Financial Statement Analysis For Business

Executive Summary of CSL Limited Financial Analysis

The report summarizes the overall analysis of the company CSL Limited. The company functions in the biotechnology industry and at present, the industry is rapidly growing in the country. The growth rate is around 4 percent. This shows that the company has various opportunities to grow. Also, with growth, certain drawbacks include growing competition in the market and also government regulations. The valuation of the company shows a good position in the market and also the stocks are overvalued. Yet CSL Limited relative valuation has better value than the other company Baxter. Thus, showing a good position of the company.

Contents

Executive Summary.

Introduction.

SWOT Analysis of CSL Ltd.

Valuation Techniques.

Reverse engineering.

Conclusion.

References.

Introduction to CSL Limited Financial Analysis

CSL Ltd. is a public company that specializes in biotechnology. It develops, researches, and manufactures the products that are used for treating the medical conditions. Also, these products help prevent the conditions of medical. The company's product area includes blood plasma derivatives, anti-venom, vaccines, and reagents of cell culture. These products are used in various research on genetic and medical conditions and used in manufacturing. The company started in the year 1916 by the Federal government and in the year 1994, it was privatized (CSL Annual report 2019). The company’s headquarter is in Parkville, Victoria. It is in the inner suburbs of Melbourne.

In past years the company has performed well overall. The company's revenue has ramped up by 11% and the profit reported for the company was at US $1,919 million. The net profit of the company has increased by 17%. Strong growth has been seen in the core immunoglobulin and albumin theories. The product Privigen sales were up by 23% and 22% for Hizentra. Albumin’s sale was up by 22%(CSL Annual report 2019). There are 30 new collection center of Plasma has been opened. Also, the strategy of influenza is bringing profits for the company (Andrews et al. 2019). Sales of the company have improved by 19% and various awards have been received by the company that includes the FTSE4 Good Index series which is recognized globally for corporate responsibility.

Industry

In Australia, the average growth of the biotechnology industry at 4% from the year 2015 to 2020. In the country, government and non-profit organizations have remained an important source for the supply of funds. The private sector is also a major contributor to the revenue in the industry. The ASX listed Australian industry of biotechnology has a capital of around AU$100.042 billion and has around 100 industries in the list. There are around 48000 Australian who have STEM jobs in high-value companies. In the country, the industry has become one of the most important sectors and is expected to grow at 4.3% from 2020 to 2022 (Gascon et al 2017). The company has a great scope for development in the country. The growth rate in Australia is much higher than the other countries.

The company also has a major presence in the United States. The country is one of the major biotech players in the globe. The industry generates around 112 billion U.S. Dollars and has a market capitalization of around 700 billion U.S. dollars. There are around 700 companies in the industry and over 200 thousand people working in the United States and Europe alone. The industry has grown .8% per year from 2015 to 2020 on an average. The factors that are affecting the industry include low volatility of the revenue and the adults who are aged 65 and older. These are affecting the growth of the company in the United States while Australia provides a promising future as the industry is flourishing and has greater scope for growth.

CSL ltd net profits have improved from the year 2018. In the year 2018, the net profit of the company was $1729 million while in the year 2019 it has reached $1919 million. The company's Earning per share also improved and reached to $4.24 per share in 2019 from $3.82 per share in 2018. The operating revenue has constantly grown from the past 5 years and has reached to $8539 million in 2019 from $7915 million in the year 2018. The company is performing well and improving every year in its performance.

SWOT Analysis of CSL Ltd

CSL Limited is a leading company in the industry and has a dominant position in the market. SWOT-analysis helps in identifying the internal strategic factors for the company.

Strengths:

  • The company has a track record of successful development of new products i.e. product innovation.
  • Another strength of the company is the satisfaction of its customer. The company has a dedicated relationship manager for the department of customers and has been able to achieve high-level satisfaction of customers with a good equity brand.
  • The company has a highly-skilled workforce. The company is investing resources that are huge in training and development keeping its workforce skilled and motivated.
  • The company has been able to build its expertise in entering a new market and make them successful( CSL limited 2020).
  • CSL limited free flow of cash is strong that helps the company in expanding the new projects.

Weakness

  • The company’s forecasting of the product demand is inaccurate, due to which the company faces a high rate of missed opportunities as compared to its competitors.
  • The investment made by the company is below the level of fastest-growing players and even after spending above the industry average on Development and research, the company is not been able to compete with the top players in terms of the innovation in Industry( CSL limited 2020).
  • The company’s attrition rate is higher and it has to spend a lot more than any other company in the industry and the development of employees.
  • The company requires a lot more investment in the new technologies. According to the expansion scale, the company has planned to expand it needs to put in a lot of money in the technology to integrate the process and at present, the company does not have so( CSL limited 2020).

