# Vale S.A. (VALE) Investment Valuation

January 23rd, 2013 Posted by No Comment yet
Vale S.A. (VALE) is a Brazilian multinational corporation engaged in metals and mining. It one of the largest logistics operators in Brazil. Formerly Companhia Vale do Rio Doce is the largest producer of iron ore and nickel in the world.
Value Investing Approach on VALE
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.

## VALE Investment in Enterprise Value

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

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

#### Explanation

The market capitalization was erratic in movement with an average of \$137 billion.  Its total debt represents 18 percent average. While its cash and cash equivalent represent 5 percent. Thus, enterprise value was greater by 13 percent against the market capitalization. Buying the entire business of Vale would be paying 13 percent debt and 87 percent equity.

Further, the purchase price of Vale to date, January 21, 2013, would be \$180.6 billion at \$56.96 per share.  The market price to date was \$20.01 per share.

## Benjamin Graham’s Stock Test

### Net Current Asset Value (NCAV) Approach

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

### Net Current Asset Value (NCAV) Method

The net current asset value approach of Benjamin Graham shows that the stock was trading at an overvalued price. Because the market price was greater than the 66 percent ratio from 2007 to the trailing twelve months.  The 66 percent ratio represents only 7 percent of the market price, thus the market price was overvalued.

What does it mean? It tells us that the stock of Vale was expensive and did not pass the stock test of Benjamin Graham.

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

Calculating market capitalization over the net current asset value of the company, we will know if the stock is trading over or undervalued. The result should be less than 1.2 ratios for Graham to buy stocks.

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

The MC/NCAV valuation tells us that the stock price of Vale was overvalued from 2007 to the trailing twelve months because the ratio exceeded 1.2. The result of ratios was 24.55 against 1.2 ratios, thus the price was considered very expensive. From here, we can say that it did not pass the stock test of Benjamin Graham.

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

Margin of Safety = Enterprise Value – Intrinsic Value

#### Explanation

The margin of safety for VALE resulted at a 67 percent average which is equivalent to \$166 average. Enterprise value was \$46 average. As seen in the table above, there was a margin of safety from 2007 to the trailing twelve months except in 2009, where there were zero margins of safety.

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

Wherein;

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

By looking at the table, intrinsic value result was \$207 average. This is the true value of VALE’s stock. The formula factors the earning per share and the sustainable growth rate. The earning per share was \$2.93 average while the sustainable growth rate was \$28.56 average.

#### Earnings per Share (EPS)

Sustainable growth rate (SGR) 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 plow back ratio, which is equal to 1 minus the dividend payout ratio.

#### Sustainable Growth Rate (SGR)

The formula is Sustainable growth rate = ROE x (1 – dividend-payout ratio).

The table above stated that the average return on equity was 31.55 percent. Payout ratio garnered 12.47 percent average.

Moving on, Return on Equity (ROE) is an indicator of company’s profitability by measuring how much profit the company generates with the money invested by common stock owners. It shows how many dollars of earnings result from each dollar of equity.

As you can see, the relative approach in calculating Vale’s sustainable growth rate, produced almost the margin of safety compared to the average approach. The margin of Safety was greater when an average approach is a concern.

#### Explanation

In 2009, the revenue and net earnings of Vale went down by 38 and 60 percent, respectively. In 2010 period and the following year, its revenue and net earnings soared up to 94 and 229 percent, respectively. Moreover, in 2011 it soared up by 30 percent both in revenue and net earnings. Moreover, the margin of safety was high in 2011 at 89 percent. The average margin of safety was 67 percent using the relative approach.

## VALE Relative Valuation Methods

The relative valuation methods for valuing a stock is to compare market values 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 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.

#### Explanation

The P/E*EPS tells us that the stocks were overvalued because the price was higher than the P/E*EPS ratio. Therefore, the stock price of Vale is expensive.

There are two approaches also in calculating the P/E*EPS valuation. It is the relative P/E approach and the average P/E approach. I have summarized the results of these two approaches in the table shown below.

### 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). The difference will then represent the earnings (EPS).

#### Explanation

In this EV/EPS valuation, the price (P/E) was 44 percent average.  Earnings (EPS) was 56 percent average. This is the price a certain investor would pay in buying.

