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CSL Limited and Cochlear Ltd. Case study report

Executive Summary
The purpose of this report is to guide the clients of G.S. Klyne, in making investment decision. The clients are interested in the Australian Biotechnology sector and have asked us to do a comparative study between two companies. The two companies’ under study are CSL Ltd and Cochlear Ltd. Both companies are listed on the Australian stock exchange.

In order to accomplish the projects along the stated lines top –down approach is used. In this we studied the present condition of Australian economy and the sector in which the company is present. Further we analyze the Balance Sheets and P/L Account of both the companies over the period and estimate future Balance sheet and profit and loss statement. For this detailed research about the company is done. Apart from Percentage of Sales method, past ratios and assumptions are also used to forecast future financials. Trends analysis of all the items in the profit & loss statement and balance sheet is done to give us any indicator of the future potential. For this notes to accounts have been studied in detail to know the impact of these items in estimating the intrinsic value of the share. A lot of assumptions have

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been taken into consideration for doing the analysis.

After that risk analysis is done for both the companies. This helps us understand what necessary steps has the company taken to handle adverse scenarios and cases. For e.g.  Has the company kept sufficient reserves to handle a recessionary situation which occurred last year? Accounting analysis and adjustment of journal entries helps us to find out the adjustments which the company has made. These adjustments have been thoroughly examined and deciphered so that it gives us a clear picture of what this entry actually leads too.

Then Discounted Cash Flow valuation method is used to determine the free cash flow. Various variables like cost of equity, cost of debt, beta etc are determined to calculate WACC. Finally we find out the intrinsic value of the share.

Based on the DCF valuation method used we found out the Intrinsic value of Cochlear Limited to be 71 AUD and for CSL to be 33.75. Both the stocks are trading around their intrinsic values as on 11th May 2010. Based on accounting analysis and ratios it was found that CSL’s ratio was better as compared to Cochlear. The company’s fundamental are strong and is also financially well managed. Trend analysis also gives us a positive picture about the company. So we would suggest our clients to invest in CSL Ltd.

Introduction
From an investor’s perspective, a company must generate returns that not only allow it to stay in business but also give its investors an adequate reward for their investment. Any long term and thoughtful investment decision should be preceded by a thorough study and research about the prospective company. So to find out the right investment option proper valuation of the company needs to be done which will lead to better returns.

Valuation
Valuation is the estimation of an asset’s value based either on variables perceived to be related to future investment returns or on comparisons with similar assets. Skill in valuation is one very important element of success in investing. The valuation of a business is not as simple as someone buying the business for an amount equal to its net worth. Business valuation usually takes into account the net worth reported in its balance sheet, but many other factors play a role in putting a value on a business.

Valuation process

We have seen that the valuation of a particular company is a task within the context of the portfolio management process. Each individual valuation that an analyst undertakes can be viewed as a process with the following five steps:

Understanding the business: This involves evaluating industry prospects, competitive position and corporate strategies. Analysts use this information together with financial statement analysis to forecast performance.

Forecasting company performance: Forecasts of sales, earnings, and financial position (pro forma analysis) are the immediate inputs to estimating value.

Selecting the appropriate valuation model.

Converting forecasts to a valuation.

Making the investment decision (recommendation).
Analysts may consider qualitative as well as quantitative factors in financial forecasting and valuation. For example, some analysts may modify their overall valuation judgments and recommendations based on qualitative factors. These may include the analyst’s viewpoint on the business acumen and integrity of management as well as the transparency and quality of a company’s accounting practices. Although analysts may attempt to reflect the expected direction of such considerations in their financial forecasts or to otherwise quantify such factors, no formal valuation expression can fully capture these factors.” Equity analysts study financial results and disclosures for information bearing on the company’s current and future ability to create economic value.

Investment analysts play a critical role in collecting, organizing, analyzing, and communicating corporate information, and in recommending appropriate investment actions based on sound analysis.

Some analysts use discounted cash flow models to value firms, while others use multiples such as the price earnings and price-book value ratios. Since investors using this approach hold a large number of ‘undervalued’ stocks in their portfolios, their hope are that, on average, these portfolios will do better than the market. (Investopedia 2010)

Discounted cash flows

In a famous article Pearson Hunt came back from a visit to Ireland with Professor Finagle’s three laws of information:

1) The information we have is not what we want,

2) The information we want is not what we need,

3) The information we need is not available.

