# Tencent Holdings Limited (0700 HKG) Investment Valuation

February 19th, 2013 Posted by No Comment yet

Tencent Holdings Limited is a Chinese multinational investment holding conglomerate founded in 1998. The subsidiaries specialize in various Internet-related services and products, entertainment, artificial intelligence, and technology.

## Tencent Value Investing Approach

This method of valuation approach for Tencent Holdings Ltd was based on the Discounted Model.  The historical data was calculated. And then we come up with the projected financial data and ratios to come up with the net present value of the 6th year period. Net present value is one way to decide if an investment is worthwhile by looking at the projected cash inflows and outflows.

## Tencent Discounted Cash Flow Approach

The formula for the discounted cash flow is:

Where:

• Vo is the value of the equity of a business today.
• CF1 to CFn represent the expected cash flows (or benefits) to be derived for periods 1 to n.  The discounted cash flow model is based on time periods of time of equal length.
• r is the discount rate that converts future dollars of CF into present dollars of value.

The equation above is the basic discounted cash flow (DCF) model.

#### Explanation

The Discounted Cash Flow spreadsheet shows the historical income and expense plus the equity data in the total amount and per share.  The present value of equity was \$26.35 at a rate of 29.80 percent.  The future value of \$96.94 is equal to the present value of \$26.35. This means, leaving you a choice of having \$26.35 today or wait for the 6 time periods to have \$96.94 per share. If you take the \$26.35 today, you will have a chance to reinvest the money at 29.80 percent at the same equal time periods which will end up having more than \$26.35.  Moreover, the projected net income for year 5 was \$32.05 per share a total value of \$59.62 billion, while the present value was \$25.7 billion.

On the other hand, the capital rate that was used was 15 percent. The future value of equity was \$312.9 billion at a future price of \$168.25 per share. While the present value of Tencent Holdings Ltd was \$135 billion at \$72.74 per share. The return on investment that was used was 33.07 percent. While the price to earnings that were used in the calculation was \$5 and it’s earning per share was \$8.71.  The current market price, February 13, 2013, was \$35.10 per share.

## Tencent Investment in Enterprise Value

The concept of enterprise value is to calculate what it would cost to purchase an entire business. Enterprise Value (EV) is the present value of the entire company. Market capitalization, on the other hand, is the total value of the company’s equity shares. In essence, EV is a company’s theoretical takeover price, because the buyer would have to buy all of the stock and pay off existing debt while pocketing any remaining cash. This gives the buyer solid grounds for making its offer.

#### Explanation

The market capitalization for Tencent Holdings Ltd was increasing except in 2011 where it experienced a drop of 8 percent. The total debt represents 6 percent average, while the cash and cash equivalent represent a 78 percent average. As a result, the enterprise value was lesser by 72 percent against the market capitalization. If an investor decides to buy the entire business of Tencent Holdings Ltd, then he/she will be paying 100 percent of its equity, no debt, because cash was greater than the total debt.

The purchase price to date February 13, 2013, in buying the entire business of Tencent Holding Ltd was \$42.9 billion at \$23.07 per share. The market price to date was \$35.10 per share.

## Benjamin Graham’s Stock Test

### Net Current Asset Value (NCAV) Approach

Graham developed and tested the net current asset value (NCAV) approach between 1930 and 1932. Graham reported that the average return, over a 30-year period, on diversified portfolios of net current asset stocks was about 20 percent. An outside study showed that from 1970 to 1983, an investor could have earned an average return of 29.4 percent by purchasing stocks that fulfilled Graham’s requirement and holding them for one year.

### Net Current Asset Value (NCAV) Method

Studies have all shown that the Net Current Asset Value (NCAV) method of selecting stocks has outperformed the market significantly.

Graham was looking for firms trading so cheap that there was little danger of falling further.  His strategy calls for selling when a firm’s share price trades up to its net current asset value. The reason for this according to Graham is when a stock is trading below the Net Current Asset Value Per Share, they are essentially trading below the company’s liquidation value and therefore, the stock was trading at a bargain, and it is worth buying.

The concept of this method is to identify stocks trading at a discount to the company’s Net Current Asset Value per Share, specifically two-thirds or 66percent of net current asset value.

#### Explanation

The net current asset value approach of Benjamin Graham indicates that the stock price was overvalued from 2007 to 2012. Because the market value was greater than the 66 percent ratio. The 66 percent ratio represents only 18 percent of the market value. Thus, the stock was trading above the liquidation value of Tencent Holdings Inc.

It tells us that the stock of Tencent did not pass the stock test of Benjamin Graham because the price was expensive.

### Market Capitalization/Net Current Asset Value (MC/NCAV) Valuation

By calculating market capitalization over the net current asset value of the company, we will know if the stocks are trading over or undervalued. The result should be less than 1.2 ratios. Graham would only buy if the ratio does not exceed 1.2 ratios.

