Posts by nellyt

apple inc appl

AAPL Increased Brand Value by 21% and Still Claim the No. 1 Spot

March 16th, 2015 Posted by Company Research Report No Comment yet

Company Research

AAPL 1

About the Company (Timeline)

  • On April 1, 1976, Apple Inc. (APPL) is the largest information technology company founded by Steve Jobs, Steve Wosniak and Ronald Wayne on April 1, 1976.
  • On January 3, 1977, they were incorporated as Apple Computer, Inc., renamed as Apple Inc. on January 9. 2007, to reflect their new focus toward consumer electronics. Apple makes personal computers, portable digital music players, and a variety of related software, services, peripherals, networking solutions, and third-party digital content and applications.
  • In 2013 Apple bought Wi-Fi Slam (Silicon Valley) in March, then Locationary Inc., Hopstop.com Inc. in July, Algo Trim AB (a Malmo-based developer of prepackaged software) in August, Prime Sense Ltd. in November, and Topsy Labs Inc in December.
  • In February 2014, Apple Inc. buys Burstly Inc., then Novauris Technologies Ltd. in April and Beats Electronics LLC (Beats) in August.

AAPL a multinational American corporation in Cupertino, California has changed the world’s information technology. Apple has a staff of computer designers and a diversified production line to successfully compete with IBM and Microsoft in the enterprise of computing market which started in the late 1970s.

Today, Apple’s market capitalization is more than these two companies, about $640.49B; IBM is 162.65B and MSFT is $391.21B. Despite this, Apple continues to buy more small and medium size companies that would help them in line with their products and services.

How do they make money?

Apple Inc. develops, designs, manufactures, sells iPhone, iPad, Mac, iPod, iTunes, Mac App Store, iCloud, Operating System Software, Application Software and Other Application Software. They deliver digital content and applications through the iTunes Store, App StoreSM, iBookstoreSM, and Mac App Store. Apple sells globally, through online and retail stores. They also conduct business through direct sales force and with third-party cellular network carriers including, retailers and resellers.

Apple is the company to look forward to, they are into bigger phones and phablets. Samsung is getting the smartphone market. Apple is into high market while low costing Chinese smartphone with Original Equipment manufacturer (OEMs) continue to capture the middle and low-end share.

Touch screens had been created and marketed before, but it was Apple that first adopted the user interface and made it a huge market. Lately, they achieved widespread success with their new iPhone 6 an innovation in mobile phones.

Apple increased its brand value by 21 percent to $118.9B still first place. Next in line is Google, the brand is valued at $107.43B increased by 15 percent. The Information came from Interbrand’s Best Global Brands ranking report as the world’s most valuable brand out of the top 100.

Who is running the business and what is their background?

AAPL 2

Mr. Timothy D. Cook is Chief Executive Officer and Director of Apple Inc. in August 24, 2011. He started in March 1998 as Senior Vice President for Worldwide Operations, Sales, Service and Support until 2002. In October 2005, he became the Chief Operating Officer. Before that, he was Executive Vice President of Worldwide Sales and Operations. He also was the Director of NIKE, Inc. and The National Football Foundation & College Hall of Fame, Inc. Mr. Cooks served as Vice President of Corporate Materials at Compaq Computer Corporation (‘Compaq’) from 1997 to 1998 and as Chief Operating Officer of the Reseller Division of Intelligent Electronics. And his 12 years with IBM’s Personal Computer Company in North and Latin America, working as Director of North American Fulfillment.

Mr. Cook was a Fuqua Scholar when he studied with Duke University for his MBA. And he graduated from Auburn University with a Bachelor of science degree in Industrial Engineering.

AAPL 3

Mr. Luca Maestri was Chief Financial Officer, Senior Vice President, and Principal Accounting Officer of Apple. He was appointed and served these positions basing on his more than 25 years of dedicated work experience in finance globally. He had a bachelor’s degree in Economics from Luiss University in Rome and a master’s degree in Science of Management from Boston University. Mr. Maestri has worked and lived in foreign places with excellent achievements internationally.

In March 2013, he joined Apple where he works with senior management for its financial role. Before this, he started his finance and working experience with General Motors for 20 years with important positions in expanding its business. He was also Chief Financial Officer of Nokia Siemens Networks and Xerox.

Apple Value Investing

Balance Sheet

Liquidity

The Current ratio declined in 2014 so as quick ratio. Cash and cash equivalent and short-term investment declined 38 percent while current liabilities increased 45 percent. Apple has short and long-term debt in 2013 and 2014 less than its net income and depreciation & amortization. Debt to equity ratio increased in 2014.

AAPL liquidity was good in 2010 to 2013 except in 2014. They introduced iPad air in its fifth generation with retina display and the launching of iPhone 6 and  6 Plus, iOS 8, Apple pay and Apple watch. They also had various business acquisitions like Beats Music, LLC., and Beats Electronics, LLC.  Latest quarter current and quick ratio increase 1.47 and 1.18.

In 2014 they issued $12.0B of long-term debt with varying maturities through 2044 and launched a commercial paper program, with $6.3B outstanding as of September 27, 2014. Debt to equity ratio increased and reduced solvency ratio.

Efficiency Ratio

Cash conversion cycle (CCC) shows longer time in paying their obligations to creditors than days sales outstanding and days inventory. In 2014 payable period increased 15 percent or more than 85 days for payables to be paid. Day sales outstanding increased by 19 percent or 31 days before it is sold or paid, and days inventory increased by 44 percent or 6 days before inventory is sold.

They have a low receivable turnover. AAPL has a problem in extending credit or collecting debts. Inventory turnover is high showing fast inventory sold and replaced.

Fixed asset turnover declined from 2011 meaning net sales is lower as a percentage of fixed asset investment. Apple was not as efficient in generating sales from their assets as the company asset grew.

Apple has a negative cash conversion cycle with high payable period. They are having problems in paying their creditors and suppliers.

Apple Income Statement

Profitability

In 2013, Apple declined in gross and net margins at the peak of the successful introduction of the fourth generation of iPad and iPad and iPad mini, a new MacBook Pro with Retina display, a new iPod touch, a new iMac, and expanded of iPhone 5 is dismay in expectation. The 11 percent declined in operating income and increased in other income of 148 percent and interest expense resulted to decrease net margin.

Dupont Analysis (Expanded Five Step Method)

Return on equity using the DuPont Analysis is computed by breaking down the following into five measures. First is the pre-interest pretax margin declines down in 2013 and 2014 because of operating income and expenses. Second, asset turnover increases 0.93 times in 2014 more than in recent years. The low turnover resulted in not investing in their asset. Third, the interest burden of long-term debt incurred in 2013 and 2014. Managing efficiently to maintain their tax efficiency as the fourth step. And the fifth step is equity multiplier increases in 2014 to 3.52 to increase in asset and decrease in equity. Thus, multiplying the results of the five steps will get the return on equity.

The bulk of the five parts of return on equity (ROE) comes from either net profit margin before its interest burden and tax efficiency, asset turnover and leverage. The case of AAPL  a return on equity coming from their sales in operations except in 2014. Increased in ROE comes from high leverage or an equity multiplier of 3.52, resulting to a high ROE of 68.4 percent.

Cash Flow Statement

Cash Flow Analysis

Net cash provided by operation has a growth of 102, 36, 6 and 11 percent. In 2013 operation decreases for net income and depreciation & amortization and abrupt increase in other working capital. Net cash used for investing show declined in 2013 and 2014 because of investment in plant, property & equipment, purchases in investments, sales/maturities in investments, and purchases of intangibles. Net cash in financing was provided by in 2010 and 2011 from common stock issued and other financing activities. And it was used for 2012 to 2014 common stock repurchases, the dividend paid and other financing activities despite common stock issued and debt issued. Thus, resulted in a net change in cash trending up in 2013 but declined down in 2014.

AAPL five-year operation shows that net cash was used heavily in investments in 2011 and 2012. Their effort garnered net cash from operations in 2012, 2013 and 2014 but in 2013 and 2014 they need to increase net cash through debt issued for common stocks was no longer enough to increase in dividend payments and common stock repurchase.

Margins

Cash flow margin declines in 2012 because of an abrupt, increase in operating cash flow and net sales. Free cash flow margin peak in 2010, but abruptly decreased in 2011, an increase in free cash flow over operating cash flow. Free cash flow remains sufficient despite growth in 2013 and 2014 of 8 and 12 percent.

AAPL has good margins in cash flow and free cash flow.

Apple Investment Valuation

Totem Method

The Totem method uses the financial calculator to compute the target price.

Apple has a 28 percent growth based on its present book value per share of $1.28 and future value of $19.02. It has a return on equity of 31.7  percent and their 5 years P/E ratio is 15.2. The return on the book in 5 years is $20.56 and the price in 5 years will be $312.51. The present value of the stock is $135.11 and as computed it resulted to after margin of safety (MOS) of $81.06. They have a dividend yield of 1.73 percent, thus the total value of dividend of $12.57. Adding the two values, price after MOS and the total value of dividend resulted in $93.64 as the target price or total value of the enterprise.

The current market price as of November 7, 2014, is $109.01 per share, more than the computed target price or the total value of $93.64. Indeed, an overvalued company and the current market price increase daily because of the coming Christmas season.

Conclusions

The following research on Apple Inc., shows both financial operations, management, and business strategies surpass immediate problems with their cash account. The products and services offered is the number one in the A & B markets categories are expensive. The reason sales growth was 9 and 7 percent in 2013 and 2014 despite the successful launching of their newest products in the market.

Apple is a good company to invest in. The management shows a strong personality to overcome today concerns. The current market price of $109.10 as of 11/7/2014 is valued more than the target price of $93.64. The company would merit a buy, but for now, will hold on until the target price achieves better profit.

Proper Citations:

Apple Inc. http://en.wikipedia.org/wiki/Apple_Inc.

Company background http://google.brand.edgar-online.com/DisplayFiling.aspx?TabIndex=2&FilingID=10264100&companyid=2035&ppu=%252fdefault.aspx%253fsym%253dAAPL

Business Organization http://google.brand.edgar-online.com/displayfilinginfo.aspx?FilingID=10255004-19999-22848&type=sect&TabIndex=2&companyid=2035&ppu=%252fdefault.aspx%253fsym%253dAAPL

Timothy D. Cooks http://www.reuters.com/finance/stocks/officerProfile?symbol=AAPL.O&officerId=2486890

Luca Maestri http://www.reuters.com/finance/stocks/officerProfile?symbol=AAPL.O&officerId=88090

Financials https://www.google.com/finance?q=NASDAQ%3AAAPL&ei=fCxQVIjzOsKwkQXa7YHIDQ

Key ratios http://financials.morningstar.com/ratios/r.html?t=AAPL&region=usa&culture=en-US

Financials http://financials.morningstar.com/income-statement/is.html?t=AAPL&region=usa&culture=en-US

Valuation http://financials.morningstar.com/valuation/price-ratio.html?t=AAPL&region=usa&culture=en-US

Researched and Written by: Nellyt

Alibaba Has Great Margins but Slow Pay Master

October 16th, 2014 Posted by Company Research Report, Uncategorized No Comment yet

 BABA-7.png (299×87)

Company Research

About the Company

Alibaba Group Holding Limited (BABA) is an online and mobile commerce company. They were incorporated on June 28, 1999 through 18 people under the leadership of Jack Ma from Hangzhou, China. Alibaba works in wholesale and retail online marketplaces together with the its related companies. They also offer advertising and marketing services and other services such as electronic payment, cloud-based computing and network services and mobile solutions.

How does the company make money? 

Alibaba’s main source of revenue is the three retail marketplaces; one wholesale and two international. They offer a platform for third parties to provide technology infrastructure and marketing online for cloud computing services and internet infrastructure services. Cloud Computing intends to support its commerce ecosystem through providing distributed computing infrastructure in handling large volume of data and traffic generated by the company’s online marketplaces.

Do you know that Alibaba also provides payment and escrow services? Yes. They have contractual arrangement wherein third party receives and disburses money or documents for any transactions made in Alipay. As an e-commerce company, they have Taobao Markeplace, Tmall and Juhuasuan where people can buy stuffs online. In addition to its three online marketplace, Alibaba also have 1688.com, AliExpress.

Moreover, they also have small and medium enterprise (SME) loan business. The company provides micro loans to vendors on its wholesale and retail marketplaces.

As operators of their “ecosystem” as a platform for third parties, they generate revenues from China and international commerce retail and wholesale, cloud computing and internet infrastructure and others through online marketing services and commissions. Online marketing services includes  P4P marketing fees, Display marketing fees, Taobaoke commissions, Storefront fees, Commissions on transactions, Placement fees and Fees from Memberships and Value-added Services. Alibaba does not stop there and continue expanding their ecosystem to maintain the health and sustainability of its marketplaces. That is why they are the largest online and mobile commerce company in the world in terms of gross merchandise volume in 2013 of 529 in billions of Renminbi (RNB). Also, their three China retail marketplaces, generated a combined GMV of RMB1,833 billion (US$296 billion) from 279 million active buyers and 8.5 million active sellers in the twelve months ended June 30, 2014.

BABA competes with Tencent and Baidu. Tencent and Baidu has market capitalization in USD of 135.50B and 74.34B compared to BABA’s 216.37B.

Who is running the business and what is their background?

BABA 8

First off is Mr. Jack Ma, the Lead Founder and Executive Chairman of Alibaba Group Holding Limited. In 1999, he was the Group Chairman and Chief Executive Officer (CEO) with the overall responsibility for strategy and focus. Later in 2013, he stepped down as CEO to concentrate on the Group’s business strategy and development. He is a board of director of SoftBank Corporation and Huayi Brothers Media Corporation. He is also served as chairman of The Nature Conservancy’s China board of directors. Mr. Ma graduated in Hangzhou Teacher’s Institute with a bachelor’s degree in English.

Next is Mr. Jin Jianhang who serves as the President of Alibaba Group Holding Ltd since August 2014. He is a member of Alibaba’s founding team and served as senior vice president of corporate affairs from September 2009 to July 2014. As a founding member, he had served management roles like heading the marketing and website operations functions for one of their marketplaces. From 2008 to 2009 he was the general manager of China Yahoo! (later Yahoo! Koubei). He was the vice president of human resources and CEO office from 2006 to 2007.  He received a bachelor’s degree in journalism from Fudan University.

BABA 9a

Ms. Maggie Wu is the Chief Financial Officer for Alibaba Group Holding Limited since e May 10, 2013. She is in-charge for the company’s overall financial management like operations finance, reporting, internal control, tax and treasury as well as corporate finance and audit. She first joined Alibaba in July 2007 as chief financial officer of Alibaba.com. In mid 2012, she co-lead the privatization of Alibaba. After that, she served as deputy chief financial officer of Alibaba Group where she is responsible in overseeing key aspects of the company’s finance organization. Prior to Alibaba, she was an audit partner for 15 years at KPMG in Beijing. She is a member of the Association of Chartered Certified Accountants (ACCA) and a member of the Chinese Institute of Certified Public Accountants. Ms. Wu has a bachelor’s degree in accounting from Capital University of Economics and Business.

Value Investing

Balance Sheet

This focus on the asset, liability, and equity ending balances account of the Company BABA.

Alibaba 1

BABA’s current ratio are stable with the exception of 2012 when it peak at 2.37. Their quick ratio also trend up in 2012 at 1.9 but it retracted lower than previous years. Their total current asset growth has increases of 19, 111, 55 and 57 percent. This shows an increased in 2012 current asset, thus this accounts for the increased in its current ratio. Their total current liabilities have growth of 9, 69, 104 and 56 percent. It is noted that current ratio decreases in 2013 because of the sudden increase in their current liabilities. Summing it up, BABA has enough current asset and cash to pay off its current liabilities.

Their solvency ratios have increased in 2012 and have been recovering from a low of .34 in 2013. It drastically increased in 2012 of 431 percent because of the sudden trend up in net income from continuing operations. In 2013 the decrease was due to the increase in their total short and long term debts. In 2014, BABA’s solvency ratio increases 79.4 percent, because net income increased 171 percent despite the increase in total debts of 47 percent.

Debt to equity ratio was relative low for the pass three consecutive years of not more than 17 percent.  Starting in 2013 the company has been increasingly relying on debt of 2075 percent growth and a negative stockholders’ equity of -24 million Renminbi. In 2014 debt to equity ratio increased abruptly to a high of 140 percent for total debt growth of 47 percent.

BABA as seen in their balance sheet current and quick ratios means good liquidity, they can pay off current obligations as it becomes payable. Analysing behind the scene a question comes to mind why the sudden gaps in amounts from 2011 to 2012. The statements depicted a change in business strategy. Is this in preparation for their launching in New York Stock Exchange for their initial public offering or are they massively expanding into buying companies? The fact shows heavy increases in their total debts from 2011 to 2014. This means borrowing as they run out of money to the extent of depleting their stockholders’ equity in 2013 as reflected in their debt to equity ratio. Despite increases in total debts they still are solvent for the mere fact that net income from continuing operations jump up higher that previous years.

Efficiency Ratio

Is BABA efficient in its operations?

Alibaba 2

BABA has declining day sale outstanding. It takes increasing days from 121 to 261days to collect its accounts receivable. Their payable period has a growth rate of -40, 1433, -3.3 and 18 percent from 2010 to 2014. This shows a drastic increase in 2012, telling us that it takes more than three months for BABA to pay its invoices from trade creditors and suppliers compared to its previous years of only 8 days. Their cash conversion cycle has a growth rate of 7, 3, 84, and 9 percent. This is the total number of days it takes for their products and services to turn to cash. As seen in 2013 the increase in days account for the increased in receivable and payable turnover.

Their fixed assets and assets turnover has been increasing year after years except for a slight dip in 2012. It shows that they have been more effective in using their investment in fixed assets to generate revenues so as with their assets. This measures  BABA’s ability to generate net sales from fixed-asset investments, specifically property, plant and equipment (PP&E). This accounts for the increase in their sales revenue, for lower profit margins tends to have high asset turnover due mainly to cutthroat and competitive pricing.

Income Statement

Alibaba 3

Gross margin is 83.2, 80.4, 67.3, 71.8 and 74.5 with TTM of 73.5 from 2010 to 2014. This represents the percent of total sales revenue that the company retains after incurring the direct costs sold by BABA. Growth ratio trend of -3.5, -16, 6.7, and 3.7 percent.  And net margin is 26.44, 26.69, 21.11, 24.35, and 43.95 with TTM of 53.98. It is growing at 0.95, -21, 15, and 80 with TTM of 54 percent.

