Financial Management

Executive Summary of The Impact of Dividend Policy on Price-Earnings Ratio

In this report, the performance of Boral Limited has been analysed and have been compared with its competitive firm, CSR Limited. The liquidity position has been analysed by comparing the current ratio and efficiency have been measured by computing the asset turnover and net profit margin. ROE has been calculated with the help of DuPont analysis in which ROE is divided into three financial metrics, namely, asset turnover ratio, equity multiplier and net profit margin. The cash conversion cycle has been computed to get the idea about the operational efficiency of the firm. Boral Limited has a shorter cash conversion cycle that enables the company to acquire cash in a small period that can be effectively used for additional repayment of debt or purchases. The price-earnings ratio provides investors with better knowledge regarding the value of the corporation. P/E ratio of Boral Limited has increased from 13.53 in 2018 to 24.48 in 2019 which indicates that the companies have growth stocks and infers that the company’s performance will rise in the future period.

Table of Contents

Executive Summary.

Financial ratios.

Peer firm comparison and trend analysis.

DuPont method – Return on equity.

Working capital management

Market ratios.

Conclusion.

References.

Financial Ratios

Financial ratios help in evaluating the performance of the organization concerning liquidity, efficiency, capital structure and profitability. Various ratios have been calculated below for both Boral Limited and CSR Limited.

Boral Limited

Particulars

2019

2018

2017

2016

2015

Current ratio

1.30

1.75

1.20

1.43

1.89

Debt ratio

0.35

0.44

0.40

0.29

0.37

Total asset turnover ratio

0.61

0.61

0.56

0.74

0.75

Net profit margin

4.70

7.69

17.08

11.33

15.63

Source – (Morningstar, 2020)

CSR Limited

Particulars

2019

2018

2017

2016

2015

Current ratio

2.11

1.59

1.43

1.61

1.51

Debt ratio

0.46

0.02

0.03

0.03

0.03

Total asset turnover ratio

1.13

1.23

1.14

1.06

0.98

Net profit margin

3.36

7.24

7.21

6.19

6.20

Source – (Morningstar, 2020)

Peer Firm Comparison and Trend Analysis

Net profit margin help in knowing the amount of net income earned by the company about total sales. This profitability ratio has declined significantly from 17.08% in 2017 to 4.70% in 2019 in case of Boral Limited. Whereas, for CSR Limited, the net profit margin has reduced from 7.21% in 2017 to 3.36% in 2019. This indicates that both the companies are facing difficulty in converting sales into profits because of a slowdown in construction. When both the companies’ profitability position is compared with each other, Boral Limited is considered to be at a higher position. The current ratio helps in measuring the liquidity position of the firm by comparing the current assets with current liabilities for a specific period. The current ratio of Boral Limited has reduced from 1.75 to 1.30 in 2019 from 2018 which indicates that the company’s current assets are declining to lead to the problem in paying off its current liabilities using such assets only. On the other hand, this ratio has improved in the case of CSR Limited from 1.43 in 2017 to 1.59 in 2018 to 2.11 in 2019. It infers that CSR Limited now have more than sufficient amount of current assets that can be used to effectively pay off its current liabilities. Debt ratio has been computed to estimate the amount of debt in comparison to equity raised by the companies to finance its various operations. Boral Limited has reduced the debt borrowings as the debt ratio has declined from 0.44 in 2018 to 0.35 in 2019 which indicates that the company’s operations are mainly financed through equity. This further implies that the interest expenses for the company are also declining (De Vito & Gomez, 2020). Whereas, in case of CSR Limited, this ratio has increased extremely from 0.02 in 2018 to 0.46 in 2019 which indicates that the company is now raising a large number of funds through debt which further implies raising in the interest expenditure for the company which the company has to pay irrespective of the profits earned by it. Asset turnover ratio helps in measuring the efficiency of the management of the company in generating a large amount of sales revenue about the total assets. This ratio is almost consistent for Boral Limited which indicates that the company’s management is effectively generating a consistent amount of revenue by efficiently using the assets. On the other hand, in the case of CSR Limited, this ratio has declined from 1.23 in 2018 to 1.13 in 2019. The management is facing difficulty in raising revenue by using the assets of the company. This may be because of the decline in the construction work due to COVID – 19 outbreak in the economy (Dyer, 2019). This pandemic has significantly influenced the economy and the liquidity scenarios of the companies.

