Investment Profile Analysis for McCormick & Company - Assignment Example

Table of Contents Introduction 2 Company Profile 2 Rationale for selecting McCormick & Company for investment purpose 3 Company performance evaluation 4 Ratio Analysis 4 Cashflow analysis 10 Stock price analysis 12 Recommendations 12 References 14 Introduction Company Profile McCormick & company is a Fortune 1000 company registered in New York Stock Exchange. The main business of the company is related to manufacturing of spices, edible herbs, condiments and seasoning mixes and their distribution for industrial, commercial and retail market. The company was founded in 1889 and is headquartered at Maryland. Over the years, the company has grown tremendously and presently it is a global leader in flavours. In major global markets, the company owns huge market share and claims to have its consumer brands available in 110 countries. However, the largest share of operations exists in America and Europe. The company caters retail consumers, food product manufacturers and food service businesses. In addition, the company also supplies for store brands that are private level items. The company’s current employee strength is around 10000 including members of its research facilities. The company’s success pillars include continuous innovation, participative management for managing workforce, quality assurance and maintenance and delivering high performance. A research on company profile suggests that the decision of participative management and empowering employees have helped the company to achieve its current position. According to the management, learning and development initiatives by the company such as Global Leadership Program, Global Learning Network and High performance Organisation has also played an important role in the company’s success. The company claims that its internal and external investments are responsible for supporting its financial growth. According to the company, it has a stable balance sheet and annual cash flow that has helped in continual investment flow in the business and paying rewards in the form of dividends to its investors (McCormick, 2014a). Rationale for selecting McCormick & Company for investment purpose McCormick & Co. (MKC) is growing at a fast pace and has become the largest spice company globally with sales value of USD 4123 millions in 2013. In the spice industry the size and reputation of the company matters and as a result, McCormick & Co. has a competitive advantage over its competitors. It has been observed that consumers in spice industry are price sensitive but they are equally concerned with the quality of the product. The price of MKC is comparatively high and it mainly competes with various private brands. However, the products of MKC are highly distinguished because of its substantial investment in research and development. This has helped the company in achieving high market capitalisation. From business point of view, the company has well positioned brands in different countries and the company is always on the roll to acquire new as well as rival brands to improve its market positioning. More than 50% of its sales are covered by consumer section while about 40 percent covers industrial sales. The company is an appropriate choice for investment because its performance in terms of revenue and growth shows that the company has done exceptionally well in recent years. Moreover, the company is old yet growing steadily as well as listed as a fortune 1000 company which in itself explains the status of the company (The Wall Street Journal, 2014). Company performance evaluation The performance of the company has been evaluated by using two methods: ratio analysis and studying the company’s cash flow pattern taking in account data available for past three years: Ratio Analysis Table: 1 (Source: Author’s creation) Liquidity ratio- The liquidity ratio include current and liquid ratio that helps in understanding the company’s liquidity position. Figure: 1 (Source: Author’s creation) Current ratio: The current ratio exhibit the relationship between current assets and current liabilities of the company. This ratio is otherwise known as working capital ratio as it exhibit relationship between the main components of working capital. The three year analysis as depicted in the chart shows that the current ratio of the company has been more or less same over the years. The current ratio shows deviation from the industry standard (1.29) in 2011 and 2012; however, it complies with the same in 2013 which means that the company is in a position to pay-off its current obligations using its current assets. Liquid ratio: Liquid ratio is a better measure of a company’s liquid position. It does not take in consideration the non-liquid components of current asset such as inventories or stock as these cannot be liquidated easily during exigencies or within a year. The industry standard of liquid ratio is 0.65. The company’s liquid ratio has been almost consistent over the three year’s span. Apart from mild fluctuation in 2012, the performance of the company shows that its liquid condition is stable and it has sufficient liquid assets to meet its current obligations, even if the payment is to be made within a year (Will, Subramanyam & Robert, 2001). Profitability ratio- The profitability ratio aims at expressing the performance of the company. The ratios have been depicted graphically at figure: 2. Operating Profit ratio: Operating profit of a firm represent the