Ratio Analysis Of Computershare Limited To Evaluate Financial Potential

Executive Summary

Computershare Limited is one of the early start-up businesses related to the world of technology. It was originally founded in Melbourne in 1978. The company has since then expanded to various countries such as China, United Kingdom, United States, Canada etc. to name a few. The organization has expanded globally with a market cap in billions, having more than 125 million customer accounts with 16,000 people in their staff across all major financial markets. In this report, the financials of 2015, 2016 and 2017 were taken into consideration for the ratio analysis. The report indicated that the company has increased its overall profitability which is good for the company. However, the ratio analysis also indicated that the company does not have a healthy current ratio and the debt to equity and debt to assets ratio values are high. This indicated that the company is highly funded through its liabilities which is alarming for the company. They need to reduce down their liabilities as a result. The report was concluded by providing recommendations which the organisation can use in order to improve their financial performance.

Business Profile

History

Computershare was established in Melbourne in 1978 and entered the United States market in 2001. Since then, it has developed into the world’s leading investor services provider and transfer agent. It is one of the first start-up technology companies of Melbourne. The initial goal of this business was to offer computer services to companies that needed to automate processes. Computershare then progressed to giving specialist computer bureau services to share registrars in Australia. The company swiftly excelled at it. Over the years, Computershare has continued to develop best in class technology that reduces costs, risk and simplifies processes for their customers.

Size of the Company

In 1994, when the company was listed on the Australian Securities Exchange the company had a market cap of AUD $36 million, handled around 6 million shareholder accounts and had about 50 people in their staff. Now, the organization has expanded globally with a market cap in billions, handling more than 125 million customer accounts with 16,000 people in their staff across all major financial markets. The company operates in 21 countries as of yet.

Business Strategy

Computershare has brought several diverse businesses together as well as several diverse people and products and services around the world. Their strategy is based on three believed qualities. They are certainty, ingenuity and advantage. By certainty they mean that their clients can count on them to deliver their services always on time. With regards to ingenuity, they have stated that they look beyond today’s problems in order to see the opportunities for tomorrow. Advantage has been described as the skill that they can help their clients unlock or identify their competitive benefit.

Current Services

Computershare continues to be a unique Australian success story. As the years have progressed, they have expanded on a global scale by acquiring other successful corporations and grown their local footprint gradually. They have built on their share registry business by fruitfully expanding into:

• Stakeholder communications
• Employee equity plans
• Corporate governance
• Class action administration
• Fund services
• Deposit protection
• Mortgage servicing

Corporate Structure

The company organizational structure involves the senior management, middle management and operational level management. The hierarchy of organization involves the following corporate structure.

Board of directors

• Simon David Jones (Chairman)
• Stuart James Irving (President and Chief Executive Officer)
• Christopher John Morris
• Tiffany Lee Fuller
• Markus Erhard Kerber
• Penelope Jane Maclagan
• Christopher John Morris
• Arthur Leslie Owen
• Joseph Mark Velli

Company Secretary

Dominic Matthew Horsley

Ratio Analysis

Profitability Ratios Gross

Margin 2,017 2,016 2,015 18% 15% 15% Gross Profit 380,443 295,145 299,813 Revenue 2,105,762 1,961,125 1,971,252 The gross margin ratio shows that how much company earns their after deducting cost of goods sold in terms of revenue they earn. The above ratio trend shows a significant increase in 2017 compared to 2016 but gross profit margin remained the same in 2016 as in 2015. The increase of gross profit was due to an increase in revenue. The company earns more gross profit in 2017 as compared to 2016 and 2015. Net Margin 2,017 2,016 2,015 13% 8% 8% Net Profit 271,701 161,798 157,278 Revenue 2,105,762 1,961,125 1,971,252 The net profit margin ratio shows that how much company earns in terms of their revenue generated. The net profit margin ratio is the same for 2015 and 2016 but it has increased in 2017. This might occur due to increase in revenue or interest and tax expenses decrease due to change of regulations. Return on Asset 2,017 2,016 2,015 7% 4% 4% Net Income 271,701 161,798 157,278 Asset 3,947,030 3,977,748 3,801,455 The return on asset ratio shows that how much company earns by spending their asset. The trend shows that company increasing their return year by year. The company earns huge revenue in 2017. As compared to other years, the financial position in 2017 is satisfactory. However, the company needs to maintain their control on expenses.

