Monthly Archives: August, 2012

Almost Family Inc (AFAM) is Capable of Paying Obligations

August 31st, 2012 Posted by Company Research Report No Comment yet

Almost Family Inc. (AFAM) and its other subsidiaries provide home health-care and adult day care services in the eastern and mid-western of the United States. Analyzing this company financials, let’s begin with its balance sheet analysis as to guide on value investing. This is to determine Almost Family Inc.’s financial liquidity, efficiency, and strength.

AFAM Balance Sheet

Almost Family Inc. showed a good start from 2007 to 2011 with a working capital growth ratios of -39 percent, 40, 471, 80, and -11. This means that despite the decline in 2011, its TTM is greater than the 2011 working capital. So, this prospectively indicated that Almost Family Inc. is financially healthy with its current resources enough to settle obligations and creditors. It was only in 2008 that current ratio decrease and the quick ratio was less than 1 due to an economic crisis in the US during this time, but they had recovered and depicted sufficient funds.

AFAM liquidity & WC

Liquidity

Liquidity is a firm’s ability to pay its short-term debt obligations. Its financial ratios will help us determine how liquid the firm is or how successful it will be in meeting its short-term obligations. As we can see in the table above, current ratio was consistently increasing for the last four years and decrease slightly in 2011 of 10.8 percent compared to trailing twelve months (TTM) which decreased by 11.6. On the other hand, its quick ratio decreased of 17 percent in 2008, increase 123 and 46.8 in 2009 and 2010. It decreases again in 2011 of 13.5, and TTM of only 1.19. This means that Almost Family Inc. is liquid and has the ability to pay their short-term creditors.

Working Capital

Their working capital in million dollars and the difference between current assets and current liabilities. It also shows an increasing trend for the last four years with a slight dip in 2011 of 11 percent. Its TTM depicts 263 million dollars.

As we can see in the graph below, Almost Family Inc. manage their receivables at an average of 8 same as to their TTM. Payables were being paid with an average of 28 times and it is lower than TTM which is 29 times. This also showed an increase in 2009 and 2010 of 58 percent and 10.6, meaning high accounts payable turnover may be a signal that AFAM isn’t receiving very favorable payment terms from its own suppliers. Regarding its fixed asset turnover ratio they had been efficient and they have a good profit earning capacity meaning higher ratios with the greater intensive utilization of fixed assets.

AFAM efficiency

Efficiency Ratios

  • The receivable turnover ratio is the number of times accounts receivable are collected throughout the year. Almost Family Inc. showed a good receivable management with an average of 8.2 times which tend to increase in 2008 but slightly decreased down in 2009 to 2011.
  • Likewise, payable turnover ratio shows investors how many times per period the company pays its average payable amount. In the results, AFAM depicted an average of 28 times a year.
  • And fixed-asset turnover ratio measures a company’s ability to generate net sales from fixed-asset investments – specifically property, plant and equipment (PP&E) – net of depreciation. A higher fixed-asset turnover ratio shows that a company is more effective in using the investment in fixed assets to generate revenues. With Almost Family Inc. had a high fixed asset turnover ratio averaging to 76 times yearly and the trend decreased down in the first three years with a slight increase in 2010 and decrease again in 2011.

Cash Conversion Cycle

AFAM table 2

Explanation

  • Receivable conversion period gives a measure of the number of days it takes a company to collect on sales that go into accounts receivables (credit purchases). They had an average 45 days to collect credit sales with a trend of slightly decreasing for the first three years then increases in 2010 and 2011.
  • Payable conversion period gives a measure of how long it takes the company to pay its obligations to suppliers. This has an average of 15 days with a trend of decreasing down and a slight increase in 2011.
  • Cash conversion cycle validates the effectiveness of the company’s resources in generating cash. AFAM has an average of 30 days and has a trend of slight increases.

Overall cash conversion period was not so bad for Almost Family IncThey managed a well efficient conversion cycle for receivables have only an average of 45 days to be converted to cash the same with TTM. Their payables have a shorter term average of 15 days to pay their obligations to suppliers wherein TTM show a much shorter term of only 12.5 days. This means that they do not have a favorable payment term with their suppliers. Total cash conversion cycle of 30 days validates the effectiveness of the company’s resources in generating cash.

Interpretation

Looks like another graph is here with leverage ratios as a heading.  Financial analysts make use of solvency ratios to measure the financial soundness of a business or a company and a high solvency ratio indicates a healthy company. Different industries have different standards as to what qualifies as an acceptable solvency ratio, but, in general, a ratio of 20 percent and higher is considered healthy. Potential lenders may take the solvency ratio into account when considering making further loans.

Leverage Ratios

AFAM leverage

Explanation

  • Debt ratio indicates what proportion of debt a company has relative to its assets. Wherein AFAM, it showed a trend of a slight and constant decline with an increase of 4 percent in 2011.
  • Debt to equity ratio is a measure of the relationship between the capital contributed by creditors and the capital contributed by shareholders. The trend started with a high debt to equity ratio of 48.6 percent indicates that a company may not be able to generate enough cash to satisfy its debt obligations. Its growth decreases down abruptly from 30.8 percent, 94, 72.6, and 11.
  • Solvency ratio determines how well the company is able to meet its debts as well as obligations, both long-term and short-term. The trend depicts a higher increasing ratio year after year.

Interpretation

Regarding its debt ratio which has an average of 28.8 percent indicates that they have more assets than debt.  This measure gives investors an idea of the extent of company’s leverage along with the potential risks it faces in terms of its debt-load. Their debt to equity ratio, an average of 17 percent showed the extent to which shareholders’ equity can fulfill a company’s  obligations to creditors in the event of a liquidation. Their low debt-to-equity ratios may indicate that Almost Family Inc. was not taking advantage of the increased profits that financial leverage may bring. Insolvency ratios, they do not have short-term liabilities from 2009 to 2011 as well as long-term liabilities decreases down meaning the company is very solvent.

Overview

In totality, the relationship of ownership of the company’s total assets shows that an average of 16.7 percent was claimed by their suppliers or creditors, 10.2 average by bank holders. Moreover, an average of 71.5 by their shareholders. This means that the owners have the majority claims of the company’s total assets.

When investing in a certain company, investors would also look into its fixed assets if it is still useful in their business operations. In Almost  Family Inc.its investment from 2007 to 2011 are as follows:

Plant, Property & Equipment

AFAM table 4

Explanation

  • Their property, plant, and equipment had a gross of 14.6 million dollars average for the past five years and it has a trend of inconsistent up and down.
  • Accumulated depreciation was 10.6 million dollar which represents 72.6 percent of the average cost.
  • So, PPE, net book value was 3.8 million dollars equivalent to 27.4 percent of the average cost.

Therefore, they used capital lease in their fixed assets. In relation to this, AFAM uses capital lease in their fixed assets.  This accounts for the high fixed asset turnover ratio and the slight increases in PPE, gross amount.

On the lighter note, capital lease is a lease that is classified as a purchase by the lessee which meets one or more of the following criteria: the lease term is greater than 75 percent  of the property’s estimated economic life; the lease contains an option to purchase the property for less than fair market value; ownership of the property is transferred to the lessee at the end of the lease term; or the present value of the lease payments exceeds 90 percent of the fair market value of the property

AFAM Income Statement

Almost Family Inc. income statement allows a business as well as investors, to understand if the company is operating efficiently and successfully. First, let us look into the profitability of the company using the profitability ratios as our measuring gauge and it is computed as shown in Table 1 with TTM.

AFAM profitability 1

Explanation

  • Their net margin which simply is the after-tax profit a company generated for each dollar of sales. It had an average of 7.38. The trend has been going up with the growth of 33 percent, 7.7, 10.5 and a decline of -32.8 in 2011.
  • Their asset turnover, which measures the effectiveness of the company to convert its assets into revenues,  resulted from an average of 1.78.  The trend had been consistently decreasing gradually year after year.
  • The return on assets tells us how much profit the company generated for each dollar of total assets. AFAM had an average of 13.04. Its trend has been going up and down for the last five years w and TTM also showed a decrease by  9.5.
  • Their return on equity the company could return such profit percent for every dollar of equity. It had an average of 19.77. But the trend increased a bit in 2008 with  3.4 percent then declined yearly by  19.8, 7.9, and 42 with a decrease of 10.6 on TTM.
  • Return on invested capital is the financial measure that quantifies how well a company generates cash flow relative to the capital it has invested in its business. For AFAM, it had an average of 16.09 and it was up and down for the last five years.
  • The company’s financial leverage measures the financial structure ratio of the company base on total assets against total stockholders equity. An average of 1.5 was the result for Almost Family Inc.

Profitability

Looking into its profitability; which is measured by the success of a business in maintaining a satisfactory earning power and steadily increasing ownership equity; AFAM net margins depicted a favorable and consistent growth compared to their asset turnover which was gradually declining. Therefore, this showed an inverse relationship with high net margin against the low volume of asset turnover. Meaning they earned more from revenue than converting assets to revenue.

Their return on assets depicted unsatisfactory earnings for every dollar of total assets. This was due to their net income and total assets growth ratio yearly which caused an up and downtrend.

The return on equity showed a favorable first two years but due to the financial crisis in the US, in 2009 to 2011  returns declined down. And financial leverage or the portion of the equity which was the return on debts showed unpredictable decreases and slight increase. Therefore the bulk of the return comes from profit margins and sales. Likewise, return on invested capital because of the crisis, cash flow earned from invested capital played unsteadily. So, overall profitability was not quite impressive.

Income

afam income

Explanation

  • Their revenue is how much money a company has brought in a certain period, wherein it showed a yearly increasing trend with a TTM of 352 million dollars. Growth ratio was61 percent, 40, 13, and 0.89.
  • Gross profit showed how much of their markup a company receives on the goods and services it sells. This also been depicting an increasing trend with a decline in 2011.  Growth ratio was  67.6, 38.4, 15, and -5.5.
  • Operating profit is the best indicator of a company’s true performance in their operations. AFAM growth ratio on this was of 28.5, 50, 23.8, and -32.7.
  • Income before tax is the earnings after deducting non-operating income and expenses, which showed a minimal cost of more or less than one million dollars.
  • Net income is the leftover of a company after all expenses have been accounted for, wherein Almost Family Inc. constantly increased except for 2011. It had a growth ratio of 100 percent, 56, 24, and -32.

Almost Family Inc.’s income generated had been constantly increasing but noting its growth ratios, they were all down.Considering this, Almost Family Inc. experienced a problem in their revenues causing a decline and their cost was consistently yearly increasing, too. This means that business in home health-care and adult day care services was slowing down and most people in the United States depended on their Medicare. When the time comes and income cannot longer pay for all their cost and expenses their company would be in deep trouble,” Nelly explained.

Expenses

We are basically done with income. But as we all know, a company needs to spend money to make money and these outflows from providing and selling its services are called expenses. Then what are the breakdowns of their expenses?

AFAM expenses

Explanation

  • Cost of revenue was the amount the company paid for the goods that were sold during the year. It had a growth ratio of 54.6 percent, 40, 10.8, and 8.4.
  • Total operating expense was the expenses incurred in conducting their regular operations of the business and it had a growth ratio of 57, 37.6, 12.8, and 4.5.
  • Interest expense was interest on their debt or long-term liabilities use in their business which showed a consistent amount for the first year years.
  • Provision for income tax was the amount allocated for their payment of income taxes. Almost Family Inc. had a growth ratio of 120, 54.5, 23.5 and -33.

In their expenses, its cost of revenue accounts for 47 percent of revenue and the total operating expenses account for 39.8, moreover, interest expense of 0.23 and provision for income tax of 5.15. So, overall expenses had the total of  92 percent leaving an average net of 7.4 percent.

Margins

 The margins as computed represents the percentage of revenue which will help us look deeper into our analysis of their income and expenses. Results for AFAM are the followings:

AFAM 4

Explanation

  • Gross margin indicates the percentage of revenue dollars available for expenses and profit after the cost of merchandise is deducted from revenues. For AFAM, gross margin accounts for an average of 52.8 percent of revenue. Further, this means that cost of sales was so high for a service company to incurred almost one half of their revenue 
  • Operating margin is the operating income expressed as a percentage of sales or revenue after deducting the operating expenses from gross profit. EBIT margin is the EBT expressed as a percentage of sales or revenue after deducting the non-operating income and expenses from operating income. AFAM operating margin averages 12.68 percent and EBIT margin of 12.37. And their net margin accounts only 7.38 percent of revenue. Both increased yearly for the first four years except in 2011 wherein they both declined as well.
  • While the net margin is the net income expressed as a percentage of sales or revenue after deducting provision for income tax from income before tax. This show also an increasing trend and decline in 2011.

AFAM had a very high maintenance on their cost and operating expenses. 

AFAM Cash Flow Statement

The statement of cash flows reveals how a company spends its money (cash outflows) and where the money comes from (cash inflows). It has 3 categories; the cash flow from operating activities, and the cash flow from investing activities and cash flow from financing activities. The graph below shows the cash flow statement of Almost Family Inc.

Cash Flow from Operating Activities

Cash flow from operating activities of AFAM from 2007 to 2011 are as follows:

AFAM OCF

Explanation

  • Net income was 8,16,25,31 and 21. TTM was  20 which showed a consistent increase for the first 4 years, then dropped in 2011 by 32 percent.
  • Depreciation and amortization was 1,1,2,3 and 3; TTM of 3.
  • Deferred income tax was 1,1,1,3 and 4and TTM of 3.
  • Other working capital was -4,-12,-2,3 and -5. TTM of -4 which shows a negative result in 2007 to 2009 and 2011.
  • Non-cash item was 2,4,4,4 and 2. TTM of 3.
  • Net cash provided by operating activities was 7, 9, 27, 35 and 26. TTM marked 20. It showed that the company expanded during its first 4 years by 28 percent, 200 and 30 but dropped in 2011 by  26 percent.

The net cash flow provided for operation of Almost Family Inc. showed a positive balance and its increasing during its first four years but slightly decreased in 2011 by 26 percent. This means the company can still afford for investing.

Cash Flow from Investing Activities

Under this category of cash flow statement are cash inflows and outflows. As shown in the investing activities of AFAM, all transactions are cash out and these are:

afam cfi

Explanation

  • Investment in PPE was -1, -1, -2, -3 and -3. TTM of -3, which shows that AFAM did not invest more in fixed asset, and
  • The net acquisition was -9,-60,-7,-3 and -37. TTM of -33, with high asset acquisition in 2008 of $60 and followed by $37 in 2011, leaving the rest periods at a minimal level.
  • Therefore, net cash used for investing activities was -9,-61,-9,-5 and -40; and TTM of -36, which showed that its balance from 2007 to 2011 was negative because all transactions involved cash outlay.

As shown in the above table, AFAM is conservative in the investment of fixed asset during its five years of operation; however, its acquisition was high in 2008 as well as in 2011. Its cash flow for investing activities incurred a negative balance since there was no cash inflow transaction during these periods and only cash outflow.

Cash Flow from Financing Activities

Cash flow from financing activities consists of transactions not classified under operating under-investing. These are transactions that happened only once each period, while others happened twice every five years period. Similar to cash flow from investing, it also involves cash inflow and cash outflow. For AFAM, the following are transactions under financing activities from 2007 to 2011:

afam cff

Explanation

  • Total cash outflow was -32, which are debt repayment of -29 and -2 in 2009 and 2010 only and repurchase of common stock -1.
  • Total cash inflow was 82, which are common stock issued of 42 and 28 in 2008 and 2009, and other financing activities of -1, 11, 0 and  2, therefore;
  • Net cash for financing activities was -1, 53, 0 and -1, it’s a negative 1 in 2007, high in 2008 at 53 and negative 1 in 2010.

Cash flow from financing activities of Almost Family Inc. showed a positive balance in 2008 because of common stock issuance and other financing activities. Moreover, the rest of the periods have -1 and 0 since its cash inflow transactions were offset with its cash outflow.

Free Cash Flow

Free cash flow represents the cash that a company is able to generate after laying out the money required to maintain or expand its asset base. It is a measure of financial performance calculated as operating cash flow minus capital expenditures. Almost Family Inc. had available funds to retire additional debts, increase dividends and invest new lines of business.

afam fcf

  • Free cash flow of AFAM in dollars was 6, 8, 25, 32 and 23. TTM of 17. It shows that it was increasing per year from 2007 to 2010 but dropped by $9 in 2011. It further shows a positive result which indicates that the company has enough funds to pay its obligations; current, long-term and dividends to its stockholders.

Cash Flow Ratios

Cash flow analysis uses ratios that focus on cash flow and how solvent, liquid, and viable the company is. Here are the most important cash flow ratios for AFAM company:

afam cf efficiency

Explanation

  • Operating cash flow to sales ratio measures how much cash generated from its revenue for the period.
  • Further, operating cash flow ratio measures how much cash left after considering short debt. 
  • Free cash ratio helps us conclude if the company will grow in the future.  Operating cash flow less dividend paid less capital expenditure over operating cash flow.
  • Capital expenditure ratio measures company sustainability in maintaining their assets by using the result of operating cash flow over capital expenditure for the period.
  • Total debt ratio measures the company’s efficiency from the result of operating cash flow over total liabilities.
  • Current coverage ratio measures how much cash available after paying all its current debt. It can be determined by cash flow from operating less dividend over current liabilities.

Explanation

Based on the above table and graph, operating cash flow to sales has an average of .07 and it slightly decreased by 1 percent in 2008. Thereafter, it rose up by 5 percent and 1 percent and went down again in 2011 by 2 percent. Further, the average operating cash flow and current coverage ratio were .79, which showed an up and downtrend starting at 47 percent in 2007, dropped to 24 in 2008. Further, with high marks in 2009 and 2010 at 108 percent and 125 percent respectively but went down in 2011 by 35 percent. Furthermore, free cash flow had an average of 89 percent. Started at 86 percent in 2007 slightly increased by 3 and 4 percent in 2008 and 2009 but went down by 2 and 3 percent in 2010 and 2011, respectively.

Overview

Almost Family Inc.’s capital expenditure ratio had an average of 2.32.It was low in 2008 due to material acquisitions made. However, recovered in 2009 to 2010 but declined again in 2011 at 65 percent. Least investment made was noted in 2010. Therefore, total debt ratio had an average of .53. It means that AFAM operating cash flow was 53 percent proportionate to its total obligations.

Written by: Nelly and Rio

Edited by Cris

diana shipping inc-dsx

Is There A Margin of Safety Buying Diana Shipping Company?

August 30th, 2012 Posted by Investment Valuation No Comment yet

Diana Shipping Inc (DSX) is a global provider of shipping transportation services. DSX specializes in the ownership of dry bulk vessels.

DSX Value Investing Approach 

This investment valuation is prepared in a simple and easy way to value a company for business buying, business sell, and business evaluation. This model adopts the investment style of Benjamin Graham, the father of Value Investing. My basis in valuation is the company’s five years of historical financial records, the balance sheet, income statement, and cash flow statement.  The financial statement is scrutinized prior to the valuations.  In this model, we calculate first the enterprise value as our first step in the valuation. I also apply the relative valuation method by using Price to Earnings (P/E), Earning Per Share (EPS), Enterprise Value (EV) and Earnings Before Interest, Tax, Depreciation, and Amortization (EBITDA).

The Investment in Enterprise Value

In valuing Diana Shipping Inc, I performed the Enterprise Value (EV) valuation. The concept is to calculate what it would cost to purchase an entire business. Enterprise value represents the total value of the entire company. It factors liabilities and cash. In other words, EV measures the value of the productive assets or the operating assets that are used in producing its product or services.

Market capitalization, on the other hand, is the total market value of all of the company’s outstanding shares. Computed by multiplying a company’s shares outstanding by the current market price of the share. The total debt represents the sum of short-term debt and long-term debt. Cash and cash equivalent are taken from the balance sheet as well as the short term investment.

diana shipping inc.

Explanation

In calculating the enterprise value of DSX, total debt is added to market capitalization and cash and cash equivalent plus short-term investment were deducted, then it produces the enterprise value. In buying a company, you do not only buy the equity but you also have to pay for the debt of the company. That is why total debt was added to market capitalization. Cash and cash equivalent plus short-term investment were deducted because this account is not an operational asset, the company is not using cash to generate revenue. Cash could offset debt and can be absorbed by the buyer.

Market Capitalization

Market capitalization as seen in the table above represents the total value of the company’s equity shares as valued by the market.  While, the enterprise value, represents the value of the productive assets or operating assets both equity capital and debt capital. This is the costs of the entire company if you are buying. It shows that the value of the company was diminishing in value from its five years of operation.  The total debt represents 27% of the enterprise value, while cash was 24%.  EV was trending down at -53, 3, -12, -42 and 12% with an average of -18% from 2008 to 2011 and the TTM. The distribution of the buying price would be as follows:

Average = Total Operating Assets – 100% = Equity – 98% + Total Debt (net of cash) – 2%

TTM        =  Total Operating Assets – 100% = Equity – 100% + Total Debt – 0%

The enterprise value represents almost 100% equity, total debt has only 2% average. Total debt was offset by cash and cash equivalent, these two accounts were almost equal in amount.  If an investor buys the entire business, the investor is paying for the company’s total equity.  Enterprise value is trending down by  -20% average, while market value is trending at 3% average.

Benjamin Graham’s Stock Test

Net Current Asset Value per Share (NCAVPS)

The concept of this method is to identify stocks trading at a discount to the company’s net current asset value per share, specifically one-third below net asset value or two-thirds of NCAV. This method is one of the oldest documented stock selection methodologies, dating back in the 1930s.

DSX NCAVPS

Explanation

The current assets are basically considered as cash, its liquidity is for a short period of time less than one year.  Net current asset value excludes land, properties, and equipment, which is included in book value. NCAV is the excess of current assets over current liabilities. Graham looked for stocks trading for less than two-thirds of the company’s NCAV. The computed 66% of NCAVPS was lesser than the price, therefore, it did not pass the test in buying the stock. Diana Shipping price was over 77% average from the computed 66% of the NCAVPS. The stock price was trading over the company’s liquidity value at 49% over the trailing twelve months. It indicates that the price was expensive.

Market Value/Net Current Asset Value (MV/NCAV)

Another stock test made by Graham is by calculating market capitalization by NCAV and the result should be lesser than 1.2 ratios The result shows the ratio was greater than 1.2, therefore it indicates that the price was expensive. The stock price of DSX shows that it was trading at an overvalued price base on the MV/NCAV stock test of Graham.

diana shipping inc.

Benjamin Grahams Margin of Safety

MOS is used to identify the difference between company value and price. It represents an excess of intrinsic value over market price, or alternatively, a discount of the price below the intrinsic value of at least forty to fifty percent is desirable. MOS requires knowing when the buying price is low in absolute terms rather than merely relative to the market as a whole. This formula is used to identify the difference between company value and price. It represents an excess of intrinsic value over market price, or alternatively, a discount of the price below the intrinsic value of at least forty to fifty percent is desirable.

Explanation

Enterprise value, in theory, represents the entire cost of a company if someone were to acquire it. Enterprise value is a more accurate estimate of takeover cost than market capitalization because it takes includes a number of important factors such as preferred stock, debt, and cash reserves.

Intrinsic Value = EPS x (9+2*Sustainable Growth Rate

Explanation

Here is the explanation for the formula: EPS: the company’s last 12-month earnings per share; G: the company’s long-term (five years) sustainable growth estimate; 9: the constant represents the appropriate P-E ratio for a no-growth company as proposed by Graham (Graham proposed an 8.5, but we changed it to 9); 2: the average yield of high-grade corporate bonds.

The intrinsic value of DSX has an erratic movement. In 2008 it was very low but jumped up to 654% in 2009 and trending down by an average of 19% up to 2012 ttm.

Explanation

The return on equity was 7.99 in the trailing twelve months.

Explanation

The graph shows that the intrinsic value (IV) line was below the enterprise value (EV) line in 2007, and the point of intersection was in 2008, and it goes up higher in 2009 from $14 to $56.39 with a percentage of 403%. and slightly going down at an average of 19% from 2010 to 2012 TTM.  This shows that the enterprise value or the price was lesser than the true value, therefore the price was cheap from 2009 to 2012 TTM. The margin of safety was 77% average over the intrinsic value.

According to Graham, when a market price is considerably lower than the intrinsic value by a minimum of 40-50%, then he would consider buying.  It shows that the price was lesser than the intrinsic value by 45% average from 2007 to 2012 TTM. The buying price for the entire company would be $597 at $7 per share of stock.

DSX Relative Valuation Method

This method of valuation is used to compare the market values of the stock with the fundamentals of the stock.

Price to Earning*Earning Per Share (P/E*EPS)

The PE*EPS ratio indicates that the price was higher than the PE*EPS ratio in 2007 and 2008, telling us that the price was trading at an overvalued price. On the other hand, from 2009 to 2011 and the TTM, the price is equal to the PE*EPS ratio, indicating that the stock price is trading at fair value.

Explanation

By using the average price to earnings ratio in P/E*EPS valuation it produces a higher result than by using the relative price to earnings ratio. The P/E*EPS result was greater than 17% in using average price to earnings ratio. EPS serves as an indicator of a company’s profitability.

Enterprise Value/Earning Per Share (EV/EPS)

Another use of this ratio is by dividing the enterprise value per share by its projected earnings per share (EPS).   The price to earnings (P/E) was 40% average, whereas, the price was averaging 60%. On the other hand, using the average price to earnings ratio, the price is 107% and the earnings are -7%.  In 2007 to 2012 price was 58% and the earnings were 42%. Based on the relative Price to Earnings ratio, the price was trading at an overvalued price.

Enterprise Value (EV)/Earnings Before Interest, Tax, Depreciation, and Amortization (EBITDA) or EV/EBITDA)

This metric is used in estimating business valuation. It compares the value of the company inclusive of debt and other liabilities to the actual cash earnings exclusive of non-cash expenses. This metric is useful for analyzing and comparing profitability between companies and industries. It gives us an idea of how long it would take the earnings to pay off the price of buying.

Enterprise value is the value of the company. While EBITDA is net income with interest, taxes, depreciation, and amortization. EV/EBITDA tells us the investor will cover up the purchase price in cash in 6 years. However, in TTM, it will take 4 years of the earnings of the company to cover the costs of buying.

Conclusion

The current market price as to date, 8/22/2012 was $7.07 and the margin of safety is 55%. It exceeds Benjamin Graham’s requirement in buying at 40-50% margin of safety. Therefore, I recommend a BUY for the stocks of Diana Shipping Inc (DSX).

Written by Cris

kingstone-companies-inc-kins

Kingstone Companies Inc (KINS) Cash Activities Slumped

August 30th, 2012 Posted by Company Research Report No Comment yet

Kingstone Companies, Inc. (KINS), which has its headquarters in Kingston, New York, provides property and casualty insurance products through its subsidiary, Kingstone Insurance Company. Wikipedia

Balance Sheet

Liquidity

Liquidity is the ability of the firm to convert assets into cash. It is also called marketability or short-term solvency. The liquidity of a business firm is usually of particular interest to its short-term creditors since the liquidity of the firm measures its ability to pay those creditors. Current resources of the Kingstone are still sufficient to pay off its current obligation as the business continues to run. Being an insurance company, there was no inventory involved. Let’s have a further review of the liquidity of the company from 2007 to 2011 through the results below:

Facts

  • Current ratio in percent was .94, .75, 5.60, 4.50 and 2.29. Average of 2.81. The current ratio is calculated by dividing the current asset by current liabilities. The average current ratio of Kingstone was 2.81, which means that the current asset of the company is 281 percent against its current liabilities.
  • Quick ratio in percent was .94, .75, 5.60, 4.50 and 2.29. Average of 2.81. The company’s monetary resources are also 281 percent higher than its current liabilities.
  • Working capital in dollars was -1, -1, 23, 21 and 18. Average of 12. Kingstone’s working capital showed negative results in 2007 and 2008, however, it immediately recovered high in 2009  at $23 but slightly decreased from 2010 to 2011 by $2 and $3 respectively.

