Five things to note about the latest company profit season

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Australian Economy

Amidst various macro-economic factors that have been quite harsh this year on companies across the globe, below are key points to note about the latest company profit season for Australia:

 Australian companies witnessed above average profit rise: As per the CommSec reports, over 128 firms from S&P/ASX 200 delivered profits for the year to June 2016, as at August 26, 2016. However, profits declined by 15.1% over the year to $30.4 billion, in effect from BHP Billiton’s results. BHP reported a loss of US$6,385 million against the previous year profit of $US1910 million. As a result, S&P/ASX 200 (INDEXASX: XJO) lost over 1.5% in the last four weeks of August 2016. But, CommSec analysts reported that this earnings season was still decent without BHP Billiton results. Barring BHP Billiton, aggregate profits surged 8.5% to $36.8 billion while average earnings per share rallied 2.2%. Overall sales rose 2.9% over the year while aggregate costs/expenses rose 2.7%. 64.8% of firms rose profit over the year, which is better than the long-term average near 60%. Aggregate cash holdings rose by 0.9% to $72.8 billion while aggregate dividends enhanced by 7.9%. Various companies including Corporate Travel Management and WiseTech global, even came up with strong forward guidance.

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Above average profit season *excluding BHP (Source: CommSec Reports)

 

On the entire reporting season on aggregate full year results for 139 companies from S&P/ASX 200, 88.5% companies reported profit and there was 6.8% rise in profits to $36.8 billion. It has been further reported that 92.1% of companies have paid dividends; and out of this, 66% had lifted profits while 16% maintained their dividends. On the other hand, 18% of companies particularly in mining and energy sector had cut dividends.

2016 being considered as a restructuring year overall: As per Deutsche Bank, the 2016 year is considered as the restructuring year due to mounting legal costs, record-low interest rates and volatile markets and with the Britain’s decision to exit the European Union that has clouded economic prospects and is potentially weighing on deal-making across the region. The Australian companies having exposure to the UK and international market were seen to feel the heat from the aforementioned macro-economic factors. We also see some stabilization as of now.

Volatile market conditions: The Brexit outcome had created a sense of panic among the global investors as Britain has been the third major economy in Europe and fifth major economy in the world. As a result, the current earnings season was impacted owing to negative effect on various Australian companies’ performance to a certain extent. Even China and other emerging market economies constitute an important locus of global financial stability risks, due to increase in debt in the post-crisis period.

Interest rates impact: Interest rates determine the amount you need to repay on loans. The public companies borrow large amounts of cash as sometimes their immediate funds aren’t enough. Companies might need cash for the daily operations of the business or for acquiring another company. Lower interest rates mean a lower cost to borrow, and this in turn increases the propensity to borrow, which depends upon the earning potential of the company. On the other hand, the recent hint by US federal reserve of a possible interest rate rise had again raised concerns over the companies’ profits in the coming periods.

Fluctuation in Australian Dollar: The fluctuation in Australian dollar also affected the profits of some companies exposed to this currency as revenue of the company gets impacted from the export and the import activities and associated dollar value. The Australian dollar owes its strength in large part to the resources boom. This has been the major cause of the appreciating exchange rate over the past decade. However, the contribution from the mining sector has fallen recently, which has affected the Australian dollar and consequently the profit of the companies.

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