BABA gross margin increases only 3.7 percent in 2013, compared to 2012 of 6.7 percent. The higher the percentage, the more the company retains on each dollar of sales to service its other costs and obligations. Their net margin shot up from 2011 decrease to 80 percent growth in 2013.

Dupont Analysis

In Totem we are using the expanded five-step model of DuPont analysis. This provides us with insights as to what is driving a company’s return on equity.

The extended five-step DuPont Model breaks return on equity down into five components: pre-interest pretax profit margin, asset turnover, interest burden, tax efficiency and leverage ratio. Their pre-interest pretax margin keeps going up except for 2012.  The decline was the effect of the increased in earnings before interest and taxes (EBIT) of 176 and sales revenue of 212 percent. Succeeding years increase because of lesser growth in sales revenue compared to growth in EBIT. Their asset turnover increases with a dent in 2011 of 0.21. This means they are using their assets to generate sales revenue. The decreased account for the sudden increased in assets and sales revenue growth. Its interest burden started in 2012, showing their borrowings through long term debts with interest expenses to be paid. Their tax efficiency depicted within the level of 83 to 86 with a declined in 2011 of 76 percent. This means taxes went down slightly as compared to 2011. Its equity multiplier has been changing year after year. This depicted an increased in their financial leverage.

BABA’s return on equity breaks down the net profit margin into its pre-interest pretax profit margin. This is to assess the impact of their interest expense associated with increased leverage and its tax burden. In this capacity the increased of EBIT account for their increased in total operating expenses especially its selling, general and administrative (SGA) due to their expansion in buying companies like Shenzhen One-Touch, investments in technology to improve their ecosystem and privatization of Alibaba.com. In 2014 SGA expenses has an equity-settled donation expense of RMB1,269 million or US$205 million relating to the grant of options to purchase 50,000,000 of our ordinary shares to a non-profit organization designated by Jack Ma and Joe Tsai.They have lower net profit margin as compared to asset turnover except in 2011 and this cause the increase of return on equity (ROE) in 2014. Aside from this, increase in equity multiplier also account for high ROE. So, BABA is highly leveraged and it would be risky for default.

Cash Flow Statement

This captures both the current operating results and the accompanying changes in the balance sheet.

Net cash provided by operating activities had been consistently increasing. BABA adjusted net income and this represents net income (loss) before share-based compensation expense, amortization, impairment of goodwill, intangible assets and investments, gain (loss) on deemed disposals/disposals/revaluation of investments, and one-time expense items consisting of the Yahoo TIPLA amendment payment and an equity-settled donation expense.

Their net cash used for investing activities increased in prior years with abruptly increase much more in 2014 but in 2013 it declined down 545 million RMB. BABA had used their cash on investments in PPE, purchases of investment, and purchases of intangibles. The decreased was from cash provided from properties, plant and equipment reduction, net of acquisitions and other investing charges.

And net cash provided by financing uplifted years 2010, 2012 and 2014 from short term borrowing, long term debt issued, and in 2013 issuance of common and preferred stocks. They used cash for financing activities in their long term debt repayment, redemption of preferred stocks in 2014, treasury stocks repurchase, cash dividend payments in 2013 and 2014 and other financing activities. Thus, this resulted a declined in 2011 and 2013.

BABA is globally inclined in sales revenues and this effect of exchange rate from Chinese Yuan Renminbi (CNY) in millions to US Dollars and other currencies. Their Alibaba.com, AliExpress and AliPay are receiving payments in different currencies so, this accounts for the changes. Net change in cash had decrease in 2010 of -112, but it increases back until a sudden declined in 2014 of -80 percent.

BABA adjusted EBITDA, adjusted net income and free cash flow, each a non-GAAP financial measure, in evaluating their operating results and for financial and operational decision-making purposes. Therefore, their operation cash flow from nothing in 2010 has improved 325 percent in 2011. This drastically change their operations, likes the introduction of Logistics Warehouse and Shipping and Logistics Management Services on AliExpress, unveils Mobile Cloud Operating System, agreement with Alibaba Group, Yahoo!, and SoftBank  on Alipay and 38 new leading Chinese B2C Sites in Taobao Mall. And in 2012 the talks of privatization of Alibaba, repurchase and restructure of Yahoo!, and launches Yu Le Bao Platform and Tmall global so as US based investments as among what has been happening to BABA. Their cash had been finance by short term borrowings and long term debts so as issuance of common and preferred stocks for them to expand their operations, purchases of investments, intangibles and properties, plant and equipment. To the extent the decrease in 2013 total stockholders’ equity was primarily due to the repurchase of their ordinary shares from Yahoo in September 2012 and the privatization of Alibaba.com partially offset by the issuance of ordinary shares to finance the repurchase.

alibaba 5

Cash flow margin has reached the peak at 69 and dip in 2013. Net cash flow from operations has increased drastically in 2012 of 325 compares to net sales growth of only 161 percent. And declined in 2013 is just the opposite meaning more increased in net sales and lesser cash flow from operation. This is how efficient BABA converts its sales revenue to cash for expenses and purchases of assets and investments.

Free cash flow margin high at 92, decreased in 2012 and subsequent steady at 83 and 82. The decrease in 2012 account for the increase in net cash provided by operating activities less the capital expenditure of purchases of property and equipment, excluding acquisition of land use rights for, and construction of, their office campuses in China and intangible assets, adjusted for changes in loan receivables.

BABA’s cash flow margin has higher percentage or it is more than 50 percent. This means they have more cash available from the sales, so as its free cash flow ratios. The more free cash flows embedded in the operating cash flows the better it is. It is a very good indicator of financial health of a company.

Totem’s Method

Totem  method adopt the investment style which is applicable to the company. One valuation style is that seeks out undervalued companies whose stock price are temporary down, but whose fundamentals are sound in the long run. The financial calculator is our main instrument in computing the equity selection. This is to know whether BABA is under or overvalued.

BABA has a growth rate of 22 percent as computed base from present book value of 1.14 and future value of -3.78 from 2010 to 2014 and TTM. This resulted to a book value in 5 years of $10.26. Its average return on equity is 37.33 percent, the return on book in 5 years is $3.83 and the price in 5 years will be $172.43. Using the industry P/E ratio of 45 than its current P/E ratio of 53.2 which is more conservative will get the present value of the stock of $74.55 and after margin of safety or total value of appreciation of $44.73. Their current market price as of October 13, 2014 is 85.12.

Since their official initial public offering in New York Stock Exchange, BABA has a stock price or current market price that reached a high of $93.89 in September 19, 2014. But stock price had decreased down in September 23, 25 and October 1 of $87.17, 88.92, and 86.10. And today October 13, 2014 it is $85.12 which is 47.4 percent more than its total value of appreciation. This shows that stock price is overvalued.

Relative Valuation

This is a comparative study on their book value, earnings, price to earnings and returns to help in the valuation of company BABA. These are methods for comparison, in valuing of a company. One is the book value per share with abrupt increase in 2012, downslide to -0.01 in 2013 and reverted back in 2014. This is the effect of their over expansion and buying of companies to the extent of having no equity and increased long term debts to finance its investments. Its price to earnings (P/E) ratio current is 53.2 compared to industry P/E of 45 which Totem used to have a conservative computation for BABA’s TTM P/E ratio is only 39.24. This is an important equity valuation multiple helping as defined the market price per share over its annual earnings per share. Their earnings per share are 0.29, 0.34, 1.69, 3.89 and 9.9 with TTM of 0.34 from 2010 to 2014. It is the monetary value of earnings per each outstanding share of BABA’s common stock. This increased for their net income from continuing operations increased abruptly especially from 2012 to 2014 due to change in their business strategy uplifting their online marketing services and others. So, as their return on equity declined in 2012 and abruptly increased in 2013 and 2014.

BABA’s book value was $3.09 which increased after a week from its initial public offering in NYSE to $3.78 per share. Earnings per share in 2014 show a $9.90 or 10 per share from only 0.29 in 2010. This is a very massive increase per share, due to the successful launching which was unmatched and exceed their expectations. Their return on equity (ROE) increased shows how well BABA uses its investment funds to generate earnings growth.

Conclusion

Totem’s basis of valuation is the company’s five years financial records wherein BABA’s has limited results of their financial performance trailing with progress. The fact that the company is overvalued at $85.12 per share as of October 13, 2014 and total value as compute is only $44.73. This would merit a buy when the share goes undervalued or risk it since to date market price still went down to $84.95.

As all knows, BABA is one of the best-positioned companies within the global internet services space, both inside China and around the globe. Their shares have climbed by 25% since its initial public offering last month. BABA’s growth is higher than that of the rest of the industry and it seems impressive and sustainable.

CITATIONS

https://www.google.com/finance?q=NYSE%3ABABA&ei=WXEdVIihAoatkgXYvoHYBQ

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

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

http://google.brand.edgar-online.com/displayfilinginfo.aspx?FilingID=10205127-920-1972851&type=sect&TabIndex=2&companyid=934140&ppu=%252fdefault.aspx%253fcompanyid%253d934140

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

Researched and Written by: Nellyt

We Think Facebook is Worth $94

September 15th, 2014 Posted by Company Research Report No Comment yet

Facebook, Inc (FB) is an American online social media and social networking service company. It is based in Menlo Park, California. It was founded by Mark Zuckerberg, along with fellow Harvard College students and roommates Eduardo SaverinAndrew McCollumDustin Moskovitz, and Chris Hughes

Company Research  

Facebook Inc.

Nature of Business  

Mark Zuckerberg founded Facebook Inc., while he was studying psychology at Harvard University. He was a keen computer programmer who had developed a number of social-networking websites such as “Coursematch” and “Facemash.”

In February 2004 Mr. Zuckerberg launched “The Facebook” or Facebook, Inc., it engaged in building products to create a utility for users, developers, and advertisers. People use Facebook to stay connected with their friends and family, to discover what is going on in the world around them, and to share and express what matters to them to the people they care about.

Developers use the Facebook Platform to build applications and Websites that integrate with Facebook to reach its global network of users and to build personalized and social products.   The site’s features have continued to develop during 2007. Users can now give gifts to friends, post free classified advertisements and even develop their own applications – graffiti and Scrabble are particularly popular. Currently, the company continues to grow and give people the power to share and make the world more open and connected.

How do they make money? 

Facebook Inc., generate substantially all of their revenue from advertising and from fees associated with their payments infrastructure that enables users to purchase virtual and digital goods from its company’s developers with applications on the Facebook website.

Advertising revenue is generated by displaying ad products on Facebook properties, including company’s mobile applications and third-party affiliated websites or mobile applications. Marketers pay for ad products either directly or through their relationships with advertising agencies, based on the number of clicks made by users, the number of actions taken by users, or the number of impressions delivered.

Facebook, recognize revenue from the delivery of click-based ads in the period in which a user clicks on the content and action-based ads in the period in which a user takes the action the marketer contracted. They recognize revenue from the display of impression-based ads in the contracted period in which the impressions are delivered. Impressions are considered delivered when an ad is displayed to users.

FB also generates its income from payment and other fees from its users when they purchase virtual and digital goods from its developers with an application on the company’s websites.  Users can transact and make payments on the Facebook website by using debit and credit cards, PayPal, mobile phone payments, gift cards or other methods. The company will then receive a fee from developers when users make purchases in these applications using its Payments infrastructure.

FB recognizes revenue, net of amounts remitted to their developers. They have mandated the use of their payments infrastructure for game applications on Facebook, and fees related to payments are generated almost exclusively from games. Facebook, Inc other fee revenue, which has not been significant in recent periods, consists primarily of user-paid services and its ad serving and measurement products.

Who is running the business and what is their background?

Facebook Inc.

Mr. Mark Zuckerberg is the Founder of Facebook, Inc., and has been its Chief Executive Officer since July 2004. He is responsible for setting the overall direction and product strategy of Facebook. He leads the design of Facebook’s service and development of its core technology and infrastructure. Mr. Zuckerberg has been the Chairman and Director of Facebook Inc., since January 2012 and July 2004 respectively. He serves as a Member of the Investment Committee at FB Fund, L.P. Mr. Zuckerberg attended Harvard University, where he studied computer science.

Facebook Inc.

Mr. David M. Wernher serves as Chief Financial Officer, Vice President – Corporate Finance and Business Planning of Facebook Inc, effective June 1, 2014. Mr. Wehner has served as Facebook’s Vice President, Corporate Finance, and Business Planning since November 2012. From August 2010 through November 2012, He also serves as Chief Financial Officer of Zynga Inc. From February 2001 to July 2010, Mr. Wehner was employed at Allen & Company, an investment bank focused on media and technology where he served as a Managing Director from November 2006 to July 2010, and a director from December 2005 to November 2006.  He also served as an Analyst at JP Morgan Chase & Co, Research Division.

In his career, he worked as a Consultant with the global strategy consulting firm Monitor Company, where he advised clients in a range of industries both in the United States and Asia. Mr. Wehner joined the New York investment banking firm Allen & Company, LLC in 2001, where his responsibilities include principal investing, corporate finance and mergers & acquisitions advisory.  Mr. Wehner holds a B.S. in Chemistry from Georgetown University, and an M.S. in Applied Physics from Stanford University, where he was a National Science Foundation fellow.  

Do you trust these people and are they competent? 

Facebook Inc., hires and retain people who can contribute to developing its strategy, quickly innovate and build new products. CEO and CFO of the company are highly talented and able to show its competency, as well as demonstrated strong leadership. Therefore, my confidence and trust are absolutely positive as they both shows good management capabilities.

Value Investing

If you want to invest in a company, you need to know not only the nature of business, background and the people behind the success of the firm but most of all to know the financial standing of the company. And this could be found on the balance sheet, income statement and cash flow statement for the given period.

Balance Sheet

Financial Liquidity

Shown in the table below would determine how liquid the company Facebook is through calculations of data from 2010 to 2013.

Facebook inc.

Current ratio average in the past four years from 2010 to 2013 was 8.37, with the latest quarter of 12.81 times. This is the very high current ratio, while the quick ratio average was also 8.06 and the latest quarter was 12.48, which means the company has very high current resources. Looking at its details, cash is the number one contributor of this very high current ratio and quick ratio, which is 60, 62, 64 and 64 percent of total assets.

Their debt to equity ratio is minimal at an average of 0.13 while the solvency ratio is 86 percent average.

By looking at the above data, Facebook is financially healthy and stable. They are very liquid with high current resources. Their debt to equity is only 13 percent and the solvency ratio of 86 percent so above the general rule of thumb which is 20 percent.

Efficiency

The table below is the efficiency ratios of Facebook Inc., wherein it is used to analyze how well a company uses its assets and liabilities internally. Efficiency ratios can calculate the turnover of receivables, the repayment of liabilities, the quantity and usage of equity and the general use of inventory and machinery.

Facebook Inc.

Accounts receivable turnover can be used to determine whether the company is having trouble collecting on sales where they provide customers on credit. Facebook Inc., shows an increasing trend from 2010 to 2013 with TTM of 10.19 times which is a good sign. Converting this into Days sales outstanding which are computed as 365 days over accounts receivable turnover. The result is amazing with the declining trend from 69 days to 42 days and TTM of 36 days.

Days payable or payables period shows likewise a declining trend with TTM of 19 days. This means Facebook pays their payables in the short term within 22 to 15 days.

Fixed asset turnover measures the company’s effectiveness in generating sales from its investments in plant, property, and equipment. It has an up and down trend with a TTM of 3.39 times or 108 days.

Asset turnover measures the ability of a company to use its assets to efficiently generate sales. Facebook asset turnover has been slightly up in 2011 and down in 2012 and 2013 with a TTM of 0.55 times or 664 days. This means they don’t usually generate sales from their total asset.

Their cash conversion cycle (CCC) measures how long they will be deprived of cash if it increases its investment in resources in order to expand customer sales. This show that Facebook has a declining cash conversion cycle from 2010 to 2013 with a TTM of 16.8 days.

Efficiency ratios are important because an improvement in the ratios usually translates to improved profitability. Knowing its cash conversion cycle so they can utilize well their cash from sales more efficiently in more investments as well as its asset base – efficiently to generate sales and that is a very good thing.

Income Statement

Revenue is the amount of money that is brought into a company by its business activity. It is the “top line” or “gross income” figure from which costs are subtracted to determine net income.

The table below shows the detailed income of Facebook from 2010 to 2013 and the latest five quarters:

Facebook Inc.

Facebook Inc.

As observed in the above table the trend of revenue and gross income per annual data was yearly increasing which means it is getting higher and higher year after year. While the operation and net income of Facebook have a similar trend which declined in 2012 by 69 and 95 percent respectively.

Meanwhile, quarterly data shows that revenue, gross profit, and operating income were consistently going up in the first three-quarters, but slightly down in quarter 2014-03 however, it recovered in the quarter ending June 2014. Net income shows getting higher and higher every quarter.

Margin

It refers to the percentage results of gross income, operating income and net income over total revenue.

Facebook Inc.

Annual data showed that Facebook Inc., average gross margin was 77 percent, operating margin 37 percent and net margin was 19 percent. However, quarterly data shows the net margin of the company was getting higher and higher every quarter from 2013-06 to 2014-06 with the following percentage:  18, 21, 20, 26 and 27.  This means a good profitability for the company recovering after the 2012 crisis.

Dupont Analysis

It is an expression which breaks return on equity (ROE) into three parts. And this tells us how much profit the company generated for each dollar of total assets. Return on equity using the DuPont Method as computed by a Net profit margin x Asset turnover x Equity multiplier.

Facebook Inc., has the following data in TTM: Net profit margin = 24; Asset turnover = 0.55 and Equity multiplier = 1.13. Therefore, ROE equals 15 percent; which Facebook Inc., could return such profit for every dollar of equity. This is the portion of the return on equity earned on the debt at work in the business.

Cash Flow Statement

FB cash flow data from 2010 to 2013 are shown per the table below:

Facebook Inc.

Operating activities are transactions which include the cash inflows associated with sales interest and dividend revenues and cash outflows associated with operating expenses, interest and taxes. FB’s operating cash flow from 2010 to 2013 was positive and increasing yearly. It shows that the company is doing good and continue progressing. It has an average of $2,578M.

The company’s investing cash flow shows a negative balance from 2010 to 2013, with an average of $-3,418M. It indicates that cash outflows are greater than inflows on this category. The company was expanding through the purchase of investments yearly.

