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The group is asked to compare and contrast the financial performance of both ANZ and NAB banks and to come up with a consolidated view of which bank is better from a investor point of view. Price-to-Earnings ratios (P/E), Return on Equity (ROE), Capital Adequacy Ratio, Dividend Yield ratio and Weighted Average Cost of Capital (WACC) were calculated in this report as indicators as they are deemed as the most relevant ratios in this context.
The P/E ratio gives an indication of the number of years it will take for net profit to “cover” the price paid for the share assuming no further shares are issued and same net profit is earned (Phan, 2011). ROE is a crucial ratio that allows one to inspect earnings performance of companies (Pysh, 2012). Capital adequacy ratios are measures of the amount of a bank's capital expressed as a percentage of its risk-weighted assets (on and off balance sheet) and are significant indicators to measure the quality of its assets, stability, market risk, credit risk concentration, and adequacy of provisioning and the effectiveness of the bank’s management systems for monitoring and controlling risks (APRA, 1999). Dividend yield ratio shows how much earnings of the company are being distributed in dividend versus reinvestment (Marshall, 2010). ROA gives investors a gauge of how effectively the company is converting the money it has to invest into net income. In fact, a higher ROA is better as this means the company is earning more money on less investment (Investopedia). WACC calculates a firm’s cost of capital where all capital sources like common stock, preferred stock, bonds and any other long-term debt are all proportionately weighted. With all factors being equal, the WACC of a firm increases as the beta and rate of return on equity increases, as an increase in WACC notes a decrease in valuation and a higher risk (Investopedia).
After analysing the trend of these ratios individually and as a whole, ANZ is concluded to be a better performer for this period.
Table of Contents
Table of Contentsii
Part A Discussion1
1) Price-to-Earnings Ratio (P/E)1
2) Return on Equity (ROE)1
3) Capital Adequacy Ratio (CAR)2
4) Dividend Yield Ratio3
5) Weighted Average Cost of Capital (WACC)3
Part B Discussion5
Part A Discussion
1) Price-to-Earnings Ratio (P/E)
A P/E ratio between...