Formula: Market Capitalization / NCAV = Result (must be lesser than 1.2)

Let’s go over with the result from the table below:

The MC/NCAV valuation tells us that the stock price of Tencent was overvalued from 2007 to 2012. Because it exceeded the 1.2 ratios. It did not pass the stock test of Graham because the stock was expensive.

### Benjamin Graham’s Margin of Safety (MOS)

The margin of Safety requires knowing when the buying price is low in absolute terms, rather than merely relative to the market as a whole. This formula is used to identify the difference between company value and price.Graham called it the intrinsic value.

This is the concept taught by Benjamin Graham and still referred to by Warren Buffett. Value investing is buying with a sufficient margin of safety. Graham considers buying when the market price is considerably lower than the intrinsic or real value, a minimum of 40 to 50 percent below. Because enterprise value takes into account the balance sheet and a much more accurate measure of the company’s true value compared to market capitalization,

To arrive at the results below for Tencent Holdings Ltd, we used the formula Margin of Safety = Enterprise Value – Intrinsic Value.

#### Explanation

Benjamin Graham’s margin of safety indicates a 96 percent average for Tencent Holdings Ltd. The margin of safety was at \$282 average. The enterprise value was average \$10 representing only 3 percent of the intrinsic value, while on the other hand, the intrinsic value was average \$292 representing 3041 percent of the enterprise value.

#### Intrinsic Value

Intrinsic Value = Current Earnings x (9 + 2 x Sustainable  Growth Rate)

The explanation in the calculation of intrinsic value was as follows:

EPS or the company’s last 12-month earnings per share; G as the company’s long-  term (five years) sustainable growth estimate; 9 is the constant that represents the appropriate P-E ratio for a no-growth company; and 2 for the average yield of high-grade corporate bonds.

#### Explanation

What factors intrinsic value? In our calculation, using the formula of Benjamin Graham for intrinsic value, the earning per share and the growth plays an important role in the calculations. The earning per share was \$3 average, while the sustainable growth rate was 39 average. On the other hand, the annual growth rate was 86 average.

#### Earnings per Share (EPS)

The formula for earning per share was:

Sustainable growth rate (SGR), on the other hand, shows how fast a company can grow using internally generated assets without issuing additional debt or equity. To calculate the sustainable growth rate for a company, you need to know its return on equity (ROE). You also need to know the dividend payout ratio. From there, multiply the company’s ROE by its blowback ratio, which is equal to 1 minus the dividend payout ratio.

#### Sustainable Growth Rate

Sustainable growth rate = ROE x (1 – dividend-payout ratio)

The table above shows that the return on equity was average 42 percent while the payout ratio was 8 percent average.

Let’s move on with Return on Equity or ROE. This is used as an indicator of a company’s profitability by measuring how much profit the company generates with the money invested by common stock owners. In other words, the return on equity shows how many dollars of earnings result from each dollar of equity. The formula for the return on equity was:

#### Relative and Average Approach

The summary of the two approaches is in the table below.

Let us walk farther and see how is the real value of the stock of Tencent Holdings Ltd and the market price of the stock significant in the margin of safety.

#### Explanation

The intrinsic value line soared up very high at a rate of 2969 percent average from 2007 to the trailing twelve months 2012. This is the true value of the stock of Tencent Holdings Ltd. This means that the true value of the stock is soaring high, but in the trailing twelve months of 2012, it falls down at -9 percent. The price was stable at an average of \$10, trending at 13 percent average.  The graph shows a 96 percent average margin of safety from 2007. Overall, this is what Benjamin Graham meant, when he said, purchasing at a discount to its underlying intrinsic value.

IV is the true value of the stock and EV is the market price and the difference between the two lines is what we called the margin of safety.

## Tencent Relative Valuation Methods

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

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

This valuation will determine the status of the stock price. Stocks may be undervalued or overvalued.  One way to do this is by simply multiplying the Price to Earnings (P/E) ratio with the company’s relative Earning per Share (EPS) and comparing it to the enterprise value per share.

#### Explanation

The P/E*EPS valuation shows that the price was undervalued from 2007 to the trailing twelve months 2012. The enterprise value represents only 8 percent of the P/E*EPS ratio, therefore, the price was cheap.

The price was undervalued because the stock price was lesser than the result of the P/E*EPS ratio. Another way of calculating this valuation is by using the average price to earnings ratio.

Price to earnings ratio using the average approach has greater results because it takes into consideration the past performance of the company, in which the P/E ratio for 2006 was 5000 percent.

### The Enterprise Value (EV)/Earning Per Share (EPS) or (EV/EPS)

The use of this ratio is to separate price and earnings in the enterprise value. By dividing the enterprise value of projected earnings (EPS). The result represents the price (P/E) and the difference represents the earnings (EPS).  If the analysts think that the appropriate ratio is greater or lower than the result.

