This section of our article will give you the guide to value investing in how the financial status of Investment Technology Group Inc (ITG) goes along in the business.
For stock investors, the balance sheet is an important consideration for investing in a company because it is a reflection of what the company owns and owes. The strength of the company’s balance sheet can be evaluated by working its capital adequacy, asset performance, and capitalization structures.
Financial liquidity of Investment Technology Group is good as far as its current resources are concerned. It has plenty of cash to settle its current as well as long term obligations. To compute for this, we used the current ratio, quick ratio, and working capital from 2007 to 2011 and the results were indicated below:
- The current ratio in percent was 1.12, 1.24, 1.31, 1.11 and 1.22. Average of 1.18. The company’s proportion of current assets is 122 percent against its current liabilities.
- The quick ratio in percent was 1.12, 1.24, 1.31, 1.11 and 1.22. An average of 1.18, which means that its monetary assets are 18 percent more than its current liabilities.
- Working capital in dollars was 150.93, 189.48, 236.09, 170.77 and 169. Average of $183.25. ITG’s working capital showed a positive balance throughout its five year period with an average of $183.25. It means that the company is able to pay off its current and long term obligations.
Based on the company’s performance through financial leverage ratio calculations, there was a need to continuously observe and monitor if the company could generate enough funds out of its resources to continuously run its business operation without additional borrowings made.
Another way to measure the financial stability of a company is through its financial leverage. Every investor should want to know if the business he wanted to invest in is not in depth debt. It is not bad to borrow money from banks or other creditors provided that such is closely monitored and no lapses in repayments. Let us find out the financial leverage ratio of ITG from 2007 to 2011 on the data below:
- The debt ratio in percent was .66, .53, .49, .66 and .69. An average of .61 or 61 percent of the total assets of the company was owed from creditors.
- Debt to equity ratio in percent was 1.98, 1.14, .96, 1.91 and 2.25. Average of 1.65. This means that ITG’s debt is equivalent to 165 percent average against its equity.
- Solvency ratio was .08, .13, .05, .01 and 0. An average of .05. It means that the company is only 5 percent solvent. This is unhealthy.
- Current liability to total asset was .60, .47, .45, .64 and .67. An average of .57. This shows us that the creditors have 57 percent claims on the company’s total assets.
- Stockholders’ equity to total assets was .34, .47, .51, .34 and .31. An average of .39, which means that the owners or shareholders have only 39 percent claims on ITG’s total assets.
There are several general rules that should be kept in mind when calculating asset turnover. First, asset turnover is meant to measure a company’s efficiency in using its assets. The higher the number, the better; but investors must be sure to compare a business in its industry since it is a misconception to compare completely unrelated businesses. In relation to the profit margin, the higher a company’s asset turnover, the lower its profit margin tends to be (and vice versa). For ITG, its fixed asset turnover ratio has an average of 15.64.
We would say that earnings of ITG are classified into high quality when expressed as EBITDA since it is exclusive of the estimated amount. Earnings are important to shareholders because dividends are paid based on annual earnings. Sometimes earnings are expressed as EBIT (earnings before interest and taxes), or EBITDA (earnings before interest and taxes, depreciation and amortization. Earnings per share (net profit divided by the number of shares). For ITG, its earnings results from 2007 to 2011 are as follows:
- EBIT in dollars was 174.18, 199.31, 202.78, 104.41 and 67.94. Average of 149.7. The company’s reported income before interest and tax deduction has an average of $149.7.
- EBITDA in dollars was 196.68, 235.31, 256.98, 165.21 and 130.34. Average of 196.9. This is the average income of an ITG company before interest and tax, depreciation and amortization
- Earnings per share was 2.21, 2.48, 2.61, .97 and .55. Average of 1.76.
ITG Income Statement
The reliability of the income statement as a report of the company’s performance differs widely among various types of companies. Net income of a retail store that sells only for cash has a high inventory turnover. Leases of its building and equipment are of high quality because the reported amount is relatively not influenced by estimates, while an income is of lower quality if it contains large items that require estimates of future events (such as depreciation expense).
One area to consider in this area of financial statement is profitability. To calculate for this, we used the DuPont Method which consists of three components as shown below:
- Net profit margin (NI/Sales) was 16.3, 15.2, 15.0, 6.8, 4.2 and -31.43. This simply was the after tax profit a company generated for each dollar of revenue.