Professor Hunt discusses Finagle’s laws in the context of what investment analysts want from a firm’s financial statements. What they have are the financial statements with “accounting earnings” the bottom line. However, what analysts need for their valuations are not accounting earnings, but cash flow, the actual cash generated from the firm’s operations.

Discounted cash flow tries to work out the value of a company today, based on Projections of how much money it’s going to make in the future. In discounted cash flows valuation, the value of an asset is the present value of the expected cash flows on the asset, discounted back at a rate that reflects the riskiness of these cash flows. Target prices (from which recommendations are derived) are based on the sum of present value of future earnings based on a discount rate incorporating an equity risk premium. This approach comes with the best theoretical credentials.

There are several tried and true approaches to discounted cash flow analysis, including the dividend discount model (DDM) approach and the cash flow to firm approach. We will use the free cash flow to equity approach to determine the “fair value” of companies.

Steps in DCF valuation

·         Determine Free Cash flow

Free cash flow is the cash flow available to all investors in the company – both shareholders and bondholders after consideration for taxes, capital expenditure and working capital investment.

Free cash flow = NOPAT + Depreciation – Capital Expenditure – (+) Increases

(Decreases) in Working Capital Investment

Where NOPAT = Net Operating Profit after tax = Earnings before Interest But    after Taxes

              = EBIT (1- Tax rate)

                EBIT = Revenue – cost of goods sold – operating expenses – depreciation

·         Estimate a suitable discount rate for the project

The discount rate should reflect the capital structure of the project. To calculate the discount rate:

·         Find out cost of equity

Cost of Equity (Re) = Rf + Beta (Rm-Rf).

Where

Rf – Risk Free Rate (This is the amount obtained from investing in securities considered free from credit risk, such as government bonds)

Beta – Co-variance (SENSEX return, Stock return)/ Variance (SENSEX return)

This measures how much a company’s share price moves against the market as a whole

Rm – The returns investors expect, over and above the risk-free rate.

·         Cost of Debt

The cost of debt (Rd) should be the current market rate the company is paying on its debt.

·         WACC

WACC is the weighted average of costs of debt and equity, the weights being   target, market value debt-to-value and equity-to-value ratios respectively

WACC = Re x E/V + Rd x (1 – corporate tax rate) x D/V.

Where V- Value of firm      E- Equity value         D-Debt value

·         Calculate the present value of cash flows

Discount the free cash flows using the WACC calculated to get the present value of cash flows.

·         Estimate the terminal Value

The terminal value is the present value of cash flows occurring after the forecast period. If we assume that cash flows grow at a constant rate after the forecast period, the terminal value

T.V = [CFt (1+g)] / k-g

Where CFt  = cash flow in the last year

            g = constant growth rate

            k = discount rate

·         Add present value of terminal value

Value of the firm = Present value of future cash flows + Present value of Terminal value

So DCF gives us the Intrinsic Value (real value) of the stock and help investors in deciding about their investments. (Palepu, Healy, Bernard 2004)

Cochlear limited
Cochlear Limited (Cochlear) operates in the implantable hearing device industry. Its products include cochlear implant system, Baha system, freedom accessories, speech processor upgrades and nucleus freedom implant. Nucleus Freedom is the next generation of Cochlear’s technology, including SmartSound 2, which brings clarity to everyday hearing. Its bone conduction implant, the Baha system, helps people with conductive hearing loss, mixed hearing loss, as well as Single Sided Deafness (SSD). The Company has also introduced Nucleus Freedom speech processor technology to all of its Nucleus implant recipients. Cochlear’s Nucleus Freedom implant with Contour Advance electrode and Nucleus Freedom implant with Straight electrode features an electronics platform with a microchip. During the fiscal year ended June 30, 2009, Cochlear acquired Percutis AB, a Swedish company.( Cochlear official website (2010))

INTRINSIC VALUE

 DCF methodology was used to calculate the intrinsic value of the company’s share. Initially trends were studied of the net operating profit after tax and then forecasting was done by taking the average of the trends. Then free cash flow to the firm was calculated using the above explained DCF methodology. (Reuters 2010)

Assumptions

·         Trend of operating profit has been found out and then average of it has been taken to forecast future operating profits. In this case we have found out the average to be 15%.

·         Increase in capital expenditure has been taken to be 500,000 AUD per year. Even this has been the trend of the last four years.

·         Market premium has been taken to be 5.8% which is the average of the last 100 years.

