Analysis of the Financial Statements and Ratios of Boston Beer Company - Essay Example

Analysis of the financial ments and ratios of Boston Beer Company School Analysis of the financial ments and ratios of Boston Beer Company Introduction to ratio analysis Quantitative analysis of the information accompanied in the financial statements of a company is known as Ratio Analysis. Ratio analysis is mostly based on the line items of the financial statements of a company such as the cash flow statement, balance sheet income and statement (Clatworthy, 2005). The ratios are then calculated for one item – or a combination of more items - to that of another item or a combination. Ratio analysis is carried out to determine the various dimensions of financial and operating performance of a company for example its liquidity, efficiency, solvency and profitability (Narayana, Appannaiah & Sathyaprasad, 2010). The trend all these ratios have over time is analyzed to check if they are deteriorating or improving (Steffy, Zearley & Strunk, 1974). Comparative valuations of different companies belonging to the same sector are also carried out in order to see how they stack up, and also to get an idea of their comparative performance (Sen, 2008). Ratio analysis is a very important factor of fundamental analysis (Johri, 2010). Although there is abundance of financial ratios, investors are mostly familiar with a few key ratios, especially the ones that are comparatively easy to calculate. A few of these ratios are the current ratio, the debt-equity ratio, return on equity, the price/earnings ratio and the dividend payout ratio. (Muhammad Arif Ghani, 2007) Most companies have some values, for a specific ratio, that have a certain range. A company may be assumed to be grossly overvalued or undervalued depending on the ratio figured out provided the ratio does not fall in that range. Keeping in view the fact that a ratio which is acceptable for one industry may be considered as much more high in another, therefore the ratios are generally compared for those companies which are in operations in the same sector. A good example may be; companies in utilities sectors typically have high debt-equity ratios, but the same ratio may be considered as unsustainably high for a technology company (Palepu, Bernard & Healy, 1996). Ratio analysis can be very useful in providing an early warning of a potential deterioration or improvement in the financial performance or situation of a company. To find for any such hints, the experts and analysts does engage in extensive ratio calculations of the financial data in quarterly financial reports of a company (Cadle, Paul & Yeates, 2010). Generally, successful companies show solid ratios in all the areas, and a small hint of weakness in a single area may ignite a significant sell-off in the stock (Blais, 2012). Some ratios are scrutinized closely because of the fact that they are relevant to a specific sector, as for example the days sales outstanding for a technology companies and the inventory turnover for a retail sector. (Hafiz Mohi-ud-din Tahir, 2013) What does this document contain? This document contains the interpretation and analysis of the financial statements and financial ratios of Boston Beer Company. It also contains the comparison between other companies like CRAFT BREW ALLIANCE, INC and the Anheuser-Busch. A review of all these information is given below which may help users of financial statements to make important decisions. Balance sheet analysis and key account changes The three years balance sheet data of Boston Beer Company shows a stable increase in all the key amounts year by year (Yahoo! Finance, 2014). The Property, Plant and Equipment, however, shows a significant increase for the current year as the total amount shows an increase of almost 99 million dollars (opening 189.9 to 266.6) for the current year. This means that the company has made sufficient investment made in the property, plant and equipments. Income statements analysis and key account changes Very similar to the balance sheet, the income statement also shows a very stable increase in all its key accounts except in revenues and cost of sales. Simultaneous increase in both the revenue and cost of sales accounts provides evidence that the company’s sales increased sufficiently. This is a positive sign for the company’s future. Profitability and Growth As already mentioned, the company’s investment in property, plant and equipment and therefore its revenue increases a lot for the current year therefore we can conclude a sufficient expansion in its operating activities. This means the company is showing growth compared to the previous years, especially 2012 in which the net income and other key aspects of the income statements remained very low. Similarly the income statement of Boston Beer Company shows a big jump in the profit, hence we can also say that the company is showing profitability (Google.com, 2014) Sources of cash and its use An investor desires to analyze closely as to how often and how much a company raises the capital, and sources of that capital. For example, a company that relies heavily on investors from the outside for frequent, large cash infusions can become a serious issue if the capital markets seize up, just like they seized up during the Credit Crisis in 2007. Determination of the maturity schedule for a debt raised is also worthwhile. Raise in equity is usually a sign of gaining access to long-term, stable capital. The same can be concluded for long-term debt that gives flexibility to pay debt off (or down) to a company for a longer period of time. A short-term debt can become a burden as it needs to be paid back as soon as possible. (Salah-ud-din, 2010) The cash flow statement of the company depicts that