And financing cash flow, the balance were positive except in 2012 which is -667. Through looking back at its details the company retired the debt of $1,891M in 2012, so cash outflow exceeds cash inflow.

Free Cash flow

It is the cash left over after deducting capital expenditures from the operating cash flow.

The table below shows the free cash flow balance of Facebook from 2010 to 2013.

FB 9

FB’s free cash flow shows a positive balance, with an average of 1,559 and trailing twelve months of $3,208 from 2010 to 2013 operation.  It shows that the company is capable of expanding its business wider.

Valuation

In this investment valuation, the company’s historical financial records such as the balance sheet, income statement and cash flow statement are our basis aside from the key ratios. It is Totem’s philosophy to buy wisely when prices are down and to sell when prices rise a great deal. And doing this valuation is the heart of any investment decision.

Totem Investment uses this method. The financial calculator is our main instrument in computing the equity selection. The result data as seen below:

Growth    47%

Yield        0 %

Value of Appreciation                $   94.29

Value of Dividend                                 0

Total Value                                 $  94.29

Price investor is willing to pay    $363.52

Facebook Inc., has a company growth of 47% as a computed base from their book value. They had an average P/E ratio of 50 and a dividend yield of 0%. In computing the value appreciation it is the average ROE with the return of book value, price, and the average P/E all in 5 years. Therefore, the result of the present value after the margin of safety of 40% equals $94.29. And the value dividend is $0 resulted from dividend divided by interest rate of 15%, which is constant.So, the total of the two value appreciation and value dividend equals $94.29 as their total value. Comparing the total value of $94.29 with the current price per share of $77.43 dated September 10, 2014. This means the company stock is trading at an undervalued price of 17.9%. But the price investor is willing to pay amounting $363.52 as computed by multiplying historical P/E with expected earnings for five years.

Aside from these let us compare market values of the stock with the fundamentals, their earnings, book value, growth multiples and other metrics as shown in the table below:

FB 10

The book value per share showed an increasing trend of 129, 396, and 507 percent from 2009 to 2013 with TTM of $7.06 and an average of $3.58 per share. This is used to calculate the per share value of a company based on its equity available to common shareholders and just one of the methods for comparison in valuing of a company.

Its historical price to earnings has trended up and down ratio of 1666.7and 92.6 percent from 2012 to 2013 with TTM of 84 and an average of 879. P/E ratio is an equity valuation multiple. It is defined as market price per share divided by annual earnings per share.

Earnings per share have a growth ratio of – 0.98 and 0.59 with an average of 0.35 and TTM of 0.92 per share. It is the monetary value of earnings per each outstanding share of a company’s common stock.

Their return on equity (ROE) showed an up and down trend of -0.05, -0.98, and 2638 percent with an average of $14.75 and TTM of 15.44. ROE measures the rate of return on the ownership interest (shareholders’ equity) of the common stock owners. It is a gauge of a firm’s efficiency at generating profits from every unit of shareholders’ equity (also known as net assets or assets minus liabilities). This shows how well a company uses investment funds to generate earnings growth. ROE’s between 15% and 20% are generally considered good.

Conclusion

Totem Investment is looking for companies with a strong balance sheet or those with little debt, above average profit margin and ample of cash flow. So, as undervalued whose stock price is temporarily down, but whose fundamentals are sound in the long run.Facebook Inc., passed these criteria. Current market price is down at $77.48 per share dated September 12, 2014. So, compared to its total value of $94.29,  the company is undervalued and still merits a buy.

CITATIONS:

https://www.google.com/finance?q=FB&ei=OMv2U7DyKO_SigL7w4HACw  

http://www.reuters.com/finance/stocks/officerProfile?symbol=FB.O&officerId=2502019  

http://www.sec.gov/Archives/edgar/data/1326801/000132680114000032/fb-6302014x10q.htm   

Researched and Written by Nelly, Rio, and Meriam

Edited by Cris

Holly Frontier Corporation HFC

Holly Frontier an Independent Petroleum Refiners in The US

March 6th, 2014 Posted by Company Research Report No Comment yet

hfc 0

Holly Frontier Corporation (HollyFrontier), formerly Holly Corporation, is a petroleum refiner, which produces light products, such as gasoline, diesel fuel, jet fuel, specialty lubricant products, and specialty and modified asphalt.  Operates in two segments: Refining and Holly Energy Partners, L.P. The Refining segment includes the operations of its El Dorado, Tulsa, Navajo, Cheyenne and Woods Cross Refineries and NK Asphalt. The HEP segment involves all of the operations of HEP.

As of December 31, 2011, it operated five refineries having a combined crude oil processing capacity of 443,000 barrels per day that serve markets throughout the Mid-Continent, Southwest and Rocky Mountain regions of the United States. The Company merged with Frontier Oil Corporation (Frontier), on July 1, 2011. On November 9, 2011, HEP acquired from the Company certain tankage, loading rack and crude receiving assets located at its El Dorado and Cheyenne Refineries. The Company owns a 39% interest in Holly Energy Partners, L.P. (NYSE: HEP), which includes our 2% general partner interest.

How does the company make money?

HEP owns and operates logistic assets consisting of petroleum product and crude oil pipelines and terminal, tankage and loading rack facilities. Revenues are generated by charging tariffs for transporting petroleum products and crude oil through its pipelines and by charging fees for terminal petroleum products and other hydrocarbons, and storing and providing other services at its storage tanks and terminals.

Who is running the business?

holly frontier corporation

Mr. Michael C. Jennings, also known as Mike, has been the Chief Executive Officer and President of HollyFrontier Corporation since July 2011, also serves as Chief Executive Officer and President at HEP UNEV Pipeline LLC. Mr. Jennings has been the Chairman of the Board at HollyFrontier Corporation since January 1, 2013, He has 18 years of experience in finance and acquisitions with Cameron International Corporation (formerly, Cooper Cameron Corp.), Unimin Corp., British Petroleum and U.S. Trust Company of New York.

Mr. Jennings served as the Executive Vice President of Finance & Administration and Chief Financial Officer of Frontier Oil Corp. from June 14, 2005 to January 1, 2009. He served as Vice President and Treasurer of Cameron International Corporation from May 2000 to June 2005. From December 1998 to May 2000, he served as Vice President of Finance and Corporate Development of Unimin Corporation. Mr. Jennings holds a Bachelor of Arts degree in Economics and Government from Dartmouth College and a Master of Business Administration degree in Finance and Accounting from the University of Chicago.

holly frontier corporation

Mr. Douglas S. Aron is Chief Financial Officer, Executive Vice President of HollyFrontier Corporation. He served as Executive Vice President and Chief Financial Officer of HLS since November 2012, a position he previously held from July 2011 through December 2011. Prior to joining the Company, he was Executive Vice President and Chief Financial Officer of Frontier from 2009 until 2011. Additionally, he served as Vice President-Corporate Finance of Frontier from 2005 to 2009 and Director-Investor Relations from 2001 to 2005. He was responsible for the treasury department, investor relations and capital markets for Frontier Oil Corp. He served as a Commercial Lending Officer of Amegy Bank (formerly Southwest Bank of Texas) from March 1998 to March 2001. He served as Senior Vice President of Holly Logistics Services, L.L.C. Mr. Aron earned an MBA from the Jesse H. Jones Graduate School of Business at Rice University and a B.J. from the University of Texas at Austin.

Financial health

Let’s look into the liquidity and solvency ratios as our measurement of financial stability of Holly Frontier Corporation.

The current ratio of Holly Frontier Corporation showed an average of 1.73times. And it has been trending up since 2010 to 2012 and dip down in 2013 due to decrease in total current asset. This indicates their market liquidity or their ability to meet creditor’s demands is within the limits of generally accepted range of 1.5 to 3.0.

Holly Frontier’s quick ratio has an average 1.21 times and has been going up since 2008 but in 2013 it decreased in total cash. This means that a company has $1.21 of liquid assets available to cover each $1 of current liabilities.The company has  solvency  average of 68 percent and has been increasing after it decline to 17 percent in 2009.

Income Statement

 

Holly Frontier Corporation has an average of 11 percent. This number represents the proportion of each dollar of revenue that the company retains as gross profit. And the higher the percentage, the more the company retains on each dollar of revenue to service its other costs and obligations. As shown in above data it had increase from 2009 to 2011 and declined in 2012 and 2013 because of the decrease in gross profit.

They have a net margin an average 4 percent, this shows how much of each dollar earned by the company is translated into profits. As shown on table above HFC has increase in 2011 and then slightly declined in 2012 and 2013 due to decrease in net income.

Holly Frontier Corporation has an average 53 percent cash flow margin and TTM of 57 percent. This means the higher the percentage, the more cash available from the sales. Meanwhile its free cash flow ratio depicted an average of 5 percent and TTM of 68 percent. The more free cash flows are embedded in the operating cash flows of a company, the better it is. This is a very good indicator of the financial health of a company.

Investment Valuation

Valuation is at the heart of any investment decision, whether that decision is a buy, sell or hold. Totem’s Pricing Model adopts the investment styles applicable to the company. One valuation style is that,seeks out undervalued companies whose stock price are temporarily down but whose fundamentals are sound in the long run. The philosophy was to buy wisely when prices fall and to sell wisely when the price rise a great deal

Relative Valuation Methods

This is to compare market values of the stock with the fundamentals, their earnings, book value, growth multiples, and other metrics.

holly frontier corporation

The book value per share showed an increasing trend with TTM of $31.02 and an average of $19.09 per share. Its price to earnings increased 1,010 percent in 2009 then declined for the last two years and increase again 5.6 and 13.6 in 2012 and 2013 with TTM of  12.5 and an average of 21.36 per share. Earnings per share drop down $0.20 and 0.97 in 2009 and 2010, abruptly increased in 2011 and 2012 then declined to $3.64 in 2013 with an average of $3.72 per share. Holly Frontier Corporation return on equity drastically showed an up and then down trend with an average of $19.40. Generally, these indicate a good gauge of their profitability and was able to generate favorable returns on their earnings.

The summary data as seen in the table below:

Growth — 25%

Yield —  1.8 %

Value of Appreciation — $ 302.50

Value Dividend   —  5.47

Total Value  — 307.97

Price Investor is Willing to Pay — $ 1, 166.15

As computed Holly Frontier Corporation has an equity growth of 25 percent and dividend yield of 1.8 percent. To get the total value or the worth of the company using the formula value dividend plus the value appreciation. Wherein value appreciation of $302.50 is equivalent to Warren Buffet’s margin of safety of 40 percent of the calculated present value. And the value dividend of $5.47 is dividend divided by interest rate of 15% (which is constant). So, the total of the two resulted in $307.97 as their total value. Compares the total value of $307.97 with the current price per share of $45.57dated February 28, 2014. This indicates that the stock is trading at an undervalued price meaning a candidate for a buy. And price investor is willing to pay as computed by multiplying historical P/E with expected earnings in five years amounted to $1,166.15 per share.

Conclusion

 Holly Frontier’s current price was $45.57 over a total value of $307.95.   Plus, value investing is buying with a sufficient margin of safety of 50 percent as computed which is above 40%. Overall, with data as computed Holly Frontier Corporation is financially healthy and merits a buy.

BHP Billiton plc

BHP Billiton is Struggling with Numbers

January 16th, 2013 Posted by Company Research Report 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.

Great Northern Iron Ore Properties

Great Northern Iron Ore Properties made Business Sustainable

December 21st, 2012 Posted by Company Research Report No Comment yet

Great Northern Iron Ore Balance Sheet

Financial Liquidity

Liquidity is a firm’s ability to pay its short-term debt obligations. Its financial ratios, this will help us determine how liquid the firm is or how successful it will be in meeting its short-term obligations.

gni bs1

The table relays the following:

  • The current ratio is the result of dividing current assets by current liabilities. This showed a downward trend in 2008 and 2011, with a growth ratio of -17.3 percent, 7.5, consistent at 2.0 times but in 2011 it decrease again to -22 percent and has an average of 1.93 times.
  • The quick ratio, on the other hand, is the result of dividing quick asset (current asset minus inventory) over current liabilities. GNI don’t hold any inventory on iron ore.
  • And their net working capital ratio, the result of working capital over the total asset. This indicated an up and down trend with a growth ratio of 7.1 percent, -20, 45.8, -31.4 and an average of 0.28.

Great Northern Iron Ore has the same good current and quick ratios results because they don’t hold any inventory but only a  trust leases land to major mining corporations. This indicated that they had sufficient funds or current asset to pay off their current debts and liabilities meaning they are financially liquid. Looking into their net working capital, they depicted sufficient funds needed to run the business thus, they have operational liquidity. And with their total asset, it resulted to a favorable and average ratio of 28 percent for the continuity of their business.

Efficiency

The concept of efficiency ratios is to analyze how well a company uses its assets and liabilities internally. These ratios are meaningful when compared to peers in the same industry and can identify a business that is better managed relative to the others. They are important because any improvement in ratios usually translate to improved profitability.

Wondering if the result is in favor of Great Northern Iron Ore Properties? Nelly wrapped up things for us.

gni3

  • The receivable turnover ratio measures the number of times average receivables are collected during the period. This was computed as net sales over average receivable and resulted in an up and down trend with a growth ratio of -10 percent, -35, 54, -8 and an average of 3.93 times.
  • The payable turnover ratio is a short-term liquidity measure used to quantify the rate at which a company pays off its suppliers. This is calculated by taking the total purchases made from suppliers and dividing it by the average accounts payable amount during the same period. They don’t maintain payables and showed only payable turnover ratio in 2007 and 2008 which was decreasing trend of -3.89 percent in growth.
  • 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 an increasing trend but a slight dipped happened in 2009 with a growth ratio of 41 percent, -16.7, 40, and 92.9, with an average of 7.15.
  • Asset turnover ratio was a number of sales generated for every dollar’s worth of assets. Wherein this showed an up and down trend with a growth ratio of 16.8 percent, -27, 50.6, 14.8 and average of 1.10 for GNI.

The company as a trust leases properties to major mining corporation does not hold much receivable nor payables and they do not have any inventories to maintain in their operations. Therefore they have a low receivable turnover which averages 4 times a year. And it has a payable turnover that averages 6 times a year which is not bad for this kind of firm. They also had a higher and increasing trend fixed-asset turnover ratio which dips 16.7 percent in 2009 due to US financial crisis that had greatly affected mining companies.

GNI had been more effective in using the investment in fixed assets to generate revenues. Same as to the result of their asset turnover which was up and down too in 2009. The higher the number, the better for this will indicates pricing strategy.

Cash Conversion Period

Cash conversion cycle or CCC measures how long a firm will be deprived of cash if it increases its investment in resources in order to expand business revenues. Thus, it is a measure of the liquidity risk entailed by growth.

gni4

  • Receivable conversion period measures the number of days it takes a company to collect its credit accounts from its customers. GNI showed at least two to three months average except for 2009 wherein it reach more than 4 months to collect.
  • While payable conversion period measures how the company pays its suppliers in relation to the sales volume being transacted.  The company only have credit in 2007 to 2009 which averages one to two months before it was paid
  • Cash conversion period or cycle refers to the time span between a firm’s disbursing and collecting cash. GNI showed an average of two months.

Their receivable conversion period has an average of 96 number of days implies the company should re-assess its credit policies in order to ensure the timely collection of impart credit that is not earning interest for the firm, especially trust leases, are bounded by lease contract. While payable conversion, they have minimal to nil business transaction done in credit only in 2007 to 2009 which averages one to two months before it was paid. And total conversion period takes more than two months to turn credit to cash needed in the business.

Leverage

gni2

  • Debt ratio indicates what proportion of debt a company has relative to its assets. This showed an up and down trend and it has an average of 41.2 percent.
  • The debt-to-equity ratio is a measure of the relationship between the capital contributed by creditors and the capital contributed by shareholders. This showed an upward trend with an abrupt dip of 33.5 percent in 2009 and has an average of 73.3.
  • Solvency ratio determines how well the GNI is able to meet its debts as well as obligations, both long-term and short-term. This attributed that in 2007 and 2008, it has a long-term debt wherein it was 1400 and 950 percent more than its obligations.

Great Northern Iron Ore Properties 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 except in 2011. Debt to equity indicated that it has high ratios meaning they were taking advantage of the increased profits that financial leverage may bring. And solvency ratio depicted how solvent and financially sound the company is.

Major Control of the Company Based on Total Assets

gni5

  • 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 31.8 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. The banks and bondholders have claimed on their total assets the first two years but three years after they don’t have any long-term debt.
  • Then, stockholders equity to total assets is to know how much the owner can claim in its total assets. This showed an average of 58.8 percent.

Based on their total five years of operation, the majority in control of their total asset are their stockholders at 58.8 percent, then their creditors of 31.8 and last to their bank/bond holders at 3.1 percent average.

Plant, Property & Equipment

The idea of analyzing this is to look through its fixed assets, plant, property & equipment and see if it still have a useful life in their business operations.

gni6

  • Gross plant, property, and equipment is the gross total of fixed assets cost, this shows a trend that was constant for the first four years and a slight increase in 2011.
  • Accumulated depreciation is to reduce the carrying value of an assets to reflect the loss of value due to wear,  tear and usage. This showed a trend of gradual increase every two years.
  • The net plant, property, and equipment is the result after deducting the accumulated depreciation from gross PPE, wherein it indicated a lesser value left in their PPE.

Based on the above data, the remaining book value of the PPE of Great Norther Iron Ore Properties was 7.65 percent, using the percentage method of depreciation. This means it has 0.38 useful years remaining which is very much lower and may often increase in value depending on local real-estate conditions.

Great Northern Iron Ore Income Statement

Great Northern Iron Ore Properties income statement shows whether the company made or lost money from  2007 to 2011.

Profitability

Every firm is most concerned with its profitability. One of the most frequently used tools of financial ratio analysis is profitability ratios which are used to determine the company’s bottom line and its return to its investors. 

gni 1s 7

  • Their net margins which simply is the after-tax profit a company generated for each dollar of sales. This has a growth ratio of 1 percent, -9, 8.4, 2.9 and an average of 83.21.
  • Their asset turnover which measures the effectiveness of the company to convert its assets into revenues. This showed an upward trend with a slight dip in 2009. It has a growth ratio of 16.8 percent, -27, 50.6, 14.8 and an average of 1.10.
  • The return on assets, this tells us how much profit the company generated for each dollar of total assets. This indicated an upward trend except for 2009, with growth ratios of 17.4 percent, -33.6, 64, 17.4 and an average of 91.9.
  • The company’s financial leverage this measures the financial structure ratio of the company base on total assets against total stockholders equity. This showed an increasing trend with a growth ratio of 23.2 percent, -16.1, 13.9, 18 and an average of 1.70.
  •  Their return on equity the company could return such profit percent for every dollar of equity. Still, this showed increasing results with a growth ratio of 33.19 percent, -32.3, 59.4, 36.8 and as the average of 153.28.
  • Their return on invested capital, this is the financial measure that quantifies how well a company generates cash flow relative to the capital it has invested in its business. This has generated returns same as their return on equity.

