Financial Management

Executive Summary of Financial Management

This assignment aims at critically analyzing the financial statements of Macquarie Group Limited and applies the principles of the financial management regarding the ratio analysis and assesses the impact of the same in the business decisions of the company. The core analysis involves the scrutiny of various aspects of the financial data as available including the capital structure and profitability analysis of the company. The profitability ratio helps the investors to evaluate the earning capacity of a company and the efficiency ratios measure the extent to which the assets and the investors of stakeholders are used towards the revenue of the company. The liquidity ratio measures the availability of the liquid assets of the company against the short-term obligations owed by the company and the gearing ratios assess the capital structure part of the analysis.

Table of Contents

Introduction

Company Analysis

Ratio Analysis

Recommendations

References

Introduction to Financial Management

Macquarie Group Limited is an investment bank and provides financial services in more than 25 countries employing more than 14000 people across the globe. The bank is based in Australia and ranks first in the infrastructure asset management and also aggressively involved in advisory of the mergers and acquisitions. The bank is supervised by the Australian Prudential Regulation Authority (APRA) and other regulators such as ASIC and AUSTRAC. The company was founded in 1969 as a subsidiary to a UK based company. In the 1980s, due to the deregulation, restrictions on foreign banks were reduced, and to take the advantages of such opportunity, the Macquarie Bank Limited was formed making it the second private bank for trading in Australia. The company was listed on the ASX in 1996 and focused on the expansion of the bank across the globe in the following two decades. Macquarie Bank took over many companies during its course and diversified its business in four main categories:

  • Macquarie Asset Management
  • Banking and Financial services
  • Commodities and Global Market
  • Macquarie Capital

For the financial ending March 2020, the net profit earned by the company increased by 22% whereas the operating income increased by 4% and the operating expenses decreased by 3%. The major increase in the revenue was contributed by the commodities and global market and the lease income of the company. The total assets of the company increased by 29.35% during the year and the capital adequacy ratios of the company have improved.

Company Analysis

Financial Statements, Current Financial Performance & Economic Outlook

The financial statement of a company includes the financial position, financial performance, cash flow statement, and the statement of changes in equity for a year. The financial position values the values of assets and liabilities of a company on the last day of the period for which the same is prepared. For Macquarie Group Limited, the total assets of the company increased by $58,025 million in the year ending 2020 when compared to the year 2019. The major increase in the value of assets was due to the increase in the derivative assets as the same has increased by 220%. This was due to the increase in the trade volumes of the clients and the major movements in the energy market. The loan Assets also increased by 20% from 2019 because of the growth in the home loan and business banking loans. The Cash collateral on securities increased by 27% including the reverse purchase agreements as the client flow has increased. Margin money and settlement assets increased by 34% simply because of the increase in the call margin.

Correspondingly, the liabilities also increased and the major increase was in the value of derivative liabilities by 202% as the same increased by $25,300 million, and the reason being the same as the increase in derivatives assets. Macquarie Group issued a debt of $22,594 million during the year which increased the closing value of debt issued by 35% when compared to the previous year. The deposits and the margin money and settlement liabilities increased by 20% and 57% respectively due to an increase in the customer deposits and the call margin money. The customer borrowings also increased by 88% mainly because of the oil finance transactions. The company had issued 45,085,663 equity shares at $22.18 to the parent company Macquarie B. H. Pty Limited during the year ending March 2020 which increased the value of equity of the company. The major reason for the increase in the value of retained earnings was due to an increase in the value of foreign exchange translation reserve which increased by 90% during the year and the non-attribution of profits and reinvested in the business.

The net operating income of Macquarie Group has decreased by 4.4% those values to $179 million because of an decrease in the other operating income and the net interest and trading income. The income from lease, increased by 28%, and the credit and other impairment charges increased by 91%. because of the corrosion of macroeconomic conditions due to COVID-19. There was a fall of 4% in the fee and commission income as the low wealth management fees and the low base fee. This was partially set off by the increase in the commission of future products. Due to the decrease in the performance of underlying investments, the share of net profits of associates and joint ventures decreased by 4%.

The operating expenses of the company decreased by 1.25% in comparison to the previous year as the decrease in Brokerage and commission and trading expenses. There was also an increase of 2.03% in the employment expenditure as the headcount of the company decreased and the performance-based profits decrease because of higher retention rates. The income tax expenses of the company increased by $151 million as the effective tax rate increased from 26.7% to 30.9%. The demographic composition and the nature of earnings also increased the tax expenses of the company.

