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The present report aims to analyze and examine the financial performance of selected two ASX listed companies, that are, Easton Investment Ltd (Company A) and Charter Hall Group (Company B). This has been carried out in the report by reviewing the annual report of both the companies for evaluating the financial statements of both the corporations. In this context, the report undertakes the evaluation of the business scenarios given in relation to both the companies.
Easton Investments Ltd, is Company A, an ASX listed financial services company. It is actively involved in providing financial services related to wealth and asset management, distribution, accounting and taxation. The company operational activities mainly consist of investing in public sector equity markets around the world with special focus on Australia. The company is currently involved in operational activities of investing the funds in accounting enterprises for promoting the growth and development of businesses the company is investing in. The main objective of the company is to promote the growth and performance of businesses by providing them capital and industry knowledge. The company provides industry knowledge to the business through its highly talented executive team that has good experience and knowledge of wide range of industries. In addition to this, the company is also involved in proving distribution capability in accounting and financial services sector. This is undertaken by the company to increase its strategic value by creating scale distribution in the financial service sector. The company is planning to grab acquisition opportunities in the future through enhancing the strategic development of its distribution capability (Easton Investments Ltd, 2015).
On the other hand, Company B is Charter Hall Group (CHC) that is an ASX listed widely recognized properly enterprise in Australia. The company was established in the year 1991 and has today become a leading brand in property market of Australia with overall portfolio of $19.0 billion. The company is known to posses about 314 commercial properties within the country that includes office buildings, retail stores, and industries such as institutional and wholesale. The company mainly operational activities includes providing services related to investment management, asset management and property management. The company is highly focused to provide long-term returns for its investors through developing an integrated business model and retaining highly talented workforce diversity. Under investment management, the company is focused to manage wide variety of property funds of institutional and retail investors. Also, the company’s operations include providing leasing solutions for its tenants though analyzing the market environment and thus developing effective marketing strategies for properly managing the funds. The company in its asset management services aims to provide maximum income and asset values to its tenants and customers through working in co-operation with fund managers. The property management operational activities of the company include managing and reviewing the performances of its retail and industrial properties. The company has highly talented team that is actively involved in proving good accommodation to its tenants (Charter Hall, 2017).
The economic factors relate to forces that impacts the performance of businesses. The economic factor that can impact the performance and position of Company A is interest rates and inflation. The high interest rate is likely to have a significant impact on cost of borrowing funds and this may discourage the businesses to access capital from Easton Investment. The high interest rates will also reduce the economic growth and profitability and thus may decrease the profitability of businesses and thus this may cause businesses to not to utilize the financial services of Company A. Another economic factor that can impact the performance of Company A is inflation. Inflation refers to increase in the price level of goods and services in an economy over a period of time. The increase in inflation rate in economy may increase the cost if borrowing and thus businesses due to their decreasing profit margins are unlikely to seek the financial services offered by Company A. There are also certain industry factors that can have a wide impact on the performance and position of Company A (Easton Investment Limited: Annual Report, 2016).
Industry factors impacts the overall performance of the industry in which Company A is operating such as presence of raw materials, location, workforce diversity etc. The major industry factor in this context is presence of high competition in the industry chain. There is presence of many financial services company within the Australia financial market and thus high rivalry can impact the future growth and performance of Company A. In this context, Company A has to attain a competitive advantage in the financial market of Australia for ensuring its sustainable growth and development. The competitive advantage can be achieved through providing distinct and superior financial services to its business clients as compared to its competitors. The other industry factor impacting the Company A performance is threat of new entrants. The financial services sector of Australia has very low barrier to entry as any new firm entering in the industry requires small capital investment. Thus, there is high thereat for new entrants in the industry that can have a negative impact on the future growth and position of Company A (Easton Investment Limited: Annual Report, 2016).
The specific factors that can impact the performance and position of Company B are analyzed and examined from its annual report. The first specific factor is government regulations relating to acquisition of property within Australia. As analyzed from the annual report of Company B, its funds under management have significantly increased from $1.4 billion to $10.3 billion due to acquisition of new property within Australia. Thus, the government regulations in the property market of Australia developed by Australian Prudential Regulation Authority (APRA) can have a wide impact on the future growth and performance of Company B. Another specific factor that can impact the performance of Company B is taxation. The increase in property tax and real estate taxes in future period of time may cause a significant impact on the performance of Company B. The company mainly drives its income and growth from management of real estate funds and therefore any rising tax implications on the property market will have a negative impact on its future growth and sustainability (Charter Hall: Annual Report, 2016).