Profitability, based on the ratio that showed returns representing the firm’s ability to measure the overall efficiency in generating earnings for its shareholders, marked a favorable result for five years. But due to US financial crisis, there was a slight declined in 2009.

Dupont Model is used to summarize above ratios and to show where the component parts of the return on asset (ROA) comes from as well as the return on equity (ROE). This is very helpful in determining where financial adjustments need to be made. In Great Northern Iron Ore Properties, they have higher net margins and low volume of asset turnover, this tends to be inversely related. This means they earned more from converting revenue to earnings than assets itself. Return on assets depicted satisfactory earnings for every dollar of total assets due to their net income upward trend except in 2009. Thus, the higher the percentage, the better, because that means the company is doing a good job using its assets to generate sales.

With regards to their return on equity, it shows high increasing returns except in 2009 declined. And financial leverage showed likewise an increasing trend and a dip in 2009. But the bulk of the returns comes from profit margin and sales.

Income

Of course, we all know that income plays a vital role in running a business. This will help sustain the company in long run. For Great Northern Iron Ore Properties, the table will reflect us their earnings generated from 2007 to 2011 business operations.

gni8

  • Their revenue is how much money a company has brought in yearly. This showed a growth ratio of 23.5 percent, -28.6, 40, 28.6 and an average of 20.
  • Operating income is the best indicator of a company’s true performance in their operations. This showed a growth ratio 28.6 percent, -38.8, 54.5, 35.2 and average 16.6.
  • Net income is what’s left over for a company after all expenses have been accounted for, and this amounted just the same with their operating income.

The company’s income growth ratio indicated that business was doing good, in 2009 decreased in revenue due to US financial crisis was compensated in 2010 increase in revenues of 40 percent. This was caused by delayed in lease collections from mining companies affected by the crises. Their operating and net income were both the same because this means that they don’t have any transactions on non-operating income or expense. In addition, the two showed good results because they have minimal total cost and expenses to gain a favorable profit.

Expenses

This is the cost and expenses incurred during the course of their business.

gni9

  • The cost of revenue was the amount the company paid for the goods that were sold during the year. This showed that they only have cost from 2007 and 2008. Last three years no cost was incurred.
  • Total operating expense was the expenses incurred in conducting their regular operations of the business. This composed sales, general and administrative and the depreciation expense involving their properties. Overall total expenses showed a growth ratio of 33 percent, -25, and remain consistent at 3 percent with an average of 3.4.

Great Northern Iron Ore total expenses account an average of 17 percent of revenue. Wherein cost of revenue was 2 percent, sales, general and administrative was 10 percent and depreciation expense was 5 percent. This showed a minimal percentage of total expenses.

 Modified Income Statement

gni11

The company deals in property lease to mining companies and as indicated in the graph revenue was increasing except for 2009. And total expenses which were only 17 percent of average revenue indicated that they had minimal expenses incurred. So, net income leftover was good at a higher margin of 83 percent.

Margins

Ratios that show margins represent the firm’s ability to translate sales dollars into profits at various stages of measurement. 

gni10

The overall margins showed how efficient GNI’s management was. They were able to sustain their profits despite the decline in 2009 since they were able to recover in 2010. This reflected an impressive operating and net margins which were very high and profitable as well as their returns.

Great Northern Iron Ore Cash Flow Statement

 Cash from Operating Activities

gni 15

Cash flow from operating activities comes from their net income adding back depreciation and amortization, other working capital and other noncash items to get the net cash provided by operations. This showed a growth ratio of -12.5, 14.2, -6.3, 40 and an average of 16.4 percent for GNI. They had a good cash flow from operations except for declined in 2008 and 2010 due to other working capital.

Cash from Investing Activities

gni16

Cash flow from investing activities comes from their purchases of investments, sales/maturities of investments and other investing activities to get the net cash used in investing activities. Wherein this showed a growth ratio of 600 percent, -50, 300, -100 and an average of -.40. They don’t have purchases transaction in investments for the first two years only other investing activities. And it purchases average a -4.4 percent, sales, and maturities of investments average 4.0 percent and other investing activities of 0.20 thus, leaving a net cash used for investments average of -0.40.

Cash from Financing Activities

gni17

Cash flow from financing activities comes from cash dividend paid to get net cash used for financing activities. Wherein this depicted a growth ratio of -6.25 percent, 0, 13, 17.6 and an average of -16.6. This means they had used cash flow in financing activities to pay off cash dividend and they don’t have financing activities from other sources.

Net Change in Cash

gni cf 14

The cash flow of Great Northern Iron Ore Properties had a good operating cash flow with slight decreases in 2008 and 2010 due to US financial crisis. And in their investing activities resulting from gains (losses) from investments in the financial markets and operating subsidiaries, and changes from amounts spent on investments in capital assets showed minimal change. While financing activities measure the flow of cash between the company, its owners, and creditors. This indicated negative numbers meaning the company is servicing debt, but it can also mean the company is making dividend payments which investors might be glad to see.

Free Cash Flow

Free cash flow (FCF) represents the cash that a company is able to generate after laying out the money required to maintain or expand its asset base. Free cash flow is important because it allows a company to pursue opportunities that enhance shareholder value.

gni 18

The table above showed that Great Northern Ore Properties was not investing much on capital expenditure thus indicating an operating cash flow equivalent to its free cash flow. While free cash flow doesn’t receive as much media coverage as earnings do, it is considered by some experts to be a better indicator of a company’s financial health.

Cash Flow Efficiency

Cash flow efficiency is a cash flow metrics in variations of the results from its sales, liabilities,  available capital expenditures, free cash flow and the results of operating. In view thereof, the following formula shows how the resulting percentage come out for GNI.

gni19

Cash flow analysis uses ratios that focuses on cash flow and how solvent, liquid, and viable the company is. Here are the most important cash flow ratios as well as the results after analyzing Great Northern Iron Ore Properties:

  • Operating cash flow to sales ratio measures how much cash generated from its revenue for the period and gives investors an idea of the company’s ability to turn sales into cash. This had an up and down trend for GNI’s  past five years and a growth ratio of -28.7 percent, 58.2, -33, 9.85 with an average of 83. This is an important indicator of its creditworthiness and productivity, wherein a high percentage means the company will be able to grow for it has sufficient cash flow to finance additional production and a lower ratio indicates the opposite.
  • Operating cash flow ratio measures how much cash left after considering short debt by using the result of operating cash flow from operations over current liabilities. This showed an up and down trend with a growth ratio of -50 percent, 100, -37.5, -8 and an average of 290 for five years. This indicated how liquid GNI was despite the declining growth, so they still have the ability to meet current liabilities without having to sell assets.
  • Free cash ratio helps us conclude if the company will grow in the future. GNI had no capital expenditure for the five years of operations, therefore they had a free cash flow ratio of 100 percent of operating cash flow. A Higher value of free cash flow to operating cash flow indicates a better financial strength.
  • Capital expenditure ratio measures company sustainability in maintaining their assets. The company does not have expenditures creating future benefits or to add to the value of an existing fixed asset with a useful life extending beyond the taxable year.
  • Total debt ratio measures company efficiency, the result of operating cash flow over total liabilities. This showed an up and down trend with growth of -42 percent, 72, -19.8, -11.2 with an average of 218. This means the company has sufficient operating cash flow to pay off total liabilities.
  • And current coverage ratio measures how much cash available after paying all its current debt. In this case, the company experienced a varied changes year after year with the growth ratio -78 percent, 705, -99, 25.8 and an average of 103 for five years. These changes were caused by a number of cash dividend payments made to shareholders.

Written by Nelly
Edited by Cris

GameStop-Corp-GME

GameStop’s Corp (GME) Favorable Return on Equity

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

GameStop Corp (GME).

Gamestop Corp Balance Sheet

Financial Liquidity

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

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

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

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

Efficiency

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

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

Let’s have a look at the table below.

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

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

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

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

Cash Conversion Cycle

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

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

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

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

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

Leverage

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

GameStop Corp

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

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

Major Control of the Company based on Total Asset

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

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

Plant, Property & Equipment

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

Gamestop Corp Income Statement

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

Profitability

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

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

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

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

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

Income

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

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

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

Expenses

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

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

Modified Income Statement

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

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

Margins

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

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

Cash Flow Statement

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

Cash from Operating Activities

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

Cash from Investing Activities

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

Cash from Financing Activities

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

Net Change in Cash

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

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

Free Cash Flow

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

Cash Flow Efficiency Ratio

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

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

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

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

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

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

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

Written by Nelly
Edited by Cris

Why Zynga Inc (ZNGA) Stock is Rated as a “Sell”

October 10th, 2012 Posted by Company Research Report No Comment yet

Balance Sheet

This is the first area of the financial statement. To further understand, we will begin to look into their liquidity, efficiency, and strength.

Liquidity

zynga bs 1

The current ratio is the result of dividing current assets by current liabilities. 

The trend of first three years increased with a growth ratio of 83 percent, and 74, with a latest quarter current ratio of 2.24 times. Likewise with a quick ratio or the result after dividing quick asset (current asset minus inventory) over current liabilities showed the same trend as a current ratio with the latest quarter of 2.07 times. Their net working capital ratio depicted a favorable growth of 45 percent and 54, an increasing trend with an average of 28 percent. This was computed by working capital over the total asset.

Their current ratio and quick ratio depicts that they are financially healthy with its current resources having enough funds to settle obligations and creditors. But their net working capital ratio which starts a dip down -0.05 percent in 2009, increases 35 and 54 percent in 2010 and 2011 respectively. This means they have a favorable and sufficient working capital for operations.

Efficiency

Efficiency ratios measure how effectively the company utilizes their assets to generate revenues, as well as how well it manages its receivables and liabilities. 

ZYNGA 2

  • The receivable turnover ratio is the number of times accounts receivable collected throughout the year. This showed a downward growth trend of 19.2 percent and 22.8 with trailing twelve months of 11.67 times.
  • The payable turnover ratio shows investors how many times per period the company pays its average payable amount. There was an increasing growth trend of 142 percent and 33 with trailing twelve months of 7.72 times for ZNGA.
  • And fixed-asset turnover ratio measures a company’s ability to generate net sales from fixed-asset investments – specifically property, plant and equipment (PP&E) – net of depreciation. Wherein for  2010, ZNGA increased by  212 percent and had a decrease of 34.8 in 2011 with trailing twelve months of 3.79 times.
  • Asset turnover ratio is a number of sales generated for every dollar’s worth of assets. This showed an up and down trend with trailing twelve months of 60 percent. This means a lower and unstable amount of sales generated for every dollar of total assets.

Zynga Inc had managed well their receivables at an average of 13.75 times and their TTM of 11.67.  This means that receivables collected turn to cash monthly. While payable s were being paid with an average of 5.85 times and TTM 7.72 times. This tells us that they are paying their creditors or obligations favorably within two months compared in 2009. They don’t have any inventory for a service company. And regarding, its fixed asset turnover ratio and asset turnover ratio, it has been unstable for the last three years meaning lesser utilization of fixed assets.

Cash Conversion Cycle

  • Receivable conversion period measures the number of days it takes a company to collect its credit accounts from its customers. There was an upward trend of 23.7 percent and 29.6 with trailing twelve months of 31.3 days for ZNGA.
  • While payable conversion period measures how ZNGA pays its suppliers in relation to the sales volume being transacted. This showed a favorable decreasing trend of 58.8 percent and 24.9 with TTM of 47.3.
  • Cash conversion cycle validates the effectiveness of the company’s resources in generating cash. Which shows a good decreasing trend of 73.9 percent and 72.6 with TTM of 16.0.

Therefore, cash conversion cycle was favorable for Zynga Inc.  They managed well their conversion cycle for receivables having an average of 26.5 days to be converted to cash with TTM of 31. Their payable has a term average of 79.4 days to pay their obligations to suppliers wherein TTM show a much shorter term of only 47.3 days. This means that they do have a favorable payment term with their suppliers. Total average cash conversion cycle of 51.8 days or TTM of 16 days validates the effectiveness of the company’s resources in generating cash.

Leverage

Zynga Inc manages  their debt ratio well, meaning their total asset was more than their total liabilities. And they have low debt-to-equity ratios indicating that the company is not taking advantage of the increased profits that financial leverage may bring. Thus, with lesser long term liabilities, solvency ratios show their financial soundness in meeting their obligations.

zynga6

  • Debt ratio indicates what proportion of debt a company has relative to its assets. This showed a declining trend of 47.2 percent and 47.3 with a total average of three years of 43.
  • Debt to equity ratio is a measure of the relationship between the capital contributed by creditors and the capital contributed by shareholders. This showed that they don’t have any long term debt in 2009 and minimal other long term debt in 2010 and 2011 or 8 and 3 percent respectively.
  • Solvency ratio determines how well the company is able to meet its debts as well as obligations, both long-term and short-term. But in ZNGA, they had less other long term debt with no short term liabilities, therefore they were very solvent at  333 percent and 506 in 2010 and 2011, respectively.

Majority Control of the Company based on Total Asset

zynga 4

  • Current liabilities to total assets identifies how much will be claimed by the creditor against total assets. This show a decreasing growth trend of -49 percent and -42, with an average of 55.
  • While another long term debt to total assets is to make out how much claim has the banks or the bond holder against its total assets. This show that they don’t have any long term debt in 2009 only in 2010 and 2011 of 3 and 2 respectively, with an average of 1.7 percent.
  • Then, stockholders equity to total assets is to know how much the owner can claim in its total assets. This shows a negative amount of 8 in 2009 and increases to 43 and 70 percent with an average of 35 percent.

Therefore, majority control of the ZYNGA INC based on total asset was claimed by their creditors of averaging to 55 percent and 35 percent of a total asset was by their stockholders. And 1.7 percent of total asset had been claimed by their bond holders and banks.

Plant, Property & Equipment

zynga 5

  • Gross plant, property, and equipment is the gross total of fixed assets cost, which show an increasing growth trend of 159 percent, and 202  with an average cost of 167.67.
  • Accumulated depreciation is to reduce the carrying value of an assets to reflect the loss of value due to wear,  tear and usage. Likewise in an increasing trend with an average of 49.33 million dollars or 29 percent of the gross PPE.
  • The net plant, property, and equipment is the result after deducting the accumulated depreciation from gross PPE, this shows an increasing growth trend of 114 percent and 229. And it has an average of 119 million dollars or 71 percent of gross PPE.

Therefore, based on the above data, the remaining book value of the PPE has an average of 71 percent, using the percentage method of depreciation, this means it has 3.5 useful years remaining.

Income Statement

The second financial statement we need to review is the income statement of Zynga Inc.  This allows a business as well as investors, to understand if the company is operating efficiently, successfully,  gaining or losing.

zynga is7

 Profitability

  • Their net margins which simply is the after tax profit a company generated for each dollar of sales. Wherein this showed an up and down trend with growth ratios of -7100 and -133 percent with -42 percent trailing twelve months.
  • Their asset turnover which measures the effectiveness of the company to convert its assets into revenues. This reflected a likewise up and down trend with growth ratios 85 and -27 percent with trailing twelve months of 60 percent.
  • The return on assets tells us how much profit the company generated for each dollar of total assets.  This depicted negative returns in 2009 and 2011 as well, and only in 2010, it has a favorable return of 13 percent.
  • Their return on equity is how much ZYNGA  could return such profit percent for every dollar of equity. This showed that the company had a low return on equity of 30 and 31 percent in 2010 and 2011 respectively with trailing twelve months of -36 percent.
  • The company’s financial leverage measures the financial structure ratio based on total assets against total stockholders equity. They had an equity multiplier of 2.30 in 2010 and 1.44 in 2011 with trailing twelve months of 1.46.

Zynga’s  net margin was unfavorable in 2009 and 2011 because of the net loss incurred during the said period. Its asset turnover ratio tends to be inversely related to their net margin, wherein they had a lower net margin and higher asset turnover. The investors can compare companies using this to determine which one is a more attractive business. And this means they earned more from converting assets to revenue than revenue itself.

Their return on assets depicts unsatisfactory earnings for every dollar of total assets due to their net loss and total assets growth ratio yearly was on an upward trend. But they had a good return on assets in 2010.

DuPont Model is an equity multiplier used to measure the financial leverage allowing investors to see what portion of the return on equity is the result of debt. In terms of Zynga Inc’s return on equity using this model, it was abruptly high at 230 and  144 percent in 2010 and 2011. While return on equity based on profit margin and sales showed only 30 and 31 percent meaning the bulk of the return comes from the debt portion of the equity.

Income

zynga 11

  • Their revenue means how much money they  havegeneratedin terms of  sales, representing the amount of money a company brings in for selling its goods and services. In this case the ZYNGA’s  revenue was upward with growth ratios of 393 and 90 percent with trailing twelve months of 1,272 million dollars.
  • Gross profit shows how much of their markup they received on the goods and services it sells after deducting its cost of revenue. Likewise,  this showed an increasing trend with growth ratios of 548 and 92 percent with 354 million dollars trailing twelve months.
  • Operating profit is the best indicator of a company’s true performance in their operations. This is the result after deducting all the expenses incurred in their operations. This showed that the ZYNGA INC have negative amounts of -53 and -406 in 2009 and 2011 while in 2010 a favorable earnings of 125 million dollars.
  • Net income is what’s left over for a company after all expenses have been accounted for. This depicted an up and down trend with growth ratios of -1500 and -343 percent with trailing twelve months of -531 million dollars for ZYNGA.
The company showed a good revenue and gross profit the past three years but due to their increasing operating expenses in research and manpower cost their operating profit and net income resulted in a loss in 2009 and 2011.