Explanation

Usually, a company acquires inventory on credit, which results in accounts payable. A company can also sell products on credit, which results in accounts receivable. Cash, therefore, is not involved until the company pays the accounts payable and collects accounts receivable. So the cash conversion cycle measures the time between outlay of cash and cash recovery. For Kingstone, we could not calculate its cash conversion cycle since the company has no inventory and no accounts payable balance.

Leverage

Leverage is a business term that refers to borrowing. If a business is “leveraged,” it means that the business has borrowed money to finance the purchase of assets. The other way to purchase assets is through the use of owner funds or equity. Leverage is not necessarily a bad thing. It is useful to fund company growth and development through the purchase of assets. But if the company has too much borrowing, it may not be able to pay back all of its debts.

One way to determine leverage is to calculate the debt-to-equity ratio, showing how much of the assets of the business are financed by debt and how much by equity (ownership). For Kingstone Companies Inc., debt ratio, debt to equity ratio and solvency ratio from 2007 to 2011 are as follows:

Facts

  • Debt ratio was .74, .44, .79, .78 and .77. Average of .71, which means that the company’s debt capital average was 71 percent of its total assets.
  • Debt to equity ratio was 2.83, .80, 4.20, 3.54 and 3.60. Average of 2.99. The company’s debt has an average of 299 percent of shareholders’ equity.
  • Solvency ratio was 0, 0, .09, .05 and .07. Average of .04, which means that Kingstone is only 4 percent solvent.  Solvency is the ability to pay all debt obligations as they became due.
  • Current liability to total asset was .70, .44, .09, .10 and .20. Average of .31 which means that the average current liabilities was 31 percent of its total assets, so the creditors have 31 percent claims on the total assets of Kingstone.
  • Stockholders’ equity to total assets was .26, .56, .19, .22 and .21. Average of .29. The average owners’ equity was 29 percent of total assets, therefore, the shareholders have only 29 percent claims on the total assets of the company.

Based on the analysis, Kingstone Companies Inc. is in deep debt and has only a 4 percent chance of paying all debt obligations. Therefore, the company needs close monitoring before a decision is made.

Asset Management

Property, plant, and equipment (PPE) is consists of assets that are tangible and relatively long-lived. The firm has acquired these assets in order to use them to produce goods and services that will generate future cash inflows. These are recorded at cost upon acquisition. Fixed asset turnover ratio measures the company’s effectiveness in generating sales from its investments in PPE. It is especially important for a manufacturing firm that uses a lot of plant and equipment in its operations to calculate this ratio.

  • For Kingstone, its fixed turnover ratio has an average of 5.80. It is just fair enough considering the value of the company’s investment in property, plant, and equipment.
  • Kingstone has not invested much in the fixed asset as shown on the balance sheet statement, its fixed asset in the year 2007 and 2008 was fully depreciated, while there’s a remaining balance of $2 per period for the year 2009 to 2011 respectively.

And now Nelly will give us the second part…the income statement.

Income Statement

Kingstone Companies Inc. deals with DCAP Group, which is an independent storefront insurance agency that offers automobile, motorcycle, boat, life, business, and homeowners insurance.

Profitability

Let us have a view on their profitability. To compute for this, we have what we called profitability ratios or metrics used to know the ability of the company to generate earnings against expenses. For Kingstone, results are as follows:

  • Net margin in percent was -0.83, -107.24, 62.88, 4.55 and 9.04. This simply is the after-tax profit a company generated for each dollar of revenue.
  • Asset turnover was 0.24, 0.06, 0.25, 0.39, and 0.43. This measures the efficiency of the company to convert its assets into revenues.
  • Return on assets was -0.20, -5.98, 15.54, 1.77 and 3.90. This tells us how much profit the company generated for each dollar on total assets.
  • Financial leverage was 3.78, 1.79, 5.07, 4.53 and 4.55. This measures the financial structure ratio of the company base on total assets against total stockholders equity.
  • Return on equity was -0.78, -17.12, 61.64, 8.43, and 17.72.  The company could return such profit percent for every dollar of equity.
  • Return on invested capital was -0.33, -12.20, 52.63, 7.60 and 16.27. This is a financial measure that quantifies how well a company generates cash flow relative to the capital it has invested in its business.

Explanation

In terms of profitability, the net profit margin showed a decrease in 2007 to 2008 of -0.83 and -107.24 which reflected a decrease in net income, too. In 2009 net margin abruptly increase to 62.88 percent, however, it declined in 2010 and 2011 to 4.55 and 9.04 percent, respectively. Asset turnover dipped down in 2008 but increase back from 2009 to 2011. It showed that Kingstone was greatly affected during the financial crisis in 2008 that is why it is difficult to earn revenues from their assets. Return on assets showed a decrease for the first two years, then it abruptly increased in 2009 too but dropped down in 2010 and a slight increase in 2011. This means that earnings from total assets were unpredictable, especially with the decrease net income for 2007 and 2008.

Interpretation

Financial leverage marked an up and down trend. The debt was also unpredictable in relation to total assets and total stockholders’ equity. It was high in 2009 of 5.07 and low in 2008 by 1.79. So, their return on equity decreased in 2007 and 2008, and then it was very impressive in 2009 with a high increase of 52.63. A decrease again in 2010 and but recovered back in 2011 by 16.27. This means that earnings on equity were very profitable in 2009 and they gradually earned back in 2010 and 2011 in reference to their losses in 2007 and 2008. Their return on invested capital generated a cash flow showing a fair return on the capital invested in the business with an average of 12.79.

Revenue

When it comes to income from 2007 to 2012 1st quarter, Kingstone marked the following results:  

  • Revenue in million dollars was 6, 1, 8, 22, and 28, with an average of 13.  Its 2012 1st quarter was 7. This was the company’s total earnings.
  • Operating income was -1, -1, 0, 2, and 4.  Its 2012 1st quarter was 1. This was the company’s income after deducting all operations expenses.
  • Income before taxes was -1, -1, 5, 2, and 4.  Its 2012 1st quarter was 1. This was the income after interest and other income and expenses.
  • Net income was 0, -1, 5, 1, and 3. Its 2012 1st quarter was 1. This was the company’s income after deducting income taxes.

Explanation

The company’s revenue showed a good start. Average depicted 13 million dollars and 2012 1st quarter was 7, so therefore it is more than one-half of average, meaning revenue is definitely increasing favorably. Its operating income was down the first three years in 2007 to 2009 but recovered in 2010 and 2011 of 2 and 4 million dollars, respectively. This means operating margin was -24.24, -111.81, -2.85, 8.56 and 12.97 from 2007 to 2011. This was a hopeful figure that eventually operations had recovered definitely so as to their income before tax margin of -9.49, -64.41, 65.48, 8.56, and 12.97. Their net income has a net margin of -0.83, -107.24, 62.88, 4.55 and 9.04 from 2007 to 2011. Thus, net income was profitable in 2009 with an impressive net margin and the succeeding years had been fair enough.

Expenses

What about the expenses incurred by Kingstone Companies Inc. from 2007 to 2011 as well as its 2012 first quarter?

  • Operating expenses was 7, 2, 8, 20 and 24, with an average of 12.20 and its 2012 1st quarter of 6.
  • Interest expense was 1 in 2007 and none for the following years with an average of 0.20.
  • Other income and expense were 1, 1 and 6 in 2007 to 2009 and none for 2010 and 2011 with an average of 1.6.
  • Provision for income taxes was 1 and 1 in 2010 and 2011, with an average of 0.40.
  • Income from discontinued operations was 1 in 2008, with an average of 0.20.

Considering the company’s expenses, they don’t have the cost of revenue and their operating expense accounts for 93.84 percent of revenue. This means their margin for other income and expenses would be more or less than 7 to 6 percent, which is very low. While interest expense was 1.53, other income and expense were 12.33, provision for income taxes was 3.07 and income from discontinued operations was 1.53. Therefore, net income accounts an average of 12.30.

Conclusion

“In conclusion, I can say that insurance business is very lucrative and unpredictable business for I also worked in an insurance company for almost eight years. Revenue was likely unpredictable because this would greatly depend on the finances of the persons, business, and corporate entity. If they don’t have excess funds they would just forgo insurance or get just a minimum coverage or protection. Another thing is that sometimes if insurance is yearly renewable, the company renew this policy without payment and this accounts for the increasing accounts receivables. In the U.S. wherein people or employers are very keen on getting protection as a must, so, therefore, this is indeed a lucrative business,” Nelly explained.

And now, you will find the cash flow for Kingstone Companies Inc. from 2007 to 2011 which was summed up by Dyne.

Cash Flow

Cash flow statement is the primary indicator of business health. It will determine how effective cash flow management will help protect the financial security of its business.

Cash Flow from Operating Activities

The net cash provided or used by operating activities was a net cash remained after considering the result of the net income; add/deduct any changes in the working capital and also the non-cash items which relate to the operation. In KINS, the following accounts affect the result of cash flow from the operation:

  • Net income in $ million was 0, -1, 5, 1 and 3.
  • Other working capital was 0, 1, 2, 1 and 5
  • Other non-cash items was -1, 0, -5, 0 and -1
  • Net cash provided by operating  activities was 0, -1, 1, 4 and 7

The result of cash flow from operating activities of KINS was progressive, it indicates that from 2007 to 2008 was their downturn, due to the net loss; but for the remaining three years which from 2009 to 2011 the net cash provided grew by 87 percent in contribution of working capital which represents a 60 percent increase.

Cash Flow from Investing Activities

Cash from investing activities was an activity of the cash where the company utilizes it. As reviewed, Kingstone Companies Inc. is basically a provider of insurance products to small and medium businesses also to individuals. The following are where the company used its cash:

  • Investment in property, plant, and equipment was zero.
  • Acquisitions, net was 1, 0, 0 from 2009 to 2011
  • Purchases of investments were -8, -10 and -13 from 2009 to 2011
  • Sales/maturities of investments were 4, 6 and 6 from 2009 to 2011
  • Other investing activities was 2, 1, 2, 0, 0
  • Net cash used for investing activities was 2, 1, 0, -4 and -7.

The cash from investing activities of KINS was notable. Being an insurance provider they are more focus on the purchase of investment instead of PPE. It means, while waiting for the maturity of each of their plan holder, they used it first for investment. It results, the net cash for investing from 2007 to 2008 was positive which the inflow was exceeding the outflow or while 2010 and 2011 were in negative result due to the purchase of investment went up by 23 percent.

Cash Flow from Financing Activities

Below was the result

  • Debt issued from 2009 to 2011 was 1, 0 and 0
  • Debt repayment from 2008 to 2011 was -1, -1, 0 and -1
  • Common stock issued was zero for five years.
  • Common stock repurchased was zero for five years.
  • Dividend paid for five years was zero.
  • Other financing activities was -2, -1 and zero from 2009 to 2011.
  • Net cash provided by (used for) financing activities was -2, -1, 0, 0 and -1

Results showed that cash from financing activities of KINS was in a slump. In 2009 and 2010 shows no activity. It means the company was very conservative in financing that it was declining all throughout their five years of operation.

Cash Flow Efficiency

Net change in cash will help us determine how much cash coming in and out per one accounting cycle. This can be use as the basis for management decision in planning for their future growth. Kingstone’s outflow has exceeded their inflow as shown below:

  • Net change in cash was 0, -1, 0, 0 and 0
  • Cash at beginning of period was 1, 1, 0, 1 and 0
  • Cash at end of period was 1, 0, 1, 0 and 0

The free cash flow was the result using the operating cash flow less the amount of capital expenditure and also dividend. Below were the results:

  • Operating cash flow was 0, -1, 1, 4 and 7
  • Capital expenditure was zero
  • Free cash flow was -1, -1, 1, 4 and 7

Explanation

The operating cash flow ratio measures how much cash from the operation can cover the short-term obligation of the company. Below was the result:

  • Net cash provided by operating  activities was 0, -1, 1, 4 and 7
  • Total current liabilities was 16, 4, 5, 6 and 14
  • The operating cash flow ratio in percentage was 0, -25, 20, 67 and 50

The operating cash flow ratio result that in every $1 of debt the company equivalent cash available was 0. -.25, .20, .67 and .50 from 2007 to 2011. It tells us, they have no sufficient cash from the operation to cover its short-term debt.

The total debt ratio measures how much cash from the operation available to pay its total debt. The following was the result of KINS:

  • Net cash provided by operating   activities was 0, -1, 1, 4 and 7
  • Total liabilities was 17, 4, 42, 46 was 54
  • The total debt ratio indicates, in every $1 of total debt the company available cash was 0, -.25, .02, .09 and .13. It means the company had no enough funds for their total debt.

Written by Nelly, Rio, and Dyne

Edited by Cris

Kingstone Company’s Excellent Customer Service

August 30th, 2012 Posted by Company Research Report No Comment yet

Who started Kingstone Companies Inc and why?

What makes insurance companies important is that they help us pay things we pretty much can’t cover. My mom used to work for this company that offered not only her health insurance but to me and my dad as well. Pretty neat, don’t you think? With that, we kept going back and forth trying to avail of the offer. And since we’re talking about insurance products here, why don’t you allow me to open up to you the doors on our company research about Kingstone Companies Inc (KINS).

Kingstone Companies Inc. was formerly known as DCAP Group, Inc. and was founded in 1961. Barry Goldstein is 10 percent owner of KINS. The Co-Operative Fire Insurance Company was organized in 1886. The first officers were John H. Bagley, Jr., Omar V. Sage, and Clarence E. Bloodgood. The company offers technical assistance in the establishment and/or operation of insurance agencies and insurance brokerage businesses.

A cooperative or co-operative, as what Meriam and Karla have revealed to me, is an autonomous association of persons who voluntarily cooperate for their mutual social, economic, and cultural benefit. Cooperatives include non-profit community organizations and businesses that are owned and managed by the people who use its services (a consumer cooperative) and/or by the people who work there (a worker cooperative)

What is the background of the company? Its history and development?

So basically, they did not just emerge out of nowhere, right? There has got to be some explanation behind every success, or so we thought. Florence and Karla have listed some really awesome facts about their background, history and development as well.

  • The company was founded in 1886, with its headquarters in Kingston, New York
  • Kingstone Companies Inc. redeemable preferred stock has been reported as a liability of $1,299,231 on December 31, 2009
  • On April 17, 2009, Kingstone Companies Inc. sold all of its assets
  • The company acquired KICO on July 1, 2009
  • From June 2009 to March 2010, KINS borrowed $1,450,000 and issued promissory notes in such huge amount
  • The company issued 787,409 shares of common stock in exchange for 1,299 shares, effective on June 30, 2010
  • In 2011, KINS received a license to write property and casualty insurance in Pennsylvania
  • In 2011, the company declared its first quarterly dividends on common stock
  • On July 11, 2011, the company reduced the interest rate from 12.625% to 9.5% per annum
  • The company obtained a $500,000 line of credit on December 27, 2011
  • The A.M. Best rating for KICO was upgraded from B (Fair) to B+ (Good) last 201

What is the nature of business?

As far as I know, an insurance company is equal to insurance. That’s just about it. What I don’t know is that KINS is actually more than that. As a matter of fact, they are the leading regional provider of insurance products intended for small, middle sized business and of course, for individuals as well. It modified itself from a broker into an underwriter, where insurance is still its main business. The company performs two lines of business, franchising, ownership and operation of storefront insurance agencies and premium financing of insurance policies. Its focus is on automobile, motorcycle and homeowners insurance and their customer base is mainly individuals rather than businesses. In addition, Kingstone Companies Inc. is the parent company of Payments, Inc., an NYS licensed Insurance Premium Finance Company.

When asked what insurance was, all I could blurt out is “Oh, you know…that stuff when people get paid for, when something broke…” Silly me. With that, I asked help from Meriam and Karla about it. They said, “Insurance is a form of risk management used to hedge against the risk of a contingent, unsure loss. Insurance means the equitable transfer of the risk of a loss, from one entity to another, in exchange for payment. An insurer is a company selling the insurance. The insured, or policyholder, is the person or entity buying the insurance policy. The amount to be charged for a certain amount of insurance coverage is called the premium. Insurance is also defined as the equitable transfer of the risk of a loss, from one entity to another, in exchange for payment.”

Who is running Kingstone Companies Inc and their background?

A company would never ever function without the proper people who are only but fitting in their positions. So for Kingstone Companies, Inc., they are led by a team of executive personnel namely: Mr. Barry B. Goldstein, the Chief Executive Officer and Chief Financial Officer in the person of Mr. Victor Brodsky.

Mr. Barry B. Goldstein is the President, Chief Executive Officer and Chairman of the Board of Kingstone Companies Inc. He held several executive positions in the company such as Treasurer and Chief Financial Officer. He also previously served in AIA Acquisition Corp as President for 7 years. He has extensive experience in insurance and investment industry. He earned a B.A. and M.B.A. from the State University of New York at Buffalo.

Mr. Victor Brodsky is the Chief Financial Officer and Secretary of Kingstone. He was previously connected to Vertical Branding Inc. Mr. Bradsky holds a BBA degree with the accounting major from Hofstra University. He spent 16 years of his career in Michael &Adest firm in New York. He is also a certified CPA in New York.

There are loads of courses in college that any person with the heart in Business Administration could possibly take. And one of them is the Master of Business Administration (MBA or M.B.A.). It is a master’s degree in business administration, which attracts people from a wide range of academic disciplines. The MBA (Master of Business Administration) is a postgraduate degree that is awarded to students who have mastered the study of business. The MBA degree is thought to be one of the most prestigious and sought after degrees in the world.

Who is directing the company? How are the committees structured?

Aside from the people who are running the company, there has got to be someone directing it. Janice and Karla have whipped up some of the information we oh-so need, including on how their committees are structured.

Kingstone Companies Inc. has three committees with four independent directors and a chairman of the board. The committees are audit, compensation, and nominating committee. Mr. Barry B. Goldstein is the current chairman of the board. For the committee members, they are the following: 

Mr. Jay Haft, 76, is an independent director and member of the board of directors. He is a strategic and financial consultant with extensive experience in the Russian market. He has been the director of the company since July 2009. Mr. David A. Lyons, 62, is a non-executive member of the board. He is an expert in business consultation, corporate finance, and mergers and acquisitions. He has been with the company as the director since July 2009. At 51, Mr. Jack D. Seibald is the independent director of the company. He has depth knowledge in administrative service, equity research, investment management and prime brokerage service. He has been a member of the board since the year 2006. Lastly, is Mr. Michael R. Feinsod. At 41, is a non-independent director of Kingstone. He is an investment analyst, broker-dealer, and expert in finance, legal services. He served the company since July 2009 as director.

Once you feed anything that has to do with business and numbers into my brain, absolutely sure I will ask again. Maybe I was probably programmed that way since the day I was born. So for the nth time, I had to seek some help from our research team. Why they still haven’t pulled my hair out because I ask too much? That I don’t know. (Smile)

Corporate finance is the area of finance dealing with monetary decisions that business enterprises make and the tools and analysis used to make these decisions. The primary goal of corporate finance is to maximize shareholder value. Although the principle is different from managerial finance which studies the financial decisions of all firms, rather than corporations alone, the main concepts in the study of corporate finance are applicable to the financial problems of all kinds of firms.

How do they make money?

Okay. Here goes. I got sick of dengue last November. With that, my mom was just thankful enough that she works for a company that offers insurance for her family because if not, I would have rotted to death because of losing blood. (Okay, maybe not. But still!) So because of that, it came to me, how does one insurance company make money anyway? That question lingered on because no one has answered me until then. With Janice and Karla’s report, I somehow knew.

Kingstone believes that consistent provision of excellent customer service to its policyholders, producers and claimants is one of the key successes to the financial growth of the company. The company derives its revenue from their two prime subsidiaries, the KICO and Payments Inc. KICO’s sales are from the earned premiums, ceding commissions, from quota share reinsurance, investment income and net realized and unrealized gains and losses on investment securities.

Cash earnings of the company are derived from the premium finance loans, the collection of principal and interest income. The company receives certain interest and dividends from the invested assets wherein it is recognized when investment securities are sold for more than their costs or amortized costs. Another income of the company is from installment fee and fee charged to reinstate policy and premium finance fee on loans.

Underwriting refers to the process that a large financial service provider (bank, insurer, investment house) uses to assess the eligibility of a customer to receive their products (equity capital, insurance, mortgage or credit). Underwriting is one of the aspects of insurance that makes most people’s eyes glaze over. Underwriters deal with statistics — they’re number crunchers. Many people who have an insurance policy don’t even know that at some point their application passed through an underwriter’s hands. Oh great. Thanks research team for the additional information.

How do they fit into the industry they operate in?

It’s a tough world out there once you get all weakling and all. There will be competitors along the way but hey, KINS isn’t stepping out of their game that soon, as far as our research team has dug up.

KINS top competitors are American International Group, Inc., New York, NY, the Allstate Corporation Northbrook, IL Government Employees Insurance Company and Washington, DC. Barry Goldstein, KINS Chairman, and CEO, is not convinced with some competitor’s ‘one size fits all’ on-line only approach. Automobile insurance business competes with numerous agents and brokers in the market. They competed with insurers like GEICO Insurance which sells insurance policies directly to their customers. Operation and financial condition might be affected by a loss of business to competitors who render similar services.

We got this insurance package years ago by some company my grandfather worked in. But of course things aren’t always the same with every company, right? An insurance package that assembles the basic coverage required by a business owner in one bundle, as what Meriam and Karla could possibly recall, is called Business Owner Policy or BOP. It is also a combined protection from all major property and liability risks in one package. It is usually sold at a premium that is less than the total cost of the individual coverage. BOP targets small and medium-sized businesses and typically contains business interruption insurance, which provides reimbursement for up to a year of lost revenue resulting from an insured property loss.

Who are their suppliers and customers?

For suppliers and customers, Meriam and Karla have rounded up some valuable information about that. Let’s read on below.

KINS’ products are comprised of personal lines, commercial automobile, for-hire vehicle physical damage only policies, private passenger physical damage, general liability policies and canine legal liability policies. The personal line refers to property insured, while automobile policies are for different vehicles including private passenger physical damage.

Through its subsidiary, KINS companies offer property and casualty insurance products to small businesses and people in New York, likewise, contracts with a third party licensed premium finance company. Services are offered through independent retail and wholesale agents, and brokers. The company provides its services priority in New York and eastern Pennsylvania.

Wholesale insurance broker… what are they? A wholesale insurance broker, as defined by Meriam and Karla, may be the perfect resource for those who have been unable to find coverage anywhere else. Most individuals are familiar with using traditional insurance agents to locate appropriate policies, while there are independent retailers who are the source of much of what is new and different.

What is their workforce like?

Since we’ve pretty much covered the little details, let’s move on to their workforce. What is it like working under one heck of a company like KINS?

Kingstone is dedicated to their customers through promoting personal service which made the company successful.

The company makes business through independent retail, wholesale agents and brokers. As of December 31, 2011, Kingstone has a total of 49 employees all of whom are located in New York. KINS is highly dependent on the successful and uninterrupted functioning of the information technology. Insurance producers are also the company’s partners in business.

Insurance producers, from what I heard from Janice and Karla, are licensed professionals who sell and serve insurance products. Producers may become licensed to sell property and casualty products such as auto or homeowner insurance, or life and health insurance products like medical insurance and term life insurance.

How do they treat their employees? What are the pay and working condition like?

 It’s very important that a company not only focuses on what others see on the outside but also how they give attention and treat their employees. Janice and Karla have some report on their pay and working conditions too. The company believes they have a good working relationship with their employees. None of the employees were covered by a collective bargaining agreement.

Kingstone management and personnel follow certain company code of ethics policy. Non-executive director receives a retainer’s fee annually, attendance fee per board and committee meeting attended and the additional fee for committee chair. Executives like the president receive the following compensation: annual base salary, annual bonus, stock option award and other incentives per employment agreement. They adopted the 2005 Equity Participation Plan which provides issuance of incentive stock options, non-statutory stock options and restricted stock to eligible executive and employees. Insurance producer receives excellent, consistent personal service coupled with competitive rates and commission levels from the company.

I should probably learn some words of a business or numbers dictionary. This is getting confusing. Gladly, Janice and Karla were there to aid my concerns regarding policyholder. The policyholder is an entity that owns an insurance policy and has the right to exercise all privileges under the contract of insurance, except where restricted by the rights of an assignee. A policyholder may or may not be the insured, or the sole or one of the beneficiaries of the policy. They are also called policy owner. 

Compensation Table

The table below shows the pay structure of executives and directors of KINS from fiscal years 2007 to 2011.

kins pay structure

Gossips

There. We’re almost done. Florence and Karla have just decided to give you one final summary to clear up any uncertain horizons in your mind.

APRIL 27, 2012, OLDWICK, N.J., reported that A.M Best Co. has affirmed the financial strength rating of B+ (Good) and issuer credit rating (ICR) of “bbb-” of Kingstone Insurance Company (Kingstone) (Kingston, NY). The outlook for all ratings was stable. The ratings and outlook reflect Kingstone’s adequate capitalization, favorable operating performance, moderate investment leverage ratios and local market knowledge in New York.

From bloomberg.com datedMarch 01, 2011, Kingstone Insurance Company extended employment agreement with John Reiersen to serve as Executive Vice President effective January 1, 2012, Barry Goldstein to succeed as President and CEO. Sam Yedid, a director of KICO and Chairman of its Compensation Committee, stated, “The amendment that KICO has entered into with John Reiersen is important to its long-term stability. Our Board is very pleased that this will ensure a smooth transition for KICO of CEO responsibilities to Barry Goldstein as well as continued guidance and assistance from John for the foreseeable future. The combination of Barry’s excellent management abilities and John’s vast industry experience bodes well for the future of KICO.”

Earlier on April 17, 2009, another report, DCAP Group announced the closing of a sale of 16 retail insurance. “Proceeds from the sale will be used to reduce the company’s indebtedness,” said Victor Brodsky, DCAP’s Chief Accounting Officer.

On May 7, 2009, DCAP announces a sale of a franchise business. “In this difficult marketplace we have been able to dispose a number of businesses at a price approximating book value,” said Victor Brodsky, DCAP’s Chief Accounting Officer.

Kingstone Companies Inc. gained a positive image and reputation after receiving a good rating along with its subsidiary, Oldwick. The good rating reflected the company’s great performance with regards to their revenues and income. The extension of John Reiersen’s employment to serve as Executive Vice President could impact the company’s operation as Mr. Reiersen has been driving force in further developing and improving KICO. However, with DCAP Group Inc., former name of the company, the downfall they have experienced before was with selling their retail agencies to reduce the company’s indebtedness.

