Financial Analysis Report Each student is required to perform a comparative financial ratio analysis for the most recent year available on a publicly traded company and its primary competitor using the financial ratios covered in class in Chapter 4. Target vs CVS GETTING STARTED: First Step: Pick a publicly traded company listed on the NYSE or NASDAQ. This cannot be a financial company. It should be a manufacturer or a nonfinancial service company. I already pick the two company Target vs CVS How do I do that? Go to Yahoo.Finance Select “Symbol Lookup” Enter a company name Second Step: Pick a primary competitor for that company. How do I do that? Go to Rueters.com Use search icon at top right and type in company name and hit return Select “Companies” tab Select a company from the list Then look at the right under “competitors” (Ensure you select a company and competitor whose prices are quoted in $.) Source of Information: You need the last available year of financial statements to perform your analysis. While there are several good sources on the Web, an easy source to use is: http://www.finance.yahoo.com (Note: The last available year on your two competitors does not have to be the same year. That is, if the last available year on one company is 2016, and the last available year on its competitor is 2017, that is OK.) REPORT FORMAT: A HEAVY PORTION OF THE GRADING OF YOUR REPORT WILL BE BASED ON FOLLOWING THE FORMAT GIVEN BELOW. 1st page – Your cover page should list your names, the course name, the semester, and the title “Comparative Financial Analysis of ___ and ___” (the blanks are the company names) Next 2-to-3 pages – This should be your executive summary in which you discuss your findings, along with your assessments and the reasoning for your findings. It should contain the sections listed below: I. Introduction – What is the primary line of business for each company? How do they differ in this regard? II. Liquidity Analysis – Which company has the stronger liquidity ratios? Which company appears to be a safer candidate for a short-term loan? III. Asset Management Analysis – Which company appears to be more efficient in the management of its assets? What are the major differences in this area? • Note that “Cost of Revenues” may be used as “Cost of Goods Sold” (they are the same measure). • The item labeled “Net Tangible Assets” may be ignored. IV. Debt Management Analysis – Which company appears to be the safer company to a long-term bond investor or stock investor? V. Profitability Analysis – Which company appears to be performing better in terms of profitability? VI. Market Value Analysis – Which company is trading at a higher price/EPS ratio or a higher price/BVPS ratio? What do you think that one of the companies is trading at higher price multiples than the other? VII. Summary – Briefly discuss the one or two most dramatic differences observed between the two companies in terms all of the ratios examined above. Offer your opinion of which company is being better operated and financial stronger overall. Explain your reasoning. Next one or two pages – These should include your ratio calculations and table of ratio values. Last four pages – These should include the balance sheets and income statements for each of the two companies. How can you lose points due to formatting mistakes? - Fail to include one of the primary sections above. Fail to use subheadings in the executive summary. Refer to numbers instead of comparisons in your discussions in the executive summary: Incorrect format: “Company A’s current ratio of 2.3 is greater than the Company B current ratio of 2.1.” Correct format: “Company A shows higher current and quick ratio values than those of Company B (refer to Ratio Findings – Table B).” - Fail to include table of ratio calculations. Fail to include table of ratio value findings. Fail to include financial statements. Fail to provide label and title for each table or attached financial statement: Incorrect format: “Ratio Calculations” Incorrect format: “Table B” Correct format: “Table B – Ratio Calculations” - - Have financial statements that spill over to more than one page each. Have financial statements presented in very small font. (Suggestion: Copy the financial statements into a spreadsheet. Then delete the rows or columns that contain no values.) Have messy financial statements that are not clean (i.e., include web garbage in the margins). Have any portion of the report