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.

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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.

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.

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.

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.

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

Income Statement