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What Are You Actually Buying With Alibaba?

November 23rd, 2015 Posted by Deep Analysis 4 comments

Alibaba Group Holdings Limited (BABA) has marked an amazing record of Singles’ Day sales of $14.3 billion (91.2 billion Yuan) on November 11, 2015. BABA is a super online and mobile marketplace around the globe. This giant company is contributing a lot to the economy of the People’s Republic of China (PRC) with regards to its success and high growth. The company has an attractive return on equity at 29.97 and has a huge potential for more future growth. However, Alibaba Group had a different corporate legal structure and ownership structure.

Furthermore, the company is using the “variable interest entity” (VIE) structure. In 2000, this structure was created to bypass PRC’s restrictions in certain industries like communications and technology. We have provided a graphic presentation, illustration, and interpretation of this corporate and ownership structure for easy understanding. It will help you understand the flow of ownership. Find out in this article what investors are really buying in the shares of Alibaba Group China in the initial public offering in the United States.

Company Research

Alibaba

Problem

Alibaba Group Holdings Limited is experiencing a counterfeit problem. Jack Ma said, that, the sale of one fake product could lead to a loss of five customers. Further, Ma said, fighting against counterfeits is not a matter for BABA as they are servicing in different parts of the globe.

Effect

  • Counterfeit problems affect Alibaba and also the Chinese economy according to Xinhua.
  • The company is spending additional expenditures, hundreds of million Yuan, in tracking and fighting counterfeits, according to Jack Ma in an interview with Xinhua.
  • In addition, BABA is also spending in refunding and compensating for their customers who bought counterfeits products.

Cause

According to Jack Ma, counterfeits could fundamentally damage the Chinese manufacturing sector. Further, Jack Ma said, “It leaves visible wounds on Alibaba, but it could severely affect the economic transition”.

Solutions

  • Shops involved with counterfeit products are closed according to Jack Ma.
  • Alibaba is tracking and fighting these counterfeit attack.
  • According to Jack Ma, improving the Chinese laws could help honest businesses to build competitive brands.
  • The company is monitoring the sale of counterfeit products and kept the market watchdog informed, according to Jack Ma.
  • Further, the counterfeit issue can only be solved with the help of the internet and big data, Ma stated. He further stated that in the company’s internet, they have an evaluation system for the goods.
  • And with big data, they can locate those who produce and sell counterfeits.

About the Company

Company Profile

Alibaba Group Holding Limited (BABA) is a super online and mobile marketplace around the globe by revenue. BABA is the Cayman Islands holding company operating in China through its subsidiaries and variable interest entities (VIE) as a whole, engaged in online and mobile commerce activities of buy and sell of products, services, and technology. The giant company helps small businesses to communicate and connect with their consumers by their technology services and online marketplace. Further, they believed that small businesses have all the chance to grow and prosper by making it easy for them to do business online.

BABA have maintained their culture since the founding of the company and it has been the key to its success. The company cares and look with the interests of their customers and employees. Mr. Jack Ma sees to it that every policy they make with regards to the business, the customer’s concerns come first. Ma is responsible for the company’s strategic plans, culture, and customers concerns.

Company History

Its first website is English-language Alibaba.com, a global wholesale marketplace. On June 2011, Taobao Mall (currently known as Tmall.com) is spun off from Taobao Marketplace as an independent platform. On July 2005 Aliwangwang, a personal computer-based instant messaging tool that facilitates text, audio, and video communication between buyers and sellers, is launched on Taobao Marketplace.

Special Events

2014

October 2014, Taobao travel becomes an independent platform and is brand named “Alitrip”.
Ant Financial Services Group, a related company of Alibaba Group previously known as Small and Micro Financial Services Company, was formally established.
September 2014 Alibaba Group goes public on the New York Stock Exchange (NYSE).
July 2014 Completes its investment in digital mapping company AutoNavi.
Establishes a joint venture with Intime to develop a 020 business in China.
June 2014 The company completes the full acquisition and integration of mobile browser company UCWeb.
The company starts offering mobile virtual network operators (MVNO) services in China under the All Telecom brand.
Completes acquisition of an approximately 60% stake in movie and television program producer ChinaVision (currently known as Alibaba Pictures Group).
February 2014 Tmall Global is officially launched as an extension of Tmall.com to enable international brands to offer products directly to consumers in China.

2010 – 2013

Sep 2013 Alibaba Group officially launches its mobile social networking app, Laiwang.
Aug 2013 Relocates its campus to Xixi District in Hangzhou.
Jul 2013 Unveils the Alibaba Smart TV OS.
May 2013 Taobao’s 10th anniversary is marked with a global gathering of Alibaba Group employees in Hangzhou.
Sep 2012 Completes an initial repurchase of shares from Yahoo! In a restructuring of the companies’ relationship.
Jan 2012 Establishes the Alibaba Foundation with a sizeable fund dedicated to social causes.
Nov 2010 Alibaba.com announces the acquisition of One-touch, a provider of one-stop services for exporters in China.
Aug 2010 The Mobile Taobao App is launched.
Jul and Aug 2010 Alibaba.com acquires Vendio and Auctiva, providers of e-commerce solutions to US small businesses.
July 2010 The Alibaba Partnership is established to ensure the sustainability of Alibaba Group mission, vision, and values.
May 2010 Announces that it will earmark 0.3% of its annual revenue to fund efforts designed to spur environmental awareness and conservation in China and around the world.
Apr 2010 Officially launches AllExpress to enable exporters in China to reach and directly transact with consumers around the world.
Mar 2010 Renames its China marketplace 1688.com
Taobao Marketplace introduces online group buying marketplace Juhuasuan.

2005-2009

Sep 2009 Alibaba Cloud Computing (currently known as AliCloud) is established in conjunction with Alibaba Group 10th anniversary celebration.
Alibaba.com announces the acquisition of HiChina, China’s leading internet infrastructure service provider.
Sep 2008 Alibaba Group R&D Institute is established.
Ap 2008 Taobao Mall (currently known as Tmall.com), a dedicated platform for third-party brands and retailers, is introduced to compliment Taobao Marketplace.
Nov 2007 Alibaba Group launches Alimama, an online marketing technology platform.
Alibaba.com completes its initial public offering on the Main Board of the Hong Kong Stock Exchange.
Jul 2006 The Taobao University program is launched, providing e-commerce trading and education to buyers and sellers.
Oct 2005 Takes over the operations of China Yahoo!.
Aug 2005 Form a strategic partnership with Yahoo!

2001-2004

Dec 2004 Alipay, currently a related company of Alibaba Group, is launched as a third-party online payment platform.
Jun 2004 Alibaba Group organizes its first Nentrepreneur Summit, a gathering of internet entrepreneurs, and honors the first 10 Netrepreneurs of the Year.
Feb 2004 The company raises USD82 million from several first-tier investors in the largest private equity commitment ever in the Chinese Internet sector.
May 2003 Online shopping website Taobao Marketplace is founded, again in Jack Ma’s apartment.
Alibaba Group continues to operate in spite of the SARS epidemic and quarantine measures that prevent staff from coming to work.
Dec 2002 Alibaba Group becomes cash flow positive for the year.
Dec 2001 Alibaba.com surpasses 1 million registered users
Outlines its mission and corporate values.

1999-2000

Sep 2000 Alibaba Group organizes the first West Lake Summit, a gathering of internet business and thought leaders.
Jan 2000 Organizes the first West Lake Summit, a gathering of internet business and thought leaders.
Oct 1999 Raises USD 5 million from a consortium of investors
1999 Launches a China marketplace (currently known as 1688.com) for domestic wholesale trade
1999 Established by its 18 founders led by Jack Ma, working out of Jack Ma’s apartment in Hangzhou

Source: Alibaba website

The Company’s significant subsidiaries:

  • Taobao Holding Limited, an exempted company incorporated with limited liability, under the laws of the Cayman Islands. In addition, it is a wholly-owned subsidiary and also the indirect holding company of the PRC subsidiaries relating to the company’s Taobao Marketplace and Tmall platform.
  • The Taobao China Holding Limited, a Hong Kong limited liability company. It is the direct wholly owned subsidiary of Taobao Holding Limited. In addition, it is the direct holding company of the PRC subsidiaries relating to the company’s Taobao Marketplace and Tmall platform. Furthermore, it is an operating entity for the overseas business of the company’s Taobao Marketplace and also Tmall  Global.
  • Taobao (China) Software Co. Ltd., a limited liability company incorporated under the laws of PRC. It is the indirect subsidiary of Taobao Holding Limited, and also a wholly foreign owned enterprise. In addition, it provides software and also technology services for the company’s Taobao Marketplace.
  • Zhejiang Small Technology Co., Ltd., a liability company incorporated under the laws of the PRC. It is an indirect subsidiary of Taobao Holding Limited and also a wholly-foreign owned enterprise. Furthermore, it provides software and also technology services for the company’s Small platform.

More of Company’s Subsidiaries

  • Alibaba.com Limited, an exempted company incorporated with limited liability under the laws of the Cayman Islands. It is the company’s wholly-owned subsidiary and the indirect holding company of the PRC subsidiaries relating to the company’s Alibaba.com, 1688.com and AliExpress businesses.
  • Alibaba.com Investment Holding Limited, a company incorporated with limited liability under the laws of the British Virgin Islands. It is the direct wholly owned subsidiary of Alibaba.com Limited. In addition, it is also a lower level holding company of the PRC subsidiaries relating to the company’s Alibaba.com, 1688 and AliExpress businesses.
  • Alibaba Investment Limited, a company incorporated with limited liability under the laws of the British Virgin Islands. It is the company’s wholly-owned subsidiary and the principal holding company for the company’s strategic investments.

Source: Form 20-F Alibaba Group Holding Limited

Date of Incorporation

Alibaba Group Holding Limited was incorporated in the Cayman Islands on June 28, 1999.

Place/Head Office

The registered office of the company is located at Trident Trust Company (Cayman) Limited, 4th floor, One Capital Place, P.O. Box 847, George Town Grand Cayman, Cayman Islands.

The Headquarters is located at 969 West Wen Yi Road, Yu Hand District, Hangzhou 311121, People’s Republic of China.

Telephone Number: +86-571-8502-2077

The service company office in the US is located at 1180 Avenue of the Americas, Suite 210, and New York, New York 10036.

Company’s website: www.alibabagroup.com

Founder/Founding

Alibaba Group Holdings Limited was founded on June 28, 1999, by a group of 18 people headed by Mr. Jack Ma, a former English teacher from Hangzhou, China.  It all started when Jack Ma founded Alibaba.com, a website that connects Chinese manufacturers with overseas buyers, a business to the business portal, in 1999.

Branches

Alibaba Group Holdings Limited is operating worldwide through the internet doing services as online shopping.

Date of IPO

Alibaba Group Holdings Limited started its Initial Public Offering (IPO) on September 19, 2014, in which the company had sold 368,122,000 ADSs, with the proceeds of $10 billion. The company is listed on New York Stock Exchange (NYSE) with a ticker symbol BABA. Registered in the United States after Jack Ma could not achieve status with Hong Kong regulators.

Other Significant Company Information

  • A total of 34,985 full-time employees as of March 2015 are based in China.
  • BABA is recently involved in medical industry chain as compared with BIDU and Tencent. The company has better internet resources in online medical care, which could give a head start in cultivating more products, according to Xinhua news agency.
  • Simon Xie, one of the founders of Alibaba Group Holdings Limited, Vice President of China Investment team.
  • Jack Ma tried to raise funds with Silicon Valley but rejected because his business model was unprofitable. However, Goldman Sachs and SoftBank invested $5 million and $20 million, respectively in Alibaba Group.

Material Events Affecting the Numbers

MAJOR SHAREHOLDERS

BABA Major shareholders

The table above presents the major shareholders of Alibaba Group Holdings Limited with respect to beneficial ownership of the company’s ordinary shares. 

Facts:

  • Jack Ma owned 190.67 million ordinary shares at 7.6 percent of the total ordinary shares.
  • Joseph Tsai owned 78.4 million ordinary shares at 3.1 percent.
  • Softbank owned 797.7 million ordinary shares at 31.80 percent.
  • Yahoo! owned 383.57 million ordinary shares at 15.30 percent.
  • All directors and executive officers as a group owned 328.5 ordinary shares at 13.10 percent.

Explanation

  • It represents 2,033,177 ordinary shares held directly by Jack Ma.
  • Tsai has 35 million shares held by APN Ltd, a Cayman Islands company. In addition, Jack Ma hold 70 percent equity interest in the Cayman Islands.
  • Ordinary shares held directly by Tsai was 1,437,964.
  • 15 million ordinary shares held by APN Ltd. in which Tsai holds a 30 percent equity interest.
  • SoftBank Corp. owned 466,826,180 ordinary shares, and also 15 million ordinary shares owned by SBBM Corporation (Tokyo). In addition, 315,916,800 ordinary shares owned by SB China Holdings Pte Ltd (Singapore).
  • Yahoo! Inc. (USA) owned 92,626,716 ordinary shares, and also 290,938,700 ordinary shares owned by Yahoo! Hong Kong Limited.
  • The ordinary shares outstanding as of June 23, 2015, were 2,512,427,504 shares.
  • The 1,015,779,482 ordinary shares at 40.4 percent of the company’s total outstanding shares were held by 159 record shareholders in the US.
  • The number of beneficial owners of the companies American Depository Shares (ADSs) in the US is much greater than the number of record holders of the company’s ordinary shares in the US.

Interpretation

Jack Ma owns only 7.6 percent ownership interest in the company. Investors from Alibaba IPO will not have a direct ownership of Alibaba Group Holdings Limited instead, will only have a claim to the profits of the Chinese-owned variable interest entities.  Restrictions under the People’s Republic of China laws a risk is involved in the ownership.

Alibaba Group Holdings Limited Corporate Legal Structure

 

BABA corporate structure

Source:  Latest F-1 filing with the SEC

The illustration above presents the corporate legal structure of Alibaba Group with its significant subsidiaries and the variable interest entities. The structure is a combination of variable interest entities (VIE), wholly foreign-owned subsidiaries (WFOS ) and 100 percent owned intermediate holding companies, which use equity interests and contractual obligations to operate within China.

Alibaba’s Contractual Arrangements With Investors 

The People’s  Republic of China has a different structure when it comes to ownership of companies operating in China and listed in the United States. Foreign investment is restricted or prohibited in the PRC through wholly-foreign owned enterprises, majority-owned entities, and variable interest entities. The variable interest entities of the companies are owned by Jack Ma and Simon Xie with 80 and 20 percent ownership, respectively. Further, Zhejiang Taobao Network Co., Ltd. represents 90 and 10 percent ownership of Jack Ma and Simon Xie, respectively. 

The company has entered into contractual agreements which will enable them to exercise effective control over the variable interest entities and realize substantially all of the economic risks and benefits arising from the variable interest entities, a statement taken from the F-1 filings filed with SEC. In other words, it indicates that Jack Ma and Simon Xie holds a very significant share of Alibaba Group Holdings Limited and all other properties that the company is operating in PRC.

Ownership Structure and Contractual Arrangements

BABA Ownership structure

Source: Latest F-1 Filings with the SEC

The illustration above presents the ownership structure and contractual arrangements. The wholly foreign-owned subsidiaries and the variable interest entities profits go to Alibaba Group Holdings Limited, a Cayman Island ownership. The company is using the term “variable interest entities” for its Chinese assets.

The investors from Alibaba IPO has no direct ownership in the Chinese-based companies, however, they can claim to the profits. This is due to the PRC restrictions on foreign entities in having ownership of the Chinese assets. In other words, investors in the US IPO is buying shares in Cayman Islands entity the Alibaba Group Holdings Company Limited and not shares of Alibaba China. This applies to all foreign investors of Alibaba Group including Yahoo! and SoftBank. Moreover, the laws of PRC applies to all companies incorporated in China and listed under the United States, like BIDU and other Chinese companies.

Other significant information

There are significant risks that Alibaba had stated in their F-1 Filings. They indicate that this kind of structure might be illegal in the Chinese law since it ignores the prohibitions on foreign investments.

Moreover, the following statement  from the company’s F-1 Filings with the SEC may be significant to the holders of the American Depositary Shares (ADSs), quoted,

You may face difficulties in protecting your interests, and your ability to protect your rights through the U.S. federal courts may be limited because we are incorporated under Cayman Islands law, we conduct substantially all of our operations in China and most of our directors and all of our executive officers reside outside the United States.

MAIN ACTIVITY

How Does the Company Make Money?

Alibaba Group Holding Limited is doing business by providing online and mobile commerce to small businesses in China and other parts of the globe. Moreover, the company provides retail and wholesale marketplaces through its subsidiaries and make it available through personal computers and mobile devices. What makes Alibaba Group Holdings Limited different with other giant companies in other parts of the globe is that BABA has a concern with their customers and every policy that they make, they make sure that the customers come first and everyone is benefited, according to Jack Ma.

Products

The major business activities and products of Alibaba Group Holdings Limited were E-commerce, online auction hosting, online money transfers, and mobile commerce.

Market

Alibaba Group Holdings Limited is doing its business operations online where they can reach customers around the world with its high internet resources.

Who is running the Business?

Person-in-charge of the Company

JACK YUN MA, Lead founder, Executive Chairman, and Chief Executive Officer

BABA Jack MA

Jack Yun Ma is the head founder and the Executive Chairman since May 2013. Ma is the Chairman and Chief Executive Officer from 1999 to May 2013.

Jack Ma was born on September 10, 1964, in Hangzhou, Zhejiang Province, China. His real Chinese name, Ma Yun was difficult to pronounce and his foreign friends named him Jack.

Ma the head founder of Alibaba Group, called the Chinese business magnate and philanthropist. Also known as the richest man in China as of November 2014, and the 18th richest person in the world with its estimated net worth of $24.1 billion according to Wikipedia.  

Education:

  • In 1988, he graduated in Hangzhou Teacher’s Institute with bachelor’s degree in English.
  • In the late 1980’s, he started his career as lecturer/teacher in English and International Trade at the Hangzhou Dianzi University
  • Earned his MBA from Cheung Kong Graduate School of Business when he was already establishing Alibaba in early 2000.
  • Jack Ma also earned a Doctoral Degree with honors in addition to his MBA at Cheung Kong University.

What did the person worked on in the past and leading up to the present position?

