Help me complete my part of my group project – Creditworthiness and Financial Distress Risks Analysis

Financial Reporting and Analysis. My sections are assess creditworthiness, Financial Distress Risks Analysis, and Sustainable Growth Ratios. The working google doc, template, and details are attached.

Part II: Financial Statement Analysis
ACG 6175: Financial Reporting and Analysis
Part II: Financial Statement Analysis
Introduction
Biogen is a leading biotechnology company that focuses on researching, developing, and
commercializing therapies for various conditions, including muscular atrophy and Parkinson’s
disease. The firm has been able to expand its operations to over fifty countries globally, which
has enhanced its revenues and profitability. Considering that Biogen develops novel treatment
therapies, it maintains a significant control over its operating market since its intellectual
property rights provide a competitive edge. The company’s large patent portfolio for Europe and
the United States for various drugs and therapies enhance its competitiveness in the
pharmaceutical industry. A financial analysis of Biogen will provide significant insights into its
overall profitability, credit worthiness and growth prospects.
Overall Profitability
Companies have to generate sufficient profits to provide suitable returns for shareholders. The
return on equity (ROE) and return on assets (ROA) ratios are suitable metrics for analyzing the
efficiency of a firm in generating returns. Using the traditional ROE decomposition method as
shown in Table 1, the ROA and ROE of Biogen declined year on year due to a decrease in the
net profit margin and the asset turnover, The decline in the two metrics stemmed from a
significant drop in the net sales for the year 2023. However, Biogen had a higher ROA and ROE
in 2023 than Pfizer due a higher net profit margin.
Table 1: ROE Decomposition-DuPont
ROE decomposition traditional
Biogen
Pfizer
Ratios
2023
2022
2023
Net Profit Margin
11.81%
29.95%
3.62%
x Asset Turnover
0.38
0.42
0.28
ROA
4.52%
12.58%
1.00%
x Financial Leverage
1.82
1.99
2.29
= Return on Equity (ROE)
8.24%
25.03%
2.29%
Using the alternative ROE decomposition method, there was a decline in Biogen’s ROA and
ROE due to a decrease in the operating income for the year. As observed earlier, Biogen is more
efficient than Pfizer at generating returns for shareholders as shown by the higher ROA and ROE
ratios in 2023.
Table 2: ROE Decomposition- Operating Focus
ROE decomposition alternative
Biogen
Ratios
2023
2022
2023
Net Operating Profit Margin
14.71%
22.53%
4.54%
x Net Operating Asset Turnover
0.52
0.58
0.37
=Operating ROA
7.58%
13.15%
1.69%
Spread
-17.38%
76.07%
-2.96%
x Net Financial Leverage
0.15
0.09
0.47
=Financial Leverage Gain
-2.64%
6.85%
-1.38%
Return on Equity (ROE) = Operating
4.94%
20.00%
0.30%
ROA + Financial Leverage Gain
Evaluating Profitability
Pfizer
Biogen recorded a profit in both 2022 and 2023. However, the profitability declined year on year
as highlighted by the margin ratios in Table 3 below. The change was primarily due to a decline
in net sales for the year 2023. As a result of a decline in the pretax income, the effective tax rate
also declined. Even though Biogen had significantly lower net sales than Pfizer, it was more
efficient than its competitor in managing its operating and nonoperating expenses, resulting in
higher profitability margin ratios
Table 3: Profitability Analysis
Biogen
Pfizer
Ratios
2023
2022
2023
Gross Margin
74.24%
77.61%
57.34%
Net Profit Margin
11.81%
29.95%
3.62%
NOPAT Margin
14.71%
22.53%
20.20%
EBITDA Margin
20.73%
42.83%
16.34%
Effective Tax Rate
10.43%
17.62%
-105.4%
Evaluating Productivity
Biogen
RATIOS
Working capital management and turnover ratios
2023
Pfizer
2022
2023
Operating Working Capital to Sales Ratio
25.67%
15.98%
2.24%
Operating Working Capital Turnover
4.74
4.90
10.62
Accounts receivable turnover
5.8
6.0
5.3
Inventory turnover
1.3
1.2
3.0
Accounts Payable turnover
5.7
5.1
4.3
Days Receivable (Average collection period)
62.5
60.4
69.0
Days Inventory
278.9
310.1
119.8
Days Payable
64.5
71.7
84.5
Operating Cycle
341.4
370.6
188.8
Cash Conversion Cycle
277.0
298.9
104.3
In 2023, Biogen saw a significant increase in its Operating Working Capital to Sales
Ratio, jumping to 25.67% from 15.98% in 2022. This signals a heavier reliance on operating
working capital to drive sales compared to the previous year. However, its Operating Working
Capital Turnover slightly dipped from 4.90 in 2022 to 4.74 in 2023, indicating a slight decrease
in sales generated per unit of operating working capital. The company’s accounts receivable
turnover also saw a slight decline from 6.0 in 2022 to 5.8 in 2023, suggesting a slightly longer
time to collect receivables. Conversely, the inventory turnover increased from 1.2 in 2022 to 1.3
in 2023, indicating faster inventory turnover with a shorter holding period.
