HSBC Company is analyzed in this project. Financial health of the company is analyzed in this project. Out of the several techniques, ratio analysis technique is used to analyze income statement and balance sheet of HSBC. Three different categories of ratios are used to analyze the statement of HSBC. These three categories are liquidity ratio, profitability ratio and efficiency ratio. Two years ratios are compared to know about increment and decrement of ratios as ratio alone cannot tell anything about financial health of the company. Some ratios should be and some should be low for best financial statement. These high and low values depend upon type of ratio.
Introduction
HSBC is a global bank which is situated in all the major countries of the world. According to recent ranking of Forbes, HSBC is at number six in banking and financial industry. This statistics tells about glory of this organization. HSBC has around eight thousand offices in eighty countries. It has its presence in 5 continents. According to recent stats, HSBC's has $2418 trillion assets. It has more than 100 million customers all over the world. HSBC has its headquarter in London.
According to one famous magazine HSBC is most valuable banking destination for every customer. HSBC bank is considered as risk-averse bank and it adopts conservative approach of banking. The reason of subprime crisis was aggressive strategies and low risk averse banking while HSBC has totally opposite business nature. There were some bad incidents associated with HSBC as some data got leaked and this incident lead to very embracing situation. This situation was handled very wisely by the bank and the problem was sorted out very quickly. All these discussion make it clear that HSBC has very strong customer base and very good brand name in almost every location of the world.
HSBC has marketed itself as a local bank to every location. In its recent promotional tagline, it positions itself as 'World's Local Bank'.
Study Plan
Task is to analyze financial statement of HSBC. Following steps are carried out for analyzing financial statements of HSBC:
Required data of HSBC will be collected.
Different techniques of financial statement analysis will be identified. These techniques are common size analysis and financial ratio analysis.
Appropriate technique will be chosen for financial analysis. Financial ratio analysis can be found as most accurate measure of analysis.
There are different types of ratios available. All ratios will be identified and most suitable ratios will be chosen for analysis.
During the identification of suitable ratios, it should be kept in mind that 2008 was year of recession so liquidity ratio should be given prime importance.
Comparison between 2008 and 2009 figures will be done on the basis of most suitable ratios.
Comment on financial health will be given on the basis of numerical values obtained during financial ratio analysis.
Analysis
Return on capital employed
Return on capital employed= net profit before tax & interest/ (share capital+ reserves+ long- term debt) (Besley, 2007)
2009
Return on capital employed = 6 %
2008
Return on capital employed = 12 %
Return on capital employed represents how efficiently HSBC has utilized its funds. When this parameter is analyzed from 2007 till 2008, we come across a fact that there is a rising pattern in it. Based over projected figures of various financial entries, it is going to improve in coming period. The growth in Return of capital employed is remarkable as it has just doubled and this has led to more return per capital being employed in the business.
Profit Margin
Profit Margin = net profit before tax & interest / revenue (turnover)
Net profit/ (loss) before tax & interest (2009e) = $ 7,079 m
Net profit before tax & interest (2008) = $ 9,307 m
Revenue (2009e) = $ 78,631 m
Revenue (2008) = $ 88,571 m
Profit/ (loss) margin (2009e) = 7,079 / 78,631
= 0.090028
Profit/ (loss) margin (2008) = 9,307 / 88,571
= 0.10507
Profit/ (loss) margin is calculated by comparing gain or loss after tax through total revenue generated in that specific year. Profit margin indicates what part of the total turnover of the company has been reflected as profit in the income statement of the company. This is the clear indication of the profit generation capacity of the company with respect to the turnover/revenue of the company in the year concerned. Profit margin for HSBC was reduced drastically from 0.105 to 0.090028 in the year 2009.
Asset utilization ratio
Asset utilization ratio= revenue/ (share capital+ reserves+ long-term debts)
Revenue (2009e) = $ 78,631 m
Revenue (2008) = $ 88,571 m
Share capital (2009e) = $ 128,299 m
Share capital (2008) = $ 93,591 m
Reserves (2009e) = $ 22,236 m
Reserves (2008) = $ (3,747) m
Long-term debt (2009e) = $ 80,092 m
Long-term debt (2008) = $ 74,587 m
Asset utilization ratio (2009e) = 78,631 / (128,299 + 22,236 + 80,092)
= 0.3409
Asset utilization ratio (2008) = 88,571 / (93,591 -3,747 + 74,587)
= 0.5386
Asset Utilization ratio of any company reflect the revenue generation of the company per unit of the asset being utilized by the company. The asset utilization ratio of the company got reduced for the company from 0.53 in year 2008 to 0.34 in year 2009 reflecting the incompetent utilization of assets by the company in the year 2009 as compared to 2008.
Current ratio
Current ratio= current assets/ current liabilities
Current asset (2009e) = $ 2364.0 m
Current asset (2008) = $ 2527.0 m
Current liabilities (2009e) = $ 2228.0
Current liabilities (2008) = $ 2517.0
Current ratio (2009e) = 2364.0 / 2228.0
= 1.0614
Current ratio (2008) = 2527.0 / 2527.0
= 1.0039
Current ratio depicts the ratio of current assets to current liabilities which reflects the effectiveness of the bank in building their assets with increasing their liabilities. HSBC bank in the two years has seen the reduction in the current ratio reflecting that the current assets of the company have reduced with respect to the current liabilities the company has to face.