Present Serve as Board member of SoftBank Corp., a major shareholder of Alibaba Group Holdings Limited and a Japanese corporation listed on Tokyo Stock Exchange.
Director of Huayi Brothers Media Corporation, an entertainment group in China listed on The Shenzhen Stock Exchange.
Chairman of The Nature Conservancy’s China board of directors.
2013 to Present Director of UCWeb Inc.
September 2013 Director of the Breakthrough Prize in Life Sciences Foundation
May 2013 Jack Ma stepped down as Chief Executive Officer.
2010 to Present Director of The Nature Conservancy
2007 to Present Director of SoftBank Group Corporation.
1999 Jack Ma founded Alibaba Group Holdings Limited
1999 to May 2013 Chairman, Chief Executive Officer and President of Alibaba Group Holdings Limited
Co-Founder of Yunfeng Capital and Yunfeng Fund II LP
1999 to Present Chief Executive Officer of Alibaba Taobao.com
Chief Executive Officer of Alibaba.com He was responsible for the overall strategy of Alibaba.com and Alibaba Group.
1998 to 1999 Ma headed an information technology company established by the China International Electronic Commerce Center (CIECC).
President of CIECC and became keen with the e-commerce needs of small and medium-sized businesses.
Early 1999 Ma left MOFTEC and launched Alibaba.
Ma began a career as English teacher.
Chairman of Zhejiang Alibaba Finance Credit Network Technology Co., Ltd., Alipay (China) Information Technology Co. Ltd., Alibaba (China) Software Co. Ltd., Alipay Software (Shanghai) Co. Shangcheng (Shanghai) Commercial Factoring Co. Zhejiang Alibaba Cloud Computing, Hangzhou Alibaba Online Goods Trading Co., Chongqing Alibaba Small Loan Co., Beijing Yahoo Network Information Technology Co. Ltd., Inter China Network Software (Beijing) Co, and many other companies which he served as Chairman.
1995 Jack Ma founded China Pages.
May 1991 Founded Ever Team International Corp.
Mid 1990’s Mr. Ma sees a great business opportunity in technology.

Daniel Zhang, Chief Executive Officer

BABA Daniel Yong Zhang

Daniel Zhang is the Chief Executive Officer of Alibaba Group Holding Limited starting May 10, 2015. Mr. Zhang, the former Chief Operating Officer replaced Jonathan Lu who has a strong understanding of business.

Education

  • Bachelor’s Degree in Finance from Shanghai University of Finance and Economics.
  • Member of the Chinese Institute of Certified Public Accountants.

What did the person worked on in the past and leading up to the present position?

Apr 30, 2014, to Sep 7, 2015,

Mar 2014 to Present Non-Executive Director and Member of Strategic Committee of Haier Electronics Group Co.
Jul 2014 to Present Non-Executive Director of Intime Retail (Group) Company Limited
2015 Non-Executive Director, Health Information Technology Limited
2014 to Present Director of Weibo Corporation
Aug 2005 to Aug 27, 2007, Chief Financial Officer and Vice President of Shanda Interactive Entertainment.
Sep 2005 Financial Controller of Shanda Interactive Entertainment Ltd.
Aug 2007 to Jun 2011 Chief Financial Officer of Taobao
Since Jun 2011 President of Tmall.com and General Manager for 3 years.
2002 to 2005 Senior Manager at PricewaterhouseCoopers’ Audit and Business Advisory Division in Shanghai, China.

Maggie Wei Wu, Chief Financial Officer (CFO)

BABA Maggie Wei Wu

Ms. Maggie Wei Wu was the Chief Financial Officer of Alibaba Group Holding Limited since May 2013 to the present. Ms. Wu joined the company in July 2007 as Chief Financial Officer of Alibaba.com and responsible in the establishment of financial systems and organization which lead to the initial public offering in Hong Kong.

 

Education

Ms. Wu has a Bachelor’s Degree in Accounting at the Capital University of Economics and Business.

What did the person worked on in the past and leading up to the present position?

October 2011 to May 2013 Served a Deputy Chief Officer of Alibaba Group Holdings Limited.
2012 Co-lead the privatization of Alibaba.com
2010 Voted as Best CFO in FinanceAsias’s Annual
Poll for Asia’s Best Managed Companies.
Prior to 2007 Became an audit partner at KPMG in Beijing.
Lead audit partner for IPO and some large capitalization companies listed in international capital markets. She provides audit and advisory services to major multinational corporations operating in China.
Member of the Association of Chartered Certified Accountant (ACCA)
Member of the Chinese Institute of Certified Public Accountants.

NUMBERS ANALYSIS

Equity and Retained Earnings

BABA Historical SHE RE

Facts:

  • The shareholders’ equity growth in the past five years was 1,861 percent.
  • The retained earnings growth in the past five years was 98 percent.
  • Shareholders’ equity dropped by 100.08 percent from 31.5 billion to -24 million CNY in 2013.
  • Equity rose by 122,000 percent from negative RMB 24 million to RMB 29 billion in 2014.
  • Equity rises again by 396 percent RMB 29 billion to RMB 145 billion in the trailing twelve months.
  • Retained earnings in 2013 have dropped by 263 percent and suffered negative results of RMB 20 billion.
  • Retained earnings increased by 106 and 2000 percent in 2014 and 2015, respectively.

Explanation:

  • Acquisition of shares at RMB15.9 billion in 2013 deducted in shareholders equity.
  • Repurchase and retirement of ordinary shares at RMB 45 billion deducted to shareholders equity. In addition, in 2013, a reduction in retained earnings at RMB 41 billion.
  • Deconsolidation of subsidiaries at 8.6 billion RMB added to equity in 2013.
  • Issuance of ordinary shares at 16.4 billion RMB in 2013 added to shareholders’ equity.
  • Net income of RMB 23.4 billion added to equity in 2014.
  • RMB 24.26 added to retained earnings in 2015.
  • Acquisition of subsidiaries at RMB 14.7 added to equity in 2015.
  • Amortization of compensation cost at RMB 13 billion in 2015 added to equity.
  • Proceeds from the issuance of ordinary shares – IPO at RMB 61.5 billion in 2015 added to shareholders equity.
  • Conversion of convertible preferred shares at RMB 10.3 billion in 2015 added to equity.

Interpretation

The shareholders’ equity and the retained earnings have increased significantly due to the company’s net income and also the proceeds from the issuance of ordinary shares during its IPO.

The decline from Fiscal 2012 to 2013 was primarily due to the repurchase of ordinary shares from Yahoo! in September 2012. In addition, the privatization of Alibaba.com partially offset by the issuance of ordinary shares to finance the repurchase.

The Trend Graph

BABA SHE RE Trend

The graph above presents the historical movement of the company’s shareholders’ equity and the retained earnings. Consequently, in Fiscal 2013 both the shareholders’ equity and retained earnings were below zero.

Historical Number of Shares Outstanding

BABA # of shares

The table above presents the historical shares outstanding from 2011 to the trailing twelve months. Ordinary shares of 149,220,834 issued on Alibaba’s IPO in September 2014.

VALUATION

BABA valuation model

Facts:

  • The book value growth rate of Alibaba in the past two years was 16 percent.
  • Future book value in 5 years was $25.77
  • The average return on equity from 2007 to the trailing twelve months was 45.74.
  • The return on book value in five years was $11.78.
  • The price of the stock of Alibaba in five years was $403.01.
  • The present value of the stock was $174.23.
  • There was zero percent dividend yield.
  • The risk used was 15 percent.
  • The current price of the stock of Alibaba as of November 19, 2015, was $77.69 per share.
  • The intrinsic value of the stock of Alibaba was $104.54 per share.

Statement of Cash Flows

BABA Statement of CF

Facts:

  • The cash from operating activities was 50.70 CNY.
  • The capital expenditure was 7.7 billion CNY.
  • The net cash used for investing activities was -31.7 billion CNY.
  • The net cash provided by financing activities was -10.6 CNY.

Explanation

  • The cash from operating activities was increasing year over year in the past five years at an average rate of 109 percent.
  • The capital expenditures are the investment in properties, plant, and equipment.

Interpretation

Alibaba has a decent net cash from operating activities and was increasing year over year. Further, the company has a free cash flow higher than the net income for five years. Therefore, it indicates that the company has good free cash flow and Alibaba Group Holdings Limited is a healthy company.

Conclusion

Alibaba Group Holdings Limited (BABA) is a high growth and a healthy company. However, Alibaba has unusual corporate and ownership structures due to the laws and regulations brought about in China. Hence, investors in the US IPO might hesitate to buy shares of Alibaba China. Because they are buying shares in the Cayman Islands entity named Alibaba Group Holdings Company Limited. In addition, investors will not have direct ownership, but rather access to the profits. Furthermore, this may play a significant factor in making a decision on the stock of Alibaba Group Holdings Limited. A Hold position is recommended on the stock of Alibaba due to its ownership structures.

 

CITATION

http://www.sec.gov/Archives/edgar/data/1577552/000119312514333674/d709111df1a.htm#toc709111_11

https://www.sec.gov/Archives/edgar/data/1577552/000104746915005768/a2225010z20-f.htm

http://www.alibabagroup.com/en/about/overview

http://www.alibabagroup.com/en/about/history

https://www.sec.gov/Archives/edgar/data/1577552/000119312514184994/d709111df1.htm#toc709111_2

http://www.alibabagroup.com/en/about/history

 

Researched and Written by Criselda

Twitter: criseldarome

 

 

Adobe Systems a Quick Look

November 22nd, 2013 Posted by Company Research No Comment yet

ADOBE-SYSTEMS-007

Nature of Business

Adobe Systems Incorporated (Adobe) is a diversified software company. The Company offers a line of software and services used by professionals, marketers, knowledge workers, application developers, enterprises and consumers for creating, managing, delivering, measuring and engaging with content and experiences across multiple operating systems, devices and media.

The Company markets and licenses its software directly to enterprise customers through its sales force and to end users through application stores and its Website at www.adobe.com. Adobe also distributes its products through a network of distributors, value-added resellers (VARs), systems integrators, independent software vendors (ISVs), retailers and original equipment manufacturers (OEMs).

adobe-creative-suite1

Who is Running the Business?

Narayen, Shantanu

Chief Executive Officer

Shantanu_Narayen_hi

Mr. Shantanu Narayen is President, Chief Executive Officer, Director of Adobe Systems Inc. He joined Adobe in January 1998 as Vice President and General Manager of Company’s engineering technology group. In January 1999, he was promoted to Senior Vice President, Worldwide Products, and in March 2001 he was promoted to Executive Vice President, Worldwide Product Marketing, and Development. In January 2005, Mr. Narayen was promoted to President and Chief Operating Officer, and effective December 2007, he was appointed Company’s Chief Executive Officer and joined Company’s Board of Directors. Mr. Narayen serves on the board of directors of Dell Inc. Mr. Narayen holds a B.S. in Electronics Engineering from Osmania University in India, an M.S. in Computer Science from Bowling Green State University and an M.B.A. from the Haas School of Business, University of California, Berkeley.

 

Garrett, Mark

Chief Financial Officer

garrett-180x250

Mr. Mark Garrett is Chief Financial Officer, Executive Vice President of Adobe Systems Inc., since February 2007. Mr. Garrett served as Senior Vice President and Chief Financial Officer of the Software Group of EMC Corporation, a products, services and solutions provider for information management and storage, from June 2004 to January 2007, his most recent position since EMC’s acquisition of Documentum, Inc., an enterprise content management company, in December 2003. Mr. Garrett first joined Documentum as Executive Vice President and Chief Financial Officer in 1997, holding that position through October 1999 and then re-joining Documentum as Executive Vice President and Chief Financial Officer in 2002. Mr. Garrett is also a director of Informatica Corporation.

Income Statement

Profitability

1

Adobe’s gross margin and net margin was averaging 89.56 and 19.30 percent, respectively, this shows the profit the company. It also indicates the financial success and viability of Adobe’s products and services. Net margins measure the percentage of revenue that was left after deducting all of the expenses of the company. In other words, it shows how much cash earned during a certain period. Overall, this shows that ADBE is efficient in generating enough revenue from its business operation.

Cash Flow Statement

1

The cash flow margin average is 0.35 or 35 percent. Cash flow margin is cash from operating activities as a percentage of sales.  Cash from operating activities over total sales. On the other hand, Adobe’s free cash flow was averaging $1.49 million. It tells us that the company can of generating enough revenue and has cash left for payment of dividends and for future investment.

Valuation

The Totem Investment model adopts the investment style which we think applicable to the company, we looked for companies with a strong balance sheet or those with little debt, above average profit margin and ample cash flow. One evaluation style is that,  seek out undervalued companies whose stock price are temporarily down, but whose fundamentals are sound in the long run. The philosophy was to buy wisely when prices fall and to sell wisely when the price rise a great deal.

1

The sustainable growth rate is 13.04 percent, this implies how fast Adobe Systems Inc can grow without using more funds from creditors or investors, or where the company can keep its operation internally. Meanwhile, the calculated margin of safety was 98.45 percent. The market price as of November 22, 2013, was $57.17 per share.

Relative Valuation Methods

1

The relative valuation interpreted the following data: the book value per share average is $10.63, Price to Earnings ratio average was $24.92, and this is the price that the investors are willing to pay for the company’s earnings. The earnings per share average are $1.42, this represents the company’s net earnings allocated to each share of common stock. On the other hand, the return on equity is 14.3 percent; this implies how much profit Adobe generates with the investment that the shareholders’ have invested.

Conclusion

The metrics and methods used have shown that Adobe Systems Inc. is financially stable and sound. Moreover, the profitability ratios and the cash flow margins imply that the company is capable and efficient of generating enough revenue for paying dividends and for future investments. The stock of Adobe Systems Inc. compares the total value with the current price indicates that the company is undervalued. With this, I recommend a BUY on the stock of Adobe Systems, Inc.

 

CITATIONS:

http://financials.morningstar.com/ratios/r.html?t=ADBE&region=USA&culture=en-US

https://www.google.com/finance?q=NASDAQ%3AADBE&ei=1bqOUriQLI6RkgWdJQ

http://www.reuters.com/finance/stocks/officerProfile?symbol=ADBE.O&officerId=175923

http://www.reuters.com/finance/stocks/officerProfile?symbol=ADBE.O&officerId=920528

Researched and Written by Karla

Edited by Cris

Microsoft Corporation

Microsoft, the Company Behind the Latest Innovation in the Technology World

January 16th, 2013 Posted by Company Research No Comment yet

Have you heard the latest operating system in town? Yes, the Windows 8. I bet you already know what company is behind this latest innovation in the technology world. Without any further ado, let us allow the Stories team — Meriam and Karla, present this company research about Microsoft Corporation.

Who started Microsoft Corporation and why?

Almost every computer installed all over the world has dedicated its applications to Microsoft. And we all have Bill Gates and Paul Allen to thank that for. Microsoft Corporation enables people and businesses throughout the world realize their full potential by creating technology that transforms the way people work, play, and communicate.

Microsoft Corporation

Microsoft Corporation was founded by Bill Gates and Paul Allen on April 4, 1975. They are childhood friends who both have a passion for computer programming, seeking to make a successful business by utilizing their shared skills. Bill Gates was born in Seattle on 1955 and was first exposed to computers at school in the late 1960’s. Paul Allen is the son of two Seattle librarians.

The company develops and markets software, services, and hardware that deliver new opportunities, greater convenience, and enhanced value on most people’s lives.

The process of developing and implementing various sets of instructions to enable a computer to do a certain task is what we call Computer Programming. Furthermore, it is also the process of designing, writing, testing, debugging and maintaining the source code of computer programs, software, and applications we are using today.”

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

Microsoft Corporation

What is the nature of Microsoft Corporation business?

MSFT is a software product line specializing in engineering methods, tools and techniques for creating a collection of similar software systems from a shared set of software assets using a common means of production.

They are an American multinational corporation headquartered in Redmond, Washington and is the largest software company in the world and have offices in more than 100 countries. The company is committed to developing, licensing and supporting a range of software products and services. Microsoft designs and sells hardware, and delivers online advertising to the customers. Operating system server applications, business and consumer applications, and software development tools, as well as Internet software, technologies, and services.

MSFT operates in five segments: Windows & Windows Live Division (Windows Division), Server and Tools, Online Services Division (OSD), Microsoft Business Division (MBD), and Entertainment and Devices Division (EDD).

Who is running the company and their background?

Microsoft CorporationMr. Steven A. Ballmer is the chief executive officer of Microsoft Corporation. He graduated from Harvard University with a bachelor’s degree in mathematics and economics. He joined Microsoft on 1980 and was the first business manager hired by Bill gates. He became Executive Vice President, Sales and Support since February 1992. He served as President from July 1998 to February 2001. Mr. Ballmer served as corporate vice president and CFO of Microsoft’s Business Division (MBD)

Microsoft CorporationMr. Peter S.Klein holds a bachelor’s degree from Yale University. He is a Master of Business Administration from the University of Washington. He spent 13 years in corporate finance in the Seattle area, primarily in the communications and technology sector. Mr. Klein joined Microsoft on 2002 and was named Chief Financial Officer in November 2009. He was CFO of Microsoft’s Server & Tools Business Group (STB). He became Chief Financial Officer of Server and Tools from July 2003 to February 2006 and served as Corporate Vice President, Chief Financial Officer, Microsoft Business Division from February 2006 to November 2009.

Corporate finance is the amount, expressed as a percentage, that is earned on a company’s total capital calculated by dividing the total capital into earnings before interest, taxes, or dividends are paid.

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

The company’s strategic planning defines their process, direction and making decisions on allocating their resources to pursue a particular strategy. In order to determine the organization’s direction,  it is important to understand its current position and the possible avenues through which it can pursue a particular course of action.

MSFT’s audit committee is responsible for the appointment, compensation, retention, and oversight of the independent auditor engaged to issue audit reports on companies financial statements and internal control over finances.

Bill Gates is the chairman of the board. He has unparalleled knowledge of the Company’s history, strategies, technologies, and culture and is considered a technology visionary. Mr. Gates retired as an employee effective July 1, 2008, but continues to serve as an advisor on key development projects.

Helmut Panke, Ph.D. is the chairman of Regulatory and Public Policy. Mr. Panke understands product manufacturing processes, how to manage a company through business cycles and intense competition, and how to build and sustain a globally recognized and respected brand.

Charles H. Noski is the chairman of audit and governance and nominating committee. He has an extensive background in finance, accounting, risk, capital markets, and business operations, also has a unique portfolio of business skills. He provides services to leading organizations in the accounting and auditing fields reflects his expertise in finance and accounting matters.

Dina Dublon is the chairman of the compensation committee. She holds a B.A. in economics and mathematics from the Hebrew University of Jerusalem and an M.S. from the Business School at Carnegie Mellon University.

How do they make money?

Windows Division revenue comes from Windows operating system software purchased by original equipment manufacturers (“OEMs”). Generates revenue by developing, licensing, and supporting a wide range of software products and services. MSFT does business worldwide, wherein revenue increased due to strong sales of Server and Tools products and services and the 2010 Microsoft Office system.

Profit is earned primarily from usage fees and advertising. Its cloud-based computing services include Bing, Windows Live Essentials suite, Xbox LIVE service, Microsoft Office 365, Microsoft Dynamics CRM Online customer relationship management services and the Azure family of platform and database services.

Usage cost is an additional cost incurred in repairing or replacing items damaged in assembling handling installing, and/or testing.

How do they fit in the industry they operate in?

Microsoft Corporation is a rivalry in the technology sector derived rapidly with changing and disruptive technologies, shifting user needs, and frequent introductions of new products and services.