Biogen improved its accounts payable turnover from 5.1 in 2022 to 5.7 in 2023, signaling
faster payments to suppliers. Furthermore, the time taken to pay suppliers decreased from 71.7
days in 2022 to 64.5 days in 2023. Additionally, Biogen’s operating cycle shortened from 370.6
days in 2022 to 341.4 days in 2023, implying quicker completion of operating activities.
Similarly, the cash conversion cycle decreased from 298.9 days in 2022 to 277.0 days in 2023,
indicating faster conversion of sales into cash. Overall, these shifts in ratios reflect changes in
Biogen’s efficiency, Cash flow control, and Inventory management from 2022 to 2023.
When comparing Biogen to Pfizer, various ratios and analytical measures provide
valuable insights. Biogen’s elevated Operating Working Capital to Sales Ratio indicates its
reliance on working capital for sales generation, while Pfizer’s higher Operating Working Capital
Turnover implies it achieves greater sales per unit of working capital, showcasing Pfizer’s
efficiency in generating revenue. Both companies exhibit similar accounts receivable turnover
rates, suggesting comparable efficiency in collecting debts owed from customers. Pfizer’s
substantially higher inventory turnover signifies superior inventory management. However, this
is offset by Biogen outpaces Pfizer in supplier payments, which is evident from its higher
accounts payable turnover. While Biogen displays faster receivables collection, Pfizer
demonstrates more efficient inventory management and debt repayment, leading to better cash
conversion efficiency. Overall, Pfizer displays superior effectiveness in managing working
capital and turnover across inventory, operational, and cash conversion cycles when compared to
Biogen.
Biogen
Ratio
Pfizer
2023
2022
2023
Long-term asset turnover
1.18
1.22
1.24
PP&E turnover
2.65
2.74
1.62
Total asset turnover
0.38
0.40
0.28
Long-Term Assets Management
When comparing Biogen’s long-term assets management ratios between 2023 and 2022,
several conclusions can be made. Firstly, the long-term asset turnover ratio saw a slight decrease
from 1.22 in 2022 to 1.18 in 2023, indicating a slight decline in Biogen’s efficiency in generating
sales per unit of long-term assets. Secondly, the PP&E turnover ratio also experienced a minor
decrease from 2.74 in 2022 to 2.65 in 2023, suggesting a slightly slower rate of turnover for
property, plant, and equipment assets. Lastly, the total asset turnover ratio decreased from 0.40 in
2022 to 0.38 in 2023, indicating a reduction in the company’s ability to generate sales per unit of
total assets.
In 2023, a comparison of the long-term assets management ratios between Biogen and
Pfizer reveals prominent contrasts. Pfizer exhibits an incremental change in its long-term asset
turnover ratio of 1.24, indicating its superior ability to generate sales per unit of long-term assets,
whereas Biogen reports a ratio of 1.18. On the other hand, Biogen boasts a significantly higher
PP&E turnover ratio of 2.65, surpassing Pfizer’s 1.62, indicating a faster turnover of property,
plant, and equipment assets. Also, Biogen shows a higher total asset turnover ratio of 0.38,
contrasted to Pfizer’s 0.28, indicating greater efficiency in generating sales per unit of total
assets. These differences suggest probable changes in operational strategies, business models, or
geographic trends between the two companies in leveraging their assets for revenue generation in
2023.
Missing : ·
Assess Creditworthiness
o Coverage Ratio
§ Times Interest Earned
§ EBITDA Coverage Ratio
§ Cash from Operation to Debt
§ Free Operating Cash Flow to Debt
Financial Management
Table
Biogen
Pfizer
Consolidated Statement of OperationsUSD($) shares in Billions
Short- Term Liquidity ratios
2023
2022
2023
Working Capital
1.14
1.59
-6.25
Current Ratio
2.0
3.0
.9
Quick Ratio
1.2
2.5
.5
Cash Ratio
0.3
1.5
.3
Operating Cash Flow Ratio
15.7%
13.6$
14.9%
From analyzing all data received from both companies, the calculator from the short-term
liquidity ratios has decreased for Biogen. The short-term ratios include working capital, current
ratio, quick ratio, cash ratio and operating cash flow. Allo the ratios listed above have been on
decline from the previous fiscal year. In addition there has been a significant drop within the
quick ratio as it has decreased by over one point. Pfizer has been in the negative for 2023 due to
the numerous articles explaining that vaccines are no longer needed for Covid. Dating back to
2020 and 2021 where vaccines were mandated across America. Pfizer benefited well with the
high number of sales producing vaccines all across the nation. Fast forward to now where they
aren’t mandated, PFizer has taken a strong hit gaining capital and maintaining sales from the
previous years.
