## Question:

## Answer:

### Ratio Analysis

### Profitability Ratios

The profitability ratios are calculated for analyzing the revenue generated by a business entity in comparison to the expenses incurred. The ratios examined for measuring the profitability of ANZ and Commonwealth bank are as follows:

Net Profit ratio: The net profit ratio depicts the percentage of profit realized from the business operations after meeting all the operating expenses, interest expenses and taxes. It is calculated through the help of following formula:

Net Profit=Profit after tax/Net Sales

Return on Assets: It depicts the profit gained by a business entity through the use of its total assets (Atrill, McLaney and Harvey, 2014). It is calculated as:

Return on Assets (ROA) =Net Income/Average Total Assets

The profitability ratios of ANZ and Commonwealth Bank as calculated are as follows:

Profitability Ratio | 2014 | 2015 | 2016 | |

Net Profit Ratio | ANZ | 36.26% | 35.56% | 27.81% |

Commonwealth | 33.50% | 33.56% | 33.56% | |

Return on Assets | ANZ | 0.94% | 0.84% | 0.62% |

Commonwealth | 1.09% | 1.04% | 0.99% |

As depicted form the above table, the net profit ratio of ANZ have shows a decreasing trend from 2014-2016 while of Commonwealth have shown an increasing trend for the same period. On the other hand, the ROA of both ANZ and commonwealth bank is declining from 2014-2016. Thus, it can be said that Commonwealth bank has realized larger profits in the recent years as compared to ANZ (ANZ : Annual Report, 2015).

### Efficiency Ratios:

The efficiency ratios depict the ability of a business entity to realize sales from the effective use of its assets. The efficiency ratios analyzed for ANZ and Commonwealth are as follows:

Fixed Turnover Ratio: It depicts the use of fixed assets by a business entity to generate sales and is calculated as:

Fixed Asset Turnover Ratio=Net Sales/Average Fixed assets

Asset Turnover Ratio: It depicts the amount of revenue realized by a business entity through the use of its assets (Harris and Mongiello, 2012). It is calculated as:

Asset Turnover Ratio=Net Sales/Average Total Assets

The Efficiency ratios of ANZ and Commonwealth Bank as calculated are as follows:

Efficiency Ratio | 2014 | 2015 | 2016 | |

Fixed Turnover Ratio | ANZ | 0.034 | 0.032 | 0.031 |

Commonwealth | 0.039 | 0.038 | 0.036 | |

Asset Turnover Ratio | ANZ | 0.026 | 0.024 | 0.022 |

Commonwealth | 0.033 | 0.031 | 0.029 |

The above table indicates that fixed asset turnover ratio for ANZ and Commonwealth bank is decreasing from the year 2014-2016. Similarly, the asset turnover ratio for both the banks has shown a decreasing trend for the same period. Therefore, it can be said that both the banks are not using their asset base effectively for generating revenue (ANZ : Annual Report, 2016).

### Liquidity Ratios:

The liquidity ratios depict the ability of a company to hold cash for meeting its financial obligations. The liquidity ratios analyzed for both the banks are as follows:

Current Ratio: It compares the current assets of a company in relation to the current liabilities and is calculated through the formula:

Current Ratio=Current Assets/Current Liabilities

Quick Ratio: The quick ratio measures the amount of liquid assets of a business entity in comparison to the current liabilities (Atrill, McLaney and Harvey, 2014). It is calculated as:

Quick Ratio= (Cash + Marketable Securities + Accounts Receivable) / Current Liabilities

The liquidity ratios of ANZ and Commonwealth Bank as calculated are as follows:

Liquidity Ratio | 2014 | 2015 | 2016 | |

Current ratio | ANZ | 2.32 | 2.00 | 1.37 |

Commonwealth | 0.64 | 0.69 | 0.74 | |

Quick ratio | ANZ | 2.32 | 2.00 | 1.37 |

Commonwealth | 0.64 | 0.69 | 0.74 |

The current ratio of ANZ is decreasing form the period of 2014-2016 while that of Commonwealth is increasing for the same period. Also, the quick ratio of ANZ is decreasing from the financial year 2014-2016 while that of Commonwealth bank have shown an increasing trend. It indicates that Commonwealth bank has maintained a good liquid position in comparison to ANZ bank Commonwealth Bank: Annual Report, 2016).