·         Long term growth has been assumed to be 3.5%. This has been found out taking into consideration the life cycle in which the company is currently present and the sector outlook for future.

The table below shows the weighted average cost of capital calculations. Risk free return is got from the yield on 10 year bonds issued by the Australian government. Beta is taken from the Reuters database and market premium is found out by taking average returns for the past years. Cost of debt has been calculated from the interest charges paid by the company divided by the total debt.

COH: WACC Calculation

Particulars
%
Risk Free Return (Rf)
5.4
Market Premium (Rm)
5.8
Calculated Beta
0.64
Cost of Equity (Re)
6.936
Cost of Debt (Pre-tax) %
9
Debt /Equity
0.5178
WACC
1.053

CSL : DCF Calculation

Particulars
Rs. Cr
(A) Present value of the explicit phase
630240.8
Terminal value
15599168
Terminal growth rate
3.50%
(B) Present value of the terminal value
13361580
(A+B) Total present value
189036.3
Net debt
7244965
Equity Value
6746856
Shares(cr)
95000
Implied DCF value per share (Rs)
71.01954

We arrive at an intrinsic value of 71 AUD. Currently the stock is trading around 72 AUD which suggests that the markets reflect the correct value of the stock. Data from income statement and balance sheet were used to arrive at this value.

2009
2008
2007
2006
Income Statement
$000’s
$000’s
$000’s
$000’s
Revenue
694,699
601,725
559,412
452,260
Cost of sales
(196,244)
(169,013)
(161,334)
(130,962)
Gross profit
498,455
432,712
398,078
321,298
Other income
3,081
2,510
1,133
884
Selling and general expenses
(185,230)
(156,487)
(141,046)
(124,808)
Administration expenses
(44,979)
(36,092)
(38,635)
(29,951)
Research and development expenses
(96,682)
(80,017)
(65,949)
(58,926)
Results from operating activities
174,645
162,626
153,581
108,497
Net finance income/(expense)
1,623
(5,909)
(10,100)
338
Profit before income tax
176,268
156,717
143,481
108,835
Income tax expense
(45,728)
(41,483)
(45,805)
(30,610)
NET PROFIT
130,540
115,234
97,676
78,225

Additional Information

Basic earnings per share (cents)
233.7
208.1
182.9
146.8
Diluted earnings per share (cents)
233.2
206.6
180.1
145.2
Dividends Per Share (cents)
175
150
125
100
Share Price ($)
57.70
43.65
61.00
54.63
Market Capitalisation ($mill)
3,230
2,423
3,341
2,985
No. Shares on Issue (mill)
55.979
55.510
54.770
54.640
Interest Expense ($000’s)
8,851
12,022
8,892
6,391

2009
2008
2007
2006

Balance Sheet
$000’s
$000’s
$000’s
$000’s

Assets

Cash and cash equivalents
80,016
36,687
83,382
87,073

Trade and other receivables
173,256
173,266
143,076
109,388

Inventories
105,944
99,169
91,890
76,822

Current tax receivables
3,898
4,157
0
0

Prepayments
8,205
8,817
5,390
5,920

Total current assets
371,319
322,096
323,738
279,203

Trade and other receivables
31,086
15,963
6,178
0

Other financial assets
0
0
477
383

Property, plant and equipment
46,794
43,219
40,565
30,833

Intangible assets
208,275
208,959
196,268
205,238

Deferred tax assets
21,899
17,679
18,511
30,267

Total non-current assets
308,054
285,820
261,999
266,721

TOTAL ASSETS
679,373
607,916
585,737
545,924

Liabilities

Trade and other payables
64,881
60,830
61,923
57,345

Loans and borrowings
0
15,438
161,337
70,547

Current tax liabilities
5,362
2,803
7,997
24,981

Provisions
32,222
31,516
30,953
27,058

Deferred revenue
14,678
14,358
17,338
23,525

Total current liabilities
117,143
124,945
279,548
203,456

Trade and other payables
56
0
0
0

Loans and borrowings
188,583
154,545
37,552
125,493

Provisions
9,178
8,633
7,828
6,433

Other
179
452
0
764

Total non-current liabilities
197,996
163,630
45,380
132,690

TOTAL LIABILITIES
315,139
288,575
324,928
336,146

Equity

Share Capital
97,435
82,972
69,998
66,663

Reserves
(2,435)
13,035
15,357
3,010

Retained earnings
269,234
223,334
142,637
137,864

Minority interest
0
0
0
2,241

TOTAL EQUITY
364,234
319,341
227,992
209,778

TOTAL LIABILITIES AND EQUITY
679,373
607,916
552,920
545,924

Source: Reuters

VALUATION RATIOS

Market Capitalisation

Per Share Data ($   AUD)