Biogen
Pfizer
Consolidated Statement of OperationsUSD($) shares in Billions
Solvency Analysis
2023
2022
2023
Liabilities-to-equity ratio
0.45
0.4688
.79
Total Debt-to-equity ratio
.50
.49
.69
Net debt-to-equity ratio
0.47
.47
.70
Debt-to-capital ratio
0.31
0.32
.33
Net-debt-to-net-capital ratio
.44
.45
.28
The solvency analysis has an assortment of ratios to establish a better understanding of
the companies on an annual basis. The calculated data from Biogen displays a slight change in
ratio. Each ratio increases or decreases by just one point, however the net debt to equity ratio
remains the same for the fiscal year. The liabilities increased by just one point, which states that
the equity may have risen for that year compared to the liabilities in Biogen. In comparison to
Pfizer which has over a 30 point difference. There is also a heavy distance within the net debt to
equity ratio for Pfizer compared to the data of Biogen.
Missing:
·
Financial Distress Risks Analysis
o Altman Z-Score
·
Sustainable growth ratios
o ROE * (1 – Dividend payout ratio)
o Dividend payout ratio = Cash dividends paid
Net income
Conclusion
Biogen has a better comparative advantage than Pfizer in achieving long-term growth and
market competitiveness. Its strong portfolio of products, innovative research, and strategic
partnerships contribute to this. Biogen’s financial analysis shows a healthy balance sheet,
consistent revenue growth, and increasing net income. Its overall financial stability and excellent
creditworthiness make it an attractive investment opportunity in the dynamic and competitive
pharmaceutical industry.
Appendix
Reported Financial Statements
Biogen Inc.
Income Statement
Income Statement
BIOGEN
For the Year Ended
Dec. 31, 2022
$ Amount in millions
Reported
Net Sales
Cost of sales
Gross Profit
SG&A
$
9,835.60
$
2,533.40
$
7,302.20
$
5,471.10
$
1,831.10
Dec. 31, 2021
Common
Size
Reported
Common
Size
Reported
100%
$
10,173.40
100%
$
10,981.70
100%
25.76% $ 2,278.30
22.39% $ 2,109.70
19.21%
74.24% $ 7,895.10
77.61% $ 8,872.00
80.79%
55.63% $ 4,993.20
49.08% $ 6,064.00
55.22%
$ (209.10)
$ (32.70)
18.62% $ 3,111.00
30.58% $ 2,840.70
25.87%
Other operating expense
Operating Income
Dec. 31, 2022
Common
Size
Non-operating Items:
Investment Income
$ (2.60)
Other Expense (income)
$ 218.80
2.22% $ (372.60)
-3.66%
$ (34.90)
-0.32%
Interest expense (income)
$ 315.50
3.21% $ (108.20)
-1.06% $ 1,095.50
listo
$
1,296.80
13.18% $ 3,594.40
35.33% $ 1,095.50
9.98%
Tax expense
$ 135.30
1.38%
6.22%
$ 52.50
0.48%
Net Income from Continuing
Operations
Income (loss) from Discontinued
Operations
$
1,161.50
11.81% $ 2,961.60
29.11% $ 1,043.00
9.50%
0.00%
0.00%
$-
0.00%
11.81% $ 2,961.60
29.11% $ 1,043.00
9.50%
0.00%
-0.84%
1.56%
Earnings before income taxes
Consolidated Net Income
$$
1,161.50
Less, Consolidated Net Income
attributable to noncontrolling Interest
$ 0.40
Consolidated Net Income attributable
to controlling Interest
$
1,161.90
11.81%
$ 632.80
$-
$ (85.30)
$ 2,876.30
28.27%
$ 171.50
$ 1,214.50
Balance Sheet
Biogen Inc.