Expenses

zynga 9

  • Cost of revenue was the amount ZYNGA  paid for the goods that was sold during the year. This showed an increasing growth trend ratios of 209 and 87.5 percent with trailing twelve months of 918 million dollars. This showed an average against revenue of 30 percent.
  • Operating expense was the expenses incurred in conducting their regular operations of the business. Wherein it had an increasing growth trend ratio of 151 and 311 percent. And it had an average against revenue of 87 percent.
  • Other income and expense was the non operating income and expenses from their business. This showed 2 in 2010 and a -1 in 2011.
  • Provision for income tax was the amount allocated for their payment of income taxes. And this reflected a 36 million dollars in 2010 and a -2 in 2011. This has an average of 1.8 percent against revenue.
Cost of revenue is a direct cost to help in the distribution and marketing of their services as a provider of social gaming.  The result on this was abruptly increasing . While its 2011 operating expenses reflected a double increase of 311 percent from 2010 which was to high with an average of 87 percent. This means that expenses with reseach and development in their operations soar unexpectedly causing a big gap in cost so as their total expenses abruptly increase. ZYNGA INC  was definitely investing to expand in their operational business as accounted for the increase in research and expanding manpower cost.

ZYNGA INC

Margins

ZYNGA’s margins measures the total performance of their business operations for the past three years. Wherein gross margin has an average of 65 percent which show a good profit margin of at least more than 50 percent. But they have unfavorable  operating margin of -19.34, EBT margin of -19.27 and net margin of -23.33 percent. This means it was below our scaling standards therefore gauging their performance in 2009 and 2011 were both unimpressive.

ZYNGA INC

  • Their gross margin indicates  the percentage of revenue dollars available for expenses and profit after  the cost of merchandise is deducted from revenues. The results showed an increasing trend with growth ratios of 32.3 and 0.74 percent with a three year average of 65.
  • And their operating margin is the operating income expressed as a percentage of sales or revenue  after deducting the operating expenses from gross profit. This has an up and down trend with a favorable ratio of 21 percent in 2010 and negative ratios in 2009 and 2011 with trailing twelve months of 24 percent.
  • While net margin is the net income expressed as a percentage of sales or revenue after deducting provision for income tax from income before tax. It only had a good operations in 2010 that reflected a 15.24 percent of net margin. While both 2009 and 2011 and TTM depicted negative ratios of -43.48, -35.62 and -41.75 percent respectively.

Cash Flow Statement

The third financial statement of Zynga Inc is their cash flow statement. This help us determine if they have an available cash for the operation, how much was used and provided in investing or financing or if they have a good free cash flow and excess of funds to refinance operations for business expansion.

 Cash Flow from Operating Activities

ZYNGA INC

As shown in table above, Zynga Inc had an unimpressive net income, a decrease trend in 2009 of -53 million dollars then favorably increase to 91 in 2010, but abruptly decline to -404 in 2011 with trailing twelve months of -531. Their depreciation and amortization had an increasing growth trend of 290 percent and 143 with TTM of 123. It has an amortization of debt discount in 2010 and 2011 of 2 and 3 respectively with TTM of 8. It has investment gain in 2011 of 1 and same trailing twelve months of 1. Deferred income taxes of -8 in 2010 was  due to negative net income in 2009 and a 4 in 2011. Their stock based compensation was quite alarming that it showed a growth trend of 500 percent and 2400 with trailing twelve months of 782 million dollars. Its accounts receivable and payable had an increasing trend with TTM of -9 and -26. It has other working capital with an up and down trend and trailing twelve months of only 20. And other non cash items of -37 in 2010 and a 14 in 2011 with TTM of -9. So, the company had  a favorable net cash provided by operation in an increasing trend of 70.6 percent and 19.3 with TTM of 357 million dollars.

ZYNGA INC had sufficient cash flow provided from operating activities and it seems to be increasing yearly. This show us that they had a good earning operations despite that their net income was unimpressive in 2009 and 2011. And as noted they have a high increases in their stock based compensation from 24 million dollars in 2010 to 600 in 2011. This means compensation to employees and directors was paid in stocks, thus also increasing their additional paid in capital in 2011.

Cash Flow from Investing Activities

Their investments in plant, property & equipment of ZYNGA INC, as shown in  table below,  depicted an increasing amounts of -39, -57 and -238 with trailing twelve months of -425 million dollars. They had net of acquisition of -1, -62 and -43 with TTM of -217. They had purchases of investments in an up and down trend amounting -125, -805 and -650 with TTM of -1,397. They also had  sale/maturities of investments with growth ratio of 422 percent and 166 with TTM of 607 million dollars. Its purchases of intangibles showed -1 in 2009 and 2010 and -4 in 2011 with trailing twelve months of -3.  With other investing activities of -1, -17 and 8 in 2009 to 2011 with TTM of 24. Therefore, net cash used in investing activities have an up and down trend yearly of -103, -617 and -63 in 2009 to 2011 with TTM of -1,411.

ZYNGA INC

Net cash used for investing activities was used in investments in property which increases from 75 million dollars in 2010 to 247 in 2011. This means  they heavily invested abruptly in 2011 in plant, property and equipment. And they also have purchases of investments, purchases of intangibles and other investing activities. This means ZYNGA INCused funds wisely into their investing activities. So as, it has cash flow from investing as provided by the sale/maturities of investments.

Cash Flow from Financing Activities

In reference of the  table below,  you can see that the company had cash flow from financing by issuance of preferred stock of 14, 305, and 485 or a growth ratio of 2079 percent and 59 with warrant issued in 2010 of 5 million dollars. While issuance of common stock in 2011 of 961 with common stock repurchases in 2010 and 2011. They had an excess tax benefit from stock based compensation of 40 and – 14 in 2010 and 2011 with TTM of -14. And other financing activities of 3 and -80 with TTM of 971 million dollars. Thus, net cash provided by financing results fairly with 14, 351 and 1,069 or growth ratio of 2407 percent and 204.5 with trailing twelve months of 955 million dollars.

ZYNGA INC

ZYNGA INC was favorably finance by their issuance of stocks preferred and common, in fact they used their stock to compensate their employees and directors. This is to increase their stockholder’s equity by increasing their additional paid up capital. And only 30 percent of the issued common stock was repurchased.

This graph is to picture the relationship of the following: cash flow from operation, investments and financing activities as well as the net change in cash.

ZYNGA INC

Net Change in Cash

ZYNGA INC

Zynga Inc overall showed that for the three years operations  they have a net change in cash  amounting 102, 60 and 1,395 million dollars in 2009 to 2011 respectively. This is the total results of cash flow from operations, investing and financing activities, with an up and down trend and growth ratio of -41 and 2225 percent and TTM of -99 million dollars. To check the company’s net change in cash,  the beginning cash of 26, 127 and 188, will be deducted from the their cash at the end amounting 127, 188, and 1,582.

The result showed that they have an increasing trend in cash with ending balance of 1,582 million dollars in 2011. Thus, telling us that their net change in cash in 2009 was  102, in 2010 it decrease to 60 due to the increase in purchases of investments but it has greatly improve in 2011 to 1,395 million dollars due to the issuance of common stocks.

 Free Cash Flow

ZYNGA INC

To get if the company have free cash flow to be used in operations and expansions, we deduct their capital expenditures from operating cash flow amount resulting to free cash flow.  The result showed  that ZYNGA INC have sufficient free cash flow but in a up and down trend yearly with growth ratio of 76.3 percent and -45 with trailing twelve months of -71 million dollars. This tell us that capital expenditure abruptly increase in 2011 causing free cash flow to decrease.

 Cash Flow Satement Efficiency Ratios

Cash flow analysis uses ratios that focuses on cash flow and how solvent, liquid, and viable the company is. Here are the most important cash flow ratios  as well as the results for ZYNGA INC:

ZYNGA INC

  • Operating cash flow to sales ratio measures how much cash generated from its revenue for the period and gives investors an idea of the company’s ability to turn sales into cash. Herein it started well with 158 percent and declining down to 55 and 34 from 2009 to 2011 with TTM of 28, or approximately 1.58, 55 and 34 cents of operating cash flow in every sales dollar. Therefore, the greater the amount of operating cash flow the better. The past three years reflected an inconsistent and unfavorable investment qualities due to the decreasing trend of its ratio for ZYNGA INC.
  • Operating cash flow ratio measures how much cash left after considering short debt by using the result of operating cash flow from operations over current liabilities. This show a good liquidity in terms of using cash flow as opposed to income which is sometimes a better gauge. In this case ZYNGA INC had  a sufficient operating cash flow to cover up its current obligations of 81 percent, 63 and 58 from 2009 to 2011, but trend yearly was decreasing. They needed to increase operating cash flow to have a good and favorable company’s liquidity in the short term.
  • Free cash ratio help us conclude if the company will grow in the future. Through the result from operating cash flow less dividend paid less capital expenditure over operating cash flow. This show that the company have free cash flow in an up and down trend. During 2009 and 2010 it has a high and beneficial relationship of 80 and 82 percent respectively. However, in 2011 it abruptly goes down to only 38 percent and as the single most important financial  metric used to measure the investment quality this reflect unfavorable to the company for the larger the number/ratio the better. And trailing twelve months depicted an unimpressive -20 percent.
  • Capital expenditure ratio measures company sustainability in maintaining their assetsby using the result of operating cash flow over capital expenditure for the period. ZYNGA INC showed an up and down trend which was inconsistent for the past three years. In 2009 and 2010 it has a high and increasing cash flow to capital expenditure ratio of 489 and 562 percent indicating a financial flexibility to invest in itself. But in 2011 it declined down to 161 percent due to the increase in capital expenditures. This means they invested in their plant, property & equipment making upgrades to its buildings, machinery, and processes.
  • Total debt ratio measures company efficiency, the result of operating cash flow over total liabilities. It showed a 68, 52 and 51 percent from 2009 to 2011 respectively which reflected a favorable decreasing trend. This mean that their debt ratio of less than 1 indicates thatZYNGA INC had more assets  than debt. Therefore, in conjunction with other measures of financial health,  the debt ratio can help investors determine a company’s level of risk.
  • Current coverage ratio measures how much cash available after paying all its current debt. It is determine through cash flow from operating less dividend over current liabilities. This depicted an  inconsistent decreasing trend ratios of 81, 63 and 58 percent from 2009 to 2011 respectively on ZYNGA INC’s and this showed a lesser percent of debt the company’s current cash flow can retire  or repay. Therefore, a  good cash debt coverage ratio of 1:1 (100%) or greater shows that the company can repay all debt within one year.

Written by Nelly

Edited by Cris

Navigant Consulting Inc NCI

Navigant Consulting Inc (NCI) Acceptable Cash Flow Margin

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

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

Balance Sheet

Liquidity

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

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

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

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

navigant consulting inc

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

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

Leverage

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

navigant consulting inc

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

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

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

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

Property, Plant & Equipment

navigant consulting inc

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

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

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

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

Income Statement

Profitability

navigant consulting inc

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

 navigant consulting inc

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

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

Income

navigant consulting inc

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

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

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

Expenses

navigant consulting inc

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

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

navigant consulting inc

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

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

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

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

Cash Flow

navigant consulting inc

Cash Flow from Operating Activities

navigant consulting inc

navigant consulting inc

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

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

navigant consulting inc

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

Cash Flow from Investing Activities

navigant consulting inc

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

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

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

Cash Flow from Financing Activities

navigant consulting inc

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

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

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

 navigant consulting inc

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

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

Free Cash Flow

 navigant consulting inc

navigant consulting inc

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

Cash Flow Ratios

navigant consulting inc

 navigant consulting inc

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

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

Written by Rio, Nelly and Dyne

Edited by Cris

diana shipping inc dsx

Diana Shipping Inc (DSX) Financially Sound

July 27th, 2012 Posted by Company Research Report No Comment yet

Diana Shipping Inc. (DSX) is a global provider of shipping transportation services, specializing in the ownership of dry bulk vessels. Source: Diana Shipping Inc. website

Diana Balance Sheet

Liquidity

Diana Shipping Inc is financially stable, with extremely high current asset and quick asset ratio of average 671 percent and 892 percent respectively and its working capital is tremendously increasing per period.

  • Working capital was $1, 49, 265, 322 and $385. Average of $204. The company’s working capital was consistently increasing with a high gap each year. This further means that the company is indeed making progress.
  • The current ratio was 1.05, 3.45, 9.28, 10.76 and 9.02. Average of 6.71, which means the company has $1.05, 3.45, 9.28, 10.76 and $9.02 of current assets for every $1 of current liabilities.
  • Quick ratio was .95, 3.30, 9.19, 10.64, and 8.92. Average of 6.60. It tells us that, the quick assets had $0.95, 3.30, 9.19, 10.64 and 8.92 for every $1 of current liabilities.

Working Capital

Working capital showed that the yearly balance is increasing. It tells us that, the company was able to meet its current obligations such as payment of salaries to its staffs, utility bills and make loan payments. Current ratios indicate that current asset is greater than the current liabilities at the ratio of 6.71 average, while quick ratios increase from year to year at 8.92 average.

Based on the analysis and balance sheet statement, its current asset was mainly cash and cash equivalents of about 96 percent. The company is running its business hassle-free on almost purely cash basis. This is possible considering that the line of business is a shipping company.

Cash Conversion Cycle

Cash conversion cycle (CCC) is a metric used to measure the length of time the company is able to turn resources inputs into cash flows. To measure this, we use the following related ratios.

  • Inventory turnover ratio was 19, 18, 18, 16 and 13. Average of 17. The company’s inventory has an average of 17 times turn each period.
  • Inventory conversion period was 19, 20, 21, 22 and 28. Average of 22. The average days to convert its inventory to sales were 22 days.
  • Receivable turnover ratio was 95, 168,0, 0 and 43. Average of 61, which means the company’s receivable turns 61 times average.
  • Receivable conversion period was 4, 2, 0, 0, and 9. Average of 3. The company’s average days to collect its receivable are 3 days.
  • The payable turnover ratio was 47,0, 0, 0 and 37. Average of 17. The company has recorded accounts payable in 2007 and 2011 only with an average turn of 17 times.
  • Payable conversion period was 38, 0, 0, 0 and 39. Average of 15. The company’s payable is 15 days average to pay.
  • Cash conversion cycle was -15, 22, 21, 22 and -3. Average of 9. This tells us that DSX has an average of 9 days CCC.

Further interpretation of the cash conversion cycle:

Particulars 2007 2008 2009 2010 2011 Ave.
Inventory Conversion Period 19 20 21 22 28 22
Receivable Conversion Period 4 2 0 0 9 3
Payable Conversion Period 38 0 0 0 39 15
Cash Conversion Cycle -15 22 21 22 -3 9

Based on the analysis of the company’s debt obligations, Diana Shipping is less indebted, and 143 percent able of paying all its debt obligations, so it’s an ideal company to invest in. In addition, the owners of the company have the majority control on total assets with 76 percent claims.

Financial Leverage

Leverage is the relationship between debt financing and equity financing, also known as the debt-to-equity ratio. Equity is created by the personal funds of the business owner(s), and/or by the stockholders of shares in a corporation. As these funds have no claim on any of the assets of the business, the assets are available to be used as collateral for debt financing. For DSX, debt ratio, debt to equity ratio and solvency ratio from 2007 to 2011 were computed for the leverage. The results are as follows:

Facts

  • Debt ratio was .13, .25, .22, .27 and .22. Average of .22, which means that the company’s debt capital was only 22 percent of total assets.
  • And the debt to equity ratio was .16, .34, .29, .37 and .29. Average of .29. The company’s debt has an average of 29 percent against shareholders’ equity.
  • While solvency ratio was 134.19, 222.16, 121.16, 129.13 and 107.16. Average of 142.76, or 143 percent solvent. Solvency is the ability to pay all debt obligations as they became due.
  • On the other hand, current liabilities to total assets was .02, .02, .02, .02 and .03. Average of .02. The company’s current liabilities was 2 percent average to total assets, so the creditors have 2 percent claims on the total.
  • Likewise, stockholders’ equity to total assets was .85, .73, .76, .71 and .75. Average of .76. The owners’ equity was 76 percent average of total assets; therefore, the shareholders have 76 percent claims on the total assets of the company.

Explanation

The only ratio that measures the company’s effectiveness in generating sales from its investments in plant, property, and equipment is the fixed asset turnover ratio.  It is especially important for a manufacturing firm that uses a lot of plant and equipment in its operations to calculate this ratio. To get this is to divide the company’s revenue by its property, plant, and equipment. For DSX, fixed asset turnover ratio was .21, .34, .22, .23 and .23 with an average of .24. It is good enough considering the value of its investment on property, plant, and equipment.

Diana Income Statement

Profitability

This section of our report gives an overview of the company’s financial performance over a specific period. Nelly, part of Numbers team, shared the profitability ratios of DSX from 2007 – 2011. Let us take a look at the data below.

  • Net margin in percent was 70.46, 65.71, 50.76, 46.75 and 41.86. This simply is the after-tax profit a company generated for each dollar of revenue.
  • While asset turnover was 0.26, 0.34, 0.20, 0.19 and 0.16. This measures the efficiency of the company to convert its assets into revenues.
  • And the return on asset was 18.45, 22.15, 10.22, 8.86 and 6.74. This tells us how much profit the company generated for each dollar on total assets.
  • Moreover, financial leverage was 1.18, 1.36, 1.32, 1.40 and 1.33. This measures the financial structure ratio of the company base on total assets against total stockholders’ equity.
  • Likewise, return on equity was 23.09, 28.15, 13.69, 12.09 and 9.19.   This tells us how much the company could return for every dollar of equity.
  • And the return on invested capital was 19.18, 23.19, 10.57, 9.21 and 6.94. This is a financial measure that quantifies how well a company generates cash flow relative to the capital it has invested in its business.

Explanation

Diana Shipping Inc.’s profitability in terms of their net profit margins has been trending down for the last five years. This means that net income and revenues were slightly playful or unstable during the previous years. Despite that, they have a higher profit margin, generated for each dollar of revenue compared to their asset turnover. As the rule, the higher the profit or the net profit margin, the lower the volume of the asset turnover. This determines the attractiveness of the business. Meaning that in terms of revenue they generate more than converting assets into revenues.

Return on Asset

The return on assets was high in 2008 of 22.15 percent as compared to 2007 of 18.45 and the latest years 2009 to 2011 which slightly decreased yearly by 10.22, 8.86 and 6.74. This means the company’s earnings from total assets declined because of the increase in total assets of 944 million dollars, 1,057, 1,320, 1,585, 1,604 from 2007 to 2011.

Financial Leverage

With regards to their financial leverage, the portion of the return on equity as the result of debt measured by the equity multiplier showed an up and downtrend for the last five years. This was in relation to total assets and total stockholders’ equity. Return on equity increased in 2008 and declined through the following years. This means the return earned a higher percentage of internally generated revenues.