Competition among platforms, ecosystems, and devices. Face from firms that provide competing platforms, applications and services. Competitors vary in size from Fortune 100 companies to small, specialized single-product businesses and open source community-based projects. Competes with: Apple Computer, Inc.; Hewlett-Packard Company; International Business Machines Corporation; Logitech International SA; Novell, Inc.; Sony Corporation; Sun Microsystems, Inc.; Time Warner Inc.; Yahoo! Inc.

MSFT continues to develop versions of products with basic functionality that are sold at lower prices than the standard versions.

Information Technology people knew what a software is. But for those, just like me, that aren’t familiar with this, I asked some help over the Internet. Software,  means computer instructions or data. This is anything that can be stored electronically is software, in contrast to storage devices and display devices which are called hardware.

Who are their suppliers and customers?

Company’s growth depends on their ability to innovate by offering new and adding value to their existing software and service offerings.

Primary products and services rendered by MSFT’s segment: Windows & Windows Live Division, Server and Tools, Online Services Division , Microsoft Business Division and Entertainment and Devices Division. Includes operating systems for personal computers (PCs), servers, phones, and other intelligent devices. Its clients are individual consumers, small- and medium-sized organizations, enterprises, governmental institutions, educational institutions, Internet service providers, application developers, and OEMs. Markets and distributes products and services primarily through the following channels: OEM; distributors and resellers; and online.

Originally an OEM (original equipment manufacturer) REG was a company that supplied equipment to other companies to resell or incorporate into another product using the reseller’s brand name. Sometimes it is referred to as “bulk packed”, “white box”, “brown box” and “gray market”.

What is their workforce like?

As of June 30, 2012, MSFT employed approximately 94,000 people on a full-time basis, 55,000 in the U.S. and 39,000 internationally.

On January 2009, announced and implemented a resource management program to reduce discretionary operating expenses, employee headcount, and capital expenditures. The record employee severance when a specific plan has been approved by management, the plan has been communicated to employees, and it is unlikely that significant changes will be made to the plan. Success is highly dependent on company’s ability to attract and retain qualified employees. None of their employees are subject to collective bargaining agreements.

Program management refers to the process of managing several related projects often with the intention of improving an organization’s performance.

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

MSFT has an employee stock purchase plan (the “Plan”) for all eligible employees, in which employees may purchase shares having a value not exceeding 15 percent of their gross compensation during an offering period. It has a savings plan in the U.S. that qualifies under Section 401(k) of the Internal Revenue Code, and a number of savings plans in international locations.

The compensation program allows compensation committee and board to determine pay based on a comprehensive view of quantitative and qualitative factors designed to produce long-term business success. Microsoft designed executive officer’s benefits programs to attract, motivate, and retain the key executives who drive our success and industry leadership.

Employee Savings Plan is a pooled investment account provided by an employer that allows employees to set aside a portion of their pretax wages for retirement savings or other long-term goals (i.e. paying for college tuition, purchasing a home). In addition, many employers match their employees’ contributions up to a certain dollar amount, or by a certain percentage.

CITATION

Who started the company and why?

http://en.wikipedia.org/wiki/Microsoft_Corporation

http://www.sec.gov/Archives/edgar/data/789019/000119312512451049/d423661d424b2.htm

http://www.fundinguniverse.com/company-histories/microsoft-corporation-history/

What is the background of the company? Its History and Development?

http://www.google.com/finance?q=NASDAQ%3AMSFT&ei=MTzFUKi5LtCZlQWeHg

http://en.wikipedia.org/wiki/Microsoft_Corporation

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

http://www.fundinguniverse.com/company-histories/microsoft-corporation-history/

What is the nature of the business?

http://www.google.com/finance?q=NASDAQ%3AMSFT&ei=MTzFUKi5LtCZlQWeHg

http://en.wikipedia.org/wiki/Microsoft_Corporation

http://finance.yahoo.com/q/pr?s=MSFT+Profile

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

http://www.fundinguniverse.com/company-histories/microsoft-corporation-history/

http://www.sec.gov/Archives/edgar/data/789019/000119312512316848/d347676d10k.htm

https://www.google.com/url?q=http://www.fundinguniverse.com/company-histories/microsoft-corporation-history/&sa=U&ei=y0bFUM_DAaKKmQWls4GgCQ&ved=0CAcQFjAA&client=internal-uds-cse&usg=AFQjCNGAgEzJfySDeeYx4e-VVgwBJKeMow

Who is running the company and their background?

http://www.sec.gov/Archives/edgar/data/789019/000119312512316848/d347676d10k.htm p12

http://www.microsoft.com/en-us/news/exec/steve/default.aspx

http://www.sec.gov/Archives/edgar/data/789019/000119312512316848/d347676d10k.htmp12

http://www.microsoft.com/en-us/news/exec/pklein/default.aspx

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

http://www.sec.gov/Archives/edgar/data/789019/000119312512418708/d375562ddef14a.htm

http://www.sec.gov/Archives/edgar/data/789019/000119312512418708/d375562ddef14a.htm#sum375562_34 p12

http://www.sec.gov/Archives/edgar/data/789019/000119312512418708/d375562ddef14a.htm#sum375562_34 p18

http://www.sec.gov/Archives/edgar/data/789019/000119312512418708/d375562ddef14a.htm#sum375562_34 p14

http://www.sec.gov/Archives/edgar/data/789019/000119312512418708/d375562ddef14a.htm#sum375562_34

http://www.sec.gov/Archives/edgar/data/789019/000119312512418708/d375562ddef14a.htm#sum375562_34 p14

http://www.sec.gov/Archives/edgar/data/789019/000119312512418708/d375562ddef14a.htm#sum375562_34

http://www.sec.gov/Archives/edgar/data/789019/000119312512418708/d375562ddef14a.htm#sum375562_34 p13

http://www.sec.gov/Archives/edgar/data/789019/000119312512418708/d375562ddef14a.htm#sum375562_34

How do they make money?

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

http://www.sec.gov/Archives/edgar/data/789019/000119312512316848/d347676d10k.htm

http://www.sec.gov/Archives/edgar/data/789019/000119312512316848/d347676d10k.htm

http://www.sec.gov/Archives/edgar/data/789019/000119312512316848/d347676d10k.htm p26

http://www.sec.gov/Archives/edgar/data/789019/000119312512316848/d347676d10k.htm p51

http://en.wikipedia.org/wiki/Microsoft_Corporation#cite_note-BBCTL-8

http://www.sec.gov/Archives/edgar/data/789019/000119312512316848/d347676d10k.htm p4

How do they fit in the industry they operate in?

https://www.google.com/url?q=http://www.fundinguniverse.com/company-histories/microsoft-corporation-history/&sa=U&ei=y0bFUM_DAaKKmQWls4GgCQ&ved=0CAcQFjAA&client=internal-uds-cse&usg=AFQjCNGAgEzJfySDeeYx4e-VVgwBJKeMow

http://www.sec.gov/Archives/edgar/data/789019/000119312512316848/d347676d10k.htm

http://www.sec.gov/Archives/edgar/data/789019/000119312512316848/d347676d10k.htm

http://www.sec.gov/Archives/edgar/data/789019/000119312512316848/d347676d10k.htm p14

http://www.sec.gov/Archives/edgar/data/789019/000119312511200680/d10k.htm p15

Who are their suppliers and customers?

http://www.google.com/finance?q=NASDAQ%3AMSFT&ei=MTzFUKi5LtCZlQWeHg

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

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

http://www.sec.gov/Archives/edgar/data/789019/000119312512451049/d423661d424b2.htm

http://www.sec.gov/Archives/edgar/data/789019/000119312511200680/d10k.htm p81

http://www.sec.gov/Archives/edgar/data/789019/000119312512316848/d347676d10k.htm

http://www.sec.gov/Archives/edgar/data/789019/000119312512316848/d347676d10k.htm p10& 11

http://www.sec.gov/Archives/edgar/data/789019/000119312512316848/d347676d10k.htm

What is their workforce like?

http://www.sec.gov/Archives/edgar/data/789019/000119312511200680/d10k.htm p52

http://www.sec.gov/Archives/edgar/data/789019/000119312511276022/d230161d10q.htm

http://www.sec.gov/Archives/edgar/data/789019/000119312512316848/d347676d10k.htm

ttp://www.sec.gov/Archives/edgar/data/789019/000119312512418708/d375562ddef14a.htm

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

http://www.sec.gov/Archives/edgar/data/789019/000119312512316848/d347676d10k.htm pp83

http://www.sec.gov/Archives/edgar/data/789019/000119312512316848/d347676d10k.htm

http://www.sec.gov/Archives/edgar/data/789019/000119312511200680/d10k.htm p18

http://www.sec.gov/Archives/edgar/data/789019/000119312512418708/d375562ddef14a.htm#sum375562_34

http://www.sec.gov/Archives/edgar/data/789019/000119312512418708/d375562ddef14a.htm#sum375562_34

http://www.sec.gov/Archives/edgar/data/789019/000119312512418708/d375562ddef14a.htm#sum375562_34 p20

Researched by Meriam
Written by Meriam and Karla
Edited by Cris

BHP Billiton plc

BHP Billiton is Struggling with Numbers

January 16th, 2013 Posted by Company Research No Comment yet

 

Financial Liquidity
BHP Billiton plc (ADR)

  • Current ratio is mainly used to give an idea of the company’s ability to pay back its short-term liabilities (debt and payables) with its short-term assets (cash, inventory, receivables). The higher the current ratio, the more capable the company is of paying its obligations. BHP Billiton plc (ADR) showed an increasing trend from 2008 to 2010 then declined in 2011 and 2012, with growth ratio of 43 percent, 1, -33, -27 and average of 1.47 times.
  • Quick ratio, on the other hand, measures a company’s ability to meet its short-term obligations with its most liquid assets. The higher the quick ratio is, the better the position of the company. The trend went up from previous year and decreased in 2011 and 2012 with growth ratio of 47 percent, 1, -36, -33 and average of 1.12 times.
  • And their net working capital ratio or essentially the cash needed to run the business over their total asset showed a growth ratio of 7 percent, 0, -62, -80 and an average of 7.

A current ratio of 0.93 during 2012 which was under 1 suggests that the company would be unable to pay off its obligations if they came due at that point. This mainly showed that the company was not in good financial health but it does not necessarily mean that it will go bankrupt as there were many ways to access financing. However, it is definitely not a good sign. The quick ratio is more conservative than the current ratio, a more well-known liquidity measure because it excludes inventory from current assets for some companies have difficulty turning their inventory into cash. BHP Billiton plc (ADR) short-term financial strength in 2011 and 2012 was insufficient in the event that short-term obligations need to be paid off immediately. And their net working capital ratio has lower and declining rates meaning lesser cash to run the business over the amount of their total asset.

Asset Management 

BHP Billiton plc (ADR)

BHP Billiton plc (ADR)

  • Receivable turnover is a measure used to quantify a firm’s effectiveness in extending credit as well as collecting debts. Wherein, turnover showed a decreased in 2009 of 6.79 times or 54 days and a declining growth ratio of 32 percent, 26, 17 with an average of 9.78 times or 39 days in 2010 to 2012.
  • The inventory turnover is a measure of the number of times inventory is sold or used in a given period. Its turnover showed a decreasing trend with a slight increase in 2012 which is inversely related to the number of days which was increasing and declined in 2012. This has a growth of 28 percent, 8, 0, -4 with an average of 82 days.
  • Payable conversion period is an indicator of how long BHP Billiton plc is taking to pay its trade creditors. This showed an up and down trend with a growth ratio of 16 percent, 1, -3, 3 and an average of 101 days.
  •  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. This showed a decreasing trend, a slight increase in 2011 with a growth ratio of -26 percent, -3, 14, -24 and an average of 1.10 times.

BHP Billiton plc (ADR) has indirectly extending interest-free loans to their clients in terms of accounts receivable. This means they have a high ratio or number of times in their collection per year, depicting an efficient extension of credit and collection of accounts receivable which average 39 days. Their inventory turnover has an average of 4.53 times a year, this means an average of 82 days for inventory was being purchased and sold. It is important to understand how quickly the business usually needs to purchase new inventory. Their payable conversion period showed an average of 101 days or more than three months. Thus, cash conversion period fluctuates up and down with an average of 20 days for the whole process of purchasing, inventory, receivables (sales) turn into cash. The shorter the cycle, the less time capital is tied up in the business process, for the better of the company’s bottom line.

A higher fixed-asset turnover ratio shows that the company has been more effective in using the investment in fixed assets to generate revenues. Wherein the past four years they had been doing good except in 2012, it showed a declined to 0.88. This means major purchases are made for net PP&E to help increase output.

 Debt Management Ratio

BHP Billiton plc (ADR)

  • Debt ratio indicates what proportion of debt a company has relative to its assets. This indicated a consistent debt below 50 percent which was the same for two years but declined in 2010 of 8 percent and 2 in 2011 and back again to 49.
  •  The debt-to-equity ratio is a measure of the relationship between the capital contributed by creditors and the capital contributed by shareholders. Wherein this showed a consistent growth ratio in 2009, a declined of -14.4 percent in 2010 and -2 in 2011 but recovered to increase 18 percent in 2012.
  •  Solvency ratio determines how well the company is able to meet its debts as well as obligations, both long-term and short-term. This showed a growth ratio with an up and down trend of -52 percent, 87, 531, -88 and an average of 203 percent.
  •  Payable turnover ratio, a short-term liquidity measure used to quantify the rate at which a company pays off its suppliers. This was calculated by taking the total purchases made from suppliers and dividing it by the average accounts payable amount during the same period. This shows an up and down trend with a growth ratio of -14.6 percent, -1, 3.7, -2 and a five-year average of 3.61.

BHP Billiton plc (ADR) showed that it has more assets than liabilities. This means the company was not highly leveraged or financed by debts, since ratio it less than 50 percent. And they had high debt/equity ratio which generally means that a company has been aggressive in financing its growth with debt. This can result in volatile earnings as a result of the additional interest expense. Their solvency ratio depicted how solvent and financially sound the company is, but it went down in 2009 and 2012 because net income decreased. And the increase of solvency ratio in 2011 of 663 percent was due to a decrease in long-term liabilities of 555 million dollars as compared to the rest of the years.

Payable turnover ratio depicted an average of almost 4 times, this means they pay their creditors three to four times a year.

Majority In Control Based on Total Asset 

Who’s the majority in control of BHP Billiton plc (ADR)? According to Nelly, if we were to base it on their total five years of operation, the majority in control of their total asset are their stockholders at 51 percent then their creditors of 17 and last to their bank/bondholder at 13 percent average.

BHP Billiton plc (ADR)

  • Current liabilities to total assets identifies how much will be claimed by the creditor against total assets. This showed an up and down trend with an average of 17 percent.
  •  While long term debt to total assets is to make out how much claim has the banks or the bond holder against its total assets with an average of 13 percent.
  • Then, stockholders equity to total assets is to know how much the owner can claim in its total assets. This showed an average of 51 percent.

Plant, Property, and Equipment

Looking into its fixed assets — the plant, property & equipment, is knowing if it still has useful life in their business operations. Based on the data below, the remaining book value of the PPE was 67 percent, using the percentage method of depreciation. This means it has 3.34 useful years remaining which is very much lower and may often increase in value depending on local real-estate conditions.

BHP Billiton plc (ADR)

  • Gross plant, property, and equipment is the gross total of fixed assets cost, this shows an increasing trend with a growth ratio of 10.5 percent, 9, 20, 32 and it has an average of 94,339.20 million dollars.
  •  Accumulated depreciation is to reduce the carrying value of an assets to reflect the loss of value due to wear,  tear and usage. This also showed an increasing trend with a growth ratio of 24 percent, 2, 15, 19 and an average of 31,208.20 million dollars or 33 percent of gross.
  • The net plant, property, and equipment is the result after deducting the accumulated depreciation from gross PPE, wherein it showed an increasing trend with a growth of 3 percent, 13, 23, and 39.

Income Statement

BHP Billiton plc (ADR)’s income statement indicates how the revenue or money was received from the sale of products and services before expenses are taken out and transformed into the net income which is the result after all revenues and expenses have been accounted for.

Profitability 

BHP Billiton plc (ADR)

  • Net margins or the result of net profit divided by net revenue is an indication of how effective the company was in their cost control. For the higher the net margin the more effective the company is in converting revenue into actual profit. This depicted an up and down trend for the last five years with a growth ratio of  -54 percent, 108, 32.9, -35.2 with an average of 23.12 percent.
  •  Their asset turnover is a number of sales generated for every dollar’s worth of assets. It is calculated by dividing revenues by total assets. Wherein it showed a declining trend with a slight increase in 2011, growth ratio was -26 percent, -4, 19, -17 and an average of 0.71.
  •  Return on assets shows how profitable a company’s assets are in generating revenue. This indicated an up and down trend with a growth ratio of -66.8 percent, 99, 62.5, -46 and an average of 16.74.
  •  Financial leverage is the degree to which an investor or business utilize borrowed money. This showed a growth ratio of -0.50 percent, -7.10, -1.09, 8.28 and an average of 1.91.
  • Return on equity measures the rate of return on the ownership interest of the common stock owners. This depicted a growth ratio of -66.8 percent, 91.6, 56.2, -44 and an average of 31.82.
  •  Return on invested capital which refers to the rate of earnings on the amount of capital invested during the period. This indicated an up and down trend with a growth ratio of -67.2 percent, 97.6, 80.2, -47, and an average of 24.16.

BPH Billiton plc (ADR) profitability indicates that the company showcased a good performance during 2008 and 2011 compared to 2009, 2010 and 2012.  A low net margin means lower net income earned from each dollar of revenues but the higher a company’s profit margin compared to its competitors, the better. Its asset turnover ratio tends to be inversely related to their net profit margin, wherein the higher the net profit margin the lower the asset turnover. The investors can compare companies using this to determine which business is more attractive. And this means they earn more from revenue than converting assets to revenue. Their return on assets depicted a fluctuating earnings for every dollar of total assets due to their net income and total assets growth ratio yearly was in an up and down trend, with increases in 2010 and 2011.

In terms of their returns using the DuPont Model; wherein, an equity multiplier is used to measure their financial leverage, allows investors to see what portion of the return on equity was the result of debt.

In the case of BHP Billiton plc (ADR), financial leverage was decreasing and only increase in 2012 thus this indicates no difficulty in paying interest and principal while obtaining more funding. While their return on equity show a high favorable decreasing trend thus the bulk of the return comes from profit margins and sales. It showed how well a company uses investment funds to generate earnings growth, and a ROE’s between 15 percent and 20 percent are generally considered good. Likewise,  the return on invested capital was fluctuating up and down, the increase was due to financial leverage or shareholders’ return on investment associated with borrowing.

Income 

Provided below is BBL’s income from 2008 to 2012.

