Hello class,
For this week, please comment on the 5 -10 year RNOA, ROE, ROA, CCC and Stock Performance trends of your company. You are welcome to divide and conquer this leg work as a group – each member may discuss the trend of one ratio so you share and compare the work. HOWEVER, each individual needs to post a blog commenting on their thoughts about this trend, providing context into the number they are reporting. Please feel free to leverage msn money/yahoo finance/google finance in downloading these numbers directly into spreadsheets to make easy computations.
In class today, we discussed key metrics for evaluating the health of a business model. Additionally, we covered strategies (i.e. “taking a bath”) to create rainy day (or “cookie jar”) funds to show a false sense of positive performance in order to inflate the stock price of the company.
Look forward to seeing the results!
I was sick and absent yesterday.
Coke’s financial ratios:
Stock price performance:
In 2007, KO prices climbed to a high of $31.90. The company acquired Fuze Beverages that year, which contributed to a slightly higher stock price immediately after the deal was announced. This was a good move for Coca-Cola, as investors had been pressuring the company to add non-carbonated, “healthy” drinks to its lineup. However, due to the recession and therefore lower levels of consumer spending, KO prices dropped dramatically in 2008 and 2009. Prices hit a low of $19.55 in March 2009. The stock began to recover in late 2010 and hit current levels in 2013. This was due partly to its rollout of low-calorie drinks and viral marketing campaigns.
The decreasing ROA is a bad sign because each dollar of earning is decreasing for each dollar of asset. This decrease in ROA is due to a decrease in net income and an increase in average assets. As a result, the company is not using their assets in an efficient manner. In comparison to Pepsi, Coca Cola’s competitor, Coke has a higher ROA in terms of absolute ratio. However, Coke’s ROA is decreasing at a faster rate than Pepsi’s ROA.
The decreasing ROE is a bad sign as well because the company has generated less profit with the amount of money shareholders have invested. In comparison to Pepsi, Coke, for the majority of 10 years, has had a lower ROE. This is a bad sign for Coke because investors may be swayed to invest in Pepsi because there is a higher return from their investments.
For Coke, CCC decreased from 2009-2011, but is slowly on the rise again (re-approaching 2010 numbers in present-day). In general, lower CCC indicates better management efficiency. An increasing CCC trend seems problematic for Coke, as the company is taking longer to sell inventory, collect receivables, and pay its bills (particularly worrisome is the increasing days in inventory trend). With a higher CCC, more of their cash is tied up in working capital.
ROE is not as useful of a ratio, as RNOA, since it’s hard to understand to what extent leverage played a role in generating the returns for shareholders. Return on Net Operating Assets (RNOA), on the other hand, is the measure of a company’s capability to create profit from each piece of equity.
While RNOA is a good internal management ratio, ROE is a good gauge for investors on how well their funds are utilized to generate more profit. ROE is a good tool for determining how well a company does compared to other companies in the same industry while RNOA is not as good.
During our class discussion, we learned that a “good” RNOA is around 10%. In our analysis, we noticed that Coca Cola’s RNOA has been decreasing over the past five years which tells us that Coke has been becoming less efficient at creating profit from their existing equity.
Source for research: http://www.differencebetween.net/business/finance-business-2/difference-between-roe-and-rnoa/
It’s interesting to observe that from 2010 to 2011, Coca Cola was able to reduce its “days in inventory” significantly, compared to previous years. Moving forward from 2011, however, Coca Cola’s “days in inventory” have been slowly rising – this is slightly concerning. If Coca Cola’s inventory period continues to rise and impact its cash conversion cycle, the company may be at a disadvantage compared to its competitors. Our team will definitely keep this in mind as we assess how we can improve Coca Cola’s existing business model.
Jean Carlo did an excellent job at grabbing all the numbers and formulating them. See attached. I found it interesting that the ROE and ROA are starting to decline in 2012 and 2013.
In this chart put together by Jean Carlo you can see the slight decline.
