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Draft 2: Financial Statement Analysis
Group 7 NETGEAR Kyle Marshall Quan Dang Minh Hoang Shane Estes
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Current ratio = current assets/current liabilities The current ratio is one of the short-term liquidity analysis ratios. This is a near term measurement as current liabilities are regarded as coming due within one year and current assets are projected to become cash within the next year. Of great concern to the analyst wishing to make an informed decision about the financial condition of a company are the liquidity.Financial Statement Analysis Crucial financial data from the four financial statements. The three categories are to be explored for the company NETGEAR and three of its competitors: CISCO. These ratios make evaluating a company a much simpler task by being able to see a scalar for items of interest instead of large and variable dollar amounts. It also makes evaluating a company in terms of its industry much easier by factoring out economies of scale that may not be shared by all members of a particular industry. particularly the balance sheet and the income statement. Liquidity Liquidity refers to both how much cash and cash equivalents a company holds as well as how quickly a company can generate cash. Page 1 of 19 . We look at 5 years of previous data to determine any company specific trends as well as industry-wide trends. can be processed into ratios. profitability. Juniper. and capital structure ratios. which measures how well a company can cover its current liabilities that are due within the next year. Liquidity ratios are important for determining how capable a company is in paying off its short term liabilities. & Seagate.
6 to 2.00 1. we can tell that Cisco is doing better than its competitors since their current ratio has been increasing rapidly in recent years while Juniper and NETGEAR’s current ratios are declining.00 0.50 0. A minimum of 1 would indicate that a company has enough assets to cover its liabilities.9.50 3.50 1.Current Ratio 3. This is a good sign. Just by looking at the current ratio. it is still quite high.50 2. Other companies in the industry such as Cisco and Juniper also have high current ratios ranging from 2.00 2.00 2005 2006 2007 2008 2009 2010 NETGEAR Juniper Cisco Seagate Industry Even though NETGEAR’s current ratio has been declining from 2005 to 2010. A value of two indicates that every dollar of liability has two dollars of assets to cover it. The value of cash on hand can outweigh the opportunity cost of storage by being a buffer to revenue variability and macroeconomic uncertainty. ranging from 2. Quick asset ratio = (cash + marketable securities + accounts receivable)/ current liabilities Page 2 of 19 . The reason for this high current ratio is likely due to the fact that tech companies usually have a large amount of cash on their balance sheet. Tech companies such as NETGEAR use quite a bit of cash for R&D and mergers and acquisitions.1 to 3.0 in the last 5 years.
which ranges from 1.00 1. hence it is not considered in the quick test. A very similar pattern is found with Cisco.3. Juniper and Seagate. The ratios give a good indication of a company’s ability generate cash in the near term to cover its financial obligations.9 to 2.50 1. It may not happen quickly.55 as a result of having high cash and investment. This is done because liquidating inventory may not be a smooth process. Again.00 0. This indicates that these tech companies do indeed hold a large amount of cash or cash equivalents. we see Cisco having the highest recent quick ratio of 2. Operating efficiency Many liquidity ratios can be classified into a subcategory called operational efficiency.00 2. Accounts Receivable Turnover = Sales/AR Page 3 of 19 .50 2.The quick asset or acid-test ratio is very similar to the current ratio except that it excludes inventories.00 2005 2006 2007 2008 2009 2010 NETGEAR Juniper Cisco Seagate Industry NETGEAR has a quick ratio.50 0. Quick Assets Ratio 3.
98 which is the lowest among its competitors.00 2005 2006 2007 2008 2009 2010 NETGEAR Juniper Cisco Seagate Industry NETGEAR’s account receivable turnover for 2010 is 3.00 8. Accounts Receivable Turnover 10.00 7.00 5.00 6.00 3.00 2.00 9. This could indicate that NETGEAR’s collection process is inefficient compared to others in the industry.00 0. notably one year. It gives an indication of how efficiently a company is collecting. even if it is processed first into a receivable.00 1. Page 4 of 19 . Inventory Turnover = COGS/ Inventory Inventory turnover shows how many times an amount of inventory would be sold or turned over in a given period of time.00 4. Because Cost of goods sold and inventory are recorded at historical prices. this ratio is a good indicator of how quickly inventory can be processed back into cash.AR turnover shows how many times receivables are collected or turned over during the year.
