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Northrop Grumman Corporation (NOC) Extended Graph Analysis

June 3rd, 2020 Posted by Extended Analysis No Comment yet

Company Profile

NOC logo

Northrop Grumman Corporation (NOC) is an American Corporation that provides solutions in space,  aeronautics, defense and cyberspace worldwide. It is the third defense company in the US and the number two provider of information technology to the federal government and is the largest naval shipbuilder in the world. The company also provides information technology solutions to the government and commercial clients.

NOC was founded in 1994 in Denver, Colorado, United States, headquartered in Falls Church, Virginia, US. The company has more than 90,000 employees as of 2020.

 

Northrop Grumman Corporation (NOC) Extended Graph Analysis

 

1. NOC CASH FLOW

NOC CASH FLOW

2015 2016 2017 2018 2019 2020
Net cash flow provided by operating activitIes 2,162,000,000 2,813,000,000 2,613,000,000 3,827,000,000 4,297,000,000 4,217,000,000
Net cash used for investing activities -431,000,000 -805,000,000 -889,000,000 -8,878,000,000 -1,207,000,000 -1,197,000,000
Net cash provided by (used for) financing activities -3,275,000,000 -1,786,000,000 6,960,000,000 -4,595,000,000 -2,424,000,000 -590,000,000
Capital expenditure -471,000,000 -920,000,000 -928,000,000 -1,249,000,000 -1,264,000,000 -1,252,000,000
Free cash flow 1,691,000,000 1,893,000,000 1,685,000,000 2,578,000,000 3,033,000,000 2,965,000,000
Working Capital 877,000,000 1,226,000,000 9,384,000,000 1,406,000,000 1,251,000,000 1,251,000,000


Facts:

  • Cash provided by operating activities was $4.2 billion in 2020.
  • Cash used for investing activities was -$1.2 billion in 2020.
  • Cash provided by (used for) financing activities was -$590 million in 2020.
  • Capital expenditures were -$1.252 billion in 2020.
  • Free cash flow was $3 billion in 2020.
  • Working capital was $1.251 in 2020.

Explanation

  • Cash flow from operations grew 95 percent in five years.
  • Cash from investing activities was investment in property, plant and equipment.
  • Net cash provided by (used for) financing activities were debt repayment, common stock repurchased, dividends paid and other financing activities.
  • Capital expenditure was investment in property, plant and equipment.
  • Free cash flow grew 75 percent in five years. 
  • Working capital grew 45 percent in five years.

Interpretation

The company was able to generate cash from operations in the last five years. There was free cash flow and working capital in the last five years.

 

2. NOC BALANCE SHEET

NOC BALANCE SHEET

2015 2016 2017 2018 2019
Total cash 2,319,000,000 2,541,000,000 11,225,000,000 1,579,000,000 2,245,000,000
Current Assets 6,334,000,000 6,856,000,000 16,349,000,000 9,680,000,000 10,685,000,000
Net property, plant and equipment 3,064,000,000 3,588,000,000 4,225,000,000 6,372,000,000 8,423,000,000
Total non-current assets 18,120,000,000 18,758,000,000 18,568,000,000 27,973,000,000 30,404,000,000
Total assets 24,454,000,000 25,614,000,000 34,917,000,000 37,653,000,000 41,089,000,000
Current liabilities 5,457,000,000 5,630,000,000 6,965,000,000 8,274,000,000 9,434,000,000
Non-current liabilities 13,475,000,000 14,725,000,000 20,904,000,000 21,192,000,000 22,836,000,000
Total liabilities 18,932,000,000 20,355,000,000 27,869,000,000 29,466,000,000 32,270,000,000
Retained earnings 10,661,000,000 10,630,000,000 11,548,000,000 8,068,000,000 8,748,000,000
Stockholders equity 5,522,000,000 5,259,000,000 7,048,000,000 8,187,000,000 8,819,000,000

Facts:

  • Total cash was $2.2 billion in 2019.
  • Current assets were $10.7 billion in 2019.
  • Net property, plant and equipment was $8.4 billion in 2019.
  • Non-current assets were $30.4 billion in 2019.
  • Total assets were $41 billion in 2019.
  • Current liabilities were $9.4 billion in 2019.
  • Non-current liabilities were $23 billion in 2019.
  • Total liabilities were $32 billion in 2019.
  • Retained earnings were $8.7 billion in 2019.
  • Stockholders equity was $8.8 billion in 2019.

Explanation

  • Total cash represents 5 percent of total assets and 21 percent of current liabilities.
  • Current assets grew 67 percent and represent 26 percent of total assets.
  • Net property, plant and equipment grew 175 percent and it represents 21 percent of total assets.
  • Non-current assets grew 68 percent in five years and it represents 74 percent of total assets.
  • Total assets grew 68 percent in five years.
  • Current liabilities represent 29 percent of total liabilities.
  • Non-current liabilities represent 71 percent of total liabilities.
  • Total liabilities represent 79 percent of total liabilities and stockholders equity.
  • Retained earnings represents 99 percent of total stockholders equity.
  • Stockholders equity represents 21 percent of total liabilities and stockholders equity.

Interpretation

The company has enough resources to meet its current obligations. The company is using borrowed money more than the investor’s investment in the operation of its business.

 

3. INCOME AND MARKET

NOC INCOME AND MARKET

2015 2016 2017 2018 2019 2020
Revenue 23,526,000,000 24,508,000,000 25,803,000,000 30,095,000,000 33,841,000,000 34,272,000,000
EBIT 3,076,000,000 3,193,000,000 3,299,000,000 3,780,000,000 3,969,000,000 3,967,000,000
Net Income 1,990,000,000 2,200,000,000 2,015,000,000 3,229,000,000 2,248,000,000 2,253,000,000
EBITDA 3,558,000,000 3,680,000,000 3,884,000,000 5,104,000,000 4,094,000,000 4,095,000,000
Intrinsic Value 36,610,000,000 54,474,519,777 89,267,000,000 79,353,016,543 178,677,000,000 354,091,000,000
Market Capitalization 34,232,000,000 40,995,000,000 53,426,000,000 41,782,000,000 57,735,000,000 55,124,000,000

Facts:

  • Revenue was $34 billion in 2020.
  • EBIT was $39.7 billion in 2020.
  • Net income was $2.3 billion in 2020.
  • EBITDA was $4 billion in 2020.
  • Intrinsic value was $354 billion the trailing twelve months 2020.
  • Market capitalization was $55 billion in the trailing twelve months 2020.

Explanation:

  • Revenue increased 46 percent in five years. 
  • EBIT increased 29 percent in five years and it represents 12 percent of revenue.
  • Net income grew 13 percent in five years and it represents 7 percent of total revenue.
  • EBITDA increased 15 percent of the revenue and it represented 12 percent of revenue.
  • Intrinsic value was greater by more than 500 percent of the market capitalization.
  • Market capitalization is only 16 percent of the intrinsic value.

Interpretation

Revenue and EBIT was increasing year-over-year and was capable of producing a fair net profit. Its earning per share was 13.38 in the trailing twelve months of 2020. NOC has a stable balance sheet.

 

4. NOC FINANCIAL RATIOS

NOC FINANCIAL RATIOS

2015 2016 2017 2018 2019 2020
Asset turnover (average) 0.92 0.97 0.85 0.83 0.86 0.83
Return on assets % 7.80 8.79 6.66 8.90 5.71 5.43
Return on equity % 31.20 40.81 32.75 42.39 26.44 25.31
Return on invested capital % 17.57 20.01 13.35 17.07 12.07 10.42
Debt/Equity 1.16 1.34 2.04 1.70 1.60 1.72

Facts:

  • Asset turnover was averaging 0.83 in 2020 trailing twelve months.
  • Return on assets was 5.43 percent in 2020 trailing twelve months.
  • Return on equity was 25.31 percent in 2020 trailing twelve months.
  • Return on invested capital was 10.42 percent in 2020 trailing twelve months.
  • Debt/Equity ratio was 1.72 in 2020 trailing twelve months.

Explanation

  • Asset turnover indicates that for every dollar invested in assets it generated 83 cents of sales.
  • Return on assets indicates that for every dollar invested in assets it generated 5.43 cents of net income.
  • Return on equity indicates that for every dollar invested in stockholders equity it generated a return of 0.2531 cents of net income.
  • Return on invested capital indicates that the company generated a return of 0.4142 cents per share.
  • Debt/Equity ratio means that the company has $1.72 in debt for every dollar invested in equity. Debt level is 172 percent of equity.