For the year ending March 2020, the major economic outlook that affected the entire global economy was the respiratory illness that is COVID-19. The consolidated company has taken the effect of such a crisis in the preparation of financial statements along with the market volatility. The impact of COVID-19 was seen in the last quarter of the financial year and the company has considered the future impact on its assets and liabilities. The adjusting events that occurred in the reporting period have been considered in this period and the events arising after the reporting period will be taken into consideration in the future periods. Various scenarios that may occur have been explained and assumptions for the expected credit loss have been made accordingly in the financial statements. The impairment analysis of the other financial and non-financial asset classification and disclosures have been made in the annual report. The company stress-tested the scenarios which may impact the company's risk management and capital adequacy. The trading assets and liabilities along with the financial investments of the bank have been measured at Fair Value through Profit or loss and other comprehensive items after considering the impact of COVID-19. The bank reviewed the wholesale and retail portfolios at each expected credit loss along with the nature of collateral and exposure to the bank and the deferment of payments.

The unemployment rate in Australia is expected to increase to 9% which may recover in 3 years and the GDP will also contract by 9% which may recover by the end of 2021. The global GDP declined by 6.5% and the fall in the consumption and investment will adversely impact the credit spread and therefore affecting the banking industry. The expected credit loss in the various scenarios has been measured at Amortised cost, FVOCI, and others along with the gross exposure.

Ratio Analysis

Profitability and Market ratios

(see appendix for calculations)

2020

2019

Industry average

Return on assets

1.20%

1.51%

%

Return on equity

13.60%

16.58%

%

Net profit margin

46.78%

53.96%

%

Net Interest Income

0.82%

0.89%

%

Expense ratio/Cost to Income ratio

71.98%

69.55%

%

Earnings per share

791 cents per share

870 cents per share

$

Price-earnings ratio

10.84 times

14.65 times

times

Dividends per share

$ 4.30

$ 5.75

$

The profitability and the market ratios help in the analysis of the profit earning of a company by using the funds available to the company. The return on assets is the ratio that measures the profit that the company has earned by using the assets available to the company. This ratio has decreased from 1.51% in 2019 to 1.20% in 2020 as the total earning of the company has not increased in the same proportion as the increase in the total assets of the company. The decline in this ratio is not a good sign. This measures the efficiency of the assets of the company which had declined.

The Return on equity of the company has also decreased from 16.58% in 2019 to 13.60% in 2020 which reflects that the company generated a lower profit level in the current year for the equity capital than to last year. This ratio measures the profit earned by the company using the net assets of the company or about equity.

The net profit margin of the company has decreased, i.e. 46.79% in 2020 from 53.96% in 2019 due to the marginal decrease in the expenses of the company. As the expenses of the company have decreased, the amount of profit of the company has increased thereby increasing the net profit margin. The decrease in cost was due to the decrease in the employment cost and various other costs.

The net interest income is calculated for banks only which reflect the interest-earning capacity of a bank using the earning assets that the bank has. The net interest income of the Macquarie Bank has increased to 119.05% in 2020 from 115.60% in 2019. The company has been able to increase its net income by 3% approximately as discussed above which can be verified by this ratio. The increase is a progressive sign for the bank.

The expense ratio is the ratio of expenditure incurred by a company to generate revenue for the company. If this ratio is higher, it shows that the margin earned by the company is not enough. The management can assess the extra cost incurring areas by using this ratio and thereby take appropriate actions to minimize the cost. The expense ratio of the company has decreased to 78% in 2020 from 83% in 2019 which shows that the bank has been able to decrease its cost and is earning an increased profit margin more efficiently.

Cash return on sales ratio measures the operational efficiency of a company. If this ratio falls, it acts as an indicator to the management that there is a credit problem in the company and the internal financial controls of the company are weak. The cash flow operating activities for the year 2019 was negative which made the ratio for the company in that year negative but the same was recovered by the company during the year and currently is at 112% which is a very good sign. This shows that the financial controls of the bank have improved and the company can generate sufficient cash from its operations. 

Earnings per share are a performance indicator that reflects the amount earned by a company for the equity shareholder for his investment in the company against one share as owned by him. This is a mandatory requirement for the presentation of financial statements. The EPS of the company has decreased from 870 cents per share in 2019 to 791 cents per share in 2020 due to the increase in the number of shares that were issued to the parent company Macquarie B. H. Pty Limited during the year. The net profit of the company did not increase significantly which led to the decline in the EPS.

The dividend per share is the amount of dividend paid by the company during the year to the equity shareholders. The Dividend per share of the group decreased from $5.75 per share in 2019 to $4.30 in 2020 due to the increase in the number of shares at the end of the year.

Efficiency ratios

(see appendix for calculations)

2020

2019

Industry average

Asset turnover

2.56 times

2.79 times

times

Fixed Asset turnover

0.07 times

0.12 times

times

The assets turnover ratio of a company denotes that the revenue generated by a company using the total assets of the company. The asset turnover ratio of the company has decreased from 2.79 in 2019 to 2.56 in 2020 showing that the company has not efficiently utilized the assets available with it and hence the ratio has declined.