Market Cap ($ Millions)
4,156.52

Earnings
2.41
Shares Outstanding
56.41

Sales
12.41
Float
55.69

Book Value
7.19

Cash Flow

Cash
1.43

Valuation Ratios

Management Effectiveness (%)

Price/Earnings
30.54

Return on Equity
38.19
Price/Sales
5.98

Return on Assets
20.28
Price/Book
11.32

Return on Investment
24.98
Price/Cash Flow
27.2

Profitability Ratios (%)

Financial Strength

Gross Margin
72.75

Quick Ratio
2.27
Operating Margin
26.54

Current Ratio
3.17
Net Profit Margin
19.77

LT Debt/Equity
51.78
Dividend Information

Total Debt/Equity
51.78
Dividend Yield (%)
2.58

Dividend Per Share ($   AUD)
1.9

Payout Ratio
75.14

CSL Limited
CSL Limited is a biopharmaceutical company engaged in the research, development, manufacture, marketing and distribution of biopharmaceutical and allied products. It operates in three segments: CSL Behring, which is engaged in manufacturing, marketing and developing plasma products; Intellectual Property Licensing, which is engaged in licensing to unrelated third parties of intellectual property generated by the Company, and Other Human Health, which comprises CSL Bioplasma and CSL Biotherapies. These businesses manufacture and distribute biotherapeutic products. It operates in Australia, United States, Switzerland and Germany. (CSL Limited official website ,2010)

Current Financial Performance

For the six months ended 31 December 2009, CSL Limited’s revenues increased 2% to A$2.41B. Net income increased 23% to A$617.4M. Revenues reflect an increase in income from Other Human Health segment of the group. Net income also reflects a decrease in research & development expense, lower selling & marketing expenses and a decrease in finance costs. CSL Limited is engaged in the development and manufacture of vaccines. (Reuters, 2010)

Intrinsic value

 DCF methodology was used to calculate the intrinsic value of the company’s share. Initially trends were studied of the net operating profit after tax and then forecasting was done by taking the average of the trends. Then free cash flow to the firm was calculated using the above explained DCF methodology.

Assumptions

·         Trend of operating profit has been found out and then average of it has been taken to forecast future operating profits. In this case we have found out the average to be 17%.

·         Increase in capital expenditure has been taken to be 2,250,000 AUD per year. Even this has been the trend of the last four years.

·         Market premium has been taken to be 5.8% which is the average of the last 100 years.

·         Long term growth has been assumed to be 4%. This has been found out taking into consideration the life cycle in which the company is currently present and the sector outlook for future.

The table below shows the weighted average cost of capital calculations. Risk free return is got from the yield on 10 year bonds issued by the Australian government. Beta is taken from the Reuters database and market premium is found out by taking average returns for the past years. Cost of debt has been calculated from the interest charges paid by the company divided by the total debt.

CSL: WACC Calculation

Particulars
%
Risk Free Return (Rf)
5.4
Market Premium (Rm)
5.8
Calculated Beta
0.65
Cost of Equity (Re)
5.66
Cost of Debt (Pre-tax) %
9
Debt /Equity
0.0706
WACC
1.0578

CSL : DCF Calculation

Particulars
Rs. Cr
(A) Present value of the explicit phase
6345321.735
Terminal value
228575343.7
Terminal growth rate
4.00%
(B) Present value of the terminal value
193083994.3
(A+B) Total present value
2244305.624
Net debt
15156628.02
Equity Value
184272688.1
Shares(cr)
546289.5
Implied DCF value per share (Rs)
33.75

We arrive at an intrinsic value of 33.75 AUD. Currently the stock is trading around 33 AUD which suggests that the markets reflect the correct value of the stock. Data from income statement and balance sheet were used to arrive at this value.