Interpretation

The company is efficient in using its assets to generate a good sales and return on net income. Financial ratios show a good return on the invested capital. The company is profitable.

 

5. NOC KEY EXECUTIVE COMPENSATION

NOC KEY EXECUTIVE COMPENSATION

  2015 2016 2017 2018 2019
Key Executive Compensation     
Salary 1,386,154 1,529,039 2,299,931 3,391,347 4,783,904
Bonus 0 0 100,000 0 0
Annual Other Income 0 0 0 0 0
Restricted Stock Award 6,200,145 6,499,836 10,250,040 20,899,981 26,499,659
Securities Options 0 0 0 0 0
LTIP Payout 0 0 0 0 0
Non-Equity Compensation 1,654,000 2,504,000 2,963,000 5,880,000 10,044,000
Other Compensation 622,561 480,320 1,590,371 1,139,525 11,631,569
Total 9,883,642 11,213,415 17,960,756 31,310,853 46,384,546
Kathy J. Warden/Chairman of the Board, President and CEO 
Salary 701,077 772,500 807,116 963,462 1,488,462
Bonus 0 0 0 0 0
Annual Other Income 0 0 0 0 0
Restricted Stock Award 3,200,053 3,499,856 3,499,993 9,999,869 13,000,159
Securities Options 0 0 0 0 0
LTIP Payout 0 0 0 0 0
Non-Equity Compensation 814,000 1,272,000 1,061,000 1,920,000 4,509,000
Other Compensation 425,783 165,596 206,548 458,976 622,758
Total 5,161,675 5,910,172 5,962,672 13,342,307 20,307,994
Kenneth L. Bedingfield/Former Corporated VP and CFO    
Salary 685,077 756,539 790,192 811,154 834,385
Bonus 0 0 0 0 0
Annual Other Income 0 0 0 0 0
Restricted Stock Award 3,000,092 2,999,980 3,250,106 3,500,008 3,499,779
Securities Options 0 0 0 0 0
LTIP Payout 0 0 0 0 0
Non-Equity Compensation 840,000 1,232,000 1,041,000 1,304,000 1,401,000
Other Compensation 196,798 314,724 351,426 312,214 296,756
Total 4,721,967 5,303,243 5,432,724 5,927,376 6,031,920
Janis Pamiljans/Corporate VP and President, Aerospace Systems    
Salary 702,623 826,154 850,192
Bonus 100,000 0 0
Annual Other Income 0 0 0
Restricted Stock Award 3,499,941 3,500,008 3,499,779
Securities Options 0 0 0
LTIP Payout 0 0 0
Non-Equity Compensation 861,000 1,328,000 1,428,000
Other Compensation 1,032,397 241,318 356,125
Total 6,565,360 5,895,480 7,222,256
Mark A. Caylor/Corporate VP and President, Mission Systems 
Salary 790,577 850,192
Bonus 0 0
Annual Other Income 0 0
Restricted Stock Award 3,900,096 3,499,779
Securities Options 0 0
LTIP Payout 0 0
Non-Equity Compensation 1,328,000 1,428,000
Other Compensation 127,017 129,727
Total 6,145,690 6,794,344
Christopher T. Jones/Corporate VP and President, Technology Services 
Salary 790,673
Bonus 0
Annual Other Income 0
Restricted Stock Award 3,000,163
Securities Options 0
LTIP Payout 0
Non-Equity Compensation 1,278,000
Other Compensation 226,203
Total 6,028,032

Facts:

  • Total key executive compensation was $9,883,642 in 2015.
  • Total key executive compensation in 2016 was $11,213,415.
  • Key executive compensation in 2017 was $17,960,756.
  • Key executive compensation in 2018 was $31,310,853.
  • Executive compensation in 2019 was $46,384,546.

Explanation

  • Total key executive compensation represents 2 percent of the net income in 2019
  • Kathy J. Warden, CEO total compensation represents 44 percent of the total key executive compensation in 2019.
  • Kenneth L Bedingfield, CFO total compensation represents 13 percent of the total key executive compensation.
  • Janis Pamiljans, VP and President Aerospace System total compensation in 2019 represents 16 percent of total key executive compensation.
  • Mark A. Caylor, Corporate VP and President, Mission Systems total compensation for 2019 represents 15 percent of the total executive compensation.
  • Christopher T. Jones, Corporate VP and President, Technology Services total salary represents 13 percent of total key executive compensation compensation.

Interpretation

Total executive compensation includes salary, restricted stock award, non-equity compensation and other compensation.

 

6. NOC LOBBYING AND CONTRIBUTIONS

NOC LOBBYING ND CONTRIBUTIONS

PERIOD USD LOBBYING CONTRIBUTIONS
1998 6,120,000 6,120,000
1999 5,130,000 5,130,000
2000 7,000,000 7,000,000
2001 12,510,000 12,510,000
2002 11,770,000 11,770,000
2003 10,410,000 10,410,000
2004 12,650,000 12,650,000
2005 13,720,000 13,720,000
2006 16,830,000 16,830,000
2007 11,180,000 11,180,000
2008 20,930,000 20,930,000
2009 15,180,000 15,180,000
2010 15,740,000 15,740,000
2011 12,770,000 12,770,000
2012 20,437,387 17,540,000 2,897,387
2013 20,590,000 20,590,000
2014 14,271,739 10,216,960 4,054,779
2015 11,020,000 11,020,000
2016 16,284,706 12,050,000 4,234,706
2017 14,460,000 14,460,000
2018 19,987,039 14,390,000 5,597,039
2019 17,314,233 13,620,000 3,694,233
2020 13,620,000 13,620,000

Facts:

Northrop Grumman Corp is incurring lobbying and contributions from 1998 to the present date.

Explanation:

A note from Center for Responsive Politics, OpenSecrets.org, quoted as follows:

“Campaign finance totals for the current election cycle were released by the FEC on May 21, 2020 and by the IRS on April 03, 2019, lobbying data was released by the Senate Office of Public Records on March 19, 2019, outside spending data was released by the FEC on May 29, 2020, and personal finances data was released by the House, Senate, and US Office of Government Ethics starting in June 2011.”

Interpretation

The amount of lobbying and contributions spent by Northrop Grumman Corp. varies per cycle.

 

7. NOC FINANCIAL STRENGTH

NOC FINANCIAL STRENGTH

DATA

Working Capital $1,251,000,000
Total Assets $41,089,000,000
Sales $34,272,000,000
EBIT $3,967,000,000
Market value of equity $54,330,100,000
Book value of total liabilities $32,270,000,000
Retained earnings $8,748,000,000

CALCULATION

Ratio Score Result
A – Working Capital / Total Assets 0.03 1.2 0.04
B – Retained Earnings / Total Assets 0.21 1.4 0.30
C – EBIT / Total Assets 0.10 3.3 0.32
D – Market Value of Equity / Book Value of Total Liabilities 1.68 0.6 1.01
E – Sales / Total Assets 0.83 1 0.83
Z-Score 2.50


Formula: Z-Score = 1.2A + 1.4B + 3.3C + 0.6D + 1.0E

 

Explanation:

Z-Score is a statistical measurement that compares data points from different sets of data to find correlations. This measurement by Dr. Edward Altman is a significant measure in determining the financial strength of the company because it relies on different weighted financial liquidity and profitability metrics to come up with the overall score. This measure indicates the probability of bankruptcy.

Interpretation

The calculated Z-Score of Northrop Grumman was 2.50.Dr. Altman’s grading scale of below 3.0 indicates that the company is likely to declare bankruptcy in near future. Altman score weights different profitability and liquidity metrics to arrive at the overall score. It is then compared to his grading scale. The formula does not reflect cash flows, the company might be able to pay liabilities however, may have difficulty in the operations and may gradually lead to insolvency.

Overview

Northrop Grumman Corporation is financially strong due to its innovative and advanced technology solutions. The company focused on high technology solutions for its customers. The company was able to solve critical problems in space, aeronautics, defense and cyberspace.

