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After reading Commonwealth Bank of Australia’s (ASX:CBA) latest earnings update (31 December 2017), I found it beneficial to look back at how the company has performed in the past and compare this against the most recent numbers. As a long-term investor I tend to pay attention to earnings trend, rather than a single number at one point in time. I also like to compare against an industry benchmark to understand whether CBA has outperformed, or whether it is simply riding an industry wave. Below is a brief commentary on my key takeaways. Check out our latest analysis for Commonwealth Bank of Australia
Did CBA beat its long-term earnings growth trend and its industry?
To account for any quarterly or half-yearly updates, I use the ‘latest twelve-month’ data, which either annualizes the most recent 6-month earnings update, or in some cases, the most recent annual report is already the latest available financial data. This method allows me to examine various companies in a uniform manner using the most relevant data points. For Commonwealth Bank of Australia, its most recent bottom-line (trailing twelve month) is AU$9.99B, which, relative to last year’s level, has increased by a somewhat subdued 6.06%. Given that these figures may be relatively short-term thinking, I have determined an annualized five-year figure for Commonwealth Bank of Australia’s net income, which stands at AU$8.30B This means that, generally, Commonwealth Bank of Australia has been able to steadily raise its earnings over the past few years as well.
What’s enabled this growth? Let’s see whether it is solely due to an industry uplift, or if Commonwealth Bank of Australia has experienced some company-specific growth. Over the past few years, Commonwealth Bank of Australia expanded its bottom line faster than revenue by successfully controlling its costs. This brought about a margin expansion and profitability over time. Viewing growth from a sector-level, the Australian banks industry has been growing, albeit, at a subdued single-digit rate of 5.20% over the prior year, and 4.44% over the past five years. This means that whatever uplift the industry is deriving benefit from, Commonwealth Bank of Australia is able to amplify this to its advantage.
What does this mean?
While past data is useful, it doesn’t tell the whole story. Companies that have performed well in the past, such as Commonwealth Bank of Australia gives investors conviction. However, the next step would be to assess whether the future looks as optimistic. You should continue to research Commonwealth Bank of Australia to get a more holistic view of the stock by looking at: