knight-capital-group-inc-kcg2

Knight Capital Group Inc (KCG) Is Highly Leveraged

September 17th, 2012 Posted by Company Research Report No Comment yet

Knight Capital Group Inc (KCG) was an American global financial services firm engaging in market making, electronic execution, and institutional sales and trading. Source: WikiPedia

Knight Capital Group Inc (KCG) Balance Sheet

The balance sheet allows us to see how much a company owes (liabilities)and how much it owns (assets). To keep things in balance between assets and liabilities, we have retained earnings (equity). I evaluated the following key indicator like financial liquidity, leverage, among who had majority control and asset management.

Financial Liquidity

Financial liquidity is to determine the ability to pay short-term debt accounts payable that can be converted quickly to cash. Commonly used liquidity ratios include the current ratio, working capital ratio, and net working capital. The current ratio is an indicator of a company’s short-term liquidity; which divides current assets by current liabilities. In addition, the working capital ratio is used as a barometer to measure a company’s over health and liquidity; which is current assets less current liabilities divided by total assets. Networking capital indicates the ratio or percentage of working capital against total assets.

KCG financial liquidity

Explanation

Financial liquidity ideal results were equivalent to 1 or 100 percent or more. KCG based on the graph had only a total average of 71 percent availability over their current liabilities. In other words, in every $1 of short-term debt, they had available assets of net working capital was declining, it was down to 20 percent based on 2008 results. It had an average of 5 percent means still they were are unable to meet the short-term debt.

Leverage

Leverage is the amount of debt used to finance a firm’s assets. A firm with significantly more debt than equity is considered to be highly leveraged. It is composed of debt ratio, debt to equity and solvency. The debt ratio is to determine how many total assets financed by borrowing funds, through the results of a current asset over current liabilities. Further, debt to equity ratio is the ratio of total shareholders’ equity financed by borrowing funds, from the result of total liabilities over the result of total stockholders’ equity. Furthermore, the solvency ratio measures a company’s ability to meet long-term obligations. Through the result of income after tax add the depreciation and divide to the result of current and long-term liabilities.

KCG leverage

Explanation

KCG leverage is too high in terms of the short term. The company finance from borrowed funds was equivalent to $.68 for every $1 of debt. Based on equity, it had an average of 213 percent financed by borrowed funds. It means that in every $1 of equity it was financed two times and it was too high. The ideal solvency result is 20 percent.

Majority in Control

In evaluating,  it is also important to consider who is in majority control of the company. To determine, it includes control from current liabilities to total assets which to identify how much will be claimed by the creditor against total assets of the company. On the other hand, long-term debt to total assets is to make out how much claim has the banks or the bondholder against its total assets. Then, stockholders’ equity to total assets is to know how much the owner can claim in its total assets.  Let us see the results for Knight Capital Group Inc.

KCG mjority control

Explanation

From the above results; if we based on their total five years of operation; the majority in control was the creditor holder at 33 percent, followed by the stockholder at 32 percent then last to bank/bondholder only at 6 percent. Though from the first three years, it was the stockholders it went down to 20 percent in 2011 compared to the creditor which rose up to 43 percent.

Asset Management

Asset management is composed of the following: total asset turnover, receivable turnover ratio, and payable ratio. When we speak of total asset turnover, it tells us the number of times that the assets turn per period, from the results of revenue over current assets. While receivable turnover ratio measures the number of days that companies collect its receivable or convert it into cash by using the result of outstanding receivable over its revenue for the period multiplied by 365 days. Then, the payable turnover ratio is to determine the number of days that the company pays its obligation to its suppliers from the outstanding accounts payable over its total cost of revenue multiplied by 365 days.

KCG Asset Management

Explanation

Based on the table above, KCG ’s five years of operation it showed that the company had a minimum of 167 days to convert their sales into cash. While in the total five years of operation, their minimum of the number of days to pay to its supplier were  529 days.

KCG Income Statement

The income statement is the bottom line result of the business for the period after deducting all the direct cost associated with its revenue and the operating expenses like admin and maintenance cost. Then, we can determine the net margins. Below are the results, in terms of their profitability, revenue, expenses and margin report for Knight Capital Group Inc.

Profitability

Profitability is a key measure for the business success; its composition of net margin ratio which defines as the net results after deducting all the expenses, from net income over revenue for the period. Asset turnover measures effectiveness how their assets easily convert to sales; through revenue over the total asset.  Return on assets or ROA tells us how much profit the company generated for each dollar of total assets by the result of net income over a total asset.

On the other hand, return on equity (ROE), using DuPont, measures the return of such profit percent for every dollar of equity. It can be determined using the result of the net profit margin multiplied by asset turnover. The financial structure ratio is the specific mixture of long–term debt and equity that a company uses to finance its operations. Further, the tax efficiency ratio measures how much profit left after deducting the income tax. It can be determined using the result of net income over profit before tax.

