BSBCUS501- CSR’s financial performance | Good Grade Guarantee!
Introduction:-When considering the information needs of management to make prudent and tactical business decisions, it is important to understand the financial statements, their use and their analysis. Focusing on management as the user group and recognising the difficulty of assessing their requirements, it is highly conceivable that they require a number of information inputs to perform their role appropriately, such as preference shareholders, investors and lenders requirements, employee, analysts and auditors interests. Bazley and Hancock (2013) states that ‘[t]hey require detailed information on the performance of the business as a whole, and on its parts, to enable them to manage the business on a day-to-day basis’, including profitability, efficiency, short and long term solvency, and market based ratios.Measuring these common information needs and their performance lays the ground work for effective management judgement. It is important to comprehend and examine the powerful influence these financial ratios or information has on applying to business needs. ‘Financial ratios are valuable tools in understanding and monitoring a company’s position and performance’ Erdogan (2013). ‘It is the interpretation, rather than the calculation, that makes financial ratios a useful tool for business managers’ Najjar (2013).
The following examinations attempt to review and critically analyse the data in the annual reports of CSR Limited against Boral Limited. Both companies are positioned in the building industry and compete in similar market segments. Analysing CSR Limited’s data internally and comparatively to Boral Limited will provide the benchmark for the measurements relative importance.
The underlying requirement for business health is its ability to sustain profitability. To obtain this information the profitability ratios are applied. ‘Profitability ratios provide information on the success of a firm in generating profits’ Erdogan (2013). Some examples include percentage of gross profit, net profit of sales, and asset turnover. The efficiency ratios are used to test and determine the company’s ability to manage its assets, as suggested by Erdogan (2013). Examples include debtors turnover period and inventory turnover period.
Short-term and long-term liquidity ratios explain business resources ability to pay its bills within the next 12 months and beyond, and how much debt the company is in respectively. The market-based ratios show the company’s earnings position and potential to investors and the share market. It includes ratios such as price per earnings and earning yield.
The figures presented in this paper of the financial statements have been rounded and negative numbers are in parenthesis to assist with the ease of layout, readability and interpretation. Refer to Appendix 1 for actual numbers and calculations used throughout this document.
1.ProfitabilityProfitability of any firm is its primary objective of ‘going concern’ to continue operating into the foreseeable future and providing maintainable financial strength. Some analysis of firms is conducted to find out how successful they are at generating the business profits.
Moving our focus on the profitability of CSR Limited, we use three common ratios to determine its profit sustainability. First we will consider gross profit margin, then net profit margin and asset turnover.
It is worth noting at this early stage of this paper that CSR treats one of its divisions (Viridian Glass) as a ‘significant item’. The implications are that Viridian’s underperformance over several years is undergoing major restructuring. Accordingly, in the annual reports there is a sense of two differing financial reporting outcomes. For example in the 2013 Annual Report, the chairman of CSR, Jeremy Sutcliffe reports a net profit after tax of AU$32.7 million before ‘significant items’, and net loss of AU$146.9 after tax and after ‘significant items’ attributed to Viridians’ performance. Jeremy Sutcliffe points to the AU$196.2 million of asset write downs and impairment to the carrying value of Viridian has resulted in the net loss.
1.1. Gross profit marginGross profit margin has the ability to elucidate the efficiency of turning over of goods into profit. It is measured by deducting the cost of goods sold from net sales to obtain a gross margin. Referring to Appendix 1, Table 2, and obtaining the components and calculations, we observe that CSR Limited has a fairly steady gross margin through 2009 to 2013, peaking at thirty one percent in 2010 and 2011. The same can be deduced of Boral Limited, although there is a decline from thirty three percent in 2009 to twenty seven percent in 2013.
The overall result should convince investors and other external interested groups that both companies have fairly healthy margins and are comparatively similar.
1.2. Net profit marginThe net profit margin clarifies the profit returned by each dollar of sales after payments of interest and is another significant indicator of the health of the business. Dividing the net profit by the sales revenue gives us this margin. CSR Limited’s net profit margin for 2012 and 2013 illustrates a major change, going from positive territory of just over four percent to a dramatic slide to negative eight point seven percent. Similarly, this trend is confronted by Boral Limited as well, who displayed nearly four percent margin in 2012 and dipping to a negative four percent margin in 2013. CSR did however enjoy a twenty six percent margin in 2011. As a result, net profit margin graph in Appendix 1 shows the above picture more visually.