But then again, this valuation depends on the analyst’s own discretion.

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

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

#### Explanation

The EV/EBITDA valuation tells us that it will take 9 years to cover the costs of buying the entire business of Vale.  In other words, it will take 9 times the cash earnings to cover the purchase price. The net income of Vale was 33 percent average.

In conclusion:

The market capitalization for Vale was erratic in movement with an average of \$137 billion. Its total debt was 18 percent average. While the cash and cash equivalent were 5 percent average. Thus the enterprise value was greater by 13 percent against the market capitalization. Buying the entire business of Vale, the investor would be paying 13 percent of its debt and 87 percent of its equity. The purchase price to date, January 22, 2013, for the entire business, is \$180.6 billion at \$56.96 per share. The current market price was \$20.02 per share.

#### Net Current Asset Value

The net current asset value approach shows that price was overvalued from the period 2007 to 2012.  This is because the market price was higher than the 66 percent ratio of net current asset value per share. The MV/NCAV shows that the price was overvalued because the results exceeded the 1.2 ratios. The net current asset value approach indicates that the price was expensive and did not pass the stock test of Benjamin Graham.

In addition, the margin of safety for Vale was 67 percent average and its intrinsic value was \$207 average. While the growth represents 29 percent for sustainable growth rate. And 66 percent in the annual growth rate, while the return on equity was 31.55 percent average.

#### P/E*EPS

Furthermore, the stock price was overvalued because the P/E*EPS ratio was only 57 percent average against the market price. Therefore, the price was expensive overall. On the other hand, the EV/EPS indicates that the price (P/E) was 44 percent and the earnings (EPS) was 56 percent average.

#### EV/EBITDA

It will take 9 years to cover the costs of buying the entire business of Vale.  In other words, it will take 9 times the cash earnings to cover the purchase price.

Therefore, recommends a HOLD in the stock of Vale SA (ADR).

Researched and Written by Cris

# Vale SA ADR (VALE) Investment Valuation

January 23rd, 2013 Posted by No Comment yet
VALE is a Brazilian multinational corporation engaged in metals and mining and the largest producer of iron ore and nickel in the world.
VALE Investing Approach
This model is prepared in a very simple and easy way to value a company, it adopts the investment style of the Father of Value Investing Benjamin Graham. The essence is that any investment should be purchased at a discount, meaning the true value should be more than the market value. Graham believed in fundamental analysis and was looking for companies with a sound balance sheet and with little debt. The basis for this valuation is the company’s five years of historical financial records, the balance sheet, income statement, and cash flow statement. We calculated first the enterprise value as our first step. We believed this is important because it measures the total value of the company.

## VALE Investment in Enterprise Value

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

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

#### Explanation

The market capitalization was erratic in movement with an average of \$137 billion.  Its total debt represents 18 percent average, while its cash and cash equivalent represent 5 percent. Thus, enterprise value was greater by 13 percent against the market capitalization. Buying the entire business of Vale would be paying 13 percent debt and 87 percent equity.

If you are asking how much it would cost you to buy the entire business, then the purchase price of Vale to date, January 21, 2013, would be \$180.6 billion at \$56.96 per share.  The market price to date was\$20.01 per share.

## Benjamin Graham’s Stock Test

### Net Current Asset Value (NCAV) Approach

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

### Net Current Asset Value (NCAV) Method

The net current asset value approach of Benjamin Graham shows that the stock of Vale was trading at an overvalued price because the market price was greater than the 66 percent ratio from 2007 to the trailing twelve months.  The 66 percent ratio represents only 7 percent of the market price, thus the market price was overvalued.

What does it mean? It tells us that the stock of Vale was expensive and did not pass the stock test of Benjamin Graham.

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

Calculating market capitalization over the net current asset value of the company, we will know if the stock is trading over or undervalued. The result should be less than 1.2 ratios for Graham to buy stocks.

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

The MC/NCAV valuation tells us that the stock price of Vale was overvalued from 2007 to the trailing twelve months because the ratio exceeded 1.2. The result of ratios was 24.55 against 1.2 ratios, thus the price was considered very expensive. From here, we can say that it did not pass the stock test of Benjamin Graham.