Balance Sheet (amount in million $)
Dec. 31, 2023
Dec. 31, 2022
11.06%
Common
Size
Common
Size
Assets
Reported
Current assets:
Cash and marketable securities
Accounts receivable
Inventory
Other current assets
Total current assets
$ 4,750
8,947
$ 10,178
$ 5,299
$ 29,174
2.5%
4.6%
5.3%
2.7%
15.1%
$ 4,968
9,472
$ 9,851
$ 5,017
$ 29,308
3.2%
6.2%
6.4%
3.3%
19.1%
Long-term tangible assets
Long-term intangible assets
Other long-term assets
Total long-term assets
TOTAL ASSETS
18,940
132,588
12,471
163,999
193,173
9.8%
68.6%
6.5%
84.9%
100.0%
16,370
94,649
13,163
124,182
153,490
10.7%
61.7%
8.6%
80.9%
100.0%
6,809
22,568
2,945
32,322
32,884
9,812
42,696
75,018
3.5%
11.7%
1.5%
16.7%
17.0%
5.1%
22.1%
38.8%
5,578
24,939
2,945
33,462
36,195
11,331
47,526
80,988
3.6%
16.2%
1.9%
21.8%
23.6%
7.4%
31.0%
52.8%
95,661
284
95,945
49.5%
0.1%
49.7%
77,203
256
77,459
50.3%
0.2%
50.5%
170,963
88.5%
158,447
103.2%
Liabilities and Shareholders’ Equity
Current liabilities:
Accounts payable
Other current liabilities
Short-term debt
Total current liabilities
Long-term debt
Other long-term liabilities
Total Long-Term Liabilities
Total Liabilities
Shareholders’ equity:
Preferred Stock
Common shareholder equity
Noncontrolling Interests
Total shareholders’ equity
TOTAL LIABILITIES AND
SHAREHOLDERS’ EQUITY
Reported
Statement of Cash Flow
Biogen Inc.
For the Year Ended
$ in millions
Cash Flows from Operating Activities
Net Income
After-tax interest expense (income)
Non-operating Losses (gains)
Long-term operating accruals
Depreciation and Amortization
Other
Operating cash flow before working
capital investments
Dec. 31,
2023
Dec. 31,
2022
Dec. 31,
2021
1,161.50
2,961.60
1,727.60
(315.50)
108.20 (1,095.50)
425.30 (1,537.60)
994.10
526.30
82.80
638.00
212.60
1,117.00
(53.30)
1,880.40
2,382.80
2,689.90
(74.20)
(500.60)
(542.60)
(255.70)
(136.40)
135.40
(73.90)
(92.00)
(144.50)
1,231.70
1,492.50
2,544.40
(4,101.00)
1,576.60
(563.70)
(2,869.30)
3,069.10
1,980.70
315.50
149.30
(108.20)
(997.30)
1,095.50
(286.20)
Net (Investments in) or Liquidation of
Operating Working Capital
(Increase) Decrease in current assets
Increase (Decrease) in current Liabilties
Increase (Decrease) in Other Operating Assets and
Liabilities, Net
Operating cash flow before
investment in long-term assets
Cash Flows Used for Investing Activities
Net (Investments in) or Liquidation of
Operating Long-term Assets
Free cash flow available to debt and
Equity
Cash Flows from (used for) Financing Activities
After-tax net interest (expense) income
Net Debt (Repayment) or Issuance
Free cash flow available to equity
Dividend (payments)
Net Stock (Repurchase) or Issuance
0.00
0.00
0.00
0.00
(750.00) (1,800.00)
Net increase (decrease) in cash
Effect of exchange rate changes on cash and cash
equivalents
Reconcile
Cash & Cash equivalents at beigning of year
Cash & Cash equivalents at ending of year
(2,404.50)
35.10
1,213.60
(55.70)
990.00
(59.80)
3,419.30
1,049.90
2,261.40
3,419.30
1,331.20
2,261.40
Reported Financial Statements
Pfizer Inc
Income Statement
Income Statement
Pfizer Inc
For the Year Ended
31-Dec-23
$ Amount in millions
Dec. 31, 2022
Dec. 31, 2021
Reporte Commo
Common
Common
Reported
Reported
d
n Size
Size
Size
Net Sales
$ 58,496
Cost of sales
24,954
Gross Profit $ 33,542
SG&A
14,771
100% $ 100,330
100%
$ 81,288
100%
34,344
34.23%
30,821
37.92%
57.34% $ 65,986
65.77%
$ 50,467
62.08%
25.25%
13,677
13.63%
12,703
15.63%
32.09% $ 52,309
52.14%
$ 37,764
46.46%
0.22% $ (4,878)
-6.00%
42.66%
Other operating expense
Operating Income $ 18,771
Non-operating Items:
Investment Income
Other Expense (income)
$ (835)
-1.43%
$ 217
Interest expense (income)
585
1.00%
987
0.98%
1,255
1.54%
32.52% $ 51,105
50.94%
$ 41,387
50.91%
$ 1,115
1.91%
$ 3,328
3.32%
$ 1,852
2.28%
$ 17,906
30.61% $ 47,777
47.62%
