Cochlear Case
Major Assignment Part 2
Company: Cochlear Limited (ASX: COH)
Student name: Trinh Hoang Anh Vu
Student ID: 41735765
Prospective Analysis
In this analysis, Cochlear’s income statement and balance sheet are being forecasted using mainly the percentage of sales forecasting, except the following items: Interest expense, Dividend, Loans and borrowings and Accumulated retained earnings. In addition, considering the strong financial position as well as Cochlear is reaching the stage of maturity in its business life cycle, we believe that the company will be able to continue maintaining the stable sale growth of 10% in the future years. As the consequence, the base percentage of sales for each account is estimated by averaging their percentage of sale item in 2010 and 2011 respectively. Since this is only a one year forecasting, we believe that this estimation is sufficient to predict the following year finance. The other exceptional accounts are forecasted as following: * Interest expense: * It is clearly that interest expense is not driven by the sale growth, instead it depends on the amount of debts that Cochlear have. Thus, it is naïve to forecast interest expense …show more content…
using the percentage of sale. In addition, since we do not have sufficient information about the effective interest rates for Cochlear debt, the interest expense item is being estimated using the percentage of debts. This base forecast is calculated by averaging the percentage of debts of both 2010 and 2011. * Dividends: * Dividends are estimated using the average of dividend payout rate in 2010 and 2011, since the dividend are paid out depend on Cochlear dividend policy, rather than the percentage of sales. * Loans and Borrowing: * Analysing the balance sheet in 2010 and 2011, we find that Cochlear has recently lessened its dependence on long term debt and increased the short term debts to finance its business operation. Thus, for this forecast, we estimate that long term debt would be 1% of sale, and the short term debt is calculated by subtracting Other current liabilities, Total non-current liabilities and Total equity from Total asset. * Accumulated Retained Earnings: * Although the accumulated earnings is affected by the current year profit, it is naïve to estimate it by the percentage of sale. This is because the account also includes the component of previous year retained profit as well as it also depend on the dividend payout policy. Thus current retained earnings is calculated by subtract dividend from net income, then current retained earnings is added to the previous year of accumulated earnings to get current year accumulated earnings.
Recommendation
Through valuating Cochlear equity value using its financial report and comparing with the recent share price, I believe that Cochlear has more to offer its investor.
The price calculated is higher than the current share price because it has not taken into account the effect of the recall of the bionic product. However, this recall is voluntary from Cochlear, thus instead of signalling a bad indication, it strengthens the image of its management. This is demonstrated by the rise of recent share price after the recall. In addition, the share price chart shows that company manage to recover in such a short period during GFC, although it beared a huge effect from the crisis since its highest profit segment is the US. Thus, this indicates a strong ability to grow in the future. (See appendix
1)
Moreover, assessing the ratio analysis of Cochlear using the forecast data of 2012, Cochlear profitability is stable and strong which is revealed by the high and consistent ROE, Gross profit margin and EBIT margin. The quick ratio and interest coverage ratio show declining however, I believe that it would not have mature affect to Cochlear business operating in the short term. Hence, from the ratio analysis, Cochlear is seem to in Cash Cow position at the moment as they show high profitability and steady growth. Thus, with the above opinion, we strongly believe that investor should hold Cochlear share to enjoy a return in short term period. However, as Cochlear is reaching maturity stage, low risk aversion investor could also think of selling them later soon to invest in new risky firm that compensate higher return.
Appendix 1
Chart collected from ASX
Appendix 2
Company: Cochlear Limited (ASX: COH)
Student name: Trinh Hoang Anh Vu
Student ID: 41735765
Prospective Analysis
In this analysis, Cochlear’s income statement and balance sheet are being forecasted using mainly the percentage of sales forecasting, except the following items: Interest expense, Dividend, Loans and borrowings and Accumulated retained earnings. In addition, considering the strong financial position as well as Cochlear is reaching the stage of maturity in its business life cycle, we believe that the company will be able to continue maintaining the stable sale growth of 10% in the future years. As the consequence, the base percentage of sales for each account is estimated by averaging their percentage of sale item in 2010 and 2011 respectively. Since this is only a one year forecasting, we believe that this estimation is sufficient to predict the following year finance. The other exceptional accounts are forecasted as following: * Interest expense: * It is clearly that interest expense is not driven by the sale growth, instead it depends on the amount of debts that Cochlear have. Thus, it is naïve to forecast interest expense …show more content…
using the percentage of sale. In addition, since we do not have sufficient information about the effective interest rates for Cochlear debt, the interest expense item is being estimated using the percentage of debts. This base forecast is calculated by averaging the percentage of debts of both 2010 and 2011. * Dividends: * Dividends are estimated using the average of dividend payout rate in 2010 and 2011, since the dividend are paid out depend on Cochlear dividend policy, rather than the percentage of sales. * Loans and Borrowing: * Analysing the balance sheet in 2010 and 2011, we find that Cochlear has recently lessened its dependence on long term debt and increased the short term debts to finance its business operation. Thus, for this forecast, we estimate that long term debt would be 1% of sale, and the short term debt is calculated by subtracting Other current liabilities, Total non-current liabilities and Total equity from Total asset. * Accumulated Retained Earnings: * Although the accumulated earnings is affected by the current year profit, it is naïve to estimate it by the percentage of sale. This is because the account also includes the component of previous year retained profit as well as it also depend on the dividend payout policy. Thus current retained earnings is calculated by subtract dividend from net income, then current retained earnings is added to the previous year of accumulated earnings to get current year accumulated earnings.
Recommendation
Through valuating Cochlear equity value using its financial report and comparing with the recent share price, I believe that Cochlear has more to offer its investor.
The price calculated is higher than the current share price because it has not taken into account the effect of the recall of the bionic product. However, this recall is voluntary from Cochlear, thus instead of signalling a bad indication, it strengthens the image of its management. This is demonstrated by the rise of recent share price after the recall. In addition, the share price chart shows that company manage to recover in such a short period during GFC, although it beared a huge effect from the crisis since its highest profit segment is the US. Thus, this indicates a strong ability to grow in the future. (See appendix
1)
Moreover, assessing the ratio analysis of Cochlear using the forecast data of 2012, Cochlear profitability is stable and strong which is revealed by the high and consistent ROE, Gross profit margin and EBIT margin. The quick ratio and interest coverage ratio show declining however, I believe that it would not have mature affect to Cochlear business operating in the short term. Hence, from the ratio analysis, Cochlear is seem to in Cash Cow position at the moment as they show high profitability and steady growth. Thus, with the above opinion, we strongly believe that investor should hold Cochlear share to enjoy a return in short term period. However, as Cochlear is reaching maturity stage, low risk aversion investor could also think of selling them later soon to invest in new risky firm that compensate higher return.
Appendix 1
Chart collected from ASX
Appendix 2