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

Margin of Safety = Enterprise Value – Intrinsic Value

#### Explanation

The margin of safety for VALE resulted at a 67 percent average which is equivalent to \$166 average. Enterprise value was \$46 average. As seen in the table above, there was a margin of safety from 2007 to the trailing twelve months except in 2009, where there were zero margins of safety.

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

wherein;

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

By looking at the table, intrinsic value result was \$207 average. This is the true value of VALE’s stock. The formula factors the earning per share and the sustainable growth rate. The earning per share was \$2.93 average while the sustainable growth rate was \$28.56 average.

#### Earning per Share (EPS)

The term earnings per share (EPS) represents the portion of a company’s earnings, net of taxes and preferred stock dividends, that is allocated to each share of common stock.

Sustainable growth rate (SGR) 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 plow back ratio, which is equal to 1 minus the dividend payout ratio.

#### Sustainable Growth Rate (SGR)

The formula is Sustainable growth rate = ROE x (1 – dividend-payout ratio).

The table above stated that the average return on equity was 31.55 percent. Payout ratio garnered 12.47 percent average.

Moving on, Return on Equity (ROE) is an indicator of company’s profitability by measuring how much profit the company generates with the money invested by common stock owners. It shows how many dollars of earnings result from each dollar of equity.

As you can see, the relative approach in calculating Vale’s sustainable growth rate, produced almost the margin of safety compared to the average approach. The margin of Safety was greater when an average approach is a concern.

#### VALE Intrinsic Value Graph

During 2009, the revenue and net earnings of Vale went down by 38 and 60 percent, respectively. During the 2010 period and the following year, its revenue and net earnings soared up to 94 and 229 percent, respectively. Then, in 2011 it soared up by 30 percent both in revenue and net earnings. The margin of safety was high in 2011 at 89 percent. For Vale, the average margin of safety was 67 percent using the relative approach.

## VALE Relative Valuation Methods

The relative valuation methods for valuing a stock is to compare market values 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 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.

#### Explanation

The enterprise value per share was lesser than the P/E*EPS ratio by 71 percent. It was overvalued for the rest of the periods because the price was higher than the P/E*EPS ratio. The market price was 175 percent of the P/E*EPS ratio, therefore, the stock price is considered expensive.

There are two approaches also in calculating the P/E*EPS valuation. It is the relative P/E approach and the average P/E approach. I have summarized the results of these two approaches in the table shown below.

### 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). The difference will then represent the earnings (EPS).

#### Explanation

The price (P/E) was 44 percent average and the Earnings (EPS) was 56 percent average. This is the price a certain investor would pay in buying.

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

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

#### Explanation

The EV/EBITDA tells us that it will take 9 years to cover the costs of buying the entire business of Vale.  In other words, it will take 9 times the cash earnings to cover the purchase price. This valuation shows the profitability of the company. The net income of Vale was 33 percent average.

In conclusion:

The market capitalization for Vale was erratic in movement with an average of \$137 billion. Its total debt was 18 percent average. While the cash and cash equivalent were 5 percent average, thus the enterprise value was greater by 13 percent. Buying the entire business the investor would be paying 13 percent of its debt and 87 percent of its equity. The purchase price to date, January 22, 2013, for the entire business, is \$180.6 billion at \$56.96 per share. The current market price was \$20.02 per share.

#### Net Current Asset Value (NCAV)

The stock price was overvalued from the period 2007 to 2012 because it exceeded the 1.2 ratios.  The NCVA approach indicates that the price was expensive and did not pass the stock test of Benjamin Graham.

In addition, the margin of safety for Vale was 67 percent average and its intrinsic value was \$207 average. While the growth represents 29 percent for sustainable growth rate. And 66 percent in the annual growth rate. While the return on equity was 31.55 percent average.

#### P/E*EPS

Furthermore, the P/E*EPS indicate that the stock price was overvalued because the P/E*EPS ratio was only 57 percent market price. Therefore, the price was expensive overall. On the other hand, the EV/EPS valuation indicates that the price (P/E) was 44 percent. Moreover, the earnings (EPS) was 56 percent average.

#### EV/EBITDA

EV/EBITDA valuation tells us that it will take 9 years to cover the costs of buying the business of Vale.  In other words, it will take 9 times of the cash earnings of Vale to cover the purchase price.

