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After doing research, our group also puts forward some recommendations to change loan assets or asset size by different company types to improve company performance. 2. Literature Review 2. 1 Asset Size There is a positive correlation between asset size and company performance. Asset size refers to the total market value of the securities in a mutual fund’s portfolio (Investigated, 2014, p 1). According to some research, the concave quadratic relationship between size and performance was found which indicates the existence of an optimal size (Bowdon, Cavalier, & Snug??, 201 1).
Cochran (1993) indicated that takeovers can improve firm performance. Takeovers can expand the asset size of companies. The paper indicated that bigger asset size is benefit to company performance (Cochran, 1993). Furthermore, Dunne and Hughes (1994) stated that smaller companies had higher death rates on business. Big asset size will lead to lower death rates which improves firm performance. Alton also indicated that the asset size reduction dominates any sales movements through the assumptions (Alton, 201 2, p 1).
However, some articles stated that acquisitions have negative influence on company performance which may have lower return than internal investment (Dickerson, Gibson, & Toadstool, 1997, p 344). Acquisition is a common way to change the asset size which may sometimes have detrimental impact on company performance. Therefore, asset size and company performance may have positive relationship in most cases. The bigger asset size will be more beneficial on company performance. 2. 2 Total Operating Income There is a positive correlation between total operating income and company performance.
Operating income is equal to gross income minus operating expenses and then minus depreciation (Investigated, 2014). Kurt stated that profit metrics can be used to evaluate performance and many analysts use operating profit to determine the value of shares (Kurt, 2014). Rinehart and Iliac both measure accounting-based financial performance by calculating operating profits (Rinehart & Liz’, 2000). It is important to measure operating income that it can indirectly reflect the efficiency Of business (Investigators, 2014). The company has higher operating income will lead to higher performance (Investigators, 2014).
Moreover, Johnson and Media stated that profit margin measures the financial success of a company (Johnson & Media, 2014). Profit margin is determined by dividing net income by sales revenue Monsoon & Media, 2014). It indicates that total operating income is relevant to company performance which keeps a positive tendency between them. Therefore, higher total operating income can lead to higher company performance under the same industry. 2. 3 Impaired asset expense as % of average loan assets There is a negative correlation between impaired asset expense of average loan assets and company performance.
Impaired asset refers to the asset which the value is less than company listed on balance sheet (Investigated, 2014). The loan impairment charge includes impairment losses (Fitch Ratings, 2009). The ratio that dividing loan impairment charges by average gross loans determines credit quality management against the size of loan assets (Fitch Ratings, 2009). It will have an influence on company performance. Furthermore, there will be a revaluation decrease in comprehensive income if impaired assets are revalued (Ernst & Young, 2010).
There exists a view Of point that impairment charges provide ways to access company management (Caffeine, 2014). It also mentioned that many business failed by declining impaired assets value (Caffeine, 2014). Therefore, these viewpoints all reflect that impaired asset expense of average loan assets have great impact on 2. 4 ROAR / ROE The company performance can be measured by return on asset (ROAR) and return on equity (ROE). According to Mugginess and Smart (2008, pop), “the return on total assets (ROAR), often called the return on investment (ROI), measures the overall effectiveness Of management in using its assets to generate returns. They also claimed that the ROE is a measure of profitability, which can captures the return earned on the common stockholder investment in a firm (Mugginess and Smart, 2008). ROAR equals earnings available for common stockholders divided by total assets, while ROE equals earnings divided by common stock equity (Mugginess and Smart, 2008). Most Wall Street analysts, investors and executives tend to focus on turn on equity as their primary measure of company performance, because this metric has proven enduring and it gives a shareholder a quick and easy to understand metric (Haggle, Brown & Davison, 2010).
In addition, although ROAR receives less attention from executives and investors alike, it avoids the potential distortions created by financial strategies and has a lot of merits (Haggle, Brown & Davison, 2010). As Haggle, Brown and Davison stated (2010), ROAR explicitly analyses the assets used to support business activities and determines whether the company is able to generate an adequate return on hose assets rather than simply showing return on sales. Furthermore, using ROAR is beneficial for managers to focuses on the assets required to run the business (Haggle, Brown & Davison, 2010).
Therefore, higher ROE or ROAR suggest better performance. 2. 5 Net interest margin (net interest income / average total asset) Investors usually measure performance of companies by Net interest margin (MIN). Net interest margin is one of a performance metric that assesses the success of a firm’s investment decisions as contrasted to its debt situations (Radiations, 2014). A negative MIN suggests that the firm is unable to make an optimal session, which is because interest expenses are higher than the amount of returns (Radiations, 2014).
Furthermore, Frankfort (1986) stated that doing analysis of net interest margin can help managers to keep balance on financial industry assets and liabilities, so it provides managers needed information about companies’ gross profit margin. Additionally, this metric can be used by financial industry, such as a bank, to measure its interest-rate risk (Grommets, 1984). On the other hand, an improving loan portfolio is leading to better financial performance, and the increase in net interest income which generates from loan is leading to higher net interest margin.
Thus, net interest margin is related to financial performance (Ridging, 2010). Therefore, net interest margin may be used generally in financial industry and higher MIN indicates better performance. 2. 6 Loan asset growth per year There is another indicator, loan asset growth, can be used to measure companies’ performance. According to Gardner (2006), loan growth can reflect the growth of country market and companies’ associations. These non- GAP financial measures include loan growth can facilitate to assess internal management and operating environment (Gardner, 2006).