BHP Billiton plc (ADR)

  • Their revenue means how much money a company has generated in terms of “sales”, representing the amount of money a company brings in for selling its goods and services. This showed a growth ratio of -15.5 percent, 3.9, 35.8, 0.67 and it has a five-year average of 61,536.8 million dollars.
  •  Gross profit shows how much of their markup a company receives the goods and services it sells after deducting its cost of revenue. Wherein it depicted a growth ratio of -20.5 percent, 9.8, 50.7, -5.2 and an average of 38,271.6 million dollars.
  • Income before taxes refers to the gross taxable income of the company before deducting the income taxes. This showed a growth ratio of -50.5 percent, 68.5, 59.7, -26.3 and it has an average of 21,789.8 million dollars.
  •  Net income is what’s left over for a company after all expenses have been accounted for. This indicated a growth ratio of -61.8 percent, 116.5, 85.8, -34.8 and it has an average of 14,610.8 million dollars.

BPH Billiton plc (ADR) revenue for five years decrease in 2009 of -15.5 percent, and succeeding years it slightly went up with an abrupt increase in 2011 of 35.8 percent. This means revenue so as its gross profit and income before taxes was affected by US financial crisis in 2009 and 2010 but had recovered its earnings in 2011 and 2012. Therefore, net income showed a dipped in 2009 of -61.8 percent and 2012 of -34.8.

Expenses

BHP Billiton plc (ADR)

  • The cost of revenue was the amount the company paid for the goods that were sold during the year.  This depicted a growth ratio of -7.72 percent, -3.97, 13.2, 12.6 and an average of 23,265.2 million dollars.
  •  Operating expense was the expenses incurred in conducting their regular operations of the business. This showed a growth ratio of 33.34 percent, -29.2, 36.5, 34.08 and has an average of 16,481.8 million dollars.
  •  Provision for income tax was the amount allocated for their payment of income taxes. This showed an up and down trend with a growth ratio of -22.3 percent, 24.15, 11.36, 2.47 and an average of 6,687.8.
  •  Other income (expenses) was the amount represented by other means or nonoperating income (expenses). This showed a growth ratio of -64.4 percent, -37.7, 3.83, -61.4 and it has a five-year average of -491.2 million dollars.

Overall total expenses have been increasing except for a slight declined in 2010 of -10.22 percent, for this showed a decrease of cost or revenue of -3.97 so as operational expenses of -29.2. This means during the financial crisis in 2008 and 2009, BPH Billiton PLC (ADR) tightens on their expenses as depicted in a decrease in total expenses to increase net earnings during the year.

Modified Income Statement 

I think it’s high time for us to sum up the income statement. What we have below is the interpreted summary of income statement based on its revenue, total expenses, and net income.

BHP Billiton plc (ADR)

BHP Billiton plc (ADR) is a diversified miner that supplies aluminum, coal, copper, iron ore, mineral sands, oil, gas, nickel, diamonds, uranium, and silver indicated in the graph revenue was increasing except for 2009. Total expenses which were only 74.66 percent of average revenue indicated that expenses incurred were three-fourths. As a result, net income leftover was good at 23.74 percent.

Margins 

The following ratios show margin that represents the BBL’s ability to translate sales dollars into profits at various stages of measurement.

Overall margins showed how efficient the company’s management was able to sustain their profits. Despite the declined in 2009 they were able to recover in 2010 but declined again in 2012 due to a decrease in gross profit, operating and EBT margins.

Net Change in Cash 

BHP Billiton plc (ADR)

  • Net cash provided by operating activities. To calculate this, one must calculate cash generated from customers and cash paid to suppliers. The difference between the two reflects cash generated from operations. This showed a growth ratio of 3 percent, -4, 67, -18 and an average of five years amounting 21,881.20 million dollars.
  • Net cash provided by (used for) financing activities is where the company reports the money that it took in and paid out in order to finance its activities. In other words, it calculates how much money the company spent or received from its stocks and bonds including any dividend payments that the company made to its shareholders, any money that it made by selling new shares of stock to the public, any money it spent buying back shares of its stock from the public, any money it borrowed, and any money it used to repay money it had previously borrowed. This indicated a down and uptrend of -83.9 percent, 349.7, 201.8,  -84.3 with an average of -5,467.4 million dollars.
  • Net change in cash has been affected by the exchange rate of different currencies used thus a net change in cash from operations, investments and financing resulted in an up and down trend of 415.6 percent, -75.6, -46.2, -118.9 with an average of five years of 496.6 million dollars.
  •  Cash at the beginning of the period, this showed an increasing trend with declined in 2012, growth ratio of 74.02 percent, 159.6, 14.9, -19.06 with an average of 7,987.4 million dollars.
  •  Cash at the end of the period, likewise this showed an increasing trend with decreases in 2011 and 2012, growth ratio of 159.5 percent, 14.9, -19.06, -51.6 with an average of 8,484 million dollars.

Looking at BPH Billiton plc (ADR) operating cash flow, this will show you whether a company is burning more money than it is earning. In this case their operating cash flow a gauge of company’s liquidity indicates they were able to generate sufficient positive cash flow to maintain and grow its operations, but it required external financing especially in 2011 and 2012, for they purchased investments amounting 5, 045 and 12,897 million dollars that cause a negative net change in cash. Therefore, a positive cash flow is a good sign, while negative cash flow needs to have a one-time explanation (an investment or expense that will not be repeated; for example, an acquisition or a new factory or purchase of investments).

Free Cash Flow 

BHP Billiton plc (ADR)

Operating cash flow showed an up and down trend with a growth ratio of 3.87 percent, -4.99, 67.8, -18.9 and an average of 21,881.2 million dollars. Its capital expenditure indicated likewise an uptrend with a decline in 2010 and 2011. It has a growth ratio of 21.87 percent, -1.24, 8.15, 67.5 and an average of 12,322.6 million dollars. Deducting from operating cash flow it resulted in a free cash flow with a growth ratio of -13.5 percent, -10.1, 157.2, -73.3 and has an average of 9,558.6 million dollars.

BHP Billiton plc (ADR) in 2012 depicted a decline in operating cash flow, so as a decrease in capital expenditure. This means that operations were affected by US financial crisis as seen by the declined in revenue in 2009.  Free cash flow indicated a decreasing trend except for 2011 but overall they have sufficient funds needed for operations.

Written by Nelly
Edited by Cris

 

Interested tin learning more about the company Here’s investment guide for a quick view, company research to know more of it’s background and history; and investment valuation for the pricing.

Vale SA

Vale S.A (VALE) Is Financially Healthy

January 9th, 2013 Posted by Company Research No Comment yet

Balance Sheet

VALE SA Liquidity

Liquidity refers to how quickly and cheaply an asset can be converted into cash. Money (in the form of cash) is the most liquid asset. Assets that generally can only be sold after a long exhaustive search for a buyer are known as a liquid. Since the main cast of our report is Vale SA, let’s analyze if the company has been liquid from 2007-2011 through the liquidity ratios presented below.

 Vale SA

  • Working capital ratio of the company was .02, .20, .12, .11 and .08. with an average of .11. This means that working capital (current asset-current liabilities) was only  11 percent compared to the company’s total asset. Its high working capital was in 2008 at 20 percent.
  • The current ratio was 1.13, 3.21, 2.32, 1.77 and 1.97, with an average of 2.68. This tells us that current resources of Vale were greater than its current obligations by an average of 2.68.
  • And quick ratio (current asset inventory over current liabilities) was .75, 2.67, 1.97, 1.53 and 1.49 average of 2.44. This shows that the company has a less monetary asset in 2007 while its peak was in 2008 at 2.67.

To consider a firm financially healthy is to have a current and quick ratio of at least 2. With this, current resources of Vale SA is good enough to continue running its business.

VALE SA Asset Management/Efficiency

Efficiency ratios are used to measure the quality of the company’s receivables and how efficiently it uses its other assets. By looking at the table below, this will give us the idea of how efficient Vale SA  uses its other assets from 2007 to 2011.

 Vale SA

  • Average inventory turnover ratio of Vale SA was 4.49. This ratio tells how often a business turns its inventory in a year. Because inventories are the least liquid form of asset, a high inventory turnover ratio is generally positive. On the other hand, an unusually high ratio compared to the average for your industry could mean a business is losing sales because of inadequate stocks on hand.
  • The receivable turnover ratio was 5.66 times average. Receivables turnover is a good way to gauge the effectiveness of company’s payment terms. If this number is low compared to the industry average, it may mean payment terms are too lenient or that you are not doing a good enough job on collections.
  • The payable turnover ratio of Vale SA was 11.84 times average. Payables turnover trends can help a company assess its cash situation. Just as accounts receivable ratios can be used to judge a company’s incoming cash situation, this figure can demonstrate how a business handles its outgoing payments.
  • Asset turnover ratio of the company was .39 average.  This compares the sales revenue of a company to its total asset.  This ratio tells us how effectively and efficiently a company is using its assets to generate revenues as well as indicates the productivity of assets in generating revenues.

Based on the above data, if we are going to convert its efficiency into days,  Vale’s inventory was  81 days, days receivable was 64 and days payable was 31 days.

VALE SA Leverage

Leverage is the relationship between debt financing and equity financing, also known as the debt-to-equity ratio. Leverage is not necessarily a bad thing. Leverage 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.

Debt ratio, debt to equity and solvency ratio of Vale SA from 2007 to 2011 is  detailed below:

 Vale SA

  • The company’s debt ratio was .57, .47, .44, .47 and .40. an average of .47. It means that its total liabilities was only 47 percent average compared to the total asset.
  • Its debt to equity ratio was 1.31, .88, .80, .87 and .66. with an average of .90.  The company’s total obligations were high is 2007 at 131 percent compared to stockholders’ equity, however, the company managed to lower it down to 66 percent in 2011.
  • Solvency ratio was .32, .43, .18, .35 and .52. Averagely, it is quite good, a solvency ratio of .20 is good enough as a rule of thumb.

Vale SA’s invested capital was half loan, total debt compared to total asset was 47 percent and 90 percent of total stockholder’s equity. The company was not high leveraged as they managed to lower it down in 2011.

In order to know who are the majority claimants of the company, we used the following ratios:

 Vale SA

  • Current liabilities to total asset was.11 average which means that the creditors have 11 percent claims of the total asset of the company.
  • Its long-term liabilities to total asset was .20, this tells us that 20 percent will be claimed by the banks or bondholders.
  • And stockholders’ equity to total asset was .53 average. It means that  53 percent of the total asset of Vale belong to its stockholders, therefore, they are the majority claimants of the company’s property.

VALE SA Property, Plant & Equipment

This category 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.

Let’s have a glance of Vale SA’s investment in PPE from 2007 to 2011:

 Vale SA

  • The company’s investment in PPE has an average of $83,934 in 5 years. If we deduct its accumulated depreciation of $15,217, the net value of the fixed asset would be  $68,716.

Using the above scenario, we estimate a 5-year useful life of the property, so the remaining life will be 4.1 years to be usable.  Therefore, the company could save for 4 years for the use of the existing fixed asset.

Income Statement

This is the financial statement that measures a company’s financial performance over a specific accounting period. Financial performance is assessed by giving a summary of how the business incurs its revenues and expenses through both operating and non-operating activities.

VALE SA Income

Income is the amount of money that a company actually receives during a specific period, including discounts and deductions for returned merchandise. It is the “top line” or “gross income” figure from which costs are subtracted to determine net income.  Vale SA’s income from 2007 to 2011 are detailed below:

 Vale SA

  • Revenue was 32242, 37426, 23311, 45293 and 58990, its TTM (trailing twelve months) was 48099. Its growth in 2008 was 16 percent, however, it dropped by  38 percent in 2009, but recovered in 2010 until 2011 by 94 and 30 percent.
  • The company’s gross profit was 15779, 19785, 9690, 26479 and 32607 with TTM of 12820. Its growth is also trending up except in 2009 wherein it dropped by 51 percent, the lowest performance in five years.
  • Operating income and income before tax was 15233, 13217, 7123, 20314 and 26799. with ttm of 12820. Both have the same figures and the trend was it lowered by 13 percent in 2008 and 46 percent in 2009 but rose up in 2010 by 185 percent and 32 percent in 2011.
  • Finally, income after tax was 11825, 13218, 5349, 17264 and 22885. ttm was 12830. A growth of 12 percent in 2008, dropped down to 60 percent in 2009, however, it recovered by 223 percent in 2010 and 33 percent in 2011.

Revenue of Vale SA showed a successive positive balance in 5 years period. The trend was up and down but continuously have a positive growth in the year 2010 to 2011. Its net income results were impressive at 27 percent.

VALE SA Expense

The economic costs that a business incurs through its operations to earn revenue. In order to maximize profits, businesses must attempt to reduce expenses without also cutting into revenues. Because expenses are such an important indicator of a business’s operations, let’s take a look at Vale’s expenses from 2007 to 2011:

 Vale SA

  • The cost of revenue was 16,463, 17641, 13624, 18814 and 26383. Its percentage of total revenue was 51, 47, 58, 42 and 45. with 55 percent ttm.
  • Its operating expense was 546, 6568, 2567, 6165 and 5808 which was 2, 18, 11, 14 and 10 percent of revenue. Its highest operating expense was in 2008 and lowest in 2007.
  • Likewise, another expense of Vale was 2994, -1, 1774, 2718 and 4147 or an average of  6 percent in five years.
  • And total expense was 3540, 6567, 4341, 8883 and 9955 which was equivalent to 11, 18, 19, 20 and 17 percent of total revenue.

Proportionate of Vale’s expenses against its total revenue was 55 percent cost of revenue, operating expense was 11 percent, other expense 6 percent and total expense average were 17 percent to total revenue.

VALE SA Margin

The margin is a measure of profitability expressed in percentage.  Vale’s  gross margin, operating margin, pre-tax margin and net profit margin from 2007 to 2011 are detailed below:

 Vale SA

  • The company’s gross margin was .49, .53, .42, .58 and .55, average was .51. This is the gross profit compared to sales expressed in percentage.
  • Its operating margin and pretax margin were .47, .35, .31, .45 and .45 with average of .41. Its highest was in 2007 and lowest in 2009 because of low sales in the same year.
  • Net profit margin was .37, .35, .23, .38 and .39. its ttm  was .27. The results showed that in 2009, the net profit margin was only 23 percent it’s lowest while 39 percent in 2011.

Considering its industry, gross margin of Vale was impressive at an average of 51 percent, operating margin was 41 percent with a net margin TTM of 27 percent. Its low margin in 2009 was affected by the low sales of the company.

VALE SA Profitability

What I’ve found out from Rio is that profitability ratios help users of a company’s financial statements determine the overall effectiveness of management regarding returns generated on sales and investments. Commonly used profitability ratios are gross profit margin, operating profit margin, and net profit margin.

What are the results for Vale SA from 2007 to 2011? Let’s find out.

 Vale SA

  • Net margin was .37, .35, .23, .38 and .39. TTM was .27. This is the bottom line of the business operation which shows how much of each sales dollar shows up as net income after all expenses are paid.
  • Asset turnover ratio was .39 TTM. It shows that the company is doing well in using its assets to generate sales.
  • Return on equity was .46, .31, .13, .29 and .34. Its trailing twelve months was .31 and it shows that the company is doing a good job using the investors’ money.
  • Financial leverage or equity multiplier was 2.31, 1.88, 1.80, 1.87 and 1.66, ttm was 1.90. It is derived by dividing asset by its stockholder’s equity. It allows the investor to see what portion of the ROE is the result of debt.
  • Finally, return on invested capital was .19 TTM. This ratio determines the amount of return that a firm could earn on additional contributed capital. The calculation measures the return generated when a company converts its capital into capital expenditures, which generate revenues from core operations.

Based on the above data, Vale ‘s profitability is good, with no negative result. Its overall performance shows that its peak year was in 2011 while its lean period was in 2009. This was due to low sales in 2009 which resulted in the low-profit margin, however, total performance was impressive.

Cash Flow

Cash flow statements facilitate decision making by providing a basis for judgments concerning the profitability, financial condition, and financial management of a company. It is categorized into three; operating cash flow, investing cash flow and financing cash flow. The graph below shows the cash flow of Vale from 2007 to 2011:

 Vale SA

VALE SA Cash Flow from Operating Activities

Operating cash flows are cash received or expended as a result of the company’s internal business activities. It includes cash earnings plus changes to working capital.

Transactions affecting the operating cash flow of Vale SA from 2007 to 2011 are as follows:

 Vale SA

  • Net income was 11825, 13218, 5456, 17453 and 22652. TTM was 12522. This is the result of the normal transaction of the business.
  • Depreciation and amortization were 2186, 2807, 2722, 3260 and 4122.
  • Accounts receivable was 0, -466, 616, -3800 and -821. while
  • Its inventory was -343, -467, 530, 503 and -1343.
  • Other working capital was 1579, -338, 26, 541 and -725.
  • Other non-cash items were -3535, 1729, -2276, 1478 and 1993.
  • So, its net cash provided by operating activities was 11012, 17114, 7136, 19669 and 24496 with TTM of 20515. It is a consistently positive balance.

After the adjustments on the operating activities transactions of Vale company, its net operating cash flow was still high at $20515 TTM.  It has money left for future expansion.

VALE SA Cash Flow from Investing Activities

Cash received from the sale of long-life assets or spent on capital expenditure (investments, acquisitions, and long-life assets) fall under this category.

Transactions related to cash flow from investing activities of Vale company from 2007 to 2011 are:

 Vale SA

  • Total cash outflow was -10048, -11535, -13765, -19138 and -16943 which are investments in PPE, purchases of investments and other investing activities.
  • While total cash inflow was 1042, 134, 606, 1954 and 2874 which includes sales/maturities of investments and PPE reductions.
  • So, net cash used for investing activities was -9006, -11401, -13159, -17184 and -14069.

Net cash used in investing activities of Vale SA incurred a negative balance because cash outflow was more than its cash inflow transactions under investing category.

VALE SA Cash Flow from Financing Activities

Financing cash flows refer to cash received from the issue of debt and equity or paid out as dividends, share repurchases or debt repayments.

  • Total cash inflow was 0, 15210, 5339, 6693 and 2442. These came from debt issued and common stock issued.
  • While total cash outflow was  -5209, -6206,- 4714, -9262 and -16813,  which were debt repayment, repurchase of treasury stock, cash dividends paid and other financing activities.
  • So, net cash provided by (used for) financing activities was -5209, 9004, 625, -2569 and -14371. Its negative balance was due to cash outflow exceeds cash inflow while positive balance, the company has more than enough funds to offset cash out under financing category.

Under financing cash flow activities, it incurred a negative balance in 2007, 2010 and 2011 because cash outflow transactions were greater than cash inflows. Meanwhile, cash outflows exceed cash inflows in 2008 and 2009 which resulted in a positive balance.

VALE SA Free Cash Flow

This is a measure of financial performance calculated as operating cash flow minus capital expenditures. Free cash flow is important because it allows a company to pursue opportunities that enhance shareholder value. Without cash, it’s tough to develop new products, make acquisitions, pay dividends and reduce debt.

  • Free cash flow of Vale SA from 2007 to 2011 was 4361, 8142, -960, 7022 and 8421. It has a negative balance in 2009 because its capital expenditure exceeds its operating cash flow balance, however, rests of the period shows a positive result.