CITATION

https://www.northropgrumman.com/

https://www.morningstar.com/stocks/xnys/noc/quote

https://www.opensecrets.org/orgs/summary?id=D000000170

Researched and written by Criselda

Texas Instruments Inc (TXN) Extended Graph Alalysis

May 18th, 2020 Posted by Extended Analysis No Comment yet

Company Profile

TXN LOGO

Texas Instruments Incorporated (NASDAQ: TXN) designs and manufactures, tests and sells analog and embedded semiconductor chips around the world. The company was founded in 1930 as Geophysical Service Inc., an oil and gas exploration company however in the 1950s became officially Texas Instruments Incorporated a semiconductor conductor industry. Headquartered in Dallas, Texas in the United States.

The company market in electronic systems includes industrial, automotive, personal electronics, communications equipment and enterprise systems.

 

Texas Instruments (TXN) Extended graph Analysis

 

1. TXN CASH FLOW

TXN CASH FLOW

2015 2016 2017 2018 2019 2020
Net cash flow provided by operating activitIes 4,268,000,000 4,614,000,000 5,363,000,000 7,189,000,000 6,649,000,000 6,393,000,000
Net cash used for investing activities -302,000,000 -650,000,000 -1,127,000,000 -78,000,000 -1,920,000,000 -2,267,000,000
Net cash provided by (used for) financing activities -4,165,000,000 -3,810,000,000 -3,734,000,000 -6,329,000,000 -4,730,000,000 -5,328,000,000
Capital expenditure -551,000,000 -531,000,000 -695,000,000 -1,131,000,000 -847,000,000 -757,000,000
Free cash flow 3,717,000,000 4,083,000,000 4,668,000,000 6,058,000,000 5,802,000,000 5,636,000,000
Working Capital 4,519,000,000 5,193,000,000 6,476,000,000 5,623,000,000 6,638,000,000 6,638,000,000

Facts:

  • Cash provided by operating activities was $6 billion in the trailing twelve months.
  • Net cash from investing activities was $-2 billion in the trailing twelve months.
  • Cash provided by (used for) financing activities was $-5 billion in the trailing twelve months.
  • Capital expenditures were $-757 million in the trailing twelve months.
  • Free cash flow was $6 billion in the trailing twelve months.
  • Working capital was $7 billion in the trailing twelve months.

Explanation:

  • Cash from operations has a growth rate of 50% in five years, moreover, the management was able to generate cash from operations in the last five years.
  • Cash from investing activities were investment in property, plant and equipment, and purchases of investments.
  • The cash provided by financing activities were common stock repurchased, dividends paid and other financing activities.
  • Capital expenditures was investment in property, plant and equipment.
  • Free cash flow grew 52 percent in five years.
  • Working capital grew 47 percent in five years.

Interpretation

The management is efficient and capable of producing cash from operations, positive free cash flow and working capital in the last five years.

 

2. TXN BALANCE SHEET

TXN BALANCE SHEET

2015 2016 2017 2018 2019
Total cash 3,218,000,000 3,490,000,000 4,469,000,000 4,233,000,000 5,387,000,000
Current Assets 7,074,000,000 7,457,000,000 8,734,000,000 8,097,000,000 8,761,000,000
Net property, plant and equipment 2,596,000,000 2,512,000,000 2,664,000,000 3,183,000,000 3,303,000,000
Total non-current assets 9,156,000,000 8,974,000,000 8,908,000,000 9,040,000,000 9,257,000,000
Total assets 16,230,000,000 16,431,000,000 17,642,000,000 17,137,000,000 18,018,000,000
Current liabilities 2,555,000,000 2,264,000,000 2,258,000,000 2,474,000,000 2,123,000,000
Non-current liabilities 3,729,000,000 3,694,000,000 5,047,000,000 5,669,000,000 6,988,000,000
Total liabilities 6,284,000,000 5,958,000,000 7,305,000,000 8,143,000,000 9,111,000,000
Retained earnings 31,176,000,000 33,107,000,000 34,662,000,000 37,906,000,000 39,898,000,000
Stockholders equity 9,946,000,000 10,473,000,000 10,337,000,000 8,994,000,000 8,907,000,000

Facts:

  • Total cash was $5 billion in 2019.
  • Current assets were $9 billion in 2019.
  • Net property, plant and equipment was $3 billion in 2019.
  • Non-current assets were $9 billion in 2019.
  • Total assets were $18 billion in 2019.
  • Current liabilities were $2 billion in 2019.
  • Non-current liabilities were $7 billion in 2019.
  • Total liabilities were $9 billion in 2019.
  • Retained earnings were $40 billion in 2019.
  • Stockholders equity was $9 billion in 2019.

Explanation

  • Total cash grew 67 percent in five years and it represents 30 percent of the total assets.
  • Current assets grew 24 percent in five years and it represented 49 percent of total assets.
  • Net property, plant and equipment grew 27 percent in five years and it represented 18 percent of total assets.
  • Non-current assets represented 51 percent of the total assets.
  • Total assets grew 11 percent in five years.
  • Current liabilities represent 23 percent of total liabilities.
  • Non-current liabilities represent 77 percent of total liabilities.
  • Total liabilities represents 51 percent of total liabilities and stockholders equity.
  • Retained earnings increased year-over-year in the last five years.
  • Stockholders equity represents 49 percent of total liabilities and stockholders equity.

Interpretation

The company is liquid and stable, and capable of meeting current obligations in due time. Retained earnings was huge compared to total assets, it was over 121 percent of the total assets. The shareholders have 50 percent stake in the total assets and creditors have also 50 percent stake in total assets.

 

3. TXN INCOME AND MARKET

TXN INCOME AND MARKET

2015 2016 2017 2018 2019 TTM
Revenue 13,000,000,000 13,370,000,000 14,961,000,000 15,784,000,000 14,383,000,000 14,118,000,000
EBIT 4,532,000,000 5,103,000,000 6,531,000,000 7,034,000,000 5,975,000,000 5,811,000,000
Net Income 2,986,000,000 3,595,000,000 3,682,000,000 5,580,000,000 5,017,000,000 4,976,000,000
EBITDA 5,439,000,000 5,965,000,000 7,062,000,000 7,765,000,000 6,948,000,000 6,794,000,000
Market Capitalization 55,428,000,000 72,932,000,000 102,932,000,000 89,317,000,000 119,570,000,000 105,526,000,000
Intrinsic Value 99,968,027,187 125,687,492,273 171,079,397,912 158,840,889,167 232,349,843,836 268,195,183,423

Facts:

  • Revenue was $14 billion in the trailing twelve months.
  • EBIT was $6 billion in the trailing twelve months.
  • Net income was $5 billion in the trailing twelve months.
  • EBITDA was $7 billion the trailing twelve months.
  • Market capitalization was $105.526 billion in the trailing twelve months.
  • Intrinsic value was $268.195 billion in the trailing twelve months.

Explanation

  • Revenue grew 9 percent in five years.
  • EBIT represents 41 percent of revenue.
  • Net income represents 35 percent of revenue and it grew 67 percent in five years.
  • EBITDA represents 48 percent of revenue.
  • Market capitalization grew 90 percent in five years.
  • Intrinsic value was over 154 percent of the market capitalization.

Interpretation

The management was able to generate sufficient revenue for its business operations and net income represents one-third of the revenue which is impressive. The stock price of TXN was undervalued.

 

4. TXN FINANCIAL RATIOS

TXN FINANCIAL RATIOS

2015 2016 2017 2018 2019 TTM
Asset turnover (average) 0.77 0.82 0.88 0.91 0.82 0.81
Return on assets % 17.34 21.74 21.41 31.84 28.54 28.66
Return on equity % 28.94 34.77 35.06 57.29 56.05 61.23
Return on invested capital % 20.6 25.60 25.94 39.62 35.59 35.89
Debt/Equity 0.31 0.28 0.34 0.48 0.62 0.71

Facts:

  • Asset turnover was averaging 0.81 in the trailing twelve months.
  • Return on assets  was 28.66 percent in the trailing twelve months.
  • Return on equity was 61.23 percent in the trailing twelve months.
  • Return on invested capital was 35.89 percent in the trailing twelve months.
  • Debt to Equity ratio was 0.71 in the trailing twelve months.

Explanation:

  • Asset turnover indicates that TXN is generating 81 cents of sales for every dollar invested in assets.
  • Return on assets indicates that the company generates 28.66 cents of net income for every dollar invested in assets.
  • Return on equity indicates that for every dollar invested in common equity it generated 61.23 cents of net income.
  • Debt/Equity ratio indicates that TXN has $0.71 in debt for every dollar of assets.