2009
2008
2007
2006
Income Statement
$000’s
$000’s
$000’s
$000’s
Sales revenue
4,622,387
3,556,662
3,172,397
2,848,908
Cost of sales
(2,399,720)
(1,928,683)
(1,737,543)
(1,703,033)
Gross profit
2,222,667
1,627,979
1,434,854
1,145,875
Other revenues
247,666
237,630
137,779
54,624
Other income
169,352
9,080
3,275
2,081
Research and development expenses
(311,615)
(225,121)
(190,846)
(161,023)
Selling and marketing expenses
(489,150)
(396,100)
(373,692)
(339,863)
General and administration expenses
(407,264)
(251,648)
(192,123)
(161,197)
Results from Operating Activities
1,431,656
1,001,820
819,247
540,497
Finance costs
(61,909)
(49,796)
(45,188)
(41,517)
Profit before income tax
1,369,747
952,024
774,059
498,980
Income tax (expense)/benefit
(223,815)
(250,222)
(234,760)
(148,087)
NET PROFIT
1,145,932
701,802
539,299
350,893

Additional Information

Basic earnings per share (cents)
192.51
127.58
295.39
192.77
Diluted earnings per share (cents)
191.74
126.85
293.40
184.25
Dividends Per Share (cents)
70.00
46.00
34.70
22.70
Share Price ($)
32.15
35.70
29.33
17.91
Market Capitalisation ($mill)
19,370
19,649
16,106
9,775
No. Shares on Issue (mill)
545.667
549.126
550.400
602.487
Interest Expense ($000’s)
61,909
49,796
45,188
41,517

2009
2008
2007
2006
Balance Sheet
$000’s
$000’s
$000’s
$000’s
Current Assets

Cash and cash equivalents
2,528,097
701,590
480,237
753,694
Trade and other receivables
885,884
709,390
616,980
593,679
Inventories
1,522,039
1,198,133
1,128,281
973,427
Current tax assets
12,174
0
0
6,889
Other financial assets
854
1,513
594
7,872
Total current assets
4,949,048
2,610,626
2,226,092
2,335,561
Non-Current Assets

Trade and other receivables
10,225
8,160
10,667
17,673
Other financial assets
8,397
8,442
13,808
4,728
Property, plant and equipment
1,197,502
975,936
858,894
816,336
Deferred tax assets
227,096
173,238
150,656
187,432
Intangible assets
974,547
910,510
927,594
820,841
Retirement benefit assets
0
8,052
11,983
3,514
Total Non-Current Assets
2,417,767
2,084,338
1,973,602
1,850,524
TOTAL ASSETS
7,366,815
4,694,964
4,199,694
4,186,085

Current Liabilities

Trade and other payables
663,818
444,723
439,510
388,979
Interest-bearing liabilities and borrowings
332,358
128,052
157,145
463,632
Current tax liabilities
101,173
123,018
97,801
88,038
Provisions
126,959
139,525
103,110
85,885
Deferred government grants
469
469
100
371
Derivative financial instruments
873
167
0
4,635
Total Current Liabilities
1,225,650
835,954
797,666
1,031,540
Non-Current Liabilities

Interest-bearing liabilities and borrowings
385,420
825,134
850,612
595,197
Non-current tax liabilities
0
0
0
5,043
Deferred tax liabilities
108,062
93,677
85,515
61,767
Provisions
38,811
41,553
107,623
408,053
Deferred government grants
12,083
6,950
4,961
4,093
Retirement benefit liabilities
133,894
85,571
84,468
90,588
Total Non-Current Liabilities
678,270
1,052,885
1,133,179
1,164,741
TOTAL LIABILITIES
1,903,920
1,888,839
1,930,845
2,196,281

Equity

Contributed Equity
2,760,207
1,034,337
1,023,941
994,101
Reserves
15,198
(134,299)
(190,371)
(55,767)
Retained Earnings
2,687,490
1,906,087
1,435,279
1,051,470
TOTAL EQUITY
5,462,895
2,806,125
2,268,849
1,989,804

TOTAL LIABILITIES AND EQUITY
7,366,815
4,694,964
4,199,694
4,186,085
Source: Reuters

RATIOS

Market Capitalisation

Per Share Data ($   AUD)

Market Cap ($ Millions)
18,488.56

Earnings
2.12
Shares Outstanding
557.05

Sales
8.43
Float
555.69

Book Value
7.76

Cash Flow

Cash
4.22

Valuation Ratios

Management Effectiveness (%)
Price/Earnings
15.62

Return on Equity
27.72
Price/Sales
3.67

Return on Assets
19
Price/Book
3.64

Return on Investment
22.92
Price/Cash Flow
14.1

Profitability Ratios (%)