Days Sales Outstanding = 365/ ARTO DSO is an attempt to quantify the average number of days a company takes to collect on its receivables. This lower in sales could due to the fact that it is a smaller company.Inventory Turnover Ratios 16. However.00 0.00 12.00 2005 NETGEAR 2006 Juniper 2007 Cisco 2008 2009 Seagate 2010 Industry In the table above. The average of this industry is around 40 to 50 days. it has a smaller number of sales and has to compete with its larger competitors.7 for year 2010.00 14. This number is also a bad sign compared to Cisco’s much lower average collection period of 50 in the same year. NETGEAR inventory turnover is not too much below industry average. NETGEAR has an average collection period of 91.00 2. therefore.00 4. Page 5 of 19 .00 10.00 8.00 6. NETGEAR inventory turnover is lower than industry average because it has a lower sales than average.
00 60. This means that it is taking too long to collects accounts receivable.00 80.00 0.00 50.00 40.00 90.00 20.00 10. Days Supply Inventory 90.00 2005 2006 2007 2008 2009 2010 NETGEAR Juniper Cisco Seagate Industry NETGEAR almost doubles that of industry average in 2010.00 0.00 80.00 30.00 60.00 30. Days Sales Inventory= 365/Inv. We see NETGEAR consistently taking longer to roll over its inventory than its competitors.00 70.TO DSI is a measurement of how many days it takes for inventory to be turned over.00 20.00 2005 2006 2007 2008 2009 2010 NETGEAR Juniper Cisco Seagate Industry Page 6 of 19 .00 10.00 70.Days Sales Outstanding 100.00 50.00 40.
00 80.00 60.00 40.00 100.NETGEAR has been underperformed because a higher ratio would represent a less effective inventory management. NETGEAR lags its industry.00 20. which is the numeric difference between the current assets and the current liabilities. Cash to Cash Cycle 180. This ratio shows how every dollar above that needed for the short term obligation can generate a dollar amount of sales. we get a good idea of how many days it typically takes a dollar invested into inventory to be converted back to into cash as an asset.00 2005 2006 2007 2008 2009 2010 NETGEAR Juniper Cisco Seagate Industry We see that NETGEAR is a little slower on the loop than its main competitors. is divided into sales for the working capital turnover. In this case the inventory is too high for NETGEAR. Working Capital Turnover = Sales/Working capital Working capital. Page 7 of 19 . Cash to Cash Cycle = DSO + DSI By combining the days sales outstanding and the days standing inventories into the cash to cash cycle.00 0. all else being equal.00 160.00 120.00 140.
00 10. but also if can pay its expenses. that NETGEAR’s customers don’t pay as quick as other’s in the same industry.00 2. for example. it is equally important to an investor to know if a company can not only pay its short term liabilities. Page 8 of 19 .Working Capital Turnover 14. pay for its operations. Profitability Beyond knowing the liquidity of a company. pay its taxes and ultimately pay back an equity stakeholder with profit.00 8. pay its creditors. while NETGEAR’s current and quick-asset ratios show it has an acceptable amount of liquidity. Its inability to collect cash timely could be a reason to worry since they won’t get access to much of their assets (specifically account receivables) in order to reinvest in R&D or pay their debts.00 4. And can a company profit enough that it can grow as a business or increase its cash or liquid asset holdings as insurance against macroeconomic swings. It has a poor showing in efficiency within its industry.00 6.00 12.00 0.00 2005 2006 2007 2008 2009 2010 NETGEAR Juniper Cisco Seagate Industry In conclusion. The low account receivable turnover and high days sales outstanding number shows.
Therefore. Both Seagate and NETGEAR are smaller in size compared to Juniper and Cisco. and taxes come from gross profit. The impact of gross profit margin being smaller is also caused by the lower sales revenues in smaller companies as well as the higher costs of goods sold. The result is a percentage of by how much revenues exceed the costs of goods sold. This remainder is then divided by sales. interest. the less costly it is to produce the products.Gross profit margin = Gross Profit/ sales Gross profit is the remainder after the costs of goods sold has been subtracted from the sales. The more they produce. than it would for Juniper or Cisco. Bigger companies have the economy of scale effect. A bigger company could produce products for less cost than that of a smaller company. The higher the number the better as all subsequent expenses for operations. Page 9 of 19 . it costs more to make products for NETGEAR and Seagate. Gross Profit Margin 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 2005 NETGEAR 2006 Cisco 2007 Juniper 2008 2009 Seagate 2010 Industry NETGEAR's gross profit is lower than two of its competitors most likely because of its size. NETGEAR is underperforms based on the industry average.