hand-written. Student: Robert Cudd FIN341 Business Finance Spring 2017 Comparative Financial Analysis of Stanley Black & Decker Corporation And Danaher Corporation Executive Summary Introduction The following is a basic financial analysis of Stanley Black & Decker Corporation and Danaher Corporation. For the sake of brevity, Stanley Black & Decker Corporation is hereafter referred to simply as Stanley. Likewise, Danaher Corporation is hereafter referred to simply as Danaher. Stanley is a global provider of tools and storage, commercial electronic security, and engineered fastening systems worldwide. It also offers alarm monitoring, video surveillance, and other home and other security systems. However, the primary source of sales is the manufacture and sale of power and hand tools. The company was formerly known as The Stanley Works and changed its name to Stanley Black & Decker Corporation in 2010. The company was founded in 1843 and is headquartered in New Britain, Connecticut. Danaher designs, manufactures, and markets professional, medical, industrial, and commercial products and services worldwide. The products include laser scanning, compound, and surgical and other stereo microscopes, and other technologies to the biopharmaceutical, food and beverage, medical, aerospace, microelectronics, and general industrial sectors. The company was formerly known as Diversified Mortgage Investors, Inc. and changed its name to Danaher Corporation in 1984. Danaher Corporation was founded in 1969 and is headquartered in Washington, the District of Columbia. While Reuters lists these two companies as primary competitors, there is a considerable difference in the composition of their sales, which may cause ratio comparisons to be considered with cautious discretion. Stanley provides a broad variety of products and services, however, Danaher has a much greater portion of its products and services concentrated in the medical services and products sector. The following analysis is based on financial ratios for the 2016 fiscal year for each company. Ratio results are presented in Exhibit A. Calculations of the financial ratios are displayed in Exhibits B1 and B2. The balance sheets and income statements are presented in Exhibits C1, C2, D1, and D2. Liquidity Analysis Comparison of the two liquidity ratios suggest that Danaher is much less liquid than Stanley (refer to Liquidity Group in Exhibit A). The current ratio and quick ratio values for Danaher are roughly half those of Stanley. If nature of the medical sector sales causes the daily cash flow for Danaher to be much more stable than that for Stanley, the lower liquidity ratio values for Danaher may be justified and not reflect greater risk in paying short-term obligations. Taking the liquidity ratios at face value, however, Danaher appears to be the less liquid of the two companies. To the extent that the two companies are comparable in makeup, this should cause the cost and availability of short-term loans to be less favorable for Danaher. Asset Management Analysis The pattern of comparison of the turnover ratios suggests that Danaher is more efficient in moving its inventory, but less efficient in generating sales relative to its size whether measured by fixed assets or total assets (refer to Asset Management Group in Exhibit A). While the fixed assets turnover ratio is only slightly lower for Danaher, the total assets turnover ratio is much lower. Part of the difference in total assets turnover could be reflected in the longer days sales outstanding for Danaher, which would cause receivables to be higher and total assets turnover to be lower. Many of these differences, however, could also be due to differences in the composition of sales between the two companies, especially with a large portion of Danaher’s sales occurring in the medical sector. More stable sales in the medical sector would permit Danaher to carry less in inventory safety stocks. At face value, Danaher appears to be less efficient in generating sales for its size than Stanley, and also less efficient in managing its collections. Debt Management Analysis Contrasting the first two ratios, there appears to be mixed results (refer to Asset Management Group in Exhibit A). Danaher has a lower debt-to-capital ratio, but a slightly higher debt ratio. This could be due to a relatively greater use of non-capital sources of funding for its size by Danaher (such as accounts payable). This could also partially explain