La Farge as an Investment Decision - Assignment Example

La Farge as an Investment Decision I am respectfully submitting report of my analysis for La Farge. I have used the financial data from its published statements for a 5 year period from 2004 to 2008. La Farge’s financial performance has been compared to the industry and sector it belongs to see its relative position. Ratios of performances were also computed to see its growth and to see liquidity concerns. From the analysis and data reviewed, it is safe to recommend to the investor that La Farge is a good investment. Hereunder are the results of the analysis. Tables, charts and data are included for further review. 1. Analysis of how business is financed. In 2009, La Farge has a reported net income of €404.0B, and a capitalization of €39,453.0 (Reuters1) In 2008, it has a debt to equity ratio of 69% which means that the company uses more debt than equity. This shows that the company has been aggressive in financing its growth through debts. Investors may be happy at this ratio because benefits of earnings are spread to the same number of stockholders and there is no need to add in new investors. However, analysts feels that a high debt financing may result to unstable earnings because of high interest that can be too much for the company to handle (Investopedia) The total debt to equity ratio of 115% shown in Table 1 is an analysis done by stock brokers that is higher than the sector average (Table 1 attached) A high ratio is generally accepted to capital intensive industry that tends to have a higher ratio, according to Investopedia 2. Financial analysis of the company’s published accounts over a five (5) year period (most recent) including profitability and liquidity ratios and analyzed with graph for each ratio are presented in annexed tables and charts. Gross Profit ratio. As of 2008, La Farge has a gross profit ratio of 27.86% which is slightly lower than 27.89% of 2007. Its gross profit ratio does not differ much in previous years’ performances as shown in Table 1 and Chart 1. (Reuters Financial Statement) Net profit ratio. The sales turnover of 2008 provided 8.40% net profit ratio for the company which is lower than its net profit ratio of 2007 that is 10.8% Table 2 and Chart 2 show Net Profit Ratio of the company for five years. Return on Shareholders. In 2008, La Farge gave the shareholders a return on their investment of 18%. This figure is very much lower than the 25.39% ROS in 2007. Table 3 and Chart 3 show fluctuating ROS, with 2007 as having the highest, followed by 2004. Return on Capital Employed. ROCE of La Farge in 2008 is 11% lower than 2007 14%. Table 4 and Chart 4 shows figure for 5 years. Liquidity. Current Ratio of the company in 2008 show 1.11% which means company can pay its maturing obligations. The quick current ratio is less than 1 which shows that company has a short term liquidity problem. Table 5 shows computation on different years. 3. Historical chart of share prices has been obtained from Digital Look Analysis and is shown below. Share price of La Farge as of November 20, 2009 is €56.83. From the chart it showed significant upward movement from July to October. The share price movement is an indication of investors’ confidence to the company’s performance or a response to Source: Digital Look economic problems. Stock analysts recommend a “Strong Buy” transaction to La Farge. La Farge has forecast revenue for 2010 of a 3 percent growth above the 2009 performance, and a yield of 3.2% which is over the 2.8% yield of 2009. (Digital Look) 4. The comparative financial analysis of La Farge within the industry and sector is done to present the relative position of the company. (Table 6) Results are highlighted below: Valuation ratios of La Farge are found to be higher than the industry and sector. Comparison within the industry and sector is done because they have same growth prospects while S & P index has different growth prospect. Dividend yield on a 5 year average as well as payout ratio is much higher than competitor. However, La Farge has slower growth rate on a 5 year average. In terms of growth rate, sales have negative growth rate on a one year period and a slow growth average for 5 years. The Earnings per share also showed negative figure on a 1 year TTM (trailing time). On a 5 year average, EPS growth is higher than the industry. La Farge showed financial strength as its Current ratio is 1.1 and quick ratio of 0.833 which means it has readiness to pay maturing obligations. Company uses more debt to finance company’s growth. It is observed that the industry uses same debt structure pattern. In terms of profitability, La Farge showed strength as its ratios of net profit margin is over than the competition In management effectiveness, the return on investment of La Farge is higher than industry and sector. 