Evaluation of Financial Services Assignment Sample

Evaluating Macquarie Group's Financial Performance in 2020 (Financial Services Assignment Sample)

Introduction Of Evaluation of Financial Services at MACQUARIE GROUP LTD

Macquarie is an eminent player in the financial services group having a presence in 31 markets and covering areas such as asset management, banking, financing, investment and other premier services. The company consists of a sound capital structure with a risk management framework that has helped the company to ensure the profitability trend. It operates through various wings that is the Banking and Financial Services, Macquarie Capital and Macquarie Asset Management (MAM)

MAM operates as the asset management business, and the business pertains to full-service asset manager hence it can meet the need of the customers through investment solution that consists of real estate, private credit, fixed income and agriculture. On 31 March 2020, the company projected $A597.7 billion of assets. The division consists of 1890 staffs and presence in 22 markets.

Get free samples written by our Top-Notch subject experts for taking assignment help services.

Macquarie Banking and Financial Services is another retail base of the company that provides services relating to the management of wealth, finance, banking and other services in respect to brokers, clients and advisers. On 31 March the group comprised of deposits amounting to $A63.9 billion and home loans amounting to $A52.1 billion. The third is Macquarie Capital which provides specialist expertise and helps in giving advice together with the capital solution that helps the client (Macquarie 2020).

Analysis of Macquarie Capital and Macquarie Asset Management Company 

The net profit margin of Macquarie amounted to $A2,31 million in 2020 that happened to be 8% lowered as compared to 2019. The higher performance of 2019 was offset by the credit increment and other relevant charges of impairment hence projecting deterioration in the present situation. The net operating income dropped a decline of 3% from $A12,754 million in the past year (Macquarie). 

The higher charges of credit were followed by the higher charges of impairment that led to a drop in the net profit. 

The operating expense amounting to $A8871 for 2020 was in tune with the amount of last year that is $A8,887 million followed by the increment in the employment expenses and expenses of non-salary together with the drop in the trading expenses (Macquarie 2020). 

As per the annual report, the fundamentals remained intact and was supported by the risks management policy that is possible through the underlying strength. It is properly disciplined and thereby provides sufficient capital that helps in growth activities. As the headquarters is located in Australia, thereby it carries the benefit of operating in a healthy financial environment that supports long-term growth and success (Macquarie 2020).

The major highlight of 2020 is as follows:

The operating income of the company stood at $A12,325 million.

The operating expenses of the company were $A8871 million.

The ROE was seen at 14.5% in 2020 in comparison to 18% of 2019 (Macquarie 2020)

The EPS dropped to $A8871 million

The payment of the dividend was $A4.30

The market scenario of the company remained challenging considering the short terms scenario. The year 2020 was disturbed by COVID-19 pandemic and the aftermath will still be seen in the year 2021. Hence, instead of the same, there will be a drop in the business and drop in the customer's confidence. Further, the market scenario will be volatile and will lead to crisis.

Ratio Analysis 

Ratio analysis is a primary analytical tool when it comes to an understanding the financial statements for comparison of the performance and position. This helps in getting a proper comparison with the rivals and thereby helps in understanding the overall status of the company.

Ratio analysis helps in understanding the trend and pattern of the company that leads to comparison with the predetermined or past result. This helps to make the study easier. Looking at the financial result and getting the ratio is more comfortable; thereby, the method is widely prevalent.

However, the ratio analysis is not free from shortfalls. The analysis can fetch a better result when the differentiation or comparison happens between two companies that belong to the same industry; otherwise; the result will be invalid. Secondly, different company follow the different framework and thereby difficult in evaluating because different adjustments might be needed.

Profitability ratios

Profitability is an important parameter because it denotes the ability of the company to fetch result from the sales, utilize the assets and the equity. The ratio helps in projecting the profit derived through the investment of the shareholders, asset management, and profit over sales.

Return on Assets indicates the proficiency through which the company has put the assets to use (Pucheta-Martiinez & Garcia-Meca, 2019).

As indicated by the calculation that the ratio dropped from 2% in 2019 to 1% in 2020, which is very alarming for the company. The change owes to the improper utilization of the assets. Similarly, the ROE ascertains how effectively the wealth of the shareholder is used to reap returns. In the case of MCQ. The ratio has dropped from 18% in 2019 to 14.5% in 2020. If visualized from the perspective of the investor, it can be commented that the performance has dropped in 2020 but managed to remain above the industry average. If ROE and ROA are compared it can be commented that the performance of the company has dropped.

