Investment on the Monsanto Company - Research Paper Example

Financial Research Report Task Introduction The paper will present an analysis of an asset suitable for investment. The asset will be a publicly traded company on the New York Stock Exchange. Monsanto will be the company whose performance will be analyzed to aid an investment decision-making for a client. The paper will contain the investor profile, the rationale for choosing the company, the analysis of Monsanto’s performance using ratios and recommendations. Monsanto Company’s background Monsanto Company is an open market traded American multinational agrochemical and agrarian biotechnology enterprise headquartered in Creve Coeur, Greater St. Louis, Missouri. It is a main maker of hereditarily designed (GE) seed and of the herbicide glyphosate, which it advertises under the Roundup brand. Established in 1901 by John Francis Queeny, Monsanto at first delivered nourishment added substances like saccharin and vanillin, ventured into modern chemicals like sulfuric corrosive and PCBs in the 1920s, and by the 1940s was a noteworthy maker of plastics, including polystyrene and manufactured filaments. Outstanding accomplishments by Monsanto and its researchers as a compound organization included achievement inquire about on reactant awry hydrogenation and being the first organization to produce light transmitting diodes (LEDs) in a large scale. The organization additionally once made dubious items, for example, Agent Orange, PCBs, the bug spray DDT, and recombinant bovine somatotropin (also referred to as bovine development hormone) (Monsanto: form 10-K, 2014). Monsanto Company, alongside its subsidiaries, is one of the principal worldwide suppliers of agricultural products. The company’s seeds, biotechnology attributes, herbicides, and accuracy farming items give agriculturists arrangements that enhance efficiency, decrease the expenses of cultivating, and deliver better nourishments for purchasers and better encourage for creatures. Monsanto’s business operations are divided into two sections: Seeds and Genomics and Agricultural Productivity. The company views its Seeds and Genomics fragment as the driver for its future development. In the Agricultural Productivity section, worldwide glyphosate makers have considerable ability to supply the business sector, and the Company anticipates that this global limit will keep up the weight on edges (Monsanto: form 10-K, 2014). Performance analysis The position of Monsanto in the business can be dictated by a considerable measure of components, for example, market share, market capitalization, and so forth. The examination will determine the organizations position in light of the business’s market capitalization. Monsantos business promotion is $ 54.18 billion, which is higher when contrasted with the business normal business underwriting, $ 3.76 billion. The business sector underwriting of different contenders like Syngenta, which is one of the top performing in the Industry is $ 40.48 billion. Taking into account the short correlation, it can be inferred that Monsanto beats the business execution in view of the business underwriting. Accordingly, the organization is position one in the business (Yahoo Finance, 2015). Ratio analysis (See appendix 1) The ratio analysis will cover the three most recent years (2012, 2013, and 2014). The following ratios will aid the analysis: current ratio, quick ratio, total asset turnover, net profit margin, operating profit margin, earnings per share, price earnings ratio, and debt to equity ratio. Current ratio- the ratio determines how well the company can use the available current assets to service the current obligations arising from the day-to-day operations. A company is in a stable liquidity condition if the current asset to current liability ratio is 2:1 (Tauringana & Clarke, 2000). Concerning Monsanto Company, the current ratio for the year 2012, 2013 and 2014 are 2.288, 2.324, and 1.893 respectively. Based on the result for the financial year 2014, $ 1.893 of current assets were available, in the company, to cover every dollar of the current liabilities. Based on the analysis, there is a decreasing trend between the two periods because the Business’s current obligations increased. During the three periods, the company’s liquidity position was strong and sufficient enough to settle the current obligation as they fall due. Consequently, the liquidity level of the corporation should be maintained (Najjar, 2013). Quick ratio or Acid test – the ratio is concerned with immediate liquidity, therefore, ignores the inventory. It measures the Company’s ability to meet the short-term obligations using highly liquid assets. A highly liquid asset is that which is easily converted into cash. A company is considered well off if this ratio is 1. Concerning Monsanto Company, the quick ratio for the year 2012, 2013 and 2014 are 1.227, 1.241, and 0.857 respectively. The trend shows a decrease in the quick ratio. The decrease is attributed to an increase in the current liabilities. From these ratios, the company’s liquidity is strong since it could meet its short-term obligations using the immediate liquid assets except for the year 2014 (Najjar, 2013). Debt/equity - ratio measures the percentage of borrowings and equity in the company’s capital structure (Hunt & Andrews 1968, pp. 94). Concerning Monsanto Company, debt ratio for the year 2012, 2013 and 2014 are 68%, 62.35%, and 177.7% respectively. Based on the result for the financial year 2014, the debt level in the company’s capital structure was 177.7%. Based on the analysis, there is an increasing trend of leverage level over the periods because the Business sought for more debt. The analysis shows an excessively high level of gearing especially in 2014. Therefore, the Company faces more debt risk (the risk of debt default and solvency) (Mclean, 2003). Net profit margin- this ratio measures the ability of a company to manage its operating expenses such as the administrative costs and the cost of borrowings. A high ratio signifies a lower level of the company’s operating expenses. Concerning Monsanto Company, the net profit margin ratio for the year 2012, 2013 and 2014 are 16.56%, 17.86%, and 18.85% respectively. Based on the result for the financial year 2014, the company’s net profit was 18.85% of the revenues, whereas, the other 81.15% of the revenue were used to settle the operating expenses. Based on the analysis, there is an increasing trend over the periods because the company’s net profit increases. Based on the analysis, the operating expenses of the company are fairly high, which indicates the need for more focus