The company shows that it is financially healthy consecutively in 2007 to 2008 and 2010 to 2011. It means it has available funds to retire debts and pay dividends. However, it was negative in 2009 by 13 percent.

VALE SA 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 with their calculations and interpretation for Vale SA operation from 2007-2011.

 Vale SA

  • Cash flow margin is the result of dividing operating cash flow by total revenue. For Vale SA, its trailing twelve months was .43 which means that for every dollar of sales, it generates cash flow of $0.43.
  • Operating cash flow was the result of dividing operating cash flow by total current liabilities. Vale SA’s trailing twelve months was 1.51 which shows that it can meet financial obligations thru cash generated by operating activities.
  • Free cash flow ratio compares the company’s free cash flow to its operating cash flow. The company incurred a negative result in 2009 of .13, however, recovered in the succeeding period.
  • Capital expenditure ratio was 1.66, 1.99, .88, 1.56 and 1.52. its TTM was 1.19. It measures the company’s ability to acquire long-term assets using free cash flow.  It shows that the company can invest in itself in capital expenditures.
  • Total debt ratio was .34 TTM. It tells us of a company’s ability to cover total debt with its yearly cash flow from operations. The higher the percentage ratio, the better the company’s ability to carry its total debt.

For Vale SA, as far as its profitability ratios are concerned,  shows impressive results except in its free cash flow in 2009 which was negative -0.13 but the company managed to recover thereafter.

 

Written by Rio
Edited by Cris

Microsoft Corporation

Microsoft Corporation A Stable Company

December 26th, 2012 Posted by Company Research 1 comment

Balance Sheet

Liquidity

Liquidity ratios help financial statement users evaluate a company’s ability to meet its current obligations. In other words, liquidity ratios evaluate the ability of a company to convert its current assets into cash and pay current obligations. Thanks to Rio for that brief description. But the question now is, how liquid was Microsoft Corporation from 2008 to 2012 and last quarter using the following ratio: working capital ratio, current ratio, and quick ratio?

Microsoft Corporation

  • The working capital ratio of the company was 0.18, 0.29, 0.34, 0.42,  0.43 and 0.33 for the latest quarter. This is the percentage of net working capital against the company’s total asset.
  • The current ratio was 1.45, 1.82, 2.13, 2.6, 2.6 and 2.68 for the latest quarter.  It shows that current asset was 268 percent of current liabilities, meaning the company’s current resources was greater than its current obligation.
  • And quick ratio was 1.25, 1.58, 1.9, 2.35, 2.41 and 2.44 for the latest quarter. This also tells us that the company’s monetary asset (current minus inventory) was also greater than its current liability.

Above data show how financially stable Microsoft Corporation is as far as its current resources are concerned. Working capital as of the latest quarter shows its capability to continue running its business well. 

Asset Management

Asset management ratios are the key to analyzing how effectively and efficiency your business in managing its assets to produce sales. Asset management ratios are also called turnover ratios or efficiency ratios. 

Shown below are the efficiency ratios of Microsoft Corporation from 2008 to 2012:

Microsoft Corporation

  • Inventory turnover ratio was 14 times average. This measures the number of times business sells its stock in a 12-month period.
  • The company’s receivable turnover ratio was 5 times average. This shows how long, on average, a business takes to collect the debts owed to it by customers who have purchased their goods on credit.
  • The payable turnover ratio was 16 times on average. This number reveals how quickly the company pays its bills. The payable turnover ratio reveals how often MSFT’s payable turn over during the year.
  • And asset turnover ratio got.71 average. This measures the productivity of the business (i.e. how much worth of sales revenue can be generated from the assets employed). This means that for every $1 of the net asset, the business generates $0.71 of sales revenue.

If we convert the inventory turnover of 14 times average in days, it is 26 days, while the company’s receivable turnover ratio of 5 times average will be 73 days and the payable turnover ratio of 16 times average was 22 days. Based on the above performance, Microsoft Corporation is efficiently managed. 

Debt Management/Leverage

For Microsoft Corporation, leverage ratios from 2008 to 2012 are detailed below. This will give us if the company is high leverage or not.

Microsoft Corporation

  • The company’s debt ratio was .50, .49, .46, .47, 45 and .48 average in five years period. This is the comparison between the total liabilities against total assets. It shows that MSFT’s debt ratio did not exceed 50 percent wherein .45 in 2012 was its lowest so far.
  • Debt to equity ratio measures total liabilities against its total equity. For Microsoft Corporation, it was 1.01, 0.97, 0.86, 0.90, 0.83 and an average of .91. The year 2008 was over by 100 percent but it is slowly reduced that in 2012 it dropped to .83.
  • Solvency is the company’s ability to pay its total debt when becomes due. The company had 0.54, 0.45, 0.54, 0.50, 0.36 and 0.48 average in five years. As a rule of thumb, 0.20 ratio is good enough.

When it comes to debt management or leverage, the company observed full control on its long-term investments on credit. As shown above, its debt ratio was up to 50 percent only while its debt to equity was managed to reduce to 0.83 in 2012. The company is also able to pay off its total obligations as they become due at 0.48 average solvency.

Property, Plant & Equipment 

This category 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.

For MSFT, its investment on property, plant, and equipment from 2008 to 2012 is shown below:

Microsoft Corporation

  • The company’s gross PPE was $16,221 average. As shown in the above table its fixed asset expanded per year,  its lowest investment was in 2008 at $12,544  and its highest was in 2012 at $19,231.
  • Accumulated depreciation was $8,654 average or 53 percent in five years period.
  • And net PPE was $7,568 average which is equivalent to 47 percent.

Based on the above table, the average used life of the PPE investment is 2.7 years and the remaining useful life of the PPE investment would now be 2.3 years. This is based on the estimated five years shelf life of the property.

Income Statement

A financial statement that measures a company’s financial performance over a specific accounting period. Financial performance is assessed by giving a summary of how the business incurs its revenues and expenses through both operating and non-operating activities. It also shows the net profit or loss incurred over a specific accounting period, typically over a fiscal quarter or year.

Income

I guess most of us knew what an income is. But to have some refreshment here, it is the amount of money, as defined, a company actually receives during a specific period, including discounts and deductions for returned merchandise.

MSFT’s income from 2008 to 2012 is shown below:

Microsoft Corporation

  • Revenue of the company was increasing except in 2009 which was lower by 3 percent, however in the succeeding years it continues to increase, its trailing twelve months was $72,359. It grew 5 percent on average.
  • Gross profit was 48,822, 46,282, 50,089, 54,366 and 56,193, with ttm (trailing twelve months) of 54,438.
  • The company’s operating income was 22,492, 20,363, 24,098, 27,161 and 21,763. Its ttm was $19,868.
  • Its income before tax 23,814, 19,821, 25,013, 28,071 and 22,267. It has a ttm of $20,495.
  • And finally, income after tax of MSFT has a trailing twelve months of 15706 which is 22 percent of total revenue.

Overall income of MSFT is doing well, its revenue and gross profit have the same trend of growth rate while its operating income in 2012 dropped down by  20 percent due to increase in operating expenses within the same year. Income before tax and after tax income are 28 and 22 percent respectively. There’s no negative balance throughout the five years period.

Expenses 

These are money spent or cost incurred in an organization’s efforts to generate revenue, representing the cost of doing business. In five years period, from 2008 to 2012, the following are the expenses of Microsoft Corporation:

Microsoft Corporation

  • MSFT’s cost of revenue was 11,598, 12,155, 12,395, 15,577 and 17,530.  It had an increased each year for 5 years with an average growth of 11 percent. MSFT’s cost of revenue trailing twelve months was 25 percent of total revenue
  • Operating expense’s trailing twelve months was 34570. This was equivalent to 48 percent of revenue.
  • Other expense was 4,811, 5,794, 5,338, 4,011 and 4,785. TTM was 4,162 or 6 percent of revenue.
  • Total expense was 31,141, 31,713, 31,329, 31,216 and 39,215 which was 64, 69, 63, 57 and 70 percent of revenue.

Margins

This ratio looks at how well a company controls the cost of its inventory and the manufacturing of its products and subsequently pass on the costs to its customers. Let’s take a look at the margin of MSFT from 2008 to 2012:

Microsoft Corporation

  • Gross margin of Microsoft Corporation was up and down trend, showing an average fluctuation of 1.5 percent.
  • Its operating margin has no movement in 2008 and 2009, dropped by 2 and 3 percent in 2010 to 2011 and recovered by 8 points in 2012.
  • The company’s pretax margin was low in 2012 at 30 percent but marked its highest percentage in 2010 and 2011 at 40 percent.
  • Finally, its net profit margin was 29, 25, 30, 33 and 23 percent, with the highest percentage in 2011 at 33 percent and its lowest was 23 percent in 2012.

Profitability

I’m not that familiar with different terminologies so I asked Rio for the definition of profitability and this is what I’ve learned. Profitability ratios show a company’s overall efficiency and performance. We can divide profitability ratios into two types: margins and returns. Ratios that show margins represent the firm’s ability to translate sales dollars into profits at various stages of measurement. On the other hand, ratios that show returns represent the firm’s ability to measure the overall efficiency of the firm in generating returns for its shareholders.

Microsoft Corporation

  • The company’s average net margin was 9 percent, with 10 percent marked in 2009 while 7 percent in 2011. This is the bottom line result of the day to day normal business transactions.
  • Asset turnover has an average of 71 percent. It is a measure of how effectively a company converts its assets into sales. It is inversely related to net profit margin, the higher the net profit margin the lower the asset turnover.
  • Return on asset was 0.33, 0.25, 0.29, 0.26 and 0.18 in 2012. Its average was 0.26. It measures the amount of profit earned relative to the firm’s level of investment in total assets. A Higher percentage is better because the company is doing a good job using its assets to generate sales.
  • Return on equity was 0.66, 0.50, 0.54, 0.49 and 0.34, with an average of 0.51. It is perhaps the most important of all the financial ratios to investors in the company. It measures the return on the money the investors have put into the company. This is the ratio potential investors look at when deciding whether or not to invest in the company.
  • Financial leverage was 2.01, 1.97, 1.86, 1.90, and 1.83, with an average of  1.91. It is useful to the investor, it allows to see what portion of the ROE is the result of debt.
  • Return on invested capital was .49, .34, .37, .34 and .22. with an average of .35. It is the percentage result of net income over invested capital. For MSFT, its return on invested capital was 35 percent.

As far as its profitability ratios are a concern, results of MSFT is quite good, there’s no mark of a negative result, so the company is doing good in its business.

Cash Flow

Cash flow is the movement of money into or out of a business, project, or financial product. It is usually measured during a specified, finite period of time. It has three categories: operating cash flow, investing cash flow and financing cash flow.

Microsoft Corporation

Cash Flow from Operating Activities

Operating cash flows are cash received or expended as a result of the company’s internal business activities. It includes cash earnings plus changes to working capital. Over the medium term, this must be net positive if the company is to remain solvent.

Related transactions of MSFT’s operating cash flow from 2008 to 2012 are as wrapped up below:

Microsoft Corporation

  • Net income of Microsoft Corporation was 17,681, 14,569, 18,760, 23,150 and 16,978; ttm of 15706. This is the result of the company’s day to day business transactions. It consistently showed positive results.
  • Depreciation and amortization was 2,056, 2,562, 2,673, 2,766 and 2,967; ttm was 2951.
  • Its investments losses (gains) was 683,  -208, -362 and -200; ttm of -159. In 2009, the company incurred an investment loss of 683 but thereafter its investments resulted in having gains.
  • Deferred income taxes was 935, 762, -220, 2 and 954, with ttm of 590.
  • Other working capital was -2,435, -2,393, 2,899, -1,049 and 829. ttm was -205. It shows negative in the year 2008-2009 and 2011, however, a positive result in 2010 and 2012.
  • So, its net cash provided by operating activities was 21,612, 19037, 24073, 26994 and 31626. Its ttm was 31617. It shows consistent positive results.

Cash flow from operating activities of MSFT tells us that the company has funds to retire additional debts, pay dividends and expand through investment in another line of business.

Cash Flow from Investing Activities

Cash received from the sale of long-life assets or spent on capital expenditure (investments, acquisitions, and long-life assets). Investing cash flow transactions of Microsoft Corporation from 2008 to 2012 are summarized below:

Microsoft Corporation

  • Total cash inflow was 27,729, 25,997, 22,578, 22,777 and 45,275, with ttm of 49,480. This represents sales/maturities of investment.
  • Total cash outflow was -32,316, -41,767, -33,892, -37,393 and -70,061. These were an investment in PPE, acquisitions, purchase of investment and other investing activities.
  • So, net cash used for investing activities was -4587, -15770, -11314, -14616 and -24786 which showed negative balance because transactions affecting cash outlays exceeded cash inflows.

Cash flow from investing activities of Microsoft Corporation incurred a negative balance because cash outflows are more than cash inflows. It involves the only transaction on sales/maturities of investment.

Cash Flow from Financing Activities

Financing cash flows refer to cash received from the issue of debt and equity or paid out as dividends, share repurchases or debt repayments.

Microsoft Corporation

  • MSFT’s total inflow was 3,494, 6,657, 6,523, 9,213 and 2,006. Included here were debt issued, common stock issued and excess tax benefit from a stock base.
  • Total cash outflow was negative 12,934, -7,463, 13,291, 8,376 and 9,408. It included debt repayment repurchased of common stock, dividends paid and other financing activities. This also showed negative results because outflows transactions were more than cash received by the company.

Similar to investing cash flow, the company’s financing cash flow was a consistent negative balance because cash outflows exceeded cash inflows.

Free Cash Flow

The graph below will reveal us the free cash flow of Microsoft Corporation from 2008 to 2012:

Microsoft Corporation

  • Free cash flow of MSFT from 2008 to 2012 was 18,430, 15918, 22096, 24639 and 29,321. Its ttm was 29,145. It showed a consistent high running balance throughout its five years of operation.
  • Free cash flow shows that the company had huge funds to pay its obligations; current, long term and dividends to its stockholders and even enough to invest new lines of business.

Cash Flow Ratios

Cash flow analysis uses ratios that focuses on cash flow and how solvent, liquid, and viable the company is. Here are the most important cash flow ratios that Rio used with her calculations and interpretation on Microsoft Corporation.

Microsoft Corporation

  • Cash flow margin was 0.36, 0.33, 0.39, .39 and 0.43;  its ttm  was .44. Cash flow margin measures how efficiently a company converts its sales dollars to cash.
  • Operating cash flow was 0.72, 0.70, 0.92, 0.94 and 0.97. ttm of .85. It is a measure of how well current liabilities are covered by the cash flow generated from a company’s operations.
  • Free cash flow was 0.85, 0.84, 0.92, 0.91 and 0.93.  It shows that the company has excess funds after paying expenses and dividends.
  • Capital expenditure was 6.79, 6.10, 12.18, 11.46 and 13.72. with ttm of 12.79. A ratio that measures a company’s ability to acquire long-term assets using free cash flow. The cash flow to capital expenditures (CF to CAPEX) ratio will often fluctuate as businesses go through cycles of large and small capital expenditures.
  • Total debt ratio was 0.59, 0.50, 0.60, 0.52 and 0.58; ttm of 0.56. This ratio provides an indication of a company’s ability to cover total debt with its yearly cash flow from operations. The higher the percentage ratio, the better the company’s ability to carry its total debt.

Cash flow ratios of MSFT show that the company’s cash flow margin has a ttm of .44. Therefore, the company is efficient in converting its sales in dollars to cash. Operating cash flow is also impressive at 0.85. Its capital expenditure is also high which means that the company is able to acquire long-term assets using its free cash flow. Finally, the total debt ratio is 50 percent and above, so the company has the ability to carry its total debt up to 50 percent.

 

Written by Rio
Edited by Cris

Jinpan International Limited

Having Effective Management makes Jinpan International Financially Healthy

December 12th, 2012 Posted by Company Research No Comment yet

 

Balance Sheet

Liquidity

jstliq

  • The current ratio of JST was 2.62, 2.18, 3.07, 2.38 and 2.20 with an average of 2.49. This shows that the company’s current resources were greater than its current liabilities by an average of 249 percent for the last five years period.
  • Its quick ratio, which is current asset less inventory was 1.92, 1.60, 2.48, 1.97 and 1.81, an average of 1.96; also shows that it has an average of 196 percent for the same period.
  • And JST’s net working capital ratio was .50, .40, .50, .44 and .41 or average of .45 in five years. We get this by dividing the net working capital by the total asset of the company.
  • Finally, its working capital (in dollars) which is current asset less current liabilities was 60, 65, 91, 101 and 114, its average was 86.2. There was a trending up of its business from 2007 to 2011 as clearly shown in the above table. There was an expansion of business seen as its working capital was increasing per year.

Looking up at the above data, the company is doing well in its business with sufficient current resources. The company is considered financially healthy according to Rio.

Efficiency or Asset Management

jsteffic

  • Inventory turnover ratio was 4.62, 4.97, 6.12, 4.90 and 6.08. The company has an average inventory turnover of 5.34 for the last five years. This is the number of times the inventory moved and replaced.
  • The receivable turnover ratio of the company was 2.79, 2.69, 2.48, 1.93 and 2.03, with an average of 2.39 in five years. Receivables turnover looks at how fast we collect on our sales or how many times each year we clean up or totally collect our accounts receivable.
  • Its payable turnover ratio was 20, 14.45, 15.90, 11.31 and 9.78. an average of 14.29. It reveals how often payables turn over during the year.  It shows that the company pays its supplier 14 average each period.
  • Fixed asset turnover ratio was 10, 6.63, 5.48, 4.32 and 5.63. It has an average of 6.41 for the last five years.  It shows that the ratio is trending down so there’s a need to look closer into it.

Leverage

Below is where you can see the debt ratio, debt to equity and solvency ratio of Jinpan International Limited from 2007 to 2011.

jstlev

  • Debt ratio of the company was .32, .34, .25, .33 and .35, with an average of .32. It shows that its leverage is below 50 percent.
  • Debt to equity was .47, .51, .34, .49 and .54. an average of .47. It also shows that total obligation was 47 percent of equity.
  • While solvency ratio was .44, .40, .72, .24 and .29. an average of .42, which shows that there’s a decrease in 2010 and 2011 because of the company’s increase in short-term debt during this period.

In order to determine who has the majority control of the company’s total assets, we also use the following ratios:

  • Current liabilities to total asset was .30, .34, .24, .32 and .34. an average of .31. It tells us that the creditors, particular suppliers have 31 percent claims on the total asset of the company.
  • Long-term liability to total asset was .01, 0, .02, .01 and .01. an average of .01. It shows that only 1 percent will go to the banks or bond holders.
  • Stockholders’ equity to total asset was .69, .66, .75, .67 and .65 average of .68 which shows that the stockholders or owners have 68 percent claims on the company’s total asset, so they are the major claimant of the company.

The above data shows that Jinpan International Limited ran its business with minimal debt; the sources of funds were internal. They have sufficient current resources to fund its business, the company is well managed and continue expanding.