Earnings per Share Basic USD
Earnings per share = (Net Income - Dividends preferred Stock)/ Average Outstanding Shares
2009
Earnings per Share = USD 0.34
2008
Earnings per Share = USD 0.47
Earnings per share in very basic form reflects the earnings as registered with respect to the number of shares i.e. net income being deducted of the dividends issued to the preferred stocks divided by the average outstanding shares floating in the market. EPS for HSBC bank has increased from 0.34 USD to 0.47 USD reflecting the increase in the income per share.
Earnings Per Share Diluted
Earnings per share = (Net Income - Dividends preferred Stock)/ Outstanding diluted Shares
2009
Earnings per Share Diluted = 0.34 USD
2008
Earnings per Share Diluted = 0.47 USD
Earnings Per Share Growth (%)
Earnings per share growth rate = (Earnings per share at the close of the period - Earnings per share at the starting of the period) / Earnings per share at the start of the period
2009
Earnings per Share Growth (%) = -75
2008
Earnings per Share Growth (%) = -5
Earnings per share growth rate means growth rate in earnings per share over a period. In the mathematical formulae form it is calculated as a ratio of increase in the Earnings per share over a period to Earnings per share at the start of the period. Earnings per share growth has been negative for the year 2009 as the EPS growth rate has gone down from -5 to -75 reflecting the reduction in the EPS growth rate.
Operating Margin (%)
Operating Margin = Operating Income/ Net Sales
2009
Operating Margin (%) = 7 %
2008
Operating Margin (%) = 9 %
Operating margin is the ratio of operating income to net sales of any company. Operating margin reflects what part of the net sales is the operating income of any company. For HSBC operating margin has reduced clearly reflecting the case of recession and thus the operating profit for the company as compared to the net sales in the year 2009. (HSBC Annual Report 2009 , 2010)
ROCE (%)
ROCE = Earnings before Interest and Taxes/ Capital Employed
2009
ROCE (%) = 6 %
2008
ROCE (%) = 12 %
Return of capital employed is the ratio of earnings of the company as calculated before interest and taxes over capital employed i.e. the return of the company to the capital employed. For HSBC bank the return to the capital employed has reduced in the year 2009 as compared to 2008, clearly indicating the effect of recession in the banking industry worldwide. This clearly indicates even if the capital employed in the bank was increased the return had reduced.
Dividend Cover
Dividend Cover = Earnings per Share /Dividend per Share
2009
Dividend Cover = 1.00
2008
Dividend Cover = 2.13
Dividend cover is defined as the cover in the form of earnings to every share. It is calculated as earnings per share divided by the dividend per share. For HSBC in the year 2009 this dividend cover has also gone done drastically from 2.13 to 1 in the year concerned. This clearly indicates the fall in the earning per share for the company stocks floating in the market.
Dividend Yield
Dividend Yield = Annual Dividend per Share / Price per Share
2009
Dividend Yield = 3.10
2008
Dividend Yield = 7.10
Annual dividend yield is defined as yield in terms of dividend calculated per share with respect to the price of the share i.e., how much the stock is returning in form of dividend per share per unit price of the share. The dividend yield for HSBC has drastically gone down to 3.10 from 7.10 indicating the reduction in the stockholder's confidence as afar the return to the stock is concerned. The dividend yield has gone a drastic change for year 2009 reflecting the reduction in the earnings of the company to be distributed as dividends. (HSBC Annual Report 2008 , 2009)
Price / Earnings Ratio
Price/Earnings Ratio = Market Value Per Share/ Earnings per share (Siddiqui, 2006)
2009
Price / Earnings Ratio = 32.50
2008
Price / Earnings Ratio = 6.60
Price to Earning share is an important ratio reflecting the effectiveness of the stock in the market being calculated as ratio of price per share to earnings per share. In the year 2009, the price of the stock of HSBC has increased dramatically with respect to the earnings per share of the company. There was a drastic change from 6.6 to 32.5 in the year 2009.
Dividend Per Share Growth (%)
2009
Dividend per Share Growth (%) = -47
2008
Dividend per Share Growth (%) = -18
Dividend per share growth of the HSBC bank in the year has been negative and the dividend growth reduced to -47 % from 18 % in the year 2009. This indicates the dividend per share was reduced in the year and reflecting the reduction in the net income in the company reducing the amount to be distributed in the form of dividend for the year.
Conclusion
All the above discussion can be concluded by saying that there are mixed result of ratio analysis as some ratios were better in 2008 and some were better in 2009. Return on Capital employed and profit margin is decreased in 2009 which shows that profitability decreased in year 2009. Asset utilization ratio was also decreased in year 2009. Current ratio was slightly increased in year 2009 which shows that company's liquidity strengthened in year 2009. So HSBC's 2008 statement were better than HSBC's 2009 statement in terms of efficiency and profitability while liquidity was better in year 2009. This shows that HSBC adopted conservative strategies to increase liquidity of company. (Siddiqui, 2006)
