Introduction
Several tools and techniques used in this section will facilitate the evaluation of the Cochlear LTD. The first technique used is the profitability ratio. First, net income will be analyzed. Net income is the difference between gross revenue and associated total costs, where total cost includes variable and fixed costs (Cordazzo, 2013). In 2015, Cochlear recorded a loss of -1.9. From 2015 t0 2020, the company recorded an increasing profit, which is ten times in 2020 from 2016. This growth shows that the company will be profitable in the future and can be used in forecasting by the company and to make plans involving its operations.
The second technique used is average equity, which calculated by adding ownership of two periods and dividing the value by 2 (Saji et al., 2013). The average investment of Cochlear LTD was increasing at an increasing rate from 2014-2018. The increase would be a result of the firm offering more equity shares to finance its operations. An additional increase in average equity share denotes the company was making profits, thus luring the investors to invest. This upsurge of growth in average equity shows the investors forecasting of higher-income in the future hence higher dividends. Another technique used is the return on investment; return on equity increased at an increasing rate from 2016 to 2018. This is an indication the company was making profits hence paying investors the performances in the form of dividends. This shows the company in the future will make more profits. Average assets were increasing at an increasing rate from 2014-2018. The indication here is that company made a profit, and investors were willing to invest in terms of shares, making the company purchase assets to be used to run its operations. The other technique used is the return on assets; Cochlear recorded an increasing ROA rate from 2016-2018. A clear indication that the company was using its assets to generate income, Cochlear in the future, can increase profits since ROA shows good use of assets.
Another technique employed is sales analyzes; Cochlear doubled its sales from 2016 to 2018. An indication that the company was engaged in production or offering of services. Moreover, the current ratio is used to show if the company is in a position to pay the debtors. For Cochlear, the current ratio was increasing at an increasing rate from 2015-2018, indicating that in this period, it was able to pay debts, and investors are willing to invest in such a high ratio. The current rate is the quotient between existing assets and current liabilities (Mohammed & Kim-Soon, 2012). Another financial measure used is earnings before interest, taxes, depreciation, and amortization (EBITDA).EBITDA for Cochlear increased at an increasing rate from 2014-2020. EBITDA measures the company's financial performance and helps investors make profound analysis during investment time (Verriest et al., 2018).
The debt to equity ratio is zero from 2014-2018.
Investment Risk
Operational risks. Cochlear did not pay any dividend to investors. The detrimental of not paying the bonus is that investors need to see value in their investment, and in this case, investors will not be willing to invest. This risk is referred to as the risk of dividend payment (Rippel, 2009).
Market risk. These are risks that are associated with factors affecting the market (Los, 2003). First is equity risk, when a Cochlear is not performing, and the share price drops. The demand for it shares by investors will fall, and not many investors will be willing to invest in the shares. The other market risk is interest rate risk. If Cochlear chooses to invest in bonds as an alternative investment when interest rate lowers, Cochlear will lose money. Lastly, currency risk is associated with the exchange rate. For example, Cochlear invests in treasury bonds offered by the United Kingdom government. If the value of pound rises, the market value of bonds drops hence losses.
Liquidity Risk
Liquidity risk is a risk due to the inability to sell the investment at market price to realize initial costs (Ericsson & Renault, 2006). Thus when Cochlear purchases bonds, but when selling the offer price is lower than price invested, liquidity risk is involved.
Concentration Risk
Concentration risk is the risk associated with investing in one form of investment (Zhang et al., 2013). Cochlear should diversify their investment in several ways to mitigate the failure related to one stake. Cochlear can invest both in commodity and financial markets.
Credit Risk. Credit risk is the risk that a firm or government issuing bond will not be able to pay interest or principal at maturity (Ericsson & Renault, 2006). Cochlear LTD, must pay attention when investing in bonds since some bonds possess high credit risk while others are low risk. Cochlear to aim at government financial instrument with low credit risk.Foreign investment risk. Foreign investment risk is the risk associated with investing in different geographical locations (Brealey, 2012). Cochlear should pay attention to economies with stable regulations to minimize risks associated with foreign countries.
Inflation Risk
The inflation risk is associated with the purchasing power of a currency (Campbell & Vuolteenaho, 2004). Cochlear should invest in government bonds of economies where inflation is stable in time. In the case of investing in an economy with a high price rise, it can lead to losses since the number of bonds purchased will be lower, hence less return on investment.
Conclusion
In a nutshell, the techniques analytic tools used are profitability ratio, average equity, return on equity, return on assets, current rate, sales analyzes, and debt to equity ratio. Additionally, investment risks such as operation risk, market risk, liquidity risk, concentration risk, credit risk, foreign investment risk, and inflation risk give the dangers faced by Cochlear LTD.
References
Brealey, R. A., Myers, S. C., & Marcus, A. J. (2012). Fundamentals of corporate finance. McGraw-Hill/Irwin,Campbell, J. Y., & Vuolteenaho, T. (2004). Inflation illusion and stock prices. American Economic Review, 94(2), 19-23.
Cordazzo, M. (2013). The impact of IFRS on net income and equity: evidence from Italian listed companies. Journal of applied accounting research.
Ericsson, J., & Renault, O. (2006). Liquidity and credit risk. The Journal of Finance, 61(5), 2219-2250.
Los, C. (2003). Financial market risk: measurement and analysis. Routledge.
Mohammed, A. A. E. & Kim-Soon, N. (2012). Using Altman's model and current ratio to assess the financial status of companies quoted in the Malaysian stock exchange. International Journal of Scientific and Research Publications, 2(7), 1-11.
Rippel, M. (2009). Operational Risk: A scenario analysis.
Saji, K. B., Isberg, S., & Pitta, D. (2013). Using financial analysis to assess brand equity. Journal of Product & Brand Management.
Verriest, A., Bouwens, J., & De Kok, T. (2018). The Prevalence and Validity of EBITDA as a Performance Measure. Available at SSRN 3171131.
Zhang, J., Jiang, C., Qu, B., & Wang, P. (2013). Market concentration, risk-taking, and bank performance: Evidence from emerging economies. International Review of Financial Analysis, 30, 149-157.
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