5. Conclusion and recommendations The study used two analytical frameworks in arriving at a conclusion. First I have used the cost driver analysis that quantified and analyzed the monetary effects of costs associated with an activity. The analysis produced ratios that provided meaningful relations. The second is the framework of competitive analysis that draws the advantage and position of the company relative to its competitors. In a business where competition exists, a company should not be complacent and should be aware of competitors’ move. and positioning. Moves of competitors could be seen thru observable data, recorded data and opportunistic data. Recorded data are those gathered from press releases, published financial data, newspaper articles and government reports. This study has gathered valued information from these sources. The observable data are those seen from advertising campaigns, pricing links and patent registrations for new product moves. Opportunistic data are information gathered from meetings with suppliers, trade shows, seminars and trade conferences. Neither of the last two is used for the study. However, in a more intense analysis, use of all these data gathering method is needed. The cost analysis is based on the financial statements of the company. I have noted that the 2008 Financial Performance of La Farge is lower than its 2007 performance in terms of growth and profitability. Revenues, net income and returns to shareholders are also affected. This is a gray area that needs to be further researched as to what could possibly be the reasons for decline. I would like to advance my theory that economic crisis may be one of the reasons for the decline as La Farge is in the construction materials business. It will be recalled that there was an economic crisis in the United States in 2008 that was rooted in realty mess. As a consequence, there was a slow down in the construction business. Construction was almost put to a stopt when credit financing imposed tightening. This crisis transcended to other countries as wider effect was felt. La Farge is also doing business across countries, and sales are affected in a multi-layered effect. La Farge cannot be spared with the effects like other businesses in the United States who felt the same economic crunch and recession (White House Blog) However, economic analysts predicted that the crisis will soon be over by the latter part of 2010. The economic package of President Obama calls for infrastructure spending for 2009 and onwards. I feel this is an opportunity for recovery for the company as there is a big budget appropriated for this. La Farge, as a leading supplier of construction materials may see this as a chance to recover as their products will be needed. Another possible cause is the presence of competitors that is sharing the pie of construction business At present, there are 11 competitors in the industry (source0 A comparative analysis was done based on their financial statements. On the overall analysis, as compared with the industry and sector, La Farge is well positioned in the market. Its ratio performances in all the economic indicators are above the competitors in five years of analysis. Finally, we draw a conclusion based on the result of the two techniques of capital budgeting and investment that La Farge is a possible area of investment. Reflective Statement This module has given me an insight on the importance of understanding financial statements Benefits learned from this exercise are the leanings of how financial statements are done, how accounting reports provides the information of company operation. It taught me how to analyze costs and profit at a control period; examine variances for managers to take action. The module has become meaningful as data from financial reports are not only hard figures, but I learned to express it as a tool used for planning, control and decision-making. I learned