Introduction
In this research paper, the financial performance of CSL Limited is examined for the years 2020 and 2021. The research will look into the various ratios used in analyzing financial situations of businesses like the debt ratios, current ratios, return on equity ratios, profit margin ratios, dividends per share, and earnings per share ratios. It will then apply the findings from this analysis to determine if CSL Limited is performing well. A data collection method was used from the company’s annual financial statements for both years to understand the company’s financial history better.
Company Overview
CSL is a world leader in biotechnology, developing and delivering revolutionary medicines that save lives, safeguard public health, and enable people living with life-threatening medical diseases to live complete lives. The company’s core operations are to conduct research, manufacture, develop, and sell biotherapies for the treatment and prevention of uncommon and dangerous medical diseases (CSL Limited, 2021). CSL’s product lines include blood plasma derivatives, vaccines, venom, and cell culture reagents utilized in various medical and genetic research and industrial applications (CSL Limited, 2020). CSL Behring and SCL Seqirus are the two primary subsidiaries of the biopharmaceutical holding corporation.
Financial Ratio Analysis
To examine the company’s colossal presence in the biotherapies sector, chosen statistics from the CSL Limited financial statements for the previous two years are examined. This financial analysis will be conducted using a commonly utilized financial ratios analysis approach in the accounting profession.
Interpretation
Profit Margin Ratio
The CSL Limited maintained almost a constant profit margin ratio in the two years. Profit margin indicates how profitable a company is to assets. It gives investors an idea of how effective the company is in converting the money it invests into net income for investors. The high-profit margin recorded by the company in the two years is a clear indication that CSL can earn more money with a smaller investment.
Return on Equity Ratio
Return on equity (ROE) measures how effectively a business uses equity to produce income. While observing the ROE ratio margin for CSL Limited, the company faces a consecutive decline recording a ratio of 32.21% and 28.34% in 2020 and 2021, respectively. The decrease results from faster equity growth than the cash flow between the two years. To an investor, it means that more and more potentially usable cash is tied up in the property and that the return on that cash is declining.
Earnings Per Share
Earnings per share (EPS) indicates the financial health of a company. A closer examination of the CSL EPS ratio reveals a significant increase from 4.63 in 2020 to 5.22 in 2021. The growth is considered favorable. The increase in EPS is due to its earnings and implies that CSL is more profitable.
Dividends Per Share
The company recorded a slight drop of 0.03 in its dividends per share (DPS). A good DPS is beneficial to income investors who want their investments to provide a steady stream of funds through dividend payments. A company with a growing DPS over several years is an attractive investment for these investors. However, it is worth noting that a low DPS does not inherently raise red flags regarding an investment. It might simply indicate that the firm is reinvesting profits in research or other areas that would encourage growth instead of returning money to shareholders through dividends.
Cash Flow
The cash ratios for CSL Limited within the two years are impressive since it recorded values of more than one, which are also almost constant. It implies that CSL has more cash and cash equivalents than current liabilities. Hence it can cover all short-term debt and still have some cash remaining. However, while that sounds responsible, a higher cash ratio does not necessarily reflect a company’s strong performance, especially if it is significantly greater than the industry norm (Rao, 2021). High ratios could signify that CSL Limited is ineffective in utilizing cash. Instead of investing in profitable projects, it is letting money stagnate in a bank account.
Analysis of Financial Position of CSL Limited
Current ratio
Current ratio analysis is used to determine the liquidity of a business. It is used to determine a business’s capacity to repay short-term debt or debt that matures within a year and that a company can pay off its current obligations by converting assets to cash.
The current ratio compares the total existing assets to total current liabilities. From the figures above, it a be ascertained that CSL’s current ratio dropped over the year, recording a current ratio of 2.83 and 3.01 in 2021 and 2020, respectively. Although the 3.01 current ratio recorded in 2020 by CSL indicates that the company could cover its current liabilities three times, it is not using its existing assets efficiently. On the other hand, a current ratio of 2.83, as recorded in 2021, is beneficial for CSL company since it implies that the company has substantially more assets to take care of its short-term liability and that it now runs in steady financial solvency.
Debt Ratio
The debt ratio is a metric that illustrates how much leverage a firm employs to finance its operations by relying on debt rather than really owned capital. It is one of many tools investors use to gauge how much leverage a company uses to improve its capital or assets to gain more profits.
CSL Limited experienced a slight increase in its debt ratio from 33.22% to 42% in 2020 and 2021. As opposed to 2020, the high debt ratio recorded in 2021 implies that most CSL Limited assets came from borrowed capital. This might result from them believing that in exchange for taking more risks, they could generate more income and be more profitable in the long run (Rao, 2021). Ideally, the company should not incur too many debts unwittingly as the consequences could be detrimental.
The results of 2020 imply that CSL used fewer debts which could probably result from them adopting a more conservative approach. Not only that, but investors are also relatively more attracted to this type of business since the risks are more manageable. Alternatively, potential lending institutions are also more inclined to prolong their credit; hence the CSL has a higher chance of meeting their payment duty on time.