Further, I recommend a HOLD in the stock of Vale SA (ADR).

Researched and Written by Criselda

# AstraZeneca Plc (AZN) has Enough Funds to Continue Business

January 22nd, 2013 Posted by No Comment yet

AstraZeneca plc (AZN) is a British-Swedish multinational pharmaceutical and biopharmaceutical company. In 2013, it moved its headquarters to Cambridge, UK, and concentrated its R&D in three sites: Cambridge; …Wikipedia

## Balance Sheet

### Financial Liquidity

Liquidity is the ability of the firm to convert assets into cash. It is also called marketability or short-term solvency. For AstraZeneca plc (ADR)’s financial liquidity from 2007 to 2011, Rio presented a graph below:

What does this mean?

• The current ratio was 1.12, 1.21, 1.35, 1.50 and 1.49, with an average of 1.33  which shows that current asset of the company is greater than its current liabilities by an average of 133 percent.
• Quick ratio was .99, 1.09, 1.25, 1.40 and 1.37, average of 1.22. This is the monetary asset of the company. On average, it is 122 percent which means that it is also greater than its current obligations except in 2007 which was only 99 percent.
• Working capital ratio was .04, .06, .11, .15 and .15. Average of .10. This is the percentage result of networking capital over total assets.

AZN is financially healthy as shown on the above data, wherein its current resources exceeded current obligations and its working capital showed growth each year.

### Financial Leverage

Financial leverage of AstraZeneca plc (ADR) from 2007 to 2011 is detailed below:

• Debt ratio had an average of .62. It means that the company’s total liabilities were 62 percent of total assets.
• Debt to equity ratio average was 1.71 or total liabilities reached as high as 171 percent when compared to total equity.
• Solvency ratio has an average of .31 which shows that the company was 31 percent able to pay off its total obligations.

The company operates its business within its normal level of borrowing. Its total debt was 62 percent of total asset and 171 percent of total equity. Leverage is not necessarily a bad thing. Leverage is funding company growth and development through the purchase of assets. But if the company has too much borrowing is risky because it might not be able to pay back all of its debts.

### Asset Management/Efficiency Ratios

• Inventory turnover ratio average was 3.48 times. This signifies the number of times inventory is sold and restocked each year.
• The receivable turnover ratio has an average of 4.71 times. It measures the number of days it takes a company to collect its credit accounts from its customers.
• The payable turnover ratio was 5.58 times average in five years period. This is the number of times the company pays its obligation each period. This ratio measures how the company pays its suppliers in relation to the sales volume being transacted.
• Asset turnover ratio was .62 times average. Asset turnover ratio shows how efficiently your assets, in total, generate sales. The higher the total asset turnover ratio, the better and the more efficient you use your asset base to generate your sales.

Efficiency ratios show that AstraZeneca plc (ADR) was efficient and effective enough in generating sales out of its resources if compared to other company of the same industry. Converted into days, inventory turnover was 104 days, receivable turnover was   77 days while payable turnover was 65 days.

### Property, Plant, and Equipment

Investment in property, plant and equipment of AZN from 2007 to 2011 are as follows:

• PPE, gross was 15,502 average in 5 years. This is the average total cost of the fixed asset at the time of acquisition.
• Accumulated depreciation was 8303 average. This is a cumulative depreciation of an asset up to a single point in its life.
• Netbook value of PPE was 7206 average. This is the net cost of the property after deducting the accumulated depreciation.

Using the available data above, fixed asset investment shows that AstraZeneca plc (ADR) has used up the property for 2.7 years.  Therefore, the average remaining life is 2.3 years to fully use the property.

## AstraZeneca Income Statement

### Income

The income or revenue is the amount of money that is brought into a company by its business activities. You might be thinking what would it be if we analyze AZN’s income, right? For that, Rio has the answer.

• Revenue was 29559, 31601, 32804, 33269 and 33591; ttm was 29347, which shows that the revenue of AstraZeneca was increasing every year. Its percentage growth was 7, 4, 1 and 1 percent respectively.
• Gross profit was 23140, 25003, 27029, 26880 and 27565; ttm was 23557. Its growth per year was 8, 8 -1 and 3 percent.
• Operating income was 8094, 9144, 11543, 11494 and 12795; ttm was 22606.
• The Income before tax was 7983, 8681, 10807, 10977 and 12367. It’s ttm was 7916. This is the company’s income per year before deducting income tax.
• Income after tax was 5595, 6101, 7521, 8053 and 9983; ttm was 6262. As you can see, it is increasing yearly by 9, 23, 7 and 24 percent.