 CITATIONS

Who started the company and why?

http://www.kingstoneinsurance.com/

http://trade.mar.cx/US77480679

http://finance.yahoo.com/q/pr?s=KINS

What is the background of the company? Its history and development?

http://www.sec.gov/Archives/edgar/data/33992/000135448812001575/kins_10k.htm

http://www.kingstonecompanies.com/about.asp

http://www.google.com/finance?q=NASDAQ:KINS

http://www.reuters.com/finance/stocks/companyProfile?rpc=66&symbol=KINS.O

http://www.sec.gov/Archives/edgar/data/33992/000135448812001575/kins_10k.htm

http://www.sec.gov/Archives/edgar/data/33992/000135448812001575/kins_10k.htm

What is the nature of the business ?

http://marketpublishers.com/report/insurance/kingstone_companies_inc_swot_analysis_bac.html

http://www.answers.com/topic/dcap-group-inc

http://pro.edgar-online.com/ipo.aspx?ColLeft=613ecf6a-b2a7-4b42-a0c8-809161372aec&ColRight=76baaeb6-2549-44f5-8e1d-cd700701e704&ci  

http://www.kingstonecompanies.com/about.asp

http://www.sec.gov/Archives/edgar/data/33992/000135448812002558/kins_10q.htm

Who is running the company and their background?

http://www.sec.gov/Archives/edgar/data/33992/000102177112000036/proxystatement2012.htm

http://www.kingstonecompanies.com/execteam.asp 

http://www.reuters.com/finance/stocks/officerProfile?symbol=KINS.O&officerId=186620

http://www.sec.gov/Archives/edgar/data/33992/000135448812001575/kins_10k.htm p48

http://www.kingstonecompanies.com/execteam.asp?rec_id=100026

http://www.reuters.com/finance/stocks/officerProfile?symbol=KINS.O&officerId=1033484

Who is directing the company? How are the committees structured?

http://www.sec.gov/Archives/edgar/data/33992/000102177112000036/proxystatement2012.htm p16

http://www.sec.gov/Archives/edgar/data/33992/000102177112000036/proxystatement2012.htm p16

http://www.sec.gov/Archives/edgar/data/33992/000102177112000036/proxystatement2012.htm p16

How do they make money?

http://www.sec.gov/Archives/edgar/data/33992/000135448812001575/kins_10k.htm  p39

http://www.sec.gov/Archives/edgar/data/33992/000135448812001575/kins_10k.htm  p2

http://www.sec.gov/Archives/edgar/data/33992/000135448812002558/kins_10q.htm  p36

http://www.sec.gov/Archives/edgar/data/33992/000135448812002558/kins_10q.htm  p36

http://www.sec.gov/Archives/edgar/data/33992/000135448812001575/kins_10k.htm  p20&21

How do they fit into the industry they operate in?

http://investing.businessweek.com/research/stocks/snapshot/snapshot_article.asp?ticker=KINS:US

http://www.sec.gov/Archives/edgar/data/33992/000135448812002558/kins_10q.htm  p25

http://pro.edgar-online.com/ipo.aspx?ColLeft=613ecf6a-b2a7-4b42-a0c8-809161372aec&ColRight=76baaeb6-2549-44f5-8e1d-cd700701e704&cikid=

Who are their suppliers and customers?

http://www.reuters.com/finance/stocks/companyProfile?rpc=66&symbol=KINS.O

http://investing.businessweek.com/research/stocks/snapshot/snapshot.asp?ticker=KINS:US  

http://investing.businessweek.com/research/stocks/snapshot/snapshot_article.asp?ticker=KINS:US

http://www.answers.com/topic/dcap-group-inc

What is their workforce like?

http://www.sec.gov/Archives/edgar/data/33992/000135448812001575/kins_10k.htm  p5

http://www.sec.gov/Archives/edgar/data/33992/000135448812001575/kins_10k.htm  p16

http://www.sec.gov/Archives/edgar/data/33992/000135448812001575/kins_10k.htm  p45

http://www.commercialmutual.com/

How do they treat their employees; what are the pay and working condition like?

http://www.sec.gov/Archives/edgar/data/33992/000135448812001575/kins_10k.htm  p51

http://filings.issuerdirect.com/viewer/index/33992/000102177112000036/  p6

http://www.sec.gov/Archives/edgar/data/33992/000102177112000036/proxystatement2012.htm  p4

http://www.sec.gov/Archives/edgar/data/33992/000102177110000043/q.htm  p19

Gossips

http://www.marketwatch.com/story/am-best-affirms-ratings-of-kingstone-insurance-companies-inc-and-its-subsidiary-2012-04-27

http://www.bloomberg.com/apps/news?pid=conewsstory&tkr=KINS:US&sid=aVILv0OGzRIU

http://www.bloomberg.com/apps/newspid=newsarchive&sid=aCWiHubpWSqc 

http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aUjbmYYw1J.c 

Researched and Written by Meriam, Janice, and Karla

Edited by: Stephanie  and Maydee

investment-technology-group-inc-itg

Investment Technology Group Inc (ITG) Company Research

August 24th, 2012 Posted by Company Research Report No Comment yet

This section of our article will give you the guide to value investing in how the financial status of Investment Technology Group Inc (ITG) goes along in the business.

Balance Sheet

For stock investors, the balance sheet is an important consideration for investing in a company because it is a reflection of what the company owns and owes. The strength of the company’s balance sheet can be evaluated by working its capital adequacy, asset performance, and capitalization structures.

Financial Liquidity

Financial liquidity of Investment Technology Group is good as far as its current resources are concerned. It has plenty of cash to settle its current as well as long term obligations. To compute for this, we used the current ratio, quick ratio, and working capital from 2007 to 2011 and the results were indicated below:

  • The current ratio in percent was 1.12, 1.24, 1.31, 1.11 and 1.22. Average of 1.18. The company’s proportion of current assets is 122 percent against its current liabilities.
  • The quick ratio in percent was 1.12, 1.24, 1.31, 1.11 and 1.22. An average of 1.18, which means that its monetary assets are 18 percent more than its current liabilities.
  • Working capital in dollars was  150.93, 189.48, 236.09, 170.77 and 169. Average of $183.25. ITG’s working capital showed a positive balance throughout its five year period with an average of $183.25. It means that the company is able to pay off its current and long term obligations.

Leverage

Based on the company’s performance through financial leverage ratio calculations, there was a need to continuously observe and monitor if the company could generate enough funds out of its resources to continuously run its business operation without additional borrowings made.

Another way to measure the financial stability of a company is through its financial leverage. Every investor should want to know if the business he wanted to invest in is not in depth debt. It is not bad to borrow money from banks or other creditors provided that such is closely monitored and no lapses in repayments. Let us find out the financial leverage ratio of ITG from 2007 to 2011 on the data below:

  • The debt ratio in percent was .66, .53, .49, .66 and .69. An average of .61 or 61 percent of the total assets of the company was owed from creditors.
  • Debt to equity ratio in percent was 1.98, 1.14, .96, 1.91 and 2.25. Average of 1.65. This means that ITG’s debt is equivalent to 165 percent average against its equity.
  • Solvency ratio was .08, .13, .05, .01 and 0. An average of .05. It means that the company is only 5 percent solvent. This is unhealthy.
  • Current liability to total asset was .60, .47, .45, .64 and .67. An average of .57. This shows us that the creditors have 57 percent claims on the company’s total assets.
  • Stockholders’ equity to total assets was .34, .47, .51, .34 and .31. An average of .39, which means that the owners or shareholders have only 39 percent claims on ITG’s total assets.

Asset Management

There are several general rules that should be kept in mind when calculating asset turnover. First, asset turnover is meant to measure a company’s efficiency in using its assets. The higher the number, the better;  but investors must be sure to compare a business in its industry since it is a misconception to compare completely unrelated businesses. In relation to the profit margin, the higher a company’s asset turnover, the lower its profit margin tends to be (and vice versa). For ITG, its fixed asset turnover ratio has an average of 15.64.

We would say that earnings of ITG  are classified into high quality when expressed as EBITDA since it is exclusive of the estimated amount. Earnings are important to shareholders because dividends are paid based on annual earnings. Sometimes earnings are expressed as EBIT (earnings before interest and taxes), or EBITDA (earnings before interest and taxes, depreciation and amortization. Earnings per share (net profit divided by the number of shares). For ITG, its earnings results from 2007 to 2011 are as follows:

  • EBIT in dollars was 174.18, 199.31, 202.78, 104.41 and 67.94. Average of 149.7. The company’s reported income before interest and tax deduction has an average of $149.7.
  • EBITDA in dollars was 196.68, 235.31, 256.98, 165.21 and 130.34. Average of 196.9. This is the average income of an ITG company before interest and tax, depreciation and amortization
  • Earnings per share was 2.21, 2.48, 2.61, .97 and .55. Average of 1.76.

ITG Income Statement

The reliability of the income statement as a report of the company’s performance differs widely among various types of companies. Net income of a retail store that sells only for cash has a high inventory turnover. Leases of its building and equipment are of high quality because the reported amount is relatively not influenced by estimates, while an income is of lower quality if it contains large items that require estimates of future events (such as depreciation expense).

Profitability

One area to consider in this area of financial statement is profitability. To calculate for this, we used the DuPont Method which consists of three components as shown below:

  • Net profit margin (NI/Sales) was 16.3, 15.2, 15.0, 6.8, 4.2 and -31.43. This simply was the after tax profit a company generated for each dollar of revenue.
  • Capital Turnover (Sales/Assets) was 48.0, 41.0, 40.3, 37.4, and 27.0 and 0.24. This measured the effectiveness of a company to convert its assets into sales.
  • Financial structure ratio (Assets/Shareholder’s Equity) was 241, 298, 214, 196, 291 and 325. This measured the financial leverage of the company
Calculation

Then multiply every three components to get;

  • Return on equity in percent was 18.3, 16.9, 15.4, 5.2, 2.8 and -23.33. The company could return such percent for every dollar of equity.

Computation of the return on assets:

  • Operating margin (EBIT/Sales) was 29.06, 27.3, 25.6, 12.1, 8.6 and -36.12. This measured the operations efficiency of the company.
  • Asset turnover was 48.0, 41.0, 40.0, 37.0, 27.0, and 24.0. This measured the total utilization efficiency of assets.

Lastly, multiply the two components and you get;

  • Return on assets was 7.90, 6.24, 6.06, 2.53, 1.13, and -7.64. This tells us how much profit the company generated for each dollar on total assets.

Explanation

ITG’s profitability analysis from 2006 to 2010 tells us that the company was able to generate a return on equity at an average of 11.72 or 12 percent for every $1 of investing capital, which was in a declining trend since 2008. It also declined to -23.33 percent during 2011. This means that ITG operations went down as portrayed by a decrease also in net income but in the 1st quarter of 2012, its prospective net income showed a good amount of 5.458 million dollars compared to 23.98 million dollars to -180 in 2010 and 2011, respectively.

Return on Assets

Return on assets (ROA) is an indicator of how profitable a company relative to its total assets. It showed a declined trend from 2006 to 2008 and a big leap in 2009 decreasing to a -7.64 percent in 2011. This means that the company is not progressing in using total assets enough to generate steady revenue, especially that in 2008 during the worldwide economic crisis, where it broke down a -62.64 percent decline in net income from 114.64 million dollars to 42.83 in 2008 and 2009, respectively.

Revenues

Let’s look into the total revenues, operating income, and net income of ITG. By comparing its income from 2006 to 2011, we could get the following results:

  • Total revenue in million dollars was 599.48, 731.00, 762.98, 633.07, 570.75 and 572. This was the company’s total earnings.
  • Operating income was 174, 199, 196, 76, 49, and -207. This was the company’s income after deducting all operations expenses.
  • Net income was 98, 111, 115, 43, 24, and -180. This was the company’s income after deducting income taxes.

Explanation

Total revenues depicted an increase in 2007 and 2008 of 21.94 percent and 4.38 but decreased by -17.03 and -9.84 in 2009 to 2010. In 2011 it increased slightly to 0.22.  then 2012 1st quarter decreases again to -9.13. This show a roller coaster trend meaning total revenues was not stable for ITG; it depends mostly from commissions and fees from investments plus recurring revenues from connectivity fees, software and analytical products, maintenance, customer technical support, investment research services, and others.

Operating income looks almost the same with total revenues showing growth in 2007 and 2008 of 8.43 percent and 3.53, the decline in 2009 to 2010 of -60.90 and -35.47 to -103.96 in 2012. This was caused by the increasing amount of operating expenses. While net income increase in 2007 and 2008 of 13.46 and 3.18, and then decreased in 2009 and 2010 of -62.64 and -44.02, to -39.13 in 2012.

Earnings per Share

In their earnings per share, it showed that from 2006 to 2008 they were earning as much as 2.21 dollars, 2.48, and 2.61 per share respectively. However, from 2009 to 2011 it declined down to 0.97, 0.55 and -4.42. This really would cause an alarming concern that management should look into their operations and find the means to solve their problem.

Expenses

What about their expenses for the year 2006 to 2010? Kindly take a look at the results provided below:

  • Cost of revenue was 80.70, 112.00, 95.08, 95.62 and 85.39Selling, general and administrative expenses was 344.60, 419.69, 465.13, 458.49 and 435.37
  • Income tax was 64.04, 77.76, 80.88, 33.62 and 25.35. In 2011 was 26.84; 2012 1st quarter was 3.036.
  • Operating expenses in 2011 was 778.67. In 2012 1st quarter was 127.88.

Explanation

The analysis of the expenses of the company from 2006 to 2010 tells us that, the cost of revenue represents 14.26 percent, while the operating expenses represent 64.9, and income taxes was 10  against average total revenue. In 2011 and 2012 1st quarter operating expenses account for -136 percent and 93.77 while income tax accounts for 4.69 and 2.22 against total revenue. Thus, the total deduction from average total revenue was 89.17 and the remaining 11.5 will be the net income average percentage; in 2011 and 2012 1st quarter was only -31.4 and 4.01. Therefore, this showed a very tight margin for net income against their total revenues, meaning that operations were heavily burdened by increasing expenses incurred.

Conclusion

“In conclusion, I can say that ITG was earning good in 2006 to 2008. But due to the worldwide financial crisis, their operations were badly hit and start to dwindle down. Total revenue declined; operating expenses and income taxes increased so, naturally net income also decreases to the extent that the company was losing in 2011. But in the 2012 1st quarter the company recovered a good sizable amount of net income of 5.5 million dollars. Total assets increase accounts for the increase in receivables thus, return on assets increase to 1.43 percent. While return on equity gave 8.2 results due to the increase in net income and a decrease in stockholders’ equity” Nelly said.

ITG Cash Flow Statement

The statement of cash flows is an integral part of a company’s financial statements. Does, it tells us the most important thing of all. And how much cash a company generates. It documents both cash coming in and cash going out of a business-income and expenditures. Moreover, it has three activities which are the operating, investing and financing.

Cash Flow from Operating

ITG had a negative result in 2007 and recovered in 2008 with an increase of 129 percent. In 2009 to 2011 it was shrinking. The main reason was that net income was also declining. The 2012Q1 had a negative result of 53 percent if we compared it from 2011Q1.

Cash from operating activities can be computed using the indirect method of accounting through the net income of the company and add or deduct the key accounts that give an impact for this activity like by deducting the accounts receivable and adding the accounts payable. Below are the results:

  • Net income in million dollars was 111, 115, 43, 24 and -180
  • Accounts receivable was -596, 474, 16, -793, 128 and -764
  • Accounts payable was 384,-317,-41, 862, -130, 700
  • Cash from operating activities was -109, 380, 97, 176, 67 and 1. In 2011Q1 was-58 compared to 2012Q1 was -123.

Explanation

Cash collections were the sum of total sales less the increase and add the decrease of accounts receivable. This is to determine if the management was effective in handling their collection. Below are the results:

  • Total sale was 731, 763, 633, 571 and 572
  • Accounts receivable was -596, 474, 16, -793 and 128
  • Cash collection was 1,327, 289, 617, 1,364 and 444.

The above results showed that the cash collection of the company was in sideways. It had a bulk collection in 2010, represented at 55 percent due to the decrease of accounts receivable.

Cash payment

The cash payments for purchases where the sum of the total cost of revenue. Deduct the increase or add the decrease of inventory and add the increase or deduct the decrease of accounts payable. These are the total cash paid by the company for their purchases per year. The following are the results for ITG:

  • Cost of revenue, the total was 112, 95.08, 95.62, 85.39 and 91.60
  • Total inventory for five years was zero
  • Accounts payable was 384, -317, -41, 862 and -130
  • Cash payment for purchases was 496.00, -221.92, 54.62, 947.39 and -130.

Explanation

Results shown was erratic in movement. In 2008, it had 324 percent down, due to the decrease of accounts payable and in 2010, up to 94 percent due to the increase of accounts payable. It indicates the cash payments paid for the operating expenses were also in sideways. It showed that only in 2011 they had an increase of 36 percent.

Cash payments for operating expense were the total cash paid for the operating expenses like selling or general and admin expenses also for unusual expenses. This can be computed by taking all the operating expenses and add the increase or deduct the decrease of prepaid expenses and then add the decrease or deduct the increase of accrued expenses. In ITG’s five years of operation, they had no record of prepaid and accrued expenses, then, the total operating expenses – 404.05, 452.27, 447.41, 427.47 and 671.75, results from 2007 to 2011 – were considered as the total cash payments for operating expenses.

Explanation

The cash payments for income tax were the sum of income tax total and by adding the decrease or deduct the increase of income taxes payable. Cash payments for income tax decreased from 2008 to 2011. It indicates that the year 2011 had decreased to negative 109 percent. This was due to the decline in the net income of the company. The results are:

  • Income tax – total was 77.76, 80.88, 33.62, 25.35 and -179.79
  • Income tax payable was 0, 3, -25, 10 and -6
  • Cash payment of income taxes was 77.76, 77.88, 58.62, 15.35 and -173.79.

By using the direct method of accounting, the cash from operating activity results are:

  • Cash collection was 1,327, 289, 617, 1,364 and 444
  • The cash payment for purchases was 496.00, -221.92, 54.62, 947.39 and -38.40
  • While, cash payment for operating expenses was 404.05, 452.27, 447.41, 427.47, and 671.75
  • In addition, the cash payment of income taxes was 77.76, 77.88, 58.62, 15.35 and -173.79
  • Net cash flow from operating activities was 349.19, -19.25, 56.42, -26.46 and -15.52.

Explanation

The total operating activities for five years were 344. The total cash collection for five years was represented at 1173 percent over the total cash operating activities, while the cash payment for purchases was 359 percent of the total cash payments. Operating expenses were 698 percent and the total cash payments for income taxes was 16 percent. It tells us the company had a greater percentage expense out in operating expense compared to the purchases.

The cash payments for operating activities using the direct method in accounting only had positive results in 2007 and 2009; the other years showed negative results. It was calculated using the cash collection less the cash payments for purchases, for operating expenses, and for income tax.

Cash Flow from Investing

To determine how much cash used for investing and where a company invested, we see that in the investing activities section in cash flow. The normal cash outflow compositions are the purchase of a fixed asset, intangibles, and acquisition of business and purchase of other investment. The inflow is the sale of maturity of investments. In ITG, the following are:

  • Sales/maturity of investments was 3, 3, 0, 0 and 2
  • Acquisition and disposition was -15, -6, -2, -49 and -36
  • Purchase of intangibles, net was -41, -43, -38 and -29
  • Other investing activities were -63,-26, -15, -15 and -23
  • Net cash used for investing activities was -74, -70, -60, -102 and -86.

Explanation

The net cash flow from investing of ITG was a straight negative result; the movement was also in sideways. It means, every year they kept on investing. It had a big impact on investment through the purchase of intangibles, represented at 39 percent total over the total of investing, and followed by other investment at 36 percent then the acquisition of a business represented at 27 percent.

Cash Flow from Financing

The cash flow from financing activities includes sales and re-purchases of corporate stocks, dividend payments, and long-term borrowings, from here we can determine the company’s funding commitments and why the business needs the money. For ITG, it resulted in the following:

  • Change in short-term borrowing was 101, -76, -25, 0 and 2.
  • Long-term debt issued was 0, 0, 0, 0, and 25.
  • Long-term debt repayment was -28, -38, -48, -47 and -4.
  • Common stock issued was 14, 7, 11, 11 and 10.
  • Repurchases of treasury stock were -50, 0, -23, -50 and -39
  • Other financing activities were 6, 0, -2, -4 and -6.
  • Net cash provided by (used for) financing activities was 43, -130, -64, -90 and -12.

The cash flow from financing resulted that it was in 2007 they had cash provided at 17 percent over the total cash in financing activities. From 2008 to 2011 had negative cash used in particular for long term debt repayment and repurchase of treasury stock.

Free Cash Flow

The free cash flow represents the company’s ability to generate cash but also signals that the company should be able to continue funding its operations. It can also determine the company’s ability to pay debt, dividends, buy back stock and facilitate the growth of the business. Below were the results of ITG free cash flow:

  • Net cash provided by operating activities was -109, 380, 97, 176 and 67
  • While, capital expenditure was 15, 47,45, 87 and 65
  • In addition, free cash flow was -124, 333, 52, 89 and 2.

The free cash flow has indicated that in 2007 they had negative results and recovered in 2008 to 2011 with positive free cash flow but it was shrinking due to the cash from operating which was also in sideways.

Cash Flow Solvency

  • Net cash provided by operating activities was -109,380,97,176,67.
  • On the other hand, total liabilities were1397,898,835, 1661 and 1507.
  • While cash flow solvency was -0.08, 0.42, 0.12, 0.11 and 0.04.

The cash flow solvency represented at every $1 of debt was -0.08,0.42,0.12,0.11 and0.04 from 2007 to 2011, respectively. It means, the company had no sufficient cash to pay its debt.

Written by: Rio, Nelly, and Dyne

Edited by Cris

Navigant Consulting Inc NCI

Navigant Consulting Inc (NCI) Acceptable Cash Flow Margin

August 22nd, 2012 Posted by Company Research Report No Comment yet

Navigant Consulting Inc. (NCI) is one of the few established specialty consulting firms in the United States that provides dispute, investigative, business, and economic consulting services to clients around the world. And doing the Balance sheet analysis is to determine Navigant Consulting Inc. financial strength, liquidity, and efficiency.

Balance Sheet

Liquidity

Let’s start with liquidity, how to measure this on Navigant Consulting Inc.? In value investing, the following financial ratios are used to measure the liquidity of the company, working capital, current ratio and quick ratio from 2007 to 2011 shows as follows:

  •  Working capital in million dollars started with an up and down trend yearly with a growth ratio of 30 percent, -4, 17, -44 and 2 and average of 88.
  • Current ratio in percent shows that the company had  $1.80, 1.73, 1.86, 1.40 and 1.40 of current assets for every $1 of current liabilities.  Its current assets are greater than current liabilities with an average of 164 percent.
  • And quick ratio tells us that quick assets had  $1.80, 1.73, 1.86, 1.40 and 1.42 for every $1 of current liabilities. The company has no inventory, so its quick ratio was the same as its current ratio.

Navigant Consulting, Inc. working capital started good for the first three years but it was unpredictable in 2010 and in 2011 it decreased down to -44 percent.  Its amount of 64 and 65 million dollars which was even below its yearly average of 88.8. Regarding its liquidity of current assets against current liabilities results, the current resources of the company could sufficiently pay off its current obligations as the business continues to run efficiently. It went down slightly in 2010 and 2011 due to the decrease in current assets specifically its cash and cash equivalents. There was no inventory involved being an industry on consulting services.

The following ratios are used to get the CCC of Navigant Consulting Inc.:

navigant consulting inc

  • Receivable turnover ratio showed that the average was 4 to 5 times a year.  It is the receivable average collection time to turn revenues into cash.
  • Receivable conversion period measures the number of days it would take a company to collect its credit account from a client or customer. For Navigant Consulting Inc., it takes 2 to 3 months or trailing twelve months of 86 days to collect their accounts receivables.
  • And their payable conversion period, the company pay their debts an average of  7 days or a week their creditors.
  • Thus, their cash conversion cycle has a ttm of 88 days.  It takes more than two months for receivable to convert into cash to pay their creditors and debts.

Considering the line of business of Navigant Consulting Inc. which caters on services, there was no inventory account and its accounts receivables represent 24.35 percent, 21.51, 19.95, 20.60, and 20.46 of total assets from 2007 to 2011 which made up most of its current assets.

Leverage

Navigant Consulting Inc. results from 2007 to 2011 are computed as follows:

navigant consulting inc

  • The debt ratio of the company has an average of .49 which tells us that out of its total assets, 49 percent of which was still payable when due date.
  • Debt to equity ratio was 1 averaged, which means that 100 percent of the owners or shareholders’ equity was loaned or acquired on credit.
  • Solvency ratio which is the company’s ability to pay all debts when they become due was 18 percent. The company is doing good as far as its net income is concerned.

Who are in control of the company’s total resources. To compute for this, we use the following as well as provide the exact results

  • Current liabilities to total assets ratio shows an average of .14, so its creditors have 14 percent claims on the total resources of the company while,
  • Long term liabilities to total assets ratio was .25 average which means that the banks have 25 percent claims on the total assets of Navigant Consulting Inc.
  • Stockholder’s equity to total assets ratio was .58 averaged. This further tells us that the owners have 58 percent or the majority claimant of the total assets of the company.

Navigant Consulting Inc., which is a services company, was 42 percent leverage as far as its total assets are concerned. Its owners’ investments were 71 percent on credit or loaned and still payable when due date. In addition, the company was 18 percent solvent. However, the majority claimant of its total assets was the owners or shareholders since 58 percent of the total assets were stockholders’ equity while only 14 percent belongs to the company’s creditors or suppliers and 25 percent belongs to the banks or bondholders.

Property, Plant & Equipment

navigant consulting inc

·   Investment in PPE for 5 years period expanded every year. Its ttm was $137 million.

·    Its average accumulated depreciation was $97  or 71 percent of the total cost of the fixed asset.

·   Therefore, the net book value of the PPE was $4 which is equivalent to 29 percent of the total cost.

As of 2011, the average net book value of Navigant Consulting Inc. fixed assets was 29 percent of the total cost. Based on five years estimated the life of the fixed asset, the remaining useful life would be 2.4, 2, 1.8, 1.5 and 1.5 or have an average of 1.5 years before they are fully depreciated.

Income Statement

Profitability

navigant consulting inc

  • Net margins are simply the percent of the tax profit a company generates for each dollar of revenue. This depicted a decline in 2009 and 2010 but went up in 2011  with an average of 4.21.  Their net margins showed a low but positive rate from 3 to 5.2 percent for the last five years against their revenues.
  • Their asset turnover had an average of 0.94, and this measured the efficiency of the company to convert its assets into revenues.  It showed a rate from 1.07 down to 0.83 percent with a slight increase in 2011 to generate revenue from total assets.  
  • Return on assets has an average of 4.01. This tells us how much profit the company generated for each dollar on total assets.  As you can see, that in 2008 the returns were high but decreased in 2009 and 2010. It has increased in 2008 by 5.10 percent but declined to 2.72. It slightly increased to 2.85 in 2009 and 2010 and continued to recover in 2011 to 4.72. This means that their earnings from total assets went down in 2009 and 2010 as asset turnover and net income decreases.  
  • Financial leverage measures the financial structure ratio of the company based on the total assets against total stockholders equity. The portion of the return on equity as the result of debt measured by the equity multiplier has a yearly average of 1.99.  This showed a declining trend yearly, meaning debt was yearly diminishing. 
  • Return on equity has an average of 7.77, the company could return such profit percent for every dollar of equity.  It has earned a yearly growth of 40 percent more in 2008 and decline down in 2009 and 2010 of -51 and -2.1 percent, but in 2011 it increases favorably to  54.3.  And their returns were based on profit margins and revenues than debt.  
  • Return on invested capital; with an average of 5.2; is the financial measure that quantifies how well a company generates cash flow relative to the capital it has invested in its business which depicts a favorable return.  This means Navigant Consulting Inc. has impressively recovered their downfall in 2009 and 2010 with what 2011 growth rate showed. 

 navigant consulting inc

As reflected in their graph, ROE represented the highest mark of averaging 8 percent and they have a return on invested capital of 5.  Wherein ROE minus their financial leverage of 2, they still earned more return from profit margin and sales of 6  than their return from debts. Likewise, comparing their net margin of 4 and asset turnover of 1, which are inversely related but still the company has a higher net profit margin and lower volume of asset turnover. This determined the attractiveness of this business, meaning that in terms of revenue they generated more than converting assets into revenues. Their ROA represents a low return on assets based on decreased net income in 2009 and 2010.

Navigant Consulting Inc.’s earning power as generated by their business operations results from 2007 to 2011 are as follows:

Income

navigant consulting inc

  • Revenues in million dollars with a yearly average of 754.8.  This was the company’s yearly total earnings. It showed a yearly growth ratio of 12.51 percent, 5.68, -12.76, -0.51 and 11.51  from 2007 to 2011  and a 9.44 for 1st quarter 2012 respectively.
  • Gross profit has an average of 239.4, this was company’s income after deducting its cost of revenue.  
  • Operating income has an average of 68, this was company’s income after deducting all operations expenses.   
  • Income before taxes has an average of 59.8, this was the income after interest and other income and expenses. 
  • The net income has an average of 32, this was the company’s income after deducting income taxes. 