Opportunities

  • The various markets have been opened for the company by the government and in turn, provided an opportunity for the company for entering the new markets that are emerging.
  • The green drive of the government has also opened up various portals for the procurement of CSL products(CSL limited 2020).
  • The development in the market will create dilution of advantage to the competitors and will enable CSL to increase the competitiveness to the other companies.
  • An increase in the spending of the customers and uptick in the economy after various years of recession and slow rate of growth provides an opportunity to company for capturing new customers (CSL limited 2020).

Threats:

  • New regulations of the environment can be a threat to certain existing categories of products.
  • Changing patterns of the buying behavior of consumers and shifting to the online channel can be a threat to the existing infrastructure that is a physical driven chain model of supply.
  • The trend that has been increasing of isolationism can negatively affect the international sales.
  • New technologies that are being developed by the competitors or the disrupters in the market can be a threat to the company and the industry in the long or medium term.
  • Stable profitability increased the number of players that puts downward pressure on the overall sales of the company( CSL limited 2020).

Valuation Techniques

The two valuation techniques that have been used are:

1)- Dividend discount model and

2)- Relative valuation

Dividend discount model

The dividend discount model refers to the method that is used to value the stock of the company. It is based on the theory that the price of the present day is worth all the sum of future payments of dividends (Bao and Feng 2018). This method helps in calculating the fair value of the stock, irrespective of the value that is prevailing on the stock market. This model helps in evaluating whether the stock should be brought in or not.

Dividend Discount model valuation

 

Formula

V0=D1/r-g

   

where,

 

V0= The current value of stock

 

D1- Dividend payment

 

r- Cost of equity

 

g- a growth rate of a company's dividend

 
 

In $

V0=

282.7

D1=

93 cents

Cost of equity

36.7%

Growth

9.74%

   
 

344.955

Source : (Annual Report 2019)

In the above calculation, it can be seen that the value that is prevailing in the stock market is lower than the value that has been received concerning the dividend model of valuation. This means that the stocks of the company are undervalued and they should be brought as eventually the prices will rise and reach to the defined level. So, it is better to buy the stocks as prices will rise in the future.

Relative valuation

Relative valuation refers to the valuation that is also called as comparable valuation. This method is helpful in the effective valuation of the company's health. The techniques that are used under this are price to earnings ratio, enterprise value, and also enterprise value/ EBITDA (Forte, Gianfrate and Rossi 2020).

The company that has been taken for comparison with CSL is Baxter. Both companies function in the Biotechnology industry and are basically into pharmaceuticals.

CSL

2019

2020

Price/ Earnings

45.76

44.82

Enterprise value

130.87m

135.36m

Enterprise value/EBITDA

36.45

36.39

Baxter

2019

2020

Price/ Earnings

27.97

42.07

Enterprise value

45.05m

43.9m

Enterprise value/EBITDA

24.85

28.2

Price/Earnings ratio depicts the price multiple that the investor is willing to invest in getting 1 dollar of the company's earning. The PE ratio of CSL is higher than Baxter. This depicts that company value is higher than its peers which means that the company is performing well and the stock price is overvalued for the company. The PE ratio of the company has remained higher in both the years than Baxter. But Baxter has improved significantly from the year 2019. This depicts that competition for the profit is rising and to maintain its value the company needs to perform well in the market.

Enterprise value depicts the total value of the company and is also used as an alternative for equity capitalization in the market. This metric is used mostly for the tower value of enterprise will depict a situation where the company can be bargained to purchase. CSL ltd has a very high enterprise value than its peer. Baxter value of the enterprise is at 45.05 million while for CSL it stands at 130.87 in the year 2019. In the next year 2020, the enterprise value of CSL has improved and reached to 135.36 million while the enterprise value of Baxter has reduced and reached to 43.9 million. This shows that CSL performance of stock has improved in the market while for Baxter it has reduced. CSL is performing better than the others and has more value attached to it.

Enterprise value/ EBITDA

EV/EBITDA metric is used for the tool of valuation to compare the value of a company that includes debt and also the cash earnings of the company. This technique of valuation helps in analyzing the company within the industry in which it is functioning. The lower the value of EV/EBITDA the lesser will be the value of the company in the industry. This ratio helps in depicting the times the investor has to generate EBITDA for acquiring the entire business. This value is easily calculable as the data is available easily. With that, this value is used widely in the financial world to understand the value. Also, certain drawbacks are attached to it that states that this value does not provide a proxy for good cash flows. It also does not take into account the capital expenditures of the business. But this value helps in understanding the worth of the business.

