Ratio Analysis of: West Field Office Trust – Australia
West Field Office Trust
West Field Office trust is largest domestic real estate saving trust in Australia. The West Field Office Trust Company Analysis is done on the basis of Short term liquidity and Long Term solvency ratios which helps the investor to invest in the Company or not. Long Term Solvency Ratios helps the investor to know about the Company’s bottom line and to invest in the company or not for the long term. Short term liquidity and long term solvency ratios of the Company helps the VU bank to know what kind of risks are associated with Current, quick and long term solvency ratios. The analysis of business and financial risk helps the VU bank to know that the Company is able to pay financial and operating expenses or not.
Short Term Liquidity Ratios
Solvency Ratios
These ratios help the company in measuring the financial reliability of the business, to see how well the company can manage its long term and short term position.
Current Ratio
This ratio is a measure of short term solvency to see the ability of the company, to pay the current debts if they come due. Normally, creditors use this ratio, to measure company liquidity and see the ability that the company is able to pay short term debts or not. According to standard criteria, current ratio should be 2:1 (Rosemary, 2010)
It is observed that current ratio helps the investor in determining the risk of the business of the company that it is able to pay short term liabilities on time or not. If company is not able to pay short term liabilities on time then it would result in risk of insolvency and monetary difficulty in future. Short term liquidity ratios help the investors in reducing the uncertainty in share market and help them in choosing of the portfolio. The researchers had analyzed that short time creditor of the companies give preference to increase current ratio because increase current ratio help the investor in reduction of the risk while shareholders give preference to low current ratio they think more assets will help the company in growth of the business.
Current ratio = Current Assets / Current Liabilities
| Year | Current Assets | Current Liabilities | Current ratio = Current Assets / Current Liabilities |
| 2010 | 3514.10 | 1368.9 | 2.56 |
| 2009 | 2863.4 | 3483.9 | 0.8218 |
The researchers have analyzed that if current ratio is less than or equal to 1 then the company can face the risk of bankruptcy and if current ratio is less than or equal to 2 then the company may face difficulty in fulfilling the short term liabilities.
It is observed that, the current ratio in 2010 had increased as compared to last year 2009, because of increase in Current Assets and decrease in current liabilities. It is analyzed by the researchers if short term liquidity ratios decreases then it would have increased the risk of working capital. But in case of Westfield office trust current ratio had increased as compared to last year this shows that the company had not faced the risk of maintaining working capital and it gave good indication to investors and VU bank that company can meet its short term liabilities on time. Apart from these high current ratio of the company gave good indication to creditors and reduced their risk. The current ratio of the company was more than 2 in year 2010 which showed that company had potential to pay their short term debts with current assets and near current assets (Rosemary, 2010)
Cash Ratio
It is observed by researchers that cash ratio helps companies in meeting their short term liabilities of the business. This cash ratio helps the business to meet their short term obligations with the help of cash and cash equivalents.
Cash ratio = Cash and Cash equivalents / Current LiabilitiesThe researchers have analyzed about the Cash ratio in three ways first, if cash ratio is less than or equal to one then it shows very low liquidity second, if cash ratio is greater than 1 then it shows that the company will pay short term debt with the help of cash and close to cash items and third if cash ratio is more than 2 then it shows poor management of short term position and assets can be invested for long term to earn a higher return.
It is observed that, cash ratio in 2010 had decreased from 0.018 to 0.015 it shows that company was dependant more on cash and cash equivalents to pay short term debts. The cash ratio of Westfield office trust for 2010 was less than 1 which showed that the company had a very low liquidity. The cash ratio in 2010 revealed that the company had faced a risk of maintaining a liquidity to pay short term debts.
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Long term Solvency Ratios
A company’s long-term solvency depends in part on its ability to pay its long-term bills. Long-term solvency ratios are also called financial leverage ratios and leverage ratios (Lafincoff, 2010)
This ratio helps the company to know its ability to pay its long term liabilities or not. These ratios are also called leverage and financial leverage ratios.
Debt to Equity Ratio:
The debt equity ratio is calculated by the following formula:
= Total long term Liabilities/ Total Equity
| Year | Long term liabilities | Total equity | Debt equity Ratio |
| 2010 | 5581.0 | 11108.1 | 0.502 |
| 2009 | 6461.6 | 18042.4 | 0.358 |
It is observed that, debt to equity ratio had increased in 2010, because of decreased in total equity as compared to last year. The increased debt to equity ratio gave bad impression to investors due to reduction in total equity. According to financial analyst, financing of debt reveals financial risk which makes an obligation to the company for payment of interest and repayment of principal. The long term solvency ratio of the company helps the investor who wants to invest in a company for the long term.
Business Performance
Return Ratios
Return on Assets.
This ratio helps the investor to know about the Company efficiency, through how the Company, has used its assets and generate income out of them. It helps the investor to know that the company is able to utilize their assets or not.
