Case on Ratio Analysis Question one The of the company under review is the Texas Instruments Inc known as TXN on the market. The company’s financial year-end is at December 31 of each year. 17141000 dollars as at the end of the financial year marked December 31, 2013 were the outstanding shares at the end of the financial year under consideration. Price per share for the company is calculated using common stockholder’s equity divided by common shares outstanding. This is equivalent to 10807000/1714000 =6.3 per share. Market capitalization is outstanding shares multiplied by share value. Question two Read about your company using the information in the 10-K.
You need to understand the nature of the company, its products/services, and its customers. Using FactSet, generate a list of 5 competitors that compete most directly with your firm and list them. Be certain your list of competitors is logical given what you know about the company. Do not include companies as competitors just because they are listed on FACTSET as having the same NAICS or SIC code. Do some research on each company before you include them as a competitor.
Choose and label the major competitor from this list. The major competitor should be selected based on competing for the same customers, not just their size in sales or market capitalization. Justify your selection of this company as the major competitor. Be prepared to invest significant effort in this analysis. Company description The company Texas Instruments Inc was developed and started in 1930. TXN is a company that designs, sells and deals in the manufactures of electronics and semiconductors. The company has grown its business through its segmented operations that include the analog developments, Embedded processing and last comes others.
The analog segment of the business deals with the development of high volume analog products also automotive safety products. The company also produces touch screen controllers integrated motor controllers among other of its products that have designed their own niche in the market. The analog segment also provides the market with quality high performance products that include high-speed converters for data, sensors, and amplifiers among others. The second segment the embedded processing segment deals with processor products that include digital signals, processes microcontrollers memory aspects, peripherals and many more products.
Based on these, the company produces these products to capture the market and control activities of their competition. The other segment deals with the production of projector products, integrated circuits and the production of calculators. Baseband products and connectivity product all fall under this category of products. The marketing aspects that the company employs in dealing with the market and handling their competition include direct sales and the use of distributors as a channel of business.
RATIO FORMULA FOR RATIO CALCULATION RATIO FOR YOUR FIRM BASED ON 10-K Calculated—show work RATIO FOR YOUR FIRM FROM FACTSET RATIO OF TOP COMPETITOR QUALCOMM Incorporated RATIO OF PEER GROUP LIQUIDITY RATIOS Current Ratio Current assets /current liabilities Current assets/current liabilities 8019000/2747000= 2.9 19555000/5213000 = 3.75 Acid Test Ratio (cash+accounts receivable+short term investments)/current liabilities (1627000+1596000+2202000)/2747000 = 2.0 (6142000+2715000+8824000)/5213000 = 3.4 Average Collection Period (Days*Average amount of accounts receivable)/credit sales (365*133000)/1596000= 30.4 (365*226250)/2715000= 30.4 AP Deferral Period Total supplier purchases/average accounts payable 9820000/(23293000/12)=40.12 9820000/1941083= 5.1 Inventory Conversion Period Inventory/cost of sales/365 1731000/(5841000/365) = 108.2 1302000/(9820000/365)= 48.4 Cash Conversion Cycle DIO+DSO-DPO CAPITAL STRUCTURE RATIOS Times Interest Earned EBIT/totals interest payable on bonds and other contractual debts 27820000/7000 = 397.43 8194000/31000 = 246.32 Debt Ratio Total debt/total assets 4158000/18938000= 0.22 0/207000000= 0 Equity Multiplier Assets/stock holder equity 18938000/10807000 = 1.75 45516000/36088000 = 1.26 ASSET MANAGEMENT EFFICIENCY RATIOS Total Asset Turnover Sales or revenues/total assets 12205000/18938000= 0.64 24866000/45516000= 0.55 Fixed Asset Turnover Net sales/total fixed assets 12205000/10919000 = 1.12 24866000/259619000 = 0.96 PROFITABILITY RATIOS Gross Profit Margin (Revenue-COGS)/revenue (12205000-5841000)/12205000 = 0.52 (24866000-9820000)/24866000 = 0.6 Operating Profit Margin Operating income/ net sales 2832000/12205000 = 0.23 7230000/24866000 = 0.3 Net Profit Margin (FactSet labels this Net Margin) Net profit/revenue 2162000/12205000 = 0.18 6853000/24866000 = 0.28 Operating Return on Assets (OROA) Net income/total assets 12205000/18938000 = 0.64 24866000/45516000 = 0.55 ROE Net income/shareholders equity 2162000/10807000 = 0.20 6853000/36088000 = 0.19 MARKET VALUE RATIO Price-Earnings Ratio (Use LTM- Last Twelve Months) Market value per share/earnings per share 48.75/1.10 = 44.32 75.53/1.20 = 62.94 EPS (Net income-dividends on preferred stock)/average outstanding shares (2162000-1175000)/(10807000/12) = 1.10 $2.69 (6853000-2055000)/(36088000/12) = 1.20 Market-to-Book Ratio Book value of firm/market value of firm 1.10/48.75 = 0.023 1.20/75.53 = 0.016 Question three: Using the following table, explain the information provided by each of the following ratios, explain how this information would impact your decision of whether or not to invest in this company, and compare the ratio for your company to the top competitor and the peer group.