The Company A is presently focusing on developing online distribution capabilities for increasing its earnings contribution. The company has enhanced its earnings growth through developing its distribution capabilities within Australia financial services sector. The significant increase in earnings per share of the company is made possible as developing distribution services do not require large capital investment. Also, the company has developed and maintained its highly qualified workface that is responsible for its continuing growth and success. Thus, the development of highly talented team and significant organic growth opportunities through creating online distribution is resulting in improved earnings and shareholder value for the company in last two years (Easton Investment Limited: Annual Report, 2016).
Company B has achieved a sustainable growth in its performance over the last two year as a result of developing an integrated business model that is strongly focused on property and funds management business within Australia. The company has recorded an increase of 26.2% operating earnings in the year 2016 by its adequate management of funds. The company has developed an integrated business model through dividing its operational activities into two broad streams. The company gains large earnings firstly from its integrated property finds management platform. The second operational activities of the company include deriving property investment income through co-investing the funds in its partner’s unit name as Charter Hall Property Trust (CHPT). In addition to this, the company has created a diverse workforce team that is responsible for developing a sustainable organizational culture that aligns performance of employees with the sustainable growth of the business (Charter Hall: Annual Report, 2016).
In this part of the report is in relation to the advice to the head office of the Bestfunds Bank on the loan application submitted by the Company A. This advice is given by branch lending officer to the senior manager at the head office of the company. The motive for this advice is to evaluate the financial solvency position of the Company A to check its creditability position in the market.
The loan amount required by the Company A was equal to the 35 % of the total shareholder’s equity and with making the simple calculations the loan amount can be calculated as $ 6,735,750 ($19,245,000.00 * 35 %). The amount of interest per year on this amount of loan derives to $ 606,217.50 ($ 6,735,750 *9%). So it can be said that if company A takes the loan of $ 6,735,750 in the current year than it will raise its finance cost by $606,217.50 which will directly reduce the profit available for equity shareholders (Easton Investment Limited, 2016).
In order to check the ability of company to repay the loan and interest thereon there is need to interpret some ratios like debt equity ratio, interest coverage ratio and debt to total assets ratios. The debt equity ratio help to find out the amount of debt the company have against the shareholder’s equity. In year 2015 the debt equity ratio was 0.23 times and it year 2016 it was 0.22 times that indicates that company A assets are mainly financed through the equity capital. So it can be concluded that company can easily pay the loan amount in future having much burden on the management of the company A (Easton Investment Limited, 2016). Interest coverage ratio tells the times the company can its finance cost on the amount of the loan taken. It helps to find out the company capability to pay interest amount on the loan taken by the company by the bank. It has been found in the ratio analysis that interest coverage ratio for the year 2015 was 7.70 times in year 2015 and in year 2016 it has gone to 22.30 times that shows company A 3 times more capability to repay the interest in year 2016 as compare to year 2015. Overall analysis concludes that company A has capability to repay the loan amount as well interest cost on the loan amount taken.
Company has earned significant cash flows from the operating activity and other activities. The net cash inflow and net cash flow from all these three activities are given in below table:
| Particulars | 2014 | 2015 | 2016 |
| Cash inflow or (outflow) from the Operating activity | $ 15,709.00 | $ 2,430,569.00 | $ 2,615,000.00 |
| Cash inflow or (outflow) from the Investing activity | $ (2,354,903.00) | $ (3,286,528.00) | $ 537,000.00 |
| Cash inflow or (outflow) from the Financing activity | $ 3,465,336.00 | $ (284,439.00) | $ (661,000.00) |
On the basis of above table it can be said that cash flow status of the company A in the year 2016 was apparently the best as compare to the cash flows in the other years. There is positive trend in the operating cash flows that is the good sign for any company and it is the reason why company has started repaying the debt capital as seen from the cash used in the financing activities (Easton Investment Limited, 2016).