the major sources of the cash for the company are, obviously, its sales and after that the other operating activities, issuance of common stock and other financing activities. Other operating activities have generated and a significant amount of cash for the current year. For the current year cash generated by the three, i-e operating activities, issuance of common stock and other financing activities is 11.6, 3.5 and 5.3 respectively. On the other hand major uses of cash include capital expenditures and repurchase of common stocks. The company has used 100.7 million dollars as capital expenditure while it used 29.6 million dollars on the repurchase of the common stock. Ratio analysis and comparison with the competitors A separate excel sheet containing ratios calculated from all the three selected companies is attached here with. Comparing all those ratios, Boston Beer Company shows the best results in most of the ratios out of the three selected companies. Liquidity ratios of Boston Beer Company are better than those of the competitors. It means it has sufficient cash at its disposal to meet its current liabilities compared to the others. Its return on ratio also is better than the others which mean the investments made by the company yield it more return than its competitors’ assets do. Debt to equity is also in its favor as it is low relative to the competitors. A low debt to equity ratio means that the company has acquired less debt compared to the competitors. Since acquiring debts more than normal may be risky for the business, therefore Boston Beer Company is better in this regard. Further, its cash ratio is also higher than that of the competitors which means the company has free cash at disposal more than its competitors have. It enables the company to be in a position to make investments or payments with the free cash in times of need. Statements of retained earnings The retained earnings statement shows opening balance of $ 43,876 at opening of 2011 to which net income for the year 2011 is added. At the year ended 2011, common stock of $ 62,816 is issued resulting a reduction in the total amount of retained earnings to $ 47,119. Net income of $ 59,467 for 2012 increases the retained earnings balance which is then again reduced to $ 88,541 by the issuance of common stock. For the year ended 2013, the net income amounts to $ 70,392 increasing the total retained earnings. At the year end, the issue of common stock of $ 29,584 reduces the closing retained earnings to $ 129,349. (Bostonbeer.com, 2014) Extraordinary events affecting the company’s operations Hops Purchase Commitments Many varieties of hops are being utilized by the Company utilizes in production of its products. In order to ensure that the supplies of these varieties is adequate, the Company engages in some advance multi-year purchase commitments that are based on, among other factors, hop requirements forecasted for future. The Company, during 2013, entered in some future hops contracts in the ordinary course of business. The total amount of such contracts entered into for the year ended 2013 was $33.6 million. These are denominated in U.S. Dollars, British Pounds Sterling and, Euros. The Company has not entered in any forward exchange contracts for 2013 and is currently of the view to purchase further future hops through using the exchange rate at the time of purchase. The accounting policy of the Company for hop purchase commitments and inventory is to record a loss by maintaining a reserve for aged hops and to the extent to which the commitments and inventory levels exceed the needs forecasted. The calculation of excess inventory demands from the management to make some assumptions, among others, for future product mix, sales growth, supply and cancellation costs. Actual results may be different materially from those estimated by the management. The Company still manages the purchase commitments and inventory levels in trying to maximize use of hops under commitment and hops on hand. Changes, however, in management assumptions made for future product mix, sales growth and hops market conditions may result in material losses in future. Off-Balance Sheet Arrangements As of December 28, 2013, the Company did not enter into any material off-balance sheet arrangements. Recent Accounting Pronouncements In order to improve the reporting of reclassifications from accumulated other comprehensive income the FASB issued ASU 2013-2. ASU 2013-2 demands the presentation, of amounts reclassified either in the notes or on the face of the financial statements, out of accumulated other comprehensive income by net income line item and by component. Our consolidated financial statements were not significantly affected by the adoption of this standard. (Bostonbeer.com, 2014) Operating issues and problems Revenues are on increasing trend which provides sufficient evidence that the operations of the company are good and the management need not worry about the operating matters. There are, however, some operating expenses which need to be considered for better results in future. Firstly, the advertisement expenses are increasing year by year but have no significant results as we consider the profits. These expenses are needed to be given consideration by the management as if they are not yielding estimated results, then they must be reduced for better profitability of the company. Last but not the least, impairment losses must be considered seriously as they have increased by more than 10 times compared to previous year. This issue is highly serious and management needs to take steps for the reduction of these losses. Information missing from investors’ perspective In my opinion, there is no other information that the investor might want to know about the company except