Efficiency Ratios Inventory

Turnover 2,017 2,016 2,015 0. 20 0. 22 0. 18 Receivables 422,805 425,343 361,185 Sales 2,105,762 1,961,125 1,971,252 The inventory turnover shows that in which time period company purchase back their inventory and refill their stock. The lessor the inventory days is beneficial for company. In 2017, company significantly manages the inventory turnover as compared to 2016. However, the inventory days in 2016 are comparatively high from 2015 which means in 2016 the company did not manage their inventory levels that efficiently. The larger amounts of inventory can be harmful as they can cause obsoleting of goods. Debtors Turnover 2,017 2,016 2,015 73. 73 79. 16 66. 88 Receivables 422,805 425,343 361,185 Sales 2,105,762 1,961,125 1,971,252 The receivable days shows that in how many days company received their amounts against sales. Shorter the period of receivables the more it is beneficial for the company. The above trend shows that company receivable days decreased in 2017 as compared to 2016. However, if we compare 2015 and 2016 the receivable days increased in 2016 comparatively. Nevertheless, the company maintains and decreases their receivable days in 2017 which is a good indicator.

Liquidity Ratios

Current Ratio 2,017 2,016 2,015 1. 66 1. 65 1. 70 Current Assets 1,251,701 1,315,186 1,227,837 Current Liabilities 753,141 796,337 723,695 The current ratio shows that how much company can pay their liabilities over asset. If company go into liquidation they can pay off their liabilities. The current ratio is considered good nearest to 1. The above trend shows that the company is able to manage their current ratio throughout the prospective years. The healthy ratio should not exceed 1. 5. However, above trend shows that company current ratio for the three years all exceed 1. 5. This is due to the fact that receivables are really high in comparison to current liabilities. This is not a good sign at is suggest that the company might not be utilizing its current assets efficiently. It could be that the company has high amounts of receivables or idle cash. Quick Ratio 2,017 2,016 2,015 1. 10 1. 12 1. 20 Current Assets - Receivables 828,896 889,843 866,652 Current Liabilities 753,141 796,337 723,695 The quick ratio shows that how much can pay off their debts after deducting the trade debts. The above trend shows that company maintains their quick ratio. Quick ratio above the value of 1 is usually considered good. In 2015, the company had a quick ratio of 1. 2 which is fairly good. In 2016, the ratio’s value decreased significantly to 1. 12. This was mainly due to the fact that current liabilities increased significantly. In 2017 the quick ratio further fell to 1. 10 as the value of current assets less receivables decreased significantly.

Solvency Ratios

Debt to Equity 2,017 2,016 2,015 219% 259% 223% Liabilities 2,710,002 2,869,015 2,623,814 Equity 1,237,028 1,108,733 1,177,641 The Debt to Equity ratio is calculated by dividing an organisation’s total liabilities with its shareholders’ equity. Debt to equity ratio basically measures the financial leverage of the business. The ratio is an indication of a how much debt the organisation is using to fund its assets relative to the value of the equity of shareholders. The result can either be presented as a percentage or a number. From the values above it can be seen that in 2015 the D/E ratio was 223% or 2. 23. It increased significantly to 256% (2. 56) in 2016 as liabilities increased and equity reduced in comparison to 2015. This means the financial leverage increased in 2016.

In 2017, the financial leverage reduced as liabilities decreased and equity increased. Debt to Assets 2,017 2,016 2,015 69% 72% 69% Liabilities 2,710,002 2,869,015 2,623,814 Assets 3,947,030 3,977,748 3,801,455 The debt to assets ratio is a solvency ratio which describes the total sum of debt relative to total assets of the company. This measure allows comparisons of leverage to be made between different organisations as well. The higher the value of this ratio, the higher the degree of leverage and subsequently, financial risk. The debt to assets ratio is a broad ratio that comprise of both long and short term debts, as well tangible and intangible assets. In 2015, the debt to assets value was 69%. This increased to 72% in 2016 as liabilities increased relatively higher in comparison to total assets. In 2017 the ratio fell to 69% as liabilities fell.

Share Market Performance Earnings per

Share 2,017 2,016 2,015 0. 4876 0. 2855 0. 2761 Net Income available to shareholders 266,395,000 157,334,000 153,576,000 Number of Shares outstanding 546,330,942 550,992,891 556,203,079 Earnings per share (EPS) is part of an organisation’s profit allotted to each outstanding common share. Earnings per share functions as an indicator of a corporation’s profitability. In 2015, the EPS was 27. 61 cents. This increased to 28. 55 cents in 2018 which further increased to 48. 76 cents in 2017. The higher the Earnings per share the more attractive the firm seems to investors. Book Value per Share 2,017 2,016 2,015 2. 26 2. 01 2. 12 Shareholders' equity 1,237,028,000 1,108,733,000 1,177,641,000 Number of Shares outstanding 546,330,942 550,992,891 556,203,079 Book value per common share is a method used to calculate the per share value of an organisation based on common stockholders’ equity in the organisation. Should the organisation dissolve the book value per common share shows whether the dollar value remaining for common stockholders after all assets are liquidated and all debtors are paid. The book value of common equity in the numerator indicates the proceeds an organisation gets from issuing common equity, decreased by losses or increased by earnings and decreased by dividends paid. In 2015, the value of the book value per share was 2. 12. In 2016, this decreased to 2. 01. In 2017, it increased to 2. 26.

