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Assessment 3 : Financial Analysis
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Commonwealth Bank of Australia

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 Introduction
Financial analysis of an organization is integral part of investment decision
making as well as it gives valuable information to all the stakeholders of the
organization. Mostly financial analysis is done by analyzing financial statement of
organization, share price information and calculating various ratios (Edward,
2017). This report is based on financial analysis of Commonwealth Bank of
Australia (CBA) which is listed in Australian Stock Exchange since 1991 and has
largest market capitalization in financial sector (Haisken, 2019). In this report
financial analysis of CBA is consist of working capital analysis, liquidity analysis
and capital structure analysis as well as cost of equity is calculated.

Company Description – Commonwealth Bank of Australia

Commonwealth Bank of Australia (CBA) is multinational bank headquartered in
Australia and branch network is spread throughout the world. CBA was
established by the Australian government way back in 2011; however it was fully
privatized in 90’s. Commonwealth Bank of Australia was listed in Australian
Stock Exchange in 1991 and its ASX code is ‘CBA’. Currently it is among top four
banks in Australia with its major operations in Australia, New Zealand and Asia.
Major operations of the bank are providing financial services to individuals and
businesses, investment services, brokerage services, funds management and
corporate banking. Matt Comyn is the Chief Executive Officer and Managing
Director of Commonwealth Bank of Australia since April 2018 (Haisken, 2019).
Currently CBA is leading the financial sector of ASX in terms of market
capitalizations which is $143 billion surpassing other leading banks in Australian
Stock Exchange (Mathews, 2019). Bank has various strengths and achievements
in their business domain. For example it is having largest business network with
leading payment provider. 7 million customers of CBA are using online banking
facility which is remarkably higher ratio. Employees of Commonwealth Bank of
Australia are diversified enough to have a culture of acceptance and there is no
discrimination among employees in terms of their race, gender, religion and
ethnicity. CBA has adopted sustainable working environment policies and
fulfilling the commitment of saving the environment for future generations (Yaniv,
2014).

Net Working Capital Position of CBA

Working Capital Position

Current Assets & Current Liabilities June’19 (Million June’18 (Million

$) $)
Current Assets
Cash & liquid assets 26,912 33,581
Receivable due from other financial institutions 7,334 8,376
Trading assets at fair value through P&L 32,476 29,993
Statement
Derivative Assets 24,311 30,885
Deferred tax assets 1,570 1,430
Total Current Assets 92,603 104,265
Current Liabilities
Bills payable and other liabilities 9,040 10,145
Payables due to other financial institutions 22,618 20,014
Liabilities at fair value through P&L Statement 7,961 9,106
Derivative liabilities 26,654 30,871
Current tax liabilities 129 796
Total Current Liabilities 66,402 70,932

Above table is extracted from Balance Sheet of Commonwealth Bank of Australia

(banking operations) from the year 2019 and 2018. Cash & other liquid assets
include cash in branches, cash at bank, shares, bonds and other short term liquid
assets (Haisken, 2019). There is reasonable decrease in cash items in the year
2019 as compare to the year 2018 that is because CBA has paid more money to
pay liabilities. Company has enough current asset reserves to run the banking
operations smoothly and in continuous flow. Receivable from other financial
institutions also decrease in the year 2019 as it was $8,376 million in 2018 and
reduced to $7,334 million in later year. Totaling current assets, it is observed that
current assets in 2018 were $104,625 million in 2018 which reduced to $92,603
million in the year 2019. However there is nothing to worry about this decrease
as liabilities are also reduced proportionately (Dimitrov, 2019).
Analyzing the current liability section of Commonwealth Bank of Australia, it is
observed that most of the current liabilities also decreased in year 2019 as
compared to previous year. Bills payable and other liabilities include short term
borrowings, notes payable, interest payable and unearned income. “As at 30
June 2019, $4,642 million of the Bank’s total liabilities at fair value through
Income Statement are expected to be settled within 12 months of the Balance
Sheet date. As at 30 June 2018, the majority of the Group’s and the Bank’s
liabilities at fair value through Income Statement were expected to be settled
within 12 months (De Giorgi, 2019).” Working capital position of the Bank is
satisfactory and bank has enough current asset resources to meet its current
liabilities and run operations of the bank smoothly.

