Executive Summary
The report comprises of two main tasks that are financial ratio analysis and distress analysis to determine and evaluate the financial performance of HSBC. The case study is prepared to analyze the financial conditions of HSBC. HSBC Bank Plc. is one of the largest financial services providers in the world. HSBC operates in Finance and Insurance industry that is highly competitive in the global market. The decline in values of current ratio, quick ratio, and cash ratio reveals that the company did not succeed in maintaining stability in its financial position, but the decrease of 0.02 and 0.01 is not an evident of weak financial conditions. The decline in value of fixed asset turnover shows that the company’s operational process was weak in utilizing potential non-current assets. However, the increase of one percent in receivable turnover ratio represents that HSBC had improved this area to generate profits by the utilization of current assets. HSBC had increased the proportion of equity that was financed through debt in 2015. It indicates that the company had borrowed a large amount of money in this period to increase its profitability. The profitability ratios indicate that the company was efficient in controlling the costs of revenues in the year 2015. Distress was renamed as an impairment to allow customers to reduce the risks of investments made in the financial projects of the company. The distress is shown in the financial statements 2015 of HSBC regarding current and non-current due to declining in the acquisition of total assets, but the reason was high risks involved in this. The financial analysis of HSBC shows that the company had improved its profitability in 2015 due to the improvements in its operational activities. The distress analysis shows that the company was inefficient in acquiring new assets that could reduce the burden of debt from the company but the burden was not transferred to customers to retain them for the long-term stability of the business. The financial indicators suggest that it is beneficial for investors who are willing to obtain high return in future.
Introduction
Background
Financial ratio analysis is the tool to review and analyze the company’s financial statements for decision-making. It is useful and beneficial for investors to examine the financial position of an organization before making decisions to make a relationship with it. The financial statement analysis of a public listed company will identify strengths and weaknesses that can be helpful in decision making for investments. The report is prepared to conduct a financial statement analysis of HSBC Bank Plc. that is located in London. Distress analysis is conducted to determine the potentiality of a company in paying off its long-term and short-term liabilities. It helps in decision making for investments as it is also an important to analyze the current and past environment in which the can operated.
Overview of HSBC
The bank is one of the largest financial services providers in the world. HSBC operates in Finance and Insurance industry that is highly competitive in the global market. It is headquartered in London, but the bank operates in more than 80 countries of the world. The services of HSBC include personal finance, commercial banking, consumer finance, private banking, investment, and corporate banking. There are more than 85,000 employees currently working for the organization in different cities.
Aim
The primary aim of the report is to conduct financial statement analysis and Distress Analysis of HSBC and provide rationale on the findings.
Objectives
The objectives of the report are to.
HSBC operates in the competitive global environment that possesses high external risks of competition and economic recession in various countries. The great recession of 2008 had brought an exclusive change in the economy of different countries. Financial institutions were badly affected by this recession, but now the market is showing growth. However, investors are now more concerned about the performance of financial institution to make investment decisions. The financial performance can be effectively measured by using four categories of ratios that will determine the liquidity, efficiency, profitability, and leverage position of the company. These ratios are calculated separately for the year 2015 and 20014 to provide a clear view of the financial position of HSBC.
Liquidity Ratios
Liquidity ratios refer to the classification of ratios that are used to determine the potential of a company to pay off its short-term debts. The high value of this type of ratio indicates that a company has high margin of safety to cover its debts (Howes, 2015).
It can be noticed in the above-provided chart that there was a slight change in the liquidity position of HSBC in 2014-2015. The decline in values of current ratio, quick ratio, and cash ratio reveals that the company did not succeed in maintaining stability in its financial position, but the decrease of 0.02 and 0.01 is not an evident of weak financial conditions. The economic conditions of the market were not stable, and investors have less attraction towards financial institutions. In fact, company was efficient in managing and maintaining its operations by increasing liabilities for the acquisition of potential assets such as securities that would prove to be beneficial in the long run.
Efficiency Ratios
It is the class of ratios that determines how a company is efficient in utilizing its potential resources to generate revenues. It examines the efficiency of the company to convert various assets into cash or receivables to earn profits .
The above-provided efficiency ratios indicate that HSBC was inefficient in utilizing its financial resources in generating high revenues in 2015. The decline in value of fixed asset turnover shows that the company’s operational process was weak in utilizing potential non-current assets. However, the increase of one percent in receivable turnover ratio represents that HSBC had improved this area to generate profits by the utilization of current assets. The productivity was not observed in the financial statements of the company in this year due to unfavorable economic conditions that disallowed investors to invest in financial institutions. However, it is also noticed from the annual reports of HSBC that it has efficiently managed to reduce the costs of acquisitions of non-current assets to ensure high profitability.
Leverage Ratios
It measures the portion of a company that is financed by equity or debt. The ratio is important in analyzing the potential of a company to pay its short-term and long-term obligations. It is useful for all stakeholders but creditors and lenders use this ratio to calculate the ability of a company in terms of equity, assets, and liabilities .
HSBC had increased the proportion of equity that was financed through debt in 2015. It indicates that the company had borrowed a large amount of money in this period to increase its profitability. However, a slight increased can be noticed in debt-to-assets that represents that HSBC had not acquired as many assets as debt. It is the alarming situation for the company that it has to increase its assets to strengthen its leverage position in the international market. It may be the effect of the high value of assets in the market due to competition. Also, the annual report of 2015 highlighted that the company had invested in long-term projects such as residential building projects.