=Net Income/Total Assets.
| Year | Net income | Total assets | Return on Assets |
| 2010 | 660.8 | 18058.8 | 0.036 |
| 2009 | 178.8 | 27987.9 | 0.006 |
It is observed that, after done analysis of last two years, Return on Assets had increased in 2010 as compared to last year 2009, because of increase in Net income and decrease in Total Assets. But in year 2010, it can be analyzed that, Return on Assets had increased, by 5% due to increase in Net Income by Rs 482.The increased return on assets ratio in 2010 gave idea to investors and VU bank that performance of the business of the company was good. At last, this shows that the company had utilized its assets properly and reduced the risk of maintaining profitability for the management of the Company (Rosemary, 2010)
Return on Equity
This ratio measures the return, on the capital contributed by the shareholders of the company. This Ratio helps the investor to decide to invest in company or not (Lafincoff, 2010)
= Net Income/Stockholder’s Equity
| Year | Net income | Total equity | Return on Equity |
| 2010 | 660.8 | 11108.1 | 0.059 |
| 2009 | 178.8 | 18042.4 | 0.009 |
It is observed, that after done analysis of last two years, Return on Equity had increased in 2010, as compared to last year 2009, because of increase in Net Income and decrease in Total Equity. But in year 2010, it can be analyzed that Return on Equity had increased by 5.5% because of increase in Net Income by Rs 482.It can be analyzed that increased return on equity gave idea to investors that the company had utilized its Equity very well. At last increased return on equity resulted in increased income and reduced the risk of equity shareholders and ensured them that they will receive dividend on time.
The proposed exposure to Westfield Office Trust is analysed by both Income Statement and Balance sheet with the help of horizontal and vertical analysis.
Horizontal Analysis
Horizontal Analysis is a technique of analyzing a company’s financial performance by comparing the absolute value of each item over a period of time or by comparing the percentage change in each item over a period of time.
Few key points derived from:
Income Statement
The sales figure had increased in 2010 as compared to last year 2009 by Rs.482 which gave good indication to investors that the company is in profit.
The operating expenses in the year 2010 had increased as compared to last year 2009 by Rs 11.5 due to bad economic conditions.
Balance Sheet
The cash and cash equivalents have decreased tremendously in 2010 mainly due to payment of interest bearing loans, trade creditors, payables and other creditors.
The total current liabilities of the company had decreased by 60% in 2010 which gave indication to investors that the company is in a position to pay short term debts with the help of current assets, cash and cash equivalents.
Vertical Analysis
Vertical Analysis is a technique used to judge a company’s financial performance by analyzing each item as a percentage of sales (income statement) or total assets (balance sheet) over a period of time.
Few key points derived from:
Balance Sheet
The items in the Balance Sheet have shown very insignificant change over the period. This indicates strong strategic performance of the company.
Income Statement
Net profit Ratio helps the Investors, to know how well the company is able to generate Net income out of its Sales. The larger; the margin of net profit is good for the Company. It is observed that in year 2010, Net profit ratio had increased tremendously by 257% as compared to last year from 10.5 % to 37.5%.It is expected that this ratio is going to increase in 2011 also. The increased net profit ratio gave a good indication to investors that the company had done proper utilization of assets.
Business Risk and Financial Risk
Business Risk
It is analyzed by the researchers that if the company is completely financed by equity then it would not show any financial risk, but there are chances of business risk due to change in economic conditions. In simple words, business risk is the risk which shows that the company does not have sufficient cash to pay its operating expenses.
After analyzing the annual report of Westfield Office Trust it is observed that the Company controlled its requirement of capital through the combination of equity and debt. The levels of business risk faced by Westfield Office Trust are as follows
The company had the responsibility to had adequate funds and monetary facilities on effective basis to execute the strategies of business acquisition.
The company had the responsibility to had sufficient facilities of financing to meet unforeseen contingencies in future.
The company had the responsibility to make a contribution to members without any regulated policy.
The Westfield office trust had assessed the sufficiency of its requirement of the capital, weighted average cost of capital and leverage mix to evaluate the business risk (Westfield office trust, annual report 2010)
It is observed that the company operating expenses had increased in 2010 by a very small amount as compared to last year. This revealed that the company can meet its operating expenses on time and therefore resulted in lower level of business risk.
Financial Risk
The researchers have analyzed that financial risk is the risk which shows that the company is not able to pay its financial commitments. It is observed that Companies who raise more debt they would have more financial risk.
The Westfield Office Trust managed its financial risks in relation with treasury risk policies of management. It can be seen that these procedures and policies had formulated by the company in order to address financial risks i.e. rate of interest, exchange rate and counterparty liquidity. The company had different methods to manage and control various levels of risks. The group companies of Westfield office Trust had faced the risk of interest rate on its short and long term borrowings and derivative instruments. The group companies of the Westfield office trust had entered into derivative instruments mainly rate of interest on options, rate of interest on swaps, options of the currency and contracts of exchange. The Company had entered into these types of transactions to direct and control currency and interest risks of group companies and its remaining investment from foreign operations (Westfield office trust, annual report 2010)
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