Competitor Analysis

Computershare has several competitors in the industry. Some of the major competitors are:

1. Solium: Solium is considered as Computershare’s number one competitor. Solium was established in Calgary, Alberta in the year 1999. The company is part of the Systems Software industry. In comparison to Computer, the company has a revenue of $86. 5 million which is less than the revenue generation of Computershare.
2. Global shares: The Global Shares organisation is one of the top competitors of Computershare Limited. This company was established in the year 2005 in Clonakilty, County Cork. Just like Computershare, Global Shares contests in the Diversified Financial Services Industry. This company generates a revenue of $5 million is less than the revenue earned by Computershare Limited.
3. Acquire Equity: Acquire Equity is another major competitor of Computershare Limited. This company develops and designs software solutions. The organisation provides software as well as services for all kinds of equity compensation and cash deferral plans. They offer their services in Sweden, United Kingdom, Finland, Norway and the United States.
4. Equiniti: Equiniti provides creative solutions for its clients by combining experienced insight and powerful tools. The company is situated in United Kingdom. Their focus is on financial and administration services. Their current revenue generation is $403. 1 million, which again, is less than that of Computershare Limited.
5. Certent: Certent was founded in 2002. It provides comprehensive cloud-based SaaS solutions with regards to equity compensation reporting, equity compensation management and disclosure management. The company generates a revenue of $39. 2 million.
6. Optiontrax: This organisation was established by their parent company called Plan Management Corporation (PMC). Founded in 1992, Plan Management Corporation started as an affiliate of Stock Trans, one of the leading stock transfer agents at that time in the country. Optiontrax Company is one of the most intuitive, comprehensive equity plan and securities tracking software platform. Their cap table module software is full featured investment and shareholder management as well as record keeping system suited to private organisations perfectly. Their revenue generation is $5 million, which also is less in comparison to Computershare Limited. Looking at all these five competitors, it can be seen that Computershare Limited is performing better in comparison. Computershare Limited has a higher generation of revenue as well as recruitment of employees. They have employed around 16000 employees globally.

Conclusion

In this report, three consecutive annual reports for the years 2015, 2016 and 2017 were looked at in order to study the financial of Computershare Limited. As stated above, Computershare was a unique start-up that started in Melbourne in 1978 and then later on expanded to different countries such as the United States, Canada, China, United Kingdom etc. Based on the ratio analysis that was performed, it can be seen that the company’s gross profit margin remained stagnant in 2016 as compared to 2015 but increased by 3 percent in 2017 (18%). Similar was the case for the net profit margin.

The net profit margin in 2015 and 2016 remained same while it increased by 5 percent in 2017. It was 8 percent in 2015 and 2016 but increased to 13 percent in 2017. From these ratios it can be seen that the overall profitability of the organisation increased. This is good for the company. If we look at the liquidity ratios of the company, the current ratio was above 1. 5 for all three years. While a current ratio above the value of 1 is considered good, a ratio above 1. 5 is not necessarily considered good. A high current ratio may indicate that the organisation is not utilizing its current assets as efficiently as it should, is not securing financing well or is not controlling its working capital effectively. It could be that the company has excessive receivables. Quick ratio values are above 1 and are not too high which is good. Another concerning point is the debt to equity ratio in the solvency ratios. The debt to equity ratio are extremely high in all three years which means the company is highly leveraged. It relies mostly on loans or external funding. This can be alarming for the organisation as it can lead to high interest expenses in the future. The debt to assets ratios are also high for the three years.

Recommendations

Based on the ratio analysis, the following are some measures the company can take in order to improve their company’s financial performance.

• The company has a high current ratio. To reduce it down it can reduce the value of its current assets by spending cash more optimally. Since cash is part of a company’s current asset, if it is spent it will reduce the current ratio. Cash can be used to buy fixed assets instead of using project finance.
• The company can also consider paying of the whole or a portion of their long-term debt.
• Another way of efficiently utilizing cash is to pay more dividends to the shareholders. This will not only reduce the value of cash but will also keep the organisation’s shareholders happy.
• Current ratio’s value can also be reduced by increasing the current liabilities of the company. One way of increasing current liabilities could be increasing the portion of short-term loans in comparison to long-term debts. However this might increase interest expense and the company is also already highly geared so this should be kept in mind.
• The organisation can issue new or additional stock to increase the flow of cash in the business. This cash amount then can be used to pay off the existing liabilities and as a result reduce the burden of debt. This reduction of the debt will also reduce the value of the debt to assets ratio.
• A debt to equity swap can be implemented. This means that the organisation can make a debt holder an equity shareholder in the organisation. This will annul the debt owed to him and as a result decrease the debt of the organisation and improve the value of the ratio. If planned beforehand, convertible debentures can be issued as well.
• The organisation can also sell its assets and then lease them back. This will bring in cash that can be utilized in paying off debts.