the much higher times-interest-earned ratio for Danaher, since a relatively larger portion of its debt funding does not involve interest expense (such as accounts payable). Again, many of the differences in debt management between the two companies could be due to differences between a broad array of products and services, and those unique to the medical sector. However, taking the asset management ratios at face value, Danaher appears to be considerably safer than Stanley. Danaher has a considerably lower debt-tocapital ratio and a considerably higher times-interest-earned ratio. Consequently, Danaher should find additional debt funding to be more available and at a lower cost. Profitability Analysis A comparison of the profitability ratio values indicates that Danaher has comparable or superior profitability compared to Stanley, especially in terms of its profit margins (refer to Profitability Group in Exhibit A). However, Danaher’s return-on-invested-capital is only roughly half that of Stanley, primarily because a much larger portion of Danaher’s total assets funding is through capital (i.e., interest-bearing debt and equity). Consequently, there is a mixed picture in terms of profitability with some profitability measures (e.g., operating margin and profit margin) considerably higher for Danaher and some measures (e.g., return on equity and return on invested capital) considerably higher for Stanley. Market Value Analysis The two market value ratios present a mixed picture in terms of the market’s view of the company performance (refer to Market Value Group in Exhibit A). The price-to-earnings ratio is higher for Danaher, while the price-to-book value ratio is higher for Stanley. However, two of the profitability ratios that are based on net income, the return on assets and return on equity, suggest that Danaher’s profitability is slightly lower than Stanley’s, and depressed profit can artificially inflate the price-to-earnings ratio. The market-to-book ratio, however, is less influenced by depressed profit. Comparison of the two market-to-book ratio values indicates that the market favors Stanley over Danaher in terms of this multiplier. Summary The financial analysis suggests stark differences in the operations of the two companies. Stanley appears to be the more liquid company, but Danaher appears to carry lower risk in terms of its level of debt and ability to cover interest expense on debt. Danaher appears to be considerably less efficient in terms of generating sales for its size (based on total assets), and much less efficient in its collections. While the profit margins appear to favor Danaher, returns on equity and invested capital clearly favor Stanley. Finally, the market price multipliers appear to favor Stanley. Reuters lists these two companies as primary competitors. However, caution should be exercised in interpreting the ratio comparisons just performed. The heavy concentration of Danaher’s business in the medical sector suggests that a significant portion of the differences in ratio findings may be attributed to differences in the industries in which these two companies operate. Exhibit A - Financial Ratio Results Danaher Stanley Black & Decker Current Ratio 0.97 1.71 Quick Ratio 0.72 1.18 Inventory Turnover 9.88 7.72 Fixed Assets Turnover 7.17 7.86 Total Assets Turnover 0.37 0.73 Days Sales Outstanding 68.9 41.7 Debt-To-Capital 26.4% 37.5% Debt Ratio 27.1% 24.5% 15.2 7.3 Operating Margin 16.6% 12.5% Profit Margin 15.1% 8.5% Basic Earning Power 6.2% 5.9% Return on Assets 5.6% 6.2% Return on Equity 11.1% 15.2% 5.2% 9.1% 23.5 20.3 2.6 3.1 Liquidity Group Asset Management Group Debt Management Group Times Interest Earned Profitability Group Return on Invested Capital Market Value Group Price-to-Earnings Price-to-Book Value Exhibit B1 - Danaher Ratio Calculations Liquidity Group Current Ratio 6,665,100/6,874,000 Quick Ratio (6,665,100-1,709,400)/6,874,000 Asset Management Group Inventory Turnover 16,882,400/1,709,400 Fixed Assets Turnover 16,882,400/2,354,000 Total Assets Turnover 16,882,400/45,295,300 Days Sales Outstanding 3,186,100*365/16,882,400 Debt Management Group Debt-To-Capital (2,594,800+9,674,200)/(2,594,800+9,674,200+23,002,800) Debt Ratio (2,594,800+9,674,200)/45,295,300 Times Interest Earned 2,795,700/184,400 Operating Margin 2,795,700/16,882,400 Profit Margin 2,553,700/16,882,400 Basic Earning Power 2,795,700/45,295,300 Return on Assets 2,553,700/45,295,300 Return on