profit that the company has earned from its core operations and activities. The ratio represents the relation of operating profit and net sales. It represents the percentage of the sale that is earned by the company after deducting all operating expenses. In case of MKC the core activities are manufacturing and retailing spices and equivalents, in domestic and international market. The operating profit has declined mild from 2011 to 2013, which can be justified with an increase in operational activities of the firm. Gross profit ratio: Gross profit ratio is a financial measure useful to determine the financial health of a company. It illustrates the amount of money left for a company out of its total revenue after accounting for the cost of sales. Also known as gross margin, it the ratio of revenue less cost of sales and net revenue. The gross profit of MKC has been consistent and fairly high considering the nature of its industry. The gross profit of the company is a little higher than 40% for these three years which can be better explained as for every dollar the company has earned, after paying the costs it is left with about 0.40 dollar. Figure: 2 (Source: Author’s creation) Return on Equity: The return on equity is a measure of expressing the net income as a percentage of shareholder’s net worth. In other words, it shows how much profit has been generated by the company using the money invested by shareholders. The return on equity of MKC has been stable in 2011 and 2012; however, it has declined by a few percentages in 2013. The possible explanation for this situation can be that the equity of the company is growing faster that the cash inflow. It cannot be called a bad situation, rather can be justified as the inability of the company to fully utilise the shareholders’ fund. It is also possible the company is still considering or evaluating its options to invest the money. Solvency ratio- The solvency ratio determines the ability of the company to stay afloat or protect itself from insolvency. Figure: 3 (Source: Author’s creation) Debt-equity ratio: The debt-equity ratio represents the ratio of debt financing with respect to equity financing. The industry standard for debt equity ratio is 1:1 but the lesser is considered better. MCK’s debt equity ratio was 0.93 or 90% in 2011; it reduced to 0.75 in 2013. Reduction in debt financing shows that the company is has paid off a certain extent of its long term debts and is more dependent on equity financing. Although debt financing is necessary for a firm but excessive dependence on debt implies that the company needs to pay interest for a longer period of time and it can also cause insolvency for a firm (Garrison, Noreen & Brewer, 2003). Performance ratio- The performance of a firm can be exhibited in terms of its price earnings ratio and earnings per share. Both these ratios exhibit the relationship between the prices of the firm’s share with respect to earnings. Figure: 4 (Source: Author’s creation) Price earning ratio: Price earning ratio is a measure of determining the number of times the earnings is equivalent to the market value of the share. The average price earning ratio of an industry is around 20 percent. From the graph it is visible that the P/E ratio of MCK has been increasing continuously. A growing P/E ratio suggests that the investors can expect better earning from the organisation. Moreover, the current ratio of MCK is higher than the industry average, which suggest that the company’s earnings are comparatively good. Earning per share: The earning per share is a measure of company’s profitability. It illustrates the amount of the company’s profit that is allocated to per unit of outstanding common stock of the company. It is the most important factor in determining price earning ratio. The earning per share has been increased substantially over the years which shows that the company has been paying higher return to its shareholders compared to previous years (Garrison, Noreen & Brewer, 2003). Cashflow analysis Table: 2 (Source: McCormick, 2014b) The above table briefly presents the main components of the cash flow statement of McCormick & Company for last three years. Cash flow analysis is mainly undertaken by companies to understand the changes in its working capital and net flow of cash and cash equivalents from operating, investing and financing activities by the company. The cash flow statement is one of the important financial statements generated by a company. At first glance, it may seem similar to the income statement however, unlike income statement it does not consider accrual accounting and only those transactions are considered that are liquid (cash) in nature. The working capital is a measure of short-term liquidity of a company. It is also considered as the ability of the company to cover its short term obligations. It has been observed that the operating working capital of the company has been negative for the past three years, highest being in 2011. It can possibly be explained as the company has invested excessively in its current assets in the year 2011. Post 2011, it has been observed that the working capital has started taking a positive shape. A negative value may explain inefficiency of the organization; however on a positive note, negative working capital is often exhibited by companies when they are in their growth phase. A negative operating working capital shows that the company has extraordinary Free Cash Profile, which means that the company has the ability to