$ 39,535
48.64%
0.00%
$0
0.00%
$0
0.00%
30.61% $ 47,777
47.62%
$ 39,535
48.64%
0.07%
0.03%
Earnings before income taxes $ 19,021
Tax expense
Net Income from Continuing
Operations
Income (loss) from Discontinued
Operations
$0
Consolidated Net Income
$ 17,906
Less, Consolidated Net Income
attributable to noncontrolling Interest
Consolidated Net Income
attributable to controlling Interest
39
$
17,945
30.68%
35
$ 47,812
47.65%
45
$ 39,580
Pfizer Inc
Balance Sheet
PFE
Balance Sheet (amount in million $)
Dec. 31, 2023
Dec. 31, 2022
0.06%
48.69%
Common
Size
Assets
Reported
Current assets:
Cash and marketable securities
Accounts receivable
Inventory
Other current assets
Total current assets
$ 4,750
8,947
$ 10,178
$ 5,299
$ 29,174
2.5%
4.6%
5.3%
2.7%
15.1%
$ 4,968
9,472
$ 9,851
$ 5,017
$ 29,308
3.2%
6.2%
6.4%
3.3%
19.1%
Long-term tangible assets
Long-term intangible assets
Other long-term assets
Total long-term assets
TOTAL ASSETS
18,940
132,588
12,471
163,999
193,173
9.8%
68.6%
6.5%
84.9%
100.0%
16,370
94,649
13,163
124,182
153,490
10.7%
61.7%
8.6%
80.9%
100.0%
6,809
22,568
2,945
32,322
32,884
9,812
42,696
75,018
3.5%
11.7%
1.5%
16.7%
17.0%
5.1%
22.1%
38.8%
5,578
24,939
2,945
33,462
36,195
11,331
47,526
80,988
3.6%
16.2%
1.9%
21.8%
23.6%
7.4%
31.0%
52.8%
95,661
284
95,945
49.5%
0.1%
49.7%
77,203
256
77,459
50.3%
0.2%
50.5%
170,963
88.5%
158,447
103.2%
Liabilities and Shareholders’ Equity
Current liabilities:
Accounts payable
Other current liabilities
Short-term debt
Total current liabilities
Long-term debt
Other long-term liabilities
Total Long-Term Liabilities
Total Liabilities
Shareholders’ equity:
Preferred Stock
Common shareholder equity
Noncontrolling Interests
Total shareholders’ equity
TOTAL LIABILITIES AND
SHAREHOLDERS’ EQUITY
Ratio analysis
Biogen Inc Vs Pfizer
Reported
Common Size
ROE decomposition traditional
Biogen
Pfizer
Ratios
2023
2022
2023
Net Profit Margin
11.81%
29.95%
3.62%
x Asset Turnover
0.38
0.42
0.28
ROA
4.52%
12.58%
1.00%
x Financial Leverage
1.82
1.99
2.29
= Return on Equity (ROE)
8.24%
25.03%
2.29%
Net Operating Profit Margin
14.71%
22.53%
4.54%
x Net Operating Asset Turnover
0.52
0.58
0.37
=Operating ROA
7.58%
13.15%
1.69%
Spread
-17.38%
76.07%
-2.96%
x Net Financial Leverage
0.15
0.09
0.47
=Financial Leverage Gain
-2.64%
6.85%
-1.38%
Return on Equity (ROE) = Operating
ROA + Financial Leverage Gain
4.94%
20.00%
0.30%
ROE decomposition alternative
Biogen
Pfizer
Ratios
2023
2022
2023
Gross Margin
74.24%
77.61%
57.34%
Net Profit Margin
11.81%
29.95%
3.62%
NOPAT Margin
14.71%
22.53%
20.20%
EBITDA Margin
20.73%
42.83%
16.34%
Effective Tax Rate
10.43%
17.62%
-105.4%
References
1. Cohen, G. (2023). The impact of ESG risks on corporate value. Review of Quantitative
Finance and Accounting, 60(4), 1451-1468.
https://link.springer.com/article/10.1007/s11156-023-01135-6
2. Laws, L. (2023). First ever pill for postpartum depression from Biogen Inc. and Sage
Therapeutics approved by FDA. Global Pharma, NA-NA.
https://go.gale.com/ps/i.do?p=HRCA&sw=w&issn=&v=2.1&it=r&id=GALE%7CA7600
00833&sid=googleScholar&linkaccess=abs
3. Securities and Exchange Commission (2024).
https://www.sec.gov/ix?doc=/Archives/edgar/data/0000875045/000087504524000009/bii
b-20231231.htm
4. Biogen, C.-I. (2022). Pioneers in neuroscience
https://www.biogen.com/content/dam/corporate/international/global/enUS/docs/pdfs/Biogen-ECP-digital-brochure-PPT-FINAL-21-June22.pdf
5. Forbes. (n.d.). Johnson & Johnson, JNJ Stock Price, company Overview & News.
https://www.forbes.com/companies/johnson-johnson/?sh=7805b6f94f9
Financial Reporting Analysis and Business Valuation Project
Phase II: Financial Analysis
Group #
Group Members:
1
Financial Reporting Analysis and Business Valuation Project
Phase II: Financial Analysis
Applied Materials Inc.