Analysis of Sustainability
CSL’s strategic vision is to provide a sustainable future to its employees, societies, patients, and donors by stirring innovative science and values-driven culture. CSL’s Sustainability Strategy revolves around ten major areas with focus areas spread across three main pillars that will see the company reduce ecological effects across their sites in the medium to long term. Moreover, the strategy aims to fortify their commitments and public image with donors, patients, and community members and raise awareness and participation in sustainable practices among their workforce (CSL Limited, 2021). The three main strategic pillars include environment, social, and sustainable workforce.
CSL’s sustainable strategy is pivoted around various objectives. They include reducing ecological effects across the company sites, fortifying their commitments and public image with donors, patients, and community members, and raising awareness and participation in sustainable practices. Besides, the company is keen to ensure diversity, equity, and inclusion of both the community and employees and sustainability promotion towards an end-to-end working experience (CSL Limited, 2020). The above names values support and are in tandem with some of the United Nations Sustainable Development Goals: Gender equality, reduced inequalities, and sustainable cities and communities.
CSL has been investigating the possible application of Augmented Reality (AR) across various business operations as part of its continuing digital transformation. In the midst of pandemic-related travel restrictions, novel use of AR was immediately implemented at the company’s Quality Control location in Amsterdam. The Quality Control team members in the United Kingdom could visually visit the Amsterdam laboratory to teach colleagues and impart expertise using AR technology. The usage of these AR headsets at the Amsterdam Quality Control laboratory continues to address business problems. As pandemic-related limitations loosen, this technology allows business partners and suppliers to operate more freely while also lowering CSL’s carbon impact (CSL Limited, 2021). The company’s approach to ecological and climate change is to incorporate sustainable strategies into business decisions, cut carbon emissions, minimize end-to-end waste production, and reduce carbon emissions and waste throughout our supply chain.
Focusing on the healthcare, well-being, and society of plasma donors and improving societal health via access to medications are essential components of the company’s social’ pillar, which will enhance patient and public health efficiency. Concerning the ‘environment,’ CSL recognize that sustainable resource management and optimal use are vital to long-term growth and their ability to deliver an efficient and steady supply of commodities. They establish a safe and pleasant work environment that celebrates and encourages diversity and allows workers to contribute directly to the health and well-being of our communities for their sustainable workforce.
Boards and management should prioritize environmental and social performance. A solid environmental and social program may improve access to large sums of money, promote the corporate brand, and encourage long-term sustainability that helps both firms and investors. Environmental and social investors are value-driven investors that prioritize the long term above the short term and are more concerned with building long-term value than flipping stocks. Millennials are enthusiastic about the companies for which they work because they share their beliefs. Employees devoted to the company and felt valued produce intangible goodwill, promoting the firm’s brand and raising total workforce productivity.
Risk Factor Analysis
CSL operates in the fast-paced, ever-changing research, technology, and healthcare world. They are vulnerable to the hazards associated with the global biotechnology business, including the plasma treatments industry. Patient safety and product quality are among the material concerns: product innovation and competitiveness, supply, capacity, operations, privacy and cybersecurity, and people and culture.
Product quality is ensured via production and supply to limit these risks and their negative consequences. The company implements and follows a wide variety of globally recognized standards, including outstanding production and laboratory practice. Independent regulatory authorities inspect them regularly to ensure that these conditions are satisfied. Nonetheless, CSL regularly assesses its current and potential product pipelines against market demand and its competitive landscape. Finally, CSL constantly assesses its cybersecurity threats by creating rigorous and independently certified security precautions for its information technology systems.
Recommendation
The profit margins of the two companies are a good indicator that investors should continue. A profit margin ratio of at least 28 percent, as opposed to CSL’s 25.67 percent in 2021, means that costs are effectively controlled, and revenues are growing faster than operating costs.
A current ratio of approximately 1.5 is typically deemed healthy and should sustain the share price. They should invest since it implies that the firm will have enough cash to satisfy its responsibilities while also wisely utilizing its resources.
Compared to the 42.00 percent debt ratio in 2021, a 55.00 percent debt ratio would be pretty high, implying that the company may be taking on a significant level of risk. It might mean that the company is in jeopardy if its creditors suddenly demand repayment of their debts. It is not worthwhile to invest.
For any organization, a cash flow ratio of one is pretty excellent. It means that the firm has more cash and cash equivalents than current obligations, implying that it can service all short-term debt while still having some cash leftover, and thus investing should continue.
Conclusion
A review of the leverage ratios reveals that the firm employs equity financing to cover its obligations, which is advantageous because the company saves on interest charges that would otherwise be incurred if it utilized loans and other borrowing instruments. CSL is a world leader in biotechnology, generating a revenue of $10,310 in the financial year ended June 2021, which was an increase from the year 2020, in which the revenue was 9150.8. This is a sign of a well-performing and financially sound company. It is easier for the company to invest in state-of-the-art machinery and expand into other new markets with such revenues. A comparison against blue-chip shares of the ASX in terms of debt ratio shows that CSL’s current debt ratio (42.00%) is pretty manageable compared to 55% of the blue-chip shares. This is one of the reasons why potential investors should consider investing in CSL.
References
CSL Limited (2021), CSL Limited Annual Report, accessed 29 April 2022, retrieved from The Wall Street Journal database.
CSL Limited (2020), CSL Limited Annual Report, accessed 29 April 2022, retrieved from The Wall Street Journal database.
Rao, P.M., 2021. Financial statement analysis and reporting. PHI Learning Pvt. Ltd.
Appendix
Cash flow