The cash return of assets operational efficiency of a company against the assets of the company. This displays the operating cash generation or utilization using the assets of the company. The cash flow operating activities for the year 2019 was negative which made the ratio for the company in that year negative but the same was recovered by the company during the year and currently is at 0.049 times which is a very good sign.

Fixed assets turnover ratio reflects the ratio of turnover that is generated using the non-current assets of the company. This ratio has declined from the previous which is not a good sign and reflects that the company has not been utilizing its non-current assets.

Liquidity Ratios

(see appendix for calculations)

2020

2019

Industry average

Current ratio

0.88:1

0.78:1

xx:1

Gearing Ratios

(see appendix for calculations)

2020

2019

Industry average

Debt to equity ratio

296.35%

279.35%

%

Debt ratio

91.48%

93.46%

%

Equity ratio

8.52%

9.29%

%

Interest cover ratio

1.61 times

1.57 times

Times

Debt to equity ratio reflects the percentage of debt in the company in terms of equity of the company. This helps in the comparison of the self-owned funds and the outside funds. The debt to equity ratio of the company has increased from 279.84% in 2019 to 296.35% in 2020 which is not a good sign as this reflects that the company is running its operations more on the debts or outside funds than to self-owned funds which makes the company riskier. The ratio has increased because of the issuance of debts in the current year. Although the equity shares were also issued but the proportion for the same was unfavourable.

The Debt ratio of the company has slightly decreased in 2020 when compared with 2019 which does not make much difference. This ratio measures the total debts against the total assets of the company. Equity ratio reflects the portion of equity against the total assets of the company. The ratio has decreased slightly which like the debt ratios does not make much difference. The cash debt ratio shows how much of total liabilities can be paid by the cash generated from operating activities. The cash flow operating activities for the year 2019 was negative which made the ratio for the company in that year negative but the same was recovered by the company during the year which is a very good sign.

Recommendations and Overall Assessment

Has Year 1 been better than Year 2 for the company?

After the overall ratio and core analysis of the company, it can be concluded that the Macquarie Bank performed better in the year 2020 in comparison to the year 2019. Although the impact of COVID-19 was in the last quarter of the, the effect of the same would be seen in the future reporting periods. The company has been able to increase the income and decrease its expenses between the years which reflects that the company has performed better in the current year.

Will the company succeed in the future?

The company has been diversifying its areas of services and extensively expanding globally its present services and has been able to increase its assets and income. Therefore, it will be appropriate to assume that the company will succeed in the future. There will be an impact of COVID-19 in the recent future which will have an adverse impact but in the long run, the bank will be able to operate properly.

The likelihood of a merger or acquisition?

There are no talks of merger or acquisition of the company or by the company in the current year of in the nearest future.

Consider the relevant ethical considerations if the organization becomes insolvent

Suggest what should the company be doing to help it succeed?

In case the Macquarie Group Limited becomes insolvent, the company should make sure that the impact of such insolvency should not transfer to the deposit-holders and account holders in the bank. The portfolio of the clients should not be affected as the interest of the common public is invested in the company. The company maintains a certain liquidity level and capital adequacy should be checked regularly so that the risk in the company can be appropriately managed.

The impact of the political competitive environment on the business

External factors that need to be taken into consideration

Australia is the hub of banking and financial institutions therefore the competition level in the country is very high. More so, after the great recession of 2008 and the fall of major global banks originating in the USA, the banking norms have been made stricter and the banking companies are highly regulated. The company should consider the global decline in the business due to COVID-19 and shall consider the impact of the same shortly and should take appropriate decisions.

Would you invest in this company?

The prospects of the company are good and the ratio analysis of the company indicates that the company is progressing. The company has been continuously growing and therefore I would invest in the company.

References for Financial Management

https://www.macquarie.com/assets/macq/investor/reports/2020/Macquarie-Bank-FY20-Annual-Report.pdf

https://www.macquarie.com/assets/macq/investor/reports/2019/mbl%202019%20full%20year%20annual%20report.pdf

Amba, S. M. (2014). Corporate governance and firms’ financial performance. Journal of Academic and Business Ethics, 8(1), 1-11.

Myšková, R., & Hájek, P. (2017). Comprehensive assessment of firm financial performance using financial ratios and linguistic analysis of annual reports. Journal of International Studies, volume 10, issue: 4.

Menicucci, E., & Paolucci, G. (2016). The determinants of bank profitability: empirical evidence from the European banking sector. Journal of financial reporting and Accounting.

Nguyen, T. P. T., & Nghiem, S. H. (2015). The interrelationships among default risk, capital ratio, and efficiency. Managerial Finance.

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

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