#### Explanation

The EV/EPS valuation indicates that the price (P/E) that was separated represents 36 percent average. While the earnings (EPS) a were 64 percent average. This might indicate that the price was cheap because the price represents only one-third of the enterprise value.

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

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

#### Explanation

The EV/EBITDA valuation tells us that it will take three years to cover the cost of buying the entire business. In other words, it will take three times the cash earnings to cover the cost of the purchase price. This valuation also shows the profitability wherein, it has a 74 percent average gross profit margin. Likewise, its net margin was 38 percent average.

Conclusion:

In the Discounted Cash Flow spreadsheet, the capital rate that was used was 15 percent.  The present value of equity per share was \$26.35 at the rate of 33.07 percent. While the future value was \$96.94 per share discounted today at present value. Taking the amount of \$96.94 today, you will be able to reinvest at the same 33.07 percent for the same equal 6 time period. Also, end up getting a higher amount. Moreover, the future value of equity was \$312.9 billion at a future price of \$168.25 per share. While the present value of Tencent was \$135 billion at \$72.74 per share. In addition, the projected income at year 5 was \$32.05 per share discounted at present value.

#### Enterprise Value

The enterprise value valuation, total debt represents 6 percent and the cash and cash equivalent represent 78 percent. Thus the enterprise value was lesser by 72 percent against the market value. Buying the entire business to date, December 26, 2012, will cost \$37.5 billion at 20.16 per share.

#### Net Current Asset

The net current asset value approach of Benjamin Graham indicates that the stock price of Tencent was overvalued. For the reason, the stock was trading above the liquidation value of the company. MC/NCAV valuation, on the other hand, shows that the stock price was expensive because the ratio exceeded the 1.2 ratios. Further, the margin of safety for Tencent Holdings Ltd was 96 percent average. While the intrinsic value was \$292 average. In addition, the sustainable growth rate was \$39 and ROE was \$42 average.

#### Relative Valuation

Taking consideration of the relative valuation, it shows that the stock price was undervalued. Because the price (P/E) represents 36 percent. While the earnings (EPS) was 64 percent average in the EV/EPS valuation.  Moreover, the P/E EPS valuation shows that the price was undervalued because the price represents only 8 percent average.

#### EV/EBITDA

Furthermore, the EV/EBITDA valuation tells us that it will take 3 years to cover the costs of buying the business. In other words, it will take 3 times the earnings of the company to cover the costs of buying. The gross and net margins were 74 and 38 percent average.

Overall, the stock price was cheap and the margin of safety was 96 percent average. Moreover, the company has an impressive gross and net margins at 74 and 38 percent, respectively. Moreover, the return on equity was 42 percent average. Therefore I recommend a BUY in the stock of Tencent Holdings Ltd.

Research and written by Cris

This investment valuation is a bit different from our previous report.

# Sasol Limited (SSL) Investment Valuation

November 22nd, 2012 Posted by No Comment yet

Sasol Limited (SSL) is an international integrated chemicals and energy company that leverages technologies and the expertise of their 31 270 people working in 32 countries. Moreover, SSL develop and commercialize technologies, and build and operate world-scale facilities to produce a range of high-value product stream, including liquid fuels, chemicals, and low-carbon electricity.

## SSL Value Investing Approach

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

## The Investment in Enterprise Value on SSL

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

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

#### Explanation

The market value of Sasol was stable at \$26 billion average and moving at a rate of 11 percent. While the total debt of SSL represents a 52 percent average while the cash and cash equivalent represent a 50 percent average of the enterprise value, therefore, enterprise value was greater by 2 percent against market value. Purchasing the entire business of SSL is paying 98 percent of equity and 2 percent debt.

The cost of buying the entire business of SSL to date, November 7, 2012, will be \$27546 at \$44.57. The market price to date is 42.86.

### Net Current Asset Value (NCAV) Method

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

The net current asset value approach tells us that the stock of SSL was trading at an overvalued price from 2007 to 2012. Because the market value was greater than the 66 percent of NCAVPS. The price of the stock of SSL was expensive because the stock was trading above the liquidation value of SSL.

### Market Capitalization/Net Current Asset Value (MC/NCAV) Valuation

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

The stock price of SSL was undervalued for 2007 to 2012 because the ratio was lesser than the 1.2 ratios. Furthermore,

### The margin of Safety (MOS)

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

#### Explanation

The margin of safety tells us that there was a margin of safety for 2007 to 2012 at a rate of 95 percent average. The margin of safety was stable at 95 percent all throughout its 5 years. Moreover, the stock price was cheap and it is over the requirement of Graham at 40-50 percent MOS.