J&J’s CCC decreased from 2005 to its shortest of 7.32 days in 2008 and then deteriorated from 2009 to 2011, and then improved again from 2012 to 86 days in 2013. However, J&J is still a lot less efficient in converting cash invested into cash received. J&J’s ROE and ROA fluctuated steadily from 2004 to 2007 and peaked in 2008 with 30.17% ROE and 15.61% ROA. Then both ratios decreased till 2011 and improved again from 2012. This shows that J&J experienced a difficult time in 2011 but was able to recover. In general, J&J is doing well in managing investor’s money, beating the 11%-13% average return for US publicly traded firms. And with the stock price almost continuously grow from 2004 (except one drop in 2010), we can see that investors are also confident in the company.
Other important financial and profitability ratios that I find is gross margin, operating margin and ROA and ROE. In terms of profitability as margins to sales, Johnson and Johnson’s gross margin has been slightly decreasing since the last 5-10 years from 71.65% in 2004 to 68.67% in 2013. However, it is still able to retain its efficiency in terms of its daily operations as operating margin stays stable over the years within the range of 23-25%. Furthermore, in terms of ROE and ROA, just as my group mate Zoe mentioned, J&J’s performance has been fluctuating steadily. J&J’s ROE has decreased quite significantly over the span of 10 years, from 29% in 2004 to 19.92% in 2013. This can be a sign of challenges in turning the stockholder’s investment into net sales. J&J’s ROA has also decreased from 16.75% in 2004 to 10.89% in 2013. ROA refers to how efficient J&J in managing its company resources.
information extracted from: http://financials.morningstar.com/ratios/r.html?t=JNJ
Our team is in the early stages of analyzing Fujitsu’s financial statements but I took their data from the past 10 years and calculated their ROA and ROE to find a unique trend that’s occurring. I would not have understood this had it not been for Tuesday’s lecture on ‘Big Baths’ and the ‘Cookie Jar Reserve’. However unlike the chart shown in class yesterday where there is a seemingly upwards trend with the big baths, Fujitsu’s chart shows that after the large dips they return to the exact same place as before, showing little economic growth or progress. Once we calculate the RNOA and employ a more detailed analysis of their statements we should be able to understand the reason behind the ‘dips’ on the chart.
Data used was from: http://www.fujitsu.com/global/about/ir/data/downloads/
I agree with Cassie about the big baths analysis, but I want to add that sometimes this “big bath behavior” is related to the macroeconomic atmosphere that surrounds the company. For example on 2008 there is a large dip but it was totally conditioned by the world economic depression. So, when we analyze any company’s behavior we have to study the environment in which it participates
I would overall agree with what Cassie and Diego said. What we need to highlight and look at in particular in relation to the lecture is the fact that Fujistu has a long standing basis in IT computing which is why they have been able to survive till now. However, their ‘yo-yo’ cycling system, when looking at their ROE and ROA, tells us that they probably don’t have a very consistent strategy that is driving their goal lists for each year.
Wipro’s Ratios
For the first couple of years ROA was decreasing, which indicates that Wipro wasn’t using its assets efficiently. During this time Wipro was growing its assets at a much quicker rate than its net income was growing. However, this may not necessarily be a bad thing as Wipro could have been building up assets to break into new markets. These new assets might have taken some time to set up or required other infrastructural work before they could generate revenue. Then, starting from 2013, Wipro turned its ROA around and vastly increased it. All of a sudden its assets were much better at generating revenues.
Similarly, Wipro’s ROE follows a same pattern. After a couple years of decline, it shot back up again. Shareholders were seeing less return for the amount of money they had invested until early 2013. However, this increase should be viewed cautiously since it seems like most of the improvement in ROE comes from a large amount of additional debt that Wipro took on.
Wipro’s stock prices follow these trends pretty closely as well.
During yesterday’s lecture, we learned about the RNOA. This Return on Net Operating Assets essentially shows us how well the company is doing in terms of generating profit from each operating asset. Many people rely on the ROE to gauge how well the firm is able to generate profit from each unit of equity, but the RNOA allows us to identify the ROE specific to the business operations.
As we can see above, Wipro’s RNOA has been increasing fairly steadily over the last few years. This shows that Wipro’s management has become more efficient in using its assets to generate a greater profit.
