Executive summaryThe following report aims at highlighting the profitability of the Westpac bank representative of the banking industry, the BHP Billiton Company and Dominos for the period 2010 and 2011. A return on equity (ROE) DuPont analysis will be used in addition to profitability and leverage ratio analysis. Further, the report will look into riskiness of the firms by looking at the risk exposures. The analysis would help advice on investment decisions into the firms. The analysis will also inform as to whether the bank industry represented by WBC has been making exaggerated profits, IntroductionThe banking industry has come under attack that it is involved in unrealistic profiting.
Large banks are increasing their profitability by taking advantage of the favorable market conditions in way of issuing bonds that would in the future cater for any cash deficits. Recent volatility brought about by the European credit crunch has meant that the banks’ customer base did readjust themselves to survive the hard financial times (Eun & Resnick, 2004, p. 56). The mining industry for example funds its own mining expeditions while individuals have resorted to debt payment in place of borrowing.
As a result, banks, in the effort to maintain the excessive profiting have resulted to cost cutting expeditions through such measures as retrenching their employees while increasing lending interest rates. This paper is aimed at giving an analysis of Westpac banking corporation and comparing the bank’s profitability with and financial performance with that of the mining sector represented by BHP and that of the food industry represented by Domino’s pizza. This paper also compares leverage levels of each of the two companies that would inform a decision to buy shares any of the companies (Ross, 2008, p.
37). Company analysisThe Westpac banking corporation (WBC) is one of Australia’s oldest financial institutions providing banking services to the country’s corporate and retail institutions. The bank’s commitment to risk management has enabled the bank capture a greater share of the country’s customer base. Performance Highlights (WBC 2011 P2)2010 and 2011 (WBG2011 P78)The net profit after tax for the company was reported at $6346 million, which was a 50% increase from previous year’s profits. An earning /share of 214 for 2010 and 233 for 2011.Dividend per share standing at 139 cents for 2010 and 156 cents in 2011.
Cash earnings for 2010 being $5879 million and $6301million in 2011. The cash earnings per share in 2010 was $1.978 and $2.093 for 2011. The net profit margin indicates a company’s profitability calculated as a ratio of profits after tax/revenues (Horne, 1977, p. 71)Dupont AnalysisROEThe interpretation of this ratio is such that if a company’s ROE is lower in comparison to another company, it reduces the credit worthiness and thus capital accessibility.
This then means that the company in question is not able to access funds for expansion and maintenance of market competitiveness. This is because industry regulations require companies to maintain an optimal ratio of assets to equity capital. This ratio is of greatest importance as it enables for trend analysis. The formulae = profit after taxation/total equity capital*100