Net Working Capital

Current Assets & Current Liabilities June’19 (Million June’18 (Million

$) $)
Current Assets
Cash & liquid assets 26,912 33,581
Receivable due from other financial institutions 7,334 8,376
Trading assets at fair value through P&L 32,476 29,993
Statement
Derivative Assets 24,311 30,885
Deferred tax assets 1,570 1,430
Total Current Assets 92,603 104,265
Current Liabilities
Bills payable and other liabilities 9,040 10,145
Payables due to other financial institutions 22,618 20,014
Liabilities at fair value through P&L Statement 7,961 9,106
Derivative liabilities 26,654 30,871
Current tax liabilities 129 796
Total Current Liabilities 66,402 70,932

Above table is extracted from Balance Sheet of Commonwealth Bank of Australia

(banking operations) from the year 2019 and 2018. Net Working Capital is
calculated by subtracting current liabilities from current assets. Net working
capital and its ratio for Commonwealth Bank of Australia for last two years in
calculated in below table.

Description 2019 2018

“Net Working Capital = Current Assets – =92,603-66,402 =104,265-70,932
Current Liabilities” =$26,201 million =$33,333 million
“Current Ratio = Current Assets / Current =92,603/66,402 =104,265/70,932
Liabilities (Edward, 2017) =1.39 =1.47

Net working capital of Commonwealth Bank of Australia decreased in year 2019

where bank has net working capital of $26,201 million as compared to $33,333
million in the year 2018. It means CBA’s ability to meet its current liabilities and
running of smooth operations is decreased a little over the year. This dollar figure
of net working capital would have huge in organizations other than banks.
However, in banking sector there is huge requirement of working capital to meet
operations of the bank (Dimitrov, 2019). Current ratio is also associated with
working capital of the organization as this ratio check the ability of an
organization to meet its current liabilities within a year. Current ratio for CBA is
not as impressive as it should be around 2 for smooth banking operations.

Cost of Equity for CBA

Constant Growth Model for calculating cost of equity was proposed by Gordon
who emphasis that current share price indicate PV of dividends to be paid in
future. As per this model, there are three relevant components whose figures are
presented for Commonwealth Bank of Australia. Last year closing for the bank
 was June 30’2019 so figures are taken as per closing of last financial year
(Haisken, 2019). Below is the calculation of cost of equity (constant dividend
growth model) for CBA:
Share Price (as on June 30’ 2019) = $80.37
Latest Dividend for Year ended June 30’ 2019 = $2.31
(Announced on August 14’ 2019)
Dividend Growth Rate (Assumption) = 3%

“The formula for calculating a cost of equity using this model is as follows:

Cost of Equity = D1/P0 + g

where

D1 = Dividend for the Next Year, It can also be represented as ‘D0*(1+g)‘ where D0 is
Current Year Dividend.

P0 = present value of a stock.” (Yaniv, 2014)

Applying the formula;

D1 = 2.31* (1.03) = $2.38
Cost of Equity = (2.38/80.37)% + 3%
= 2.96% + 3%
Cost of Equity = 5.96%

Liquidity & Capital Structure Analysis of CBA

Liquidity Analysis:
Liquidity analysis of an organization is done to check the ability of the
organization to meet its short term liabilities within a year of time span. There are
two important ratios for liquidity analysis, current ratio and cash ratio, which are
calculated for Commonwealth Bank of Australia for the year 2019, 2018, 2017 &
2016 (Mathew, 2019):

Ratio Year 2019 Year 2018 Year 2017 Year 2016

“Current Ratio = =92,603/66,402 =104,265/70,932 =116,093/81,381 =112,067/92,187
Current Assets / =1.39 =1.47 =1.43 =1.22
Current Liabilities

“Cash Ratio = Cash =26,912/66,402 =33,581/70,932 =42,814/81,381 =21,582/92,187

& Cash Equivalents =0.41 =0.47 =0.53 =0.23
/ Current Liabilities

Above ratio calculations are shown in following chart to get a graphical picture of
the calculated ratios.

1.6

1.4

1.2

1
Year 2019
0.8 Year 2018
Year 2017
0.6 Year 2016

0.4

0.2

0
Current Ratio Cash Ratio

Current ratio is associated with working capital of the organization as this ratio
check the ability of an organization to meet its current liabilities within a year.
Current ratio for CBA is not as impressive as it should be around 2 for smooth
banking operations. It means CBA’s ability to meet its current liabilities and
running of smooth operations is decreased a little over the years, except in 2017
where it goes up from the previous year. Similarly cash ratio shows some
improvement as compare to year 2016 when it was only 0.23.

Capital Structure Analysis

Capital structure analysis of an organization is done to check how an
organization is operating and financing its operation. It is comparison of debt and
equity composition in overall assets of the organization (Edward, 2017). There
are two important ratios for capital structure analysis, debt to capital ratio and
 assets to equity ratio, which are calculated for Commonwealth Bank of Australia
for the year 2019, 2018, 2017 & 2016:

Ratio Year 2019 Year 2018 Year 2017 Year 2016

“Debt/Capital Ratio =22,569/38,212 =22,249/37,533 =17,959/35,262 =15,138/34,125
= Long Term Loan =0.59 =0.59 =0.51 =0.44
/ Share Capital

“Asset-to-Equity =967,151/65,124 =970,552/63,920 =958,852/60,130 =968,409/58,075

Ratio = Total =14.85 times =15.18 times =15.95 times =16.68 times
Assets / Total
Equity

Above ratio calculations are shown in following chart to get a graphical picture of
the calculated ratios.

18

16

14

12

10 Year 2019
Year 2018
8 Year 2017
Year 2016
6

0
Debt/Capital Ratio Asset/Equity Ratio

*Figures in Debt/Capital Ratio are multiplied by 10 to get visible graph

Capital structure ratio analysis shows that CBA has little portion of equity in
composition of its financial structure as it can be seen that, on average, assets
are around 15 times of total equity. It means CBA mostly relying on borrowings
and deposits in assets accumulation. However it is also worth mentioning that
banking operations have somehow similar stats due to nature of the business.
CBA assets and liabilities mostly have related to operation and there is less
investment in fixed assets or lesser liabilities are related to long term loans &
borrowings. Debt to capital ratio shows that loan capital of the company is around
60% of the total share capital that is reasonable percentage and as per the
industry average (Haisken, 2019).

Conclusion & Recommendations

Financial analysis of Commonwealth Bank of Australia concludes that bank has
higher aspect of growing further in coming years because of its huge network of
operations. CBA has adopted sustainable working environment policies and
fulfilling the commitment of saving the environment for future generations. There
is reasonable decrease in cash items in the year 2019 as compare to the year
2018 that is because CBA has paid more money to pay liabilities. Company has
enough current asset reserves to run the banking operations smoothly and in
continuous flow. Cost of equity is calculated using constant dividend growth
model which shows that cost of equity is 5.96% which is moderate figure. Capital
structure ratio analysis shows that CBA has little portion of equity in composition
of its financial structure as it can be seen that, on average, assets are around 15
times of total equity.
It is recommended that Commonwealth Bank of Australia should issue more
number of shares for financing purpose because currently CBA’s equity is very
lows as compare to liabilities. Bank should set aside reasonable reserves in
order to meet any expansion purpose or initiating a new project. Current reserves
levels are low to start such initiative. Bank is recommended to have more cash
and cash equivalents so that in case of urgent need it should not have to borrow
from other institutions. It is seen that bank has more current payables than
current receivables which is incurring more expense due to interest expense. It is
recommended that CBA should settle it current payables and increase ratio of
receivables to payables.
References:

Haisken-DeNew, J., Ribar, D. C., Salamanca, N., Nicastro, A., & Ross, J. (2019).
Improving the Commonwealth Bank of Australia-Melbourne Institute Observed Financial
Wellbeing Scale.
Edward E. Williams & John A. Dobelman, 2017. "Financial Statement Analysis," World
Scientific Book Chapters,in: Quantitative Financial Analytics The Path to Investment
Profits, chapter 4, pages 109-169 World Scientific Publishing Co. Pte. Ltd.
Yaniv Konchitchki and Panos N. Patatoukas (2014) Taking the Pulse of the Real
Economy Using Financial Statement Analysis: Implications for Macro Forecasting and
Stock Valuation. The Accounting Review: March 2014, Vol. 89, No. 2, pp. 669-694.
Mathews, T. (2019). Australian Equity Market Facts: 1917–2019| RDP 2019-04: A
History of Australian Equities.
De Giorgi, E.G., Post, T. and Yalçın, A.,( 2019). A concave security market line. Journal
of Banking & Finance, 106, pp.65-81.
Dimitrov, I., (2019). The effect of changes in equity index composition on stock price:
The case of the S&P/ASX 20, 50, and MidCap 50.
Appendix