For this project, we will explore. the financial outlook of Emerson Electric Corporation.

SECTION 1: Financial Statement Analysis

Summary of the Firm- Emerson Electric Co.

Emerson Electric Co. is an American multinational corporation headquartered in Ferguson, Missouri,

United States. The firm engages in manufacturing and developing process controls systems, valves and

analytical instruments and manufactures products and provides engineering services for a wide range of

industrial, commercial, and consumer markets. As per Emerson’s executive leadership, “With our newly

energized focus on our two core business platforms — Automation Solutions and Commercial &

Residential Solutions — we can confront the challenges of an increasingly complex and unpredictable

marketplace from a position of strength, driving near- and long-term value as a trusted partner for our

customers.”

Overview of the Income Statement and Balance Sheet, per Common Size Representation

The financial statements in the appendix provide us with concrete data for the performance of Emerson

Corporation over the years. Sales Growth for 2019 came out to be 5.54% down from 14% in 2018. At

the same time the Cost of Goods Sold had a decreased growth rate-down from 13.26% to 2.73% which

shows that Emerson was better able to control the costs of producing their goods and services.

Moreover, Net Income figures over the years also had a decreasing growth rate as it fell from a mighty

high of 34% down to just below 5%. This could be a cause of concern for Emerson as it might be facing

difficulties to keep up with the rate of net profit by keeping expenses in line with the revenue to generate

equal or similar results. A deeper look at Emerson’s Balance Sheet helps us to analyze the assets,

liabilities, and the equity performance as a result of business decisions taken over the years. Investments
to Total Assets ratio calculates to be 7.29% which shows that the company might be facing a cash flow

crisis as most of the assets seem to be illiquid.

However, looking at the Total Liabilities / Total Assets which is 59.64%, it is to interpret that the

company’s overall assets are way better than the overall liabilities since the assets are only just about

sixty percent of the assets.

In-depth Ratio Analysis for Emerson Electric Corp.

The appendix attached to this report highlights a broad range of financial ratios and numerical that will

help us compare Emerson Electric’s to its past year performance. The current ratio for Emerson Electric

Co. is 1.19, which compared to the baseline of 1.07 indicates the company's ability to service short-term

obligations is satisfactory. Quick Ratio of the corporation has increased to 0.88 suggesting that the

company is regaining its composure to service short-term obligations. Although the cash ratio has

increased, it is still less than 0.5 which is an indication that the company needs to adjust its operations or

increase sales in favor of revamping cash flows. On the other hand, Emerson’s Equity Multiplier is 2.48

which compared to the baseline of 2.27 indicates a reasonable portion of the company's assets are owned

versus financed. The Debt to Equity ratio is 1.48 suggests there is both a higher risk involved for creditors

and weak, short-term, financial security for a company. The accounts receivable turnover for Emerson

Electric Co. is 5.34, which compared to the baseline of 5.21 reveals the success of the corporation in

collecting its outstanding receivables. The increase indicates a shorter time between sales and cash

collection and illustrate an effective strategy to generate cash flow intakes due to timely and reliable

debtors and debtor relations.

SECTION 2: Firm Value & Market Capitalization

Firm Value Determination

Using the Dividend Growth model, we will be using the dividends paid by Emerson from the years

2015-2019 to find the rate of equity. From the calculations in the appendix, we can see that the rate of

equity calculated to 2.6% which is in line with the firm’s long-term investment strategy. From there, we

move onto using the average dividend over the past five years and we calculate the stock price using the

dividend growth model to be almost $20. We can see that the value calculated is way off from the real

stock price which shows the shortcomings of using this model to prepare a rigorous investment

portfolio. The FCFE calculations have found the firm value to be $40686.46 and when we divide that by

the almost 800 million shares issued by Emerson, we find our share price to be $5012 which is closer to

the latest average stock price of $ 38. Moreover, when we use the terminal value or the perpetuity

method on the FCFE values and the projections, the stock price comes out to be $41.81 which is also

within the margin of error of the calculations.

When using the net income values to calculate the stock prices, we find the most accuracy since the net

income provides the clearest picture of the performance of the company over a period. Here, again we

used the same principles to chart out the data by using the 2.6% rate of equity to produce the fair value

prices and the stock prices. In the first example without terminal values, using net income, we find the

fair value of the firm to be $ 21530.67 which is slightly lower than the other models but the stock price

of $35.2107 is an accurate estimate of the stock price. Moreover, when using the terminal value method

with Net Income, we find the fair value of the firm to be $30180.23 and the stock price to be $37.17

which is the closest to the market average value of $37, clearly illustrating the accuracy of the value

using the right metrics.

SECTION 3: Extended Sensitivity Analysis & Monte Carlo Simulations

Sensitivity Analysis:

A sensitivity analysis determines how different values of an independent variable affect a dependent

variable under a given set of assumptions. In other words, sensitivity uses the concept of percentage

changes in the values of dependent variables and the values of the independent values to see how

changes in certain variables can help us predict and forecast and make certain projections.

This technique is used within specific boundaries that depend on one or more input variables. Based on

the initial values of FCFE, the firm’s value will increase or decrease proportionally, given a standard

required return rate and terminal growth rate. To examine how sensitive the firm’s value is to the

Two Way Sensitivity Analysis changes in input variables, rate of

$80.00
$70.00 equity and terminal growth rate, a
$60.00
$50.00 sensitivity analysis was
$40.00
$30.00
$20.00 performed.
$10.00
$0.00 The sensitivity analysis of the

FCFE model provides an

2.50% 2.60% 2.70% 2.80% 2.90%
3.00% 3.10% 3.20% 3.30% 3.40%
extensive look on how changes in

terminal growth rate and rate of equity affect the equity price of firm’s value.

The graph above is an illustration of the changes in the stock prices with the same changes in cost of

capital and shows the negative relationship between the two variables. By using the calculations for

stock prices and terminal values, the appendix shows the sensitivity analysis for a change in the rate of
equity from 10-19% and a change in Terminal growth rate from 2.5%-3.4%.

Monte Carlo Simulations

We conducted two Monte Carlo Simulations for Emerson by applying the concept of randomness to

solve problems that might be deterministic in principle. We took the FCFE data and firm value from the

previous projects to randomly generate the values of the growth of the firm’s expected value and used

that to randomly generate almost a thousand possible values of the value of the stock. By using the

standard deviation of the initial values from Emerson’s financial data, we have conducted two different

mechanisms using Monte Carlo methods:

i. Monte Carlo Simulations with 10-year growth and NO Terminal Value

In the above figure, with no terminal value, the difference between the deterministic and the stochastic

values comes out to be $1.49 with the max value of $61.69 and the min value of $34.07. Hence, the

simulations do not go very far from the values of the original deterministic model calculated using the

FCFE firm value method.

ii. Monte Carlo Simulations with 5-year growth AND Terminal Value
In the above case, where we use a 5-year growth period and a terminal value, the difference between the

deterministic and the stochastic models increases to $2.78, the min value is $35 and the max value is

$79.76. The simulations are useful to detect a broad range of statistical models to analyze and determine

the true nature of the firm value which will be instrumental when it comes to future financial decisions.

SECTION 4: Conclusions

This project was wide in scope and depth and included significant interpretations of financial data which

provided us with concrete and insightful views into the performance of Emerson Electric Co. The three-

stage process laid down the key assumptions, financial analysis, firm value determination and ending

with statistical modelling to determine the most accurate value. As such, we can conclude that

Emerson’s financial outlook is sound, and the fundamentals are looking valuable in the future.