Memo to: Board of Directors
From: VICTOR MABASA, Junior Analyst
Subject: Financial Analysis of ASOS PLC and BHP Billiton
BHP is a multinational Anglo Australian mining, petroleum, and metals listed public company that has its headquarters in Melbourne. The revenue of the company for the year stands at US $44.288 billion and the net income for the company is at US$9.185 in the year 2019. The profit of the company has taken a jump from the US $4.823 million in 2018 (BHP Annual Report 2019).
The other company that has been taken for an investment in ASOS Plc. The company is an online fashion and cosmetic retailer and was founded in the year 2000 in London. The company’s website sells around 850 brands and its clothing range. The revenue of the company stands at 2.573 billion pounds and has a net income of 1.307 billion pounds (ASOS Annual Report 2019). These two companies show the potential of growth due to which financial analysis on them has been conducted so that better judgment of investment can be made.
The valuation ratio will help in determining the worth of the company. Price upon earning depicts the price that is being paid for every dollar of earnings that the company is making (Spyrou 2019). It stands at 13.44 times. This is a good number as people are willing to pay 13 times more than earning.
The profitability ratio of the company depicts the position of profit concerning the sales (Laitinen and Laitinen 2018). According to the ratios, the net profit margin of the company stands at 22.40%. This means that 22% of the sales are net profit for the company. Also, the operating margin is 37.29% for the company. The company is creating a good margin of profits from sales. This shows that the profit margins that are being generated are good. Since there are various investment activities that BHP is undertaking like copper mining where it has planned to invest more in that and other activities that will improve the profits overtime for the company.
Management effectiveness ratios depict the returns that the management of the company can generate for the equity shareholders or on assets or any other investments that are made (Kamar 2017). Return on equity that is being generated by the company is at 19.14%. These returns that are being provided by the company are better than the returns that are being provided on fixed savings that stands at 1.1%. This shows that the company is covering and providing a very good margin to the shareholders for taking the risk. Return on assets is the return that is being generated through assets. It stands at 10.03%. Assets are being used efficiently as they are bringing positive results. Return on investment is 11.97% which is also on the higher sides from the fixed rates that are prevailing in the country.
The interest coverage ratio depicts the percentage of the times the company is making a $1 of interest it is paying. The better the number, the better the financial viability of the company. The interest coverage ratio of the company is at 16.65. This depicts that on paying 1 dollar of interest the company is generating $16.65. This shows that the company is using its debt capital effectively.
The efficiency ratios of the company show the turnover that the company is making. The receivable turnover of the company is at 9.18 means the company can rotate its cash cycle for 9 times in a year. While the payout ratio of the company is 76.52% which is a very good value. This means that 76% of the amount of dividend is paid to the shareholders. This shows that the company pays off dividends that are generated.
Thus, the company is having good ratios for the returns and profitability, and also the ratio of payout is good. This means that investing in the company will bring good returns and cover the pension fund. Another company where the sun will be invested in is ASOS Plc.
The company's PE ratio is very high. It stands at 80.95. This shows that the worth of the company's earning is quite in the market. The value prevails of the brand in the country. While the debt to equity ratio of the company is at .92 which means the company has a lesser amount of debt than equity. This is a good position as in case of any emergency, the company's equity holders will be able to cover the whole debt (Atkeson et al. 2019).
The gross margin of the company is at 47% while the net profit has sunk to 1.48% for the year 2019 due to the pandemic and halt of the business. Yet when the functioning starts there is a scope for growth as before the company was creating margins by 3% which are appropriate as per the industry (Aulova, Pankove and Rumankova 2019). Thus, there are the most probable chances of growth in the company.
The return on equity of the company is at 8.88%. Before it was at 19%. Even after the halt in business the company is providing returns better than the fixed rate in the economy. Once the company resumes the return will reach back to the same level and also as the business is being expanded by the company there are chances that it will improve. Return on Assets and return of investment of the company are according to the industry standards. ROA is at 3.12% while for the industry it stands at 7%, and ROI for the company is at 6.61% while for the industry it is around 12%. These numbers can be easily attained as the company was attaining more than these in the previous year,
The interest coverage ratio is 10 times, which means for every $1 of the interest being paid the company is making $10. This shows the financial strength of the company and the usefulness of the resource (Ji 2019).
The liquidity of the company is appropriate. The current ratio stands at .82 while for the industry it is at .9 which is approximately the same. The quick ratio is at .15 which is at par with the average of the industry. Thus showing that the company's liquidity position is good.
These two companies are listed on the London stock exchange and show a good future in terms of growth in the investment. Thus, these two companies can be considered for investment by PENCO for better Returns on Investment.
Annual Report. 2019. ASOS Plc. [Online]. Available at: http://www.annualreports.com/HostedData/AnnualReports/PDF/LSE_ASOS_2019.pdf. [Accessed on: 4th June 2020]. Annual Report. 2019. BHP. [Online]. Available at: https://www.bhp.com/-/media/documents/investors/annual-reports/2019/bhpannualreport2019.pdf?la=en. [Accessed on: 4th June 2020].
Atkeson, A. G., d’Avernas, A., Eisfeldt, A. L. and Weill, P.O. 2019. Government guarantees and the valuation of american banks. NBER Macroeconomics Annual, 33(1), pp.81-145.
Aulová, R., Pánková, L. and Rumánková, L. 2019. Analysis of Selected Profitability Ratios in the Agricultural Sector. AGRIS on-line Papers in Economics and Informatics, 11(665-2019-4010), pp.3-12
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