KCG Profitability Graph

KCG PROF2

Explanation

Did Knight Capital Group Inc. become profitable? The graph showed that KCG profitability within five years was in the positive result. It had a high net margin result in 2008 at 19 percent and went down from 2009 to 2011 to 8 percent a  total of $.12 generated per $1 of the sale. ROE had $0.03 generated in every $1 sale.

Revenue

Revenue is the source of income received from its normal business activities, usually from the sale of goods and services to customers. And gross profit is an income after deducting the associated cost directly from goods or services. In addition, operating income is the result after considering its operations and general expenses of the company. Moreover, income before tax is an income after deducting the taxes.

KCGRfinal new

Explanation

The revenue data and its graph imply that it was progressive except in 2010 which slow down by 1 percent. And the gross profit went continuously upward. In addition, the income before tax shows a declining trend from 2009 at 122 percent. However, recovered in 2011 by 20 percent.

Expenses

KCGENEW

Explanation

How did the expenses affect their margin? KCG expenses graph and table tell us that they have high expenses incurred in operating compared to the cost of revenue. This is no doubt since they are equity market makers and institutional brokerages. In other terms, they have lots of expenses probably in salaries and involved with research. Thus the business nature itself could define their expenses. The increase in operating expenses is not worrisome since the revenue result could justify and it was effective. It also showed that the percentage of operating expenses really affects the net margin.

Margins

The Margin determines how much can be generated in every $1 of the sale. It is composed of a gross profit margin. Further, the operating margin denotes how much percentage left after deducting the operating expenses. Furthermore, earnings before income tax or simply EBIT is the result of income before taxes. The net margin ratio or the equivalent percentage after applying all the expenses for that period.

KCG Margin Graph

KCG MARGINNEW

Explanation

Gross profit had generated a profit of $.79 over $1 on sale. And the operating margin and EBIT had the same result. The two both declined from 36 percent in 2009 and in 2010 down to 14 percent have an average $.21 generated in every $1. On the other hand, the net margin had a total average return at $.12 in every $1. It tells us they had a profitable result though in a declining trend.

KCG Cash Flow

Cash flow is a statement that helps in determining if the company has available cash for the operation alone. In other words, if they have a good free cash flow to maintain the maintenance of its resources. and if they had an excess of funds to refinance or cash available for business expansion.

Cash Flow Summary Graph

kcgfinal new

Explanation

The cash flow summary of KCG was in sideways. The cash flow from 2007 and 2008 was progressive with an equivalent of 36 and 57 percent. And then went down in 2009 and 2010 by 4 and -19 percent and went up by 22 percent in 2011. It tells us the management is recovering and efficient. In addition, the cash flow from investing in 2007 to 2009 had cash due to sales of mature investment.

Interpretation

Moreover, an outflow resulted due to the high cash used in the purchasing of PPE that purchases in investment. Financing had a reversed transaction from investing which from 2007 to 2009; it had an outflow of cash used for another financing. While, from 2010 and 2011 it had an inflow of cash due to long-term debt issued at 337 percent and change in short-term borrowing at 288 percent, respectively.

Cash Flow from Operating Graph

KCG new CFO

Explanation

Net operating cash flow had a negative result in 2010 due to the net income represented at 15 percent. Other asset and liabilities had a decreased of 84 percent. And also the increase of payables at 89 percent over their five years of operations.

  • Cash flow from operating ratio of sales measures how much cash generated from its revenue for the period.
  • And the operating cash flow ratio; by using the result of operating cash flow from operating over current liabilities;  measures how much cash left after considering short debt.
  • In addition, free cash ratios help us conclude if the company will grow in the future. Through the result of operating cash flow fewer, dividends paid less capital expenditure over operating cash flow.
  • Capital expenditure ratio measures company sustainability in maintaining their assets by using the result of operating cash flow over capital expenditure for the period.
  • Moreover, the total debt ratio is the result of operating cash flow over total liabilities. This measures the company’s efficiency.
  • Next, the current coverage ratio measures how much cash available after paying all its current debt.

knight capital group inc.

Explanation

Cash flow ratio results implied that based on the data and the movement showed. The operating cash flow of sales had an average of 11 percent In other words, $.11 generated in every $1 of sales. The operating cash flow ratio and the current coverage ratio was 269 percent in 2008. And went down to -26 percent in 2010; resulted in 80 percent average or $.80 cash available for every $1 of debt.

Interpretation

Free cash flow was not stable, fell down during 2009 due to fixed asset exceeded by -110 percent or $.57 in every $1. Capital expenditure was sufficient even though the company suffered -177 percent in 2010. It resulted in an average of 389 percent or $3.89 available cash over $1 of CAPEX maintenance. In addition, total debt ratio; through positive; was not sufficient with an average of $.09 for every $1 of debt.

Research and Written by Dyne

Edited by Cris

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