Introduction:
“Applied Materials Inc. (Applied) is the leader in materials engineering solutions used to
produce virtually every new chip and advanced display in the world. Their innovations play a
key role in the evolution of the electronics industry.”1 Over the last 50 years, Applied has
changed the way that we interact with technology and how they currently impact our lives
currently. We see many of their semiconductors and processing chips today in computers, mobile
devices and other smart devices we use on a day to day business. Applied also manufactures
large area deposition systems for LCD and OLED displays, as well as technologies that go into
solar panels. They currently hold over 13,300 patents and have about 22,000 employees in over
18 countries. Applied’s focus is to give the world a new way of using technology and with their
imaginative and innovative technological products we can experience it. Shaping the future
makes us prepared for what is possible.
Overall Profitability
When looking at the key profitability ratios, the main two points to focus on are overall
profitability and the income statement ratios. We first have to recognize that we have determined
the ROA and ROE from traditional and alternative methods within overall profitability.
Beginning with the traditional method, Applied’s ROA had (0.3%) YoY from 2018 to 2019,
driven by a slightly higher net profit margin and lower asset turnover, which was affected by a
lower net income and net sales in 2019, respectively. Compared to AMD’s FY 2019, Applied FY
2019 had twice the ROA amount, resulting in $14.6 million in net sales as AMD generated $6.7
million. In respect to the traditional ROE, Applied FY 2019 had a significant YoY increase
affected by higher financial leverage, which was influenced by the rise in long-term investments
and PP&E while total stockholders’ equity decreased. Compared to AMD’s FY 2019, Applied
FY 2019 had 12.6% higher than that of AMD as it was driven by Applied’s higher net profit
margin, driven by high in net sales and net income.
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Table 1: Overall Profitability
When we look at the alternative method, we see more factors such as net operating asset
turnover produce the operating ROA different from traditional. Applied had a minor YoY
increase of 0.1% from 2018 to 2019 as both fiscal years had a similar NOPAT margin and a little
YoY difference in the net operating asset turnover. Compared to AMD’s FY 2019, Applied FY
2019 had approximately 1.9% greater in ROA, illustrating a high net profit margin of 18.5%
while having a low asset turnover due to total assets being greater than its net sales. For the
alternative ROE, Applied had a YoY increase of 7%, driven mainly by the lower tax rate in FY
2019, 17.2% compared to 30.9%, under the provision for income taxes. Similar to the traditional
ROE, Applied FY 2019 alternative ROE was 12.6% higher than AMD’s FY 2019 as Applied had
a higher net profit margin, which is affected by high in net sales and net income.
As a reference, our group conducted average industry research on the 2018
semiconductor and 2019 technology industries. The semiconductor industry average showed the
net profit margin 3.2%, asset turnover of 0.77, traditional ROA 2.7%, and traditional ROE 2.8%.
On the other hand, the 2019 technology industry average shows the traditional ROA as 7.7% and
traditional ROE 15.9% (Citations). Although the technology industry averages in traditional
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ROA and ROE showed a higher than those of the semiconductor industry, Applied demonstrates
its market dominance in net profit margin, including net sales and net income, over other
industry companies.
Evaluation of Operating Management
Within the profitability ratios, Applied shows a significantly low YoY growth in net
profit margin by 0.3% and NOPAT margin by 0.7%, which were primarily driven by a similar
proportion of FY 2018 and 2019 net sales and net income. On the other hand, Applied showed a
Table 2:Operating Management
YoY decline in gross profit margin by (1.3%) and EBITDA margin by (4.2%), which were
affected by the decrease in net sales in proportion to its cost of products sold and operating
expenses.
Concerning the dividend payout ratio, Applied shows a negative dividend payout ratio as
the company generated negative earnings both in 2018 ($605 million) and 2019 ($771 million).
The increase in dividend payments indicates the company utilizes an excess amount of cash to
pay out dividends to shareholders.
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Evaluation of Investment Management
In analyzing the Operating Working Capital portion of the Consolidated Statements of
Operations (CSO) for Applied, it can be deduced that Applied assumed a higher level of debt,
from 2018 to 2019. The increase in its debt level is approximately 16.8%, going from $1,869
million to $2,184 million, respectively. Assets and capital also increased. Assets and Capital
increased by 16% from 2018 to 2019. Net long term assets increased significantly for 2019,
Table 3: Investment Management
contributing to most of the Net and Capital asset increase. AMD’s Operating Working
Capital is only 22% that of Applied, by comparison. Although Applied has accounts receivable
(A/R), inventory and accounts payable (A/P) that are much higher than that of AMD, Applied’s
Total Assets are more than three times that of AMD as reflected in the Balance Sheet, offsetting
liabilities.