etc.Operating Profit Margin = Operating profit/ sales The operating profit margin is found by first calculating the operating profit. Like all of the profit margin numbers. This measure gives a concise measurement. of how Page 10 of 19 . it still below the industry average. which is the profit remaining after subtracting all operational expenses such as labor. The operating profit is then divided by sales to give a percentage of every sales dollar that will become an operating profit. rent. the higher the better. is the ratio between net income and sales for a given period. Operating Profit Margin 40% 30% 20% 10% 0% -10% -20% -30% -40% -50% 2005 NETGEAR 2006 Cisco 2007 Seagate 2008 2009 Juniper 2010 Industry While NETGEAR is operating profit margin is positive. or simply profitability. Net Profit Margin = net income/ sales The net profit margin ratio. in percent form. The operating profit is what the company is able to produce above its costs to operate. from the gross profit. fuel.
NETGEAR performed better than the industry in asset turnover. and it is the combined effects of both which demonstrate NETGEAR’s respectable ROA. which is slightly concerning in itself. NETGEAR’s profit margin has averaged around 6%. Net Profit Margin 30% 20% 10% 0% -10% -20% -30% -40% -50% 2005 NETGEAR 2006 Cisco 2007 Juniper 2008 2009 Seagate 2010 Industry The profit margin of the industry has averaged around a respectable 10%. Asset Turnover = sales/ total assets Asset turnover. The asset turnover ratio gives insight into how productive a company is being with its total assets relative to sales.much of each sales dollar actually translated into net income. However. A high profit margin is desirable because it means that the company is keeping more of the profits from each sale has income. is the ratio between sales for a period and the total assets from the previous period. also known as productivity. although a few dips in profitability for individual companies have occurred. A high productivity ratio is desirable for a Page 11 of 19 .
NETGEAR has historically maintained an asset turnover ratio above 1. This implies that they do not have a large amount of sales. This is likely since NETGEAR products are available at places like Wal Mart and Best Buy and generally are cheaper to purchase than Cisco or Juniper products.40 0. Asset Turnover 1. there is also a moderate amount of variance between companies in the industry. but rather they make their money through other methods such as high sales margins. NETGEAR sales more than its competitors.20 0.00 0. This measurement is very important to potential investors because it helps to Page 12 of 19 .60 0. Although. This productivity is a positive sign in a high technology field which requires taking advantage of all assets.00 2005 2006 2007 2008 2009 2010 NETGEAR Cisco Seagate Juniper Industry The productivity for NETGEAR and its competitors is seemingly low. A large part of this is due to the differing product lines and services of each company. Return on Assets (ROA) = NI/ Total Assets = profitability x productivity Return on Assets is the ratio relating net income in a given period to the total assets in a previous period.20 1.company because it signifies that they are making more revenue from a given amount of total assets.40 1.60 1. Although the asset turnover of each company is low.80 0.
4 2005 NETGEAR 2006 Cisco 2007 Seagate 2008 2009 Juniper 2010 Industry The return on assets for NETGEAR’s industry has varied slightly over the past five years.1 0 -0. meaning that they are neither excelling nor lagging in their asset utilization. NETGEAR’s ROA is seemingly identical to the industry average. A large number can mean that a company is not only generating a reasonable income.3 -0.3 0. saw NETGEAR’s ROA rise to around 9% to rebound from a three year slide. with individual companies having large variations. This positive news is likely contributable to the end of the recession and resulting increases in net income.2 -0. 2010. This ratio gives a more clear idea of how a company performed Page 13 of 19 . Return on Assets 0.2 0. This ratio can be further disaggregated into two ratios which provide further information into a company’s business activities: asset turnover and profit margin. Return on Equity (ROE) = Net income / owner’s equity Return on Equity is computed as the ratio of net income for a given year to total owner’s equity of the previous year.demonstrate how well a company is utilizing its assets to generate income.1 -0. but is also being very efficient with their resources. The most recent reported year. The current ROA is an acceptable level for the industry and should provide potential investors with confidence in the continued success of the company.