Equity 2,553,700/23,002,800 Return on Invested Capital 2,795,700*(1-.35)/(2,594,800+9,674,200+23,002,800) Profitability Group Market Value Group Price-to-Earnings 86.62/(2,553,700/693,280) Price-to-Book Value 86.62/(23,002,800/693,280) Exhibit B2 - Stanley Black & Decker Ratio Calculations Liquidity Group Current Ratio 4,788,500/2,807,500 Quick Ratio (4,788,500-1,478,000)/2,807,500 Asset Management Group Inventory Turnover 11,406,900/1,478,000 Fixed Assets Turnover 11,406,900/1,451,200 Total Assets Turnover 11,406,900/15,634,900 Days Sales Outstanding 1,302,800*365/11,406,900 Debt Management Group Debt-To-Capital (12,100+3,815,300)/(12,100+3,815,300+6,367,000) Debt Ratio (12,100+3,815,300)/15,634,900 Times Interest Earned 1,420,600/194,500 Profitability Group Operating Margin 1,420,600/11,406,900 Profit Margin 965,300/11,406,900 Basic Earning Power 1,420,600/15,634,900 Return on Assets 965,300/15,634,900 Return on Equity 965,300/6,367,000 Return on Invested Capital 1,420,600*(1 -.35)/(12,100+3,815,300+6,367,000) Market Value Group Price-to-Earnings 128.27/(965,300/152,580) Price-to-Book Value 128.27/(6,367,000/152,580) Exhibit C1 - Stanley Black & Decker Income Statement Income Statement All numbers in thousands Revenue 12/31/2016 Total Revenue Cost of Revenue Gross Profit 11,406,900 7,139,700 4,267,200 Operating Expenses Selling General and Administrative 2,798,900 Non Recurring Operating Income or Loss 70,900 1,397,400 Income from Continuing Operations Total Other Income/Expenses Net Earnings Before Interest and Taxes Interest Expense Income Before Tax Income Tax Expense Minority Interest Net Income From Continuing Ops 23,200 1,420,600 194,500 1,226,100 261,200 6,600 965,300 Net Income Net Income Net Income Applicable To Common Shares Stock Price Per Share (Close on March 8, 2017) Number of Shares Outstanding (thousands) 965,300 965,300 $128.27 152,580 Exhibit C2 - Stanley Black & Decker Balance Sheet Balance Sheet All numbers in thousands Period Ending 12/31/2016 Current Assets Cash And Cash Equivalents Net Receivables Inventory Other Current Assets Total Current Assets 1,131,800 1,302,800 1,478,000 875,900 4,788,500 Property Plant and Equipment 1,451,200 Goodwill Intangible Assets Other Assets Total Assets 6,694,000 2,299,500 401,700 15,634,900 Current Liabilities Accounts Payable 2,741,900 Short/Current Long Term Debt 12,100 Other Current Liabilities Total Current Liabilities Long Term Debt Other Liabilities 53,500 2,807,500 3,815,300 1,903,100 Deferred Long Term Liability Charges Minority Interest Total Liabilities 735,400 6,600 9,267,900 Stockholders' Equity Common Stock Retained Earnings Treasury Stock Capital Surplus Other Stockholder Equity Total Stockholder Equity Net Tangible Assets 442,300 5,127,300 -2,029,900 4,774,400 -1,947,100 6,367,000 -2,626,500 Exhibit D1 - Danaher Balance Income Statement Income Statement All numbers in thousands Revenue 12/31/2016 Total Revenue Cost of Revenue Gross Profit 16,882,400 7,547,800 9,334,600 Operating Expenses Research Development Selling General and Administrative Operating Income or Loss 975,100 5,608,600 2,750,900 Income from Continuing Operations Total Other Income/Expenses Net Earnings Before Interest and Taxes Interest Expense Income Before Tax Income Tax Expense Minority Interest Net Income From Continuing Ops 44,800 2,795,700 184,400 2,611,300 457,900 74,000 2,153,400 Non-recurring Events Discontinued Operations 400,300 Net Income Net Income Net Income Applicable To Common Shares Stock Price Per Share (Close on March 8, 2017) Number of Shares Outstanding (thousands) 2,553,700 2,553,700 $86.62 693,280 Exhibit D2 - Danaher Balance Sheet Balance Sheet All numbers in thousands Period Ending 12/31/2016 Current Assets Cash And Cash Equivalents 963,700 Net Receivables Inventory Other Current Assets Total Current Assets 3,186,100 1,709,400 805,900 6,665,100 Property Plant and Equipment 2,354,000 Goodwill Intangible Assets Other Assets Total Assets 23,826,900 11,818,000 631,300 45,295,300 Current Liabilities Accounts Payable 4,279,200 Short/Current Long Term Debt 2,594,800 Total Current Liabilities Long Term Debt Other Liabilities Minority Interest Total Liabilities 6,874,000 9,674,200 5,670,300 74,000 22,292,500 Stockholders' Equity Common Stock Retained Earnings Capital Surplus Other Stockholder Equity Total Stockholder Equity Net Tangible Assets 8,100 20,703,500 5,312,900 -3,021,700 23,002,800 -12,642,100
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