Property, Plant, and Equipment

jstppe

  • Investment in property, plant, and equipment of JST was 19, 34, 41, 51 and 61. Average of 41. It shows that the company expanded its investment every year with a percentage growth of 79, 20, 24 and 20 percent respectively.
  • Accumulated depreciation was 7, 10, 13, 17 and 22, an average of 14. This is equivalent to 37, 29, 32, 33 and 36 percent of the gross PPE.
  • Net property, plant and equipment were 12, 24, 29, 34 and 40. with an average of 28 which is equivalent also to 63, 71, 71, 67 and 66 percent of the total cost.

With the above-given data, the remaining life of the company’s PPE would then be 3 years more before it would be fully depreciated.

Income Statement

Profitability

jstincome

  • Net margin was .13, .13, .18, .10 and .11, which shows that within two years it was the same, increased by 5 in 2009 but decline in 2010 by 8 percent and slightly went up in 2011. Its 5 years average was 13 percent.
  • Asset turnover ratio was .99, .98, .87, .64 and .81, with an average of .86. It shows that the company is effective in converting its assets into sales. It also shows that asset turnover ratio is inversely related to net profit margin if asset turnover is high net margin is low and vice versa.
  • Return on asset was .13, .12, .16, .06 and .09. an average of .11.  It tells us that the average profit the company has generated for each $1 dollar of the asset was $0.11.
  • Return on equity was .19, .19, .21, .09 and .13. an average of .16, which tells us the average profit a company earned in each $1  of shareholder equity was $0.16.
  • Financial leverage was 1.46, 1.51, 1.34, 1.50 and 1.54. an average of 1.47. This is the ratio of assets to total stockholders’ equity.
  • Return on invested capital was .19, .19, .21, .09  and .13. average of .16.

Income

jstincome

  • Revenue was 120, 159, 159, 147 and 225. its ttm was 162.  The company’s revenue shows an up and downtrend in five years of operation. It increased by 32 percent in 2008, no growth in 2009, dropped by 7 percent in 2010, however it recovered and increased by 53 percent in 2011.
  • Its gross profit was 42, 51, 67, 57 and 82, with ttm of 60.  It also shows an up and downtrend on its growth. In 2008, its growth was 21 percent, in 2009, 31 percent, however, in 2010 it decreased by 15 percent but immediately recovered and 44 percent increased in 2011.
  • Operating income was 19, 23, 31, 15 and 27.  The trend of its growth was also the same with its revenue and gross profit where in 2010 was its lowest and 2009 was its peak.
  • Income before tax was 19, 24, 32, 18 and 28. This is the company’s income before deduction of income tax.
  • Income after tax was 16, 20, 29, 14, and 24.  This is the net income of the company after applying the provision for income tax.

As noticed on the above data,  we have seen that its revenue grew year after year. Its peak was in 2011, the same trend was with Jinpan’s gross profit. However, operating income, income before tax and income after tax have the same trend of its growth, its peak was in 2009 while the lowest was in 2010.

Expenses

jstexpense

  • The cost of revenue of JST was 78, 109, 92, 90 and 142.  It represents 65, 68, 58, 61 and 63 percent of revenue.
  • Selling, general and admin was 23, 27, 36, 42 and 56, which are 19, 17, 23, 29 and 25 percent of revenue.
  • Income tax was 2, 3, 3, 4 and 3. It is 2, 2, 2, 3 and 1 percent of revenue.

Above table shows that the company’s expenses were within the normal level of each category. The business is satisfactorily handled and managed. It seems that Jinpan International Limited is on the good track.

Margin

jstmarg

Gross margin was .35, .32, .42, .39 and .36. The total average was .37. The result showed an up and down per year. It decreased by 3 percent in 2008, increased by 10 percent in 2009 then decreased again by 3 percent in 2010 and another 3 percent in 2011.

  • Operating margin was .16, .14, .19, .10 and .12.
  • Pretax margin was .16, .15, .20, .12 and .12. This is the income of the company before tax expressed in percentage.
  • Net profit margin was .13, .13, .18, .10 and .11. It is the net income of the company expressed in percentage. Its highest was in 2009 and lowest in 2010 at 10 percent.

Based on records, the company’s highest gross margin was in 2009, and so with its operating margin, pretax margin and net profit margin. The least was in 2008 for gross margin and 2010 for operating margin, pretax margin and net profit margin.

Modified IS

jstmodi is

  • The above table shows that its revenue was not going up always that during 2010 it went down. The highest revenue was in 2011. Its total expenses were also fluctuating with the highest record was in 2011.
  • Resulted in a net income averaged of 21. Its peak record was in 2009 and with lowest in 2010.

JST company is well managed as far as its income statement is concerned. The company did not experience any negative result.

Cash Flow

jstcflow

Cash Flow from Operating Activities

jstcfo

  • Net income was 16, 20, 29, 14  and 24. ttm of 21,  this is the result of the normal day to day operation of the business. Its peak was in 2009.
  • Depreciation & amortization was 1, 2, 4, 4 and 4.
  • Accounts receivable was 0, -13, -6, -10 and  -32. ttm was -26.
  • Prepaid expenses were -3, 4, -5, -19 and 17. ttm of 21.
  • Other working capital was -10, -2, -2, 17 and -14
  • Other non-cash items was 1, 0, 0, 0 and 1.
  • So, its net cash provided by operating activities was  0, 18, 22, 2  and 4.   It was  zero in 2007 but have enough balance in 2008 and 2009,  however, due to adjustments on prepaid expenses, accounts receivable and other working capital it resulted to a minimal balance in 2010 and 2011.

As shown in the above table, operating cash flow was used up in 2007, however, it was good in 2008 and 2009  having a positive result but dropped to a minimal balance in 2010 to 2011.  Transactions affecting operating cash flow aside from the net income were accounts receivable, prepaid expenses and other working capital.

Cash Flow from Investing Activities

jstcfi

  • Investment in PPE  was -7, -14, -8, -8 and -8.
  • Purchases of investments was -13, 0, 0, 0 and -2.
  • Purchase of Intangibles  was  0, -5, 0, 0 and -5.
  • And other investing activities was 0.
  • Net cash for investing activities was -19, -19, -8, -8 and -15.  It shows a negative result throughout its five years of operation.

Data of JST shows that investing cash flow of the company resulted in a negative balance of its transactions involved cash outflows.  What are those? These were an investment in PPE, purchase of investments, purchase of intangibles and other investing activities.

Cash Flow from Financing Activities

jstcff

  • Debt issued was 0, 43, 12, 17 and 48.
  • Debt repayment  was 0, -42, -17, -5 and -39
  • Cash dividends paid was -2, -2, -2, -2 and -2.
  • Other financing activities was 3, 0, 1, 0, 0.
  • Net cash provided by financing activities was  1, -1, -6,  10 and  6.  Total cash inflow was 3, 43, 13, 17 and 48 which are debt issued other financing activities. While total cash outflow was -2, -44, -19, -7 and -41 consist of debt repayment and cash dividends paid which resulted in a net financing cash flow of 1, -1, -6, 10 and 6.

Free Cash Flow

jstfcf

Free cash flow was the net amount after deducting capital expenditure from operating cash flow. For the past five years, Jinpan International Limited’s  free cash flow was -7, -1, 14, -7 and -9.  It shows that the company incurred a negative free cash flow in 2007, 2008 2010 and 2011 while in 2009, however, the company incurred a positive free cash flow of 14.

 

Written by Rio
Edited by Cris

GameStop Corp

Gamestop’s Corp (GME) Financial Shows Favorable Return on Equity

November 29th, 2012 Posted by Company Research No Comment yet

 

Gamestop Corp Balance Sheet

Financial Liquidity

Liquidity measures help us to ascertain the ability of a certain company to pay operating expenses and other short-term or current liabilitiesLiquidity measures are calculated using current assets and liabilities. The reason behind this is because current liabilities are debts that must be paid or obligations that must be fulfilled within 1 year. And also, they are paid out of current assets which are received as cash or otherwise used within 1 year.

On an extra note, low liquidity measure would indicate either one company is having financial problems or is poorly managed; hence, a fairly high liquidity ratio is good. However, it shouldn’t be too high, because excess funds incur an opportunity cost and can probably be invested for a higher return. And current ratio gives an investor a better idea of how much safety a company has in paying its current liabilities regardless of the size of the company.

GameStop Corp. showed a good current ratio. As opposite, the quick ratio declined and a bit low percentage and net working capital also depicted a lower but still sufficient amount which would be essentially the cash needed to run the business. 

GameStop Corp.

GameStop Corp. had a good current ratio, meaning they have more current assets than current liabilities. However, growth dipped down by -18 percent in 2009, and following years by 10, -3.9, and 0.8 with an average of 1.26 times. Its quick ratio went the same as current ratio, but without the value of inventory and prepaid expenses in the numerator. This showed a down and up trend with a growth ratio of -43 percent, 44, -25 and 0. The net working capital ratio or the result of working capital against total asset displayed a positive low amount of working capital and has a growth ratio of -57 percent, 67, -20, and -12.5.

Efficiency

When it comes to GameStop Corp. had a high receivable turnover ratio meaning a fast turnover in receivable collections or receivables quickly turn to cash which was favorable for the company to use and invest cash in their operations.  A decreasing and lower inventory turnover rate may point to overstocking, obsolescence, or deficiencies in the product line or marketing effort. However, in some instances, a low rate may be appropriate, such as where higher inventory levels occur in anticipation of rapidly rising prices or expected market shortages.

Their accounts payable turnover played around 6 to 7 times a year. This means a higher ratio is more favorable as payables are being paid more quickly. Nelly told me that the higher the fixed asset turnover ratio, the better because a high ratio indicates the business has less money tied up in fixed assets for each unit of currency of sales revenue. With GameStop Corp., they had a declining ratio during 2010 and 2011 may indicate that the business is over-invested in the plant, equipment, or other fixed assets. The good news was, the company recovered to increase at 1.7 percent in 2012.

Let’s have a look at the table below.

GameStop Corp.

The receivable turnover ratio measures the number of times receivables are collected during the period. Wherein GME showed a down and uptrend with a growth ratio of -8.1 percent, -3.2, 4.7, 0.5 and average of 149.91 times.

The inventory turnover is a measure of the number of times inventory is sold or used in a time period such as a year. This showed a decreasing trend with a growth ratio of -2.65 percent, -10.34, -3.85,  -4.33 and an average of 6.42 times.

Accounts payable turnover ratio is a short-term liquidity measure used to quantify the rate at which a company pays off its suppliers. It is calculated by taking the total purchases made from suppliers and dividing it by the average accounts payable amount during the same period. GME depicted an up and down trend with a growth ratio of 2.2 percent, -4.34, 5.45, 7.6 and an average of 6.95 times.

Fixed-asset turnover is the ratio of sales (on the profit and loss account) to the value of fixed assets (on the balance sheet). It indicates how well the business is using its fixed assets to generate sales. Just like accounts payable turnover ratio, it also showed an up and down trend with a growth ratio of 13.3 percent, -3.49, -1.25, 1.7 and an average of 15.84 times.

Cash Conversion Cycle

Cash conversion cycle validates the effectiveness of the company’s resources in generating cash.

GameStop Corp.

Receivable conversion period measures the number of days it takes a company to collect its credit accounts from its customers. This show a growth ratio of 9 percent, 3, -4.6, -0.40 with an average of 2.49 days for GameStop Corp. 

The days’ sales in inventory or inventory conversion period tell the business owner how many days, on average, it takes to sell inventory. GME had a growth ratio of 2.7 percent, 11.6, 3.9, and 4.6 with an average of 57.27 days. The usual rule is that the lower,  the better since it is better to have inventory that sells quickly than to have it sit on the shelves.

While payable conversion period measures how the company pays its suppliers in relation to the sales volume being transacted. This showed a down and uptrend for the last five years with a growth ratio of -2.1 percent, 4.5, -5.2, -7 and an average of 52.61 days to pay its suppliers.

Cash conversion period decreased by -0.65 days during 2008 but it subsequently increased yearly, with a growth  ratio of 3.4 percent, 1.81, 0.86, 0.59 and an average of 7.14 days.

Leverage

I remember Nelly said “The lower the percentage, the less leverage a company is using and the stronger its equity position.” Or if we put in layman’s term, it goes as, the higher the ratio, the more risk that company is considered to have taken on.

GameStop Corp

The debt ratio compares a company’s total debt to its total assets, which is used to gain a general idea as to the amount of leverage being used by a company. This depicted a decreasing trend with a growth ratio of -4 percent, -8, -4.4, -14 and average of 45 percent.

  • The debt-to-equity ratio is a measure of the relationship between the capital contributed by creditors and the capital contributed by shareholders. This also showed a decreasing trend with a growth ratio of -5.8 percent, -15.5, -8.5, and -21.3 with an average  of 83 percent.
  • The solvency ratio measures the size of a company’s after-tax income, excluding non-cash depreciation expenses, as compared to the firm’s total debt obligations. It provides a measurement of how likely a company will be to continue meeting its debt obligations. This showed a favorable solvency ratio which has an increasing trend with a growth ratio of 23 percent, 19.8, 91, and 100 with an average of 107 percent.

Major Control of the Company based on Total Asset

GameStop Corp.

  • Current liabilities to total assets identify how much will be claimed by the creditor against total assets. This showed an up and down trend for the last five years with an average of 34 percent.
  • Long-term debt to total assets, on the other hand, is to make out how much claim has the banks or the bond holder against its total assets.  This show a decreasing trend with an average of 8 percent.
  • Then, stockholders equity to total assets is to know how much the owner can claim in its total assets which showed an increasing trend with a growth ratio of 4 percent, 7.8, 3.6, and 10.5 with an average of 55 percent for five years.

Based in GameStop Corp total five years of operation the majority in control of their total asset are their stockholders at 55 percent than their creditors of 34 and last to their bank/bondholder at 8 percent average.

Plant, Property & Equipment

GameStop Corp

  • Gross plant, property, and equipment is the gross total of fixed assets cost, this shows a trend that was increasing yearly for the last five years. It has a growth ratio of 16.8 percent, 14.8, 13.9, and 5.8 with an average of 1,236 million dollars for five years.
  • Accumulated depreciation is to reduce the carrying value of an asset to reflect the loss of value due to wear,  tear, and usage.  Wherein it shows a yearly growth trend with an average of 669.8 million dollars which is 54 percent of the average cost of plant, property, and equipment.
  • The net plant, property, and equipment is the result after deducting the accumulated depreciation from gross PPE, this showed a gradual increase yearly with a dip down in 2012 of -6.7 percent.  It has an average of 566.2 million dollars which is 45.8 percent of the average cost.
  • Looking into its fixed assets is to if they still have a useful life in their business operations.  Therefore, based on the above data, the remaining book value of PPE was 45.8 percent, using the percentage method of depreciation; this means it has 2.29 useful years remaining.

Gamestop Corp Income Statement

An income statement allows a business as well as the investors themselves, to understand if the company is operating efficiently and successfully.

Profitability

The graph below will show us how the trend goes for GameStop Corp.

GameStop Corp

  • Their net margins or the after tax profit a company generated for each dollar of sales showed an up and down trend with a growth ratio of 11.3 percent, -7.96, 3.6, -17.4 and trailing twelve months of 3.55 percent.
  • Their asset turnover which measures the effectiveness of the company to convert its assets into revenues likewise depicted an up and down trend with a growth ratio of 6.53 percent, -9.43, -1.56, 2.12 and a trailing twelve months of 2.09 percent.
  • The return on assets, this tells us how much profit the company generated for each dollar of total assets. This showed up and down trend with a growth ratio of 18.7 percent, -17.06, 2.13, -15.7 and trailing twelve months of 7.43 percent.
  • The company’s financial leverage this measures the financial structure ratio of the company base on total assets against total stockholders equity. This showed a decreasing trend with growth ratios of -3.44 percent, -7.14, -3.85, -9.14 and trailing twelve months of 1.48 percent.
  • Their return on equity the company could return such profit percent for every dollar of equity. This depicted an up and down trend with growth ratios of 7.46 percent, -21.5, -3.32, -21.1 and trailing twelve months of 11.16.
  • Their return on invested capital, this is the financial measure that quantifies how well a company generates cash flow relative to the capital it has invested in its business. Same as return on equity it has an up and down trend with a growth ratio of 21.8 percent, -16.8, 3.03, -14.9 and trailing twelve months of 10.68.

GameStop Corp’s profitability indicates that in 2009 it has a good performance compared to 2008 and their subsequent years. A low net margin means lower net income earned from each dollar of revenues. Net profit margins vary by industry, but all else being equal, the higher a company’s profit margin compared to its competitors, the better. Its asset turnover ratio tends to be inversely related to their net profit margin, wherein the higher the net profit margin the lower the asset turnover. The investors can compare companies using this to determine which one is a more attractive business. And this means they earn more from revenue than converting assets to revenue.

Their return on assets depicted a fluctuating earnings for every dollar of total assets due to up and down trend in net income and total assets growth ratio yearly was an up and down trend.

In terms of their returns using the DuPont Model wherein an equity multiplier is used to measure their financial leverage allowing investors to see what portion of the return on equity was the result of debt. In the case of GameStop Corporation financial leverage was decreasing thus this indicates no difficulty in paying interest and principal while obtaining more funding. While their return on equity show a high favorable decreasing trend thus the bulk of the return comes from profit margins and sales. Likewise, the return on invested capital was fluctuating and cash flow earned from invested capital also plays unsteadily.

Income

This show how much money in million dollars GameStop Corporation has brought in for their last five years.

  • Their revenue means how much money a company has generated in terms of “sales”, representing the amount of money a company brings in for selling its goods and services. This showed an increasing trend with a growth ratio of 24.1 percent, 3.08, 4.35, 0.81 and an average of 8,800.41 million dollars.
  • Gross profit shows how much markup a company receives on goods and services it sells after deducting its cost of revenue wherein it also depicts a decreasing trend. The same with revenue, GameStop Corp in an increasing trend with a growth ratio of 25.1 percent, 7.24, 4.22, 5.59 and an average of 2,347.12 million dollars.
  • Operating profit is the best indicator of a company’s true performance in their operations. For this is the result after deducting all the expenses incurred in their operations, wherein it shows an up and down trend with a growth ratio of 37.6 percent, -6.09, 3.94, -13.4 and an average of 603.77 million dollars.
  • Income before taxes refers to the gross taxable income of the company before deducting the income taxes. This showed a fluctuating trend with a growth ratio of 43.7 percent, -7.16, 5.58, -11.6, and an average of 566.80 million dollars.
  • Net income is what’s left over for a company after all expenses have been accounted for. Likewise, this depicted an up and down trend with a growth ratio of 38.2 percent, -5.28, 8.14, -16.6 and an average of 362.35 million dollars.

Earnings for the year 2008 was good producing a 24.1 percent growth but succeeding years it went down to only 3.08, 4.35 and 0.81 which mean sales or revenue was not doing well anymore. And after deducting the cost of revenue averaging 73.3 percent, its gross profit leftover would be around 26.7 percent.  This indicates that huge amount of revenue goes to the cost of revenue, represent the direct costs associated with the goods and services the company provides. Its operating profit after deducting their operating expenses accounts only 6.86 percent of revenue and income before taxes of 6.44 percent. Therefore their net income has only a merger share of around 4.1 percent, too small to passed our grade in scaling standards.