Financial Strength

Gross Margin
51.3

Quick Ratio
2.8
Operating Margin
30.28

Current Ratio
4.04
Net Profit Margin
24.79

LT Debt/Equity
7.06

Total Debt/Equity
13.14
Dividend Information

Dividend Yield (%)
2.26

Dividend Per Share ($   AUD)
0.75

Payout Ratio
36.7

Ratios &Accounting Analysis
The table below shows the ratio analysis of Cochlear Limited. The following are the analysis based on the ratios

·         There has been no increase in the Gross profit margin. This might mean that either the sales have not increased or costs have increased. The company needs to seriously work on it and find out the reason for it. If its due to higher cost then it has to reduce its operating cost and if its due to reduced sales then increase the marketing budget.

·         There has been a reduction in the net profit margin. This is not a good sign for the company. It might be due to stagnant sales or improper tax planning.

·         Current Ratio has increased steadily. This leads to increase in the current assets. For the short term the company is good in handling its operations .This internally affects the net working capital required by the company. This effects the valuation calculation.

·         Average receivables haven’t changed significantly. This means that the company is getting the cash from the customers at the same rate as it was used to getting earlier. This leads to poor cash management. Due to this the company might be required to take additional loan from outside parties leading to increased cost of capital.

·         Inventory turnover had reduced and now it has reached back to the condition what it was 4 years before. Company needs to work on it because higher inventory turnover will mean the goods are moving at a faster rate. Company needs to work on its demand forecasting methods so that only optimum inventory can be kept and this will lead to lower inventory carrying cost.

·         Debt to equity ratio is at optimum level. This means the company is looking for expansion. This is a good sign as the money will get invested in projects and they might generate higher returns leading to better profitability.

Cochlear Limited- Ratio Analysis
2009
2008
2006
2005
Profitability

Gross Profit Margin = Gross Profit / Revenue
71.75121887
71.9119199
71.16007522
71.04276301
Price to Book Ratio = Market Capitalisation / Net Assets
0.008867926
0.007587501
0.012810141
0.014229328
Net Operating Profit Margin = NPAT / Revenue
18.79087202
19.15060867
17.46047636
17.29646663
Earnings Per Share = NPAT / No. Shares
2331.945908
2075.91425
1783.385065
1431.643485

Return on Investment

Dividend Payout Ratio = DPS / EPS
0.748823278
0.720807304
0.68343357
0.68119891
Dividend Yield = DPS / Share Price
3.032928943
3.436426117
2.049180328
1.830496064
Return on Assets = NPAT / Total Assets
19.21477598
18.95557939
16.67574355
14.32891758
Return on Common Equity = NPAT / Total Equity
136.8502117
135.5015485
174.6017404
153.1609606

Liquidity

Current Ratio = Current Assets / Current Liabilities
3.169792476
2.577902277
1.158076609
1.372301628
Acid Test Ratio = Cash and Equiv + AR / Current Liabilities
0.80369932
0.675242138
0.64510907
0.557655007
Days to Collect A/R = Avg A/R / (Sales x 360)
89.78559059
94.63053721
81.23443902
79.90310883
Days to Sell Inventory = Avg Inv / (COS x 360)
188.1348729
203.4791407
188.2316189
173.6473175

Asset Utilisation

PPE Turnover = Sales / Avg PPE
15.43552598
14.363721
15.67024286
16.31029446
Inventory Turnover = COS / Avg Inv
1.91352084
1.76922312
1.912537342
2.073167643

Solvency and Capital Structure

Total Debt to Equity = Total Liabilities / SH Equity
0.865210277
0.903657845
1.425172813
1.602389192
Times Interest Earned = EBIT / Interest Expense
-107.6062847
27.52174649
15.2060396
-320.9970414

The table below shows the ratio analysis of CSL Limited. The following trends have been ascertained

·         There has been a slow increasing trend in the Gross profit margin. This might be due to better sales due to increased marketing expenditure or due to reduced operating costs.

·         There has been a higher increasing trend in the net profit margin. This might be due to reduces taxes which can be due to some government tax benefits or any schemes given by the government.

·         Current Ratio has increased steadily. This leads to increase in the current assets. This internally affects the net working capital required by the company. This effects the valuation calculation.

·         Average receivables have reduced. This means that the company is getting the cash from the customers faster than what was it getting earlier. This helps in better cash management as the company can invest these in its future capital expenditure planning.