As shown per above data, the company’s income increased consistently per period from 2007 to 2011. Its highest percentage growth was 7 percent in 2008, with minimal growth of 1 percent in 2010 and 2011.

### Expenses

Expenses are inevitable in operating a business. Rio mentioned different kinds of expenses where AZN allotted its money from 2007 to 2011. But before that, she explained what those expenses are one by one. According to her, the cost of revenue is the expense a company incurred in order to manufacture, create or sell a product.  It includes the purchase price of raw materials as well as the expenses of turning it into a product. Operating expenses are the selling, general and administrative expenses of the company. Other expenses are those not classified under cost and operating.

• The cost of revenue was 6419, 6598, 5775, 6389 and 6026. ttm was 5790. This is equivalent to 22, 21, 18, 19, 18 percent of the total revenue.
• Operating expense was 15046, 15859, 15486, 15386 and 14770 which is 51, 50, 47, 46 and 44 percent of revenue.
• Another expense was 2499, 3043, 4022, 3441 and 2812. ttm of 16344. Other than operating expense is another expense which is 8, 10, 12, 10 and 8 percent of sales. This already includes provision for income tax.
• Finally, total expense was 17545, 18902, 19508, 18827 and 17582. ttm of 17295. This is the total of operating and other expense equivalent to 59, 60, 59, 57 and 52 percent of revenue.

The overall expenses of the company against total revenue in percentage represents the following:  For the cost of revenue, it has an average of 19.6, for operating expenses, an average of 47.6 and other expense represents 9.6, a grand total of 76.8. It tells us that the company is able to generate revenue that is sufficient for all the daily expenses of the company in its operation. It is enough to sustain all the expenses.

### Margin

From 2007 to 2011, gross margin down to net margin of AstraZeneca plc (ADR) are:

• Gross margin was .78, .79, .82, .81 and .82 which shows that it is impressive. The result is progressing each year.
• Operating margin was .27, .29, .35, .35 and .38.  The trend is similar to gross margin with consistent progress.
• Pretax margin was .27, .27, .33, .33 and .37.
• Net profit margin was .19, .19, .23, .24 and .30.  Its percentage in 2008 was the same in 2007 and continued to rose up until 2011.

AstraZeneca margin was very competitive and progressive. Its gross margin had a yearly increase of an average of 2 percent except in 2010 wherein it slightly down by 1 percent but had recovered in 2011, while the operating and pretax margin was consistent. Its net margin has same percentage in 2007 and 2008, increase by 4 percent in 2009, and 1 and 6 percent respectively in 2010 to 2011.

### Profitability

Profitability ratios help users of a company’s financial statements determine the overall effectiveness of management regarding returns generated on sales and investments.

For AstraZeneca, profitability ratios from 2007 to 2011 are:

•  Net margin was .19, .19, .23, .24 and .30, ttm of .21. It is the after-tax profit a company generated for each dollar of revenue.
• Asset turnover was .62, .68, .60, .59 and .64, ttm was .62 which shows that AstraZeneca is effective in converting its assets into sales.
• Return on asset was .17, .19, .20, .20 and .23. ttm of .20. It tells us how much profit a company generated for each dollar in the asset.
• Return on equity was .54, .55, .52, .47 and .53 with ttm of .52. This tells us that the company generates a return of \$0.54, \$0.55, \$0.52, \$0.47 and \$0.53 invested in equity.
• Financial leverage or equity multiplier was 3.25, 2.94, 2.66, 2.42 and 2.27. ttm was 2.71.
• Return on invested capital was .22, .23, .36, .25 and .33. ttm was .28, which shows that the company generated \$0.28 average return on invested capital.

Profitability ratios of AstraZeneca plc (ADR) were impressive and the company is doing well in its business. Net margin was improving each year with an average of 21 percent. Asset turnover was .62, return on equity was .52 while return on asset and return on invested capital was .20 and .28 respectively.