Income

  • Revenue in million dollars was 190, 337, 239, 275.45 and 257.
  • Gross profit was 152, 282, 186, 210 and 257.
  • Operating income was 138, 226, 124, 134 and 111.
  • Net income was 134, 222, 121, 129 and 107

Explanation

Diana’s revenues had been remarkable for the first two years 2007 and 2008 base on their growth ratio in percent of 64.06, 77.13, -29.06, 15.09, and -6.78 from 2007 to 2011. Likewise, gross profit was the same as their revenues, but gross profit margin has been decreasing of 80.0, 83.7, 77.7, 76.4 and 74.3 from 2007 to 2011. While operating income was in an up and down trend as a result of the operating expenses incurred during the year.

Net Income

Net income, despite the decline, was good especially in 2008 when everything was financially affected by the crisis. They had the ability to achieve a solid financial and operating performance in spite of a difficult industry environment. Moreover, Diana retained long-term strategies with their quality charterers.

Expenses

Their expenses cost revenues account for 21.33 percent of revenues. Operating expenses include sales, general and administrative expense accounts for 7.2, depreciation and amortization of 17. In addition, other operating expenses of -2.  Likewise, its interest expense accounts 2 percent and other income and expense of -54.4 of revenue. So, an average of 54.9 percent was left for their net income. Base on this they have indeed a very favorable and high net profit margin.

The data stated below further explains the expenses incurred from 2007 to 2011:

Facts

  • Cost of revenue was 38, 55, 53, 65 and 66 with an average of 55.4.
  • In addition, sales were 12, 14, 17, 25 and 25 with an average of 18.6.
  • And, depreciation and amortization were 24, 43, 45, 53 and 55 with an average of 44.
  • Further, other operating expense was -22, 0, 0, -2, and -1. Average of -5.0.
  • Furthermore, interest expense was 6, 6, 3, 5 and 5 with an average of 5.
  • While other income and expense were -132, -220, -121, -129, and -106 with an average of -141.40.

Diana Cash Flow Statement

Cash Flow from Operating Activities

Cash flow is a statement wherein you can determine if the company has available funds. It also denotes the activity of cash where the company used it. Cash flow from operation of Diana Shipping Inc. using the indirect method of accounting was in slope. Which the growth represents in percentage at -43, 72, -15 and 16 results from 2007 to 2011. This was due to the net income which movement was also in sideways. Based on the total, for their five years of operation; in percentage, the net income contributes at 80, depreciation at 25. While the prepaid decrease at 1 and other working capital also decreased at 4.

Facts

  • Net income of $ million was 134, 222, 121, 128 and 107
  • While, depreciation & amortization was 24, 43, 45, 53 and 55
  • And prepaid expense was 0, -1, -14, 2 and 2
  • And also, other working capital was 0, -2, -5, -11 and -19
  • In addition, net cash provided by operating activities was 149, 261, 152, 178 and 154.
  • The total in five years was 894.

Using the direct method, the result of cash flow from operating activities in percentage was 44, -68, -8 and -21 from 2007 to 2011. Within their five years of operation only in 2008 grew by 44 percent due to the increase of cash collection by 44 percent. While in 2009 to 2011 was declining which the cash payment exceeds from their cash collection.

Explanation

Cash flow from operating activities can be computed using the direct method of accounting. From the cash collection less all the cash payments made in purchases of goods and supplies, operating expenses were incurred including the interest.

Facts

  • The cash collection was 189, 337, 239, 275 and 257
  • Cash payment for purchases was 38, 55, 53, 65 and 67
  • Payment for operating expenses was 17, 55, 48, 80 and 82
  • Cash paid for interest was 6, 0, 3, 5 and 5
  • Operating activities was 128, 227, 135, 125 and 103

Cash Flow from Investing Activities

Cash flow from investing was an activity of cash wherein the company invested. The following are results from DSX:

  • An investment in property, plant, and   equipment was -459, -110, -65, -260 and -28.
  • And property, plant, and equipment reductions in 2007 was 79 and zero from 2008 to 2011
  • Likewise, acquisitions,   net was zero from 2007 to 2010 and -50, in 2011
  • In addition, other investing activity was -29, 1, -8, 7 and -12.
  • Net cash used for investing activities was -409, -109, -73, -252 and -90.
  • The total for five years was -933.

Explanation

Cash flow from investing in DSX was in sideways in percentage was 44, 12, 8, 27 and 10 results from 2007 to 2011. It tells us that from 2007 to 2009 they minimizing their investment but in 2010 grew by 19 percent due to the additional purchase of PPE. It indicates, the total PPE in five years of operation, contributes to investing was represent to 91 percent, 5 percent from acquisitions and 4 percent from other investing activities.

Cash Flow from Financing Activities

Cash flow from financing activities was a cash activity wherein the company raised and used its funds. In Diana Shipping Inc are as follows:

  • Debt issued was 288, 237, 74, 139 and 15
  • And debt repayment was -327, -98, -30, 0 and -6
  • And also common stock issued was 433, 0, 98, 0 and 0
  • In addition, repurchases of treasury stock were zero from 2007 to 2010 and -1 in 2011
  • While cash dividends paid were -131, -247 in 2007 to 2008 and zero from 2009 to 2011
  • Likewise other financing activity was 0, 0, 0, -2 and 0.
  • On the other hand, net cash provided by (used for) financing activities was 262, -107, 142, 137 and 7

Explanation

The net change in cash has a huge result in 2009 at 99 percent from 2007 data and the cash at end of the period was very impressive grew by 96 percent from 2007 to 2011. It tells us, the management was very efficient in managing their cash flow. Net change in cash was net cash available and ready to use for the next accounting cycle. Below are the results for Diana:

  • Net change in cash was 2, 45, 220, 63 and 71
  • Further, cash at beginning of the period was 15, 17, 62, 282 and 345
  • In addition, cash at end of the period was 17, 62, 282, 345 and 417.

Free Cash Flow

The free cash flow of Diana in 2007 and 2010 was in negative which the capital expenditure had exceeded operating cash flow. In addition, free cash flow was to measures how much cash available after deducting the capital expenditure. Below are the results for Diana Shipping Inc:

  • Operating cash flow was 149, 261, 152, 178 and 154
  • While, capital expenditure was -459, -110, -65, -260 and -28
  • Likewise, free cash flow was -310, 152, 87, -81 and 126.

Explanation

Operating cash flow ratio measures the amount of cash from operation to pay its short-term obligation. In addition, the result of net cash provided by operating activities over total current liabilities was used in order to get the operating cash flow ratio.

  • Net cash provided by operating  activity was 149, 261, 152, 178 and 154
  • While, total current liabilities was 21, 20, 32, 33 and 48
  • In addition, the operating cash flow ratio in percentage was 710, 1305, 475, 539 and 321.
  • Likewise, it’s averaging 670 percent or in every $1 of short-term debt.
  • Meaning, Diana had the capacity to pay it in six times.
  • Moreover, the company had excess cash over their liabilities.

Explanation

Capital expenditure ratio measures the capital available for internal reinvestment. If the result was more than 1, it means the company funds would extend to pay its other obligation.

  • Net cash provided by operating activities was  149, 261, 152, 178 and 154
  • While, investments in property, plant, and   equipment was 380, 110, 65, 260 was 28
  • In addition, capital expenditure ratio in percentage was -39, 237, 234, -68 was 550, average in five years was 226.

The capital expenditure ratio of Diana Shipping Inc was very strong, an average of 226 percent. It tells us, the company has the capability to reinvest its cash and could be used to pay its debt which in every $1. Moreover, Diana had available funds of $2.26, the average for five years.

Debt Ratio

Total debt ratio measures the availability of cash to pay its total debt; through the result of cash from the operation over the total liabilities of the company. The total debt ratio of Diana Shipping Inc declined from 2007 to 2011. It indicates a 103 percent down to 39 percent. Moreover, it means the total liabilities were greater than the cash available from the operations which in every $1 of total debt. Diana have equivalent cash to pay at $1.03, .93, .47, .39 and .39 from 2007 to 2011, respectively.

Facts

  • Net cash provided by operating  activities was 149, 261, 152, 178 and 154
  • While total liabilities was 145, 282, 321, 454 and 396
  • Likewise total debt ratio in percentage was 103, 93, 47, 39 and 39

Written by Rio, Nelly, and Dyne
Edited by Cris

stamps.com-inc-stmp

Stamps.com (STMP) Capitalized Total Assets

July 20th, 2012 Posted by Company Updates No Comment yet

Stamps Balance Sheet

Stamps.com Inc (STMP) value investing has sufficient resources to continuously run its business has proven to its liquidity related ratios.

Liquidity

Financial liquidity of the company plays a vital role in value investing. It is used to determine how capable the company of continuously running its business smoothly. It can be measured by the related ratios on current assets such as current ratio, quick ratio, and working capital. For Stamps.com Inc, below is the data from 2007 to 2011:

Facts

  • The current ratio was 5.62, 5.2, 3.93, 2.23 and 5.07. Average of 4.41. STMP has an average current ratio for its five years in the operation of 4.41, which means that its current assets are 441 percent compared to its current liabilities.
  • Quick ratio was 5.62, 5.2, 3.93, 2.23 and 5.07. Average of 4.41. The company has no recorded inventory, so its quick ratio has an average of 4.41, which tells us that its monetary assets were 441 percent against its current liabilities.
  • Working capital was $60, 63, 41, 16 and 57. Average of $47. Working capital of the company shows a positive balance. However, its trend increased in 2008 by 5 percent but dropped by 35 percent and 61 percent in 2009 to 2010 respectively and recovered again with an increase of 256 percent in 2011. In spite of this trend, the company is capable to pay off its current obligations.

Leverage

Leverage is a business term that refers to borrowing. If a business is “leveraged,” it means that the business has borrowed money to finance the purchase of assets. The other way to purchase assets is through use of own funds or equity. One way to determine leverage is to calculate the debt-to-equity ratio, showing how much of the assets of the business were financed by debt and how much by equity (ownership). Below is the financial leverage ratio of Stamps from 2007 to 2011:

Facts

  • Debt ratio in percent was .12, .16, .16, .23 and .13. Average of .16, which tells us that 16 percent of the company’s assets were loaned.
  • Debt to equity in percent was .14, .19, .18, .30 and .15. Average of .19. It also tells us that the company’s equity is 19 percent of its total assets.
  • Solvency ratio was 1.08, .80, .50, .54 and 1.93. Average of .97, which means that Stamps is 97 percent solvent. It is computed by dividing its net income by tax plus depreciation by its total liabilities.
  • Current liabilities to total assets was .12, .16, .16, .23 and .13. Average of .16.  The company’s current liabilities, when compared to its total assets, were 16 percent average, which means that the creditors have only 16 percent claims on Stamps total assets.
  • Stockholders’ equity to total assets was .55, .84, .85, .77 and .87. Average of .84. Tells us that the owners have 84 percent claims on the company’s total assets.

Based on the results of the leverage ratio analysis, the firm did not borrow the big amount of money from outside creditors. Instead, they did utilize more on the owners’ funds as shown that 84 percent of its total assets were owners’ equity.

Plant, Property & 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 were recorded at cost upon acquisition of these assets.

The fixed asset turnover ratio measures the company’s effectiveness in generating sales from its investments in plant, property, and equipment. In Stamps, the ratio has an average of 37 meaning the company’s fixed asset has 37 times average turn per period.

Stamps Income Statement

Earnings quality is an important aspect of evaluating an entity’s financial health, yet investors, creditors, and other financial statement users often overlook it. Earnings quality refers to the ability of reported earnings to reflect the company’s true earnings, as well as the usefulness of reported earnings to predict future earnings. The evaluation of earnings is often difficult because companies highlight a variety of earnings figures which are the revenues, operating earnings, net income, and pro forma earnings. In addition, companies often calculate these figures differently. The income statement alone is not useful in predicting future earnings.

Profitability

The company’s net profit margin showed a decrease of 11.97 percent, 7.52 and 6.47 in 2008 to 2010 compared to 2007. But it leaped high in 2011 to 25.86 percent, a 4 times fold compared to 2010. This means that Stamps increased their revenue in 2011 to 102 million dollars and earned a net income of around 26 million dollars compared to 2010 which is 6 million dollars only. Asset turnover is gradually increasing every year, therefore this depicts that they were efficient in converting their assets into revenues.

Return on Assets

Stamps return on assets showed an up and downtrend for the last four years but in 2011 it reached a height of 31.76 percent. This means that they had increased their earnings for every dollar of total assets as compared to previous years. For their financial leverage measured by equity multiplier, showing the portion of the return on equity that was the result of debt, wherein it was trending upward with a slight decrease in 2009. Then increased in 2010 by 1.30 percent but decreased again in 2011 to 1.15. This means that they can control their total liabilities within their current operations. In fact, it went to 22.99 million dollars in 2010 but managed to decrease it the following year to 12.94.

Return on Equity

Their return on equity depicted an increase in 2008 from 10.51 percent to 11.90, and then up and down in 2009 to 2010 of 8.02 to 9.23 but 2011 showed an increase of 38.0. This means that Stamps.com Incorporation was earning revenues from money invested by their stockholders, as depicted by the increase in their revenues of 18.75 percent in 2011. To further understand the thought, below is the detailed summary of the profitability ratio from 2007-2011

  • Net margin in percent was 12.43, 11.97, 7.52, 6.47, and 25.86. This simply is the after-tax profit a company generated for each dollar of revenue.
  • Asset turnover was 0.76, 0.86, 0.90, 1.17, and 1.23.  This measures the effectiveness of a company to convert its assets into sales.
  • Return on assets was 9.42, 10.26, 6.77, 7.54, and 31.76. This tells us how much profit the company generated for each dollar on total assets.
  • Financial leverage was 1.14, 1.19, 1.18, 1.30, and 1.15.  This measures the financial structure ratio of the company base on total assets against total stockholders’ equity.
  • Return on equity was 10.51, 11.90, 8.02, 9.23, and 38.00.  The company could return such percent for every dollar of equity.

Income

Revenues from 2007 to the 1st quarter of 2012 are as follows:

  • Revenue in million dollars was 86, 85, 82, 86, 102, and 28. This was the company’s total earnings.
  • Gross profit was 61, 62, 59, 62, 75, and 26.  These were the earnings after deducting the cost of revenues.
  • Operating income was 7, 4, 6, 1, 17, and 26.  This was the company’s income after deducting all operating expenses.
  • Income before income tax is 11, 7, 7, 2, 18, and 5.  This was the income after interest and other income (expenses).
  • Net income was 11, 10, 6, 6, 26, and 16.  This was the company’s income after deducting income taxes.

Explanation

Stamps.com Inc revenues were constant for the last four years with a growth ratio of 1.45 percent, -1.05, -3.28 and 4.16, and then abruptly increase by 18.75 percent in 2011.  Average revenue for five years of 88.2 compared to 28 million dollars in the first quarter of 2012; means that their revenues are definitely increasing. Both gross profits and operating income were on an increasing and decreasing trend for the last four years and then increased again in 2011. Their operating income showed a growth ratio of -42.83, -32.34, 30.38, -74.81 and 1075.97. The income before income tax differed because of the other income and expenses. Net income showed a decrease in 2008 to 2010 of 10 million dollars, 6, and 6, then an increase to 26 and 16 for the 1st quarter of 2012 along with its growth ratio of -35.21, -4.71, -39.23, -10.44 and 374.78.

What causes the increase in revenue? As you can see the company increased their total assets from 57 million dollars in 2010 to 108 in 2011, so as to their stockholders’ equity from 44 million dollars in 2010 to 94 in 2011. This means they capitalize on total assets to augment their revenues.

Expenses

Expenses from 2007 to the 1st quarter of 2012 are as follows:

  • Cost of revenue in million dollars was 25, 23, 23, 24, 26, and 3 for the 1st quarter of 2012.
  • Operating expense was 54, 58, 53, 60, and 58.
  • Other income (expense) was 4, 3, 1, 0, 1, and (21) for the 1st quarter of 2012.
  • Provision for income tax was 0, (3), 1, (4), (8) and (12) for the 1st quarter of 2012

Explanation

The company’s cost of revenue was 29.49 percent, 26.98, 27.9, 27.69 and 25.80 of revenue with an average of 24.2 which meaning, that first quarter 2012 of 3 is lesser than one-fourth of average, so the cost of revenue is decreasing. While operating expense was 62.83 percent, 67.77, 65.02, 70.6, and 54.24 of revenue with an average of 63.69. And other income and expense were 5.20, 3.44, 1.12, 0.14 and 0.55 of revenue with an average of 2.09. Thus, net income was 12.88, 8.69, 8.20, 1.86, and 17.51 of revenue or an average of 9.83.

The company’s cash flow from 2007 up until 2011 will be discussed to us by one of our Numbers team member, Dyne.

Stamps Cash Flow Statement

Cash flow would simply mean the cash in and out of the business. It was classified into three segments– the operating, investing and financing.  In operating, it was cash provided or used for the operations which are basically from the revenue. In both investing and financing, it was cash provided and used for investment and financing.

Cash Flow from Operating Activities

The results of the net cash provided by operating activities can be used to reinvest in the business, repay debt and pay dividends. In Stamps, from 2007 to 2010 it declined. Based on their total of five years of operation, 2007 represents 28 percent then went down to 8 percent in 2010. This was due to the fact that the net income was also declining. It was corrected in 2011. It grew by 17 percent with the increase also of net income by 44 percent. Probably in 2012, it will go up based on the net cash provided by operating activities in Q1 increased by 27 percent from 2011Q1 data.

The net cash provided by operating activities means a net of cash generated from operations. It can be computed using the net income and added back the non-cash items related.

Explanation:

  • Net income in million was $11, 10, 6, 6 and 26. Total for five years was 59. In 2012Q1 was 16 compared in 2011Q1 was 3.
  • Depreciation and amortization were 3, 2, 1, 1 and 1.Total for five years were 8.
  • Another non-cash item was 3, 3, 0, -3, and -8. Total for five years was -5.
  • Net cash provided by operating activities was 17, 12, 10, 5and 15. Total for five years was 59. In 2012Q1 was 11 compared in 2011Q1 was 3.

The basis for computing the cash flow from operating using the direct method of accounting is taking all the cash collection then deduct all the cash payments made by the company.