From Wipro’s financials we can see that it has been able to generate profit steadily year after year without any dramatic fluctuations. This is also shown by good and stabile key ratios for the same time frame. The company is listed on the New York Stock Exchange since year 2000 and by today it has doubled its market cap. This evaluates to a yearly growth level of approximately five percet per year over these 14 years. However, the stock price had a significant spike in 2002-2003 when it was bought for around three times the price. Wipro has also been frequent payers of dividends since the time of their listing. At least once a year have they payed dividend to their owners but they were usually very small and significantly less than 1%.
Just as Gustav said, the ratios have been stable the last few years and the stock has neither declined nor grown especially much on NYSE. Except for the years 2003-2004 when it was very volatile.
What’s interesting though is to see the difference between ROE and RNOA. The last 5 years ROE has been around 20% and RNOA somewhere about 5%. The difference, NNR, is roughly 15%, which means that most of their return comes from activities not related to its core operations. It can be explained by their large retained earnings were some is invested in short-term investment. It maybe also prepare Wipro for an acquisition or big investment and this wont constraint them.
The CCC of Wipro has seen an increased in recent years, peaking at 61 in 2012 and decreasing to 52 in 2014. It is clear that Wipro has been trying to reduce its CCC lately, allow it to generate cash quickly from its assets. With more liquid assets, Wipro showing that it has been improving its management efficiency. This is a good sign for the company, as it shows 2014 as a year of change and improvement. Having faster access to cash means that Wipro can move faster in investment and financing, so hopefully we can use that to our advantage in our business model to make investments into the Internet of Things market.
I am very happy with some of the analysis that was presented. You all seem to be tracking with me on understanding the ratios and financial statements.
The last chart I posted for United was wrong. The good news is that through the teachings in this class I was looking for what the core problem was with the company through its annual reports and was able to find that it was a mistake on our end and not the company. It was a little mistake that made a big difference. The moral of the story is that I now know how read financial statements.
The ROE and ROA are solid. United is doing great and their core business is the engine that is pushing everything forward. I will let my classmates comment on the other elements that were discussed in class since I was absent.
Here is a visual.
In class we talked about how to measure a company’s quality of profits. We learned how to calculate the RNOA ratio, which takes into account the net operating profit and net operating assets. United Health has a very high RNOA at about 30% over the five year period displayed in the above chart. This means United is utilizing their operational activities effectively to generate profits. United’s RNOA is greater than their ROE. This indicates that United is holding onto money for future purchases of intellectual property.
UNH’s financials look healthy. Their core business, health insurance, is still the main driver of its profits. RNOA, ROE and ROA have had small fluctuations in the past 5 years with a slight decline decline in last fiscal year. However, the average percentage change for the past 5 years remains positive at around 2% per year.
On another note, i will try to get specific financial information for Optum since it is the business unit we’re fosuing on. Ftom the 10-K, I could see that Optum’s revenues are growing fast every year and it would be interesting to see how profitable it is.
’08 ’09 ’10 ’11 ’12 ’13
DSO 44 44 43 47 51 82
DIO 51 52 52 61 66 72
DPO 82 82 77 75 72 82
CCC 13 14 18 33 44 72
For GE, CCC has steadily been on the rise and sharply increased for FY 2013 (unless I accidentally made a miscalculation somewhere). As we learned from lecture, understanding CCC is important to help evaluate and understand the firm’s internal policies. Although GE is not necessarily a solely retail company, an increasing CCC trend is negative because it means that GE is less efficient at selling inventory, collecting receivables, and paying its bills. After reviewing and understanding GE’s financial health from the CCC perspective, my team and I can now look into ways on how to better convert cash on hand to more cash, which can be reinvested to grow the company’s Healthcare business and provide more resources to its healthymagination goals.
I calculated the Return on Equity for GE from 2004-2014. The ROE in 2004 was around the same percentage of ROA. When stock price increased to around $41 in 2008, the ROE was the same percentage for ROA. In 2009, when the stock price dramatically decreased, the ROE decreased as well. Ever since then, the ROE has steadily remained consistent. This company has the ability to do better than it has been throughout the past 10 years.
General Electric Co.’s ROA ,the profitability ratio calculated as net income divided by total assets , deteriorated from 2011 to 2012 and from 2012 to 2013.However,it was stable during the past 5 years.