- Capital Turnover (Sales/Assets) was 48.0, 41.0, 40.3, 37.4, and 27.0 and 0.24. This measured the effectiveness of a company to convert its assets into sales.
- Financial structure ratio (Assets/Shareholder’s Equity) was 241, 298, 214, 196, 291 and 325. This measured the financial leverage of the company
Then multiply every three components to get;
- Return on equity in percent was 18.3, 16.9, 15.4, 5.2, 2.8 and -23.33. The company could return such percent for every dollar of equity.
Computation of the return on assets:
- Operating margin (EBIT/Sales) was 29.06, 27.3, 25.6, 12.1, 8.6 and -36.12. This measured the operations efficiency of the company.
- Asset turnover was 48.0, 41.0, 40.0, 37.0, 27.0, and 24.0. This measured the total utilization efficiency of assets.
Lastly, multiply the two components and you get;
- Return on assets was 7.90, 6.24, 6.06, 2.53, 1.13, and -7.64. This tells us how much profit the company generated for each dollar on total assets.
ITG’s profitability analysis from 2006 to 2010 tells us that the company was able to generate a return on equity at an average of 11.72 or 12 percent for every $1 of investing capital, which was in a declining trend since 2008. It also declined to -23.33 percent during 2011. This means that ITG operations went down as portrayed by a decrease also in net income but in the 1st quarter of 2012, its prospective net income showed a good amount of 5.458 million dollars compared to 23.98 million dollars to -180 in 2010 and 2011, respectively.
Return on Assets
Return on assets (ROA) is an indicator of how profitable a company relative to its total assets. It showed a declined trend from 2006 to 2008 and a big leap in 2009 decreasing to a -7.64 percent in 2011. This means that the company is not progressing in using total assets enough to generate steady revenue, especially that in 2008 during the worldwide economic crisis, where it broke down a -62.64 percent decline in net income from 114.64 million dollars to 42.83 in 2008 and 2009, respectively.
Let’s look into the total revenues, operating income, and net income of ITG. By comparing its income from 2006 to 2011, we could get the following results:
- Total revenue in million dollars was 599.48, 731.00, 762.98, 633.07, 570.75 and 572. This was the company’s total earnings.
- Operating income was 174, 199, 196, 76, 49, and -207. This was the company’s income after deducting all operations expenses.
- Net income was 98, 111, 115, 43, 24, and -180. This was the company’s income after deducting income taxes.
Total revenues depicted an increase in 2007 and 2008 of 21.94 percent and 4.38 but decreased by -17.03 and -9.84 in 2009 to 2010. In 2011 it increased slightly to 0.22. then 2012 1st quarter decreases again to -9.13. This show a roller coaster trend meaning total revenues was not stable for ITG; it depends mostly from commissions and fees from investments plus recurring revenues from connectivity fees, software and analytical products, maintenance, customer technical support, investment research services, and others.
Operating income looks almost the same with total revenues showing growth in 2007 and 2008 of 8.43 percent and 3.53, the decline in 2009 to 2010 of -60.90 and -35.47 to -103.96 in 2012. This was caused by the increasing amount of operating expenses. While net income increase in 2007 and 2008 of 13.46 and 3.18, and then decreased in 2009 and 2010 of -62.64 and -44.02, to -39.13 in 2012.
Earnings per Share
In their earnings per share, it showed that from 2006 to 2008 they were earning as much as 2.21 dollars, 2.48, and 2.61 per share respectively. However, from 2009 to 2011 it declined down to 0.97, 0.55 and -4.42. This really would cause an alarming concern that management should look into their operations and find the means to solve their problem.
What about their expenses for the year 2006 to 2010? Kindly take a look at the results provided below:
- Cost of revenue was 80.70, 112.00, 95.08, 95.62 and 85.39Selling, general and administrative expenses was 344.60, 419.69, 465.13, 458.49 and 435.37
- Income tax was 64.04, 77.76, 80.88, 33.62 and 25.35. In 2011 was 26.84; 2012 1st quarter was 3.036.
- Operating expenses in 2011 was 778.67. In 2012 1st quarter was 127.88.