Interpretation

The financial ratios show that Texas Instruments is in good financial health and liquid. The company was able to generate a good return on the investments made.

 

5. KEY EXECUTIVE COMPENSATION

TXN KEY EXECUTIVE COMPENSATION

2015 2016 2017 2018 2019
Key Executive Compensation
Salary 1,140,250 1,164,083 2,375,087 3,774,169 4,102,917
Bonus 0 0 0 0 0
Annual Other Income 0 0 0 0 0
Restricted Stock Award 4,900,017 4,900,048 9,300,131 12,800,422 13,600,237
Securities Options 4,900,006 4,900,007 8,300,033 12,800,070 13,600,039
LTIP Payout 0 0 0 0 0
Non-Equity Compensation 3,653,877 3,682,817 6,050,018 9,104,833 8,580,583
Other Compensation 317,702 325,510 407,131 642,455 0
Total 14,925,802 15,080,069 25,090,172 39,123,826 42,670,368
Richard K. Templetion/ Chairman of the Board, President and Chief Executive Officer   
Salary 1,140,250 1,164,083 1,188,004 1,131,252 1,295,833
Bonus 0 0 0 0 0
Annual Other Income 0 0 0 0 0
Restricted Stock Award 4,900,017 4,900,048 5,500,010 6,000,091 6,500,045
Securities Options 4,900,006 4,900,007 5,500,004 600,019 6,500,012
LTIP Payout 0 0 0 0 0
Non-Equity Compensation 3,653,877 3,682,817 3,862,601 4,026,250 3,809,167
Other Compensation 317,702 325,510 329,825 418,612 326,162
Total 14,925,802 15,080,069 16,546,722 17,576,224 18,633,807
Rafael R. Lizardi/ SVP and CFO     
Salary 488,333 591,667 655,000
Bonus 0 0 0
Annual Other Income 0 0 0
Restricted Stock Award 2,000,047 1,200,084 1,500,058
Securities Options 1,000,013 1,200,013 1,500,006
LTIP Payout 0 0 0
Non-Equity Compensation 947,667 1,118,333 1,081,000
Other Compensation 60,814 77,072 125,671
Total 4,496,874 4,187,169 4,861,735
R. Gregory (greg) Delagi / Former Senior VP    
Salary 698,750 713,750 728,750.00
Bonus 0 0 0.00
Annual Other Income 0 0 0.00
Restricted Stock Award 1,800,074 1,800,071 1,800,028.00
Securities Options 1,800,016 1,800,008 1,800,003.00
LTIP Payout 0 0 0.00
Non-Equity Compensation 1,239,750 1,292,750 1,125,750.00
Other Compensation 16,492 5,500 6,045.00
Total 7,046,576 5,613,956 7,414,651.00
Niels Anderskouv / Senior VP     
Salary 668,750 711,667.00
Bonus 0 0.00
Annual Other Income 0 0.00
Restricted Stock Award 1,900,088 1,900,053.00
Securities Options 1,900,015 1,900,009.00
LTIP Payout 0 0.00
Non-Equity Compensation 1,333,750 1,282,333.00
Other Compensation 89,458 103,898.00
Total 5,892,061 5,897,960.00
Haviv Ilan / Senior Vice President     
Salary 668,750 711,667.00
Bonus 0 0.00
Annual Other Income 0 0.00
Restricted Stock Award 1,900,088 1,900,053.00
Securities Options 1,900,015 1,900,009.00
LTIP Payout 0 0.00
Non-Equity Compensation 1,333,750 1,282,333.00
Other Compensation 51,813 68,153.00
Total 5,854,416 5,862,215

Facts:

  • The total key executive compensation in 2015 was $ 14,925,802.
  • Total key executive compensation in 2016 was $15,080,069.
  • Total key executive compensation in 2017 was $16,546,722.
  • Key executive compensation in 2018 was $39,123,826.
  • Key executive compensation in 2019 was $42,670,368.

Explanation

  • Total executive compensation represents 0.85 percent of the net income in 2019.
  • Richard K. Templetion, CEO compensation represents 44 percent of the total executive compensation in 2019.
  • Rafael R. Lizardi, CFO compensation represents 11 percent of the total executive compensation in 2019.
  • R. Gregory (greg) Delagi, Former Senior VP compensation represents 17 percent of the total executive compensation in 2019.
  • Niels Anderskouv / Senior VP compensation represents 14 percent of the total executive compensation in 2019.
  • Haviv Ilan / Senior Vice President compensation represents 14 percent of the total executive compensation in 2019.

Interpretation

Total executive compensation includes salary, restricted stock award, securities options, non-equity compensation and other compensation.

 

6. TXN LOBBYING AND CONTRIBUTIONS

TXN LOBBYING AND CONTRIBUTIONS

PERIOD AMOUNT PERIOD AMOUNT
1998 $2,226,000 2010 $1,600,000
1999 $1,910,000 2011 $1,880,000
2000 $2,200,000 2012 $1,810,000
2001 $2,090,000 2013 $1,740,000
2002 $2,600,000 2014 $1,680,000
2003 $1,740,000 2015 $2,050,000
2004 $2,120,000 2016 $1,860,000
2005 $2,200,000 2017 $2,160,000
2006 $2,310,000 2018 $1,960,000
2007 $2,760,000 2019 $1,540,000
2008 $2,140,000 2020 $1,739,631
2009 $1,800,000

Facts:

Texas Instruments Inc is spending lobbying and contributions annually and record shows above lobbying from 1998 to 2019.

Explanation:

Note from OpenSecret.org Center for Responsive Politics, quoted below:

NOTE: Figures on this page are calculations by the Center for Responsive Politics based on data from the Senate Office of Public Records. Data for the most recent year was downloaded on April 22, 2020 and includes spending from January 1 – March 31. Prior years include spending from January through December.

Interpretation

Annually the lobbying may increase or decrease depending on the federal government on how much attention they are giving their issues. 

 

7. TXN FINANCIAL STRENGTH

TXN FINANCIAL STRENGTH

DATA

Working capital $6,638,000,000
Total assets $18,018,000,000
Sales $14,118,000,000
EBIT $5,811,000,000
Market value of equity $106,526,000,000
Book value of total liabilities $9,111,000,000
Retained earnings $39,898,000,000

CALCULATION

Ratio Score Result
A – Working Capital / Total Assets 0.37 1.20 0.44
B – Retained Earnings / Total Assets 2.21 1.40 3.10
C – EBIT / Total Assets 0.32 3.30 1.06
D – Market Value of Equity / Book Value of Total Liabilities 11.69 0.60 7.02
E – Sales / Total Assets 0.78 1.00 0.78
Z-Score     12.41

Formula: Z-Score = 1.2A + 1.4B + 3.3C + 0.6D + 1.0E

Explanation:

Z-Score is a statistical measurement that compares data points from different sets of data to find correlations. This measurement by Dr. Edward Altman is a significant measure in determining the financial strength of the company because it relies on different weighted financial liquidity and profitability metrics to come up with the overall score. This measure indicates the probability of bankruptcy.

Interpretation

The calculated Z-Score of Texas Instruments Inc was 12.41. Dr. Altman’s grading scale of 3.0 and above indicates that the company will not declare bankruptcy in near future. In other terms, the company is not close to insolvency. The main factors of this statistical measurement are profitability, liquidity, leverage and efficiency. Texas Instruments has a strong financial health and is very far from insolvency.

Overview

Texas Instruments Inc is stable and healthy, the income statement shows that the company is profitable in the last five years of operations. The management is very efficient in generating sufficient and impressive revenue for its normal business operations in five years. The stock price of TXN is undervalued at the time this article was published and might be a good candidate for a Buy.

 

CITATION

http://www.ti.com/about-ti/company/history.html

https://www.morningstar.com/stocks/xnas/txn/quote

https://www.opensecrets.org/federal-lobbying/clients/summary?cycle=2019&id=D000000722

Researched and written by Criselda

Alibaba Group Holding Ltd ADR (BABA N) Extended Graph Analysis

April 3rd, 2020 Posted by Extended Analysis No Comment yet

Company Profile

BABA logo

Alibaba Group Holding Ltd Company is a Chinese multinational online company. Specializing in e-commerce, retail, internet and technology. Founded by Jack Ma on 4 April 1999 in Hangzhou, Zhejiang. Alibaba is a public company and traded as NYSE: BABA.