ROE is considered to be one of the most important ratios for any company. Page 14 of 19 . Cisco and Juniper.5 1 0.5 0 -0. Return on Equity 1. NETGEAR has high sales margins. NETGEAR ROA and ROE are at an acceptable level for the industry and has gradually increases since the end of the recession in 2009. In conclusion. This result of increase in net income provides potential investors with confidence. the three profit margins for NETGEAR have been respectively positive which shows that the company is keeping more of the profits from each sale. providing another positive signal to shareholders of the company. which is a positive sign for the company. Despite NETGEAR being a smaller company than its two competitors.relative to owner financing. it is very consistent with its profit margins throughout the years.5 -1 2005 NETGEAR 2006 Cisco 2007 Juniper 2008 2009 Seagate 2010 Industry The ROE graph of NETGEAR and several of its competitors demonstrates that the ratio has been relatively constant in the industry over the past five years. so its asset turnover is higher than industry average. and many investors require a strong ROE before potentially investing in a company. The ROE for 2010 increased for the first time in several years. NETGEAR has maintained a positive ROE since 2006.
Page 15 of 19 . NETGEAR has a low debt to equity ratio. A company deemed a credit risk has a significant chance of default and/ or bankruptcy. While borrowing will leverage a company and ideally allow it to succeed with other peoples’ money. Capital structure being the distinction of asset ownership between contributed capital and borrowed capital. For the last two years all of its liabilities have been current (non-interest bearing) liabilities. If a company also issues debt it must be able to repay the principle as well as it matures. For these very important reasons capital structure and credit risk of companies is of serious importance to investors. how a business is financed.Capital structure A final an important class of ratios are those dealing with capital structure. Debt to Equity Ratio = Total Liabilities/Stockholder’s equity This ratio gives the proportion of debt to equity in financing the assets. This is due to the fact that it has no long term debt. the interest expense. the company must generate enough profit to pay for the cost of capital.
00 0. Therefore. the TIE ratio for NETGEAR is undefined.00 3.00 1.50 3.00 2.50 0. A higher number is better. Debt Service Margin Ratio = cash flow from operations/ current portion of long term debt The debt service margin allows one to see how much long term debt impacts cash flow. A ratio of one would be the minimum needed without going into default. However. Also because NETGEAR has no interest bearing debt.00 2005 2006 2007 2008 2009 2010 NETGEAR Cisco Seagate Juniper Industry Times Interest Earned Ratio = Earnings before interest and taxes/ interest expense The utility of this ratio is to see how easily a company can pay its interest expense with profits. it has no interest expense. the debt service margin is undefined.50 2. This would represent that a company can pay its obligations and have profit to spare towards interest.50 1. Because NETGEAR has no debt.Debt to Equity 4. and net income. no long term liability. NETGEAR may have no long term debt because it’s too young of a company. It may experience too much variability in its profits to take on the risk of contractual payments. taxes. a ratio of greater than one would be needed to put an investor at ease. It is Page 16 of 19 .
00 6. and capital structure. NETGEAR says in its 10-K that it must constantly come up with new products just to stay competitive. profitability.also in a rapidly changing and growing industry. The Z-score is a sum of weighted ratios of liquidity.6[Market Value of Equity/Book Value of Liabilities] + 0.4[Retained Earnings/Total Assets] +3.99[Sales/Total Assets] Z-Scores 10. Altman’s Z-Score =1.2[Working Capital/Total Assets] +1. which gives them a low bankruptcy risk for the next year. As credit risk analysis is concerned with expected credit loss. Altman’s Z-score is an approximation of the chance of default in the near term.00 -2. A large portion of NETGEAR’s high Z score can be attributed Page 17 of 19 .00 8. It has been shown to be 95% accurate predicting a default in one year out and 72% accurate two years out.83.00 -4.00 NETGEAR 4. Altman’s Z-Score Altman’s Z-Score is a method of determining the risk of an individual company defaulting/ going bankrupt in the near future.00 SEAGATE 2. which is the chance of default x loss given default.00 0.00 2005 2006 2007 2008 2009 2010 JUNIPER CISCO The Z score for NETGEAR during 2010 was calculated as 4.3[Earnings Before Interest and Taxes/Total Assets] +0.
excluding the profit margin. which lowers total liabilities in favor of higher owner’s equity. indicate that NETGEAR is currently financially sound and not facing bankruptcy risk.09. which is the result of having a low market value and high liabilities in addition to negative operating income. Seagate has a negative Z-score of -0. Page 18 of 19 . All other financial ratios.to their lack of long term debt.
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