Further, the NPM of the company has underwent a dip from 51% in 2019 to 49% in 2020 hence projecting a declining net profit margin.

The drop in the performance can be linked to the higher charges of credit followed by the high changes of impairment and drop in the operating income. The expense ratio increased from 69.7% in 2019 to 72% in 2020, that indicates the company has a potent expense ratio. The expenses are justified as per the result of 2019 and can be linked to the brokerage decline, expenses of commission and trading.

Profitability	2020	2019	Industry average
Return on assets	1%	2%	0.73%
Return on equity (reported)	14.5%	18.0%	9.77%
Net profit margin	49%	51%	18.17%
Net interest income ratio	0.82%	0.89%	n/a
Expense ratio or Cost to income ratio (reported)	72%	69.70%	n/a
Cash flow to sales	22.27%	19.78%	n/a

Market-based ratio

The company's EPS has dropped from m$8.33 in 2019 to $7.910 in 2020 that projects a drop in the profitability. The drop in the performance was the primary reason for the PE ratio decline. As the profitability was less thereby, the dividend policy of the company was disturbed because the company pays dividend only when it earn a profit. A drop in the dividend was noticed from $4.30 per share as compared to $5.75 per share. Marginal dip in the profitability ratio was witnessed; however, the overall fundamentals remained intact.

Earnings per share	AUD$7.910	AUD$8.833	n/a
Dividends per share	AUD$4.30	AUD$5.75	n/a
Dividend payout ratio	54%	69%	n/a
Price earnings ratio	10.84 times	XX times	16.72 times

Efficiency ratios

The efficiency ratio projects how efficiently the company can use the assets to generate revenue and the company's ability to manage the assets (Sherman 2015). The efficiency of MQG is known through Asset turnover, fixed asset turnover and times receivable. The asset turnover and FTO projects the company's ability in using the assets and fixed assets. As seen from the performance, the ratio is weak and projects the weakness in the company utilization of the resources. Hence, it is an indicator that the company failed to use the resources effectively. The day's receivables remained unchanged, indicating that 235 days will be needed to transform the inventory into sales.

2020	2019	Industry average
Asset turnover	0.024367282	0.029516022	n/a
Fixed asset turnover	0.043210359	0.055755086	n/a
Days receivables	235	232	n/a
Times receivables turnover	1.55	1.56	n/a

Solvency ratio

Short term solvency

Short term solvency or Liquidity is a significant factor because it pertains to the ability of the company in honouring the obligations of the company. Further it denotes the ability of the cash when required so that the company does have a deficiency. The presence of cash for any organization is vital because that determines how the company take care of the current and upcoming obligations (Smith & Venter 2020). 

Current ratio projects the presence of an excess of current assets over the current liabilities. The sound current ratio denotes that the working capital is balanced, and hence the payment can be meeting effectively. Current ratio will guide the company to a better level of efficiency and risk. the company reduce the cost or use the funs elsewhere when more funds are attached to current assets. From the computation, it can be commented that the year 2019 is projecting a lower level of current assets in comparison to current liabilities. At present, the company has $0.88 current assets for every $1 of current liabilities. The reason for the ratio betterment in 2020 can be linked to the addition of more current assets to the organization.

The cash flow ratio further indicates the number of times the company will be able to repay the current debt with the cash level.

As seen from the computation, the ratio ranked lower in both the year and hence this will be a challenging part of the company to repay the money. thereby, it can be commented that the company will face a liquidity problem if the management does not sort the liquidity woes.

2020	2019	Industry average
Current ratio	0.883880017	0.789211696	n/a
Cashflow ratio	0.018967531	0.021395136	n/a

Long term Solevncy

Solvency helps in telling about the ability of the company to survive and succeed in the business. The main aim of the company is to conduct business and expand for expansion it requires debt, and hence opting for debt is useful for the business. If the debt is adequately used it leads to growth and creation of more project (Chen & Gong 2019). However, if used negatively it will cost the company and leads to insolvency. The debt ratio of the company remain undisturbed in both the years hence signifying that the company has higher debt component as it is 91% which is an indictor of higher interest payment. The equity ratio of the company stands at 9% which is very low, comparing the operations of the company. Hence, in this regard, it can be commented that the reliance on debt is high, which might lead to erosion of profit in the long run.

New Investment

MQG can open another stock market financial service that will boost the company's income and expand the business.