 

Alibaba Group Holding Ltd ADR (BABA N) Extended Graph Analysis

 

1. BABA CASH FLOWS

BABA CASH FLOWS

2015 2016 2017 2018 2019 2020
Net cash provided by operating activities 41,217,000,000 56,836,000,000 80,326,000,000 125,171,000,000 150,975,000,000 196,996,000,000
Net cash used for investing activities -53,454,000,000 -42,831,000,000 -78,364,000,000 -83,890,000,000 -151,060,000,000 -97,828,000,000
Net cash provided by (used for) financing activities 87,497,000,000 -15,846,000,000 32,914,000,000 20,359,000,000 -7,392,000,000 68,605,000,000
Capital expenditures -7,705,000,000 -10,845,000,000 -17,546,000,000 -29,836,000,000 -49,643,000,000 -49,643,000,000
Free cash flow 33,512,000,000 45,991,000,000 62,780,000,000 95,335,000,000 101,332,000,000 147,353,000,000
Working capital 102,437,000,000 82,031,000,000 88,745,000,000 121,045,000,000 62,604,000,000 62,604,000,000

Facts:

  • Cash provided by operating activities was CNY 196.996 billion in 2020.
  • Cash used for investing activities were CNY -97.8 in 2020.
  • Net cash provided by financing activities was CNY 68.605 billion in 2020.
  • Capital expenditure was CNY -49.6 billion in 2020.
  • Free cash flow was CNY 147 billion.
  • Working capital was CNY 62.6 billion in 2020.

Explanation

  • Cash from operations was increasing year-over-year and has a growth rate of 378 percent in five years.
  • Cash from investing activities were purchases of property, plant and equipment, acquisitions and purchases of investments.
  • Cash provided by (used for) financing activities were debt repayment and common stock repurchase.
  • Capital expenditures were purchases of property, plant and equipment and purchases of intangibles.
  • Free cash flow increases year-over-year and has a growth rate of 340% in five years.
  • Working capital was erratic in movement in the last five years.

Interpretation

Alibaba was capable and efficient in maintaining a positive cash from operations, free cash flow and working capital in the last five years. 

 

2. BABA BALANCE SHEET

BABA BALANCE SHEET

2015 2016 2017 2018 2019
Total cash 125,999,000,000 115,696,000,000 150,801,000,000 210,210,000,000 203,165,000,000
Current Assets 142,109,000,000 134,070,000,000 182,516,000,000 256,855,000,000 270,273,000,000
Net property, plant and equipment 12,244,000,000 16,505,000,000 24,897,000,000 75,866,000,000 98,449,000,000
Total non-current assets 113,325,000,000 230,380,000,000 324,296,000,000 460,269,000,000 694,803,000,000
Total assets 255,434,000,000 364,450,000,000 506,812,000,000 717,124,000,000 965,076,000,000
Current liabilities 39,672,000,000 52,039,000,000 93,771,000,000 135,810,000,000 207,669,000,000
Non-current liabilities 70,323,000,000 95,424,000,000 134,242,000,000 215,492,000,000 265,150,000,000
Total liabilities 109,995,000,000 147,463,000,000 228,013,000,000 351,302,000,000 472,819,000,000
Retained earnings 24,842,000,000 78,752,000,000 108,558,000,000 172,353,000,000 257,886,000,000
Stockholders equity 145,439,000,000 216,987,000,000 278,799,000,000 365,822,000,000 492,257,000,000

Facts:

  • Total cash was CNY 203 billion in 2019.
  • Current assets were CNY 270 billion in 2019.
  • Net property, plant and equipment was CNY 98 billion in 2019.
  • Non-current assets were CNY 695 billion in 2019.
  • Total assets were CNY 965 billion in 2019.
  • Current liabilities were CNY 208 billion in 2019.
  • Non-current liabilities were CNY 265 billion in 2019.
  • Total liabilities were CNY 473 billion in 2019.
  • Retained earnings were CNY 258 billion in 2019.
  • Stockholders equity was CNY 492 billion in 2019.

Explanation

  • Cash was increasing year-over-year and has a growth rate of 61% in five years. It represents 21 percent of the total assets.
  • Current assets represent 28 percent of total assets and have a growth rate of 90 percent in five years.
  • Net property plant and equipment represents 10 percent of total assets. It grew 704 percent in five years.
  • Non-current assets was 72 percent of total assets and it grew 513 percent in five years.
  • Total assets grew 278 percent in five years.
  • Current liabilities represent 44 percent of total liabilities.
  • Non-current liabilities represent 56 percent of total liabilities.
  • Total liabilities represents 49 percent of total equities and liabilities.
  • Retained earnings represent 52 percent of total equities.
  • Stockholders equity represents 41 percent of total equities and liabilities.

Interpretation

The balance was strong and in good health. The company was efficient in maintaining a solid balance sheet in the last five years. 

 

3. BABA INCOME AND MARKET

BABA INCOME AND MARKET

2015 2016 2017 2018 2019 2020
Revenue 76,204,000,000 101,143,000,000 158,273,000,000 250,266,000,000 376,844,000,000 488,895,000,000
EBIT 23,637,000,000 29,958,000,000 48,055,000,000 70,363,000,000 57,750,000,000 94,306,000,000
Net Income 24,261,000,000 71,460,000,000 43,675,000,000 64,985,000,000 87,886,000,000 172,126,000,000
EBITDA 39,491,000,000 90,115,000,000 76,992,000,000 125,989,000,000 138,491,000,000 212,655,000,000
Market Capitalization 0 1,356,753,374,878 2,601,380,048,653 2,601,380,048,653 3,231,462,292,833 3,231,462,292,833
Intrinsic Value 0 0 5,454,154,281,120 7,219,369,371,316 13,772,141,627,743 12,164,643,972,274

Facts:

  • Revenue was CNY 489 billion in 2020.
  • EBIT was CNY 94 billion in 2020.
  • Net Income was CNY 172 billion in 2020.
  • EBITDA was CNY 213 billion in 2020.
  • Market capitalization was CNY 3 trillion in trailing twelve months.
  • The calculated intrinsic value was CNY 12 trillion in trailing twelve months.

Explanation:

  • Revenue increases year-over-year and has grown 542 percent in five years.
  • EBIT has a growth of 299 percent in five years.
  • Net income grew 609 percent in five years.
  • Market capitalization increased year-over-year and grew 138 percent in five years.
  • Intrinsic value was over 276 percent against market capitalization, therefore market price was undervalued.

Interpretation

Alibaba was profitable in the last five years. The management was able to generate more than enough revenue for the operation of the business.

 

4. BABA FINANCIAL RATIOS

BABA FINANCIAL RATIOS

2015 2016 2017 2018 2019 2020
Asset turnover (average) 0.42 0.33 0.36 0.4 0.45 0.43
Return on assets % 13.16 23.06 10.03 10.46 10.41 15.37
Return on equity % 27.63 39.43 17.62 19.85 20.42 28.54
Debt/Equity 0.35 0.25 0.28 0.33 0.23 0.16
Return on invested capital % 13.99 11.08 12.13 9.72 9.89 12.16
Interest coverage 12.72 42.86 23.47 29.16 19.54 37.63

Facts:

  • Asset turnover was averaging 0.43 in 2020.
  • Return on assets was 15.37 percent in 2020.
  • Return on equity was 28.54 percent in 2020.
  • Debt/Equity ratio was 0.16 in 2020.
  • Return on invested capital was 12.16 percent in 2020.
  • Interest coverage was 37.63 in 2020.

Explanation

  • Asset turnover indicates that for every $1 in asset, the company generates 0.43 CNY.
  • Return on assets indicates that the company produces .15 CNY of net income for every CNY invested in assets.
  • Return on equity indicates that for every CNY invested in equity, it earns .2854 CNY net income.
  • Debt/Equity ratio indicates that for every CNY in equity, the company has .16 CNY in leverage.
  • Return on invested capital means the company earns .12 CNY profit for its invested capital.
  • Interest coverage means that the company can afford to pay its interest payment 38 times of its current financial obligations.

Interpretation

The financial ratios show that the company is managed very well from its business operations. The company is profitable.

