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Discuss about the Financial Statement Analysis for CIMIC Group Limited.
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CIMIC Group Limited is an ASX listed company and is in existence since the year 1989 with more than 50000 employees over 20 countries. The company is the member of S&P/ASX 100 index, FTSE4Good and Dow Jones Sustainability Australia Index. The company is well known for its integrity principles, innovation, delivery, accounting and is underpinned by the safety. These principles are underpinned by continuous factors focussing on safety that is fundamental for the operation of the company. The mission of the company is to create sustainable returns for the shareholders through delivery of the projects to clients taking into consideration the rewarding, fulfilling and safe careers for the employees. Further, the company supports collaborative and united culture where the employees are aligned for achieving the superior performance (Cimic.com.au 2018).
The company is mainly engaged in providing mining, construction, engineering, mineral processing, operation, concession and maintenance services for property, resources and infrastructure markets. It operates through mining and mineral processing, private public partnership, residential and commercial, services, engineering and HGL segments. The company is further engaged in construction of rails, roads, tunnels, buildings, airports, and various social projects for infrastructure. It is also engaged in resources, energy and water facilities, gas and oil structures, infrastructure projects like geothermal energy, installations of waste to power, utility-scale wind and renewable energy. Apart from these the company also provides asset management, maintenance, operation and facilities as well as ICT solutions and telecommunication services to commercial and industrial clients and governmental agencies Cimic.com.au 2018).
Major changes regarding the financial performance of the company were increase of revenue by 24% that was generated through solid contributions from the core businesses of the company. Further, the net profit after tax was increased by 21% and the free operating cash flow was increased by 12%. These increases were supported by improved rating in investment grade. These were achieved due to exceptional work of 50,000 employees (Cimic.com.au 2018).
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Ratio
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Formula
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2017
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2016
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2015
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Interpretation
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Profitability ratio
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Net profit margin
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Net profit/Sales * 100
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5.23
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5.35
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3.89
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Net profit margin that is also known as the net margin states the amount of net income the company can generate with the total sales (Vogel 2014). Net profit of the company has been increased over the years from 2015 to 2016. However, it slightly reduced in 2017 as compared to 2016 (Cimic.com.au 2018).
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Return on Asset
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Net profit/Total assets * 100
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7.34
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5.77
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5.38
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Return on asset indicates the profitability of the company with regard to its assets. ROA states the management’s efficiency considering the usage of assets for generation of earning (Brigham et al. 2016). ROA is important as it helps in analysing the profitability status of the company. Further, it can be used for comparing the performance of the company with previous years. Looking into ROA of the company it can be identified that the ROA of the company is in increasing trend that states that the profitability status of the company over 3 years period has improved (Cimic.com.au 2018).
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Stability ratio
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Debt to asset ratio
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Total liabilities / total asset
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0.65
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0.67
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0.57
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Debt to total assets indicates the financial leverage of the company. It states the total asset percentage financed by the creditors. Increasing trend of debt to asset ratio indicates that the company is unable to pay off its debt that further indicates that the company may be at default for payment (Babalola and Abiola 2013). It can be identified from the debt to asset ratio of the company that it is increasing trend that indicates that the leverage position of the company is increasing (Cimic.com.au 2018).
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Debt equity ratio
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Total liabilities / total equity
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1.85
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2.06
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1.35
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Debt equity ratio that is also called as the risk ratio or gearing ratio indicates the proportion of total debt and financial obligations against shareholder’s equity. High debt equity ratio will be considered good if the firm is able to meet its debt obligation comfortably. Further, the debt cost is lower as compared to cost of equity as the debt expenses are deductible expenses under tax whereas the equity expenses are not (Heikal, Khaddafi and Ummah 2014). Looking into the debt to equity ratio of the company it is recognized that the debt to equity ratio of the company has been increased over the years from 2015 to 2016. However, it has been reduced over the years from 2016 to 2017 (Cimic.com.au 2018).
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Liquidity ratio
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Current ratio
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Current assets / Current liabilities
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0.99
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0.87
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1.24
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The current ratio is the efficiency and liquidity ratio that is used to measure the ability of the company to pay off the short-term obligations. It is an important measure for liquidity as the short term obligations are payable within short period of time (Ehiedu 2014). Hence, the company gets limited time for raising funds for paying off these obligations. Generally the current ratio of 1 or more than that indicates that the liquidity position of the company is good. Looking into the current ratio of the company it is identified that except for 2015 the current ratio for other 2 years are less than 1 (Cimic.com.au 2018).
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Quick ratio
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(Current assets – inventories) / current liabilities
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0.95
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0.83
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1.18
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Quick ratio that is also known as the acid test ratio is used to measure the ability of the company to meet the short term obligations. It is called as liquid ratio as the most liquid current assets like inventories are not taken into consideration as these are not convertible to cash rapidly and are generally sold on credit (Enekwe, Agu and Eziedo 2014). Looking into the quick ratio of the company it is identified that except for 2015 the quick ratio for other 2 years are less than 1 that indicates that the liquidity position of the company is not satisfactory (Cimic.com.au 2018).