The analysis of the expenses of the company from 2006 to 2010 tells us that, the cost of revenue represents 14.26 percent, while the operating expenses represent 64.9, and income taxes was 10 against average total revenue. In 2011 and 2012 1st quarter operating expenses account for -136 percent and 93.77 while income tax accounts for 4.69 and 2.22 against total revenue. Thus, the total deduction from average total revenue was 89.17 and the remaining 11.5 will be the net income average percentage; in 2011 and 2012 1st quarter was only -31.4 and 4.01. Therefore, this showed a very tight margin for net income against their total revenues, meaning that operations were heavily burdened by increasing expenses incurred.
“In conclusion, I can say that ITG was earning good in 2006 to 2008. But due to the worldwide financial crisis, their operations were badly hit and start to dwindle down. Total revenue declined; operating expenses and income taxes increased so, naturally net income also decreases to the extent that the company was losing in 2011. But in the 2012 1st quarter the company recovered a good sizable amount of net income of 5.5 million dollars. Total assets increase accounts for the increase in receivables thus, return on assets increase to 1.43 percent. While return on equity gave 8.2 results due to the increase in net income and a decrease in stockholders’ equity” Nelly said.
ITG Cash Flow Statement
The statement of cash flows is an integral part of a company’s financial statements. Does, it tells us the most important thing of all. And how much cash a company generates. It documents both cash coming in and cash going out of a business-income and expenditures. Moreover, it has three activities which are the operating, investing and financing.
Cash Flow from Operating
ITG had a negative result in 2007 and recovered in 2008 with an increase of 129 percent. In 2009 to 2011 it was shrinking. The main reason was that net income was also declining. The 2012Q1 had a negative result of 53 percent if we compared it from 2011Q1.
Cash from operating activities can be computed using the indirect method of accounting through the net income of the company and add or deduct the key accounts that give an impact for this activity like by deducting the accounts receivable and adding the accounts payable. Below are the results:
- Net income in million dollars was 111, 115, 43, 24 and -180
- Accounts receivable was -596, 474, 16, -793, 128 and -764
- Accounts payable was 384,-317,-41, 862, -130, 700
- Cash from operating activities was -109, 380, 97, 176, 67 and 1. In 2011Q1 was-58 compared to 2012Q1 was -123.
Cash collections were the sum of total sales less the increase and add the decrease of accounts receivable. This is to determine if the management was effective in handling their collection. Below are the results:
- Total sale was 731, 763, 633, 571 and 572
- Accounts receivable was -596, 474, 16, -793 and 128
- Cash collection was 1,327, 289, 617, 1,364 and 444.
The above results showed that the cash collection of the company was in sideways. It had a bulk collection in 2010, represented at 55 percent due to the decrease of accounts receivable.
The cash payments for purchases where the sum of the total cost of revenue. Deduct the increase or add the decrease of inventory and add the increase or deduct the decrease of accounts payable. These are the total cash paid by the company for their purchases per year. The following are the results for ITG:
- Cost of revenue, the total was 112, 95.08, 95.62, 85.39 and 91.60
- Total inventory for five years was zero
- Accounts payable was 384, -317, -41, 862 and -130
- Cash payment for purchases was 496.00, -221.92, 54.62, 947.39 and -130.
Results shown was erratic in movement. In 2008, it had 324 percent down, due to the decrease of accounts payable and in 2010, up to 94 percent due to the increase of accounts payable. It indicates the cash payments paid for the operating expenses were also in sideways. It showed that only in 2011 they had an increase of 36 percent.
Cash payments for operating expense were the total cash paid for the operating expenses like selling or general and admin expenses also for unusual expenses. This can be computed by taking all the operating expenses and add the increase or deduct the decrease of prepaid expenses and then add the decrease or deduct the increase of accrued expenses. In ITG’s five years of operation, they had no record of prepaid and accrued expenses, then, the total operating expenses – 404.05, 452.27, 447.41, 427.47 and 671.75, results from 2007 to 2011 – were considered as the total cash payments for operating expenses.
The cash payments for income tax were the sum of income tax total and by adding the decrease or deduct the increase of income taxes payable. Cash payments for income tax decreased from 2008 to 2011. It indicates that the year 2011 had decreased to negative 109 percent. This was due to the decline in the net income of the company. The results are:
- Income tax – total was 77.76, 80.88, 33.62, 25.35 and -179.79
- Income tax payable was 0, 3, -25, 10 and -6
- Cash payment of income taxes was 77.76, 77.88, 58.62, 15.35 and -173.79.