Expenses

This show how much GameStop Corp. had spent (in million dollars) with their in operations and others for the last five years.

GameStop Corp.

  • The cost of revenue was the amount the company paid for the goods that were sold during the year. This showed an increasing trend and a slight decrease in 2012 with a growth ratio of 23.8 percent, 1.64, 4.4, and -0.93.
  • Operating expense was the expenses incurred in conducting their regular operations of the business. This depicted an increasing trend for the last five years with a growth ratio of 18.3 percent, 15.2, 4.24, and 12.03.
  • Provision for income tax was the amount allocated for their payment of income taxes. This likewise showed an increasing trend with a growth ratio of 23.4 percent, 3.88, 4.28 and 1.74.
  • Total expenses amount averages 8,404.74 million dollars or 95.5 percent of revenue. Wherein cost of revenue is 73.3 percent, operating expenses of 19.8, and provision for income taxes of 2.4 from average total revenue of 8,800.41 million dollars.

Modified Income Statement

Nelly presented to us a graph below which further indicates the flow of their revenues, total expenses and net income in their yearly and average data. This was done, to visualize the whole picture of their business operations.

GameStop Corp.

The table shows that total expenses show an increasing trend in revenue and net income slight in an upward and downward trend.

Margins

GameStop Corp.

  • Their gross margin indicates the percentage of revenue dollars available for expenses and profit after the cost of merchandise is deducted from revenues. And this averages 26.6 percent.
  • Operating margin is the operating income expressed as a percentage of sales or revenue after deducting the operating expenses from gross profit. Which have an average of 6.9 percent?
  • Earnings before income and tax (EBIT) margin is calculated through EBIT divided by net revenue. This showed an average of 6.4 percent for GameStop Corp.
  • And 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. And it has a 4.1 percent average only.

GameStop Corp displayed a lower gross profit margin of 26.6 percent. This means a huge percentage goes to their cost of revenue. It had also an unfavorable operating margin with 6.9 percent ratio and lastly, a net margin of less than 10 percent. To cut this short, their operations were in bad shape to have margins below scaling standards.

Cash Flow Statement

Cash flow statement helps us determine if GameStop Corp. has available cash for their operation or if they have a good free cash flow and excess funds to refinance operations for business expansion.

Cash from Operating Activities

GameStop Corp.

Cash flow from operating activities comes from their net income adding back depreciation/depletion, deferred income taxes, non-cash items and changes in working capital to get the net cash provided by operations. This showed a growth ratio of 11.2 percent, 9.09, -8.22, 5.67 and it has an average of 580.67 million dollars. It means that the company had sufficient operating cash flow. 

Cash from Investing Activities

Cash flow from investing activities comes from their purchase of fixed assets, acquisition of business,  and other investing activities to get the net cash used in investing activities. This showed an acquisition of business amounting -630.71 million dollars in 2009 but prior and succeeding years trend was increasing except in 2012 it abruptly declined 16 percent, with average of -325.29 million dollars.

Cash from Financing Activities

GameStop Corp

Cash flow from financing activities comes from other financing cash flow, issuance of stock in 2008 and 2009. This was used to the retirement of stocks from 2010, 2011 and 2012, and retirement of debt to get net cash provided by or used for financing activities. Cash from financing activities showed that they were active in paying off their obligations as well as the retirement of stocks the last three years.

Net Change in Cash

GameStop Corporation has a good net cash beginning and ending balances which were sufficient after the transaction has been completed and all charges and deductions related to the transaction have been subtracted. This was used to double check the result of cash from operations, investing and financing, the net change in cash. Investors can use net cash to help determine whether a company’s stock offers an attractive investment opportunity and to assess whether they have enough cash to make investments in future expansions.

Foreign exchange effects are the gain or loss on foreign investments due to changes in the relative value of assets denominated in a currency other than the principal currency with which a company normally conducts business. A rising domestic currency means foreign investments will result in lower returns when converted back to the domestic currency. The opposite is true for a declining domestic currency. This means a net change in cash had been increasing or decrease due to the effect of foreign exchange.

Free Cash Flow

To get if the company have free cash flow to be used in operations and expansions, we deduct from operating cash flow amount their capital expenditures resulting to free cash flow.  showed that GameStop Corporation had sufficient free cash flow after deducting its capital expenditure. It had also a growth ratio of 14.9 percent and 31.2 from 2008 to 2010, with a slight dip of 18.07 percent in 2011 and recovered an increase of 16.76 percent in 2012. As a whole, they have an average of five years amounting to 403.63 million dollars indicating the company’s financial health.

Cash Flow Efficiency Ratio

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:

Operating cash flow to sales ratio measures how much cash generated from its revenue for the period and gives investors an idea of the company’s ability to turn sales into cash. This showed an up and down trend with a growth ratio of -10.2 percent, 13.8, -12.1, 4.8 with an average of 6.6 percent. The greater the amount of operating cash flow, the better. There is no standard guideline for operating cash flow/sales ratio, but obviously, the ability to generate consistent and/or improving percentage comparisons are positive investment qualities.

Operating cash flow ratio measures how much cash left after considering short debt by using the result of operating cash flow from operations over current liabilities.  This has a growth ratio of -10.4 percent, 10.7, -13.1, 13 depicting an up and down trend with an average of 36.94. This showed a good liquidity in terms of using cash flow as opposed to income which is sometimes a better gauge.

Free cash ratio helps us conclude if the company will grow in the future. Through the result of operating cash flow, less dividend paid less capital expenditure over operating cash flow despite an up and down trend it still showed sufficiently the company have free cash flow.

Capital expenditure ratio measures company sustainability in maintaining their assets. This can be done by using the result of operating cash flow over capital expenditure for the period.  GameStop had an upward trend except for 2011 wherein it slightly decreased to 2.99 but recover in 2012 to 3.78 with an average of 3.28. So, the company has the financial ability to invest in itself through capital expenditures (CAPEX), then it is thought that the company will grow.

Total debt ratio measures company efficiency and it is the result of operating cash flow over total liabilities. A growth ratio of -3.87 percent, 16.27, -5.47, 26.83 and an average of 28.11.

Current coverage ratio measures how much cash available after paying all its current debt. It is determined through cash flow from operating less dividend over current liabilities. The same result goes with operating cash flow ratio because for they did not have any dividend payments.

Written by Nelly
Edited by Cris

GameStop Corp

Gamestop, World’s Largest Multichannel Video Game Retailer

November 28th, 2012 Posted by Company Research No Comment yet

Who started GameStop Corp and why?

GameStop Corp.

GameStop has a lineage that includes several retailing names now relegated to the historical graveyard. It was originated as Babbage’s Inc., the first software retailer store in Dallas Texas which was named after Charles Babbage, the 19th-century British mathematician.

GameStop Corp.

James B. McCurry

Babbage’s Inc. was initiated by two Harvard Business School classmates, James B. McCurry and Gary M. Kusin. They established a chain of software stores, subsidize on the burgeoning computer and home video industries with an expectation of increasing consumer interest in computer equipment and games. After several changes of names, it became GameStop Inc. on 1999.

For the awareness of everyone, Computer and software stores comprise establishments primarily engaged in retailing new computers, computer peripherals, and prepackaged computer software without retailing other consumer-type electronic products or office equipment, office furniture and office supplies; or retailing these new products in combination with repair and support services.

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

timeline

 

What is the nature of  GameStop Corp. business?

nature

Additional bits of information from Meriam and Janice. Retail software is computer software sold to end consumers, usually under restricted licenses. It is also called full retail, the term used to describe a full version of a software package that is sold at online or brick-and-mortar stores.

GameStop is an American video game and entertainment software retailer, located in Grapevine Texas United States. It is one of the biggest U.S players in retail sector specializing in video game and PC amusement software. In line with this, GME is the largest retailer of new and used games, hardware, entertainment software, and accessories.

The company operates approximately 1,750 retail stores located in 49 states under the GameStop Brand. Moreover, the retail network and family of brands include 6,628 company-operated stores in 15 countries worldwide and online at www.GameStop.com. It has a list of subsidiaries such as GameStop, Inc., GameStop.com, Inc., Marketing Control Services, Inc.; Sunrise Publications, Inc., Babbage’s Etc. LLC; and Gamesworld Group Limited.

Who is running GameStop Corp. company and their background?

The company is the world’s largest multichannel video game retailer. It is under the supervision of the executive officers, namely, Mr. J. Paul Raines and Mr. Robert A. Lloyd.

GameStop Corp.J. Paul Raines is the chief Executive officer of GameStop Corp., since June 2010, and upon joining the company, he served as the chief operating officer from September 2008 to June 2010. Prior to GameStop, he served various management positions for eight years with The Home Depot (“Home Depot”) and spent four years in global sourcing for L.L. Bean, and ten years with Kurt Salmon Associates in the consumer products group. He is a member of the board of directors of Advance Auto Parts, Inc. (“Advance Auto Parts”), and serves the Finance Committee and compensation Committee as chairperson.

Mr. Raines has extensive experience in the strategic, operational and merchandising aspects of retail businesses, and broad international experience in Europe and Asia. He shares to the board the insights he gained from his experience and expertise in the areas of retail strategy, store operations, customer service, merchandising, manufacturing, marketing, loss prevention, real estate, supply chain and global sourcing. Paul provides the company an additional unique perspective into corporate management and board dynamics at another specialty retail public company.

GameStop Corp.Robert A. Lloyd, on the other hand, is the executive vice President and chief financial officer since June 2010. He served as company’s Chief Accounting officer wherein he held the position from October 2005 to February 2010. Prior to that, he was the vice president – finance of GameStop or its predecessor companies from October 2000 and was the controller of GameStop’s predecessor companies from December 1996 to October 2000. Mr. Lloyd held several financial management positions as a controller or chief financial officer, primarily in the telecommunications industry. He also serves positions in the public accounting firm of Ernst & Young. Robert is a certified public accountant.

Global sourcing is a way of sourcing from the global market for goods and services across geopolitical boundaries? It is procurement method in which a business seeks to find the most cost effective location to manufacture a product even if the location is in a foreign country. 

I also learned from Janice that the method includes low-cost skilled labor, low-cost raw material and other economic factors like tax breaks and low trade tariffs.

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

GameStop comprises of three committees, the audit, compensation and nominating and corporate governance. The board is headed by chairman of the board, as well directors of which are independent.

Meet Ms. Stephanie M. Shern, the director, and chair of the audit committee. She has been serving the position since 2002. She was the vice chair and global director of Retail and Consumer Products for Ernst & Young LLP (“Ernst & Young”), and a member of Ernst & Young’s Management Committee from 1995 to 2001. Ms. Shern is a CPA and has extensive financial experience. She is a member of the American Institute of CPAs and the New York State Society of CPAs, and a member of Pennsylvania State University’s Smeal College Accounting Advisory Board and a founding member of Tapestry Network’s Lead Director Network. Stephanie inputs to the board vast leadership, financial, international, marketing/consumer industry and retail experience from her nearly 40-year finance career focused significantly on retail and consumer industries in both the United States and abroad.

Mr. Gerald R. Szczepanski, on the other hand, is an independent director and has been serving as a director for the company and its predecessor companies since 2002. He is the chairman of the compensation committee and a member of the audit committee. Mr. Szczepanski was the co-founder and chairman and chief executive officer of Gadzooks, Inc., a publicly traded specialty retailer of casual clothing and accessories for teenagers from 1994 to 2005. Gerald shares to the board over his 35 years of experience in the retail business and has extensive leadership experience of a public company in the specialty retail industry.

Then there’s their non-executive director and chairman of the nominating and corporate governance committee in the name of Mr. Jerome L. Davis. He has been the director of the company since October 2005. He is the current vice president of Food and Retail for Waste Management, Inc. (“Waste Management”), a leading provider of integrated environmental solutions in North America. Mr. Davis is currently serving as a  director and a member of the compensation committee and the nominating and corporate governance committee of Apogee Enterprises, Inc. (“Apogee”), since 2004, and for five years, he chaired the finance and enterprise risks committee of the company. Mr. Davis gives the board his 30 years of experience in Fortune 500 companies and has extensive expertise and insight in multiple areas including marketing and sales, strategy development.

Bankruptcy is a legal status of an insolvent person, firm or corporation, one who cannot repay the debts they owe to creditors. Bankruptcy is imposed by a court order, often initiated by the debtor, this is in most jurisdictions. I learned from Janice that in the United States the term bankruptcy is applied more broadly to formal insolvency proceedings.

How do they make money?

Working under a video game software company is no joke. Wondering where they get their revenues from? Janice has the answers for that.

The company’s sales and profits are primarily driven by the physical stores or from the company’s operating segments: United States, Canada, Australia and Europe.

GameStop records revenue from the sales of their digital products which generally allow consumers to download software or play games on the internet wherein they get a commission. They also sell new and used video game hardware, physical and digital video game software, accessories, as well as PC entertainment software and other merchandise. Revenue is recorded at the time of sale of the products, net of sales discounts, reduced by a provision for sales returns. Other incomes are from advertising revenues for Game Informer which is recorded upon release of magazines for sale to consumers.

This is the business strategy they used to gain more profit is through advertising in newspapers, television and other media to introduce and make the products available to the customers. Another way to increase market share is through increasing awareness of the GameStop brand and membership in the loyalty program, expanding the sales of used video game products, and expanding market leadership position by focusing on the launch of new hardware platforms as well as physical and digital software titles.

How do they fit in the industry they operate in?

Video game industry is the economic sector involved with the development, marketing, and sales of video games. The industry provides lots of job opportunities to people globally. 

GameStop Corp. generally competes with mass merchants and regional chains, computer product and consumer electronics stores, internet-based retailers, and other U.S. and international video game and PC software specialty stores. They also contest with toy retail chains; mail-order businesses; catalogs; direct sales by software publishers; and online retailers and game rental organizations.

Likewise, the company competes with other sellers of used video game products and other PC software distribution firm. Additionally, they compete with other forms of entertainment activities, including browser, social and mobile games, movies, television, theater, sporting events and family entertainment centers. Their top competitors are Electronics Boutique Holdings Corp., Best Buy Co., Inc., Circuit City Stores, Inc., Wal-Mart Stores, Inc., Toys “R” Us, Inc., Target Corporation, Kmart Corporation; and Amazon.com, Inc.

Who are their suppliers and customers?

They deal with new and used video game hardware, and digital Video games software, accessories, as well as personal computer (PC) entertainment software. Other products include controllers, memory cards, and other add-ons; liked playing games and trading cards. Furthermore, they sell a variety of digital goods which generally allow consumers to download software or play games on the internet. Likewise, it renders company’s products primarily through its GameStop, EB Games, and Micromania stores, as well as through its electronic commerce websites. Moreover, they offer GameStop TV in many of its locations and publish Game Informer, a video game magazine with some 7.2 million subscribers.

The company’s suppliers rely on foreign sources, generally in Asia who manufacture a portion of products which they purchased, buy, sell, and trade program that creates value for customers while recycling products no longer being played.

Interactive software is used for entertainment, role playing, and simulation. It is played on a specialized device, mobile device or personal computer, video games which have become extremely realistic, not only in their graphics and animation but in their themes.

What is their workforce like?

The company is in a fast-paced business that demands much and delivers much to those who always improve. To remain in the industry, GameStop looks for individuals who are competitive and demand the best of themselves, and someone who strives to meet and surpass the next challenge, and who set the bar continuously higher.

Approximately, the company has a total 17,000 full-time salaried and hourly employees and between 33,000 and 54,000 part-time hourly employees worldwide. Some of our international employees are covered by collective bargaining agreements, while U.S. employees are not represented by a labor union or are members of a collective bargaining unit. GameStop hires and retains employees who know and enjoy working with the products; this is a line to assist the customers better. Each of stores is managed by one manager, one assistant manager and between two and ten sales associates, most are part-time employees.

Moreover, the success of the company relies on the ability to attract, motivate and retain key management for their stores and skilled merchandising, marketing, financial and administrative personnel at our headquarters. It depends as well on the continued services of the key executive officers; any loss of the key people will adversely affect the business operations.

A store manager is the person responsible for managing the personnel and the economic performance of the store. They handle the day-to-day operation and directly reports to a district or general manager.

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

Executive people receive compensation which comprises of the following elements; base salary, annual incentive bonus, targeted total annual cash compensation, long-term incentives and total compensation (cash and long-term incentives). Some of the executive officers underwent an employment agreement with the company wherein they get stock options or restricted stock, and cover severance and termination benefits. GameStop also provides savings plan to employees who meet the eligibility requirements, primarily age, and length of service. Another benefit provides are the defined contribution 401(k) plan.

For people working in the physical store, to encourage them to sell the full range of our products and to maximize our profitability, employees are provided with targeted incentive programs to drive overall sales and sales of higher margin products. In some locations, employees have the opportunity to take home and try new video games, to enable them to better explain the games with the customers.

The compensation package, for everybody’s information, is a mixture of salary and benefits received by the employee from his employer. When evaluating job offers, one should not only consider the salary but also the total package.

Pay Structure

GameStop Corp.

GameStop Corp.

Gossips

GameStop Corp.

On November 13, 2012, www.businessweek.com announced that: GameStop ‘Call of Duty’ Sales Top 1 Million in First Day. “Black Ops II’ is shaping up to be our biggest game launch of all time,” Tony Bartel, president of the Grapevine, Texas-based chain said today in an e-mail, “GameStop sold more than 1 million units worldwide during our midnight launch period.”

According to www.bizjournals.com on October 25, 2012: GameStop to debut new GameStop Kids stores. “This is really a way for us to take share away from people who are in the toy business and have an expanded assortment,” CEO Paul Raines said, “and show people how to drive kids to new experiences, new products or an expanded assortment of existing products like Skylanders and Angry Birds.”

An Article coming from www.fool.com on September 8, 2012, stated that: Is It Game Over for GameStop? According to Joel Greenblatt’s “Magic Formula,” GameStop is a great buy — high return on capital and a cheap stock at 5 times cash flow. But as Fool analyst Austin Smith notes, there are downsides to this company.

On August 16, 2012, www.reuters.com said that: GameStop slashes sales outlook, raises the dividend. “Clearly the industry has had a tough first half,” GameStop Chief Executive Officer Paul Raines told Reuters. “The NPD data is significantly down, and perhaps the industry has declined more than anyone, even analysts’ groups, thought it would.”

The video-game retailer sold more than 1 million copies of Activision Blizzard Inc. “Call of Duty: Black Ops II” on its first day. They are launching a new store concept which shows a continued confidence by GameStop management in brick-and-mortar retail in the highly digital gaming industry. On the other hand, GME has seen an 11 percent drop in revenue for the most recent quarter and is operating in a deteriorating environment. Also, the company sharply reduced its sales forecast for this year 2012.