Interestingly, in their 2013 Annual Report, CSR and Boral justified their individual slump. CSR’s Managing director, Rob Sindel, pointing to weakness in construction and the statutory net lass after tax was attributed to a ‘significant item charge for restructuring costs and impairment charges to reduce the carrying value of Viridian Glass operations’. While, Boral’s CEO and Managing Director, Mike Kane, stressed he has seen ‘fair share of cyclical downturns’ and in his experience the upturn will come.
1.3. Asset turnover marginThe asset turnover is calculated by dividing sales with average total assets (average of previous two years total assets) and reveals the efficient use of assets to generate sales. In 2012 and 2013 both CSR and Boral were consistent with around eighty percent. However,
Boral was more consistent over the last four years, averaging over eighty percent, while CSR was much weaker in 2010 and 2011 with around fifty and sixty percent respectively.
The result of this analysis shows Boral has been periodically more efficient generating sales, whilst CSR has been inefficient leading up to 2012 and performing steadily in 2013.
1.4. Summary of profitabilityDelineating both company’s profitability performance indicates that Boral has a more consistent profitability performance. CSR’s restructuring and continual underperformance of Viridian Glass has influenced their profit reporting and decision making. Viridian is being treated as ‘significant items’ on the annual reports, almost as a separate entity as a result of its poor performance. This ‘significant items’ status of Viridian is a head-ache for CSR and is doing what it can to turn it around as evidenced by their restructuring programs. Time will tell if their patience will be rewarded.
2.Efficiency:With efficiency, we look at the firm’s ability to effectively collect account receivables in a timely manner. Two ratios that help decode the analysis are debtor’s turnover, and average day’s sales uncollected.
2.1. Debtor’s turnoverThis ratio will help make sense of the effectiveness of the company’s collection of debtors’ accounts. The formula is depicted by dividing net sales with average debtors. Average debtors are the average of previous two years from the balance sheet.
CSR has become more efficient with its debtors than Boral moving from four to nine, and Boral is steady around six. This is due to the accounts receivables reducing yearly for CSR from 2009 to 2013, as observed in Appendix 1 and Table 3.
2.2. Average day’s sales uncollectedTime or days taken to collect debtor’s accounts is the function of this ratio. Complementary to the debtor’s turnover in that the opposite trend is a sign of reduction in the amount of time it takes to recover amounts due. Tables 1 and Table 3 depict this scenario and illustrates how CSR has become much more efficient than Boral with their debtors. The balance sheets in the annual reports of both companies reveal this to be true.
3.Short-term solvency ratios:This ratio examination starts to makes sense of the risk assessment facing companies and tries to answers some vital questions about their short-term decisions. Some of the questions asked may involve the entities ability to repay its immediate and short-term loans. To begin answering the questions, there are three ratios that decipher and deliver logical solutions.
3.1. Current ratioThe first of these ratios is the current ratio which translates the short-term debt-paying ability, and ‘is an excellent diagnostic tool, because it measures whether or not your business has enough resources to pay its bills over the next 12 months’ Najjar (2013). From the calculations from Table 1 and Table 4, including the charts, the results indicate that both CSR and Boral’s ratio are around the one and a half time in 2013. Although in the last three years both companies are marginally coming down, they are exposed to minor risk. The 2013 figure is confirmed in the IBISWorld (2013) company report on CSR Limited and is marginally higher than industry average of one point two nine.
3.2. Quick ratioThis ratio reveals the company’s immediate ability to satisfy current debts in the face of more risk. The equation is quick assets/current liabilities, which is current assets minus inventory (quick assets) divided by current liabilities.In 2013 both company’s ratios were less than one, meaning they would not be able to repay their current debts immediately if they were required to do so. CSR is in more trouble as its ratio is point seventy eight to one; whereas Boral is just under one to one with point ninety nine. However, from 2009 to 2012, Boral had healthy trending ratios over one and CSR recorded ratios of less than one in 2010 and 2012. The results show that Boral is more capable of repaying its immediate debts.
