# Baidu Inc (BIDU) Has Increasing Net Margins

July 12th, 2012 Posted by 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

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