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Table 4: Working Capital Management
There is significant insight to be gained from the working capital management and
turnover ratios from Applied’s CSO. On first observation, Accounts Receivable Turnover,
Inventory Turnover, and Accounts Payable Turnover all decreased from 2018 to 2019. The
amount differences between 2018 and 2019 for these three line items were, 0.85, 0.93, and 0.73
respectively. Even having decreased, Applied’s Accounts Receivable Turnover continues to be
higher than that of AMD, its main competitor for the year 2019. However, Inventory Turnover
and Accounts Payable Turnover are less than that of AMD. AMD’s Inventory Turnover was
more than double that of Applied in 2019.
Applied’s Days’ receivables, Days’ inventory, and Days’ payable all increased
substantially from 2018 and 2019, increasing their operating cycle. Days’ receivables increased
by approximately one week. Days’ inventory is more than double that of AMD. Meanwhile,
Applied’s Days’ payable is approximately 45% higher than that of AMD. A/R increased by
about 9% and a decrease in sales. Compared to AMD, Applied has 42 more days of buffer time
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to pay back its vendors. Their time increased from 3 months to 4 months. The working capital to
sales ratio for Applied is much higher than that of AMD, almost three times as much, although
their Operating Working Capital turnover ratio is much lower. Applied sales are more than twice
that of AMD’s. Additionally, Applied’s Operating Cycle was above the industry average for
semiconductors and increased in 2019. The highest change was due to days inventory going up
by 50 days.
As it pertains to Asset Management at Applied, the CSO shows that their Long-term asset
turnover was lower in 2019 than it was in 2018, and only one third that of AMD for that same
year. Despite PP&E increasing, Applied’s sales once again offset the difference that could have
been created. It is important to note that both PP&E utilization and Long-term asset turnover are
much lower than AMD’s, with much lower turnovers. Total asset turnover is much lower at
Applied than it is at AMD, with a 43% difference, but Applied’s Total asset turnover of 0.83 is
still higher than the semiconductor industry average of 0.77.
Financial Management
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When it comes to evaluating short-term liquidity, we can use current ratio, quick ratio,
cash ratio, and operating cash flow ratio. All of the ratios above reduced from the previous year:
Current ratio decreased 0.4, Quick ratio decreased 14.8%, Cash ratio decreased 20.5%, and
Operating cash flow ratio decreased 20.8%. Liquidity refers to a company’s ability to collect
enough short-term assets to pay short-term liabilities as they come due. From the analysis above,
Applied short-term liquidity was not as good as year 2018. Especially when it comes to the
comparison with the industry ratios, Current ratio, cash ratio and quick ratio from Applied are all
below the industry average. It shows that Applies didn’t have a very healthy cash flow to cover
the operating activities. From the table above, AMD had even lower short-term liquidity ratios
than Applied. AMD’s cash ratio was only 0.64, which is 8.5% less than Applied, and 60% less
than Industry average.
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Applied’s liabilities to equity ratio was 1.58 in 2018 and 1.32 in 2019, with a YoY
increase of 16.5%. The factors of the increase are 1. payoff of the long-term debt and 2. the net
income in 2019 closed to shareholders’ equity. AMD’s liabilities to equity ratio was 1.13 in
2019, which is 14.4% lower than Applied. It is because AMD had a lower portion of long-term
debt compared to Applied. Applied’s debt to equity ratio decreased from 0.78 to 0.65 because of
the payoff of long-term debt. The same ratio for AMD was only 0.17 in 2019 as AMD did not
have any short-term debt and a minimum amount of long-term debt. The industry average debt to
equity ratio was 0.61 in 2019, compared to 0.65 from Applied it tells that Applied had a healthier
financial leverage position than AMD. Net debt to equity ratio is calculated based on the net
debt, and net debt is the difference between total interest-bearing debt and cash balance. Applied
net debt to equity ratio was 0.27 in 2019 and 2018. However, AMD’s net debt to equity ratio was
(0.36) in 2019. The negative ratio for AMD was caused by the low balance of its interest-bearing
debt. The cash can easily cover all short term and long-term debt in AMD. The suggestion for
AMD will be improving the financial leverage, it can help to maximize the capital to improve the
firm’s productively. Applied debt to capital ratio reduced 11.4% from 2018 to 2019, and it was
very close to the industry average.