 

5. BABA KEY EXECUTIVE

NAME TITLE
Sophie Minzhi WU Chief Customer Officer
Timothy A. Steinert General counsel and Corporate Secretary
Luyuan Fan Pres, Alibaba Digital Media and Entertainment
J. Michael Evans Director and President
Shan Trudy Dai President Wholesale Marketplaces
Jeff Jianfeng Zhang Chief Technology Officer and President
Junfang Jessie Zheng Chief Risk Officer and Chief Platform Governance Officer
Pen-Hung Chris Tung Chief Marketing Officer
Judy Wenhong Tong Chief People Officer

Facts:

Alibaba does not reveal the key executive compensation.

 

6. BABA LOBBYING AND CONTRIBUTIONS

BABA LOBBYING AND CONTRIBUTIONS

Period USD
2011 100,000
2012 461,000
2013 430,000
2014 450,000
2015 410,000
2016 1,020,000
2017 2,010,000
2018 2,740,000
2019 2,620,000

Facts:

Alibaba has been spending annual lobbying and contributions since 2011. The figures vary  every period. A Note from OpenSecrets is quoted as follows:

NOTE: Figures on this page are calculations by the Center for Responsive Politics based on data from the Senate Office of Public Records. Data for the most recent year was downloaded on January 23, 2020 and includes spending from January 1 – December 31. Prior years include spending from January through December.

Source: OpenSecret.org Center for Responsive Politics

 

7. BABA FINANCIAL STRENGTH

BABA FINANCIAL STRENGTH

DATA CNY
Working capital 62,604,000,000
Total assets 965,076,000,000
Sales 488,895,000,000
EBIT 94,306,000,000
Market value of equity 3,404,603,312,500
Book value of total liabilities 472,819,000,000
Retained earnings 257,886,000,000

CALCULATION

Ratio Score Result
A – Working Capital / Total Assets 0.06 1.2 0.08
B – Retained Earnings / Total Assets 0.27 1.4 0.37
C – EBIT / Total Assets 0.10 3.3 0.32
D – Market Value of Equity / Book Value of Total Liabilities 7.20 0.6 4.32
E – Sales / Total Assets 0.51 1 0.51
Z-Score 5.60


Formula: Z-Score = 1.2A + 1.4B + 3.3C + 0.6D + 1.0E

Explanation:

Z-Score is a statistical measurement that compares data points from different sets of data to find correlations. This measurement by Dr. Edward Altman is a significant measure in determining the financial strength of the company because it relies on different weighted financial liquidity and profitability metrics to come up with the overall score. This measure indicates the probability of bankruptcy.

Interpretation

Alibaba. has a Z-Score of 5.60. Dr. Altman’s grading scale of 3.0 and above indicates that the company will not declare bankruptcy in near future. In other terms, the company is not close to insolvency. The main factors of this statistical measurement are profitability, liquidity, leverage and efficiency.

Overview

Alibaba Group Holding Ltd ADR has a strong balance sheet and is financially healthy. The income statement shows that the company was profitable and liquid. The stock price of Alibaba was undervalued, therefore, could be a good Buy.

CITATION

https://www.morningstar.com/stocks/xnys/baba/quote

https://www.opensecrets.org/federal-lobbying/clients/summary?cycle=2011&id=D000064488

https://www.alibabagroup.com/en/global/home

Researched and written by Criselda

 

Tencent Holdings Limited (0700 HKG) Investment Valuation

February 19th, 2013 Posted by Investment Valuation No Comment yet

Tencent Holdings Limited is a Chinese multinational investment holding conglomerate founded in 1998. The subsidiaries specialize in various Internet-related services and products, entertainment, artificial intelligence, and technology. 

Tencent Value Investing Approach   

This method of valuation approach for Tencent Holdings Ltd was based on the Discounted Model.  The historical data was calculated. And then we come up with the projected financial data and ratios to come up with the net present value of the 6th year period. Net present value is one way to decide if an investment is worthwhile by looking at the projected cash inflows and outflows.

 

Tencent Discounted Cash Flow Approach  

The formula for the discounted cash flow is:

  Discounted Cash Flow

Where:

  • Vo is the value of the equity of a business today.
  • CF1 to CFn represent the expected cash flows (or benefits) to be derived for periods 1 to n.  The discounted cash flow model is based on time periods of time of equal length.
  • r is the discount rate that converts future dollars of CF into present dollars of value.

The equation above is the basic discounted cash flow (DCF) model.

Discounted Cash Flow Spreadsheet

Tencent Combined DCF

Explanation

The Discounted Cash Flow spreadsheet shows the historical income and expense plus the equity data in the total amount and per share.  The present value of equity was $26.35 at a rate of 29.80 percent.  The future value of $96.94 is equal to the present value of $26.35. This means, leaving you a choice of having $26.35 today or wait for the 6 time periods to have $96.94 per share. If you take the $26.35 today, you will have a chance to reinvest the money at 29.80 percent at the same equal time periods which will end up having more than $26.35.  Moreover, the projected net income for year 5 was $32.05 per share a total value of $59.62 billion, while the present value was $25.7 billion.

On the other hand, the capital rate that was used was 15 percent. The future value of equity was $312.9 billion at a future price of $168.25 per share. While the present value of Tencent Holdings Ltd was $135 billion at $72.74 per share. The return on investment that was used was 33.07 percent. While the price to earnings that were used in the calculation was $5 and it’s earning per share was $8.71.  The current market price, February 13, 2013, was $35.10 per share.

Tencent Investment in Enterprise Value   

The concept of enterprise value is to calculate what it would cost to purchase an entire business. Enterprise Value (EV) is the present value of the entire company. Market capitalization, on the other hand, is the total value of the company’s equity shares. In essence, EV is a company’s theoretical takeover price, because the buyer would have to buy all of the stock and pay off existing debt while pocketing any remaining cash. This gives the buyer solid grounds for making its offer.

Tencent EV

Explanation

The market capitalization for Tencent Holdings Ltd was increasing except in 2011 where it experienced a drop of 8 percent. The total debt represents 6 percent average, while the cash and cash equivalent represent a 78 percent average. As a result, the enterprise value was lesser by 72 percent against the market capitalization. If an investor decides to buy the entire business of Tencent Holdings Ltd, then he/she will be paying 100 percent of its equity, no debt, because cash was greater than the total debt.

The purchase price to date February 13, 2013, in buying the entire business of Tencent Holding Ltd was $42.9 billion at $23.07 per share. The market price to date was $35.10 per share.

Benjamin Graham’s Stock Test    

Net Current Asset Value (NCAV) Approach     

Graham developed and tested the net current asset value (NCAV) approach between 1930 and 1932. Graham reported that the average return, over a 30-year period, on diversified portfolios of net current asset stocks was about 20 percent. An outside study showed that from 1970 to 1983, an investor could have earned an average return of 29.4 percent by purchasing stocks that fulfilled Graham’s requirement and holding them for one year.

Net Current Asset Value (NCAV) Method  

Studies have all shown that the Net Current Asset Value (NCAV) method of selecting stocks has outperformed the market significantly.

Graham was looking for firms trading so cheap that there was little danger of falling further.  His strategy calls for selling when a firm’s share price trades up to its net current asset value. The reason for this according to Graham is when a stock is trading below the Net Current Asset Value Per Share, they are essentially trading below the company’s liquidation value and therefore, the stock was trading at a bargain, and it is worth buying.

The concept of this method is to identify stocks trading at a discount to the company’s Net Current Asset Value per Share, specifically two-thirds or 66percent of net current asset value.

Tencent MC NCAV

Explanation

The net current asset value approach of Benjamin Graham indicates that the stock price was overvalued from 2007 to 2012. Because the market value was greater than the 66 percent ratio. The 66 percent ratio represents only 18 percent of the market value. Thus, the stock was trading above the liquidation value of Tencent Holdings Inc.

It tells us that the stock of Tencent did not pass the stock test of Benjamin Graham because the price was expensive.

Market Capitalization/Net Current Asset Value (MC/NCAV) Valuation  

By calculating market capitalization over the net current asset value of the company, we will know if the stocks are trading over or undervalued. The result should be less than 1.2 ratios. Graham would only buy if the ratio does not exceed 1.2 ratios.

Formula: Market Capitalization / NCAV = Result (must be lesser than 1.2)    

Let’s go over with the result from the table below:

Tencent NCAVPS

The MC/NCAV valuation tells us that the stock price of Tencent was overvalued from 2007 to 2012. Because it exceeded the 1.2 ratios. It did not pass the stock test of Graham because the stock was expensive. 