Income generated from revenues, gross profit, operating income, income before tax and net income all went down in 2009 and 2010 but increased favorably in 2011 and  1st quarter of 2012.

Of course, it would be inevitable for the company to not have expenses, right? With Navigant Consulting  Inc., how is this going? Let’s find out how much they spent in their operations and others from 2007 to 2011 from the table below.

Expenses

navigant consulting inc

  • The cost of revenue yearly average was  515.4 million dollars and this accounts 68.3 percent of revenues.   And for the past years, 507 during 2007, then increase in 2008 by 4.14 percent, in 2009 and 2010  it went down and up of -7.76 and 2.5 respectively. But in 2011 it increased to 556 million dollars or 11.4 percent and 2012 1st quarter is already 25 percent of 2011.
  • Sales, general and administrative expense yearly average is 138.6.  This accounts 18.4 of revenues. 
  • Other operating expenses yearly average is 30.  This accounts 4 percent of revenues. 
  • The interest expenses yearly average is 13.6  and this accounts 1.8.  This means a high-interest rate on their debts and borrowing, especially during the first four years. 
  • Other income and expenses yearly average are 1.4.  This accounts 0.19 of revenues. 
  • Provisions for income taxes yearly average is 23.6.  This accounts 1.2 of revenues. 

This modified graph showed the relationship of revenue, total expense, and net income comparatively from 2007 to 2011:

navigant consulting inc

The company’s revenue shows a yearly growth ratio of 12.51 percent, 5.68, -12.76, -0.51 and 11.51. This means that income generated from revenues went down in 2009 and 2010 but increased favorably in 2011.

Their gross profit had a gross profit margin of 33.92, 34.91, 31.14, 29.12 and 29.14 after deducting the cost of revenue showing a slight increase and decreasing changes every year. While operating income showed an operating margin of 9.55, 10.95, 7.31, 7.11 and 9.72 depicts a dip from 2008 to a declining trend in 2009 and 2010 but recovered in 2011. This means that the total operating expenses were quite high and earned only one-third of gross profit.

And income before taxes showed a margin of 7.63, 8.62, 5.38, 5.85 and 9.01. This showed a favorable increase in 2011 after a decrease in 2009 and 2010.

Their net income has a growth ratio of -36.96, 19.95, -45.21, 9.61 and 70.97, depicting unpredictable changes. But 2011 was quite impressive it recovered more than the net income in 2008. And net income has a minimal net margin of 4.35, 4.94, 3.10, 3.42 and 5.24 after deducting their income taxes.  So, the excess of revenue average 6.49 percent accounts for the net income after deducting all the expenses, this shows a low net margin.

Cash Flow

navigant consulting inc

Cash Flow from Operating Activities

navigant consulting inc

navigant consulting inc

  • The company’s net income was $33, 40, 22, 24 and 41, TTM of 43, showed high in 2008 but dropped in 2009 by 45 percent and slowly increased in 2010 to 2011 by 9 percent and 71 percent respectively.
  • Its depreciation/depletion was $34, 36, 32, 27 and 22. TTM of 22 which shows that it was decreasing each year except which had an increase of $2.  
  • Other working capital was $4, -9, 1, -4 and -4.  with TTM of 3.  
  • Other non-cash Items was $24, 21, 16, 9 and 8. TTM of 8.  
  • NCI’s cash flow from operating activities was $92, 92, 77, 42 and 111.  TTM of 81.  There was no growth in 2008, decrease by 16% and 45% in 2009 and 2010 respectively but recovered or rose up by  164% in 2011.  

 On the other hand using the direct method in value investing, the following are:

navigant consulting inc

Although Navigant Consulting, Inc.’s cash flow from operating activities was on an up and down trend they showed a positive balance for five years in operation, which tells us that the company has enough funds for its operating activities.

Cash Flow from Investing Activities

navigant consulting inc

  • Total cash outflow of Navigant Consulting Inc. was -97, -65, -35, -77 and -34, trailing twelve months of -$33. The company expanded in investment property and acquisition of  real assets, while
  • Its total cash inflow was $4, which  represents  sale of PPE in 2007, therefore, 
  • Cash flow from investing activities was -$93, -66, -34, -77 and -35, TTM of -$33, which shows a negative balance since the cash out was greater than the cash inflow due to investment in property, plant and equipment and acquisition.  

Cash flow from investing activities of Navigant Consulting Inc. showed a negative balance in five years period of operation due to its expansion in property and other acquisition which resulted to greater cash out than cash coming in. Cash flow from financing activities is a category in the cash flow statement that accounts for external activities such as issuing cash dividends, adding or changing loans, or issuing and selling more stock.

This section of the statement of cash flows measures the flow of cash between a firm and its owners and creditors. Negative numbers can mean the company is servicing debt, but it can also mean the company is making dividend payments and stock repurchases, which investors might be glad to see.

Cash Flow from Financing Activities

navigant consulting inc

  • The above table shows that total cash Inflow was $450 which are;  proceeds of common stocks of $23 and other financing activity of $427.
  • Total cash outflow was -$565 which represents repayment of debts  -344 and repurchase of stocks of -221. 
  • Cash flow from financing activities was $1, -13, -17, -12 and -75, with trailing twelve months of -$48.  

The result of Navigant Consulting Inc.’s cash flow from financing activities incurred a negative balance because total cash payout exceeds cash receipt due to debt repayments and repurchase of stocks.

Net change in cash is a net cash available and ready to use for next accounting cycle. It is the difference between the cash at the end less the cash at the beginning of the period.  In value investing, for Navigant Consulting Inc.,  the results are:

 navigant consulting inc

  • Net change in cash were 0, 11, 26, -47 and 1 which tells us that there is no cash balance forwarded in 2008, 11 in 2009, 26 in 2010, -47 in 2011 and 1 in 2012.   
  • Cash at beginning of period was 12, 12, 23, 49 and 2   
  • Cash at end of period was 12, 23, 49, 2 and 3

The net change in cash was 0 in 2007, rose up to 11 in 2008, increase by 136% in 2009 but went negative -47 in 2010 and back to 1 in 2011. It is not a good sign, it needs close monitoring of its day to day’s activity of the company’s operation.

Free Cash Flow

 navigant consulting inc

navigant consulting inc

Free cash flow of Navigant Consulting Inc. was 68, 84, 60, 30, and 101. TTM was  $63.  It shows that the company has excess funds to develop new products, make acquisitions, pay dividends and reduce debt.  Navigant Consulting, Inc. has enough funds available to retire additional debts, increase dividends and invest new lines of business.

Cash Flow Ratios

navigant consulting inc

 navigant consulting inc

  • Cash flow  to net income was 2.79,2.30, 3.50, 1.75 and 2.71 . TTM of 2.61, which means that net income generates $2.79, $2.30, $3.50, $1.75 and $2.71 of cash flow.
  • Its cash flow margin was .12,  .11,  .11,   .06 and  .14 . TTM of  .11.  It measures how well a company’s daily operations can transform sales of their products and services into cash.
  • Cash flow return on asset was  .12,  .12,  .09,  .05 and  .13. TTM of  .10. It tells us that the company has $0.12, $0.12, $0.09, $0.05 and $0.13 of cash flow for every $1 of asset.  
  • And cash flow solvency was .21,  .22,  .19,  .10 and  .31 . TTM of .21. It indicates that the company has an average of 21 percent of cash flow for every $1 of total liabilities.  

Cash flow to net income indicates the company’s ability to generate cash from income. It was higher by 261 percent average versus net income.  Cash flow margin average is 11% to revenue.  Cash flow return on asset has an average of 10 percent, indicating a good sign that the company generates a favorable return on total assets and finally, Cash flow solvency is good at an average of 21 percent, indicating that the company has enough funds to settle its obligations. Cash flow solvency ratio is used to evaluate company’s credit-worthiness for long term debt.

Written by Rio, Nelly and Dyne

Edited by Cris

Sasol Limited SSL

Sasol Limited (SSL) Able to Roll the Dice on the Business Run?

August 17th, 2012 Posted by Company Research Report No Comment yet

Sasol Limited (SSL), knowing the financial status is like going for a general check-up to find out if you are healthy and fit to work. This indicates whether; for a company; is able to roll the dice on the business run.

Sasol Balance Sheet

Sasol Liquidity

Liquidity ratio measures how the company is able to meet and to pay off its near obligations. To compute for liquidity of Sasol is to analyze the following ratios as shown in the table below:

Particulars 2006 2007 2008 2009 2010 Ave
Current ratio 1.69 1.61 1.99 2.02 2.35 1.93
Quick ratio 1.31 1.0 1.26 1.46 1.63 1.33
Working capital (in dollars) 14,676 14,509 27,316 26,769 30,854 22,824.80
Free cash flow (in dollars) 417 4,261 6,327 15,166 -579 5,118.4
  • Working capital in dollars had an average of 22,824.80. It tells us that the company has sufficient resources to meet current obligations.
  • The current ratio was 1.93 on average. It means that the company had 193 percent current assets for every $1 of current liabilities.
  • Quick ratio was 1.33 average. It tells us that the company has 133 percent of quick assets for every $1 of current liabilities.
  • Free cash flow in dollars was an average of 5,118.4. It indicates that the company has money left over after expenses and dividends have been paid. The creditors have no worries of the company’s default in payments.

Sasol Efficiency

Of course, when talking about company financials, inventory is on the line. This is portioned of the business assets that are ready for sales. How to compute for this is to use the asset management ratios. For Sasol Limited, the following are the results:

  • Inventory turnover is 6.07, 4.17, 3.72, 6.07 and 4.81 for 2006 to 2010, respectively with an average of 4.96. This tells us that the average dollar volume of inventory is used up almost five times average in five years.
  • Inventory turn day was 59, 86, 97, 59 and 75. Average of 75 days. This tells us that the company keeps an average of 75 days or two and a half months of inventory on hand.
  • Accounts receivable turnover was 7.92, 7.89, 6.61, 11.03 and 7.99. An average of 8.29. This tells us that the company’s accounts receivable have an average of 8 times turn each period.
  • Average collection period was 45, 46, 55, 33 and 45.  Average 44.66 or 45. It means that the company must wait for an average of 45 days for its receivables to be converted into cash.
  • The fixed assets turnover ratio in percent was 1.31, 1.3, 1.67, 1.62 and 1.31.  Average of 1.44. It tells us that the company is generating an average of 1.44 of revenue for every $1 of fixed assets. This is considered a good ratio meaning the company is using its plant, property, and equipment effectively and efficiently.
  • The working capital turnover ratio was 1.57, 1.72, 1.88, 1.72 and 1.37. Average of 1.65. This means that the working capital of the company has 2 times turns each period. The ratio is low meaning the company is not efficient in utilizing its working capital.

Sasol Leverage

We are basically done with the inventory. Now it’s time to know the financial leverage. When we speak of leverage, we are pertaining to the amount of debt used to finance a firm’s assets. In line with this, below are the results for Sasol Limited.

Particulars

2006 2007 2008 2009 2010

Ave

Debt Ratio 0.49 0.48 0.45 0.43 0.39 0.45
Debt-to-Equity ratio 0.96 0.93 0.83 0.74 0.65 0.82
Current Liabilities to Total Assets 0.21 0.20 0.20 0.18 0.15 0.19
Long Term Liabilities to Total Assets 0.15 0.11 0.11 0.09 0.09 0.11
Net Worth to Total Assets 0.51 0.52 0.55 0.57 0.61 0.55
Interest Coverage 30.1 22.3 29.5 9.7 11.3 20.58
Cash Flow to Debt 0.27 0.28 0.27 0.50 0.25 0.31
Equity Multiplier 1.96 1.93 1.83 1.74 1.65 1.82
  • Debt ratio was 0.45 on average.  This means that the company’s debt capital was 45 percent.
  • Debt to equity ratio was 0.82 in average or total liabilities had 82 percent out of total equity. This means that the company’s creditors have fewer claims than the shareholders.
  • Current liability to total asset had an average of 0.19. This tells us that the creditors/note holders had 19 percent claims against total assets.
  • Long-term liability to total asset was 0.11 on average. This tells us that the banks/bondholders had 11 percent claims against total assets.
  • Net worth to total assets was 0.55 on average. Stockholders/owners had 55 percent claims against total assets.
  • Interest coverage was 21 percent in average meaning the company had 21 percent income before interest and tax against total interest. It further tells us that the company will not default on its payment of interest.
  • Cash flow to debt was 0.31. Tells us that the company has funds for its debt at an average of 31 percent.
  • Equity multiplier was 1.82 in average. The results show that it has a lower equity multiplier meaning that the company’s asset doesn’t finance by debt.  This also shows a number of assets owned by the firm for each equivalent monetary unit owner claims, held by stockholders. This ratio is best compared to other industry.

Facts:

  • The cash and cash equivalent growth in percent were 181, 144, 597 and 447 for 2007 to 2010 respectively. It tells us that in 2008 it decreased by almost 40 percent, but increased by 453 percent in 2009 and down again by 150 percent. In the vertical analysis, it represents 7 percent average of the total assets.
  • Total receivable in percent was 141, 210, 139 and 168 for 2007 to 2010, respectively.  It represents 13 percent of total assets. It shows that the ratio was up and down trend and the highest was in 2008.
  • A total current asset in percent was 106, 152, 147 and 149 for 2007 to 2010 respectively. It represents 35 of total assets. It shows that it was high in 2008 and the ratio increased from 2009 to 2010.
  • Property, plant, and equipment were 119, 124, 135 and 148 for 2007 to 2010 respectively. It represents 60 percent of the total assets.
  • Long-term investment in percent was 114, 162, 215 and 325 for 2007 to 2010 respectively. It shows that it is increasing from 2006 to 2010.  It represents 2 percent of total assets.
  • Notes receivable long term in percent was 155, 132, 141 and 113 for 2007 to 2010. This represents 1 percent of the total assets.
  • A total asset in percent was 115, 136, 141 and 152 for 2007 to 2010 respectively. For total assets, the trend is increased by 5 percent to 21percent from 2006 to 2010.

Cash and cash equivalent were high in 2009, which represents 14 percent of the total assets, from 2006 the cash was improving from 3 percent to 14 percent and 10 percent in 2010. Total receivable was high in 2009 because sales were also high in 2009. The increase was 69 percent and sales increased by 11 percent during the same year. Its total current assets, PPE and long-term investment rose from 2006 to 2010; which were good. While notes receivable was decreasing from 2006 to 2010, meaning the collection is being handled effectively. Its total assets were improving as well from year to year.

The overall results tell us that Sasol is financially sound.

Sasol Income Statement

Return on assets or ROA for short, tells an investor how much profit a company generated for each $1 in assets. Return on equity (ROE), tells investors how much profit a company earned in comparison to the total amount of shareholder equity on the balance sheet.

  • Return on assets in percent was 10.1, 14.3, 16.0, 9.4 and 10.2. Average of 12.
  • Return on equity in percent was 19.8, 27.6, 29.3, 16.3 and 16.8. The average is 21.96.

Return on assets had an average of 12 percent or the average return of revenue for every $1 of investment in assets, while the return on equity had an average of 21.96 percent. Sasol earns $0.22 of revenue average for every $1 investment in equity. It indicates a fair return on the money the investors have put into the company.

Sasol Income

2006 2007 2008 2009 2010
Total revenue 82,395 98,127 129,943 137,836 122,256
Gross profit 33,848 38,130 55,309 49,328 43,073
Operating income 17,212 25,621 33,816 24,666 23,937
Income before tax 17,116 25,703 33,657 24,195 23,372
Income after tax 10,582 17,550 23,528 13,715 16,387
Net income 10,406 17,030 22,417 13,648 15,941
  • The company’s total revenue was 82,395, 98,127, 129,943, 137836 and 122,256. It showed that year it was increasing except in 2010 which dropped by 11 percent.
  • Its gross profit was 33,848, 33,130, 55,309, 49,328 and 43,073 which was also increasing per year except in 2010 which slightly decreased. It shows a growth of 12.65 percent, 45.05, -10.81 and -12.68 percent from 2007 to 2010, respectively.
  • The company’s operating income was 17,212, 25,621, 33816, 24,666 and 23,937 with a yearly growth of 48.86 percent, 31.99, -27.06 and -2.96 percent.
  • The income before tax 17,116, 25,703, 33,657, 24,195 and 23,372. It showed 50.17 percent, 30.95 percent, -28.11 percent  and -3.40 percent from 2007 to 2010 respectively.
  • Income after tax in dollars was 10,582, 17,550, 23528, 13715 and 16,387.
  • Net income was 10,406, 17,030,22,417, 13648 and 15,941. Its growth in percent showed 63.66, 31.63, -39.12 and 16.80 .

Sasol’s total revenue from 2006 to 2008 moved consistently upward with a gradual increase in 2009 and drop down to -11.3 percent in 2010 but it has a good indication of a 4.7 percent increase in Q2 of 2011. After considering the cost of revenue, the gross profit of the company was still efficient in covering the operating expenses with an average of five years at 20 percent. It also moved upward from 2006 to 2008 and down in 2009 and 2010 but it was corrected with an 8 percent increase in Q2 of 2011.

Sasol Expenses

  • Cost of revenue in thousand dollars was 48,547, 59,997, 74,634, 88,508 and 79,183. The computed average was 70,173.80. The figures showed an increase from 2006 to 2009 but in 2010, there was a decrease of 11 percent against 2009. It also showed 61 percent average against total revenue.
  • Selling/general/and administrative expense in thousand dollars was 9,550, 11,912, 16,404, 24,918 and 16,890. The computed average was 15,934.80. It indicated that from 2006 to 2009 results increased while the gap in 2010 decreased by 32 percent compared to 2009. It represented 14 percent average against total revenue.
  • Income tax was in thousand dollars was 6,534, 8,153, 10,129, 10,480 and 6,985. The computed average was 8,456.20. It showed an increase from 2006 to 2009 but with a decrease in 2010 of 33 percent gap in 2009. It also shows 7 percent average of against total revenue or 7 percent average of the taxable income.

The computed cost of revenue is higher at 61 percent of total revenue which would depend on the nature and operation of the business. Selling/general/and administrative expense was 14 percent plus 7 percent of income tax. Out of these expenses, still, it shows that the company resulted in a net income of 18 percent.

Sasol Profit Margins

  • Gross margin in percent was 41, 39, 43, 36 and 35.  Average of 39. It is increasing between the year 2007 and 2008 but it shows a decrease in between the year 2006 to 2007 and from the middle of the said years up to the year 2010.
  • Operating margin in percent was 21, 26, 26, 18 and 20.  Average of 22 percent. The trend showed an increase in three consecutive years from 2006 to 2008 but down in 2009 of 8 percent and increase again by 2 percent in 2010.
  • EBIT in percent was 20.90, 26.1, 26, 17.90 and 19.60.  Average of 22.
  • Pretax margin in percent was 20.8, 26.2, 25.9, 17.6 and 19. The average is 22 percent.
  •  EBIT and pre-tax resulted with the same margin, the trend showed an increase in three consecutive years from 2006 to 2008 but decrease in 2009 of about 8 percent then increase again by 2010 of about 2 percent.

Sasol Cash Flow

Cash Flow Statement is categorized into three: cash flow from operating activities, cash flow from investing activities and cash flow from financing activities.

Sasol Cash Flow from Operating Activities

Cash flow from operating activities indicates a positive result continuously for five years period. It shows that the company is effective in generating cash flow from its revenue.

  • Cash flow from operating activities in dollars was 13,713, 16,306, 17,182, 30,838 and 15,529 for  2006 to 2010 respectively. Average of 18,713.60.
  • Working capital in dollars was 3,988, -4,929, -5,581, -3,059 and -3,688 for the year 2006 to 2010 respectively. Average of -4,249.
  • Other operating cash flow in dollars was 3,688, -3,059, -5,581, -4,929 and -3,988 for 2006 to 2010 respectively. Average of -4,249.

Sasol Cash Flow from Investing Activities

Cash flow from investing activities has a negative balance from 2006 to 2010. It means that the company has no cash for investing. Contributing factor to having a negative balance is the company’s purchase of a fixed asset on a yearly basis.

  • Cash from investing activities was -$12,283, -10,545, -10,844, -12,518 and -16,704 for the year 2006 to 2010 respectively. Average of -$12,578.80.  It tells us that the company had no cash for investing. Sale of business and sale of fixed assets contributed much on cash inflow.

Total cash outflow was  -$62,894, which are:

Particulars 2006 2007 2008 2009 2010
Purchased of Fixed Assets -$13,269 – $12,023, -$10,838 -$15,546 -$16,057
Purchase/Acquisition of Intangibles -$27 -$22 -$17 -$126 -$51
Other Investing Cash Flow $1,013 $1,500 $11 $3,154 -$596

Total cash inflow was $5,082, which are:

Particulars 2006 2007 2008 2009 2010
Acquisition of Business -$147 -$285 -$431 -$30
Investment, Net -$524 -$1,248
Purchase of Investment -$62 -$79 -$42 -$89 -$47
Sale of Fixed Assets $542 $193 $184 $697 $208
Sale/Maturity of Investment $16 $7 $14
Other Investing Cash Flow $ 77 -$529  -$393 -$393 $477

Sasol Cash Flow from Financing Activities

Cash flow from financing activities had a negative result, therefore, it indicates that the company’s cash outflows exceeded its cash inflows for investing. Total cash inflow was -5,565 while the total cash outflow was -7,990.

  • Cash flow from financing activities was -1,277, -2,893, -8,415, -1,193 and  -2,701 for the year 2006 to 2010 respectively. Average of -3,295.8. It has a negative balance successively for five years.
  •  Total cash inflow was -9,452 which is issuance (retirement) of stocks  $431,  -$3,337,  -$6,825, $75 and $204 for 2006 to 2010 respectively
  • Total cash outflow was -7,027  from 2006 to 2010 which are: issuance (retirement) of debts, Net  -1,633,  852, -1,132, -1,056 and -2,596  respectively and other financing cash flow was -75, -408, -458,  -212 and  -309   respectively.

Free cash flow measures the company’s capability to cover capital expenditures maintenance and determine if the company has still funds for future expansion.

  • Free cash flow was 417, 4,261, 6,327, 15,166 and -579 for 2006 to 2010 respectively. Average of 5,118.8. It showed that the company had sufficient funds to pay its obligations from 2006 to 2009 respectively. It means that there was money left over after paying operating expenses from 2006 to 2009 but no funds in 2010 since it showed a negative balance.

Sasol Cash Flow Ratios

Sasol Limited cash flow analysis uses ratios that focus on cash flow and how solvent, liquid, and viable the company is.

  • Cash flow from operation to net income ratio was 1.32, .96, .77, 2.26 and .97.. Average of 1.18.  It was higher by 126 percent average versus net income. It indicates the company’s ability to generate cash from income.
  • Cash flow return on asset was .1329, .1369, .1226, .2114 and .0992.. Average of 14.07 percent. It indicates that the company was able to generate cash on invested assets.
  • Cash flow margin was .17, .17, .13, .22 and .13.. Average of 16 percent which was a good indication of the company’s ability to generate cash relative to revenue.
  • Cash flow solvency in percent was 27.13, 28.38, 26.99, 49.71 and 25.14.  Average of 31.67. It indicates that the company had 31.67 percent of cash flow for every $1 of total liabilities, more than enough to settle its obligations.
  • Cash flow return on equity in percent was .10, .12, .13, .23 and .12.. Average of .14. This means that the company was able to generate a cash return of $0.14 for every $1 of equity.

Cash flow from operating activities effectively generated cash from revenue for its operation from 2006 to 2010 while cash from investing activities had a negative balance from 2006 to 2010 which clearly indicates that there was no cash from investing activities. Cash from financing activities also showed a negative result for its five years in operation due to its yearly acquisition of fixed assets, therefore indicating there were no funds for financing activities. Free cash flow tells us that the company had excess cash after paying operating expenses from 2006 to 2009 but no funds for 2010. Cash flow solvency indicated that the company had sufficient cash flow to settle its obligations. Sasol was able to generate a return of more than enough money invested in assets.

Written by Cris, Dyne, Wilmay, Nelly and Rio
Edited by Cris
Sasol Limited SSL

Sasol Limited (SSL) able to Roll the Dice on the Business Run?

August 17th, 2012 Posted by Company Research Report No Comment yet

Sasol Limited (SSL) knowing the financial status is like going for a general check-up to find out if you are healthy and fit to work. This indicates whether; for a company; is able to roll the dice on the business run.

Sasol Balance Sheet

Liquidity

Liquidity ratio measures how the company is able to meet and to pay off its near obligations. To compute for liquidity of Sasol is to analyze the following ratios as shown in the table below:

Particulars 2006 2007 2008 2009 2010 Ave
Current ratio 1.69 1.61 1.99 2.02 2.35 1.93
Quick ratio 1.31 1.0 1.26 1.46 1.63 1.33
Working capital (in dollars) 14,676 14,509 27,316 26,769 30,854 22,824.80
Free cash flow (in dollars) 417 4,261 6,327 15,166 -579 5,118.4
  • Working capital in dollars had an average of 22,824.80. It tells us that the company has sufficient resources to meet current obligations.
  • The current ratio was 1.93 in average. It means that the company had 193 percent current assets for every $1 of current liabilities.
  • Quick ratio was 1.33 average. It tells us that the company has 133 percent of quick assets for every $1 of current liabilities.
  • Free cash flow in dollars was an average of 5,118.4. It indicates that the company has money left over after expenses and dividends have been paid. The creditors have no worries of the company’s default in payments.

Efficiency

Of course, when talking about company financials, inventory is on the line. This is portioned of the business assets that are ready for sales. How to compute for this is to use the asset management ratios. For Sasol Limited, the following are the results:

  • Inventory turnover is 6.07, 4.17, 3.72, 6.07 and 4.81 for 2006 to 2010, respectively with an average of 4.96. This tells us that the average dollar volume of inventory is used up almost five times average in five years.
  • Inventory turn day was 59, 86, 97, 59 and 75. Average of 75 days. This tells us that the company keeps an average of 75 days or two and a half months of inventory on hand.
  • Accounts receivable turnover was 7.92, 7.89, 6.61, 11.03 and 7.99. An average of 8.29. This tells us that the company’s accounts receivable have an average of 8 times turn each period.
  • Average collection period was 45, 46, 55, 33 and 45.  Average 44.66 or 45. It means that the company must wait for an average of 45 days for its receivables to be converted into cash.
  • The fixed assets turnover ratio in percent was 1.31, 1.3, 1.67, 1.62 and 1.31.  Average of 1.44. It tells us that the company is generating an average of 1.44 of revenue for every $1 of fixed assets. This is considered a good ratio meaning the company is using its plant, property, and equipment effectively and efficiently.
  • The working capital turnover ratio was 1.57, 1.72, 1.88, 1.72 and 1.37. Average of 1.65. This means that the working capital of the company has 2 times turns each period. The ratio is low meaning the company is not efficient in utilizing its working capital.

Leverage

I think we are basically done with the inventory. Now it’s time to know the financial leverage. When we speak of leverage, we are pertaining to the amount of debt used to finance a firm’s assets. In line with this, below are the results for Sasol Limited.