DuPont Method – Return on Equity

DuPont analysis is regarded as a useful method in decomposing the different drivers of the return on equity. This decomposition enables the investors to emphasized major metrics of the financial performance on an individual basis to effectively determine the strengths and weaknesses (Bunea et al., 2019). These three financial metrics are asset use efficiency, financial leverage and operating efficiency. Net profit margin represents the operating efficiency, use of asset efficiency is estimated with the help of asset turnover ratio and equity multiplier is used to measure the financial leverage.

DuPont Analysis = Net profit margin x Asset turnover x Equity multiplier

Where,

Net profit margin = Net income / Revenue

Asset turnover = Sales / Average total assets

Equity multiplier = Average total assets / Average shareholders’ equity

Boral Limited

Particulars

2019

2018

2017

2016

2015

Total asset turnover ratio

0.61

0.61

0.56

0.74

0.75

Net profit margin

4.70

7.69

17.08

11.33

15.63

Equity multiplier

1.63

1.66

1.71

1.65

1.66

ROE

4.67

7.78

16.38

13.87

19.51

CSR Limited

Particulars

2019

2018

2017

2016

2015

Total asset turnover ratio

1.13

1.23

1.14

1.06

0.98

Net profit margin

3.36

7.24

7.21

6.19

6.20

Equity multiplier

1.65

1.70

1.77

1.76

1.80

ROE

6.25

15.17

14.56

11.54

10.92

Return on equity has declined significantly in the case of Boral Limited in the last three years. It has been estimated at 16.38% in 2017 that reduced to 7.78% in 2018 and then to 4.67% in 2019. This is because of the decline in the net profit margin. Similarly, in the case of its competitor, CSR Limited, this ratio also indicated a declining trend. However, it remains higher than the ROE of Boral Limited for the year 2018 and 2019. Net profit margin here indicates as the major element that has significantly affected the ROE in case of both the firms. It is the net income from which the equity shareholders earn the returns, therefore, it acts as the significant element in computing ROE. To improve ROE, Boral Limited has to undertake suitable measures to reduce its expenditure on the cost of production and other administrative expenses. The company must ensure the effective and efficient use of assets to derive an adequate amount of profits. It can also improve this ratio by raising the prices of its products. However, this may reduce the demand for its products. All of this will have a greater influence on the return on equity.

Working Capital Management

Operating cycle of the company is defined as the number of days or time between the purchase of inventory and its conversion into sales. This is measured with the help of days inventory. On the other hand, the cash conversion cycle refers to the period that the company takes to convert purchases into cash (Wang, 2019).

Boral Limited

Particulars

2019

2018

2017

2016

2015

Days inventory

61.58

58.17

74.29

68.25

64.01

Cash conversion cycle

40.88

39.08

45.99

40.83

39.84

CSR Limited

Particulars

2019

2018

2017

2016

2015

Days inventory

94.75

89.31

82.01

79.92

86.18

Cash conversion cycle

78.87

75.67

72.75

70.68

77.76

In the case of Boral Limited, cash conversion cycle has increased from 39.08 days to 40.88 which is a very minor difference. This short cash conversion cycle enables the company to acquire cash in a small period that can be effectively used for additional repayment of debt or purchases. Whereas, in the case of its competitor, CSR limited, the cash conversion cycle is increasing in the last 4 years. These long cycles may negatively impact the business of the company. It has been analysed that lower cash conversion cycle makes the business operations healthy. Businesses may undertake effective and suitable measures to minimise the cash conversion cycle by speeding up the payments that are to be received from customers and by slowing down the payments that are to be made to the suppliers. Inventory days are lower in case of Boral Limited about that of CSR Limited. This signifies that Boral Limited can convert its inventory into cash in a lesser number of days. It also indicates that Boral Limited is operationally and financially efficient.

Market Ratios

P/E ratio

Particulars

2019

2018

2017

2016

2015

Boral Limited

24.48

13.53

31.95

17.43

19.14

CSR Limited

12.62

14.64

13.26

13.13

10.82

The price-earnings ratio depicts the relationship between the stock price of the company and earning per share. This provides investors with better knowledge regarding the value of the corporation. Earnings are considered important when there is a need to value the stock of the company as the investors want to get the idea about the future and present profitability of the corporation (Jitmaneeroj, 2017). This ratio is high in the case of Boral Limited. P/E ratio has increased from 13.53 in 2018 to 24.48 in 2019 which indicates that the companies have growth stocks and infers that the company’s performance will rise in the future period and investors also have high expectations concerning the growth in future earnings and are ready to pay higher prices to acquire them. However, growth stocks are considered to be highly volatile and this puts a lot of pressure on Boral Limited to perform more effectively to justify a high valuation. Stocks with high P/E ratio are considered to be overvalued and seen as a risky investment. Whereas, in the case of CSR limited, this ratio has declined from 14.64 in 2018 to 12.62 in 2019. This indicates that poor or ineffective current and future performance. Therefore, based on the analysis of Price/earnings ratio, investors are more profitable by investing largely in the stocks of Boral Limited as it has high future growth prospects that may help the investors in generating higher returns on the amounted invested by them.