### Financial Gearing Ratio:

The financial gearing ratio analyses the capital structure of an entity though indicating the proportion of debt and equity in the financial structure (Atrill, McLaney and Harvey, 2014). The financial gearing ratios analyses for both the bank are:

Debt Equity Ratio: The ratio indicates the proportion of capital financed by debt and that by equity. It is calculated as:

Debt Equity Ratio=Debt/Equity

Debt Ratio: It indicates the leverage used by an entity in comparison to the overall equity and is calculated as:

Debt Ratio=Total Debt/Total Assets

The financial gearing ratios of ANZ and Commonwealth Bank as calculated are as follows:

Financial gearing Ratio | 2014 | 2015 | 2016 | |

Debt Equity Ratio | ANZ | 3.03 | 2.97 | 2.78 |

Commonwealth | 0.70 | 0.74 | 0.72 | |

Debt Ratio | ANZ | 0.19 | 0.19 | 0.18 |

Commonwealth | 0.04 | 0.04 | 0.05 |

The above table indicates that debt equity ratio for ANZ bank has reduced from 2014-2016 while that for Commonwealth have significantly increased. The debt ratio of ANZ is also reduced from 2014-2016 while that of Commonwealth bank have increased for the same financial years. It illustrates that use of debt in the capital structure of Commonwealth bank is increasing while that in ANZ bank is decreasing (Commonwealth Bank: Annual Report, 2016).

### Investment Analysis:

It evaluates the worth of an investment for examining its profitability and associated risk. The investment analysis for both the banks is carried through calculating the following ratios:

Earnings Per Share (EPS) = It indicates the value of earnings realized by an entity per outstanding share of stock (Brigham and Ehrhardt, 2007). It is calculated as:

EPS=Shareholder Earnings/Number of Outstanding Shares

Dividend per Share (DPS): It depicts the profits realized as dividend by the shareholders of a business entity (Atrill, McLaney and Harvey, 2014). It is calculated as:

DPS=Total Dividends/Number of Outstanding Shares

The investment analysis ratios of ANZ and Commonwealth Bank as calculated are as follows:

Investment Analysis | 2014 | 2015 | 2016 | |

EPS | ANZ | 2.57 | 2.57 | 1.89 |

Commonwealth | 5.29 | 5.29 | 5.59 | |

DPS | ANZ | 2.49 | 2.59 | 2.5 |

Commonwealth | 5.91 | 6 | 6.01 |

The given table indicates that EPS for ANZ has reduced from 2014-2016 while that for Commonwealth bank have increased for the same period. The DPS of both ANZ and Commonwealth bank have increased from 2014-2016. This indicates that Commonwealth bank is considered better in comparison to ANZ for investment purpose as it provides large returns to its shareholders (Commonwealth Bank: Annual Report, 2015).

## References

Atrill, P., McLaney, E. and Harvey, D. (2014). Accounting: An Introduction, 6/E. Pearson Higher Education AU.

Brigham, B. and Ehrhardt, M. (2007). Financial Management: Theory & Practice. Cengage Learning.

Harris, H. and Mongiello, M. (2012). Accounting and Financial Management. Routledge.

Commonwealth Bank. (2014). Annual Report. Retrieved October 31, 2017, from

Commonwealth Bank. (2015). Annual Report. Retrieved October 31, 2017, from

Commonwealth Bank. (2016). Annual Report. Retrieved October 31, 2017, from

ANZ Annual Report. (2014). Retrieved October 31. 2017, from

ANZ Annual Report. (2015). Retrieved October 31. 2017, from

ANZ Annual Report. (2016). Retrieved October 31. 2017, from