### Modified Income Statement

To summarize it all,  revenue, total expense and net income of AstraZeneca from 2007 to 2011:

• Revenue’s growth is consistent yearly although not by bulk.
• Total expense was 23964, 25500, 25283, 25216 and 23608, ttm was 23,085.
• Net income was 5595, 6101, 7521, 8053 and 9983, ttm was 6262. The trend is same as in revenue, trending up yearly.

## Cash Flow

### Cash Flow from Operating Activities

Operating cash flow transactions of AstraZeneca from 2007 to 2011 are as follows:

• Depreciation & amortization was 1856, 2620, 2087, 2741 and 2550.
• Inventory was 442, 185, 6, 88 and -256.
• Other working capital was -885, -395, 1379 and 467.
• Other non-cash items was -1886, -2349, 8523, -3120 and 6168.
• Net cash provided by operating activities was 7510, 8742, 11739, 10680 and 7821. It shows positive result throughout its 5 years of operation. It means it has funds available to retire additional debts and pay dividends to shareholders.

Cash flow from operating activities indicates positive results, though it’s up and down trend, it shows that the company was effective in generating cash flow out of its revenue. So, the company has sufficient funds for its operating activities.

### Cash Flow from Investing Activities

• Total cash outflows of AstraZeneca from 2007 to 2011 was -16605, -4079, -2988, -2802 and -2279 while total inflows were only 1718, 183, 512, 462 and 257.
• As a result, net cash used for investing activities was -14887, -3896, -2476, -2340 and -2022 which showed negative results because total cash outflows exceed total cash inflows.

### Cash Flow from Financing Activities

Shown below were the financing activities of AstraZeneca from 2007 to 2011:

Net cash provided by (used for) financing activities of AstraZeneca plc (ADR) was 6051, -6362, -3629, -7220 and -9321. It shows a positive result in 2007 due to its high other financing activities. However, the next periods were negative results because its cash outflows also exceeded cash inflows.

### Free Cash Flow

Free cash flow is the result after deducting capital expenditure from operating cash flow. It shows positive results from 2007 to 2011 of 5831, 4703, 8782, 8499 and 6524. It indicates that funds are available to retire additional debts, increase dividends or invent new lines of business. However, if it’s negative, it indicates the financing is needed to support current operations and programs.

### Cash Flow Ratios

Provided below were the most important cash flow ratios with their corresponding calculations and interpretation.

• Cash flow margin was .25, .28, .36, .32 and .23. Also called operating cash flow margin and margin ratio,  cash flow margin measures how well a company’s daily operations can transform sales of their products and services into cash.
• Operating cash flow was .49, .66, .67, .64 and .50. Operating cash flow relates to cash flows that a company accrues from operations to its current debt. It measures how liquidity a firm is in the short run since it relates to current debt and cash flows from operations.
• Free cash flow was .78, .54, .75, .80 and .83. It is the percentage of free cash flow over operating cash flow.
• Capital expenditure was 4.47, 2.16, 5.03, 13.50 and 9.32. This is the ratio that measures a company’s ability to acquire long-term assets using free cash flow. As the CF to CAPEX ratio increases, it is usually a positive sign. If a 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 was .23, .28, .34, .32 and .26. 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.

To sum it all, cash flow ratios show that AstraZeneca has enough funds to continue running its business.

Written by Rio
Edited by Cris

# AstraZeneca PLC (AZN) Investment Valuation

January 18th, 2013 Posted by No Comment yet
AstraZeneca PLC (AZN) Investment Valuation. This model is prepared in a very simple and easy way to value a company, it adopts the investment style of the Father of Value Investing Benjamin Graham. The essence is that any investment should be purchased at a discount, meaning the true value should be more than the market value. Graham believed in fundamental analysis and was looking for companies with a sound balance sheet and with little debt. The basis for this valuation is the company’s five years of historical financial records, the balance sheet, income statement, and cash flow statement. We calculated first the enterprise value as our first step. We believed this is important because it measures the total value of the company.