WACC is influenced by the external scenario and not by the company's management. It projects the minimum return a company will earn on the base of the asset to satisfy the owners, creditors, and the capital providers; otherwise, the investment will be made elsewhere (Deegan 2016). Here it is noted that MQG has various sources of capital that the regular debt, common stock, and liabilities. It will only capitalize 40% through their capital. Hence considering it, the WACC seems a good option as the usage will help in telling the different sources of finance and the returns generated by them. However, the complicated capital structure will make the scenario difficult in computing the WACC.

Going by the capital structure and performance of the company, it can be commented that the company should use retained earnings because it has earned profit and has built a strong retained earnings base. Some cash portion can be infused into the system. This means the money that was saved is now being used to generated return. Hence, this policy can be used in expansion and growing the business.

Using of cash can be dangerous because the current ratio of the company is weak and hence requirement of cash is mandate for the smooth performance of the business. If the business fails to gather the desired cash, then it will not be able for the business to perform uninterrupted. Thereby, the usage of retained earnings best suits the business.

 Conclusion

MQG is aware of the responsibility as a corporate citizen, and the performance indicates a drop but the overall fundamentals remain intact. The group operates both nationally and internationally, and hence it needs to develop significant infrastructure that will help in the expansion of the business. If the ratio of the year 2019 is contrasted with 2020, then it comes to the limelight that the ROA and ROE have dropped in the year 2020. The NPM has reduced in 2020 to 49%. Similarly, the EPS has dropped to $7.33 per share in 2020, which denotes light weakness. Further, the management needs to check the liquidity pattern because the liquidity and solvency of the company are weak, thereby projecting weakness in the performance. Weak liquidity can hamper the ability of the company in repayment of the debt, and the weak debt can lead to more interest payment.

References

Chen, A., & Gong, J. (2019). Accounting comparability, financial reporting quality, and the pricing of accruals. Advances in Accounting, Incorporating Advances in International Accounting, 45. doi:10.1016/j.adiac.2019.03.003

Deegan, C. M. (2016). Financial accounting (8e ed.). McGraw-Hill Education.

Macquarie. (2020). Macquarie 2020 annual report & accounts. Retrieved from: https://www.macquarie.com/au/en/investors/reports/full-year-2020.html

Pucheta-Martiinez, M. & Garcia-Meca, E. (2019). Monitoring, corporate performance and institutional directors. Australian Accounting Review, 29(1), 208-219. doi:10.1111/auar.12262

Sherman, E. (2015). A manager's guide to financial analysis : Powerful tools for analyzing the numbers and making the best decisions for your business (6^th ed) Ama Self-Study 

Smith, C., & Venter, E. R. (2020). Financial statement comparability in the extractive industry. Accounting Research Journal, 33(3), 523-541. https://doi.org/10.1108/ARJ-08-2019-0161

Appendix

MACQUARIE GROUP LTD (MQG) CashFlowFlag BALANCE SHEET
Fiscal year ends in March. AUD in millions except per share data.	2016-03	2017-03	2018-03	2019-03	2020-03
Assets
Current assets
Cash	-	-	-	-	-
Cash and cash equivalents	-	-	-	8,643	9,717
Short-term investments	29,136	33,826	21,751	17,446	16,855
Total cash	29,136	33,826	21,751	26,089	26,572
Receivables	59,447	27,471	38,559	4,285	3,405
Deferred income taxes	-	-	376	-	-
Other current assets	30,082	28,664	30,931	62,693	97,939
Total current assets	1,18,665	89,961	91,617	93,067	1,27,916
Non-current assets
Property, plant and equipment	14,371	14,301	15,695	7,142	8,034
Accumulated Depreciation	- 2,850	- 3,292	- 4,269	- 2,441	- 2,990
Net property, plant and equipment	11,521	11,009	11,426	4,701	5,044
Equity and other investments	10,197	3,597	5,489	11,380	17,249
Goodwill	525	442	469	1,032	1,717
Intangible assets	553	567	524	999	1,551
Deferred income taxes	850	638	650	1,031	1,340
Other long-term assets	54,444	76,663	81,150	85,547	1,00,985
Total non-current assets	78,090	92,916	99,708	1,04,690	1,27,886
Total assets	1,96,755	1,82,877	1,91,325	1,97,757	2,55,802