These may suggest that loan asset growth can used to be one of the indicators for measuring performance. On the other respect, Foss, Noreen and Weber (2010) has done empirical analysis and claimed that loan growth may have adverse effects on financial industry risk, as it can lead to loan loss and therefore do harm to profitability. In terms of Kitten (1999), they also indicate that faster loan growth might contribute to higher loan losses, which is because of financial industry lower credit standards as well as reduce loan rates, increases in ending due to supply shifts.
Thus, according to these explanations, loan asset growth may has negative relationship with companies’ performance. Therefore, higher loan asset growth per year may indicate that the company has worse performance. 2. 7 Selected Companies from Different Industries Some companies are selected from different sectors to describe their companies performance according to the all given data. In rural and farming sector, Sagebrush Finance Ltd kept increasing on its asset size in the period of 2000 to 2004. The positive trend on asset size implies that its performance also keeps increasing.
In this sector, the companies have positive tendency which lead to high performance. In personal, consumer and retail sector, Fisher & Payees Ltd owned total operating income about 5333 thousand dollar and Finance Direct Ltd was about 1 1 78 thousand dollar. The difference on total operating income between the two companies resulted in different company performance. Furthermore, Five Star Consumer Finance Ltd has higher ratio of impaired asset expense of average loan assets than Gold Band Finance Ltd. It reflects Gold Band Finance Ltd may own better company performance.
Additionally, in property industry, most of companies have Geiger ROAR and ROE than previous years, which suggest that this sector has performed better for these years. In manufacturing sector, companies also perform better as the net interest margin has increased for these years. 3. 0 Methods The data set shows the financial information including profitability, balance sheet and asset quality. The data set covers the information from 2000 to 2005. 3. 1 apart Initially, this report uses both ‘index function’ and ‘match function’ to arrange the data in sheet ‘summary’ distinctly.
For instance, as for cell ‘BE’, where two match functions determine the number of row for ‘return on assets’ and column for Allied Farmers Finance Ltd 2004′ respectively. Then the index function latches the specific content for cell ’84’. Our group uses the same steps to find the whole figures in sheet ‘summary. 3. 2 Apart For apart, this report applies the same functions to form the whole data set which is used to create relevant pivot table. The data set consists Of all the companies with corresponding lending categories and five required data items.
Then the pivot tables are created to reflect the sum, mean, standard deviation, minimum, maximum, number of observations for the five data items. Our group creates specific pivot tables for each year which ranges room 2000 to 2005. This arrangement is easier for group members to compare and analyses. 3. 3 Apart In apart, our group sectionals the companies according to the asset size and use frequency function to count the number of companies in each size class. Furthermore, the total asset amount for each size class is calculated by using ‘summit or ‘summit’ function.
The clustered bar shows the above information, which the left bar shows the total number Of companies, the right bar shows the total asset amount in NZ (million). 4. 0 Results 4. 1 Apart After comparing pivot tables between different years, our group finds that the taxation is similar. Therefore, the analysis will focus on the comparison between industries. Specifically, our group set data of year 2004 as the source of the following report. In addition, the report will ignore the meaningless data.
After the comparison, our group finds that other industries expect four industries occupy less than 50 percentage of the whole sum of asset size, which implies that the other four industries own the dominant ability to create more than 50 percentage of asset size. These four industries are Personal/Consumer/Retail, Property (Investment/Development), Business/ Manufacturing, and Rural/Farming. In addition, the standard deviation of asset size of those four industries is much lower than other industries, which means that the development of companies under the four industries is more stable.
As for the second item, Rural/Farming industry has highest operating income and it is ranked first in average operating income. However, Rural/ Farming industry also has highest standard deviation which respects higher volatility of performance in operating income. In addition, Personal/ Consumer/Retail industry performs best in net interest margin item although this industry is not outstanding in asset size and operating income. For loan asset growth ratio, we find that other industries expect four industries as mentioned before holds a high ratio of loan asset growth.
This represents that companies in other companies have a more apparent tendency to development. However, high loan asset growth ratio also implies higher risk. Therefore, the four industries perform better than other industries in all the corresponding items. 4. 2 Apart As for part 3 (see figure 1), the histogram for year 2004 and 2003 are similar. In 2004 and 2003, the number Of companies decreases as the asset size increases; the total asset amount increases as the asset size decreases. Moreover, the number of companies whose asset size is less than 50 NZ million is the largest in each year.
Though, the number of companies whose asset size is more than 1000 NZ million is the smallest, the sum of them ranked the first. Figure 1. Asset Size in Each Year 5. 0 Conclusion and Recommendations In conclusion, this report has done research on the company valuation and provided overall description of given financial information. Firstly, this report did a literature review on six indicators for measuring companies’ performance, which are asset size, total operating income, impaired asset expense as percent Of average loan assets, ROAR / ROE, net interest margin and loan asset growth per year.
In this part, the first five indicators have positive relationship with companies’ performance, while the loan asset growth has adverse effects on companies’ performance. Secondly, this report described the method of processing given data set in terms of several companies. For part 1 , this report used both ‘index function’ and ‘match function’ to arrange the data in sheet ‘summary distinctly. For part 2, this report applied the same functions to form the whole data set which is used to create relevant pivot table.
For part 3, this report sectionals the companies according to the asset size and use frequency function to count the number of companies in each size class. Thirdly, this report summarized the result of the processed data set, in which part 2 indicated that the property, business, farming and consumer industries perform better than other industries. In addition, part 3 illustrated the histogram of 2004 and 2003. With the result, our group can make recommendations that growing companies can develop themselves by increase loan assets, while mature companies should pay attention on increasing asset size.