·         Inventory turnover has more or less been the same. In fact it reduced and now it has reached back to the condition what it was 4 years before. Company needs to work on it because higher inventory turnover will mean the goods are moving at a faster rate. Company needs to work on its demand forecasting methods so that only optimum inventory can be kept and this will lead to lower inventory carrying cost.

·         Debt to equity ratio is low. This means the company is more conservative in its approach and relies on equity for further expansion. The company must start borrowing money from the market and increase its leverage so that it can grow at a faster rate.

CSL Limited- Ratio Analysis
2009
2008
2006
2005
Profitability

Gross Profit Margin = Gross Profit / Revenue
48.0848315
45.77266549
45.2293329
40.22155156
Price to Book Ratio = Market Capitalisation / Net Assets
0.003545739
0.007002183
0.007098754
0.004912544
Net Operating Profit Margin = NPAT / Revenue
24.7909143
19.73204089
16.99973238
12.31675435
Earnings Per Share = NPAT / No. Shares
2100.057361
1278.034549
979.831032
582.4075872

Return on Investment

Dividend Payout Ratio = DPS / EPS
0.363617474
0.360558081
0.117471817
0.117756912
Dividend Yield = DPS / Share Price
2.177293935
1.288515406
1.183076886
1.267108759
Return on Assets = NPAT / Total Assets
15.55532479
14.94797404
12.84138797
8.382366818
Return on Common Equity = NPAT / Total Equity
20.97664334
25.00964854
23.7697176
17.63455094

Liquidity

Current Ratio = Current Assets / Current Liabilities
4.037896626
3.122930209
2.790757034
2.264149718
Acid Test Ratio = Cash and Equiv + A/R / Current Liabilities
2.713445111
1.632595813
1.360928634
1.289476899
Days to Collect A/R = Avg A/R / (Sales x 360)
62.12143639
67.12659229
68.69210253
72.84302617
Days to Sell Inventory = Avg Inv / (COS x 360)
204.0367043
217.1194126
217.7255124
202.9331199

Asset Utilisation

PPE Turnover = Sales / Avg PPE
4.25352552
3.876830006
3.787416653
3.593750532
Inventory Turnover = COS / Avg Inv
1.764388428
1.658073756
1.653458045
1.773983469

Solvency and Capital Structure

Total Debt to Equity = Total Liabilities / SH Equity
0.348518505
0.673112923
0.851024021
1.103767507
Times Interest Earned = EBIT / Interest Expense
23.12516758
20.11848341
18.12974684
13.01869114

Conclusion
So with the help of financial analysis and valuation approach we come to a conclusion that it will be good for the clients to invest in CSL ltd. The company has better financials based on the accounting analysis and ratio analysis. It is currently trading at par with the intrinsic value. If the macroeconomic environment changes it will boost the company’s performance and will generate good returns for the investors.

References
·         Palepu, Healy, Bernard. (2004) Business Analysis & Valuation, Cengage Learning

·         Chanda, P. (2008). Risk and Return. Financial Management, Tata McGraw Hill

·         Cochlear official website (2010), About us (http://www.cochlear.com/) [accessed 11th May 2010]

·         CSL Limited official website (2010), About us (http://www.csl.com.au/) [accessed 11th May 2010]

·         Ninemsn (2010), News and analysis-bond prices (http://money.ninemsn.com.au/news-and-analysis/bond-prices.aspx) [accessed 11th May 2010]

·         Finfacts Ireland (2010), Australian market returns (http://www.finfacts.ie/Private/curency/historicalstocksreturnsperformance.htm) [accessed 11th May 2010]

·         Investopedia (2010), Fundamental Analysis (http://www.investopedia.com) [accessed 11th May 2010]

·         Reuters Money (2010), Company Profile, (http://in.reuters.com/money/quotes/companyProfile?symbol=CSL.AX), [accessed 12th May 2010]

·         Reuters Finance(2010), Company Profile, (http://www.reuters.com/finance/stocks/companyProfile?symbol=CSL.AX), [accessed 12th May 2010]

·         Reuters Money (2010), Company Profile, (http://in.reuters.com/money/quotes/companyProfile?symbol=COH.AX), [accessed 12th May 2010]

·         Reuters Finance(2010), Company Profile, (http://www.reuters.com/finance/stocks/companyProfile?symbol=COH.AX), [accessed 12th May 2010]

 

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