Financial Analysis of Advanced Micro Devices - Research Paper Example

13th April, Executive Level Report – Financial Analysis of AMD Introduction High Technology Company (HTC) always aims at dealing with those suppliers and other counter parts which have solid financial results and performances. The company is mainly interested in making some long-term contract with another promising and renowned listed company namely as Advanced Micro Devices (AMD). This report particularly involves in the analyzing the financial performance of the company with the semiconductor industry for the three years including 2008, 2009 and 2010. This report is structured in such a manner that first section of this report describes brief description of the company which includes its history, comparison of the company with its industry and the ratio analysis with some other financial indicators. Section two mainly describes the stock performance of the company which emphasizes upon the fluctuations in the share prices along with the earning and dividends analysis of AMD. Recommendation is the last section which briefly highlights as whether HTC should go for making long-term contracts with AMD or not in the light of financial analysis conducted above. Description of Company Advanced Micro Devices (AMD) is a listed entity in New York Stock Exchange (NYSE: AMD). The company started off its operations in 1969. The company mainly deals in semiconductor industry such that it manufactures microprocessors which are used in computers, mobile phones, tablets, gaming consoles, networks etc. Financial Ratio Analysis The best way to assess the financial performance of any company is to make a financial analysis of the company through ratio analysis as it covers most of the parts of the financial statements in a very comprehensive and meaningful form. Under the following paragraphs, the ratio analysis of AMD is conducted in which the financial performance of AMD is analyzed and compared with that of the industry averages and its own previous years’ performance in respect of liquidity, profitability and efficiency of the company. Liquidity Analysis The current ratio describes as in order to pay a current liability of $1, how much current assets the company has. Overall, the current ratio of the company has increased from 1.07 to 2.15 i.e. it has become double in three years. The company still way behind from the industry average which has been around 3.4 in the last three years. If the stock is ignored from the current assets of the company, then the quick ratio of the company has also become quite strong increased from 0.64 to 1.65 such that it is heading toward the industry ratio of 1.84 quite smoothly. Leverage Analysis As far as the financial leverage of AMD is concerned, it can be observed that the financial leverage of the company has dropped from 14.01 to 4.9 in the 2009 and 2010. But the financial leverage of the industry is still quite high and moves around 15. The debt ratio of the company has decreased from 6. 56 to 2.16 which is a very good as the company has become less risky but still the company is quire risky as compared to the industry average which is still below 0.5 cumulatively in the three years. Efficiency Analysis Efficiency ratios mainly involve the movements of particular current assets and liabilities which include receivables, inventory and payables. The average collection period of the company has increased from 30 days to around 48 days in the last three years. The industry average revolves around 49 days. This suggests that the company’s performance has remained consistent with that of the industry. Inventory turnover of the company has also increased such that it has increased from 4.72 to 5.89, which is still lower than the industry averages of 7 to 8 turnovers per year in last three years. Profitability Analysis Profitability is the core area in which every stakeholder to the company is directly involved. Mainly three profitability ratios have been analyzed which are return on sales (net profit margin), return on assets and return on equity. 2008 was a relatively worst year for the company’s history such that the company made huge losses in that year. The return on sales of the company was in negative zone. However, the company struggled to bounce back in 2009 and 2010 and the company managed to increase its return on sales from -53% to 7.25% which is a very good come back. The industry’s return on sales average is however quite stable at around 4%. Thus AMD is required to maintain its existing return on sales in the upcoming periods. Return on assets of the company have also increased on a similar trend such that they have increased from negative 32% to positive 6.71% which is a very healthy sign for the company . The industry average of return on assets has remained around 3.6% last year recovering from negative zone of early shocks. Since the equity portion of the company is very less in the overall capital structure of the company therefore it also has a very substantial impact upon return on equity of the company. The return of the company had crossed 100% in 2009 but in 2010 it is around 56%. The industry average of the return on equity is quite below and moves at around 5.8% as per last year’s statistics. Horizontal Analysis If the income statement of AMD is closely observed then it can be viewed that the company’s gross profits as a percentage of sales are on a slow but increasing trend such that they have increased from 39% to 42% in the last three years. Similarly operating profit margins and net profit margins of the company are also following the increasing trend. The balance sheet of AMD also shows good advancements, such that the proportion of the current assets as a percentage of the total has increased tremendously such that it has increased from 31% to around 72%. However net property, plant and equipment remained relative on a quite lower side such that it dropped from 56% to just 14% which is a question mark. Total current liabilities have also increased but at a very slow pace from 29% to 33% in three years time frame. Total liabilities however reduced to 79% of the total assets of AMD. Conversely, an increase in the shareholders’ equity can also be observed from negative equity to positive 20% of the total assets. Trend Analysis So far as the trend analysis of AMD is concerned, the company has reflected some satisfactory results such that it managed to increase the growth rate of revenues as compared to 2008 level as the company was in negative zone. Now the company is moving with 20.19% increase as compared to 2009 results. Operating income and net income of the company are also on an increasing trend such that they have increased 27% and 25% respectively as compared to 2009. Capital Spending, Credit Rating, Management and Investment Report As far as capital spending of the company is concerned, it has dropped substantially such that the company did not undertake any big investment expenditure in the last three years. The company had incurred around $646 million in 2008 but it has significantly reduced it to merely 148 million in the last year. As far as the credit rating of the company is concerned, the recent credit rating of AMD is C++ which suggests that the financial position and strength of the company is not very much satisfactory and it is more of a volatile in nature. According to the management report, the company has dis-consolidated a firm namely as Global Foundries (GF) under equity accounting method. Stock Analysis The share price of the company has remained quite volatile such that it remained extremely volatile especially in the 2009 and 2010. The share price of the company for the year 2008 is not considered as the stock markets all over the world collapsed in that year, therefore only latest two years have been considered. It can be observed that the company made the lowest of $1.86 in its share price first quarter of the 2009. However, the share price of the company reflected positive prospects and hit its highest point $10.16 in third quarter of 2010. In the last quarter of 2010, the share price of AMD moved in between $6.5 and $8.24. The earning per share of the company has also decreased from $2.2 to $0.40 which is a very alarming sign. As the company does not pay dividends, therefore dividend analysis is not taken into consideration. The beta of the company has also become quite high due to much amount of risk involved in the financial results of the company and moves in between 1.4 and 1.5 till 2010. Recommendation The CFO of HTC is recommended to analyze the prospects of AMD once again, as from the recent results of the company it can be observed that the company seems to be struggling even after 2 years of recession. The long term relationship with AMD can also increase the risk for HTC so HTS should also search other suppliers as well and also keep a closer look at the current activities of the company. References AMD: Summary for Advance Micro Devices., (n.d.). Yahoo! Finance. Web. 16 April. 2012. 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