CITATION

Who started the company and why?

http://www.today.mccombs.utexas.edu/2010/11/carpenter-kusin-robertson-new-mccombs-hall-of-famers

http://www.123people.ca/ext/frm?ti=personensuche%20telefonbuch&search_term=jim%20mccurry&search_country=CA&st=suche%20nach%20personen&target_url=aHR0cDovL3d3dy5hY2cub3JnL2F0bGFudGEvZXZlbnRzL2V2ZW50LmFzcHg%2FRXZlbnRJZD0yMjIy&section=image&wrt_id=418

http://en.wikipedia.org/wiki/GameStop_Corp.

http://www.fundinguniverse.com/company-histories/gamestop-corp-history/

http://www.chacha.com/question/what-gamestop-is-the-first-gamestop-what-is-gamestop-store-number-one-and-what-is-the-phone-number

What is the background of the company? Its History and Development?

http://www.fundinguniverse.com/company-histories/gamestop-corp-history/

http://www.google.com/finance?q=NYSE%3AGME&ei=3uiiUNCmIojzkQXIZw

http://www.sec.gov/Archives/edgar/data/1326380/000119312512262005/d354414d10q.htm p11

http://www.sec.gov/Archives/edgar/data/1326380/000119312512134615/d283661d10k.htm

What is the nature of the business?

http://www.fundinguniverse.com/company-histories/gamestop-corp-history/

http://www.sec.gov/Archives/edgar/data/1326380/000119312512381205/d385850d10q.htm p18

http://en.wikipedia.org/wiki/GameStop_Corp.

http://news.gamestop.com/about_us

http://phx.corporate-ir.net/phoenix.zhtml?c=130125&p=irol-irhome

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

http://www.fundinguniverse.com/company-histories/gamestop-corp-history/

Who is running the company and their background?

http://news.gamestop.com/leadership/executive-management/j-paul-raines

http://www.reuters.com/finance/stocks/officerProfile?symbol=GME&officerId=1236761

http://www.sec.gov/Archives/edgar/data/1326380/000119312512225064/d339099ddef14a.htm p4

http://news.gamestop.com/leadership/executive-management/robert-lloyd

http://www.sec.gov/Archives/edgar/data/1326380/000119312512225064/d339099ddef14a.htm p12

http://www.reuters.com/finance/stocks/officerProfile?symbol=GME&officerId=775171

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

http://insiders.morningstar.com/trading/insider-committees.action?t=GME

http://www.sec.gov/Archives/edgar/data/1326380/000119312512225064/d339099ddef14a.htm p6

http://insiders.morningstar.com/trading/insider-committees.action?t=GME

http://www.sec.gov/Archives/edgar/data/1326380/000119312512225064/d339099ddef14a.htm p6

http://insiders.morningstar.com/trading/insider-committees.action?t=GME

http://www.sec.gov/Archives/edgar/data/1326380/000119312512225064/d339099ddef14a.htm p5

How do they make money?

http://www.sec.gov/Archives/edgar/data/1326380/000119312512134615/d283661d10k.htm p8

http://www.sec.gov/Archives/edgar/data/1326380/000119312512134615/d283661d10k.htm#tx283661_15

http://www.sec.gov/Archives/edgar/data/1326380/000119312512134615/d283661d10k.htm#tx283661_15

www.gamestop.com/pcgames

http://www.sec.gov/Archives/edgar/data/1326380/000119312512134615/d283661d10k.htm p2

http://www.sec.gov/Archives/edgar/data/1326380/000119312512134615/d283661d10k.htm p4&5

http://www.sec.gov/Archives/edgar/data/1326380/000119312512134615/d283661d10k.htm p39

How do they fit in the industry they operate in?

http://www.sec.gov/Archives/edgar/data/1326380/000119312512134615/d283661d10k.htm p18

http://www.sec.gov/Archives/edgar/data/1326380/000119312512134615/d283661d10k.htm p6

http://www.sec.gov/Archives/edgar/data/1326380/000119312512134615/d283661d10k.htm p15

http://www.sec.gov/Archives/edgar/data/1326380/000119312512134615/d283661d10k.htm p19

http://www.fundinguniverse.com/company-histories/gamestop-corp-history/

Who are their suppliers and customers?

http://www.sec.gov/Archives/edgar/data/1326380/000119312512134615/d283661d10k.htm p2

http://www.sec.gov/Archives/edgar/data/1326380/000119312512134615/d283661d10k.htm

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

http://www.sec.gov/Archives/edgar/data/1326380/000119312512134615/d283661d10k.htm

http://www.sec.gov/Archives/edgar/data/1326380/000119312512134615/d283661d10k.htm p13

http://www.sec.gov/Archives/edgar/data/1326380/000119312512134615/d283661d10k.htm p18

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

http://investing.businessweek.com/research/stocks/financials/drawFiling.asp?formType=10-K

What is their workforce like?

http://www.sec.gov/Archives/edgar/data/1326380/000119312512134615/d283661d10k.htm p14

http://www.sec.gov/Archives/edgar/data/1326380/000119312512134615/d283661d10k.htm p16

http://www.sec.gov/Archives/edgar/data/1326380/000119312512134615/d283661d10k.htm p18

http://news.gamestop.com/about_us/company_culture

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

http://www.sec.gov/Archives/edgar/data/1326380/000119312512134615/d283661d10k.htm#tx283661_15 p F-30

http://www.sec.gov/Archives/edgar/data/1326380/000119312512225064/d339099ddef14a.htm p21

http://www.sec.gov/Archives/edgar/data/1326380/000119312512225064/d339099ddef14a.htm p22

http://www.sec.gov/Archives/edgar/data/1326380/000119312512225064/d339099ddef14a.htm p24

http://www.sec.gov/Archives/edgar/data/1326380/000119312512225064/d339099ddef14a.htm p33

http://www.sec.gov/Archives/edgar/data/1326380/000119312512134615/d283661d10k.htm p14

Gossips

http://www.businessweek.com/news/2012-11-13/gamestop-call-of-duty-sales-top-1-million-in-first-day

http://www.bizjournals.com/dallas/news/2012/10/25/gamestop-to-debut-new-gamestop-kids.html

http://www.fool.com/investing/general/2012/09/08/is-it-time-to-buy-gamestop.aspx

http://www.reuters.com/article/2012/08/16/us-gamestop-results-idUSBRE87F0OI20120816?type=companyNews

http://www.dailypolitical.com/finance/stock-market/janney-montgomery-scott-gives-buy-rating-to-gamestop-corp-gme.htm

http://www.thestreet.com/story/11737766/1/gamestop-corp-stock-upgraded-gme.html

 

Researched  and Written by Meriam, Janice and Karla
Edited by Cris

Humana Inc

Humana Inc (HUM) Is Financially Stable And Healthy

November 9th, 2012 Posted by Company Research No Comment yet

Humana Inc shows that the company is financially stable and healthy in the past five years.

Humana Balance Sheet

Liquidity ratios of Humana Inc. from 2007 to 2011 are as follows:

huliq

  • Working capital in dollars was 4861, 5324, 6820, 7418 and 7972, with an average of 6469. This is the funds left after deducting short-term obligations from the company’s current asset.  As we noticed, the company is doing good, its working capital is consistently increasing year to year and continued to have positive results.
  • The company’s current ratio was 4.27, 4.27,4.80, 4.55 and  4.65. The average was4.51, which means that its current asset was 451 percent of its current liabilities. It shows that the company possessed vast current resources.
  • Its quick ratio was also 4.27, 4.27, 4.80, 4.55 and 4.65, with an average of 4.51, which means that current resources(net of inventory) were 451 percent of its short-term obligations since the company has no inventory.
  • And net working capital ratio was .37, .41, .48, .46 and .45 with an average of .43. This means that the average net working capital left was 43 percent after paying off its current obligations.

Analysis

Based on the above table, the company is financially stable as far as its current resources are concerned. Working capital was consistently positive and continued to increase yearly.  Its current ratio has an average of more than 451 percent as well as its quick ratio and after the settlement of its current obligations, the company’s  working capital left was 43 percent.

Humana Inc. is a health insurance company, its current assets are consists of short-term investments and cash and cash equivalents and premiums and other receivables. The company has no inventory, accounts receivable as well as accounts payable. 

hulev

Facts

  • Debt ratio was .69, .66, .59, .57 and .54, with an average of .61 which means that in five years time its total liabilities was  61 percent against total assets. The company’s total debt when compared to its total assets reached more than 50 percent.
  • Debt to equity ratio was 2.20, 1.93, 1.45, 1.33 and 1.20, with an average of 1.62. This tells us that its debt was  162 percent of owners’  equity.
  • And solvency ratio was .12,  .10, .15,  .15 and  .18. The average was .14. This tells us that  Humana Inc. is 14 percent solvent.

humajor

  • Current liability to total asset was .11, .12, .13, .13 and .12. The average was .12. This tells us that the creditors, most probably suppliers have only 12 percent claims on the total assets of the company.
  • Long term liability to total asset was .13, .15, .12, .10 and .09with an average of .12 meaning that the banks have also 12 percent claims on the company’s assets.
  • Owners’ equity to total asset was .31, .34, .41, .43 and .46. The average was .39. This means that the stockholders or owners have the majority control of the total assets of the company at a percentage of 39.

Referring to the above data, the company was indebted at an average of 61 percent of total assets and 162 percent if compared to its owners’ equity. As a health insurance company, the company is operating its business through loans.

Humana Property, Plant & Equipment

The table below shows us the investment in property, plant, and equipment of Humana Inc. from 2007 to 2011:

huppe

Humana Inc. has an investment in PPE of 637, 711, 679, 815 and 912, with an average of 751 in five years’ period; however, there was no record of accumulated depreciation. The company had only recorded depreciation and amortization of 185, 220, 250, 263 and 270 or average of 238 and this represents 29, 31, 37, 32 and 30 percent of the gross PPE.

Humana Income Statement

Profitability

Profitability ratios of  Humana Inc. from 2007 to 2011 are as follows:

huprof

  • Net margin of the company has an average of .03 percent and is quite low. This is the after-tax profit a firm generated for each dollar of revenue.
  • Asset turnover ratio was 1.96, 2.22, 2.19, 2.10 and 2.08, with an average of 2.11 which means that Humana Inc. generates $2.11 average of sales for every $1 of assets.  As noticed, the asset turnover ratio is inversely related to the net profit margin, the higher the asset turnover the lower the net margin and vice versa.
  • Return on asset  was .06, .05, .07, .07 and .08 with an average of .07. This means that the company generated a profit of $0.07  for each $1 in the asset.
  • Return on equity was.32, .22, .28, .25 and .28. The average was.27 which shows the firm’s earnings on the funds invested by the shareholders or owners. The company’s high ROE was in 2007.
  • Financial leverage or equity multiplier was 3.20, 2.93, 2.45, 2.22 and 2.20. an average of 2.62. This is derived by dividing total asset by total stockholders’ equity. It allows the investor to see what portion of the ROE is the result of debt.
  • Return on invested capital was .15, .10, .14, .13 and .15.Average of .13. This shows us how well a company generates cash flow relative to the capital it has invested in its business.

Analysis

The company had a low net margin of 3 percent average. Its operating asset was efficiently used as the firm generated $2.11 average of sales for every dollar of the asset while it has also generated a profit of $0.07. Return on equity was 27 percent average which means that it earned $0.27 for every $1 of equity investment. And finally, the company’s return on invested capital had an average of 13 percent which shows the company’s efficiency in generating cash flow relative to invested capital or  $0.13 for each dollar of invested capital.

Income

huincome

  • Revenue was consistently increasing per year with a growth rate of 14, 7, 9 and 9 percent respectively from 2007 to 2011.
  • Gross profit was 5019, 5238,  6185, 6780 and 8009, trailing twelve months of 8064. The trend is increasing year after year. This is the result after deducting the cost of revenue from revenue.
  • Operating income/income before tax was 1289, 993, 1602, 1750 and 2235with trailing ttwelve monthsof 1966.This was the difference between gross profit and the operating expense.  Humana Inc. operating income in 2008  declined by 23 percent compared to 2007 results, but they were able to recover in 2009 and continue trending up until 2011.
  • And finally, income, after tax was 834, 647, 1040, 1099 and 1419 and trailing twelve months, was 1248. The company’s after-tax income in 2008  declined by 22 percent but managed to rise up in 2009 until  2011.

Analysis

The past five years performance of Humana Inc. was impressive because it showed positive revenue, with consistently increased per year. After deducting the cost of revenue, operating expenses and provision for income tax, the company maintained a positive income throughout its five years of operation, with a slight decline in 2008. The good thing is the company was to recover thereafter until 2011.

Expenses

Shown below are the expenses of  Humana Inc. from 2007 to 2011:

huexp

  • The cost of revenue was 20271, 23708, 24775, 27088 and 28823, with ttm of 30211. This represents 80, 82, 80, 80 and 78 percent of revenue.
  • Selling, the general and administrative expense was  3476, 3945, 4228, 4663 and 5395, with ttm of 5713. This is also 14, 14, 14, 14 and 15 percent of revenue.  The trend was also increasing per year.
  • Income tax was 456, 346, 562, 650 and 816, with ttm of 718, which is equivalent to 2, 1, 2, 2 and 2 percent of revenue.

Considering the industry of  Humana Inc. as a health care insurance, we could not compare it with a marketing or manufacturing company whose returns,  percentage wise reached as high as 20 percent. In the insurance industry,  5 percent net margin is quite high enough.

Margins

Detailed below is the company’s margin from 2007 to 2011:

humarg

  • Gross margin was .20, .18, .20, .20 and .22. The average was .20. The result fluctuated in 2008 by 2 percent; however, immediately recover and increased by 2 percent in 2011.
  • Operating income and pretax margin was .05, .03, .05, .05 and .06. with an average of .05.  with the same trend went to gross margin also.
  • Net margin was .03, .02, .03, .03 and .04. Average of  .03. The company incurred low net margin in 2008 but high in 2011 at 4 percent, resulted to an average of 3 percent in 5 years period.

Humana Inc. gross margin was at a normal level at 20 percent average throughout five years of operation with this kind of industry. After considering all the related operational costs plus provision for income tax, the company’s net margin was only 3 percent average. This is quite low; the company must exert effort to at least hit the 5 percent mark.

Modified Income Statement

humodi

  • As per above table, the company’s revenue was consistently going high, with its highest in 2011. with a yearly growth rate of  14, 7, 9 and 9 percent respectively.
  • After deducting the cost of revenue and operational costs, it resulted in a positive net income with its highest peak was in 2011.
  • The past year’s performance of Humana Inc. as far as its income statement is concerned is quite good and well managed.

Humana Cash Flow

The graph below shows us how the cash flow of  Humana Inc.:

hucflow

  • Net income was 834, 647, 1040, 1099  and 1419, which is the result of the normal day to day operation of the business. Its peak was in 2011.
  • Accounts receivable was 658, 61, -153, -60 and -46.
  • Depreciation & amortization was 185, 220, 250, 263 and 303.
  • While other operating expenses was  92, 24, 19, 58 and 81.
  • So, its net cash provided by operating activities was 1224, 982, 1422, 2242 and 2079.  The result was trending up except in 2008  wherein it dropped by 20 percent against 2007 but thereafter it continued to increase, however it slightly decreased in 2011 by  7 percent.

As shown in the above table, operating cash flow was good throughout its five years period, it shows a positive result.  Transactions affecting cash flow operating apart from the net income were accounts receivable, depreciation and amortization and other operating expenses.

Cash Flow From Investing Activities

Transactions related to cash flow from investing activities of Humana Inc. from 2007 to 2011 are as follows:

hucfi

  • Sales/Maturity of Fixed maturity was 3059, 5867, 5534, 3833 and 2882.
  • Acquisition & disposition was -493, -423, -12, -832 and -226.
  • Purchase of investments was -3489, -5681, -7197, -4589 and -3678.
  • Property & equipment, net was -213, -262, -184, -222 and -336.
  • And other investing activities was -709.
  • Net cash for investing activities was -1845, -498, -1859, -1811 and -1359.

Data of Humana Inc. shows that investing cash flow of the company resulted in a negative balance since its cash outflow was more than its cash inflow.  Total cash outflow in the past 5 years was -4904, -6366, -7393, -5643 and -4240 and total were 28,546; while its cash inflow was 3059, 5867, 5534, 3833 and 2882 with a total of 21175.  Overall difference was -7371.

Cash Flow from Financing Activities

hucff·

Change in short-term borrowings was 326, -1448, -250, 35 and -56.

  • Long-term debt issued was 749 in 2008,
  • Long-term debt payment  in 2008 was -51,
  • Common stock issued in 2007 was 62,
  • Repurchase of treasury stock was -27, -106, -23, -109 and -541,
  • Cash dividends paid was -82 in 2011,
  • Other financing activities was 561, 303, 354, -298 and -338,and
  • Net cash provided by financing activities was  921, -554, 81, -371 and -1017.

Transactions involved under this category, financing cash flow, were limited to issuance of common stock and payment of dividends to shareholders in 2010 and 2011 only.

Free Cash Flow

Shown below is the free cash flow of  Humana Inc. from 2007 to 2011:

hufcf

Free cash flow was the net amount after deducting capital expenditure from operating cash flow. For the past five years, the company free cash flow was 1011, 720, 1238, 2020 and 1743.  It shows that Humana Inc. has sufficient funds to retire long-term debt, pay dividends and invest additional lines of business.

Cash Flow Ratios

Cash flow ratios measure a company’s ability to meet ongoing financial and operational commitments. The following ratios are used on computingHumana Inc.’s cash flow  from 2007 to 2011:

hucfratios

Facts

  • Operating CF to sales was .05, .03, .05, .07 and .06; average of .05, which means that the company generates an average of $0.05 of cash flow for every $1 dollar of sales.
  • Operating cash flow ratio and current coverage ratio was  .83, .60, .79, 1.07 and  .95. an average of .85. It is the result after dividing cash flow from operation by total current liabilities. This tells us how much cash flow can cover the short-term obligation of the company.
  • Free cash flow ratio was .83,  .73, .87, .90, and  .84.with an average of .83. It shows that the company has available funds to retire additional debt, additional dividends and invest another line of business.
  • Capital expenditure ratio was 5.75, 3.75, 7.73, 10.1 and 6.19 with an average of 6.7. By the way, capital expenditure is a ratio that measures a company’s ability to acquire long-term assets using free cash flow. It shows us that the company has the ability to invest in itself.
  • Total debt ratio was .14, .11, .17, .24  and  .22 with an average of .18. This means that Humana Inc has only 18 percent ability to carry its total debt.  This ratio provides an indication of a company’s ability to cover total debt with its yearly cash flow from operations. According to Rio, the higher the percentage ratio; the better the company’s ability to carry its total debt.

Analysis

As shown above, the company is doing well in its operation, cash flow ratios show that  Humana Inc. has available funds to expand its business thru investment of other lines. In the same manner, it has also the ability to cover not only short-term debt but long term debt as well.  With regards to its CAPEX, the company has the ability to acquire long-term assets using its cash flow, so the company will further grow.

 

Written by Rio

Edited by Cris