Use bullet points and limit your comments to the space provided. Describe the information provided by this group of ratios Which users of financial information would be most interested in these ratios and for what decision? As a result of comparing the ratios for your company to the top competitor and the peer group, state a conclusion: stronger, comparable weaker.
Support your conclusion by references specific ratios as needed. Liquidation ratios Liquidation ratios aim at defining the possibility of a company easily to convert the possessions into cash. Creditors need this information to decide if the company is in position to pay their dues in time and have security in case of liquidation. According to the information provided, the liquidation levels for QUALCOOL seem stronger compared to those of NXT. Capital structure ratios Capital structure ratios aim at describing the capital security of the business and its growth and potential.
Shareholders and investors. These need this information to know how secure the company is for the future aspects. In capital comparison, NXT remains strong with a high capital nature though with high debt to asset ratio. Asset management efficiency ratios Asset management ratios aim at controlling the asset ability of the business. The ability of the business to develop and grow their assets.
Shareholders and managers. These need the information to ensure that the company is advancing and protected in their value. According to return on assets, the returns on assets for NXT seemed more encouraging compared to those of QUALCOMM. This shows a better asset management structure for NXT compared to that of QUALCOMM. Profitability ratios Profitability ratios provide the profit ability of the business. The ability of the business to remain profitable for more years ahead giving investors more confidence. Shareholders and prospective investors. These need the information to evaluate their future in the business.
The fact that the business is in position to remain profitable for longer period. According to the profitability ratios, the NXT company is doing better compared to apple and the peers. Market value ratios Market value shows the value of the company in relation to market dynamics. The ability of the company to hold good market values gives shareholders confidence. Stakeholders and shareholders need this information to determine the effect of their actions to the business and if it is in position to remain capturing to the market hence remain profitable.
According to the market value ratios, NXT is stronger in the market compared to the competitors. Question Four: When firms enter into loan agreements with their bank it is very common for the agreement to have a restriction on the minimum current ratio the firm has to maintain. So, it is important that the firm be aware of the effects of their decisions on the current ratio. If the company needed to make its current ratio higher to conform to a debt covenant, what are their potential strategies? The current ratio of a company explains the current assets over current liabilities that the company holds.
A high current ratio shows that the company has assets that remain in position to take care of their liabilities in case of a liquidation threat. The current ratio provides the company with a position that the bank feels is secure to provide funding to the company. It makes the bank comfortable and sure that the company is in position to payback the amount being advanced. For the company to increase its current ratio there is need for it to concentrate in building their assets and making them more secure and in position to sustain the financial liabilities that the company may have.
One way the company can increase their current assets is through the increasing of their production capacity and stock levels. The impact this will have in the company especially with borrowed more is that the money is in position to grow faster and hence making them in position to pay back the loan facility. Question Five: Using bullets, list three pieces of additional information you would want to have if you were making an investment decision regarding the company.
(Hint: refer back to the GB112 course project. ) The percentage of shares held by each individual shareholders. The growth plan that the company has for the next five years. Their plan to handle the current growth of liabilities in the company.