that data from financial statement provides ratios that could be more significant when used as comparison such as profitability ratios. Profitability ratios show growth and performance of business. Since profit is the controlling interest of business and stakeholders, profitability ratios analyzes how well the company is doing in terms of profits as compared to sales, and how well the assets are used in generating revenues. Ratios, when used alone, do not reflect any meaning, but when compared with something else, like historical figures and the competitors, it a tool in helping out managers in weighing decisions. In comparing the financial ratios of competitors I found out information of their movements in the market. For example, when there are intensive capital asset expenses, it could be interpreted that competitor is undergoing expansion; increased investment in advertising means new product innovations. Being in business means, a company should be aware of competition so as not to be left out in the market race. At a glance, the figures in the financial statements looks overwhelming such as sales, profits, and assets, but there is a need to read between the lines of the report because investors might be misguided. There is a need to understand where the company gets all these figures, the activities involved, and where their money comes. Such information is only available in the Profit and Loss Statement and Balance Sheet. Lessons in comparative ratios made it easy for me to identify and quantify the company’s strength, weaknesses, evaluate its financial position and understand the risk taking. In effect it is a SWOT analysis done in ratios. However, although ratios are invaluable tool, it should not be taken as gospel truth as there are other factors that may deride the situation If I were an investor, or a future one, it is now easy for me to understand financial statements of a company, particularly for those companies listed in the stock market Sometimes, there are figures that we do not understand, and this becomes one of the reasons why investors doubt the reliability of the company. When investors doubt performance of company, it may cause the profit or loss of the company in the stock mark To clarify these doubts, an investor is advised to look at the explanatory notes in the statement that is issued by the management. The management’s statement explains the changes of policy decisions during the year, future plans and operational activities. The explanatory notes is also mandatory procedure of Accounting Standards to provide explanations to stockholders and interested parties on activities that transpired during the period of the report. In my career path as a future Financial Analyst, the lessons learned from this assignment will certainly be used and put to recall. W.C. 1421 ANNEX Chart 1 Gross Profit Ratio Table 1. GROSS PROFIT RATIO COMPUTATION Gross profit ratio = gross profit/turnover or sales x 100 revenue gross profit Gross Profit ratio 2008 19,033 5,304 0.278673882 27.8674 2007 17,614 4,914 0.278982627 27.8983 2006 16,909 4,524 0.267549826 26.755 2005 14,490 3,905 0.269496204 26.9496 2004 12,926 3,551 0.274717623 27.4716 Source: Reuters FS Chart 2 NET PROFIT RATIO TABLE 2. NET PROFIT RATIO Net profit ratio = profit after tax/turnover or sales x100 Net income Sales NPR 2008 1,598.00 19,033 0.083959439 8.40 2007 1,909.00 17,614 0.108379698 10.838 2006 1,372.00 16,909 0.081140221 8.114 2005 1,096.00 14,490 0.075638371 7.5638 2004 1,046.00 12,926 0.080922172 8.0822 Source: Reuters FS Chart 3 Return on Shareholders Table 3 Return on Shareholders Return on shareholders fund = profit before tax/shareholders fund or equity x 100 Profit before tax Equity 2008 2,418.00 12,910.00 0.19 19.00   2007 2,763.00 10,998.00 0.253955265 25.3955 2006 2,223.00 10,314.00 0.021621098 2.1621 2005 1,797.00 9,758.00 0.184156589 18.4157 2004 1,495 7,782.00 2.248136726 22.48137 Source: Reuters FS Chart 4. Return on Capital Employed Table 4. Return on capital employed =profit before interest and tax /total asset – current liabilities x 100 PBIT Total Asset CUR. LIA. ROCE 2008 3,362.00 40,608.00 8,930.00 31,678.00 0.11 11.00 2007 3,289.00 28,308.00 5,511.00 22,797.00 0.14 14.00 2006 2,678.00 29,841.00 6,185.00 23655 0.113211 1.13211 2005 2,181.00 27,895.00 5,859.00 21982 0.099218 9.9218 2004 1,961.00 24,500.00 4,732.00 19768 0.10 10.00 Source: Reuters Balance Sheet Table 5. LIQUIDTY RATIOS Quick ratio or acid test ratio = current assets – stock/current liabilities Current assets Current LIA> Stock/equity Quick Ratio 2008 7,233.00 6,498.00 14,356.00 -7,123.00 -1.09618 2007 7,264.00 6,009.00 14,172.00 -6,908.00 -1.14961 2006 7,221.00 8,416.00 13,143.00 -5,922.00 -0.70366 2005 7,680.00 8,930.00 12,910.00 -5230 -0.58567 2004 8,489.00 6,535.00 14,238.00 -5749 -0.87972 Source: Reuters Balance sheet Current ratio = current assets/current liabilities Current Asset Current Liabilities Current Ratio 2008 7,233.00 6,498.00 1.113111727 2007 7,264.00 6,009.00 1.208853387 2006 7,221.00 8,416.00 0.858008555 2005 7,680.00 8,930.00 0.860022396 2004 8,489.00 6,535.00 1.299005356 Source: Reuters Balance Sheet Table 6 Valuation Ratios   Company Industry Sector S&P 500 P/E Ratio (TTM) 18.81 5.71 7.49 112.40 P/E High - Last 5 Yrs. -- 0.15 0.18 41.77 P/E Low - Last 5 Yrs. -- 0.03 0.03 6.97 Beta 1.57 1.12 0.95 1.37 Price to Sales (TTM) 0.94 0.63 1.01 1.96 Price to Book (MRQ) 1.11 0.86 1.22 2.17 Price to Tangible Book (MRQ) 18.71 3.68 1.30 5.56 Price to Cash Flow (TTM) 6.53 3.89 4.91 7.13 Price to Free Cash Flow (TTM) 24.51 64.38 3.92 12.61 % Owned Institutions -- -- -- -- Dividends   Company Industry Sector S&P 500 Dividend Yield -- 0.03 0.01 1.55 Dividend Yield - 5 Year Avg. 3.26 2.27 2.51 2.73 Dividend 5 Year Growth Rate -2.76 6.51 11.15 9.46 Payout Ratio(TTM) 48.28 18.58 13.44 28.51 Growth Rates   Company Industry Sector S&P 500 Sales (MRQ) vs Qtr. 1 Yr. Ago -20.03 -7.22 26.05 -13.81 Sales (TTM) vs TTM 1 Yr. Ago -9.78 2.08 20.73 -6.64 Sales - 5 Yr. Growth Rate 6.86 13.15 16.73 15.72 EPS (MRQ) vs Qtr. 1 Yr. Ago -50.94 7.75 2.99 79.71 EPS (TTM) vs TTM 1 Yr. Ago -66.54 -- -- -- EPS - 5 Yr. Growth Rate 11.57 0.32 16.51 1.36 Capital Spending - 5 Yr. Growth Rate 27.28 12.70 20.84 19.35 Financial Strength   Company Industry Sector S&P 500 Quick Ratio (MRQ) 0.83 0.96 1.05 0.79 Current Ratio (MRQ) 1.11 1.30 1.67 0.93 LT Debt to Equity (MRQ) 95.33 74.73 25.35 85.68 Total Debt to Equity (MRQ) 115.75 117.17 40.15 134.39 Interest Coverage (TTM) -- 0.07 0.09 26.20 Profitability Ratios   Company Industry Sector S&P 500 Gross Margin (TTM) 26.44 15.33 16.73 26.33 Gross Margin - 5 Yr. Avg. 27.40 26.39 23.36 26.57 EBITD Margin (TTM) 22.04 -- -- -- EBITD - 5 Yr. Avg 22.24 15.64 20.65 15.44 Operating Margin (TTM) 14.39 6.51 9.22 -- Operating Margin - 5 Yr. Avg. 16.63 9.93 14.64 20.02 Pre-Tax Margin (TTM) 8.37 2.10 7.55 7.44 Pre-Tax Margin - 5 Yr. Avg. 13.20 10.02 14.00 19.73 Net Profit Margin (TTM) 6.77 3.70 4.63 5.95 Net Profit Margin - 5 Yr. Avg. 10.05 8.50 9.93 13.99 Effective Tax Rate (TTM) 19.04 5.86 19.71 -6.82 Effecitve Tax Rate - 5 Yr. Avg. 23.85 37.70 27.44 28.11 Management Effectiveness   Company Industry Sector S&P 500 Return on Assets (TTM) 2.79 1.92 0.08 3.25 Return on Assets - 5 Yr. Avg. 5.69 4.42 10.81 5.29 Return on Investment (TTM) 3.50 2.69 0.09 4.52 Return on Investment - 5 Yr. Avg. 7.74 5.96 14.45 6.80 Return on Equity (TTM) 5.69 3.85 0.10 8.06 Return on Equity - 5 Yr. Avg. 13.60 10.32 17.45 15.30 Efficiency   Company Industry Sector S&P 500 Revenue/Employee (TTM) 202,421 2,224,213 1,697,878,160 474,552 Net Income/Employee (TTM) 13,710 204,428 75,815,662 30,126 Receivable Turnover (TTM) 6.12 5.60 0.60 6.42 Inventory Turnover (TTM) 6.10 3.61 0.18 4.79 Asset turnover (Source: Reuters La Farge Financial Highlights) REFERENCES Digital Look. (n.d.) “LaFarge Overview” Fact Set Research Systems Inc. http://www.digitallook.com/cgibin/dlmedia/security.cgi?username=&ac=&csi=25318 [Accessed 10 November 2009] Investopedia. (n.d.) Definition “Debt/equity ratio”. http://www.investopedia.com/terms/d/debtequityratio.asp [Accessed10 November 2009] President Barack OBama. (n.d.) “Economy” White House Blog. President Barack OBama http://www.whitehouse.gov/issues/Economy/ [Accessed 11 November 2009] Reuters.(n.d.) “Ratios”. LaFarge. [Accessedd 10 November, 2009 fro Reuters. (n.d.) “Income Statements”. La Farge. http://www.reuters.com/finance/stocks/incomeStatement?symbol=LAFP.PA [Accessed 10 November 2009.] Reuters. (n.d.) “Balance Sheet. LAFARGE. http://www.reuters.com/finance/stocks/incomeStatement?stmtType=BAL&perType=INT&symbol=LAFP.PA [Accessed 10 November 2009] Tutor 2u. (n.d.) “Competitive Advantage Analysis”. Tuto2u. http://tutor2u.net/business/strategy/competitor_analysis.htm [Accessed 10 November 2009] Read More