Benjamin Graham’s Margin of Safety (MOS)     

The margin of Safety requires knowing when the buying price is low in absolute terms, rather than merely relative to the market as a whole. This formula is used to identify the difference between company value and price.Graham called it the intrinsic value.

This is the concept taught by Benjamin Graham and still referred to by Warren Buffett. Value investing is buying with a sufficient margin of safety. Graham considers buying when the market price is considerably lower than the intrinsic or real value, a minimum of 40 to 50 percent below. Because enterprise value takes into account the balance sheet and a much more accurate measure of the company’s true value compared to market capitalization,

To arrive at the results below for Tencent Holdings Ltd, we used the formula Margin of Safety = Enterprise Value – Intrinsic Value.

Tencent MOS

Explanation

Benjamin Graham’s margin of safety indicates a 96 percent average for Tencent Holdings Ltd. The margin of safety was at $282 average. The enterprise value was average $10 representing only 3 percent of the intrinsic value, while on the other hand, the intrinsic value was average $292 representing 3041 percent of the enterprise value.

Intrinsic Value

Intrinsic Value = Current Earnings x (9 + 2 x Sustainable  Growth Rate)   

The explanation in the calculation of intrinsic value was as follows:

EPS or the company’s last 12-month earnings per share; G as the company’s long-  term (five years) sustainable growth estimate; 9 is the constant that represents the appropriate P-E ratio for a no-growth company; and 2 for the average yield of high-grade corporate bonds.

Tencent IV

Explanation

What factors intrinsic value? In our calculation, using the formula of Benjamin Graham for intrinsic value, the earning per share and the growth plays an important role in the calculations. The earning per share was $3 average, while the sustainable growth rate was 39 average. On the other hand, the annual growth rate was 86 average.

Earnings per Share (EPS)

The formula for earning per share was:

          EPS

Sustainable growth rate (SGR), on the other hand, shows how fast a company can grow using internally generated assets without issuing additional debt or equity. To calculate the sustainable growth rate for a company, you need to know its return on equity (ROE). You also need to know the dividend payout ratio. From there, multiply the company’s ROE by its blowback ratio, which is equal to 1 minus the dividend payout ratio.

Sustainable Growth Rate

Sustainable growth rate = ROE x (1 – dividend-payout ratio)
Tencent SGR

The table above shows that the return on equity was average 42 percent while the payout ratio was 8 percent average.

Let’s move on with Return on Equity or ROE. This is used as an indicator of a company’s profitability by measuring how much profit the company generates with the money invested by common stock owners. In other words, the return on equity shows how many dollars of earnings result from each dollar of equity. The formula for the return on equity was:

 ROE

Relative and Average Approach

The summary of the two approaches is in the table below.

Tencent Relative

Let us walk farther and see how is the real value of the stock of Tencent Holdings Ltd and the market price of the stock significant in the margin of safety.

  Tencent Graph

Explanation

The intrinsic value line soared up very high at a rate of 2969 percent average from 2007 to the trailing twelve months 2012. This is the true value of the stock of Tencent Holdings Ltd. This means that the true value of the stock is soaring high, but in the trailing twelve months of 2012, it falls down at -9 percent. The price was stable at an average of $10, trending at 13 percent average.  The graph shows a 96 percent average margin of safety from 2007. Overall, this is what Benjamin Graham meant, when he said, purchasing at a discount to its underlying intrinsic value.

IV is the true value of the stock and EV is the market price and the difference between the two lines is what we called the margin of safety.

Tencent Relative Valuation Methods       

The main purpose of these relative valuation methods for valuing a stock is to compare market values of the stock with the fundamentals (earnings, book value, growth multiples, cash flow, and other metrics) of the stock. 

Price to Earnings/Earning Per Share (P/E*EPS)  

This valuation will determine the status of the stock price. Stocks may be undervalued or overvalued.  One way to do this is by simply multiplying the Price to Earnings (P/E) ratio with the company’s relative Earning per Share (EPS) and comparing it to the enterprise value per share.

Tencent PE EPS

Explanation

The P/E*EPS valuation shows that the price was undervalued from 2007 to the trailing twelve months 2012. The enterprise value represents only 8 percent of the P/E*EPS ratio, therefore, the price was cheap.

The price was undervalued because the stock price was lesser than the result of the P/E*EPS ratio. Another way of calculating this valuation is by using the average price to earnings ratio.

Tencent Relative PE

Price to earnings ratio using the average approach has greater results because it takes into consideration the past performance of the company, in which the P/E ratio for 2006 was 5000 percent. 

The Enterprise Value (EV)/Earning Per Share (EPS) or (EV/EPS)    

The use of this ratio is to separate price and earnings in the enterprise value. By dividing the enterprise value of projected earnings (EPS). The result represents the price (P/E) and the difference represents the earnings (EPS).  If the analysts think that the appropriate ratio is greater or lower than the result.

  Tencent EV EPS

Explanation

The EV/EPS valuation indicates that the price (P/E) that was separated represents 36 percent average. While the earnings (EPS) a were 64 percent average. This might indicate that the price was cheap because the price represents only one-third of the enterprise value.

Enterprise Value (EV)/ Earnings Before Interest, Tax, Depreciation, and Amortization (EBITDA) or (EV/EBITDA)        

This metric is used in estimating business valuation. It compares the value of the company inclusive of debt to the actual cash earnings exclusive of non-cash expenses. This metric is useful for analyzing and comparing profitability between companies and industries.

Tencent EV EBITDA

Explanation

The EV/EBITDA valuation tells us that it will take three years to cover the cost of buying the entire business. In other words, it will take three times the cash earnings to cover the cost of the purchase price. This valuation also shows the profitability wherein, it has a 74 percent average gross profit margin. Likewise, its net margin was 38 percent average.

Conclusion: 

In the Discounted Cash Flow spreadsheet, the capital rate that was used was 15 percent.  The present value of equity per share was $26.35 at the rate of 33.07 percent. While the future value was $96.94 per share discounted today at present value. Taking the amount of $96.94 today, you will be able to reinvest at the same 33.07 percent for the same equal 6 time period. Also, end up getting a higher amount. Moreover, the future value of equity was $312.9 billion at a future price of $168.25 per share. While the present value of Tencent was $135 billion at $72.74 per share. In addition, the projected income at year 5 was $32.05 per share discounted at present value.

Enterprise Value

The enterprise value valuation, total debt represents 6 percent and the cash and cash equivalent represent 78 percent. Thus the enterprise value was lesser by 72 percent against the market value. Buying the entire business to date, December 26, 2012, will cost $37.5 billion at 20.16 per share.

Net Current Asset

The net current asset value approach of Benjamin Graham indicates that the stock price of Tencent was overvalued. For the reason, the stock was trading above the liquidation value of the company. MC/NCAV valuation, on the other hand, shows that the stock price was expensive because the ratio exceeded the 1.2 ratios. Further, the margin of safety for Tencent Holdings Ltd was 96 percent average. While the intrinsic value was $292 average. In addition, the sustainable growth rate was $39 and ROE was $42 average.

Relative Valuation

Taking consideration of the relative valuation, it shows that the stock price was undervalued. Because the price (P/E) represents 36 percent. While the earnings (EPS) was 64 percent average in the EV/EPS valuation.  Moreover, the P/E EPS valuation shows that the price was undervalued because the price represents only 8 percent average.

EV/EBITDA

Furthermore, the EV/EBITDA valuation tells us that it will take 3 years to cover the costs of buying the business. In other words, it will take 3 times the earnings of the company to cover the costs of buying. The gross and net margins were 74 and 38 percent average.

Overall, the stock price was cheap and the margin of safety was 96 percent average. Moreover, the company has an impressive gross and net margins at 74 and 38 percent, respectively. Moreover, the return on equity was 42 percent average. Therefore I recommend a BUY in the stock of Tencent Holdings Ltd.

Research and written by Cris

This investment valuation is a bit different from our previous report.

Sasol Limited SSL

Sasol Limited (SSL) Investment Valuation

November 22nd, 2012 Posted by Investment Valuation No Comment yet

Sasol Limited (SSL) is an international integrated chemicals and energy company that leverages technologies and the expertise of their 31 270 people working in 32 countries. Moreover, SSL develop and commercialize technologies, and build and operate world-scale facilities to produce a range of high-value product stream, including liquid fuels, chemicals, and low-carbon electricity.