## AZN Investment in Enterprise Value

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

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

#### Explanation

The market capitalization of AZN was stable at an average of \$62.8 billion. The total debt represented 15.3 percent, while cash and cash equivalent were 15.5 percent. Therefore, the total debt was offset by cash and cash equivalent, since this valuation factors the balance sheet account. Digging into results, if an investor decided to buy the entire business of AZN, he/she will be paying 100 percent of its equity.

The purchase price of AstraZeneca plc (ADR) to date, January 16, 2013, would be \$59.3 billion at \$46.26 per share. The market price to date was \$59.08 per share.

### The Net Current Asset Value (NCAV) Method

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

#### Explanation

The net current asset value approach tells us that AZN’s stock price was overvalued from 2007 to the trailing twelve months because the market price was greater than the 66 percent ratio. The 66 percent ratio represents only 6 percent of the market price average, therefore the price was overvalued.

What does it mean? It indicates that the stock of AZN traded above the liquidation value of the company.

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

By calculating market capitalization over the net current asset value of the company, we can determine if the stock is trading over or undervalued.

For AZN, the result of MC/NCAV valuation shows that the stock was at an overvalued price because the ratio of MC/NCAV exceeded the 1.2 ratios, therefore the price was expensive.

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

#### Explanation

The table shows that the margin of safety was 81 percent average. There was the margin of safety from 2007 to the trailing twelve months. The enterprise value represents only 17 percent of the intrinsic value, therefore the intrinsic value was over 600 percent of the enterprise 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 is the company’s long-term (five years) sustainable growth estimate; 9 as the constant representing the appropriate P-E ratio for a no-growth company as proposed; and 2 for the average yield of high-grade corporate bonds.

#### Explanation

The earning per share was average 5, while the sustainable growth rate was average 21. The annual growth rate was 51 average. On the other hand, the intrinsic value was \$267 average.

The earnings per share (EPS) and the sustainable growth rate (SGR) factor intrinsic value.

#### Earnings per Share (EPS)

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 you need to know the return on equity (ROE). You also need to know the dividend payout ratio. From there, multiply the company’s ROE by its plow back ratio, which is equal to 1 minus the dividend payout ratio.

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

#### Explanation

Return on Equity (ROE) is an indicator of company’s profitability by measuring how much profit the company generates with the money invested by common stock owners.

Return on Equity shows how many dollars of earnings result from each dollar of equity.  According to Cris, there are two approaches to calculating the sustainable growth rate. These are the relative ratio approach and the average ratio approach. I have summarized the difference between these two approaches in the table given below:

#### Explanation

It shows that the average approach shows a greater result than by applying the relative approach. The margin of safety was greater by 1 percent, so as with the growth and the return on equity.

I want you to understand more clearly the relationship between the price and the intrinsic value in getting the margin of safety.  Please follow me, I will explain to you what does the graph mean.

#### Explanation

The intrinsic value (IV) is the true value of the stock and the EV line is the market price. The stock of AZN is trading below the true value of the stock or in other words, the stock price of AZN is cheap.

Further, the space between the two lines is the margin of safety. The margin of safety is the difference between the enterprise value and the intrinsic value.  So, if we get the difference, the average would be 81 percent. This is the average margin of safety for AZN. The requirement of Benjamin Graham in buying the stock is at least 40-50 percent margin of safety, so this means, the stock of AZN is cheap and is a candidate for buying.

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

This approach will help us 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. This will give us an idea about the status of the stock price.

The P/E*EPS valuation above shows that the stock was trading overvalued in 2007 and 2008. While during 2009 to the trailing twelve months, the stock was trading at an undervalued price. Because the price was lesser than the P/E*EPS ratio. Overall, the stock price is considered undervalued.

### 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).

#### Explanation

The EV/EPS valuation, tells us how much is the price and the earnings in the enterprise value. It shows that the average price (P/E) was 20 percent and the earnings (EPS) was 80 percent average.

However, what important here is it separate the P/E and the EPS from the price. This is the price that the investor is willing to pay.

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

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

The EV/EBITDA tells us that it will take 5 years to cover the costs of buying the entire business. In other words, it will take 5 times the cash earnings of the company to cover the purchase price.

This valuation also indicates the profitability of the company considering the cash earnings of the company. Exclusive of the non-cash expenses against the market price, net of total debt and cash and cash equivalent. The average net margin of AZN is 23 percent.