Conclusion on The Impact of Dividend Policy on Price-Earnings Ratio

It can be concluded that the profitability position of Boral Limited is higher in comparison to its competitive firm, CSR Limited. The liquidity position is not good in case of Boral Limited as its current ratio has reduced from 1.75 to 1.30 in 2019 from 2018 which indicates that the company’s current assets are declining to lead to the problem in paying off its current liabilities using such assets only. Boral Limited has reduced the debt borrowings as the debt ratio has declined from 0.44 in 2018 to 0.35 in 2019 which indicates that the company’s operations are mainly financed through equity. This further implies that the interest expenses for the company are also declining. cash conversion cycle has increased from 39.08 days to 40.88 which is a very minor difference. This short cash conversion cycle enables the company to acquire cash in a small period that can be effectively used for additional repayment of debt or purchases. Asset turnover ratio is almost consistent for Boral Limited which indicates that the company’s management is effectively generating a consistent amount of revenue by efficiently using the assets. It is been analysed that the management is facing difficulty in raising revenue by using the assets of the company. This may be because of the decline in the construction work due to COVID – 19 outbreak in the economy. To improve ROE, Boral Limited has to undertake suitable measures to reduce its expenditure concerning the cost of production and other administrative expenses. P/E ratio of Boral Limited has increased from 13.53 in 2018 to 24.48 in 2019 which indicates that the companies have growth stocks and infers that the company’s performance will rise in the future period.

References for The Impact of Dividend Policy on Price-Earnings Ratio

Bunea, O. I., Corbos, R. A., & Popescu, R. I. (2019). Influence of Some Financial Indicators on Return on Equity Ratio in The Romanian Energy Sector-A Competitive Approach Using a Du Pont-Based Analysis. Energy189, 116251.

De Vito, A., & Gomez, J. P. (2020). Estimating the COVID-19 cash crunch: Global evidence and policy. Journal of Accounting and Public Policy, 106741.

Dyer, G. (2019). Boral confirms earnings hit from construction slowdown. Retrieved from https://www.sharecafe.com.au/2019/11/07/boral-confirms-earnings-hit-from-construction-slowdown/#:~:text=Boral%20shares%20dipped%203.7%25%20to,earnings%20and%20higher%20depreciation%20charges%E2%80%9

Jitmaneeroj, B. (2017). The impact of dividend policy on price-earnings ratio. Review of Accounting and Finance.

Morningstar. (2020). Boral Limited. Retrieved from https://financials.morningstar.com/ratios/r.html?t=0P00006WBM&culture=en&platform=sal

Morningstar. (2020). CSR Limited. Retrieved from https://financials.morningstar.com/ratios/r.html?t=0P00006WCK&culture=en&platform=sal

Wang, B. (2019). The cash conversion cycle spread. Journal of financial economics133(2), 472-497.

Remember, at the center of any academic work, lies clarity and evidence. Should you need further assistance, do look up to our Accounting and Finance Assignment Help

Get It Done! Today

Applicable Time Zone is AEST [Sydney, NSW] (GMT+11)
Not Specific >5000
  • 1,212,718Orders

  • 4.9/5Rating

  • 5,063Experts

Highlights

  • 21 Step Quality Check
  • 2000+ Ph.D Experts
  • Live Expert Sessions
  • Dedicated App
  • Earn while you Learn with us
  • Confidentiality Agreement
  • Money Back Guarantee
  • Customer Feedback

Just Pay for your Assignment

  • Turnitin Report

    $10.00
  • Proofreading and Editing

    $9.00Per Page
  • Consultation with Expert

    $35.00Per Hour
  • Live Session 1-on-1

    $40.00Per 30 min.
  • Quality Check

    $25.00
  • Total

    Free
  • Let's Start

Get
500 Words Free
on your assignment today

Browse across 1 Million Assignment Samples for Free

Explore MASS
Order Now

My Assignment Services- Whatsapp Tap to ChatGet instant assignment help

refresh