3.3. Cash flow from operations to current liabilitiesExamining the ratio of cash flow from operations to current liabilities will determine another interpretation of a company’s capacity to repay its short-term debts. This ratio is seen to be more representative of the ability to pay current liabilities as it focuses on ‘using a figure in the numerator which is not based on year-end figures’ Bazley and Hancock (2013).
From Table 4 we decode the numbers which illustrate that CSR’s progressive decline from 2010 to 2013 is a concern. It signifies that CSR’s operations generated cash flows have plummeted from fifty one percent in 201 to just fifteen percent in 2013. Comparatively, Boral’s results show a similar trend, from fifty percent in 2009 to twelve percent in 2012, but the figure rose to twenty five percent in 2013 which shows signs of debt repayment recovery.
4.Long-term solvency ratiosAdditionally, we need to also answer CSR’s long term loan repayment ability and its capacity to survive over a longer period, referred to as a ‘going concern’. Viewing the various ways of the company’s use of debt in the long-term to represent leverage or ‘gearing’, we employ two ratios, namely, debt to equity and debt to total assets.
4.1. Debt to equity ratioThis ratio is used to compare total liabilities against equity in the same year, that is, the relationship between debt financing and equity financing.The trends clarify that CSR has increased its reliance on total debt from 2012 to 2013. However, there is clearly a significant decrease in reliance from 2009 and 2010 which shows
low reliance. Boral indicates a decreased reliance on total debt, down from 2012 and progressive decrease from 2009.Note that, CSR’s debt is considerably lower than Boral’s, as shown on their annual reports from 2009 through to 2013.
4.2. Debt to total assetsShowing another view of the amount of leverage for a company, the use of debt to total assets show the proportion of total assets financed by debt, as suggested in the textbook. Benchmarking once again to Boral, we can decipher if CSR is heavily reliant on debt.
As noted above, the debt amounts of both companies are considerably different, with CSR hovering around mid thirties AU$ million and Boral over one and a half AU$ billion. CSR’s total assets have decreased from over four AU$ billion in 2009 to just over two AU$ billion in 2013. Boral has the opposite, increasing from five AU$ billion to six AU$ billion.
Therefore, although we can still test their reliance on debt, the considerable difference in debt may have little relevance. The trend, as shown on Table 5, is both CSR and Boral are reducing their reliance.
5.Market-based ratiosMarket-based ratios help investors analyse and forecast when determining their buying and selling strategies. ‘Investors can diversify their investments by examining the present value and estimating future value of their companies’ Zeytinoglu, Akarim and Celik (2012).
One market-based ratio that elucidate investor analysis is the price/earning ratio. It helps to determine the intrinsic value or what the shares of a company are worth in a vibrant and liquid stock market.
1. Price/Earnings (P/E) ratioFurthermore, the price/earnings ratio can be utilised to compare other companies. ‘A higher than normal P/E ratio could mean that either the price is too high or, as is more likely in an efficient market, the market is expecting an increase in earnings per share (EPS) in the future and is adjusting the share price to reflect this’ Bazley and Hancock (2013),
The result interprets the monetary amount the stock market or an investor is willing pay for AU$ one dollar in an effort for some profit gain. The formula and calculations are provided in Table 6.
The results convey the volatility of both of these companies, with Boral depicting more fluctuations.
5. RecommendationsClearly, CSR’s Viridian Glass division is underperforming in all areas of the financial statements, as reported in CSR’s past annual reports. Whilst the restructuring of Viridian Glass is underway, it has sent positive messages to investors. It must be noted that CSR paid over five hundred and eighty AU$ million in 2008 for Pilkington Glass and DMS Glass to form Viridian. It is worth considering off-loading this subsidiary whilst the restructuring program of it is under way and write off past losses.
The stock market has reacted positively to the Viridian restructure and is reflected in its upward trend in their share price. To maintain profitability and efficiency, CSR needs to continue to safeguard its financial position from Viridian. IBISworld (2013) shows both profit as percentage of revenue and assets at negative ten percent for Viridian, whilst the other divisions are healthy.
6.ConclusionIn summary, this paper has illustrated the claims of tough times in the building industry of which CSR one of the major player. As prescribed in the textbook with considerations for several financial ratios, an interpretation of CSR’s financial performance was conducted.
From these it was determined that CSR financial health was undermined with its Viridian division, which is treated as a special item. The ratios are an exceptional tool for performance analysis and to assist management and other user groups with their decision making processes.
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