Facts:

  • Cash collection was 86, 85, 82, 85 and 96. Total for five years was 434.
  • The payment for purchases was 25, 23, 21, 23 and 26
  • Payment for operating   expenses was 54, 58, 53, 60 and 58
  • Cash payment for income taxes was 0, -3, 1, -4 and -8
  • Total cash flow from operating  activities was 7, 7, 7, 6 and 20

With this, cash collection is the main core. If the cash collection was short over the cash payments made, the cash flow would be in negative. In Stamps, the cash collection from 2007 to 2010 there was no big movement except in 2011. It increased to 2 percent. The same thing in total cash flow from operating, no movement except in 2011 which increased to 30 percent, due to the decrease in operating expenses and the provision of income tax.

Stamps Cash Flow from Investing Activities

The net cash from investing activities for five years resulted in a total of 76. It tells us, the company has more cash provided than cash used. It indicated that only in 2009 and 2010 that they had negative cash, due to the purchase of an investment that was over than the cash from sales/maturities of investment.

After we know the result of cash from operating, it can be used as our basis if the company can utilize the cash either to invest, to purchase additional capital expenditure, purchase of an investment or acquire a business.

Investing activities are:

  • Investments in property, plant, and equipment were -1, -1, 0, -2 and -1. Total for five years was -5.
  • Purchases of investments were -44, -33, -25, -25 and -2. Total for five years was -129.
  • Sales /maturities of investments were 91, 58, 21, 24 and 14. Total for five years was 208.
  • Net cash used for investing activities was 47, 23, -4, -1 and 11. Total for five years was 76.

Stamps Cash Flow from Financing Activities

STMP net cash from financing from 2007 to 2010 were used to repurchases of treasury stock, though it was declining. The total was represented by 102 percent over the total net cash from financing for five years. In 2012, it has cash provided by 22 percent which was from other financing activities. The cash from financing activities is where we can see how the company raised cash. It shows the following:

  • Common stock issued and 1, 1, 0 and 0. Total for five years was 3.
  • Repurchases of treasury stock was -33, -27, -14, -14 and -5. Total for five years was -93.
  • Other financing activities was 0, 0, 0,-25 and 25.
  • Net cash provided by (used for) financing activities was -32, -26, -13, -40 and 20. Total for five years was -91.

Stamps Net Change in Cash

The net change in cash was cash available after paying all their expenses and obligation. It showed how much cash was made for a particular year. Below are the results:

  • Net change in cash was 32, 9, -8, -37 and 46
  • Cash at beginning of the period was 12, 44, 53, 45 and 8
  • Cash at end of the period was 44, 53, 45, 8 and 54

The cash at the end of the period was in sideways. It resulted with all in positive, though the net change in cash in 2009 and 2010 was in negative since the cash at beginning of the period was positive, still, it resulted in positive.

Stamps Free Cash Flow

Free cash flow can be determined using the operating cash flow result in less the capital expenditure and dividend paid. The following were the results:

  • Operating cash flow was 17, 12, 10, 5 and 15
  • Capital expenditure was -1, -1, 0, -2 and -1
  • Free cash flow was 16, 11, 10, 3 and 14

The free cash flow from 2007 to 2010 went down successively and jumped to 79 percent in 2011, due to the operating cash flow that was also declining and the capital expenditure in total represented at 8 percent over the total operating cash flow.

Written by Rio, Nelly and Dyne
Edited by Cris

first-marblehead-corporation-fmd

First Marblehead Corporation (FMD) A Second Thought

July 18th, 2012 Posted by Company Updates No Comment yet

First Marblehead Corporation (FMD) current financial standing of the company as shown in the year 2011 performance showed its recovery from 2010 result, the company is capable to finance its current obligations, yet, extra care is a must by taking into consideration its other resources if it could sustain to continue its business operation.

Liquidity

Liquidity ratio measures the company’s ability to pay off its total liabilities. To run the company’s operation smoothly, it should be financially stable.  To know the financial liquidity of The First Marblehead Corporation, we compute its current ratio, quick ratio and working capital from 2007 to 2011:

  • Current ratio (current assets over current liabilities) was 1.86, 1.08, 1.67, .94 and 1.10. Average of 1.33. This shows that the company’s average current ratio was 1.33 to 1. This sounds good, indicating that current asset is more than its current liabilities.
  • Quick ratio (current assets less inventories over current liabilities) was 1.53, .16, .81, .94 and 1.10. Average of .91. The quick ratio reduces the current ratio by the inventory value since inventory is not all that liquid.  This measures the company’s immediate solvency. For FMD, the quick ratio was high in 2007 but very low in 2008, then slowly recovered until 2011.
  • Working capital (current assets less current liabilities) in dollars was 96.68, 44.15, 273.60, -22.38, and 25.58. Average of 83.53. The company’s working capital shows a positive balance except in 2010 where the balance is -$22.38, but it recovered in 2011 by having a positive amount of $25.58.

Leverage

The company incurred a long-term debt of $8273.14 in 2011 which is 108 percent of its total assets. This was due to its long-term investment of $ 7012.74 of the same year. Financial leverage of the company can be measured by its debts or obligations which were directly utilized to continue running its business operation. In order to have knowledge of this, related ratios are used.

Facts

  • Debt ratio was .31, .47, .51, .63 and 1.11. Average of .60. Total liabilities compared to total assets of FMD showed that total liabilities represent 60 percent of its total assets.
  • Debt to equity ratio was .44, .88, 1.03, 1.68 and -9.70. Average of -1.13.
  • Solvency ratio was 1.0, -.38, -.90, -.43 and -.03. Average of -.15, meaning the company is not solvent. Acceptable solvency ratios will vary from industry to industry, but as a general rule, a solvency ratio of greater than 20 percent is considered financially healthy. Generally speaking, the lower the company’s solvency ratio, the greater the probability that the company will default on its debt obligations.
  • Current liabilities to total assets had an average of .60, which means that FMD’s creditors have 60 percent claims on the total asset of the company. The company has a long-term loan in 2011 which was 108 percent of total asset. This should be closely monitored. While the stockholders or owners of the company have 40 percent average claim of the total asset.

Explanations

Based on its past performance which resulted in a negative average balance, one should conclude that the company is not doing well on their investments.

Return on assets (ROA) is a useful measure if one wants to evaluate how well an enterprise has used its funds. High ROA ratio implies a well-managed asset while return on owners’ equity (ROE) reflects how much the firm has earned on the funds invested by the shareholders, either directly or through retained earnings. For FMD, below are the results:

  • Return on asset  was 30.6, -19.6, -47.5, -29.4 and -2.9. Average of -13.76.
  • Return on equity was 44.1, -36.9, -96.2, 78.7 and 25.2. Average of -28.5.

FMD Income Statement

Profitability

Return on equity is one of the most important indicators of a firm’s profitability and potential growth. FMD’s ROE from 2008 to 2010 depicted a declining trend compared to 2007 returns of 44.1 percent. This was mainly due to the decrease in net profit and total stockholder’s equity.  Also in 2012 three quarters total had a decreasing return of -224 percent because stockholders’ equity decreased also in the first quarter of 2012. This means that operations and asset management was inefficient to garner a profitable rate of return for the last four years aside from the financial crisis that happened in the US.

DuPont Model

Using the DuPont Model in the computation of the return on equity, there are three components as follows:

  • The net profit margin of a percent was 42.2, 827.5, 134.3, -1058.2, and -151.5. This simply was the after-tax profit a company generated for each dollar of revenue.
  • Capital turnover (sales/assets) was 72.5, -2.4, -28.7, 2.3, and -3.4. This measured the effectiveness of a company to convert its assets into sales.
  • Financial structure ratio (assets/shareholder’s equity) was 144.1, 163.2, 193.9, 225.3, and -1242.4. This measured the financial leverage of the company.

Multiply every three components you will get:

  • Return on equity was 44.1, -32.4, -74.7, -54.8, and 63.9. The company could return such percent for every dollar of equity.

Computation of the return on assets:

  • Operating margin (EBIT/sales) was 71.3, -1362.1, -189.6, -1336.5 and -157.2. This measured the operations efficiency of the company.
  • Asset turnover ratio was 72.5, -2.4, -28.7, 2.3, and -3.4. Measured the total utilization efficiency of assets.

Multiply the two components, the result was:

  • Return on asset was 51.7, -32.7, -54.4, -30.7 and -5.34. This tells us how much profit the company generated for each dollar on total assets.

Explanation

Therefore, if we were to leave out the equity multiplier to see how much FMD would earn, you will see that the ROE dropped to 31 percent, -19.8, -38.5, -24.3, and -5.15. In other words, the return on equity was due to profit margins and sales while 13.1 percent, -12.6, -36.2, -24.3 and 58.75 was due to returns earned on the debt at work in the business or the portion of the return on equity as the result of long-term debt. As you can see in 2011 return on equity, 58.75 percent was the result of the long-term debt they invest in long-term investment amounting 7, 012.74 million dollars.

FMD depicted a declining ROA from 2007. The company is not profitable in using total assets to generate revenue. This means the company needs to increase operational efficiency as well as increase assets utilization.

Expenses

Expenses from 2007 to 2012 three quarters total as follows:

  • No cost of revenue for this is a financial business that deals with credit services.
  • Selling, general, administrative expenses, the total was 252.96, 328.34, 104.38, 87.68, 122.27 and 282.42.
  • Depreciation and amortization were 0, 19.63, 17.8, 13.36, 8.25 and 1.26.
  • Unusual expense (income) was 3.2 in 2008.
  • Income tax, total was 256.43, -151.88, -160.63, -44.94, 2.11 and 10.89.

By looking at the expenses above (which represents the 204 percent of total revenue), FMD had a huge operating expense which was more than its average revenue earned. Its depreciation and amortization expense accounts for 13 percent; income tax, 22; unusual expense, 0.70; and another net, 12 of average total revenue.

Income

Let’s move on FMD’s income from 2007 to 2011 including 2012 three quarters total. The following are the results:

  • Total revenue in million dollars was 880.7, -28.41, -290.5, 16.15, -139.63 and 140.37 – the company’s total earnings.
  • Gross profit was 871.33, -54.03, -315.6, 6.28, -404.67 and 116.84. This was after deducting the gross revenue from the cost of revenue.
  • Operating income was 627.75, -386.96, -550.84, -215.84, -270.15 and -164.16. Company’s income after deducting all operations expenses.
  • Income before tax was 627.77, -389.96, -550.84, -215.84, -219.45 and 1,105.27. This was the company’s income before deducting income taxes.
  • Net income was 371.33, -235.08, -390.21, -170.90, -221.56 and 1,116.17.  This was the company’s income after deducting income taxes.

Explanation

  • Total revenue growth ratio declined in 2008 and 2009 by -103.2 percent and -132.9. It then recovered a bit in 2010 of 1.83 but decrease again in 2011 of -115.85 and a hopeful increase in revenue as of three quarters total in 2012 of 15.9 against 2007. This illustrates the company’s revenue was inefficient in its marketing of credit services and let revenue to go this down.
  • Gross profit was -106.2 percent, -136.2, 0.72, -146.44, 13.4 against 2007 while operating income and income before tax with -161.6 percent, -187.74, and 134.38 from 2008 to 2010. In 2011 and 2012 operating income amounts -270.15 and -164.16 or -143 percent and -126, and income before taxes of -219.45 and 1, 105.27 or -134.9 percent and 176 respectively. This differences the accounts for the non-operating income and gains on the sale of assets.
  • Therefore, net income or net loss showed growth of -163.3, -205, -146, -159.6, and 300.5 indicating that 2012 net income was quite impressive after four years of net loss in operations.

Margin

  • Gross profit margin (GMP) is often used as a measurement of a company’s efficiency but it cannot gauge the profitability. FMD, the gross profit margin was only good in 2007 and 2010 compared to the rest of the years. They did not earn impressive revenues that could pay for their huge operating expenses as depicted in their EBIT and pretax margin.
  • Net margin after deducting its declining tax rate showed a losing end for straight four years. In 2012 three quarters total, even if their operations were down, it looks prospective with net income because of the gain from the sale of assets in its second quarter.

To further understand, refer to details below:

Facts

  • Gross margin in percent was 98.9, 190.2, 108.6, 38.9, and 289.8.
  • EBIT margin was 71.3, 1362.1, 189.6, -1336.5, and 193.5.
  • Pretax margin was 71.3, 1362.1, 189.6, -1336.5 and 157.2.
  • Net margin was 42.2, 827.5, 134.3, -1058.2, and 158.7.
  • Tax rate was 40.8, 39.2, 29.2, 20.8 and -1.0.

FMD Cash Flow Statement

Cash Flow from Operating Activities

The cash from operating activities showed sideways; it had a negative cash flow in percentage which represented at 143 and 717 for 2008 and 2009. This was due to the net loss incurred from 2008 to 2011. The good thing is, it had a positive cash flow in the percentage of 121 and 19, for 2010 and 2011, respectively.

To find out, if there are still funds for the operation, we can get through by taking the net income and adding all the non-cash items. Below are the results:

Facts

  • Net income/starting line in $ million was 371.33, -235.08, -390.21, -170.9 and -221.56
  • Non-cash items was -13.33, 19.62, 181.36, 266.43 and 499.89
  • Another noncash item was -13.44, 14.39, 181.36, 266.43 and 516.66
  • Other assets was -259.41, -77.1, 329, 5.41 and -105.87
  • Cash from operating activities was 195.52, -456.08, -55.83, 268.61 and 226.52

Explanation

The total cash collection was in erratic movement; it had a positive collection in 2007 but in 2008 to 2009 was negative and recovered in 2010 with also a positive collection but in 2011 was in negative. This was affected by the total revenue which was negative in 2008 to 2009 as well as in 2011.

Historical Cash-in

To know the total collection per each year; we can get the revenue and add any decrease in receivable or deduct any increase of receivable. Below was the result:

  • Total revenue was 880.7, -28.41, -290.5, 16.15 and -139.63
  • Receivables, net was 0, 0, -166.41, 156.29 and -55.98
  • Cash collection was  880.7, -28.41, -456.91, 172.44 and -195.61

Historical Cash out

To determine how much cash the company paid for their purchases, we get the total cost of revenue and add the increase or deduct the decrease of inventory then add the decrease or deduct the increase of accounts payable. Below are the details of purchases:

  • Cost of revenue, the total for five years was zero.
  • Total inventory for five years was zero.
  • Accounts payable for five years was zero.
  • Thus, total cash payment for purchases for five years was zero.

Explanation

Since the company had no prepaid and added expense, the operating expense was represented as the total cash payments for operating expenses. Wherein, in 2008 it increased to 27 percent while in 2011 it decreased to 65 percent. By adding the total operating expense per year and add the increase or deduct the decrease of prepaid expense and add the decrease or deduct the increase of accrued expense we can determine how much the cash payments for operating expenses. Below are the results:

  • Total operating expense was 243.58, 332.93, 235.24, 222.12 and 134.52
  • The prepaid expense was zero for five years.
  • The accrued expense was zero for five years.
  • Cash payment for operating expenses was 243.58, 332.93, 235.24, 222.12 and 134.52.

Explanation

It indicates the cash payments for income tax was decreasing. It means the net income of the company that was taxable was also decreasing.

To determine, how much cash payments for income taxes; we need to add the income tax total and add the decrease or deduct the increase in income tax payable. Below are the results:

Computation

  • Income tax – total was 256.43, -151.88, -160.63, -44.94 and 2.11
  • Deferred income tax increase or decrease was -0.05, 0.24, -0.27 and 0.24 for 2008 to 2011
  • Cash payment for income taxes was 256.43, -151.93, -160.39, -45.21 and 2.35

Then how much cash from operating activities was available? Using the direct method of accounting we need to get the total cash collection less the cash payments for purchases, operating expenses and income taxes. Results are as follows:

Facts

  • The total cash collection was  880.7, -28.41, -456.91, 172.44 and -195.61
  • Total cash payment for purchases for five years was zero.
  • The cash payment for operating expenses was 243.58, 332.93, 235.24, 222.12 and 134.52.
  • Cash payment for income taxes was 256.43, -151.93, -160.39, -45.21 and 2.35.
  • Cash from operating activities was 380.69, -209.41, -531.76, -4.47 and -332.48.

The cash from operating activities shows only in 2007 had positive cash available and in 2008 to 2011 was in opposite results. This explains that the company was more on cash outflow than inflow…not enough cash collection against their expenses.

Cash Flow from Investing Activities

The cash from investing activities was in sideways; in 2008 and 2011 had a cash inflow of 396 and 863 percent, respectively, due to the company had a sale of maturity investments and other investing cash flow.

In order to know how much cash the company invested in capital expenditures and other investing items, we need to get the total capital expenditures, which is the composition of purchase of fixed assets and purchase of intangibles. The other investing cash flow items were in the composition of acquisition of a business, the sale of business, sale or maturity of investments, purchase of investments and other investing cash flow. The following are the results:

Facts

  • Capital expenditure was -20.49, -9.12, -2.14, -0.9 and -3.43, total for five years -36.
  • Other investing cash flow item was -55.98, -11.47, 63.1, -43.59 and 342.69.
  • Cash from investing activity was -76.46, -20.58, 60.96, -44.49 and 339.27.

Cash Flow from Financing Activities

How much total cash the company raised through additional funds? This can be seen in financing activities which compose of financing cash flow items, cash dividend paid, issuance (retirement) of debt and issuance (retirement) of stocks. Below are the results that give an impact on the financing activities:

Facts

  • Financing cash flow items were 23.7, 190.97, -91.83, -46.9 and -48.24
  • Total cash dividends paid was -58.47, -36.94, 0, 0 and  0
  • Issuance   (retirement) of stock, net was -59.27, 59.57, 125.61, -1.97 and -0.33
  • Issuance   (retirement) of debt, net was -4.78, 237.41, -16.34, -15.46 and -630.89
  • Cash from financing activities  was -98.83, 451.01, 17.44, -64.32 and -679.47

Explanations

The above data indicate the cash from financing activities of FMD was still in unpredictable. In 2008 and 2009, it had a cash inflow due to stocks sold but the good thing in 2010 and 2011 they raised funds through the issuance of debt.

FMD in 2008 and 2009 shows a negative cash flow because of the negative result of cash operating. But the good thing is that it recovered in 2010 by 120 percent.