Particulars

2006 2007 2008 2009 2010

Ave

Debt Ratio 0.49 0.48 0.45 0.43 0.39 0.45
Debt-to-Equity ratio 0.96 0.93 0.83 0.74 0.65 0.82
Current Liabilities to Total Assets 0.21 0.20 0.20 0.18 0.15 0.19
Long Term Liabilities to Total Assets 0.15 0.11 0.11 0.09 0.09 0.11
Net Worth to Total Assets 0.51 0.52 0.55 0.57 0.61 0.55
Interest Coverage 30.1 22.3 29.5 9.7 11.3 20.58
Cash Flow to Debt 0.27 0.28 0.27 0.50 0.25 0.31
Equity Multiplier 1.96 1.93 1.83 1.74 1.65 1.82
  • Debt ratio was 0.45 in average.  This means that the company’s debt capital was 45 percent.
  • Debt to equity ratio was 0.82 in average or total liabilities had 82 percent out of total equity. This means that the company’s creditors have fewer claims than the shareholders.
  • Current liability to total asset had an average of 0.19. This tells us that the creditors/note holders had 19 percent claims against total assets.
  • Long term liability to total asset was 0.11 in average. This tells us that the banks/bond holders had 11 percent claims against total assets.
  • Net worth to total assets was 0.55 in average. Stockholders/owners had 55 percent claims against total assets.
  • Interest coverage was 21 percent in average meaning the company had 21 percent income before interest and tax against total interest. It further tells us that the company will not default on its payment of interest.
  • Cash flow to debt was 0.31. Tells us that the company has funds for its debt at an average of 31 percent.
  • Equity multiplier was 1.82 in average. The results show that it has a lower equity multiplier meaning that the company’s asset doesn’t finance by debt.  This also shows a number of assets owned by the firm for each equivalent monetary unit owner claims, held by stockholders. This ratio is best compared to other industry.

Facts

  • The cash and cash equivalent growth in percent were 181, 144, 597 and 447 for 2007 to 2010 respectively. It tells us that in 2008 it decreased by almost 40 percent, but increased by 453 percent in 2009 and down again by 150 percent. In the vertical analysis, it represents 7 percent average of the total assets.
  • Total receivable in percent was 141, 210, 139 and 168 for 2007 to 2010, respectively.  It represents 13 percent of total assets. It shows that the ratio was up and down trend and the highest was in 2008.
  • A total current asset in percent was 106, 152, 147 and 149 for 2007 to 2010 respectively. It represents 35 of total assets. It shows that it was high in 2008 and the ratio increased from 2009 to 2010.
  • Property, plant, and equipment were 119, 124, 135 and 148 for 2007 to 2010 respectively. It represents 60 percent of the total assets.
  • Long term investment in percent was 114, 162, 215 and 325 for 2007 to 2010 respectively. It shows that it is increasing from 2006 to 2010.  It represents 2 percent of total assets.
  • Notes receivable long term in percent was 155, 132, 141 and 113 for 2007 to 2010. This represents 1 percent of the total assets.
  • A total asset in percent was 115, 136, 141 and 152 for 2007 to 2010 respectively. For total assets, the trend is increased by 5 percent to 21percent from 2006 to 2010.

Cash and cash equivalent were high in 2009, which represents 14 percent of the total assets, from 2006 the cash was improving from 3 percent to 14 percent and 10 percent in 2010. Total receivable was high in 2009 because sales were also high in 2009. The increase was 69 percent and sales increased by 11 percent during the same year. Its total current assets, PPE and long term investment rose from 2006 to 2010; which were good. While notes receivable was decreasing from 2006 to 2010, meaning the collection is being handled effectively. Its total assets were improving as well from year to year.

The overall results tell us that the company is financially sound.

Sasol Income Statement

Return on assets or ROA for short, tells an investor how much profit a company generated for each $1 in assets. Return on equity (ROE), tells investors how much profit a company earned in comparison to the total amount of shareholder equity on the balance sheet.

  • Return on assets in percent was 10.1, 14.3, 16.0, 9.4 and 10.2. Average of 12.
  • Return on equity in percent was 19.8, 27.6, 29.3, 16.3 and 16.8. The average is 21.96.

Return on assets had an average of 12 percent or the average return of revenue for every $1 of investment in assets, while the return on equity had an average of 21.96 percent. Sasol earns $0.22 of revenue average for every $1 investment in equity. It indicates a fair return on the money the investors have put into the company.

Income

2006 2007 2008 2009 2010
Total revenue 82,395 98,127 129,943 137,836 122,256
Gross profit 33,848 38,130 55,309 49,328 43,073
Operating income 17,212 25,621 33,816 24,666 23,937
Income before tax 17,116 25,703 33,657 24,195 23,372
Income after tax 10,582 17,550 23,528 13,715 16,387
Net income 10,406 17,030 22,417 13,648 15,941
  • The company’s total revenue was 82,395, 98,127, 129,943, 137836 and 122,256. It showed that yearly it was increasing except in 2010 which dropped by 11 percent.
  • Its gross profit was 33,848, 33,130, 55,309, 49,328 and 43,073 which was also increasing per year except in 2010 which slightly decreased. It shows a growth of 12.65 percent, 45.05, -10.81 and -12.68 percent from 2007 to 2010, respectively.
  • The company’s operating income was 17,212, 25,621, 33816, 24,666 and 23,937 with a yearly growth of 48.86 percent, 31.99, -27.06 and -2.96 percent.
  • The income before tax 17,116, 25,703, 33,657, 24,195 and 23,372. It showed 50.17 percent, 30.95 percent, -28.11 percent  and -3.40 percent from 2007 to 2010 respectively.
  • Income after tax in dollars was 10,582, 17,550, 23528, 13715 and 16,387.
  • Net income was 10,406, 17,030,22,417, 13648 and 15,941. Its growth in percent showed 63.66, 31.63, -39.12 and 16.80 .

“The company’s total revenue from 2006 to 2008 moved consistently upward with a gradual increase in 2009 and drop down to -11.3 percent in 2010 but it has a good indication of a 4.7 percent increase in Q2 of 2011. After considering the cost of revenue, the gross profit of the company was still efficient in covering the operating expenses with an average of five years at 20 percent. It also moved upward from 2006 to 2008 and down in 2009 and 2010 but it was corrected with 8 percent increase in Q2 of 2011,” Dyne said.

Expenses

  • Cost of revenue in thousand dollars was 48,547, 59,997, 74,634, 88,508 and 79,183. The computed average was 70,173.80. The figures showed an increase from 2006 to 2009 but in 2010, there was a decrease of 11 percent from 2009. It also showed 61 percent average against total revenue.
  • Selling/general/and administrative expense in thousand dollars was 9,550, 11,912, 16,404, 24,918 and 16,890. The computed average was 15,934.80. It indicated that from 2006 to 2009 results increased while the gap in 2010 decreased by 32 percent compared to 2009. It represented 14 percent average against total revenue.
  • Income tax was in thousand dollars was 6,534, 8,153, 10,129, 10,480 and 6,985. The computed average was 8,456.20. It showed an increase from 2006 to 2009 but with a decrease in 2010 of 33 percent gap in 2009. It also shows a 7 percent average of against total revenue or 7 percent average of the taxable income.

The computed cost of revenue is higher at 61 percent of total revenue which would depend on the nature and operation of the business. Selling/general/and administrative expense was 14 percent plus 7 percent of income tax. Out of these expenses, still, it shows that the company resulted in a net income of 18 percent.

Margins

  • Gross margin in percent was 41, 39, 43, 36 and 35.  Average of 39. It is increasing in between the year 2007 and 2008 but it shows a decrease in between the year 2006 to 2007 and from the middle of the said years up to the year 2010.
  • Operating margin in percent was 21, 26, 26, 18 and 20.  Average of 22 percent. The trend showed an increase in three consecutive years from 2006 to 2008 but down in 2009 of 8 percent and increase again by 2 percent in 2010.
  • EBIT in percent was 20.90, 26.1, 26, 17.90 and 19.60.  Average of 22.
  • Pretax margin in percent was 20.8, 26.2, 25.9, 17.6 and 19. The average is 22 percent.
  •  EBIT and pre-tax resulted with the same margin, the trend showed an increase in three consecutive years from 2006 to 2008 but decrease in 2009 of about 8 percent then increase again by 2010 of about 2 percent.

Sasol Cash Flow

Cash Flow Statement is categorized into three: cash flow from operating activities, cash flow from investing activities and cash flow from financing activities.

Cash Flow from Operating Activities

Cash flow from operating activities indicates a positive result continuously for five years period. It shows that the company is effective in generating cash flow from its revenue.

  • Cash flow from operating activities in dollars was 13,713, 16,306, 17,182, 30,838 and 15,529 for  2006 to 2010 respectively. Average of 18,713.60.
  • Working capital in dollars was 3,988, -4,929, -5,581, -3,059 and -3,688 for the year 2006 to 2010 respectively. Average of -4,249.
  • Other operating cash flow in dollars was 3,688, -3,059, -5,581, -4,929 and -3,988 for 2006 to 2010 respectively. Average of -4,249.

Cash Flow from Investing Activities

Cash flow from investing activities has a negative balance from 2006 to 2010. It means that the company has no cash for investing. Contributing factor of having a negative balance is the company’s purchase of fixed asset on a yearly basis.

  • Cash from investing activities was -$12,283, -10,545, -10,844, -12,518 and -16,704 for the year 2006 to 2010 respectively. Average of -$12,578.80.  It tells us that the company had no cash for investing. Sale of business and sale of fixed assets contributed much on cash inflow.

Total cash outflow was  -$62,894, which are:

Particulars 2006 2007 2008 2009 2010
Purchased of Fixed Assets -$13,269 – $12,023, -$10,838 -$15,546 -$16,057
Purchase/Acquisition of Intangibles -$27 -$22 -$17 -$126 -$51
Other Investing Cash Flow $1,013 $1,500 $11 $3,154 -$596

Total cash inflow was $5,082, which are:

Particulars 2006 2007 2008 2009 2010
Acquisition of Business -$147 -$285 -$431 -$30
Investment, Net -$524 -$1,248
Purchase of Investment -$62 -$79 -$42 -$89 -$47
Sale of Fixed Assets $542 $193 $184 $697 $208
Sale/Maturity of Investment $16 $7 $14
Other Investing Cash Flow $ 77 -$529  -$393 -$393 $477

Cash Flow from Financing Activities

Cash flow from financing activities had a negative result, therefore, it indicates that the company’s cash outflows exceeded its cash inflows for investing. Total cash inflow was -5,565 while the total cash outflow was -7,990.

  • Cash flow from financing activities was -1,277, -2,893, -8,415, -1,193 and  -2,701 for the year 2006 to 2010 respectively. Average of -3,295.8. It has a negative balance of successively for five years.
  •  Total cash inflow was -9,452 which is issuance (retirement) of stocks  $431,  -$3,337,  -$6,825, $75 and $204 for 2006 to 2010 respectively
  • Total cash outflow was -7,027  from 2006 to 2010 which are: issuance (retirement) of debts, Net  -1,633,  852, -1,132, -1,056 and -2,596  respectively and other financing cash flow was -75, -408, -458,  -212 and  -309   respectively.

Free cash flow measures a company’s capability to cover capital expenditures maintenance and determine if the company has still funds for future expansion.

  • Free cash flow was 417, 4,261, 6,327, 15,166 and -579 for 2006 to 2010 respectively. Average of 5,118.8. It showed that the company had sufficient funds to pay its obligations from 2006 to 2009 respectively. It means that there was money left over after paying operating expenses from 2006 to 2009 but no funds in 2010 since it showed a negative balance.

Cash Flow Ratios

Cash flow analysis uses ratios that focus on cash flow and how solvent, liquid, and viable the company is. For Sasol Limited, cash flow ratios from 2006 to 2010 are:

  • Cash flow from operation to net income ratio was 1.32, .96, .77, 2.26 and .97.. Average of 1.18.  It was higher by 126 percent average versus net income. It indicates the company’s ability to generate cash from income.
  • Cash flow return on asset was .1329, .1369, .1226, .2114 and .0992.. Average of 14.07 percent. It indicates that the company was able to generate cash on invested assets.
  • Cash flow margin was .17, .17, .13, .22 and .13.. Average of 16 percent which was a good indication of the company’s ability to generate cash relative to revenue.
  • Cash flow solvency in percent was 27.13, 28.38, 26.99, 49.71 and 25.14.  Average of 31.67. It indicates that the company had 31.67 percent of cash flow for every $1 of total liabilities, more than enough to settle its obligations.
  • Cash flow return on equity in percent was .10, .12, .13, .23 and .12.. Average of .14. This means that the company was able to generate a cash return of $0.14 for every $1 of equity.

Cash flow from operating activities effectively generated cash from revenue for its operation from 2006 to 2010 while cash from investing activities had a negative balance from 2006 to 2010 which clearly indicates that there was no cash from investing activities. Cash from financing activities also showed a negative result for its five years in operation due to its yearly acquisition of fixed assets, therefore indicating there were no funds for financing activities. Free cash flow tells us that the company had excess cash after paying operating expenses from 2006 to 2009 but no funds for 2010. Cash flow solvency indicated that the company had sufficient cash flow to settle its obligations. And the company was able to generate a return of more than enough money invested in assets.

Written by Cris, Dyne, Wilmay, Nelly and Rio
Edited by Cris
knight-capital-group-inc-kcg2

Knight Capital Group Inc (KCG) Rise and Fall

August 16th, 2012 Posted by Investment Valuation No Comment yet

Knight Capital Group Inc. (KCG) is based in Jersey City, NJ is a global financial services firm They provide access to the capital market across multiple asset classes to a broad network of clients. Including broker-dealers, institutions, and corporations. It started in 1990 as a market maker in equity securities. KCG recently ventured also into investment banking and asset management.

Please take note that this valuation was done for special events or issues that pop-up in the stock market recently. In which Knight’s trading loss of $440M shows cracks in equity markets.

KCG Investment in Enterprise Value

The concept of enterprise value is to calculate what it would cost to purchase an entire business. Enterprise Value EV) is the present value of the entire company.  On the other hand, market capitalization is the total value of the company’s equity shares. In essence, it is a company’s theoretical takeover price, because the buyer would have to buy all of the stock and pay off existing debt, and taking any remaining cash.

Enterprise Value = Market Capitalization + Total Debt – (Cash and Cash Equivalent + Short Term Investment)

ev

Explanation

The total debt represents a 21 percent average of enterprise value, while cash and cash equivalent represent 32 percent average of the enterprise value.  On the other hand, the enterprise value is lesser by 11 percent in market value due to its cash which is higher than total debt.  Likewise, buying the entire company an investor would be paying $1107 at $3 per share.  The distribution in buying would be as follows:

Operating assets – 100 percent  =  Equity – 100 percent 

Market capitalization is trending at 4, -1, -6, -14, and -13 percent from 2008 to 2012 TTM. Average of -6 percent. Enterprise value is trending at -8, -0.3, 12, -13 and -1 percent from 2008 to 2012 TTM. Average of -22 percent. Price dropped to 74 percent in the trailing twelve months.

Benjamin Graham’s Stock Test

Net Current Assets Value per Share (NCAVPS)

The Net Current Asset Value (NCAV) is a method from Benjamin Graham it is to identify whether the stock is trading below the company’s net current asset value per share. Specifically two-thirds or 66 percent of net current asset value. Meaning they are essentially trading below the company’s liquidation value and therefore, the stocks are trading in a bargain, and it is worth buying.

Net Current Asset Value  (NCAV) =  Current Assets – Current Liabilities

NCAVPS = NCAV / # of shares outstanding

knight capital group inc

Explanation

Market price was 74 percent average over the 66 percent of the NCAVPS. This means that the price was overvalued using market capitalization per share. This indicates that the stock of KCG was trading above its liquidation value from 2007 to 2012 trailing twelve months. Therefore, it did not pass the stock test of Benjamin Graham. In the trailing twelve months, the company’s net current asset value was negative since current liabilities is greater than current assets.

Market Capitalization/Net Current Asset Value (MV/NCAV)

Another stock test by Graham is by using market capitalization and dividing it to net current asset value (NCAV).  The idea is, if the result does not exceed the ratio of 1.2, then the stock passes the test for buying.

Net Current Asset Value  (NCAV) =  Current Assets – Current Liabilities

NCAVPS = NCAV / # of shares outstanding

mc over ncav

The results above showed that the ratio was over 1.2 from 2007 to 2012 trailing twelve months, meaning the stock of KCG is trading at an overvalued price. Therefore the stock of KCG did not pass the stock test of Benjamin Graham.

Benjamin Graham’s Margin of Safety

Graham called it the intrinsic value. According to Graham, the investor should invest only if the market price is trading at a discount to its intrinsic value. Value investing is buying with a sufficient margin of safety. Graham considers buying when the market price is considerably lower than the intrinsic or real value, a minimum of 40 to 50 percent below. The enterprise value is used because I think it is a much more accurate measure of the company’s true market value than market capitalization.

The margin of Safety (MOS)

margin of safety

The margin of safety represents 73 percent average of the real value (intrinsic value) and the price represents 27 percent average of the real value. This showed that the price is undervalued by an average of 73 percent.

The formula for Intrinsic Value.

Intrinsic Value = Current Earnings x (9 + 2 x Sustainable Growth Rate). Then the results are:

iv

Explanation

  • The earning per share (EPS) in the trailing twelve months was adjusted from 1.10 to 0.increaseincreasing in the number of shares of 260 shares, totaling to 355 shares (95 + 260) for TTM. The intrinsic value was then recalculated which resulted in a decrease in value by $16. (from $28 to $12).
  • In addition, calculation for EPS was: Basic Earning per Share = Net Income / Weighted average number of shares wherein,                   
    •  Net Income – $104 
    • Weighted Average # of shares = 95 + (95+260) = 95 + 355 = 450/2 = 225
    • Basic Earning per Share = $104/225 = $0.46
  • Moreover, the enterprise value per share represents 32 percent  average of the intrinsic value. It means the price was undervalued by 68 percent against the true value of the stock.    

Annual Growth Rate (SGR)

 annual growth rate

Intrinsic Value Graph

iv graph

The graph shows that the intrinsic value was greater than the price by 68 percent average, therefore, the price was trading at the undervalued price. Meaning the price was cheap.

The Relative and Average Ratio

Considering the growth of KCG from 2007 to 2012, I calculated the SGR using the relative ratio and the average ratio and compared the results.  It shows that intrinsic value and the margin of safety have higher results. The table below will show you the difference.

   

It shows that using the average ratio in calculating the growth of KCG, resulted in favorable intrinsic value and margin of safety. The result is the average for 5 years.

KCG Relative Value Method

Price to Earning*Earning per Share (P/E*EPS)

The concept of relative valuation methods for valuing a stock is to compare market values of the stock with the fundamentals (earnings, book value, growth multiples, cash flow, and other metrics) of the stock.

 pe x eps

The price was undervalued from 2007 to 2009, and it was fair value in 2010 and 2011. This is due to an adjustment in the earning per share (EPS) during the trailing twelve months for the increased in stocks by 260 shares.

Moreover, using the average price to earnings rather than the relative price to earnings shows a higher ratio. The table below shows the comparison between the two ratios:

Metrics Relative Ratio Average Ratio
Price to Earnings 61 avg 74 avg
P/E*EPS 8 avg 12 avg
% of EV over P/E*EPS 43% avg 46% avg

With this comparison, we consider the company’s growth from its five years of operation, the results were greater than 8 and 6 percent of the price to earnings and P/E*EPS, respectively.

Enterprise Value/Earning per Share (EV/EPS)

The use of this ratio is to separate price and earnings in enterprise value. And by dividing the enterprise value to projected earnings (EPS), the result represents the price (P/E) and the difference represents the earnings (EPS).

  ev over eps

The table showed that Price (P/E) represents an average of 81 percent; while earnings (EPS) represents 19 percent average.

Enterprise Value (EV)/Earnings Before Interest, Tax, Depreciation, and Amortization (EBITDA) or EV/EBITDA)

This metric is used in estimating business valuation. It compares the value of the company inclusive of debt and other liabilities to the actual cash earnings exclusive of non-cash expenses. This metric is useful for analyzing and comparing profitability between companies and industries.

EBITDA = Net Income + Interest Expense + Tax + Depreciation + Amortization

  ev over ebitda

This means that it will take 4 times of earnings of the company to cover the cost of buying or in other words, an investor will wait four years to cover the costs of the purchase price.

Conclusion

The stock price was trading at an overvalued price when pertaining to the results of Graham’s valuation method. Which are the NCAVPS and the MV/NCAV valuation. As a result;t, the stock was trading above the liquidation value of the company. Therefore, it did not pass the stock test of Benjamin Graham.

The margin of |Safety (MOS)

The margin of safety indicates that the price was undervalued by an average of 68 percent. In the trailing twelve months, the price was undervalued by 75 percent. In other words, the price was cheap.Using the average ratio in calculating the sustainable growth rate, the intrinsic value and the margin of safety represents 42.5 and 72 percent, respectively against 40.66 and 68 percent using the relative ratio.

Relative Valuation

The relative valuation method shows that the price was undervalued from 2007 to 2009. Moreover, the earning per share (EPS) decreased to $0.46 from $1.10. Due to an additional 260 shares totaled to 355 shares in the trailing twelve months. While the EV/EPS showed an overvalued price because the price represents 81 percent. And the earnings represent 15 percent of the enterprise value. In TTM, the price is 100 percent and 0 percent earnings due to the adjusted EPS.

Cost of Buying

Buying the entire business of KCG, an investor will wait 4 years to cover the costs of buying. In other terms, it will take 4 times the earnings of the Knight to cover the purchase price. Price to date, 8/15/2012 was $2.99 at $301.0 market capitalization.

Overview

The stock was trading above the liquidation value of KCG, in other words, the stock was overvalued. And the stocks did not pass the stock test of Benjamin Graham. The margin of safety indicates a 77 percent average and in the trailing twelve months. Moreover, it has a 75 percent margin of safety, meaning the price was cheap at $2.99 per share. On the other hand, relative valuation shows an overvalued price for P/E*EPS. And the EV/EPS valuation. Because the price represents 81 percent. 

Above all,

There was a margin of safety of 75 percent in the trailing twelve months meaning, the price is considered cheap at $2.99 per share.  Further, Graham would take the opportunity to buy stocks if the price was lower by 50 percent of the intrinsic value. Thus he considers the stock trading at a discount price. So, I recommend a BUY in the stock of Knight Capital Group Inc (KCG).

Researched and written by Criselda

knight-capital-group-inc-kcg2

Knight Capital Group Inc (KCG) Stock is Cheap

August 16th, 2012 Posted by Investment Valuation No Comment yet

Knight Capital Group Inc. (KCG) is based in Jersey City, NJ, is a global financial services firm that provides access to the capital market across multiple asset classes to a broad network of clients, including broker-dealers, institutions, and corporations. It started in 1990 as a market maker in equity securities. The company recently ventured also into investment banking and asset management.

This valuation was done for special events or issues that pop-up in the stock market recently, in which Knight’s trading loss of $440M shows cracks in equity markets.

KCG Investment in Enterprise Value

The concept of enterprise value is to calculate what it would cost to purchase an entire business. Enterprise Value EV) is the present value of the entire company.  Market capitalization is the total value of the company’s equity shares. In essence, it is a company’s theoretical takeover price, because the buyer would have to buy all of the stock and pay off existing debt, and taking any remaining cash.

Enterprise Value = Market Capitalization + Total Debt – (Cash and Cash Equivalent + Short Term Investment)

knight capital group inc

The total debt represents a 21 percent average of enterprise value, while cash and cash equivalent represent 32 percent average of the enterprise value.  The enterprise value is lesser by 11 percent in market value due to its cash which is higher than total debt.  Buying the entire company an investor would be paying $1107 at $3 per share.  The distribution in buying would be as follows:

Operating assets – 100 percent  =  Equity – 100 percent 

For Knight Capital Group Inc., market capitalization is trending at 4, -1, -6, -14, and -13 percent from 2008 to 2012 TTM. Average of -6 percent. Enterprise value is trending at -8, -0.3, 12, -13 and -1 percent from 2008 to 2012 TTM. Average of -22 percent. Price dropped to 74 percent in the trailing twelve months.

Benjamin Graham’s Stock Test

Net Current Assets Value per Share (NCAVPS)

The Net Current Asset Value (NCAV) is a method from Benjamin Graham it is to identify whether the stock is trading below the company’s net current asset value per share, specifically two-thirds or 66 percent of net current asset value. Meaning they are essentially trading below the company’s liquidation value and therefore, the stocks is trading in a bargain, and it is worth buying.

Net Current Asset Value  (NCAV) =  Current Assets – Current Liabilities

NCAVPS = NCAV / # of shares outstanding

knight capital group inc

Market price was 74 percent average over the 66 percent of the NCAVPS. This means that the price was overvalued using market capitalization per share. This indicates that the stock of Knight Capital Group was trading above its liquidation value from 2007 to 2012 trailing twelve months, therefore, it did not pass the stock test of Benjamin Graham. In the trailing twelve months, the company’s net current asset value was negative since current liabilities is greater that current assets.

Market Capitalization/Net Current Asset Value (MV/NCAV)

Another stock test by Graham is by using market capitalization and dividing it to net current asset value (NCAV).  The idea is, if the result does not exceed the ratio of 1.2, then the stock passes the test for buying.

Net Current Asset Value  (NCAV) =  Current Assets – Current Liabilities

NCAVPS = NCAV / # of shares outstanding

knight capital group inc

The results above showed that the ratio was over 1.2 from 2007 to 2012 trailing twelve months, meaning the stock of KCG is trading at an overvalued price. Therefore the stock of KCG did not pass the stock test of Benjamin Graham.

Benjamin Graham’s Margin of Safety

The margin of safety is used to identify the difference between company value and price. Value investing is based on the assumption that two values are attached to all companies, the market price and the company’s business value or true value. Graham called it the intrinsic value. The difference between the two values is called the margin of safety. According to Graham, the investor should invest only if the market price is trading at a discount to its intrinsic value. Value investing is buying with a sufficient margin of safety. Graham considers buying when the market price is considerably lower than the intrinsic or real value, a minimum of 40 to 50 percent below. The enterprise value is used because I think it is a much more accurate measure of the company’s true market value than market capitalization.

The margin of Safety (MOS)

knight capital group inc

The margin of safety represents 73 percent average of the real value (intrinsic value) and the price represents 27 percent average of the real value. This indicate that the price is undervalued by an average of 73 percent.

The intrinsic value is computed as follows: Intrinsic Value = Current Earnings x (9 + 2 x Sustainable Growth Rate). Then the results are:

knight capital group inc

Explanation

  • The earning per share (EPS) in the trailing twelve months was adjusted from 1.10 to 0.46 due to increase in the number of shares of 260 shares, totaling to 355 shares (95 + 260) for TTM. The intrinsic value was then recalculated which resulted in a decrease in value by $16. (from $28 to $12).
  • Calculation for EPS was: Basic Earning per Share = Net Income / Weighted average number of shares wherein,                   
    •  Net Income – $104 
    • Weighted Average # of shares = 95 + (95+260) = 95 + 355 = 450/2 = 225
    • Basic Earning per Share = $104/225 = $0.46
  • The enterprise value per share represents 32 percent  average of the intrinsic value, meaning the price was undervalued by 68 percent of the true value of the stock.    

Annual Growth Rate (SGR)

knight capital group inc

knight capital group inc

Explanation

The graph shows that the intrinsic value was greater than the price by averaging 68 percent. Therefore, the price was trading at the undervalued price. Meaning the price was cheap. In the trailing twelve months (TTM), the price was undervalued by 75 percent against the true value.

Considering the growth of KCG from 2007 to 2012, the SGR using the relative ratio and the average ratio and comparing the results.  It shows that intrinsic value and the margin of safety have higher results. The table below will show you the difference.

            knight capital group inc

It shows that using the average ratio in calculating the growth of KCG, resulted in a favorable intrinsic value and margin of safety. The result is the average for 5 years.

KCG Relative Value Method

Price to Earning*Earning per Share (P/E*EPS)

knight capital group inc

The price was undervalued from 2007 to 2009, and fair valued in 2010 and 2011. This is due to an adjustment in the earning per share (EPS) during the trailing twelve months for the increased in stocks by 260 shares.

Enterprise Value/Earning per Share (EV/EPS)

The use of this ratio is to separate price and earnings in enterprise value. By dividing the enterprise value to projected earnings (EPS), the result represents the price (P/E) and the difference represents the earnings (EPS).

The table showed that Price (P/E) represents an average of 81 percent; while earnings (EPS) represents 19 percent average.

Enterprise Value (EV)/Earnings Before Interest, Tax, Depreciation and Amortization (EBITDA) or EV/EBITDA)

This metric is used in estimating business valuation. In addition, this metric is useful for analyzing and comparing profitability between companies and industries.

