CORPORATE FINANCE

CORPORATE FINANCE - Banking Sector

CORPORATE FINANCE - Banking Sector

Introduction

The industry selected for the assignment is “Banking”. The companies selected for the analysis are HSBC Holdings PLC, Lloyds Banking Group PLC, The Royal Bank of Scotland Group PLC, and Barclays PLC.

The assignment entails the description about the performance of the aforementioned companies, determining the relationship between the profitability and capital structure, calculating and interpreting their stock returns and beta, and event analysis.

Profitability Analysis

Ratio analysis expresses the relationship among selected financial values stated in financial statements (Weygandt, 2012, pp. 650-677). Primarily, ratio analysis is conducted in order to identify the relationships among various accounts mentioned in financial statements.

Financial ratios are categorized into five primary categories: liquidity, profitability, activity, market and debt (Gitman, 2012, pp. 56-112). Market ratios measures risk & return whilst liquidity, activity & debt ratios measure risk only related to company. Profitability ratios focus on returns.

The financial performance of the company is depicted in the profit and loss financial statement. Therefore, profitability ratios undertake the assessment of the financial performance of the company, as most of them utilize the income statement values. The profitability ratio analysis of the four selected banking companies is given below:

HSBC Holdings PLC - Profitability Analysis

The data related to the financial information of the company is extracted from the Yahoo! Finance and Morningstar. The table given below calculates the essential profitability ratios.

HSBC Holdings PLC

 

 

 

 

 

Description

Formula

2008

2009

2010

2011

2012

Profitability Ratios

 

 

 

 

 

 

Operating Margin

(Operating income / Net Sale) * 100

10.00%

6.43%

20.6%

22.3%

16.2%

Net Profit Margin (in %)

(Net Profit / Revenue) * 100

6.16

7.08

16.45

20.13

16.26

ROA (Return on Asset)

(Net Income/Total assets) * 100

23%

24%

55%

67%

53%

ROE (Return on Equity)

(Net Income/Total Equity) * 100

6.12%

4.55%

8.91%

10.6%

8.00%

ROC (Return on capital)

(Net Income-Dividends / Total Capital) * 100

-7.74

-3.98

-0.05

-0.24

-0.04

Gross Profit Margin

(Gross Profit / Net Sales)* 100

51.88%

49.60%

49.43%

48.90%

45.91%

Interpretation of HSBC Holdings PLC Profitability Ratios

Profitability ratios help stakeholders to evaluate the business ability of generating revenue (earnings) as compared to its cost (expenses). Following is the HSBC's profitability ratio's interpretation for the last five years:

Operating margin expresses the relationship between the operating income and the net sales. The trend of the operating margin shows that it has been changing and the year 2011 has the highest operating margin i.e. 22.3% as well as the lowest in the year of 2009 i.e. 6.43%. The change in the ratio is because of the changing revenues and the cost of sales.

Net Profit margin expresses the proportion that how much a firm can make after meeting all of its expenses out of the net revenue. The has been the increasing trend in the HSBC's net profit margin till the year 2011 whereas recently there is a drop in the company's net profit margin i.e. quoting 16.26%.

Return on asset represents the company's ability to generate returns from the assets it owns and manage. The returns have been significantly bolstered till the year 2011, however, a dip in the recent year can be witnessed. On average, the return on asset has increased.

ROE (Return on equity) measures the relationship in proportion between the net income earned and the owners of the company ...