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Cash Flow Analysis
After reviewing Applied’s cash flow ranging from FY 2017 to 2019, there are several key
issues relating to the company’s cash flow. These areas include:
●
●
●
●
●
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Accounts receivable
Inventories
Accounts payable
Capital expenditures
Proceeds from sales and maturities of investments
Dividend
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Applied’s A/R increased from $2.3 billion to $2.5 billion while its net sales decreased
from $16.7 billion to $14.6 billion, in which the company was not able to collect the pending
payments from its customers in a timely manner. In other words, Applied sold more on credit
than collected from customers who Applied unpaid balances. One potential solution to this
problem is to focus on reducing the A/R balance as it can help the company increase its cash
balance and provide potential investment opportunities.
Other key areas are Inventories and A/P. When comparing FY 2019 to FY 2018, it
decreased approximately 6% (from $3.7 billion to $3.5 billion) as Applied had a decline in sales
in FY 2019. One potential factor to the decline is driven by end customers continuing to be
prudent in purchasing semiconductors and processing chips as the U.S. – China Trade War
continues. The decline in inventories correlates to the decline in A/P from $2.7 billion to $2.5
billion as Applied had a decrease in inventories driven by less sales.
In 2019 Applied spent $441 million in Capital Expenditures, it caused the negative cash
flow from investing activities. Applied has a YoY decrease from $622 million to $441 million in
Capital Expenditures, which means the company slowed down the investment in capital
investment: manufacturing plants, equipment, and machinery. One potential reason could be the
shortage of cash and its negative cash flow. It is considered a future risk because of the
discontinued effective productivity caused by the shortage of capital investment.
Another key area to examine is Proceeds from sales and maturities of investments.
Applied had a YoY decrease from $3.3 billion to $1.9 billion. We noticed that Applied had more
proceeds from sales, $1,940 million, than the purchases of investments, ($1,914 million), as the
net balance of these two equals to $26 million. As mentioned above, the short of cash could be
one of the factors that limited Applied from a further investment. If Applied increases its net
sales and collections (A/R), Applied can have more diversified investment opportunities.
Applied has had its Dividend payment increasing YoY. Applied continuously pays its
stockholders by using its existing cash more than previous years. Despite Applied having a
significant YoY decrease in its net income, the company paid out approximately 27% higher
dividends to the stockholders in 2019.
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Conclusion:
As stated earlier, Applied is one of the dominant players in the semiconductor
industry. In 2019 Applied increased its assets by 329%, compared to 2018. This increase
represented a $1.6 billion gain. However, in the same year, Applied’s sales decreased
approximately 13% compared to the previous year. The largest changes in 2019 occurred in
deferred income taxes and other assets. This was due to an adoption of Financial Accounting
Standards Board (FASB) guidelines where the income tax of intra-entity transfers is realized at
the time of the transfer instead of over the life of the asset.
There was an increase in A/R during the year 2019, compared to 2018, while at the same
time there was a decrease in sales. In this instance the inverse relationship between A/R and sales
results in less cash on hand, and a higher collection balance. This shortage of cash could have
influenced its seeming inability to expand investments. Also, during 2019 Applied continued to
pay higher dividends to its stockholders by using its existing cash even though its cash declined
YoY.
The working capital management analysis shows that Applied’s Operating Cycle
increased significantly from 2018 to 2019. Days’ receivable and days’ payable increased. Since
days’ inventory increased by 50 days, it had a significant impact on the Operating Cycle, which
rose by 33%. It is important to note that Applied’s days’ inventory in 2019 became about twice
as large as the average for the semiconductor industry.
Based on the analysis, we recommend that Applied focus on reducing their balance in
Account Receivables, this may help Applied increase its cash balance to invest in new
opportunities and innovation. Focusing on increasing net sales and an aggressive focus on
collection of Accounts receivable, can create solvency for investment opportunities.
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Appendix A
Reported Financial Statements
Applied Materials Inc.
Income Statement
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Applied Materials Inc.
Balance Sheet
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Applied Materials Inc.
Statement of Stockholders’ Equity
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Applied Materials Inc.
Statement of Cash Flow
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Appendix B
Standardized Financial Statements
Applied Materials Inc.
Standardized Income Statement
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Applied Materials Inc.
Standardized Balance Sheet
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Applied Materials Inc.
Standardized Statement of Cash Flow
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Appendix C
Common-size financial statements
Income Statement with AMD
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Balance Sheet with AMD
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Sources:
1. appliedmaterials.com
2. Semiconductors and Related Devices: industry financial ratios benchmarking
(Semiconductor Industry Ratios)
3. https://www-mergentonline-com.ezproxy.fiu.edu/industryanalysissearch.php
(Technology Industry Ratios)
4. https://www.sec.gov
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