EBITDA = Net Income + Interest Expense + Tax + Depreciation + Amortization

It will take 4 times of earnings of the company to cover the cost of buying. In other words, it means, an investor will wait four years to cover the costs of the purchase price.

Conclusion

The stock price of KCG was trading at the overvalued price pertaining to Graham’s valuation method. The stock was trading above the liquidation value of the company. Therefore, it did not pass the stock test of Benjamin Graham.

Using the average ratio in calculating the sustainable growth rate, the intrinsic value and the margin of safety represents 42.5 and 72 percent, respectively. While 40.66 and 68 percent respectively using the relative ratio.

Relative Valuation

The earning per share (EPS) decreased to $0.46 from $1.10, due to an additional 260 shares totaled to 355 shares. While EV/EPS indicate that price was overvalued. Because the price is 81 percent and the earnings are 15 percent of the enterprise value. In TTM, the price is 100 percent and 0 percent earnings due to the adjusted EPS in TTM.

Buying the entire business the investor will wait 4 years to cover the costs of buying. In other words, it will take 4 times the earnings to cover the purchase price. Price to date, 8/15/2012 was $2.99 at $301.0 market capitalization.

Overview

The stock was trading above the liquidation value of KCG. In other words, the stock was overvalued and did not pass the stock test of Benjamin Graham. The margin of safety was 75 percent, meaning the price was cheap at $2.99 per share. On the other hand, relative valuation shows an overvalued price in P/E*EPS and in EV/EPS valuation. 

The margin of safety was 75 percent and the stock price was cheap. Thus he considers the stock trading at a discount price. So, I recommend a BUY in the stock of Knight Capital Group Inc (KCG).

Written by Criselda

first solar inc-fslr

First Solar Inc (FSLR) Investment Valuation

August 10th, 2012 Posted by Investment Valuation No Comment yet

First Solar Inc Value Investing Approach 

First Solar Inc (FLSR). This model is prepared in a very simple and easy way to value a company, it adopts the investment style of the Father of Value Investing Benjamin Graham. The essence is that any investment should be purchased at a discount, meaning the true value should be more than the market value. Graham believed in fundamental analysis and was looking for companies with a sound balance sheet and with little debt. The basis for this valuation is the company’s five years of historical financial records, the balance sheet, income statement and cash flow statement. We calculated first the enterprise value as our first step. We believed this is important because it measures the total value of the company.

The Investment in Enterprise Value

The concept of enterprise value is to calculate what it would cost to purchase an entire business. Enterprise Value EV) is the present value of the entire company.  Market capitalization is the total value of the company’s equity shares. In essence, it is a company’s theoretical takeover price, because the buyer would have to buy all of the stock and pay off existing debt, and taking any remaining cash.

Formula: Enterprise Value = Market Capitalization + Total Debt – (Cash and Cash Equivalent + Short Term Investment)

FSLR EV

Explanation

The value of First Solar Inc (FLSR) was dropping at a percentage of -48, 3, -4, -72 and -57 percent with an average of -36% from 2008 to 2012 TTM, respectively. Net debt was -5 percent average, meaning cash was greater than debt by 5 percent. The distribution of the purchased price is as follows:

Average Total operating assets 100% Equity 95% + Net debt 5%
ttm Total operating assets 100% Equity 91% + Net debt 9%

If you have noticed in the table, the EV price was lesser than the market price, this means the cash item exceed debt. Buying the entire business at current date will cost an investor $1237 at $14 per share, inclusive of debt.

Enterprise value, as what our Pricing team has told me, is the theoretical takeover price. In the event of a buyout, an acquirer would have to take on the company’s debt but would pocket its cash. EV differs significantly from simple market capitalization in several ways, and many consider it to be a more accurate representation of a firm’s value. The value of a firm’s debt, for example, would need to be paid by the buyer when taking over a company, thus EV provides a much more accurate takeover valuation because it includes debt in its value calculation.

Benjamin Graham’s Stock Test

Net Current Asset Value (NCAV) Approach

The Net Current Asset Value (NCAV) is a method from Benjamin Graham to identify whether the stock is trading below the company’s net current asset value per share, specifically two-thirds or 66 percent of net current asset value. Meaning they are essentially trading below the company’s liquidation value and therefore, the stocks is trading in a bargain, and it is worth buying.

Net Current Asset Value (NCAV) Method

Current Assets – Current Liabilities = Net Current Asset Value

Net Current Asset Value (NCAV) / number of shares outstanding = Net Current Asset Value per Share

NCAVPS * 66% = (result) compare to Share Price.

The 66% result must not be higher than the share price.

FSLR NCAV

Illustrated in the table above, the computed 66 percent of the NCAVPS was lesser than EV price by 93 percent average. This indicates that price is trading above the liquidation value, therefore it did not pass the stock test of Graham. The price is overvalued.

Graham would consider buying if the share price does not exceed the result of 66%. The reason according to Graham is when a stock is trading below the net current asset value per share, they are essentially trading below the company’s liquidation value and therefore, the stock is trading in the bargain, and it is worth buying.

Market Value/Net Current Asset Value (MV/NCAV) Method

FSLR MV NCAV

The ratio shows that it is greater than 1.2 except in the trailing twelve months, therefore indicate that it passes the stock test.

Benjamin Graham’s Margin of Safety

The difference between the two values is called the margin of safety. According to Graham, the investor should invest only if the market price is trading at a discount to its intrinsic value. Value investing is buying with a sufficient margin of safety. Graham considers buying when the market price is considerably lower than the intrinsic or real value, a minimum of 40 to 50 percent below. The enterprise value is used because I think it is a much more accurate measure of the company’s true market value than market capitalization.

FSLR MOS

Facts:

The table shows that there was zero margin of safety for First Solar during 2007 and 2011, but during 2008, 2009, 2010 and the trailing twelve months the margin of safety was 52, 76, 70 and 90 percent with an average of 48 percent from its five years of operation. The stock of First Solar pass the requirement of Benjamin Graham of 40-50 percent below the intrinsic value, therefore the price is trading at an undervalued price. Intrinsic value factors earning per share and sustainable growth rate. I will walk you through the calculation and the explanation to the growth of FSLR, please let us go further below.

Explanation

Here is the explanation for the formula: EPS, the company’s last 12-month earnings per share. G: the company’s long-term (five years) sustainable growth estimate. 9: the constant representing the appropriate P-E ratio for a no-growth company as proposed by Graham (Graham proposed an 8.5, but we changed it to 9) 2: the average yield of high-grade corporate bonds.

Calculation for Growth Rate

FSLR IV

As you can see in the table above, we have replaced Graham’s EPS growth to a sustainable growth rate. For First Solar, there were no payments of cash dividends to the investors from 2007 to 2011 and the trailing twelve months, therefore, there was no dividends payout ratio.

Intrinsic Value Graph

FSLR graph

The graph above shows us the relationship between price and the intrinsic value (true value) of the stocks. There was a margin of safety and the stock is selling at a discount and the investor is purchasing with security. Likewise. buying the stock will give an investor a 90 percent margin of safety, this is really cheap. Although the intrinsic line is only at 130 compared to 2009 of 540, the value deteriorates thus giving us a high margin of safety.

Moving on, I will introduce you to the Relative Valuation Method. It compares the market value of the stocks with the fundamentals.

Relative Valuation Method 

This is done by multiplying the price to earnings (P/E) ratio with the company’s relative earning per share (EPS). And then comparing it to the enterprise value per share.

Price to Earning*Earning per Share (P/E*EPS)

FSLR PE EPS

The price was undervalued in the period of 2007 to 2010 and the trailing twelve months.  While 2011 shows a fair value price for the result is the same with price. As you will notice the price to earning and the earning per share of First Solar in 2011 and the trailing twelve months was negative, meaning there were no earnings during those periods. 

Explanation

Price to earning (P/E) ratio indicates the multiple that an investor is willing to pay for a dollar of a company’s earning. It shows the number of times that a stock price is trading relative to its earnings, the stock price fluctuates, so this ratio. EPS serves as an indicator of a company’s profitability.

From the table above, it shows that the stocks of FSLR is cheap and maybe a buy candidate. Of course, this is only one tool in evaluating the stock. We also have to consider other valuation in this model. So, let us walk through the EV/EPS valuation.

Enterprise Value/Earning per Share (EV/EPS)

The use of this ratio is to separate the enterprise value per share by its projected Earnings Per Share (EPS).   By dividing enterprise value per share to earnings per share, the result represents the price (P/E) and the difference represents the earnings (EPS). These separate the price to earnings ratio and the earning per share.

Formula:

Enterprise Value / Earnings per Share = Separated Price

Enterprise Value – Separated Price = Earnings

FSLR EV EPS

The price represents 15 percent average and the earning is 85 percent average of the enterprise value. Now, it is up for the investor’s own discretion whether the price is expensive or cheap. This is the price you are willing to pay.

Enterprise Value (EV)/Earnings Before Interest, Tax, Depreciation and Amortization (EBITDA) or (EV/EBITDA)

EBITDA = Income before Tax + Interest Expense + Depreciation + Amortization

FSLR EV EBITDA

Buying the entire business will take -4 years to cover up the costs of buying. In other words, there is no definite period for how long you will cover the purchase price. Because there was no income during the trailing twelve months. Buying the entire business may not be profitable in this period. Because there were no earnings and there was no definite period to cover the costs of buying.

Conclusion

First Solar value was dropping at 36 percent average. Benjamin Graham’s stock test shows that the stock did not pass the stock test in net current asset value method. Because the stock was selling above its liquidation value, therefore the price is overvalued. The MV/NCAV valuation, on the other hand, indicates that from 2007 to 2011 the price was overvalued. It did not pass the stock test of Graham. However, in the trailing twelve months, it passed the test because the ratio was lower than 1.2. Further, the margin of safety was zero in 2007 and 2011, because the price was higher than the intrinsic value. While, in the trailing twelve months, the margin of safety was 90 percent, the price was cheap.

The Relative Value Method

The price was undervalued and cheap. The EV/EPS valuation showed that the price was 15 percent. And the earnings were 85 percent average of the enterprise value per share. While the EV)/EBITDA valuation shows a -4 results. There is no definite period for an investor to cover the cost of buying since earnings were negative. The present value of the stock at this time, August 8, 2012, was $20.86 per share. It went up from the last quarter from $14 per share.

Finally,

There was a margin of safety averaging 48 percent. Therefore, the stocks of First Solar are best recommended for a BUY.

Researched and Written by Criselda

first solar inc-fslr

First Solar Inc (FSLR) Stock Is A Good Candidate for a Buy

August 10th, 2012 Posted by Investment Valuation No Comment yet

First Solar, Inc (FSLR) is an American photovoltaic manufacturer of rigid thin film modules, or solar panels, and a provider of utility-scale PV power plants and supporting services that include finance, construction, maintenance and end-of-life panel recycling. Wikipedia

FSLR has developed, financed, engineered, constructed and currently operates many of the world’s largest grid-connected PV power plants.

FSLR Value Investing Approach

This model is prepared in a very simple and easy way to value a company, it adopts the investment style of the Father of Value Investing Benjamin Graham. The essence is that any investment should be purchased at a discount, meaning the true value should be more than the market value. Graham believed in fundamental analysis and was looking for companies with a sound balance sheet and with little debt. The basis for this valuation is the company’s five years of historical financial records, the balance sheet, income statement, and cash flow statement. We calculated first the enterprise value as our first step. We believed this is important because it measures the total value of the company.

The Investment in Enterprise Value

The concept of enterprise value is to calculate what it would cost to purchase an entire business. Enterprise Value EV) is the present value of the entire company.  Market capitalization is the total value of the company’s equity shares. In essence, it is a company’s theoretical takeover price, because the buyer would have to buy all of the stock and pay off existing debt, and taking any remaining cash.

Formula: Enterprise Value = Market Capitalization + Total Debt – (Cash and Cash Equivalent + Short Term Investment)

FSLR EV

The value of FLSR was dropping at a percentage of -48, 3, -4, -72 and -57 percent with an average of -36% from 2008 to 2012 TTM, respectively. Net debt was -5 percent average, meaning cash was greater than debt by 5 percent. The distribution of the purchased price is as follows:

Average Total operating assets 100% Equity 95% + Net debt 5%
TTM Total operating assets 100% Equity 91% + Net debt 9%

If you have noticed in the table, the EV price was lesser than the market price, this means the cash item exceed debt. Buying the entire business at current date will cost an investor $1237 at $14 per share, inclusive of debt.

Enterprise value, as what our Pricing team has told me, is the theoretical takeover price. In the event of a buyout, an acquirer would have to take on the company’s debt but would pocket its cash. EV differs significantly from simple market capitalization in several ways, and many consider it to be a more accurate representation of a firm’s value. The value of a firm’s debt, for example, would need to be paid by the buyer when taking over a company, thus EV provides a much more accurate takeover valuation because it includes debt in its value calculation.

Benjamin Graham’s Stock Test

Net Current Asset Value (NCAV) Approach

The Net Current Asset Value (NCAV) is a method from Benjamin Graham to identify whether the stock is trading below the company’s net current asset value per share, specifically two-thirds or 66 percent of net current asset value. Meaning they are essentially trading below the company’s liquidation value and therefore, the stocks are trading in a bargain, and it is worth buying.

Net Current Asset Value (NCAV) Method

Current Assets – Current Liabilities = Net Current Asset Value

Net Current Asset Value (NCAV) / number of shares outstanding = Net Current Asset Value per Share

NCAVPS * 66% = (result) compare to Share Price.

The 66% result must not be higher than the share price.

FSLR NCAV

Illustrated in the table above, the computed 66 percent of the NCAVPS was lesser than EV price by 93 percent average. This indicates that price is trading above the liquidation value, therefore it did not pass the stock test of Graham. The price is overvalued.

Graham would consider buying if the share price does not exceed the result of 66%. The reason according to Graham is when a stock is trading below the net current asset value per share, they are essentially trading below the company’s liquidation value and therefore, the stock is trading in the bargain, and it is worth buying.

Market Value/Net Current Asset Value (MV/NCAV) Method

FSLR MV NCAV

The ratio shows that it is greater than 1.2 except in the trailing twelve months, therefore indicate that it passes the stock test.

Benjamin Graham’s Margin of Safety

The margin of safety is used to identify the difference between company value and price. Value investing is based on the assumption that two values are attached to all companies – the market price and the company’s business value or true value. Graham called it the intrinsic value. The difference between the two values is called the margin of safety. According to Graham, the investor should invest only if the market price is trading at a discount to its intrinsic value. Value investing is buying with a sufficient margin of safety. Graham considers buying when the market price is considerably lower than the intrinsic or real value, a minimum of 40 to 50 percent below. The enterprise value is used because I think it is a much more accurate measure of the company’s true market value than market capitalization.

FSLR MOS

Facts:

The table shows that there were zero margins of safety for First Solar during 2007 and 2011, but during 2008, 2009, 2010 and the trailing twelve months the margin of safety was 52, 76, 70 and 90 percent with an average of 48 percent from its five years of operation. The stock of First Solar pass the requirement of Benjamin Graham of 40-50 percent below the intrinsic value, therefore the price is trading at an undervalued price. Furthermore, the table below will show you how the intrinsic value was calculated. Intrinsic value factors earning per share and sustainable growth rate. I will walk you through the calculation and the explanation to the growth of FSLR, please let us go further below.

Explanation

Here is the explanation for the formula: EPS, the company’s last 12-month earnings per share. G: the company’s long-term (five years) sustainable growth estimate. 9: the constant representing the appropriate P-E ratio for a no-growth company as proposed by Graham (Graham proposed an 8.5, but we changed it to 9) 2: the average yield of high-grade corporate bonds.

Calculation for Growth Rate

FSLR IV

As you can see in the table above, we have replaced Graham’s EPS growth to a sustainable growth rate. The company’s profitability is measured by its return on equity. We also need to know the dividend payout ratio. FSLR does not pay cash dividends to the investors. therefore no dividends payout ratio.

Intrinsic Value Graph

FSLR graph

The graph above shows us the relationship between price and the intrinsic value (true value) of the stocks. As we can see, the true value line (red) was above the enterprise value line in 2008-2010 and TTM, meaning there was the margin of safety and the stock is selling at a discount and the investor is purchasing with security. Buying the stock at current date will give an investor a 90 percent margin of safety, this is really cheap. The intrinsic line is only at 130 compared to 2009 of 540, the value of FSLR deteriorates in the current date, thus giving us a high margin of safety.

Moving on, I will introduce you to the Relative Valuation Method. It compares the market value of the stocks with the fundamentals.

FSLR Relative Valuation Method 

This method will determine whether the stocks are undervalued or overvalued by multiplying the price to earnings (P/E) ratio with the company’s relative earning per share (EPS) and comparing it to the enterprise value per share.

Price to Earning*Earning per Share (P/E*EPS)

FSLR PE EPS

The P/E*EPS ratio in the table above indicates that the trading price was lesser than the result of PE*EPS. Meaning the price was undervalued in the period of 2007 to 2010 and the trailing twelve months.  While 2011 shows a fair value price for the result is the same with price. As you will notice the price to earning and the earning per share of FSLR in 2011 and the trailing twelve months was negative, meaning there were no earnings during those periods. 

Explanation

Price to earning (P/E) ratio indicates the multiple that an investor is willing to pay for a dollar of a company’s earning. It shows the number of times that a stock price is trading relative to its earnings, the stock price fluctuates, so this ratio. EPS serves as an indicator of a company’s profitability.

From the table above, it shows that the stocks of FSLR is cheap and maybe a buy candidate. Of course, this is only one tool in evaluating the stock. We also have to consider other valuation in this model. So, let us walk through the EV/EPS valuation.

Enterprise Value/Earning per Share (EV/EPS)

The use of this ratio is to separate the enterprise value per share by its projected Earnings Per Share (EPS). By dividing enterprise value per share to earnings per share, the result represents the price (P/E) and the difference represents the earnings (EPS). These separate the price to earnings ratio and the earning per share.

Formula:

Enterprise Value / Earnings per Share = Separated Price

Enterprise Value – Separated Price = Earnings

FSLR EV EPS

The price represents 15 percent average and the earning is 85 percent average of the enterprise value. Now, it is up for the investor’s own discretion whether the price is expensive or cheap. If an investor is buying stocks, one will know how much you paying for the price and how much you are paying for the earnings. This is the price you are willing to pay.

Enterprise Value (EV)/Earnings Before Interest, Tax, Depreciation and Amortization (EBITDA) or (EV/EBITDA)

EBITDA = Income before Tax + Interest Expense + Depreciation + Amortization

FSLR EV EBITDA

The result tells us that if you are buying the entire business it will take you -4 years to cover up the costs of buying. Meaning there is no definite period of how long you will cover the purchase price because there was no income during the trailing twelve months. Buying the entire business may not be profitable at this period because there were no earnings and there was no definite period to cover the costs of buying.

Conclusion

FSLR’s value was dropping at a 36 percent average. Benjamin Graham’s stock test shows that the stock did not pass the stock test because the stock was trading above its liquidation value. Therefore, the price is overvalued. The MV/NCAV valuation, on the other hand, indicates that from 2007 to 2011 the price was overvalued and did not pass the stock test of Graham. However, in the trailing twelve months, it passed the test because the ratio was lower than 1.2. Further, the margin of safety was zero in 2007 and 2011, because the price was higher than the intrinsic value. While, in the trailing twelve months, the margin of safety was 90 percent, the price was cheap.

FSLR Relative Value Method

On the other hand, the relative value method tells us that the price was undervalued or cheap P/E*EPS. The EV/EPS valuation showed that the price was 15 percent and the earnings were 85 percent average. While the (EV)/EBITDA valuation shows a -4 results. There is no definite period for an investor to cover the cost of buying the entire business since earnings were negative. The present value of the stock at this time, 8/8/2012 was $20.86 per share, it went up in the last quarter from $14 per share.

The margin of safety was averaging 48 percent and buying the stock at the trailing twelve months will give you a margin of safety at 90 percent. Therefore, the stocks of First Solar Inc (FSLR) is best recommended for a BUY.

Researched and Written by Criselda

Navigant Consulting Inc NCI

Navigant Consulting Inc (NCI) Worth Buying?

August 2nd, 2012 Posted by Investment Valuation No Comment yet

Navigant Consulting Inc (NCI) with its 10 percent year over year revenue growth and 20 percent adjusted earning per share growth, does NCI stock worth buying?

NCI Value Investing Approach 

The basis for this valuation is Navigant five years of historical financial records; the balance sheet, income statement, and cash flow statement. Enterprise value is the theoretical takeover price. In the event of a buyout, an acquirer would have to take on the company’s debt but would pocket its cash. EV differs significantly from simple market capitalization in several ways, and many consider it to be a more accurate representation of a firm’s value. The value of a firm’s debt, for example, would need to be paid by the buyer when taking over a company, thus Enterprise Value provides a much more accurate takeover valuation because it includes debt in its value calculation.

The Investment in Enterprise Value

The concept of enterprise value is to calculate what it would cost to purchase an entire business. Enterprise value (EV) represents the total value of the entire company. On the other hand, market capitalization (MC) represents the entire value of the company in the stock exchange. It represents the price of the equity.

Enterprise Value = Market Capitalization + Total Debt – (Cash and Cash Equivalent + Short Term Investment)

NCI EV

Explanation

The enterprise value was trending down at 7, -9, -26, 10 and 6 percent with an average of -3 percent from 2008 to 2011 and the trailing twelve months (TTM). Market capital went down as well by 16, -6, -36, 30 and 1 percent with an average of 1% percent from 2008 to 2012 trailing twelve months. The total cash of the company represented 2 percent of the enterprise value while total debt represents 25 percent. In the trailing twelve months, the cash was 0%, while total debts represent 22 percent of the enterprise value. Buying the entire company is paying for the equity and total debt, and the distribution would be as follows:

Average Operating Assets = 100% Equity: 77% + Total debt (net of cash) 23%
Trailing Twelve Months Operating assets = 100% Equity: 78.3% + Total debt (net of cash) 21.7%

Benjamin Graham’s Stock Test

Net Current Asset Value Per Share (NCAVPS)

The concept of this method is to identify stocks trading at a discount to the company’s net current asset value per share, specifically two-thirds or 66 percent of NCAV. This method is one of the oldest documented stock selection methodologies, dating back in the 1930s. 

Net Current Asset Value = Current Assets – Current Liabilities

NCAVPS = NCAV / # of shares outstanding

NCI NCAVPS

Explanation

The table shows that the calculated 66 percent of NCAVPS was lesser than the market value per share, this means that the price was trading at an overvalued price from 2007 to 2012 trailing twelve months. The market price was 90 percent average over the calculated 66 percent of the NCAVPS meaning it was expensive and the stock was trading above the liquidation value of the company.

Graham would consider buying if the share price does not exceed the result of 66 percent. The reason for this according to Graham is when a stock is trading below the NCAVPS, they are essentially trading below the company’s liquidation value and therefore, the stocks of NCI is trading in a bargain, and it is worth buying.

The Market Value/Net Current Asset Value (MV/NCAV)

Another stock test by Graham is by calculating the enterprise value over the net current asset value. The result must not be greater than 1.2 ratios. Graham would only consider buying if it does not exceed 1.2 ratios. 

NCI MV NCAV

The results of the calculation showed that the ratio was above 1.2, so, it indicates that the price was overvalued from 2007 to 2012, trailing twelve months. It means that the price was expensive.

Benjamin Graham’s Method of Margin of Safety

The margin of safety (MOS) is a formula to identify the difference between company value and price. If value and the price are equal, the stock price is considered fairly valued. Moreover, if the price is more than the value, then you can assume that the stock is overpriced. If the price is less than value, this is a good buy because there is lots of room available for better profit in the future.

NCI Margin of Safety (MOS)

NCI MOS

The table showed that the margin of safety for 2007, 2009 and 2010 was zero, meaning the enterprise value is lesser than the price. Further, indicates that the price during these periods was expensive. While in 2008, 2011 and the trailing twelve months, it showed that the true value was greater than the price, meaning the stock is trading at an undervalued price. The margin of safety represents a 14 percent average.

NCI Intrinsic Value (IV)

Here is the explanation for the calculation: EPS, the company’s last 12-month earnings per share. G: the company’s long-term (five years) sustainable growth estimate. 9: the constant represents the appropriate P-E ratio for a no-growth company as proposed by Graham (Graham proposed an 8.5, but we changed it to 9) 2: the average yield of high-grade corporate bonds.

NCI Intrinsic Value

I use the return on equity for the sustainable growth rate as the major factor. NCI profitability is measured by its return on equity. We also need to know what percentage of a company’s earnings per share is paid out in dividends, which is called the dividend payout ratio.

NCI Sustainable Growth Rate (SGR)

NCI Sustainable Growth Rate

The above table showed that there was no payout ratio from 2007 to 2012 trailing twelve months. It indicates that the company is not paying dividends since 2007. It is advisable that one should look into the free cash flow of the company as to where the money is going.

So, let us walk further, and I will guide you to the intrinsic value graph of NCI.

Intrinsic Value Graph

NCI Intrinsic Graph

The graph shows two comparisons, between the intrinsic value or the true value of the stocks, the market price and the enterprise value per share. In 2007, 2008 and 2010 the intrinsic value (red line) was below the price for both markets. And the enterprise (blue and green line). This means that the price was higher than the true value; therefore, the stock is trading at an overvalued price.

On the other hand, in 2008, 2011 and 2012 trailing twelve months, the intrinsic value is higher than the price. Meaning the stock is trading at a price below the real value of the stock. Therefore, the price was cheap. The margin of safety in percent was 22, 31 and 31, respectively, using the enterprise value. While using the market value, the margin of safety for the trailing months is 47%. This is the distance of the price and the intrinsic value line converted into a percentage.

The price was cheap by 31 percent considering the enterprise value and 48 percent considering the market value.

NCI Relative Valuation Method

Price to Earnings*Earning Per Share (P/E*EPS)

NCI PE EPS

The enterprise value price was overvalued because the price was higher than the EV. So, therefore, using this valuation, it would not be advisable to invest with NCI.

Enterprise Value/Earning Per Share (EV/EPS)

Another use of this ratio is by dividing the enterprise value by its projected earnings per share (EPS). By dividing the enterprise value to EPS, the result represents the price (P/E) and the difference represents the earnings (EPS). This separates the price to earnings ratio to earning per share. This metrics, EV Price to EPS separate price and earnings per share. 

NCI EV EPS

Explanation

The above calculation indicated that the price was more than the enterprise value per share. Because in calculating EPS, it factors net income and the number of shares. If the net income is lesser than the number of shares, the result of EPS is very low. Thereby, giving a higher value of price (the separated amount) than the enterprise value (the amount to be separated). And the earnings resulted in negative earnings shown in the table above. This might indicate that the company is not profitable. However, in 2011 and the trailing twelve months, the earnings show improvement by 75 percent and 15 percent, respectively.

In using this valuation, we will know whether the stock is trading over or undervalued. The price represents 158 percent. And the earnings represent -58 percent and the result of 100 percent is the enterprise value.

Enterprise Value (EV)/Earnings Before Interest, Tax, Depreciation, and Amortization (EBITDA) or (EV/EBITDA)

This metric is used in estimating business valuation. It compares the value of the company inclusive of debt to the actual cash earnings exclusive of non-cash expenses. Moreover, it is useful for analyzing and comparing the profitability between companies and industries.

EBITDA = Net Income + Interest Expense + Tax + Depreciation + Amortization

NCI EV EBITDA

Explanation

Buying the entire business would take an investor 10 years to cover up the costs of buying. In other words, it would take 10 times the earnings to recover the cost of the purchase price. Including debt or an average of 12 years to cover the costs. It is a very long period of waiting. This means that the company is not profitable because the cash generating power of the entire firm is low.