Liabilities and stockholders' equity
Liabilities
Current liabilities
Short-term debt	52245	60112	61775	56191	67342
Capital leases	-	-	-	-	1038
Accounts payable	2203	3103	3329	1745	1716
Deferred income taxes	469	212	262	413	-
Other current liabilities	54065	44983	32481	59575	74625
Total current liabilities	1,08,982	1,08,410	97,847	1,17,924	1,44,721
Non-current liabilities
Long-term debt	71566	56576	59109	66469	89063
Deferred taxes liabilities	543	621	749	425	234
Minority interest	-	-	-	-	-
Other long-term liabilities	-	-	15440	-	-
Total non-current liabilities	72,109	57,197	75,298	66,894	89,297
Total liabilities	1,81,091	1,65,607	1,73,145	1,84,818	2,34,018
Stockholders' equity
Common stock	6422	6290	6243	6181	7851
Other Equity	1152	2462	2745	1552	1478
Retained earnings	7158	7877	8817	9807	10439
Accumulated other comprehensive income	932	641	375	824	2016
Total stockholders' equity	15,664	17,270	18,180	18,364	21,784
Total liabilities and stockholders' equity	1,96,755	1,82,877	1,91,325	2,03,182	2,55,802

Income Statement

MACQUARIE GROUP LTD (MQG) CashFlowFlag INCOME STATEMENT
Fiscal year ends in March. AUD in millions except per share data.	2016-03	2017-03	2018-03	2019-03	2020-03
Revenue	4862	4331	4670	5526	5837
Cost of revenue	-	-	-	-	-
Gross profit	4,862	4,331	4,670	5,526	5,837
Operating expenses
Sales, General and administrative	4656	5030	4903	5673	5594
Other operating expenses	3758	2603	3776	4874	5085
Total operating expenses	8414	7633	8679	10547	10679
Operating income	- 3,552	- 3,302	- 4,009	- 5,021	- 4,842
Interest Expense	3182	2953	2957	3595	3297
Other income (expense)	9749	9359	10430	12483	11593
Income before taxes	3,015	3,104	3,464	3,867	3,454
Provision for income taxes	927	868	883	879	728
Net income from continuing operations	2,088	2,236	2,581	2,988	2,726
Other	-25	-19	-24	-6	5
Net income	2,063	2,217	2,557	2,982	2,731
Net income available to common shareholders	2,063	2,217	2,557	2,982	2,731
Earnings per share
Basic	6.55	6.57	7.58	8.83	7.91
Diluted	5.83	6.45	7.43	8.68	7.64
Weighted average shares outstanding
Basic	315	321	322	324	333
Diluted	354	344	344	344	357
EBITDA	7032	6208	7553	8980	8116

Profitability and Market Ratios - MQG
2020	2019	Average for Industry
Return on Assets	Net Profit / Average Total Assets	2732/ ((255802 + 197757)/2)	2982 /197757
0.012046944	0
1%	2%	0.73%
Return on Equity	Net Profit / Average Equity	2732/ ((21784 + 18364)/2)	2982 /18364
0.136096443	0.162382923
14%	16%
Return on Equity taken from Annual Report 2020 p102	14.50%	18.00%	9.77%
Net Profit Margin	Net Profit / Revenue	2732 / 5526	2982 /5837
0.494390156	0.510878876
49%	51%	18.17%
Net Interest Income	Net Interest Income / Average Earning Assets	1,859,000,000 / ((255,802,000,000 + 197,757,000,000)/2)	1760000000/ 197,757,000,000
0.00819739	0.008899811
0.82%	0.89%	result%
Expense ratio	Expenses (excluding tax) / Revenue	8,871,000,000 / 12,325,000,000	8887000000 / 12,754,000,000
Expenses = Total Operating Expenses (see below)	0.719756592	0.696801004
Reveue = Net Operating Income	72%	69.68%	result%
Expense to income ratio taken from Management Discussion 2020 p11	72.00%	69.70%
Cash flow to sales	Net cash flow from operating activity / Revenue	2745 / 12325	2523/ 12754
0.222718053	0.197820292
51.00%	19.78%	result%
Earnings per share	Profit for shareholders / Number of ordinary shares	AUD$7.910 per share	AUD$8.833 per share	$xx per share
Basic EPS taken from Annual Report 2020 p102
Dividends per share	Dividends - Special dividends/ No of shares	AUD$4.30 per share	AUD$5.75 per share	$xx per share
DPS taken from annual report 2020 p102
Share price	share price taken from Annual Report 2020 p102	AUD$85.75	AUD$129.40
Dividend payout ratio	DPS/EPS	4.30 / $7.910	5.75/8.33
DPS & Basic EPS taken from Annual Report 2020 p102	0.543615676	0.69027611
54%	69%	result%
Price earnings ratio	Share price last day of reporting year / EPS	AUD$85.75 / 7.910	AUD$129.40 / 8.833
share price taken from Annual Report 2020 p102	10.8407	14.6496
10.84 times	result times	16.72 times