By using the direct method of accounting, the cash from operating activity results are:
- Cash collection was 1,327, 289, 617, 1,364 and 444
- The cash payment for purchases was 496.00, -221.92, 54.62, 947.39 and -38.40
- While, cash payment for operating expenses was 404.05, 452.27, 447.41, 427.47, and 671.75
- In addition, the cash payment of income taxes was 77.76, 77.88, 58.62, 15.35 and -173.79
- Net cash flow from operating activities was 349.19, -19.25, 56.42, -26.46 and -15.52.
The total operating activities for five years were 344. The total cash collection for five years was represented at 1173 percent over the total cash operating activities, while the cash payment for purchases was 359 percent of the total cash payments. Operating expenses were 698 percent and the total cash payments for income taxes was 16 percent. It tells us the company had a greater percentage expense out in operating expense compared to the purchases.
The cash payments for operating activities using the direct method in accounting only had positive results in 2007 and 2009; the other years showed negative results. It was calculated using the cash collection less the cash payments for purchases, for operating expenses, and for income tax.
Cash Flow from Investing
To determine how much cash used for investing and where a company invested, we see that in the investing activities section in cash flow. The normal cash outflow compositions are the purchase of a fixed asset, intangibles, and acquisition of business and purchase of other investment. The inflow is the sale of maturity of investments. In ITG, the following are:
- Sales/maturity of investments was 3, 3, 0, 0 and 2
- Acquisition and disposition was -15, -6, -2, -49 and -36
- Purchase of intangibles, net was -41, -43, -38 and -29
- Other investing activities were -63,-26, -15, -15 and -23
- Net cash used for investing activities was -74, -70, -60, -102 and -86.
The net cash flow from investing of ITG was a straight negative result; the movement was also in sideways. It means, every year they kept on investing. It had a big impact on investment through the purchase of intangibles, represented at 39 percent total over the total of investing, and followed by other investment at 36 percent then the acquisition of a business represented at 27 percent.
Cash Flow from Financing
The cash flow from financing activities includes sales and re-purchases of corporate stocks, dividend payments, and long-term borrowings, from here we can determine the company’s funding commitments and why the business needs the money. For ITG, it resulted in the following:
- Change in short-term borrowing was 101, -76, -25, 0 and 2.
- Long-term debt issued was 0, 0, 0, 0, and 25.
- Long-term debt repayment was -28, -38, -48, -47 and -4.
- Common stock issued was 14, 7, 11, 11 and 10.
- Repurchases of treasury stock were -50, 0, -23, -50 and -39
- Other financing activities were 6, 0, -2, -4 and -6.
- Net cash provided by (used for) financing activities was 43, -130, -64, -90 and -12.
The cash flow from financing resulted that it was in 2007 they had cash provided at 17 percent over the total cash in financing activities. From 2008 to 2011 had negative cash used in particular for long term debt repayment and repurchase of treasury stock.
Free Cash Flow
The free cash flow represents the company’s ability to generate cash but also signals that the company should be able to continue funding its operations. It can also determine the company’s ability to pay debt, dividends, buy back stock and facilitate the growth of the business. Below were the results of ITG free cash flow:
- Net cash provided by operating activities was -109, 380, 97, 176 and 67
- While, capital expenditure was 15, 47,45, 87 and 65
- In addition, free cash flow was -124, 333, 52, 89 and 2.
The free cash flow has indicated that in 2007 they had negative results and recovered in 2008 to 2011 with positive free cash flow but it was shrinking due to the cash from operating which was also in sideways.
Cash Flow Solvency
- Net cash provided by operating activities was -109,380,97,176,67.
- On the other hand, total liabilities were1397,898,835, 1661 and 1507.
- While cash flow solvency was -0.08, 0.42, 0.12, 0.11 and 0.04.
The cash flow solvency represented at every $1 of debt was -0.08,0.42,0.12,0.11 and0.04 from 2007 to 2011, respectively. It means, the company had no sufficient cash to pay its debt.
Written by: Rio, Nelly, and Dyne
Edited by Cris