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Efficiency ratio
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Account receivable ratio
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Sales / average receivables
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4.18
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3.70
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4.39
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It is an efficiency metrics that is used to measure the efficiency of the company with regard to the collection of its debts. High receivable ratio indicates various things like whether the company is operating on cash basis or credit basis, receivable collection strategies of the company and credit period generally allowed by the company. High ratio also indicates that the company has conservative credit policy. It may drive away the potential customers and competitors may take away the business (Amba 2014). Looking into the account receivable ratio it can be identified that the receivable ratio has been reduced over the years from 2015 to 2016. However, it is increased in the year 2017 as compared to the year 2016 (Cimic.com.au 2018).
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Sustainability is the integral part of value creation. The company’s approach is to build reputation as the choice provider with the shareholders and clients and to create positive legacy for the shareholders and communities under which it operates. Further, the company’s sustainability performance recognised during the year 2017 by industry leader DJSI (Dow Jones Sustainability Indices). Under this the company was recognised as only engineering and Construction Company that was included under DJSI’s Australia Index. The company was recognised as the ‘industry best’ performer in various categories. Further, for the 2nd time they were included under the FTSE4Good where the performance of the companies are measured for demonstrating strong governance, social and environmental practices (Bartholomew 2018). As per the analysis, key matter of company’s success is its financial health. Its debt levels and liquidity position strongly indicates that the company is is able to fund the strategic acquisitions for the purpose of future growth. However, it is found that though the earnings growth of the company is positive, the growth rate is lower than the average of Australian market. However, in future it is expected that the company’s revenue growth will be higher than the average of Australian market (Simply Wall St 2018).
Conclusion
From the above analysis it can be concluded that the net profitability status of the company over the last 3 years has been improved. Net profit margin has been increased from 3.89% to 5.23% over the years from 2016 to 2017. Further, the return on assets has been increased from 5.38% to 7.34% over the years from 2016 to 2017. Further, the debt asset ratio of the company is stating that the company is lower leveraged. Though the liquid ratio of the company is lower than required it can be increased through paying off the short – term obligations of the company. Therefore, the overall performance of the company is good and the company’s stock can be recommended to consider for investing by the potential investors.
Reference
Amba, S.M., 2014. Corporate governance and firms’ financial performance. Journal of Academic and Business Ethics, 8(1).
Babalola, Y.A. and Abiola, F.R., 2013. Financial ratio analysis of firms: A tool for decision making. International journal of management sciences, 1(4), pp.132-137.
Bartholomew, D., 2018. How Financially Strong Is CIMIC Group Limited (ASX:CIM)?. [online] Simply Wall St. Available at: https://simplywall.st/stocks/au/capital-goods/asx-cim/cimic-group-shares/news/how-financially-strong-is-cimic-group-limited-asxcim/ [Accessed 13 Jul. 2018].
Brigham, E.F., Ehrhardt, M.C., Nason, R.R. and Gessaroli, J., 2016. Financial Managment: Theory And Practice, Canadian Edition. Nelson Education.
Cimic.com.au., 2018. [online] Available at: https://www.cimic.com.au/__data/assets/pdf_file/0005/35843/CIMIC-Annual-Report-2017.pdf [Accessed 13 Jul. 2018].
Cimic.com.au., 2018. Home – CIMIC Group. [online] Available at: https://www.cimic.com.au/ [Accessed 13 Jul. 2018].
Ehiedu, V.C., 2014. The impact of liquidity on profitability of some selected companies: the financial statement analysis (FSA) approach. Research Journal of Finance and Accounting, 5(5), pp.81-90.
Enekwe, C.I., Agu, C.I. and Eziedo, K.N., 2014. The effect of financial leverage on financial performance: evidence of quoted pharmaceutical companies in Nigeria. IOSR Journal of Economics and Finance, 5(3), pp.17-25.
Heikal, M., Khaddafi, M. and Ummah, A., 2014. Influence analysis of return on assets (ROA), return on equity (ROE), net profit margin (NPM), debt to equity ratio (DER), and current ratio (CR), against corporate profit growth in automotive in Indonesia Stock Exchange. International Journal of Academic Research in Business and Social Sciences, 4(12), p.101.
Simply Wall St., 2018. CIMIC Group (ASX:CIM) – Share price, News & Analysis. [online] Available at: https://simplywall.st/stocks/au/capital-goods/asx-cim/cimic-group-shares#future?unique_symbol=ASX:CIM&l=1&t=qrog_yp&s=3&id=266993&utm_source=post&utm_medium=finance_user<=Conc_ticker&utm_campaign=Conc_ticker [Accessed 13 Jul. 2018].
Vogel, H.L., 2014. Entertainment industry economics: A guide for financial analysis. Cambridge University Press.
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