Efficiency Ratios - MQG
2020	2019	Average for Industry
Asset turnover	Sales or Revenue / Average Total Assets	5526 / ((255802 + 197757)/2)	5837 / 197757
0.024367282	0.029516022
result times	result times	result times
Fixed-Asset Turnover Ratio	Sales or Revenue / Total Non Current Assets	5526 / 127886	5837 / 104,690
Non Current Assets figures provided by Morning Star	0.043210359	0.055755086
http://financials.morningstar.com/balance-sheet/bs.html?t=MQG&region=aus&culture=en-US	result times	result times	result times
Days receivables	(Average Receivables / Sales or Revenue) x 365	(((3405+ 3719)/2)/5526) x 365	(3719/5837)*365
Accounts Receivables = Debtors and Prepayments Annual report p175	(((3405+ 3719)/2)/5526) x 365	232.5569642
235.2750633	result days	result days
Times receivables turnover	Sales or Revenue/Average Receivables	5526/((3,405 + 3,719)/2)	5837/3719
Accounts Receivables = Debtors and Prepayments Annual report p175	5526/3562	1.569507932
1.551375632	result times	result times

Short term solvency Ratios - MQG
2020	2019	Average for Industry
Current Ratio	Total Current Assets / Total Current Liabilities	127,916,000,000 / 144,721,000,000	93,067,000,000 / 117,924,000,000
Current Assets and Current Liabilities figures provided by Morning Star	0.883880017	0.789211696
http://financials.morningstar.com/balance-sheet/bs.html?t=MQG&region=aus&culture=en-US	result:1	result:1	XX:1
Cashflow Ratio	Net Cash from Operating Activities / Total Current Liabilities	2745000000 / 144,721,000,000	2523000000/ 117,924,000,000
Current Liabilities figures provided by Morning Star	0.018967531	0.021395136
http://financials.morningstar.com/balance-sheet/bs.html?t=MQG&region=aus&culture=en-US	result times	result times	result times

Long term solvency Ratios - MQG
2020	2019	Average for Industry
Debt to Equity	Total Debt / Total Equity	64,556 / 21,784	51,389 / 18364
Debt issued taken from Annual Report 2020 p133	2.96345942	2.798355478
296%	280%	332.99%
Debt ratio	Total Liabilities / Total Assets	234,018/ 255,802	179393 / 197757
0	0
91%	91%	24.92%
Equity Ratio	Total Equity / Total Assets	21,784 / 255,802	18364 / 197757
0	0
9%	9%	result%
Cash debt coverage	Non Current Liabilities / Net Cash from Operating Activities	89,297,000,000 / 2745000000	66,894,000,000 / 2523000000
Non Current Liabilities figures provided by Morning Star	32.53078324	26.5136742
http://financials.morningstar.com/balance-sheet/bs.html?t=MQG&region=aus&culture=en-US	result times	result times	result times
Interest coverage ratio	EBIT / Interest expense	5,313,000,000 / 3,297,000,000	5,627,000,000 /3,595,000,000
EBIT (see below)	1.611464968	1.565229485
Interest expense taken from Annual Report 2020 p131	1.61 times	1.57 times	result times
(figures from www.macquarie.com 2020 annual report)
https://www.macquarie.com/assets/macq/investor/reports/2020/Macquarie-Group-FY20-Annual-Report.pdf
Industry averages taken from Bloomberg
MQG 2020 annual report
Profit/(Loss) before taxation	3,45,40,00,000	3,86,70,00,000	p131
Adjust for interest income and expense	1,85,90,00,000	1,76,00,00,000	(see below)
EBIT	5,31,30,00,000	5,62,70,00,000
interest income	5,15,60,00,000	5,35,50,00,000	p131
interest expense	3,29,70,00,000	3,59,50,00,000	p131
Interest capitalised	-	-	p
Total interest income/(expense)	1,85,90,00,000	1,76,00,00,000