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 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.


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.


  • 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.


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


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.


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 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.


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.


  • 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.


  • 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:


  • 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:


  • 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


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.


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.


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:


  • 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:


  • 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:


  • 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:


  • 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


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


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


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

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