Enterprise value is the computed value of the company. It is computed by adding total debt to market capitalization and deducting the cash and cash equivalent. In other terms, EBITDA is net income with interest, taxes, depreciation, and amortization. The advantage of the EV/EBITDA multiple is that it is capital structure-neutral. Further, you can use EV/EBITDA when you want to see the cash-generating power of the entire firm. And you don’t care whether it’s equity or debt financing this cash-generating operation.

Conclusion

The price to date was $11.37 with $586.6 market capitalization. An overall view, the stock of Navigant Consulting was trading at an overvalued price. I recommend that the stock Navigant Consulting Inc (NCI) be Hold.

Research and Written by Cris

kaman-corporation-kamn2

Kaman Corporation (KAMN) Company Research

August 2nd, 2012 Posted by Company Research Report No Comment yet

Kaman Balance Sheet

Financial Liquidity

Kaman Corporation is a diversified company operating in two business segments which is Aerospace and Industrial Distribution.

Liquidity is the ability of the firm to convert assets into cash. It is also called marketability or short-term solvency. The liquidity of a business firm is usually of particular interest to its short-term creditors since the liquidity of the firm measures its ability to pay those creditors.

In our guide to value investing for Kaman Corporation, its financial liquidity was computed through ratios from 2007 to 2011 as shown in the table below.

kaman balance sheet a

  • Current ratio average for five years of operation was 2.8, which shows that the company’s current assets was greater than current liabilities by 280 percent.
  • Quick ratio was 1.30. It tells us that Kaman’s monetary assets which is current assets less inventory, was 130 percent and was also greater than its current liabilities.
  • Working capital was $338 average in five years of operation. This is the funds left after deducting current liabilities from current assets. Kaman’s working capital showed a positive balance, increasing from year to year except in 2008 which slightly down by $1.

Kaman’s liquidity on its five years of operation was very impressive. It shows that its business was financially stable, wherein the company was capable to pay its short-term as well as long-term obligations and can even invest to other line of business.

Efficiency ratios are used to measure the quality of the company’s receivables and how efficiently it uses its other assets. For five years period from 2007 to 2011, Kaman’s efficiency are:

kaman balance sheet b

  • Inventory turnover ratio was 3 times average each period. This shows that its products are not so in demand in the market. Sales to inventory ratio shows the number of “turns” in inventory. If the ratio is very high, it may indicate that the business is losing sales to competitors because they are under stocked or customers are buying elsewhere.  If ratio is too low, this may show that the inventories are stagnant.
  • Receivable turnover ratio was 8 times average per year. Receivables turnover is a ratio that works hand in hand with average collection period to give the business owner a complete picture of the state of the accounts receivable. Receivables turnover looks at how fast we collect on our sales or, on average, how many times each year we clean up or totally collect our accounts receivable.
  • Payable turnover ratio was 14 times average. A low percentage would indicate a healthy ratio with all bills be paid in a timely manner.
  • And fixed asset turnover ratio was 16 times average.

To gauge how efficient the company in handling its resources, also consider its industry, since it varies from industry to industry. We cannot compare food lines inventory off take to non-food lines since normally, food lines are sellable than non-foods. Kaman’s performance was quite good considering its industry.

The day’s sales in inventory or inventory conversion period tells the business owner how many days, on average, it takes to sell inventory. The usual rule is that the lower, the better, since it is better to have inventory sell quickly than to have it sit on the shelves. Receivable conversion period measures the number of days it takes a company to collect its credit accounts from its customers. A lower number of days is better because this means that the company gets its money more quickly. While payable conversion period measures how the company pays its suppliers in relation to the sales volume being transacted. A low percentage would indicate a healthy ratio. For Kaman, conversion period from 2007 to 2011 are:

kaman balance sheet e

  • Inventory conversion period was 112 days average which means it takes almost 4 months to sell its inventory.
  • Receivable conversion period was 48 days which tells us that its credit accounts have more than 1.5 month to collect.
  • Payable conversion period was 35 days average which means that the company pays its suppliers within 35 days.
  • Cash conversion cycle was 125 average days. This metric looks at the amount of time needed to sell inventory, the amount of time needed to collect receivables and the length of time the company is afforded to pay its bills without incurring penalties.

Considering Kaman’s line of business, wherein products are not so in demand in the market, with line-up of competitors, cash realization is within normal level, provided, that there is a continuous transaction, proper handling and control and close monitoring.

Leverage

Leverage is a business term that refers to borrowing. If a business is leveraged it means that the business has borrowed money to finance the purchase of assets. The other way to purchase assets is through use of owner funds, or equity.

One way to determine leverage is to calculate the debt-to-equity ratio, showing how much of the assets of the business are financed by debt and how much by equity.

 

  • The company’s debt ratio was 0.57 average which means that Kaman total obligations was 57 percent of the total assets.
  • While debt to equity ratio was 1.40. It tells us that Kaman’s total obligations were more than its owners’ equity at 140 percent.
  • And solvency ratio was 0.12 average which means that the company is 12 percent solvent.
  • Current liabilities to total assets was 0.24 which tells us that 24 percent of the company’s total assets are controlled by the creditors mostly suppliers.
  • Stockholders’ equity to total assets was 0.43 average which also means that the owners have 43 percent claims on the company’s total assets.

Based on the above findings, Kaman Corporation was indebted by 57 percent against total assets. With its debt of 140 percent against total equity, the company must have to closely monitor regular settlement of its debt to bring it to manageable level.

Property, Plant & Equipment

Property, Plant & Equipment consists of assets that are tangible and relatively long-lived. The firm has acquired these assets in order to use them to produce goods and services that will generate future cash inflows. These are recorded at cost upon acquisition of these assets.  From 2007 to 2011, the company’s acquisition of plant, property and equipment are as follows:

kaman balance sheet d

  • Average property, plant and equipment was $206.
  • Accumulated Depreciation average of $122 which is equivalent to 59 percent of the total cost of PPE.
  • Net book value of PPE was $84 or 41 percent of the total cost.

Referring to the above data, property, plant and equipment of Kaman is not yet fully depreciated with remaining life of 41 percent. By using the percentage method of depreciation, the company could still use the fixed asset for two more years.

I think we are basically done with the balance sheet. It’s high time to move on the income statement. Take a look at the table below. They are the results of profitability ratios of Kaman from 2007 to 2011. But what are those? Good thing Nelly explained everything.

Kaman Income Statement

Profitability

kaman IS a

  • Net profit margin; simply the after tax profit a company generated for each dollar of sales; had a yearly average of 3.43. This depicts that it decline in 2008 of 45 percent compared to 2007 net margin of 5.51. But, in 2009 to 2011 it increases yearly of 0.40, 2.1, and 17 percent.
  • Their asset turnover; which measures the effectiveness of the company to convert its assets into revenues; showed an average of 1.63 percent.
  • Return on assets has an average of 5.64 percent and this tells us how much profit the company generated for each dollar on total assets. Which show that in 2007 returns has the highest 8.84 with decreases in 2008 and 2009 and slightly increases in 2010 and 2011 of 8 percent and 17.8.
  • Their financial leverage was 2.4 in average. This measures the financial structure ratio of the company base on total assets against total stockholders’ equity. Resulting as the equity multiplier, it allows the investors to see what portion of the return on equity is the result of debt.
  • Return on equity had an average of 12.64; the company could return such profit percent for every dollar of equity. This was computed through DuPont method wherein the formula is net profit margin multiply with asset turnover multiplied with equity multiplier.
  • Return on invested capital with an average of 9.91. This is the financial measure that quantifies how well a company generates cash flow relative to the capital it has invested in its business.

The data tells us that net profit margins vary across different companies, making it important for comparison a potential investment against its competitors. A higher net profit margin is preferable as a general rule of thumb. Kaman’s asset turnover ratio tends to be inversely related to the net profit margin. The higher the net profit margin for the last five years, the lower the asset turnover and this is more attractive to investors By comparing the results on returns earned on debts or their financial leverage to returns on profit margin and sales, they earned more on internally generated sales  which was impressive and favorable to investors.

Income

How is the revenue going on with Kaman Corporation for its five years of operation? Nelly computed for it and put the data into table as shown below:

kaman IS b

  • Revenue was the company’s total earnings per year wherein Kaman Corporation show an average of 1,260.6 million dollars for the last five years. Its trend increase slightly in 2008, decrease in 2009, then increases in 2010 and 2011.
  • Their gross profit was the company’s total earnings after deducting its cost of revenue.  Its trend was same as their revenue with a yearly average of 343 million dollars.
  • Operating income was the company’s total earnings after deducting all operations expenses. Wherein their trend showed a fixed-down-up movement with an average 67.2 million dollars.
  • Their income before tax was the income after interest and other income and expenses, wherein it shows an average of 60.2 million dollars. It’s showed an increase in 2008, decrease in 2009 and then increase in 2010 and 2011.
  • While their net income was the company’s income after deducting income taxes with a yearly average of 42.8 million dollars. It showed a decreasing trend in 2008 and 2009 and then increases in 2010 and 2011.

Looking into their income, Kaman’s revenue depicts a yearly growth ratio of 9.54, 15.43, -8.56, 15.03 and 13.62 from 2007 to 2011. This means their revenue was trending upward except in 2009 wherein revenues declined so as net income decreased. Their operating income has a growth ratio of 35.35, 0.83, -17.35, 8.34 and 52.00. This show drastic changes yearly meaning operating expenses fluctuates. Its net income growth ratio has depicts a 75.92 percent, -36.34, -8.29, 9.07 and 43.61 yearly. The decrease in net income in 2008 was cause by the increase in cost of revenue and operating expenses while in 2009 it was due to decrease in their revenues.

Expenses

How about with their expenses from its five years of operations? Listed below are the expenses incurred during 2007 to 2011:

kaman IS c

  • Their cost of revenue was the amount the company paid for the goods that was sold during the year. This had an average of 917.4 million dollars and it represents 73 percent of revenue.
  • While their operating expense was the expenses incurred in conducting their regular operations of the business. And it has an average of 275.8 which is 22 percent of revenue.
  • Their provision for income tax was the amount allocated for their payment of income taxes. And this had an average of 21.4 which represents 2 of revenue.

Overall expenses or total expenses result an average of 97 percent of revenues leaving a merger amount of 3 percent for their net income from revenues. This means KAMN’s expenses on their operations gets a huge chunk on their revenue which is unfavorable, therefore, to improve their net margin they should tighten on their budgeting and costing.

Margins

I’ve learned that profitability can be measured in two ways. One is from returns (which we tackle on the early part of the income statement; and the other one is from margins. For Kaman Corporation, Nelly laid the margins percentage of revenue from 2007 to 2011.

kaman IS d

  • Gross profit margin has a yearly average of 27 percent.
  • Operating margin has an average of 5.3.
  • EBT margin has an average of 4.8.
  • Net margin has an average of 3.

To double check Kaman Corporation as a manufacturing company, it has only a gross margin averaging to 27 percent.  This means cost of revenue holds 73 percent which was almost three fourth of their total earnings. Therefore, after deducting their operating expenses, operating margin was only 5.3 and EBT margin 4.8 minus the non-operating expenses. Thus, net margin left an average of 3 percent of revenue.

We are down now to the last part of Numbers team report and that is the cash flow.

Kaman Cash Flow

Cash flow statement is one of the useful tools that laying all the facts. This encompasses the result from the operating side up to financing activities.

Cash Flow from Operating Activities

Indirect method or reconciliation method starts with net income and converts it to net cash flow from operating activities. In other words, the indirect method adjusts net income for items that affected the reported net income but didn’t affected cash. A sample you can see from table 1 below.

Direct method also called the income statement method; reports cash receipts and cash disbursements from operating activities. The difference between these two amounts is the net cash flow from operating activities.

To compute net cash flows from operating activities, non-cash changes in the income statement are added back to net income, and net cash credits are deducted. Like as what you can see from table 1. Net income was net earnings from the revenue for the period after all deducting its direct cost and operating expenses. Depreciation and amortization was an allocation of asset, it was added back since it was not cash generating. Inventory was an item that was ready or available goods for sale. Other non-working capital was a change from accounts receivable or accounts payable. Other non-cash item refers to allowance for doubtful accounts or unrealized gains and losses in investment.

The net cash provided from operating activities for their five years of operation only blew up by 63 percent in 2009 against 2007 and went down in 2011 by 56 percent. This was due for the net income had only results in 2007 and 2011.The movement of depreciation was consistently increasing, while the inventory had only increase in 2009 by 246 percent.

 kaman CF a

On other hand, operating cash flow results using direct method, are:

kaman CF b

In direct method, cash collection was the based then deduct all the cash payments made by the company for that period. Cash payment for purchases was the purchases made within the period; cash payments for operating was cash paid in terms of operating expenses like salaries; while cash payments for income taxes was a taxes paid due for that year.

The net cash from operating indicated that Kaman Corporation had insufficient cash, the cash payments made exceeds over their cash collection. It had an average of -113 percent deficits.

Cash Flow from Investing Activities

Cash flow from investing was an activity of cash that focuses on where the company invested or utilized their cash. Based from the total, they venture in acquisition more than in PPE with equivalent percentage of 106 and 36 percent. This is because Kaman Corporation is a diversified company that conducts business in the aerospace and industrial distribution markets.

 kaman CF c

The net cash for investing activities indicates; in 2007 it had only a positive result to 40 percent based in total, due to the contribution of other investing activities which represents at 106 percent positive. In 2008 to 2009 was decline by 82 percent and from 2010 to 2011 was up to 38 percent. The movement was due for the acquisition in sideways.

Cash Flow from Financing Activities

Net cash provided or used in financing activities was mainly contributed from debt issued, debt repayment, dividend paid and other financing activities. Debt issued is a company cash provided for the business. Debt repayment is a restructuring of existing debt that the company used for the operation. Dividend paid is a cash dividend paid by the company during the period. Other financing activities are normally from the increase/decrease in debt issue costs, increase/decrease in financing costs and increase/decrease in minority interest.

kaman CF d

Table 4 showed that the net cash from financing activities of Kaman Corporation was quietly impressive; since for their five years only in 2007 and 2009 they had a negative result. This was due to the dividend and other financing cash flow paid for that respective years. The rest was positive due to the debt issued by the company.

Cash Flow Ratios

Operating cash flow to sales ratio compares the operating cash flow of the company to its sales revenue. It will help us determine, the ability of a company to generate cash from its sales. In other words, it shows the ability of a company to turn its sales into cash. It is expressed as a percentage. Though there is no any standard guideline but a consistent and/or increasing trend in this ratio is a positive; indication of good debtor’s management.

kaman CF e

By referring to table 5, operating cash flow ratio to sales ratio of Kaman Corporation was on grade C. It indicated that in every $1 of sales they can only generate at $.02,-.01, .06, .03 and .03 from 2007 to 2011, respectively.

Operating cash flow ratio help us measures the company’s ability how they operating efficiently. From operating activities result over the total current liabilities or obligation of the company. For Kaman Corporation, the result was  negative in 2008. In total result to 17 percent; it means in every $1 the company cash will be used was $.17. Table 6 furthers explains this.

The free cash flow is to provide a measure of what is available to the owners of firm after providing for capital expenditure to maintain the existing assets and to create new assets for the future growth. The higher free cash flows to operating cash flows ratio is a very good indicator of financial health of a company. For Kaman Corporation, it showed results as indicated in the table 7 below.

 

The free cash flow result of Kaman Corporation from 2008 to 2011 was declining from 214 down to 36 percent. In average; it represent at 84 percent. It means, in every $1, the company had $.84.

Written by Rio, Nelly and Dyne

Edited by Criselda

kaman-corporation-kamn2

Is Kaman Corporation (KAMN) Liquid?

August 2nd, 2012 Posted by Company Research Report No Comment yet

Kaman Corporation (KAMN) is an American aerospace company, with headquarters in Bloomfield, Connecticut. It was founded in 1945 by Charles Kaman. During the first ten years, the company operated exclusively as a designer and manufacturer of several helicopters that set world records and achieved many aviation firsts. Wikipedia

Balance Sheet

Financial Liquidity

Liquidity is the ability of the firm to convert assets into cash. It is also called marketability or short-term solvency. The liquidity of a business firm is usually of particular interest to its short-term creditors since the liquidity of the firm measures its ability to pay those creditors.

In our guide to value investing for Kaman Corporation, its financial liquidity was computed through ratios from 2007 to 2011 as shown in the table below.

  • Current ratio average for five years of operation was 2.8, which shows that the company’s current assets was greater than current liabilities by 280 percent.
  • Quick ratio was 1.30. It tells us that Kaman’s monetary assets which is current assets less inventory, was 130 percent and was also greater than its current liabilities.
  • Working capital was $338 average in five years of operation. This is the funds left after deducting current liabilities from current assets. Kaman’s working capital showed a positive balance, increasing from year to year except in 2008 which slightly down by $1.

What can we say about results? Rio said “Kaman’s liquidity on its five years of operation was very impressive. It shows that its business was financially stable, wherein the company was capable to pay its short-term as well as long-term obligations and can even invest to other line of business.”

Efficiency ratios are used to measure the quality of the company’s receivables and how efficiently it uses its other assets. For five years period from 2007 to 2011, Kaman’s efficiency are:

  • Inventory turnover ratio was 3 times average each period. This shows that its products are not so in demand in the market. Sales to inventory ratio shows the number of “turns” in inventory. If the ratio is very high, it may indicate that the business is losing sales to competitors because they are under stocked or customers are buying elsewhere.  If ratio is too low, this may show that the inventories are stagnant.
  • Receivable turnover ratio was 8 times average per year. Receivables turnover is a ratio that works hand in hand with average collection period to give the business owner a complete picture of the state of the accounts receivable. Receivables turnover looks at how fast we collect on our sales or, on average, how many times each year we clean up or totally collect our accounts receivable.
  • Payable turnover ratio was 14 times average. A low percentage would indicate a healthy ratio with all bills be paid in a timely manner.
  • And fixed asset turnover ratio was 16 times average.

To gauge how efficient the company in handling its resources, also consider its industry, since it varies from industry to industry. We cannot compare food lines inventory off take to non-food lines since normally, food lines are sellable than non-foods. Kaman’s performance was quite good considering its industry.

The day’s sales in inventory or inventory conversion period tells the business owner how many days, on average, it takes to sell inventory. The usual rule is that the lower, the better, since it is better to have inventory sell quickly than to have it sit on the shelves. Receivable conversion period measures the number of days it takes a company to collect its credit accounts from its customers. A lower number of days is better because this means that the company gets its money more quickly. While payable conversion period measures how the company pays its suppliers in relation to the sales volume being transacted. A low percentage would indicate a healthy ratio. For Kaman, conversion period from 2007 to 2011 are:

  • Inventory conversion period was 112 days average which means it takes almost 4 months to sell its inventory.
  • Receivable conversion period was 48 days which tells us that its credit accounts have more than 1.5 month to collect.
  • Payable conversion period was 35 days average which means that the company pays its suppliers within 35 days.
  • Cash conversion cycle was 125 average days. This metric looks at the amount of time needed to sell inventory, the amount of time needed to collect receivables and the length of time the company is afforded to pay its bills without incurring penalties.

“Considering Kaman’s line of business, wherein products are not so in demand in the market, with line-up of competitors, cash realization is within normal level, provided, that there is a continuous transaction, proper handling and control and close monitoring,” Rio said.

Leverage

Leverage is a business term that refers to borrowing. If a business is “leveraged,” it means that the business has borrowed money to finance the purchase of assets. The other way to purchase assets is through use of owner funds, or equity.

One way to determine leverage is to calculate the debt-to-equity ratio, showing how much of the assets of the business are financed by debt and how much by equity (ownership). For Kaman Corporation, in  five years period from 2007 to 2011, results are:

kaman corporation

  • The company’s debt ratio was 0.57 average which means that Kaman total obligations was 57 percent of the total assets.
  • While debt to equity ratio was 1.40. It tells us that Kaman’s total obligations were more than its owners’ equity at 140 percent.
  • And solvency ratio was 0.12 average which means that the company is 12 percent solvent.
  • Current liabilities to total assets was 0.24 which tells us that 24 percent of the company’s total assets are controlled by the creditors mostly suppliers.
  • Stockholders’ equity to total assets was 0.43 average which also means that the owners have 43 percent claims on the company’s total assets.

Based on the above findings, Kaman Corporation was indebted by 57 percent against total assets. With its debt of 140 percent against total equity, the company must have to closely monitor regular settlement of its debt to bring it to manageable level.

Property, Plant & Equipment

Property, Plant & Equipment consists of assets that are tangible and relatively long-lived. The firm has acquired these assets in order to use them to produce goods and services that will generate future cash inflows. These are recorded at cost upon acquisition of these assets.  From 2007 to 2011, the company’s acquisition of plant, property and equipment are as follows:

 kaman corporation

  • Average property, plant and equipment was $206.
  • Accumulated Depreciation average of $122 which is equivalent to 59 percent of the total cost of PPE.
  • Net book value of PPE was $84 or 41 percent of the total cost.

Referring to the above data, property, plant and equipment of Kaman is not yet fully depreciated with remaining life of 41 percent. By using the percentage method of depreciation, the company could still use the fixed asset for two more years.

I think we are basically done with the balance sheet. It’s high time to move on the income statement. Take a look at the table below. They are the results of profitability ratios of Kaman from 2007 to 2011. But what are those? Good thing Nelly explained everything.

Income Statement

Profitability

kaman corporation

  • Net profit margin; simply the after tax profit a company generated for each dollar of sales; had a yearly average of 3.43. This depicts that it decline in 2008 of 45 percent compared to 2007 net margin of 5.51. But, in 2009 to 2011 it increases yearly of 0.40, 2.1, and 17 percent.
  • Their asset turnover; which measures the effectiveness of the company to convert its assets into revenues; showed an average of 1.63 percent.
  • Return on assets has an average of 5.64 percent and this tells us how much profit the company generated for each dollar on total assets. Which show that in 2007 returns has the highest 8.84 with decreases in 2008 and 2009 and slightly increases in 2010 and 2011 of 8 percent and 17.8.
  • Their financial leverage was 2.4 in average. This measures the financial structure ratio of the company base on total assets against total stockholders’ equity. Resulting as the equity multiplier, it allows the investors to see what portion of the return on equity is the result of debt.
  • Return on equity had an average of 12.64; the company could return such profit percent for every dollar of equity. This was computed through DuPont method wherein the formula is net profit margin multiply with asset turnover multiplied with equity multiplier.
  • Return on invested capital with an average of 9.91. This is the financial measure that quantifies how well a company generates cash flow relative to the capital it has invested in its business.

The data tells us that net profit margins vary across different companies, making it important for comparison a potential investment against its competitors. A higher net profit margin is preferable as a general rule of thumb. Kaman’s asset turnover ratio tends to be inversely related to the net profit margin. The higher the net profit margin for the last five years, the lower the asset turnover and this is more attractive to investors By comparing the results on returns earned on debts or their financial leverage to returns on profit margin and sales, they earned more on internally generated sales  which was impressive and favorable to investors.

Income

How is the revenue going on with Kaman Corporation for its five years of operation? Nelly computed for it and put the data into table as shown below:

kaman corporation

  • Revenue was the company’s total earnings per year wherein Kaman Corporation show an average of 1,260.6 million dollars for the last five years. Its trend increase slightly in 2008, decrease in 2009, then increases in 2010 and 2011.
  • Their gross profit was the company’s total earnings after deducting its cost of revenue.  Its trend was same as their revenue with a yearly average of 343 million dollars.
  • Operating income was the company’s total earnings after deducting all operations expenses. Wherein their trend showed a fixed-down-up movement with an average 67.2 million dollars.
  • Their income before tax was the income after interest and other income and expenses, wherein it shows an average of 60.2 million dollars. It’s showed an increase in 2008, decrease in 2009 and then increase in 2010 and 2011.
  • While their net income was the company’s income after deducting income taxes with a yearly average of 42.8 million dollars. It showed a decreasing trend in 2008 and 2009 and then increases in 2010 and 2011.

Looking into their income, Kaman’s revenue depicts a yearly growth ratio of 9.54, 15.43, -8.56, 15.03 and 13.62 from 2007 to 2011. This means their revenue was trending upward except in 2009 wherein revenues declined so as net income decreased. Their operating income has a growth ratio of 35.35, 0.83, -17.35, 8.34 and 52.00. This show drastic changes yearly meaning operating expenses fluctuates. Its net income growth ratio has depicts a 75.92 percent, -36.34, -8.29, 9.07 and 43.61 yearly. The decrease in net income in 2008 was cause by the increase in cost of revenue and operating expenses while in 2009 it was due to decrease in their revenues.

Expenses

How about with their expenses from its five years of operations? Listed below are the expenses incurred during 2007 to 2011:

kaman corporation

  • Their cost of revenue was the amount the company paid for the goods that were sold during the year. This had an average of 917.4 million dollars and it represents 73 percent of revenue.
  • While their operating expense was the expenses incurred in conducting their regular operations of the business. And it has an average of 275.8 which is 22 percent of revenue.
  • Their provision for income tax was the amount allocated for their payment of income taxes. And this had an average of 21.4 which represents 2 of revenue.

Overall expenses or total expenses result an average of 97 percent of revenues leaving a merger amount of 3 percent for their net income from revenues. This means KAMN’s expenses on their operations gets a huge chunk on their revenue which is unfavorable, therefore, to improve their net margin they should tighten on their budgeting and costing.

Margins

I’ve learned that profitability can be measured in two ways. One is from returns (which we tackle on the early part of the income statement; and the other one is from margins. For Kaman Corporation, Nelly laid the margins percentage of revenue from 2007 to 2011.

kaman corporation

  • Gross profit margin has a yearly average of 27 percent.
  • Operating margin has an average of 5.3.
  • EBT margin has an average of 4.8.
  • Net margin has an average of 3.

To double check Kaman Corporation as a manufacturing company, it has only a gross margin averaging to 27 percent.  This means cost of revenue holds 73 percent which was almost three fourth of their total earnings. Therefore, after deducting their operating expenses, operating margin was only 5.3 and EBT margin 4.8 minus the non-operating expenses. Thus, net margin left an average of 3 percent of revenue.

We are down now to the last part of Numbers team report and that is the cash flow.

Cash Flow

Aspiring for investing or buyback stocks? Think hard, work hard; bolster your confidence by studying, applying strategies and reviewing the financial results of the company.  Cash flow statement is one of the useful tools that laying all the facts. This encompasses the result from the operating side up to financing activities.

Cash Flow from Operating Activities

Let’s start from operating activities which there are two formats used; one is the indirect method and the other one was the direct method.

Indirect method or reconciliation method starts with net income and converts it to net cash flow from operating activities. In other words, the indirect method adjusts net income for items that affected the reported net income but didn’t affected cash. A sample you can see from table 1 below.

Direct method also called the income statement method; reports cash receipts and cash disbursements from operating activities. The difference between these two amounts is the net cash flow from operating activities (see Table 2).

To compute net cash flows from operating activities, non-cash changes in the income statement are added back to net income, and net cash credits are deducted. Like as what you can see from table 1. Net income was net earnings from the revenue for the period after all deducting its direct cost and operating expenses. Depreciation and amortization was an allocation of asset, it was added back since it was not cash generating. Inventory was an item that was ready or available goods for sale. Other non-working capital was a change from accounts receivable or accounts payable. Other non-cash item refers to allowance for doubtful accounts or unrealized gains and losses in investment.

The net cash provided from operating activities for their five years of operation only blew up by 63 percent in 2009 against 2007 and went down in 2011 by 56 percent. This was due for the net income had only results in 2007 and 2011.The movement of depreciation was consistently increasing, while the inventory had only increase in 2009 by 246 percent.

 kaman corporation

On other hand, operating cash flow results using direct method, are:

kaman corporation

In direct method, cash collection was the based then deduct all the cash payments made by the company for that period. Cash payment for purchases was the purchases made within the period; cash payments for operating was cash paid in terms of operating expenses like salaries; while cash payments for income taxes was a taxes paid due for that year.

The net cash from operating indicated that Kaman Corporation had insufficient cash, the cash payments made exceeds over their cash collection. It had an average of -113 percent deficits.

