, more employees, and more services.

You can have a trading account with CBA and other savings account for better interest rates and

credit cards with other banks for points, etc.

(1) About Commonwealth Bank. Achieved 22 February 2021.

https://www.commbank.com.au/about-us.html.

(2) Our company. Achieved 22 February 2021. https://www.commbank.com.au/about-

us/our-company.html

(3) NetBank. Achieved 22 February 2021. https://www.commbank.com.au/digital-

banking/netbank.html?ei=access_NB.

(4) First Commonwealth Financial Net Worth 2006-2020 | FCF. Achieved 22 February 2021.

https://www.macrotrends.net/stocks/charts/FCF/first-commonwealth-financial/net-worth.

(5) L. Granwal. (2020). Total assets of the Commonwealth Bank of Australia FY 2011-

2020. Statista. Achieved 22 February 2021.

https://www.statista.com/statistics/692561/commonwealth-bank-of-australia-total-assets/.

(6) Ycharts. (2020). Commonwealth Bank of Australia Debt to Equity Ratio. Achieved 22

February 2021. https://ycharts.com/companies/CMWAY/debt_equity_ratio.

(7) Annual report 2020. Achieved 22 February 2021.

https://www.commbank.com.au/content/dam/commbank/about-

us/shareholders/pdfs/results/fy20/cba-2020-annual-report.pdf.

(8) Dring T. (2020). Australian major banks’ full year results 2020: The waiting game.

Achieved 22 February 2021. https://www.ey.com/en_au/economics/australian-banking-

full-year-results-2020.
(9) F. Norrestad. (2020). Return on average equity of the U.S. banking industry 1996-2019.

Statista. Achieved 22 February 2021. https://www.statista.com/statistics/211988/return-

on-average-equity-for-all-us-banks/

(10)Commonwealth Bank Of Australia Current Ratio 2020-2020 | CMWAY. Macrotrends.

Achieved 22 February 2021.

https://www.macrotrends.net/stocks/charts/CMWAY/commonwealth-bank-of-

australia/current-ratio.

(11)Ycharts. (2021). Commonwealth Bank of Australia PE Ratio. Achieved 22 February

2021. https://ycharts.com/companies/CMWAY/pe_ratio

(12)Ycharts. (2021). Australia and New Zealand Banking Group PE Ratio. Achieved 22

February 2021. https://ycharts.com/companies/ANZBY/pe_ratio

(13)Macroaxis. (2021). Commonwealth Earnings Per Share. Achieved 22 February 2021.

https://bom.to/Bsf9q52Gyj

(14)Commonwealth Bank of Australia ABN 48 123 123 124. Fixed Income Guide. Achieved

22 February 2021.

https://www.commbank.com.au/content/dam/commbank/assets/corporate/solutions/fixed-

income-guide.pdf.