Free Cash Flow

To determine if the company has a free cash flow, we need to take the cash from operating activities and deduct the capital expenditure also the dividend. Below are the results:

  • Cash from operating activities was 195.52, -456.08, -55.83, 268.61 and 226.52
  • Capital expenditures was -20.49, -9.12-2.14, -0.9 and -3.43
  • Total cash dividends paid was -58.47, -36.94, 0, 0 and 0
  • Free cash flow was 274.48, -410.02, -53.69, 269.51 and 229.95

Facts

To know if the company has plenty of cash to pay its obligation, we need to use the cash from operating activities over total liabilities; below are the results:

  • Cash from operating activities was 195.52, -456.08, -55.83, 268.61 and 226.52
  • Total liabilities was 371.84, 563.29, 415.87,364.31 and 8,531.86
  • Cash flow solvency was 0.53,-0.81, -0.13, 0.74 and 0.03

Explanations

The cash flow for solvency indicates that for five years of operation FMD had no cash available during 2008 and 2009 and recovered in 2010. It was still not sufficient that in every $1 of debt, they can only pay their obligation at .7 and .03, respectively.

Written by: Rio, Nelly, and Dyne

Edited by Cris

Baidu.com

Baidu Inc (BIDU) Has Increasing Net Margins

July 12th, 2012 Posted by Company Updates No Comment yet

BAIDU Balance Sheet

Liquidity

In value investing, we consider the past performance of Baidu.com Inc relative to its liquidity. When we say liquidity in a business, an account that will come out in our minds is the cash on hand or cash in banks. Inventory and receivables fall under current assets, which are easily convertible to cash within a short period of time. To determine how liquid the company is, we have to calculate ratios on current resources of the company.

Current ratio, quick ratio and working capital of BAIDU from 2007 to 2011:

  • Current ratio in percent was 2.73, 3.36, 3.46, 3.44 and 3.60. Average of 3.32. Baidu.com Inc has an average current ratio of 3.32 which means that current assets are 332 percent greater than current liabilities.
  • The quick ratio in percent was 2.73, 3.36, 3.46, 3.44 and 3.60. Average of 3.32. This ratio focus on the monetary assets of the company, the ratio is also 3.32.
  • Working capital in the dollar was 1094.29, 2003.15, 3443.15, 6230.6 and 11441.61. Average of 4842.56. It shows a consistently positive result per period for five years and still increasing yearly with a very high balance in 2011 (twice the numbers of 2010 balance).
  • Therefore Baidu was able to meet its current obligations.

Cash Conversion Cycle

One of the objectives of a business is its consistency in maintaining a sound financial position. To determine it is to consider its resources which contribute much to generating cash for operating its business.  The said resources are inventory and receivables. Baidu.com Inc has no inventory account and its payable was in 2010 only. The receivable turnover ratio has an average of 26 times turn per period in five years and 15 days to collect.  Its cash conversion cycle has an average of 12 days. To calculate CCC is to add inventory conversion period and receivables conversion period minus payable conversion period.

Asset management ratios from 2007 to 2011 of BAIDU:

  • The receivable Turnover ratio in percent was 27.14, 34.47, 27.52, 20.01 and 19.34. Average of 25.70.
  • Receivable Conversion Period in days was 13, 11, 13, 18 and 19. Average of 15.
  • Cash conversion cycle in days was 13, 11, 13, 2 and 19. Average of 12.

How efficient is Baidu’s overall process of converting product or services into cash? For the past five years in operation, the cash conversion cycle of Baidu.com Inc has an average of 12 days. Generally speaking, the faster the conversion, the less money is tied up in inventory but it depends upon the nature of the business. Baidu has no inventory and payables balance, but purely receivables aside from cash account.

Further interpretation of the cash conversion cycle:

Particulars 2007 2008 2009 2010 2011 Ave.
Inventory Conversion Period 0 0 0 0 0 0
Days’ Receivable 13 11 13 18 19 15
Days’ Payable 0 0 0 16 0 2
Cash Conversion Cycle 13 11 13 2 19 12

Leverage

What kind of leverage does the company used in the course of normal business? Baidu used its working capital and current assets, particularly short-term investments to continuously run its normal business operation.

A company with a high proportion of long-term debt is said to be highly leveraged. From the company’s standpoint, the greater the proportion of its invested capital (long-term liabilities and owner’s equity) that is obtained from its shareholders, the fewer worries the company has in meeting its fixed obligations.  In the case of BIDU, its debt ratio has an average of 25, which means, its total liabilities is 25 percent of its total assets and 35 percent of its total equity. Likewise, the solvency ratio has an average of 1.09, which indicates that BAIDU is 109 percent solvent. Solvency ratio is derived by dividing net income plus depreciation divided by its total liabilities. Detailed data below:

Financial leverage ratio of BAIDU from 2007 to 2011:

  • Debt ratio in percent was .24, .22, .23, .24 and .34. Average of .25 which means that the company’s total debt was 25 percent of its total assets.
  • Debt to Equity ratio in percent was .31, .27, .30, .31 and .53. Average of .35 which indicates that BAIDU’s obligations represent 35 percent of its equity.
  • Solvency ratio in percent was .99, 1.23, 1.06, 1.33 and .82. Average of 1.09. The company is 109 percent solvent.

It is important to know who is in control of the business, is it the creditors, banks or the owners? For the company, the creditors have 22 percent claims on the company’s total assets, while the stockholders have 75 percent claims. However, in 2011 the banks or bondholders have 10 percent claims.

Related ratios follow:

  • Current liabilities to total assets in percent was .24, .22, .23, .23 and .19. Average of .22.
  • Long-term liabilities to total assets in percent was 10 percent in 2011 only.
  • Stockholders’ equity to total assets in percent was .76, .78, .77, .76 and .66. Average of .75.

The creditors’ claims on the total assets of the company are calculated by dividing the company’s current liabilities by its total assets while the owners’ or stockholders’ claims is the quotient of stockholders’ equity over total assets.

BAIDU Income Statement

Baidu.com Inc’s income statement is one of their financial statements used to provide information on the revenues and expenses of the company; and ultimately the income and the profitability of its operations.

Income

Total revenue means the total earnings or sales operation. Business like internet information providers in the 21st century boomed. Thus, Baidu’s total revenue had a high increase of 9 and 11 times in 2010 and 2011 respectively against 2007. Likewise, gross profit, operating profit, and net profit increased from 10 to 20 times compared to 2007 amounts.

Data below detailed the income from 2007 to 2011.

  • Total revenue was 1,744.43, 3,198.25, 4,447.78, 7,915.07 and 14,500.79.
  • Gross profit was 1,095.62, 2,039.00, 2,829.07, 5,763.58 and 10,592.88.
  • Operating profit was 547.15, 1096.74, 1,604.94, 3,958.77 and 7,576.66.
  • Net profit was 628.97, 1,048.11, 1,485.10, 3,525.17 and 6,638.64.

The above amounts tell us that Baidu.com Inc’s income trend was yearly increasing thus the company’s operation and management is doing good to boost yearly increase in their income.  This shows a sound and profitable company in terms of their income generating properties.

Margins

Looking into the company’s various margins (gross, operating, pretax and net) computations against sales showed that:

  • Gross profit margin was 62.9, 63.8, 63.6, 72.8 and 73.0.  Gross profit margin was total revenue less cost of revenue, depicts that almost two-thirds or three-fourths of total revenue. And it went down from 2008 to 2009 but increase in 2010 and 2011.
  • Operating profit (OP) margin was 35.4, 36.4, 37.9, 51.3 and 52.2.  It shows a dip in 2007 but gradually recover in 2008 and 2009 but leap high in 2010 and 2011.
  • While net profit margin was 36.1, 32.8, 33.4, 44.5 and 45.8.  This depicts an opposite to OP wherein margin in 2007 increased then it dipped down in 2008; gradual increased in 2009 and leaped high in 2010 and 2011.

Explanation

Both gross profit and operating profit margins decreased in 2007 mainly due to worldwide economic crises and increased cost of revenue and operating expenses. In 2008 to 2009 it gradually recovered, thus 2010 and 2011 rose to higher margin meaning sales or revenue almost double every year.  Net profit margin increased in 2007 due to the growth of 108 percent in total revenue but dipped down in 2008 and 2009 to 32.8 and 33.4 percent. And the company had recovered that in 2010 and 2011, it grew to 44.5 and 45.8 percent. This means that the company has increasing favorable net margins.

Expenses

Expenses from 2007 to 2011are as follows:

  • Cost of revenue was 645.41, 1,155.46, 1,616.24, 2,149.29 and 3,896.88.
  • Selling, general, administrative expense was 411.16, 659.8, 803.99, 1,088.98 and 1,692.81.
  • Research and development were 140.7, 286.26, 422.62, 718.04 and 1,334.43.
  • Income tax, total was -12.75, 116.07, 198.02, 536 and 1,188.86.
  • Tax rate in percent was -2.1, 10, 11.8, 13.2 and 15.2.

Explanation

  • Cost of revenue; selling, general and administrative expenses; and research and development illustrated a yearly increasing trend. Income tax decreased in 2007 but gradually increased from 2008 to 2009 and then increased again by 44 to 64 percent in 2010 and 2011. Reviewing the expenses of the company, their cost of revenue had an average of 32 percent of the total revenue.
  • Selling, general and administrative expense; gradually increasing; showed an average of 17.7 percent against total revenue.
  • Research and development accounted for 9 percent while income tax expense represented an average of 4.7 percent of total revenue.
  • The company managed their expenses well because they still have 36.6 percent of their average total revenue. This means operations earned an average net profit after all expenses and taxes.

Profitability

To check their general earning power of the company we computed the following:

  • Return on asset was 23.7, 26.6, 24.1, 31.9, and 28.4. This tells us how much profit the company generated for each dollar on total assets.
  • Return on equity was 31.1, 33.9, 31.2, 41.9, and 43.4.  This tells us how much was earn by the stockholders on the money invested intine company.

Looking into their return on asset and equity, the company’s trend increased for the first two years but dipped down in 2009 due to the worldwide economic crisis but leaped high in 2010. Return on the asset in 2011 decreased meaning management operating performance decreased by 28.4 percent in utilizing their total assets. Returned on equity earned a high rate of 41.9 and 34.4 percent in 2010 and 2011 showing more than the average of 36.3 percent yearly.

Operating Profit

Their operating profit margin showed the return on sales which dipped down in 2007 to 35.3 percent which means an increase of direct cost of revenue and operating expenses. The company recovered gradually that it reaches a high of 51.3 and 53.9 percent in 2010 to 2011 respectively;  more than the average of 50.4percent yearly. This means they earned good that they use this to their advantage by using the profit back in their business operations as shown in the data below:

  • Operating profit margin was 35.3, 36.4, 37.8, 51.3 and 53.9. This tells us the return on sales or operating profit per dollar of sales.

Using the expanded DuPont method computations as follows:

  • Net profit margin was 36.1, 32.8, 33.4, 44.5, and 45.8. This tells us how much income left against revenue.
  • Capital turnover was 65.7, 97.0, 88.1, 92.0, and 84.3. This tells us the rate of return on common equity or how well the company uses its stockholders’ equity to generate revenue.
  • Financial cost ratio was 100 percent from 2007 to 2011.  This tells us that the company’s interest burden (pretax profit divided by EBIT) showed 1.00 meaning they have no debt or financial leverage.
  • The financial structure ratio was 131.4, 129, 128.7, 130.8, and 145.1.  This measure the financial leverage of the company and use as equity multiplier which is equal to the company’s debt to equity ratio.
  • Return on equity wherein the formula is net profit margin times asset turnover times equity multiplier was 56, 53.6, 37.9, 41, and 31.1.

To get the return on equity using the DuPont method; The net profit margin was the percentage of net income against revenue multiply by asset turnover or capital turnover multiply by equity multiplier or financial structure ratio.

Net Profit

  • Net profit margin showed a decrease in 2008 which account for the increase in cost and expenses but tends to increase abruptly in the following years’ cause by higher revenues.
  • Their capital turnover, the company’s annual sales divided by its average stockholder’s equity, showed a down and uptrend. This means that in 2008 and 2010 the company uses its capital or equity more efficiently in converting assets to revenues. But no dividends were paid.
  • The equity multiplier or financial structure ratio expressed that average total assets were more than average total stockholders’ equity.
  • These three multiplied gets us to return on equity of 56, 53.6, 37.9, 41, and 31.1, which depicts a high ratio in 2007 of 56 to lower ratio in 2011 of 31.1. This means a good return on equity in any industry.
  • If computed without the equity multiplier, ratios will lower down to 38.6, 40.9, 29.4, 31.8 and 23.7 for this is due to profit margins and sales while 17.4, 12.7, 8.5, 9.2, and 7.4 was due to returns earned on the debt at work in the business.  Comparing the two, return on equity from internally-generated sales has a higher percentage.

Is there anything that might be a concern in terms of generating an income in the future? Baidu needs to be competitive in order to maintain and increase revenue in the future.

BAIDU Cash Flow Statement

Why are we analyzing the cash flow? It is very important because from here we can determine if the company have available funds for the operation; also we can know, where the cash invested or reinvested and if the company had raised additional funds. There are three activities; which are the operating, investing & financing activities.

Cash Flow from Operating Activities

The cash from operating activities was very impressive, it had continuously increased by 86, 30, 108 and 74 percent from 2008 to 2011, respectively. It indicated that the management was efficient in handling their funds.

To determine the cash from operating activities, we can come up by taking the net income and by adding all the non-cash items like depreciation and any positive changes in working capital.

Below are the results:

  •  Net income or starting line was 628.97, 1,048.11, 1,485.10, 3,525.17 and 6,620.32
  •  Depreciation or depletion was 170.73, 268.59, 306.28, 431.1 and 819.24
  •  Non-cash item was 36.17, 94.04, 81.47, 62.25 and 145.83
  • Another non-cash item was 35.54, 90.11, 86.81, 86.8 and 118.72
  • Changes in working capital were 99.85, 332.59, 391.74, 746.09 and 592.46
  • Total cash from operating activities was 935.15,1, 741.64, 2,264.48, 4,700.48 and 8,178.82

By using the direct method of accounting, the following are the results:

The total revenue had successively gone upward; in 2007, increase to 108 percent, 83 percent increase in 2008, 39 percent increase in 2009, 78 in 2010 and 83 percent in 2011. The accounts receivable represented only to 6 percent of the revenue. Then, the cash received from the customer in percentage over their revenue for each year was 95, 100, 98, 97 and 96 results from 2007 to 2011, respectively. It tells that management was effective in handling their collections.

By getting the total revenue and adding a decrease of receivable or subtracting the increase of receivable for the year; we can determine how much the cash collection for each year. Below are the results:

Facts

  • Total sales in $ million was 1,744.43, 3,198.25, 4,447.78, 7,915.07 and 14,500.79.
  • Accounts receivable increase was 84.83, 11.54, 107.62, 211.38 and 562.43.
  • Cash collection was 1,659.60, 3,186.71, 4,340.16, 7,703.69 and 13,938.36.

Explanation

Data above indicate the cash payment for purchases was consistently increasing. It results in the total cash payments over its total revenue for five years, represents 30 percent meaning, the company had much more cash remaining to cover their general expenses.

To know how much cash dispersed to their supplier we take all the cost of revenue, adding the increase or deducting the decrease in inventory and by adding the decrease or subtracting the increase in accounts payable of the company.

Facts

  • Total cost of revenue was 645.41, 1,155.46, 1,616.24, 2,149.29 and 3,896.88.
  • Total inventory was zero for five years.
  • Accounts payable from 2007 to 2011 was zero except in 2010 at 95.7.
  • Total cash payments for purchases was 645.41, 1,155.46, 1,616.24, 2,053.59 and 3,896.88

Explanation

The total operating expense highly moved upward, giving a bulk increase in 2008 and 2011 by 42 and 67 percent, respectively. The prepaid expense had only decrease in 2009 but the accrued had an increasing result for five years. Then, the total cash payments for operating expense was increasing except in 2009, it had a decrease of 17 percent due to the prepaid which also decreased by 204 percent.

In order to get the total cash payments for operating expenses, we need to take all the total operating expenses, add the increase or deduct the decrease in prepaid expenses and add the decrease or deduct the increase in accrued expenses. Below is the summary:

Facts

  • Total operating expense was 548.47, 942.26, 1224.13, 1804.81 and 3,016.22
  • Prepaid expense was 2.74, 43.28, -41.48, 25.25 and -1.44
  • Accrued expense was -50.59, -62.36, -393.2 , -371.64 and -491.65
  • Cash payment for operating expenses was 500.62, 923.18, 789.45, 1,458.42 and 2,523.13

Even the total cash paid for the income tax went up, still, the management was efficient, this only represented 6 percent of the total revenue for five years. The total cash paid for the income tax was -12.75, 116.07, 198.02, 536 and 1,188.86 from 2007 to 2011, respectively. It shows, the movement also went up continuously.

Cash Flow from Investing Activities

The cash from investing is where we can see how much the company invested or reinvested and where they invest? BIDU was an internet provider, the composition of their capital expenditures was the purchase of the fixed asset, a little from intangibles and from software development; the other investing cash flow items were net from purchase/sale of investment and a little from the acquisition of a business. Below are the results:

Facts

  • Capital expenditure was  -577.13, -476.81, -450.07, -976.12 and -2,342.46.
  • Other investing cash flow item total was -136.08, -184.29, -86, -241.4 and -11,908.07.
  • Cash from investing activities was -713.22, -661.1, -536.07, -1,217.52 and -14,250.53.

The capital expenditure in 2008 & 2009 was decreasing and went upward in 2010 and 2011 by 117 and 140 percent, respectively. The other investing cash flow items continuously went upward except in 2009 it was down to 53 percent and in 2011, it was jumped to 48 times higher from 2010. It means the bulk of investment of the company was last year represents by 4833 percent increase. It tells us, the management was also vigilant in terms of investment, as we look back, 2009 was the year, the world most in crisis.

Interpretation

It results, the company was financially healthy only in 2008 had a cash outflow amounting to $ -35.64, the rest of the year it had a cash inflow result. It tells us, the company was very efficient.

Cash Flow from Financing Activities

Through the cash from financing activities, we can determine if the company had raised additional funds; is it through by financing or from their stockholders? Below are the results:

  • Financing cash flow items were zero from 2007 to 2010 only in 2011 at 43.97.
  • Issuance   (retirement) of stock, net was 40.7, -35.64, 95.09, 38.75 and 23.18.
  • Issuance (retirement) of debt, net was zero from 2007 to 2009, 86 and 2,358.66 for 2010 and 2011, respectively.
  • Cash from financing activities was 40.7, -35.64, 95.09, 124.75 and 2,425.81.

Written by  Rio, Nelly, and Dyne
Edited by Cris

Interested to learn more about the company? Here’s company research to know more about its background and history and investment valuation for the pricing.

Note:

Research Reports can be found under the company tab.