Cash Flow from Investing Activities

Cash flow from investing was an activity of cash that focuses on where the company invested or utilized their cash. Based from the total, they venture in acquisition more than in PPE with equivalent percentage of 106 and 36 percent. This is because Kaman Corporation is a diversified company that conducts business in the aerospace and industrial distribution markets.

 kaman corporation

The net cash for investing activities indicates; in 2007 it had only a positive result to 40 percent based in total, due to the contribution of other investing activities which represents at 106 percent positive. In 2008 to 2009 was decline by 82 percent and from 2010 to 2011 was up to 38 percent. The movement was due for the acquisition in sideways.

Cash Flow from Financing Activities

Net cash provided or used in financing activities was mainly contributed from debt issued, debt repayment, dividend paid and other financing activities. Debt issued is a company cash provided for the business. Debt repayment is a restructuring of existing debt that the company used for the operation. Dividend paid is a cash dividend paid by the company during the period. Other financing activities are normally from the increase/decrease in debt issue costs, increase/decrease in financing costs and increase/decrease in minority interest.

kaman corporation

Table 4 showed that the net cash from financing activities of Kaman Corporation was quietly impressive; since for their five years only in 2007 and 2009 they had a negative result. This was due to the dividend and other financing cash flow paid for that respective years. The rest was positive due to the debt issued by the company.

Cash Flow Ratios

Operating cash flow to sales ratio compares the operating cash flow of the company to its sales revenue. It will help us determine, the ability of a company to generate cash from its sales. In other words, it shows the ability of a company to turn its sales into cash. It is expressed as a percentage. Though there is no any standard guideline but a consistent and/or increasing trend in this ratio is a positive; indication of good debtor’s management.

kaman corporation

By referring to table 5, operating cash flow ratio to sales ratio of Kaman Corporation was on grade C. It indicated that in every $1 of sales they can only generate at $.02,-.01, .06, .03 and .03 from 2007 to 2011, respectively.

Operating cash flow ratio helps us measures the company’s ability how they operating efficiently. From operating activities result over the total current liabilities or obligation of the company. For Kaman Corporation, the result was negative in 2008. In total result to 17 percent; it means in every $1 the company cash will be used was $.17. Table 6 furthers explains this.

kaman corporation

The free cash flow is to provide a measure of what is available to the owners of firm after providing for capital expenditure to maintain the existing assets and to create new assets for the future growth. The higher free cash flows to operating cash flows ratio is a very good indicator of financial health of a company. For Kaman Corporation, it showed results as indicated in the table 7 below.

 kaman corporation

The free cash flow result of Kaman Corporation from 2008 to 2011 was declining from 214 down to 36 percent. In average; it represent at 84 percent. It means, in every $1, the company had $.84.

Written by: Rio, Nelly and Dyne

Edited by: Maydee and Stephanie

Navigant Consulting Inc NCI

Navigant Consulting Inc (NCI) Worth Buying?

August 2nd, 2012 Posted by Investment Valuation No Comment yet

Navigant Consulting Inc (NCI) is a specialized, global professional services firm. Our teams apply experience, foresight, and industry expertise to pinpoint emerging opportunities to help build, manage, and protect the business value of the clients we serve. Headquartered in Chicago, IL. NCI was founded in 1983.

Value Investing Approach for NCI

The basis for this valuation is the company’s five years of historical financial records; the balance sheet, income statement, and cash flow statement. Enterprise value is the theoretical takeover price. In the event of a buyout, an acquirer would have to take on the company’s debt but would pocket its cash. EV differs significantly from simple market capitalization in several ways, and many consider it to be a more accurate representation of a firm’s value. The value of a firm’s debt, for example, would need to be paid by the buyer when taking over a company. Thus Enterprise Value provides a much more accurate takeover valuation because it includes debt in its value calculation.

The Investment in Enterprise Value

The concept of enterprise value is to calculate what it would cost to purchase an entire business. Enterprise value (EV) represents the total value of the entire company. On the other hand, market capitalization (MC) represents the entire value of the company in the stock exchange. It represents the price of the equity.

Enterprise Value = Market Capitalization + Total Debt – (Cash and Cash Equivalent + Short Term Investment)

NCI EV

Explanation

The enterprise value was trending down at 7, -9, -26, 10 and 6 percent with an average of -3 percent from 2008 to 2011 and the trailing twelve months (TTM). Market capital went down as well by 16, -6, -36, 30 and 1 percent with an average of 1% percent from 2008 to 2012 trailing twelve months. The total cash of the company represented 2 percent of the enterprise value while total debt represents 25 percent. In the trailing twelve months, the cash was 0%, while total debts represent 22 percent of the enterprise value. Buying the entire company is paying for the equity and total debt, and the distribution would be as follows:

Average Operating Assets = 100% Equity: 77% + Total debt (net of cash) 23%
TTM Operating assets = 100% Equity: 78.3% + Total debt (net of cash) 21.7%

Benjamin Graham’s Stock Test

Net Current Asset Value Per Share (NCAVPS)

The concept of this method is to identify stocks trading at a discount to the company’s net current asset value per share, specifically two-thirds or 66 percent of NCAV. This method is one of the oldest documented stock selection methodologies, dating back in the 1930s. 

Net Current Asset Value = Current Assets – Current Liabilities

NCAVPS = NCAV / # of shares outstanding

NCI NCAVPS

Explanation

The table shows that the calculated 66 percent of NCAVPS was lesser than the market value per share, this means that the price was trading at an overvalued price from 2007 to 2012 trailing twelve months. The market price was 90 percent average over the calculated 66 percent of the NCAVPS meaning it was expensive and the stock was trading above the liquidation value of the company.

Graham would consider buying if the share price does not exceed the result of 66 percent. The reason for this according to Graham is when a stock is trading below the NCAVPS, they are essentially trading below the company’s liquidation value and therefore, the stocks are trading in the bargain, and it is worth buying.

Market Value/Net Current Asset Value (MV/NCAV)

Another stock test by Graham is by calculating the enterprise value over the net current asset value. The result must not be greater than 1.2 ratios. Graham would only consider buying if it does not exceed 1.2 ratios. 

NCI MV NCAV

The results of the calculation showed that the ratio was above 1.2, so, it indicates that the price was overvalued from 2007 to 2012, trailing twelve months. It means that the price was expensive.

Benjamin Graham’s Margin of Safety

The margin of safety (MOS) is a formula to identify the difference between company value and price. If value and the price are equal, the stock price is considered fairly valued. If the price is more than the value, then you can assume that the stock is overpriced. However, if the price is less than value, this is a good buy because there is lots of room available for better profit in the future.

The margin of Safety (MOS)

NCI MOS

The table showed that the margin of safety for 2007, 2009 and 2010 was zero, meaning the enterprise value is lesser than the price. Further, indicates that the price during these periods was expensive. While in 2008, 2011 and the trailing twelve months, the true value was greater than the price. Meaning the stock is trading at an undervalued price. The margin of safety represents a 14 percent average.

Intrinsic Value

Here is the explanation for the calculation: EPS, the company’s last 12-month earnings per share. G: the company’s long-term (five years) sustainable growth estimate. 9: the constant represents the appropriate P-E ratio for a no-growth company as proposed by Graham (Graham proposed an 8.5, but we changed it to 9) 2: the average yield of high-grade corporate bonds.

NCI Intrinsic Value

Explanation

I use the return on equity for the sustainable growth rate as the major factor. We need to know the dividend payout ratio to calculate the sustainable growth rate.

navigant consulting inc.

The above table showed that there was no payout ratio from 2007 to 2012 trailing twelve months. It indicates that the company is not paying dividends since 2007. It is advisable that one should look into the free cash flow of the company as to where the money is going.

So, let us walk further, and I will guide you to the intrinsic value graph of NCI.

Intrinsic Value Graph

NCI Intrinsic Graph

The graph shows two comparisons, between the intrinsic value or the true value of the stocks, the market price and the enterprise value per share. As we can see above, in 2007, 2008 and 2010 the intrinsic value (red line) was below the price for both market and enterprise (blue and green line). This means that the price was higher than the true value; therefore, the stock is trading at an overvalued price. On the other hand, in 2008, 2011 and 2012 trailing twelve months, the intrinsic value is higher than the price. Meaning the stock is trading at a price below the real value of the stock. Therefore, the price was cheap.

Margin of Safety

The margin of safety in percent was 22, 31 and 31, respectively, using the enterprise value. While using the market value, the margin of safety for the trailing months is 47%. The trading price in 2011 and 2012 was cheap by 31 percent.

NCI Relative Valuation Method

Price to Earnings*Earning Per Share (P/E*EPS)

This valuation will determine whether the stocks are undervalued or overvalued by multiplying the P/E ratio with the company’s relative EPS and comparing it to the EV price per share.

NCI PE EPS

The result of the calculations indicates that the enterprise value price was overvalued from 2007 to 2012. Because the price was higher than the results. So, therefore, using this valuation, it would not be advisable to invest.

Enterprise Value/Earning Per Share (EV/EPS)

Another use of this ratio is by dividing the enterprise value by its projected earnings per share (EPS). By dividing the enterprise value to EPS, the result represents the price (P/E) and the difference represents the earnings (EPS). This separates the price to earnings ratio to earning per share. This metrics, EV Price to EPS separate price and earnings per share. 

NCI EV EPS

Explanation

The enterprise value per share was separated to price (P/E) and earnings (EPS). The above calculation indicated that the price was more than the enterprise value per share. Because it factors net income and the number of shares. If the net income is lesser than the number of shares, the result of EPS is very low. Thereby, giving us a higher value of price (the separated amount) than the enterprise value (the amount to be separated). In addition, the earnings resulted in negative earnings, as we can see in the table above. This might indicate that the company is not profitable. In 2011 and the trailing twelve months, the earnings of the company show improvement by 75 percent and 15 percent, respectively.

In using this valuation, we will know whether the stock is trading over or undervalued. Converting it into a percentage, the price is 158 percent and the earnings are -58 percent. While the result of 100 percent is the enterprise value.

Enterprise Value (EV)/Earnings Before Interest, Tax, Depreciation, and Amortization (EBITDA) or (EV/EBITDA)

This metric is used in estimating business valuation. It compares the value of the company inclusive of debt and other liabilities to the actual cash earnings exclusive of non-cash expenses. It is useful for analyzing and comparing profitability between companies and industries.

EBITDA = Net Income + Interest Expense + Tax + Depreciation + Amortization

NCI EV EBITDA

Buying the entire business would take 10 years to cover up the costs of buying. In other words, it would take 10 times the earnings of the company to recover the cost of the purchase. Including debtor an average of 12 years to cover the costs. It is a very long period of waiting. This means that the company is not profitable because the cash generating power of the entire firm is low. EBITDA is net income with interest, taxes, depreciation, and amortization.

Conclusion

The price to date was $11.37 with $586.6 market capitalization. An overall view, the stock of NCI was trading at an overvalued price. I recommend that the stock of NCI be Hold.

Research and Written by Cris

kaman-corporation-kamn2

Kaman Corporation (KAMN) Is Overvalued

August 2nd, 2012 Posted by Investment Valuation No Comment yet

Kaman Corporation (KAMN) is a diversified company that conducts business in two segments: Aerospace and Industrial Distribution. Kaman have been recognized for technological breakthroughs and innovative solutions to critical challenges.

Value Investing Approach for Kaman 

This model is prepared in a very simple and easy way to value a company, it adopts the investment style of the Father of Value Investing Benjamin Graham. Meaning the true value should be more than the market value. Graham believed in fundamental analysis and was looking for companies with a sound balance sheet and with little debt. The basis for this valuation is the company’s five years of historical financial records, the balance sheet, income statement, and cash flow statement. We calculated first the enterprise value as our first step. We believed this is important because it measures the total value of the company.

The Investment in Enterprise Value

The concept of enterprise value is to calculate what it would cost to purchase an entire business. Enterprise Value EV) is the present value of the entire company.  Market capitalization is the total value of the company’s equity shares. In essence, it is a company’s theoretical takeover price, because the buyer would have to buy all of the stock and pay off existing debt, and taking any remaining cash.

Formula:  Enterprise Value = Market Capitalization + Total Debt – (Cash and Cash Equivalent + Short  Term Investment)

Total Debt = Short Term Debt + Long Term Debt

kaman pricing a

Explanation

The buying price for the entire company of Kaman Corporation was $1034, inclusive of total debt minus cash and cash equivalent at $40 per share. Market capitalization has up and down trend by 49, 29, 27, -5 and 14 percent from 2008 to 2012 trailing twelve months (TTM), while enterprise value shows a decreased by -35 percent in 2008 and during 2009 to 2012 TTM it shows an increased by 17, 42, 1 and 13 percent, respectively. 

Buying the entire company is also paying for the total debt of the company. The net of total debt and cash added was 27 percent average and 15 percent in 2012 TTM. The distribution of the buying price would be as follows:

Average Operating assets 100% Equity 85%+ Total debt (net) 15%
ttm 2012 Operating assets 100% Equity 73% + Total debt (net) 27%

Buying the company, you pay 73 percent of the equity and 27 percent of total debt (net of cash) of the company in the trailing twelve months. This is how the whole buying price will be distributed.

We are through with enterprise value. Let us now move on with Benjamin Graham’s Stock Test. There are several sub-categories on this topic.

Benjamin Graham’s Stock Test

Net Current Asset Value (NCAV) Approach

The Net Current Asset Value (NCAV) is a method from Benjamin Graham to identify whether the stock is trading below the company’s net current asset value per share, specifically two-thirds or 66 percent of net current asset value. Meaning they are essentially trading below the company’s liquidation value and therefore, the stocks is trading in a bargain, and it is worth buying.

Net Current Asset Value (NCAV) Method

The concept of this method is to identify stocks trading at a discount to the company’s net current asset value per share, specifically two-thirds or 66 percent of NCAV. This method is one of the oldest documented stock selection methodologies, dating back in the 1930s. To get the result, we use this formula:

Net Current Asset Value = Current Assets – Current Liabilities

NCAVPS = NCAV / # of shares outstanding

kaman pricing b

Explanation

Net current asset value was computed by deducting total liabilities to total assets and divide it by the number of shares outstanding. I took 66 percent of it and compared it to the price per share. Graham would buy stocks if the price is lower than the 66 percent by at least 40 percent to 50 percent. The price was higher than the computed 66 percent. Therefore, it indicates the price was overvalued by 71 percent.

The stocks of Kaman Corporation are not advisable for buying considering the NCAVPS valuation because the price was expensive as per the NCAV approach.

Market Value/Net Current Asset Value (MV/NCAV)

Another stock test by Graham is by using market capitalization and dividing it to NCAV. If the result does not exceed the ratio of 1.2, then the stock passes the test for buying.

kaman pricing c

The ratio exceeds the 1.2 ratios, therefore the price is overvalued and did not pass Graham’s stock test. The price was not advisable for making an investment at this period. The average ratio of 2.32 doubled the 1.2 minimal, indicating that the price was 194 percent above the minimum.

Benjamin Graham’s Margin of Safety

The margin of safety is used to identify the difference between company value and price. Value investing is based on the assumption that two values are attached to all companies. The market price and the company’s business value or true value. Graham called it the intrinsic value. According to Graham, the investor should invest only if the market price is trading at a discount to its intrinsic value. Value investing is buying with a sufficient margin of safety. Graham considers buying when the market price is considerably lower than the intrinsic or real value, a minimum of 40 to 50 percent below. The enterprise value is used because I think it is a much more accurate measure of the company’s true market value than market capitalization.

KAMAN IV

Explanation

As we can see in the table above, there were zero margins of safety for Kaman from 2007 to 2012 trailing twelve months, because the price was higher than the true value of the stocks. The intrinsic value represents 59 percent average of the enterprise value.

The margin of safety represents an excess of intrinsic value over market price, or alternatively, a discount off the price below the intrinsic value of at least 40 to 50 percent is desirable. There were zero margins of safety.

Intrinsic Value = Current Earnings x (8.5 + 2 x Expected Annual Growth Rate).

kaman IV2

Explanation

For the intrinsic value, I used the sustainable growth rate in lieu of Graham’s earning per share growth as it measures the company’s profitability. 

ROE*(1-Payout Ratio/100)

kaman pricing f

The sustainable growth rate for Kaman was 1.04 average, this is the growth that the company can accommodate without borrowing outside and its return on equity was 1.65 average, this indicates how much profit the company can generate with the money invested in common stock. The ratios were trending up from 2009 to the trailing twelve months.

The Intrinsic Value

Moving on, in order to understand the relationship between price and value, the graph below will show us the relationship between the enterprise value and the intrinsic value.

KAMAN graph

The distance between the two lines, enterprise value, and intrinsic value line was 41 percent average, meaning the stock was trading 41  percent above its true value. There were zero margins of safety for Kaman and the price was overvalued and expensive.

Kaman Relative Valuation Method

The relative valuation methods for valuing a stock are to compare the market values of the stock with the fundamentals (earnings, book value, growth multiples, cash flow, and other metrics) of the stock.

Price to Earnings * Earning per Share (PE*EPS) Ratio

This method will determine whether the stocks are undervalued or overvalued. By multiplying the Price to Earnings (P/E) ratio with the Earning per Share (EPS). Then comparing it to the enterprise value per share, we can determine the status of the stock price.

Formula:  (PE*EPS) = Result

kaman pricing g

It shows that from 2008 to 2012 TTM, the price was greater than the PE*EPS ratio. Therefore it indicates an overvalued price and the price was expensive. 

P/E Ratio

P/E Ratio indicates the multiple that an investor is willing to pay for a dollar of a company’s earning. It shows the number of times a stock price is trading relative to its earnings or stock price fluctuate. On the other hand, EPS serves as an indicator of a company’s profitability. EPS is a major component used to calculate the P/E valuation ratio. If the stock is trading at market value less than the (P/E*EPS) result, the price is undervalued.  If the EV price is trading greater than the result, the stock is overvalued. In the case of  Kaman, the price was overvalued and expensive.

Enterprise Value/Earning per Share (EV/EPS)

The use of this ratio is its separate price and earnings in enterprise value.

Enterprise Value / Earning per Share = Separated Price

Enterprise Value – Separated Price = Earnings

kaman pricing h

Explanation

Enterprise value was separated to price and earnings. Earnings were averaging 40 percent while the price represents 60 percent average. Enterprise value represents the buying price. Buying the entire business will cost $1034 at $40 per share. The investor will be paying a price of $594M plus $440M earnings in the trailing twelve months. This is the amount an investor is willing to pay.

Enterprise Value (EV)/ Earning Before Interest, Tax, Depreciation and Amortization (EBITDA) or EV/EBITDA

This metric is used in estimating business valuation. It compares the value of the company inclusive of debt and other liabilities to the actual cash earnings exclusive of non-cash expenses. It is useful for analyzing and comparing profitability between companies and industries. This metric gives us an idea of how long it would take the earnings of the company to pay off the price of buying the entire business, including debt.

Formula: Enterprise Value/ EBITDA

  EBITDA = Income before Tax + Interest Expense + Depreciation/Amortization

kaman pricing i

Buying the entire company it would take 10 years to cover up the costs of buying including total debt. In other terms, it would take 10 times for the earnings of the company to recover the cost.

Conclusion

Overview, the stock was trading at an overvalued price almost 100 percent of the trading price. Meaning, the stock price was expensive. A SELL on the stock of Kaman is recommended because the stock price was expensive. 

Researched and Written by Cris

kaman-corporation-kamn2

Kaman Corporation Inc (KAMN) Investment Valuation

August 2nd, 2012 Posted by Investment Valuation No Comment yet

Kaman Corporation Inc (KAMN)  value investing approach model is prepared in a very simple and easy way to value a company.

Kaman Value Investing Approach 

This value investing approach adopts the investment style of the Father of Value Investing Benjamin Graham. The essence is that any investment should be purchased at a discount, In other words, the true value should be more than the market value. Graham believed in fundamental analysis and was looking for companies with a sound balance sheet and with little debt. First of all, the basis for this valuation is the company’s five years of historical financial records, the balance sheet, income statement, and cash flow statement. I calculate first the enterprise value as our first step. I believed this is more applicable because it measures the total value of the company.

Kaman Investment in Enterprise Value

The concept of enterprise value is to calculate what it would cost to purchase an entire business. In other words, Enterprise Value EV) is the present value of the entire company.  While market capitalization is the total value of the company’s equity shares. In essence, it is a company’s theoretical takeover price, because the buyer would have to buy all of the stock and pay off existing debt, and taking any remaining cash.

Formula:  Enterprise Value = Market Capitalization + Total Debt – (Cash and Cash Equivalent + Short  Term Investment)

Total Debt = Short Term Debt + Long Term Debt

kaman pricing a

Explanation

The buying price for the entire company of Kaman was $1034, inclusive of total debt minus cash and cash equivalent at $40 per share. Market capitalization has up and down trend by 49, 29, 27, -5 and 14 percent from 2008 to 2012 trailing twelve months (TTM). While enterprise value shows a decreased by -35 percent in 2008 and from 2009 to 2012 TTM it shows an increased by 17, 42, 1 and 13 percent, respectively. In addition, the price per share for market capitalization and enterprise value can be seen in the table above.

Moreover, buying the entire company is also paying for the total debt of the company. The net of total debt and cash added was 27 percent average and 15 percent in 2012 TTM. Likewise, the distribution of the buying price would be as follows:

Average Operating assets 100% Equity 85%+ Total debt (net) 15%
ttm 2012 Operating assets 100% Equity 73% + Total debt (net) 27%

Buying the company, you pay 73 percent of the equity and 27 percent of total debt (net of cash) of the company in the trailing twelve months. This is how the whole buying price will be distributed.

We are through with enterprise value. Let us now move on with Benjamin Graham’s Stock Test. There are several sub-categories on this topic.

Benjamin Graham’s Stock Test

Net Current Asset Value (NCAV) Approach

The Net Current Asset Value (NCAV) is a method from Benjamin Graham to identify whether the stock is trading below the company’s net current asset value per share, specifically two-thirds or 66 percent of net current asset value. Meaning they are essentially trading below the company’s liquidation value and therefore, the stocks are trading in a bargain, and it is worth buying.

Net Current Asset Value (NCAV) Method

The concept of this method is to identify stocks trading at a discount to the company’s net current asset value per share, specifically two-thirds or 66 percent of NCAV. This method is one of the oldest documented stock selection methodologies, dating back in the 1930s. To get the result, we use this formula:

Net Current Asset Value = Current Assets – Current Liabilities

NCAVPS = NCAV / # of shares outstanding

kaman pricing b

Explanation

Net current asset value was computed by deducting total liabilities to total assets and divide it by the number of shares outstanding, the result is NCAVPS. The 66 percent of it was compared to the price per share. Graham would buy stocks if the price is lower than the 66 percent by at least 40 percent to 50 percent. In the above table it shows that the price was higher than the computed 66 percent, therefore, it indicates the price was overvalued by 71 percent.

The stocks of Kaman Corporation are not advisable for buying considering the NCAVPS valuation because the price was expensive as per the NCAV approach.

Market Value/Net Current Asset Value (MV/NCAV)

Another stock test by Graham is by using market capitalization and dividing it to NCAV. If the result does not exceed the ratio of 1.2, then the stock passes the test for buying.

kaman pricing c

The table above shows that ratio exceeds the 1.2 ratios, therefore indicating that the price is overvalued and did not pass Graham’s stock test. The price was not advisable for making the investment at this period. The average ratio of 2.32 doubled the 1.2 minimal, indicating that the price was 194 percent above the minimum.

Benjamin Graham’s Margin of Safety

The margin of safety is used to identify the difference between company value and price. Graham called it the intrinsic value. Hence, the difference between the two values is called the margin of safety. According to Graham, the investor should invest only if the market price is trading at a discount to its intrinsic value. In other words, value investing is buying with a sufficient margin of safety. Graham considers buying when the market price is considerably lower than the intrinsic or real value, a minimum of 40 to 50 percent below. The enterprise value is used because I think it is a much more accurate measure of the company’s true market value than market capitalization.

KAMAN IV

Explanation

As we can see in the table above, there was zero margin of safety for Kaman from 2007 to 2012. Because the price was higher than the true value of the stocks. The intrinsic value represents 59 percent average of the enterprise value.

In addition, the margin of safety represents an excess of intrinsic value over market price. Or alternately, a discount off the price below the intrinsic value of at least 40 to 50 percent is desirable. 

Intrinsic Value

Intrinsic Value = Current Earnings x (8.5 + 2 x Expected Annual Growth Rate).

kaman IV2

For the intrinsic value, I used the sustainable growth rate in lieu of Graham’s earning per share growth as it measures the company’s profitability. 

ROE*(1-Payout Ratio/100)

kaman pricing f

Explanation

The sustainable growth rate for Kaman was 1.04 average, this is the growth that the company can accommodate without borrowing outside. And its return on equity was 1.65 average, this indicates how much profit the company can generate with the money invested in common stock. Hence, the ratios were trending up from 2009 to the 2012 trailing twelve months.

Moving on, in order to understand the relationship between price and value. The graph below will show us the relationship between enterprise value and the intrinsic value.

KAMAN graph

The distance between the two lines, enterprise value, and intrinsic value line was 41 percent average. Meaning the stock was trading 41  percent above its true value. Hence there was no margin of safety in buying them and it was overvalued or expensive.

Kaman Relative Valuation Method

The relative valuation methods for valuing a stock are to compare the market values of the stock with the fundamentals (earnings, book value, growth multiples, cash flow, and other metrics) of the stock.

Price to Earnings * Earning per Share (PE*EPS) Ratio

Multiplying the Price to Earnings (P/E) ratio with the company’s relative Earning per Share (EPS) and comparing it to the enterprise value per share, we can determine the status of the stock price.

Formula:  (PE*EPS) = Result

kaman pricing g

Explanation

It shows that from 2008 to 2012 TTM, the price was greater than the PE*EPS ratio. Therefore indicates an overvalued price and the price was expensive. On the other hand, during 2007, the price was lesser than the PE*EPS, meaning the price was undervalued by 61 percent and the price was cheap.

Price to Earnings (P/E)

P/E Ratio indicates the multiple that an investor is willing to pay for a dollar of a company’s earning. It shows the number of times a stock price is trading relative to its earnings or stock price fluctuate. On the other hand, EPS serves as an indicator of a company’s profitability. Overall, the stock price was overvalued and expensive.

Enterprise Value/Earning per Share (EV/EPS)

The use of this ratio is its separate price and earnings in enterprise value. By dividing the enterprise value to projected earnings (EPS). The result represents the price (P/E) and the difference represents the earnings (EPS).  

Enterprise Value / Earning per Share = Separated Price

Enterprise Value – Separated Price = Earnings

kaman pricing h

Explanation

Enterprise value was separated to price and earnings. Earnings were averaging 40 percent while the price represents 60 percent average. Enterprise value represents the buying price, an investor who is buying the entire business at the costs of $1034 at $40 per share; he would be paying a price of $594M plus $440M earnings in 2012 trailing twelve months. This is the amount an investor is willing to pay.

Enterprise Value (EV)/ Earning Before Interest, Tax, Depreciation and Amortization (EBITDA) or EV/EBITDA

This metric is used in estimating business valuation. Moreover, it compares the value of the company inclusive of debt to the actual cash earnings. It is useful for analyzing and comparing profitability between companies and industries. This metric gives us an idea of how long it would take the earnings of the company to pay off the price of buying.

Formula: Enterprise Value/ EBITDA

  EBITDA = Income before Tax + Interest Expense + Depreciation/Amortization

kaman pricing i

Explanation

Buying the entire company will take 10 years average to cover up the costs of buying including the debt. In other words, it will take 10 times for the earnings of the company to recover the cost.

Conclusion

Overview, the Graham valuation, and the relative value methods show that the stocks were trading at an overvalued price. In other words, the stock price was expensive. Therefore, I recommended a SELL in the stock of Kaman.

Researched and Written by Criselda

 

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