In conclusion:

The market capitalization of AstraZeneca plc (ADR) was stable at \$62.8 billion average. The total debt represents 15.3 percent. An investor would be buying 100 percent equity in buying the entire business. The purchase price of the entire business to date, January 16, 2013, is \$59.3 billion at \$46.26 per share. While the market price to date was \$59.08 per share.

The net current asset value approach tells us that the stock was overvalued and expensive. Because the ratio was greater than the 1.2 ratios. Therefore the stock of AZN was expensive.

#### The margin of Safety (MOS)

On the other hand, the margin of safety was 81 percent average. There was a margin of safety from 2007 to the trailing twelve months.  The intrinsic value was \$267 average and the earning per share was 5 average. On the other hand, the sustainable growth rate was 21 average. While the annual growth rate was 51 average.

Moreover, in the EV/EPS valuation, it shows that the price (P/E) 20 percent. Moreover, the earnings (EPS) was 80 percent average.

Furthermore, the EV/EBITDA valuation shows that it will take 5 years to cover the cost of buying AZN.  In other words, it will take 5 times the cash earnings to cover the purchase price. The net margins of the company were 23 percent average.

There is a margin of safety at 81 percent in buying the stock of  AZN. Therefore, I recommend a Buy in the stock of AstraZeneca plc (ADR).

Research and Written by Cris

Interested to learn more about the company? Here’s investment guide for a quick view, company research to know more of its background and history; and value investing guide for the financial status.

# BHP Billiton is Struggling with Numbers

January 16th, 2013 Posted by No Comment yet

### Financial Liquidity

• 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

• 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

• 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.

• 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 a 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.

• 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

• 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.

• 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

• 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) 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

• 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

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.

# Microsoft Corporation (MSFT) Behind the Innovation in the Technology

January 16th, 2013 Posted by No Comment yet

Microsoft Corporation (MSFT) is an American multinational technology company with headquarters in Redmond, Washington. It develops, manufactures, licenses supports and sells computer software, consumer electronics, personal computers, and related services. Wikipedia

Have you heard the latest operating system in town? Yes, 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 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 1960s. 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 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?

Mr. 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 in 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)

Mr. 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 in 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 its 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 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 onthe  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 are 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 the 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 the executive officer’s benefits programs to attract, motivate, and retain the key executives who drive our success and industry leadership.

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

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

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

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

What is the nature of the business?

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

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

Who is running the company and their background?

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

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

Who is directing the company

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

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

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

How do they fit in the industry they operate in?

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

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

Who are their suppliers and customers?

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/789019/000119312512316848/d347676d10k.htm

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

What is their workforce like?

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

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

Researched and written by Meriam and Karla
Edited by Cris

# Vale S.A (VALE) Is Financially Healthy

January 9th, 2013 Posted by No Comment yet

Vale S.A. (VALE) is a Brazilian multinational corporation engaged in metals and mining and one of the largest logistics operators in Brazil. And Vale, formerly Companhia Vale do Rio Doce is the largest producer of iron ore and nickel in the world. Wikipedia

## 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.

• 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 the 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.

• 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 the 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

The 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:

• 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 highly 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:

• 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:

• 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:

• 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 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:

• 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.
• The operating expense was 546, 6568, 2567, 6165 and 5808 which was 2, 18, 11, 14 and 10 percent of revenue. And, its highest operating expense was in 2008 and the 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:

• 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 the 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.

• 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.
• While the asset turnover ratio was .39 TTM. It shows that the company is doing well in using its assets to generate sales.
• In addition, 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.
• Moreover, 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 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:

• Net income was 11825, 13218, 5456, 17453 and 22652. TTM was 12522. This is the result of the normal transaction of the business.
• While the depreciation and amortization were 2186, 2807, 2722, 3260 and 4122.
• On the other hand, accounts receivable was 0, -466, 616, -3800 and -821. while
• Its inventory was -343, -467, 530, 503 and -1343.
• Moreover, 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:

• 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 it is 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 from 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.

• Cash flow margin is the result of dividing the 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.
• While the operating cash flow was the result of dividing the 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.
• On the other hand, the 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.
• Further, the 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.
• Furthermore, the 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.

Finally, 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. However, the company managed to recover thereafter.

Written by Rio
Edited by Cris