Profitability Ratios
Profitability ratios are calculated to assess a company’s ability to generate profits as compared to its costs and expenses in a particular period. It shows the trend of profitability and the efficiency of the company to generate potential revenues and control of costs and expenditures in a given period of time .
The values of all profitability ratios mentioned in the above-provided table indicate that HSBC has managed its operations to obtain high profits in 2015. It can be noticed in operating profit margin that the sales were decline to some extent, but it put a positive effect on the operating profit of the company. It represents that the company was efficient in controlling the costs of revenues in the year 2015. The increase can also be noticed in return on assets and net profit margin of the company that reveals the operational and financial management team of the company was efficient in reducing costs and expenses to obtain high return in 2015.
Financial distress refers to the unfavorable conditions of a company in paying off its obligations due to high costs or liquid assets prevailing in a specific market. In the case of HSBC, there are two types of distress that are one from customers’ side, and other from creditors’ side.
Customer Side
The annual report 2015 of HSBC provided relevant information regarding the policies made for the distress conditions of customers. Various changes such as ownership transfers to third parties on future cash flows were allowed to facilitate customers. The customers of HSBC banks were offered to mitigate their loss and improve their financial conditions by availing the opportunities of impairment. Distress was renamed as an impairment to allow customers to reduce the risks of investments made in the financial projects of the company. The purpose of the company was cleared for this amendment as they tried to retain customers for the long-term stability of business and maintain its financial position in the global financial market. Customers are the key stakeholders in financial institutions that show trust by investing their resources. The primary aim of the company is to build relationships with its potential and valuable customers to obtain a high return in the long run. Although short-term plans such as investments in security were also offered to customers, the impairment proved to be beneficial for the long-term sustainability of the company (HSBC Holdings plc., 2015).
Company Side
The distress is shown in the financial statements 2015 of HSBC regarding current and non-current due to declining in the acquisition of total assets but the reason was high risks involved in this. The economic conditions of the market were not for acquiring new assets due to high costs and low return in a short run. HSBC is also committed to providing potential return to the investors in the short run so it would not favor the company to acquire such assets that fail to provide such returns. The planning and implementation of the strategy to focus on providing a high return on assets did not allow the financial management team to deal with assets that had a low return. It is also observed that the company deals in a highly competitive market where there are different standards for making investments, so HSBC requires taking extraordinary care while making an investment. Also, it is an implied responsibility of HSBC to invest the amount in less risk and high return projects. It is the main reason for the low investments of HSBC in the capital market (HSBC Holdings plc., 2015).
Conclusion
Summary of Financial Analysis
The financial analysis of HSBC shows that the company had improved its profitability in 2015 due to the improvements in its operational activities. The improvement is shown in reducing costs and expenses associated with the operations of business. The efficiency management of the company is strong due to it is financial and operational management team that was effective in achieving specific goals. The long-term stability and liquidity position of the company was decline to some extent, but the company had efficiently managed to reduce its effects on the financial performance. However, leverage position of HSBC reveals that it had financed total assets through debt that indicates the involvement of high risks in the financial management of the company. HSBC had adopted a calm strategy in this period due to the unfavorable economic conditions in the global financial market. The uncertainty factor was accurately examined and noticed by the financial management team, and they intended to avoid the purchase of new assets. In fact, the company had sold its assets that were not providing expected returns to facilitate stakeholders.
Summary of Distress Analysis
The distress analysis shows that the company was inefficient in acquiring new assets that could reduce the burden of debt from the company but the burden was not transferred to customers to retain them for the long-term stability of the business. It also indicates that HSBC has the potential to control financial distress by implementing effective strategies. However, it is not beneficial in the long run, and the company would not be able to regain its position in the financial market by avoiding purchases of potential assets. The distress analysis also reveals that the company had paid less attention to pay off its current portion of the long-term assets and moved to impairment facility provided to customers. In short, the distress was due to the uncertain economic conditions and actions of HSBC shows that they were making efforts to reduce its effect on the financial performance.
Recommendations
HSBC operates one of the largest financial institutions in the global market. It has a strong reputation in the capital market due to the effective management that comprises of efficient and expertise professionals for decision-making. The financial indicators suggest that it is beneficial for investors who are willing to obtain a high return in future. Individuals and organizations can earn high profits by creating relationships with this company. Also, HSBC is efficient in managing and controlling its costs and expenses to obtain potential profits to be distributed to shareholders. It is recommended that investors should buy shares of HSBC to obtain high return in the long run.
List of References
Goel, S., 2015. Financial Ratios. New York: Business Expert Press.
Howes, C.J., 2015. Organizational Performance: The Key to Success in the 21St Century. Bloomington: Xlibris Corporation.
HSBC Holdings plc, 2015. Annual Report and Accounts 2015. Annual Report. HSBC Holdings plc.
Tracy, A., 2012. Ratio Analysis Fundamentals: How 17 Financial Ratios Can Allow You to Analyse Any Business on the Planet. New York: RatioAnalysis.net.
Appendices
Appendix 1: Income Statement
Appendix 2: Balance Sheet