There are few points that need to be considered before making the decisions. First of all it is need to find out the requirement of loan amount and it is equal to 35 % of the total shareholder’s equity and it will raise the debt equity ratio 0.57 times (previously is was 0.22 times the shareholder’s equity). So it can be said that company has enough potential to repay the loan amount in the future years. Next important thing is that on what security the loan is rendered and in this case loan if allotted will be given on the property of the company that makes the loan completed secured in the favor of the bank. Lastly, the interest part has to be considered for payment purpose every year. It has been found that company has enough profit before interest and taxes to pay the extra burden of interest after this loan has been taken (Easton Investment Limited, 2015).
So, it is highly recommended to the bank to render the loan amount to the company A as the loan is completely safe and company A is in very good position to pay the loan amount as well as interest in near future.
As per the requirement of the rule 4.10.3 the company has fully complied with the entire compliance requirement regarding the corporate governance statement in the annual report. After reviewing the annual report of the concern company we have found below in the report:
On the basis of above report it can be said that Company B has compiled the statement on corporate governance in the annual report as well they have published it on their website to get directly get accessed by the users. There has no any non-compliance of the requirement of reporting on the corporate governance (Charter Hall, 2016).
Company B also published the corporate governance statement every year so that due consideration can be given to the corporate governance principles and recommendations as provided by the ASX. The corporate governance statement is well presented and fulfills all the requirements as required by the ASX with the listed companies. This statement contains the board of director’s structure and their roles in the corporate management. So it can be say that Company B has well completed all the requirements related to the corporate governance statement (Corporate Governance Statement, 2016).
The ASX corporate governance council principles are first introduced in year 2003 and it is re written in year 2007 and in year 2010 there were few additions regarding the diversity and the composition of the remuneration committee. The principles that are issued in year 2007 have main focus on the widely growing corporate principles all around the world. It has been the period of global financial crises and there is need to put an end to the company’s false practices that have been reported in the annual reports. So corporate governance council has decided to change the code of conduct for the enterprises and there has been introduction of new legislation regulating the corporate behavior (ASX Corporate Governance Council, 2014).
The corporate governance is defined as the set of rules, systems and processes through which the people or authority is assigned and controlled within the organization. It provides the mechanism through which companies are held liable for the work they carry out and become reportable to the stakeholders (ASX Corporate Governance Council, 2014). The principles listed by the corporate governance council helps to promote the good corporate governance and aims to avoid any issues between the various stakeholders and the management of the company. As we know that board of directors are directly help liable for any mis-happening caused in the listed company. In this regard the principles of corporate governance help them to carry out the functions in the company in given manner.
First article is on the impact of corporate governance on the firm’s performance. As per this article firm’s performance has noticed drastic change in means of profitability and accountability. Firms have now become more liable to the reporting of accounting as well as non accounting issues in the annual report so that it can be noticed by the users of annual report (Dabor, et al, 2015). It can be said that on the basis of article that listed companies have now concern over the reporting framework due to increase in due diligence and increased liabilities of the board of directors.
A second article is on how the Australian companies have noticed the change in the corporate performance after the introduction of new corporate governance principles. It can be said on the basis of this article that listed companies in Australia have noticed positive change in company performance after change in the constitution of board of directors as suggested by the new corporate governance (Nicholson, and Kiel, 2017).
ASX Corporate Governance Council. 2014. Retrieved 10 May 2017 from www.asx.com.au/documents/asx.../cgc-principles-and-recommendations-3rd-edn.pdf
Charter Hall. 2016. Annual Report. Retrieved 10 May 2017 from https://www.charterhall.com.au/
Charter Hall. 2017. Retrieved 10 May 2017 from https://www.charterhall.com.au/
Corporate Governance: An International Review 11(3): 189-205.
Corporate Governance Statement. 2016. Charter Hall Group.
Dabor, A. et al. 2015. Impact of CORPORATE GOVERNANCE on Firms’ PERFORMANCE. International Journal of Economics, Commerce and Management 3(6): 634-653.
Easton Investment Limited. 2015. Annual Report. Retrieved 10 May 2017 from http://www.eastoninvestments.com.au/
Easton Investment Limited. 2016. Annual Report. Retrieved 10 May 2017 from http://www.eastoninvestments.com.au/
Easton Investments Ltd. 2017. Retrieved 10 May 2017 from http://www.eastoninvestments.com.au/
How the Australian Experience Informs Contrasting Theories of Corporate Governance.
Nicholson, G. J. and Kiel, G. C. 2017. Board Composition and Corporate Performance.
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