generate free cash flow as its revenue grows. Cash flow from operating activities: A positive net operating cash flow is important for an organization. In MKC, the net operating cash flow has increased over the years which show that the company has the ability to generate sufficient cash to maintain its growth and flow of operation. Furthermore, if the cash flow from operating activities is higher than its net income as it is in the case of MKC, then net income or earnings is considered to be of high quality. From stockholders point of view, high operating cash flow is greatly appreciated. Cash flow from investment activities: The investment activities include earning gained or lost in shares and/or bonds as well as purchase and selling of long-term assets by the company. It was observed from the data in table: 2 that the company had heavy outflow of investment in 2011, which declined in 2012 and have again increased in 2013. The company is in its growth phase and continuously expanding its operations in different nation. Expansion of this extent often require heavy investment in plants, machinery and other long-term assets, this justifies the negative cash flow from investment activities. Cash flow from financial activities: financial activities represent the external activities such as raising capital, repaying loans, paying dividend to investors and/or issuing more shares. In MKC, the cash flow from financial activities has shown increasingly negative trend. A positive cash flow shows that money is flowing comparative more in the company, which results in increase in company’s asset. However, negative cash flow from financial activities shows that company is spending more on debt servicing and/or debt retiring. It can also be explained in terms of payment of greater share of dividend to its shareholders (Allayannis & Mozumdar, 2004). Stock price analysis MKC is one of the Fortune 1000 companies that are listed in a number of prestigious stock exchanges including New York Stock Exchange (NYSE) and NASDAQ. According to data obtained from NASDAQ (2014), the company issues common stock of non-voting nature. The current outstanding shares of the company are 118,314,000. The price earnings ratio of the company for 2014 is 22.43, which is higher than the industry standard that is 21.50. In 2014, the annual dividend paid by the company is $ 1.48 while its dividend yield is 2.03%. The company is performing well in the NYSE, where its highest price per share has been $ 73.79 and the lowest value has been $ 62.75. From its stock details for last four years, it was observed that the company’s stock values have always been reasonably high and it has declared dividend from time to time (quarterly) (NASDAQ, 2014). Recommendations Investing in MKC can prove to be a good decision keeping in view the company’s performance and growth. MKC is a fortune 1000 company which has been performing exceptionally well for past few years according to the statistics and analysis done. The company has huge market capitalization compared to its competitors and has a great reputation in the industry. The company is in its growth phase and has been expanding its operations in different countries across the world. The company has so far acquired several brands including a few of its competitors. The company’s scores have been quite good so far. The company’s returns are higher than that of the industry, which is another reason that investors are particularly interested in MKC. The ratio analysis shows that the company’s liquid position is quite stable and its profitability ratios are fairly high. From long term point of view, it was observed that the company’s debt has declined over the years which have also been reflected in the cash flow statement of the company. The company has maintained consistency in paying dividend to its shareholders and the performance ratios are better than just acceptable. The cash flow statement analysis shows that the company has been growing relentlessly and is indulge in heavy investment in long-term assets such as machinery and plants. The net cash flow from the company’s operational activities is positive which further support the previous interference. The financial activities of the company shows that it is indulge in paying off its debts as well as paying dividend to its investors which is positive sign for a company. From all the above discussions, it can be suggested that McCormick & Company is an exceptionally good profile for the purpose of investment (Bodie, Kane & Marcus, 2011). References Allayannis, G. & Mozumdar, A. (2004). The impact of negative cash flow and influential observations on investment–cash flow sensitivity estimates. Journal of Banking & Finance, 28(5), 901-930. Bodie, Z., Kane, A. & Marcus, A. J. (2011). Investments and portfolio management. New York: McGraw-Hill/Irwin. Garrison, R. H., Noreen, E. W. & Brewer, P. C. (2003). Managerial accounting. New York: McGraw-Hill/Irwin. McCormick. (2014a). Corporate profile. Retrieved from http://phx.corporate-ir.net/phoenix.zhtml?c=65454&p=irol-homeprofile. McCormick. (2014b). Fundamentals- Snapshots. Retrieved from http://phx.corporate-ir.net/phoenix.zhtml?c=65454&p=irol-fundsnapshot. NASDAQ. (2014). MKC. Retrieved from: http://www.nasdaq.com/symbol/mkc. The Wall Street Journal. (2014). Company overview. Retrieved from: http://quotes.wsj.com/MKC/company-people. Will, I., Subramanyam, K. R. & Robert, F. H. (2001). Financial statement analysis. New York: McGraw-Hill International. Read More