CSL ltd has an enterprise value of around 36 in both the year while Baxter value is at 24. This value depicts that CSL has a higher value than the other. The company overall has a better performance in its relative valuation to Baxter. Thus, CSL has a relatively higher valuation than the other company i.e. Baxter.

Reverse Engineering

Dividend discount model

The dividend discount model calculates the value of the stock based on a dividend that is being paid. Cost of equity depicts the cost that is being utilized in setting out the equity in the market. The cost is reduced from the growth rate so that appropriate value can be derived in order of the value by which dividends will grow. The company will be able to pay dividends only if the stock prices are overvalued and the company is generating more than it is being paid for. The dividend discount model helps in analyzing the same. It will help in understanding the overvaluation and undervaluation of the stocks in the market and then accordingly the growth rate will be determined from the previous year's dividends growth. Thus, in this manner, an appropriate value of the stock will be derived. According to the calculations, the value of a stock is at 344 while at present it is trading at 282. This depicts that prices are at present lower than they should be and shares should behold and new can be purchased for the company.

Relative valuation method

The relative valuation method depicts the value of the enterprise concerning a peer in the industry. The PE ratio considers the price for which the stocks are trading in the market while earnings depicts the EPS for the company. Earning is calculated through the market value that is prevailing in the market. It shows how much a share is earning in the market. In the same manner, enterprise value depicts the value of enterprise through the calculation of its debt and other values in the market. Relative valuation helps in understanding the comparison between the two firms value. PE ratio of CSL is higher than Baxter. The PE of CSL is at 45 while for Baxter it is at 27. This shows that CSL has better value than Baxter in the market. Also, enterprise value/ EBITDA depicts the time EBITDA needs to be earned to overcome the company. Ebitda is calculated after deducting all the expenses that have occurred in the firm to get the resultant profit. Only interest tax depreciation and amortization are to be considered are left that vary from company to company thus provide an appropriate picture of the firm.

Conclusion on CSL Limited Financial Analysis

CSL Limited is a company that is into the biotechnology industry and the industry provides a good picture overall. The industry in which the company operates is growing and thus there is a good opportunity for the company to grow and expand. The growth rate of the industry is around 4%. This will help CSL to grow in the market. Also, the company' revenue has grown over the past few years. Some various strengths and weaknesses are attached to the company. The company can expand into any market. With that, the company has a very satisfied client base that helps in its growth. The weakness that the company has is that its forecasting techniques that do not provide appropriate results. For opportunities, the government has to provide various avenues for growth but the threat of other companies entering the market stays with the company.

The valuation of the company has been carried out by two methods Dividend Discount model and Relative valuation. According to the dividend discount model, the company share prices are lesser than they should be. The share prices are at 282 while from the model the value that has been derived is 344. This depicts that share prices are undervalued and will rise in the near future. The shares should behold for some more time and new ones can be brought in at low prices as after some time the prices will rise to reach its value. According to relative valuation, the company has a better value than its peer Baxter and is surviving well in the market. Thus, investments can be made in the company for a better future and growth of investments.

References for CSL Limited Financial Analysis

Andrews, A., Panousis, C., Emmrich, K., Wilson, M., Dower, S., Hardy, M. and Hartman, D., CSL Behring AG, and CSL Behring Recombinant Facility AG, 2019. Mutated von Willebrand factor. U.S. Patent Application 16/068,157.

Annual Report.2019. CSL Limited. Available at:https://www.csl.com/-/media/csl/documents/annual-report-docs/csl-ltd-annual-report-2019-full.pdf?la=en-us&hash=AC57DA1C6E85B66162B25238509C47596E1CA401 (Accessed on: 20th July 2020)

Bao, G., and Feng, G., 2018. Testing the Dividend Discount Model in Housing Markets: the Role of Risk. The Journal of Real Estate Finance and Economics57(4), pp.677-701.

Fen fort University. 2020. CSL Limited SWOT Analysis/ Matrix. Available at:http://fernfortuniversity.com/term-papers/swot/nyse/5922-csl-limited.php#:~:text=SWOT%20analysis%20is%20a%20vital,in%20its%20current%20business%20environment. (Accessed on 20th July 2020).

Forte, G., Gianfrate, G. and Rossi, E., 2020. Does relative valuation work for banks?. Global Finance Journal44, p.100449.

Gascón, F., Lozano, J., Ponte, B., and de la Fuente, D., 2017. Measuring the efficiency of large pharmaceutical companies: an industry analysis. The European Journal of Health Economics18(5), pp.587-608.

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