the “market price per share.” This should have been clearly provided in the financial statements so that the investors may be sure as to what company they should choose to invest in. Decision to buy the stock of the company In my view, there is no serious issue in the operations of the company. Information about the market price per share if were given, would have been valuable but still, looking at the earning per share figures, I would not hesitate to buy the stocks of this company. The reason is that the company’s earnings per share have increased compared to the previous. Moreover, the liquidity ratios and debt ratios of the company are good enough to determine the company will be able to satisfy its liabilities in the short run. Financial problems The company has no significant problem. The current assets and current liabilities, however, must be considered in this regard. The current liabilities and current assets both are on increasing trend and it may become a serious problem with change in the value of the related currency. For example, if the value of dollar goes down, the accounts receivables and all other receivables will be depreciated automatically by this change in the currency and the amount collected will be relatively less than the actual current receivable. Similarly, if the value of the relative currency goes up, the accounts payable and all other payables will automatically be appreciated due to the said change and the amount paid will be relatively more than that which was actually payable. Future of the company The future of the company looks good as the financial statements show, majorly, positive results. Same is the case with ratios which are god enough to say that the company is going to perform well in the future. The revenue is on increasing trend and same is the case with earning per share. It means the investors would be willing to invest in the company enabling it to expand its operations more and more. Ethical issues of the company The Board of Directors of the Company, in December 2002, adopted (i) Corporate Governance Guidelines, and (ii) Code of Business Ethics and Conduct which applies to its Chief Financial Officer and its Chief Executive Officer. The company amended the Code of Business Ethics and Conduct effective August 1, 2007 in order to provide for a third-party whistleblower hotline. These, and the charters of each of the Committees of the Board, are posted on the website of the Company (www.bostonbeer.com) and are made available to any shareholder requesting them in print. Any such request is proposed be directed to Boston Beer Company, Inc.’s Investor Relations Department. The Company is of the view to disclose any other amendment to, or any waiver from, any provision of its code of ethics which applies to the Chief Financial Officer of the Company or its Chief Executive Officer and which is related to any element of the definition of Code of Ethics as enumerated by Item 406 of the Regulation S-K by posting on the website of the Company, such information. Long-term asset portfolio Long-term assets comprise of Machinery and plant equipment, Land, Building and building improvements, Leasehold improvements, Office equipment and furniture, Kegs. Changes in these assets are as follows: Machinery and plant equipment has increased from $ 183,828 to $ 259,664. Land has decreased from $ 24,515 to $ 23,260. Building and building improvements have improved $ 36,667- $ 44,234. Leasehold improvements have increased from $ 6,193 to $ 7,600. Office equipment and furniture increased from $ 12,580 to $ 14,581. Kegs increased from $ 46,899 to $ 60,350. (Bostonbeer.com, 2014) Overall, the company has invested in the long-term or fixed assets which may or may not be fruitful. The results of following years would determine the viability of such investment decisions. References Top of Form Top of Form Top of Form Top of Form Top of Form Top of Form Top of Form Top of Form Top of Form Blais, S. (2012). Business analysis: Best practices for success. Hoboken, N.J: Wiley. Boston Beer Company (2014). Annual report and accounts 2014. Boston Beer Company, Inc. SWOT analysis. (n.d.). London: Datamonitor Plc. Bostonbeer.com,. (2014). The Boston Beer Company - Overview. Retrieved 29 April 2014, from http://www.bostonbeer.com/phoenix.zhtml?c=69432&p=irol-overview Cadle, J., Paul, D., & Yeates, D. (2010). Business analysis. Swindon: British Informatics Society. Clatworthy, M. (2005). Transnational equity analysis. Chichester: Wiley. Ghani, M. A. (2007), Basics of Financial Accounting Google.com,. (2014). Boston Beer Co Inc: NYSE:SAM quotes & news - Google Finance. Retrieved 29 April 2014, from https://www.google.com/finance?q=NYSE:SAM Johri, A. (2010). Business analysis. Mumbai [India: Himalaya Pub. House. Narayana, R. P., Appannaiah, H. R., & Sathyaprasad, B. G. (2010). Business management: II. Mumbai [India: Himalaya Pub. House. Palepu, K. G., Bernard, V. L., & Healy, P. M. (1996). Business analysis & valuation: Using financial statements : text & cases. Cincinnati, Ohio: South-Western college Pub. Salah-ud-din, (2010). Study Text, Lahore, Pak. Professional Academy of Commerce Sen, M. (2008). Business management. Jaipur, India: Oxford Book Co. Steffy, W., Zearley, T., & Strunk, J. (1974). Financial ratio analysis: An effective management tool. Ann Arbor: Industrial Development Division, Institute of Science and Technology, University of Michigan. Yahoo! Finance,. (2014). Boston Beer Co. Inc. Retrieved 29 April 2014, from https://finance.yahoo.com/q?s=SAM Datamonitor (Firm). (2000). Boston Beer Company, Inc. New York, NY: Datamonitor. Bottom of Form Top of Form Bottom of Form Bottom of Form Bottom of Form Bottom of Form Bottom of Form Bottom of Form Bottom of Form Bottom of Form Bottom of Form Read More