Intrinsic Value =  Current Earnings x (9 + 2 x Sustainable  Growth Rate)

#### Explanation

The table above shows the historical intrinsic value for Sasol. The intrinsic value was increasing and this represents the true value of the stock. It factors the earnings per share (EPS) and the sustainable growth rate (SGR). While EPS is the portion of the earnings which is attributable to the ordinary shareholders. It is the earning power of the company.  While the SGR shows how fast a company can grow using internally generated assets without issuing additional debt or equity or in other words it shows how much growth a company can potentially generate internally given its level of profitability.

Furthermore, to arrive at the intrinsic value, the annual growth rate must be calculated first by multiplying SGR to (9+2). Then the result which is the annual growth rate is multiplied to EPS to get the intrinsic value.  The table below will show us the historically sustainable growth rate and how it is calculated.

#### Sustainable Growth Rate (SGR)

The return on equity (ROE) and the payout ratio factors SGR.

Return on Equity clearly shows how many dollars of earnings result from each dollar of equity.

The average ROE was \$19 and the average payout ratio was \$40, while SGR was \$11 average.

There are two approaches to calculating the sustainable growth rate and that is by using the relative ratio for return on equity and the average return on equity. I summarized the results of these two approaches in the table shown below.

#### Explanation

Using the average ratio for SSL, it produces a higher result and it is more favorable for the company. As we can see, it affected the results of the intrinsic value and the margin of safety. The graph below will make us understand it better.

The graph shows that the intrinsic value (IV) line is far above the enterprise value (EV) line. This means, that there was a margin of safety for SSL. The space between the two lines is the margin of safety.

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

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

The P/E*EPS valuation shows that the stock price was undervalued. Because the P/E*EPS result was higher than the market value. The market value represents 11 percent of the P/E*EPS ratio, therefore the stock was trading at the cheap price.

#### The Relative and Average Approaches

There are actually two ways of calculating P/E*EPS valuation, one is by using the relative price to earnings ratio and the other one is by using the average P/E ratio.  The summary of the results was in the table below.

### Enterprise Value (EV)/Earning Per Share (EPS) or (EV/EPS)

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

In the EV/EPS valuation, the price (P/E) represents 3 percent and the earnings (EPS) represents 97 percent. It indicates that the price was undervalued and cheap in 2007 to ttm6 2012.

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

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

The average EV/EBITDA was 1 time.  This means it will take only one year of the cash earnings to cover the costs of buying the business.

This valuation also shows the profitability of the company, for SSL, its net earnings were 14 percent average. The company’s free cash flow was negative for 2010, 2012 and the trailing twelve months.

#### Overview

The market value of Sasol was stable at \$26 billion average and was moving at a rate of 11 percent. On the other hand the total debt was 52 percent and the cash and cash equivalent was a 50 percent average. Buying the entire business of SSL will be paying 98 percent of equity and 2 percent of total debt. The costs of buying SSL to date would be \$27546 at \$44.57 per share.  The market price to date is \$42.86 per share.

#### The margin of safety

On the other hand, the margin of safety was averaging 95 percent. While the intrinsic value was \$1041 average. The sustainable growth rate was \$11 average moreover, the annual growth rate was \$32 average. In addition, the return on equity was \$19 average while the price of earnings was \$13 average.

Furthermore, the price was undervalued from 2007 to 2012.  While the EV/EPS valuation shows that the price (P/E) was 3 percent and the earnings (EPS) was 97 percent. It will take one year of the earnings to cover the costs of buying the entire business of SSL.

The margin of safety was 95 percent and the stock was trading at an undervalued price. Therefore I recommend a BUY in the stocks of Sasol Limited  (ADR).

Researched and Written by Cris

# Investment Technology Group Inc (ITG) Company Research

August 24th, 2012 Posted by No Comment yet

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

## Balance Sheet

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

### Financial Liquidity

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

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

### Leverage

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

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

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

### Asset Management

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

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

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

## ITG Income Statement

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

### Profitability

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

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

Then multiply every three components to get;

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

Computation of the return on assets:

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

Lastly, multiply the two components and you get;

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

#### Explanation

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

##### Return on Assets

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

### Revenues

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

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

#### Explanation

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

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

#### Earnings per Share

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

### Expenses

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

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

#### Explanation

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

##### Conclusion

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

## ITG Cash Flow Statement

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

### Cash Flow from Operating

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

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

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

#### Explanation

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

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

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

##### Cash payment

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

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

#### Explanation

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

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

#### Explanation

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

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

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

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

#### Explanation

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

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

### Cash Flow from Investing

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

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

#### Explanation

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

### Cash Flow from Financing

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

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

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

### Free Cash Flow

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

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

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

### Cash Flow Solvency

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

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

Written by: Rio, Nelly, and Dyne

Edited by Cris