SSL Value Investing Approach

This model is prepared in a very simple and easy way to value a company, it adopts the investment style of the Father of Value Investing Benjamin Graham. The essence is that any investment should be purchased at a discount, meaning the true value should be more than the market value. Further, Graham believed in fundamental analysis and was looking for companies with a sound balance sheet and with little debt. The basis for this valuation is the company’s five years of historical financial records, the balance sheet, income statement, and cash flow statement. We calculated first the enterprise value as our first step. We believed this is important because it measures the total value of the company.

The Investment in Enterprise Value on SSL

The concept of enterprise value is to calculate what it would cost to purchase an entire business. Enterprise Value EV) is the present value of the entire company.  Market capitalization is the total value of the company’s equity shares. In essence, it is a company’s theoretical takeover price, because the buyer would have to buy all of the stock and pay off existing debt, and taking any remaining cash.

Enterprise Value = Market Capitalization + Total Debt – (Cash and Cash Equivalent + Short Term Investment)

SSL EV

Explanation

The market value of Sasol was stable at $26 billion average and moving at a rate of 11 percent. While the total debt of SSL represents a 52 percent average while the cash and cash equivalent represent a 50 percent average of the enterprise value, therefore, enterprise value was greater by 2 percent against market value. Purchasing the entire business of SSL is paying 98 percent of equity and 2 percent debt.

The cost of buying the entire business of SSL to date, November 7, 2012, will be $27546 at $44.57. The market price to date is 42.86.

Net Current Asset Value (NCAV) Method

The Net Current Asset Value (NCAV) is a method from Benjamin Graham it is to identify whether the stock is trading below the company’s net current asset value per share, specifically two-thirds or 66 percent of net current asset value. Meaning they are essentially trading below the company’s liquidation value and therefore, the stocks are trading in a bargain, and it is worth buying.

SSL NCAVPS

The net current asset value approach tells us that the stock of SSL was trading at an overvalued price from 2007 to 2012. Because the market value was greater than the 66 percent of NCAVPS. The price of the stock of SSL was expensive because the stock was trading above the liquidation value of SSL.

Market Capitalization/Net Current Asset Value (MC/NCAV) Valuation  

Another stock test by Graham is by using market capitalization and dividing it to net current asset value (NCAV).  The idea is, if the result does not exceed the ratio of 1.2, then the stock passes the test for buying. 

SSL MC NCAV

The stock price of SSL was undervalued for 2007 to 2012 because the ratio was lesser than the 1.2 ratios. Furthermore,

The margin of Safety (MOS)   

The margin of safety is used to identify the difference between company value and price. Value investing is based on the assumption that two values are attached to all companies, the market price and the company’s business value or true value. Graham called it the intrinsic value. According to Graham, the investor should invest only if the market price is trading at a discount to its intrinsic value. Value investing is buying with a sufficient margin of safety. Graham considers buying when the market price is considerably lower than the intrinsic or real value, a minimum of 40 to 50 percent below. The enterprise value is used because I think it is a much more accurate measure of the company’s true market value than market capitalization.

SSL MOS

Explanation

The margin of safety tells us that there was a margin of safety for 2007 to 2012 at a rate of 95 percent average. The margin of safety was stable at 95 percent all throughout its 5 years. Moreover, the stock price was cheap and it is over the requirement of Graham at 40-50 percent MOS.

Intrinsic Value =  Current Earnings x (9 + 2 x Sustainable  Growth Rate) 

SSL IV

Explanation

The table above shows the historical intrinsic value for Sasol. The intrinsic value was increasing and this represents the true value of the stock. It factors the earnings per share (EPS) and the sustainable growth rate (SGR). While EPS is the portion of the earnings which is attributable to the ordinary shareholders. It is the earning power of the company.  While the SGR shows how fast a company can grow using internally generated assets without issuing additional debt or equity or in other words it shows how much growth a company can potentially generate internally given its level of profitability.

Furthermore, to arrive at the intrinsic value, the annual growth rate must be calculated first by multiplying SGR to (9+2). Then the result which is the annual growth rate is multiplied to EPS to get the intrinsic value.  The table below will show us the historically sustainable growth rate and how it is calculated.

Sustainable Growth Rate (SGR)

SSL SGR

The return on equity (ROE) and the payout ratio factors SGR.

ROE

Return on Equity clearly shows how many dollars of earnings result from each dollar of equity.

The average ROE was $19 and the average payout ratio was $40, while SGR was $11 average.

There are two approaches to calculating the sustainable growth rate and that is by using the relative ratio for return on equity and the average return on equity. I summarized the results of these two approaches in the table shown below.

SSL Relative

Explanation

Using the average ratio for SSL, it produces a higher result and it is more favorable for the company. As we can see, it affected the results of the intrinsic value and the margin of safety. The graph below will make us understand it better.

  SSL Graph

The graph shows that the intrinsic value (IV) line is far above the enterprise value (EV) line. This means, that there was a margin of safety for SSL. The space between the two lines is the margin of safety.

Price to Earnings/Earning Per Share (P/E*EPS)  

This method will determine whether the stocks are undervalued or overvalued by multiplying the Price to Earnings (P/E) ratio with the company’s relative Earning per Share (EPS). And comparing it to the enterprise value per share, we can determine the status of the stock price.

SSL PE EPS

The P/E*EPS valuation shows that the stock price was undervalued. Because the P/E*EPS result was higher than the market value. The market value represents 11 percent of the P/E*EPS ratio, therefore the stock was trading at the cheap price.

The Relative and Average Approaches

There are actually two ways of calculating P/E*EPS valuation, one is by using the relative price to earnings ratio and the other one is by using the average P/E ratio.  The summary of the results was in the table below.

SSL Relative PE

Enterprise Value (EV)/Earning Per Share (EPS) or (EV/EPS)

We use this ratio to separate price and earnings in the enterprise value. By dividing the enterprise value of projected earnings (EPS), the result represents the price (P/E) and the difference represents the earnings (EPS).

SSL EV EPS

In the EV/EPS valuation, the price (P/E) represents 3 percent and the earnings (EPS) represents 97 percent. It indicates that the price was undervalued and cheap in 2007 to ttm6 2012.

Enterprise Value (EV)/ Earnings Before Interest, Tax, Depreciation, and Amortization (EBITDA) or (EV/EBITDA).        

It compares the value of the company inclusive of debt and other liabilities to the actual cash earnings exclusive of non-cash expenses. This metric is useful for analyzing and comparing profitability between companies and industries.

SSL EV EBITDA

The average EV/EBITDA was 1 time.  This means it will take only one year of the cash earnings to cover the costs of buying the business.

This valuation also shows the profitability of the company, for SSL, its net earnings were 14 percent average. The company’s free cash flow was negative for 2010, 2012 and the trailing twelve months.

Overview

The market value of Sasol was stable at $26 billion average and was moving at a rate of 11 percent. On the other hand the total debt was 52 percent and the cash and cash equivalent was a 50 percent average. Buying the entire business of SSL will be paying 98 percent of equity and 2 percent of total debt. The costs of buying SSL to date would be $27546 at $44.57 per share.  The market price to date is $42.86 per share.

The margin of safety

On the other hand, the margin of safety was averaging 95 percent. While the intrinsic value was $1041 average. The sustainable growth rate was $11 average moreover, the annual growth rate was $32 average. In addition, the return on equity was $19 average while the price of earnings was $13 average.

Furthermore, the price was undervalued from 2007 to 2012.  While the EV/EPS valuation shows that the price (P/E) was 3 percent and the earnings (EPS) was 97 percent. It will take one year of the earnings to cover the costs of buying the entire business of SSL.

The margin of safety was 95 percent and the stock was trading at an undervalued price. Therefore I recommend a BUY in the stocks of Sasol Limited  (ADR).

Researched and Written by Cris

investment-technology-group-inc-itg

Investment Technology Group Inc (ITG) Company Research

August 24th, 2012 Posted by Company Research Report No Comment yet

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.

Balance Sheet

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

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.

Leverage

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.

Asset Management

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).

Profitability

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
Calculation

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.

Explanation

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.

Revenues

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.

Explanation

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.

Expenses

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.

Explanation

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.

Conclusion

“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.

Explanation

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.

Cash payment

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.

Explanation

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.

Explanation

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.

Explanation

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.

Explanation

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

Note:

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