on the company’s cost management methods (Mclean, 2003). Gross profit margin- the ratio shows the level of a company’s profitability after meeting the costs related to sales. It also shows the capability of a company to service the cost of capital and pay taxes. A higher operating profit margin signifies a higher capability to pay interest and taxes. Concerning Monsanto Company, the gross profit margin for the year 2012, 2013 and 2014 are 52.17%, 51.50%, and 54.08% respectively. The interpretation of the 2014 ratio means that 52.17% of the company’s sales were gross profit. Cost of sales consumed the remaining 47.83%. The ratios decreased in 2013 and increased in 2014 due to a similar trend in the cost of sales. Based on the analysis, the company’s cost of sale is fairly low (Khan & Jain, 2007). Earnings per share – the companys basic EPS for the years 2012, 2013 and 2014 has been determined to be $ 3.83/ share, $ 4.65/share, and $ 5.28/share respectively. The ratio shows the amount of earnings to every share held. Therefore, EPS is another criterion for measuring a company’s profitability. The trend for the ratios increases with time, which indicates an increase in the company’s profitability (Tauringana & Clarke, 2000). Total asset turnover- this ratio indicates the efficiency with which the total assets are utilized to generate revenue. Concerning Monsanto Company, the total asset turnover for the year 2012, 2013 and 2014 are 66.77%, 71.92%, and 72.13% respectively. This means in the year 2013, 71.92% of the company’s revenues were generated while utilizing the total assets. The trend shows an increasing ratio over the three-year period. The trend is attributed to a similar trend in the revenues over the three-year period. The company’s utilization rate of the net assets is strong (Tauringana & Clarke, 2000). Interest coverage ratio – this ratio evaluates a company’s ability to meet interest payments. It also indicates a company’s possibility of taking on more debt in the future. In general, the higher the ratio, the greater the company’s ability to pay interest charges. Concerning Monsanto Company, the interest coverage ratio for the year 2012, 2013 and 2014 are 16.45 times, 20.78 times and 16.43 times respectively. The ratio interpretation for the year 2013 means that the company could pay interest 20.78 times using the EBIT. The ratio increased in 2013 but decreased in 2014 (Mclean, 2003). Stock price analysis The stock price analysis will show the changes in the companies share prices and the trend. Movements in share prices can be used to determine the company’s both present and future performance. When the company’s share prices increase, it is an indication of an increasing performance and market value of the company. However, when share prices decline with time, it is an indication of a decreasing performance and market value of the company. Monsanto’s share prices from 2010 to 2014 are as follows: $ 69.64, $ 75.00, $ 96.11, $ 116.55, and $ 119.47 respectively. The graph below vividly shows the movement in share prices. The share prices are increasing between the year 2010 and 2014. As mentioned above, an increase in the share prices shows an increase in both the company’s performance and the market value as determined by market capitalization (MPS*Number of shares) (Yahoo Finance, 2015). Investment risks The investment risk is the probability that the investor will not achieve the investment goals. Such risks are caused by factors that lead to a decline in the company’s share performance, solvency problems, etc. Despite the healthy financial performance of the company, the following are possible sources of risk to the performance: first, the gearing level of the company is high (see debt-to-equity ratio). High leverage level poses debt default risks, which causes solvency risks. Second, Monsanto has created negative public image owing to its success in the manipulation of genes to produce genetically modified organisms (GMO). Consumers are worried about the health risks posed by organisms produced as a result of aggressive genetic alteration activities conducted by Monsanto (Planes, 2013). The negative public image could lead to a decline in share prices, which leads to a reduction in the company’s value. The two sources of risks described above could significantly lower the value of investments in the company. Investor profile The asset described above (Monsanto Company) is suitable for investors aged 50 years and above. Such investors possibly have a well-diversified portfolio and a strong base of investment funds enough to finance a significant investment in the company. The chances of an investor benefiting from investing in large companies such as Monsanto are higher when a significant amount of shares of such companies are purchased. Investment Rationale First, the global population is rising, and so is the demand for food. The demand for food and other agricultural products will be on the rise as long as the human race exists. Therefore, firms operating within the agriculture chemicals industry have lucrative future growth opportunities. Monsanto happens to operate in the industry. Second, Second, Monsanto is a good investment considering factors like increase in the present value as a result of pursuing viable investments. As mentioned above, investors’ goal is to achieve wealth creation. An asset that promises wealth creation in terms of increase in value is a suitable choice. Third, Monsanto’s share prices are increasing year by year. That is, $ 96.11, $ 116.55, and $ 119.47 in 2012, 2013, and 2014 respectively. The trend shows a possible increase in the share prices in the future. An increase in share prices leads to capital gains, which adds value to an investment (Brigham & Houston, 2013). Conclusion Monsantos benefits levels rise by year, showing an expanding development potential. The organization has a better chance of further expanding its value by pursuing ventures with positive money streams. Such tasks will build the organizations worth and ensure the conveyance of shareholder wealth creation. Last, the organizations stock prices are constantly rising, showing a constant flow of capital gains to the shareowners. Hence, the three focuses talked about above are solid proposals that Monsanto is suitable for investment. References Brigham, E. F., & Houston, J. F. (2013). Fundamentals of financial management. Mason, Ohio: South-Western. making, John Wiley, Chichester. Mclean, R. A. (2003). Financial management in health care organizations, Delmar Learning, Clifton Park, NY. Monsanto: form 10-K. (2014). Retrieved from http://www.sec.gov/Archives/edgar/data/1110783/000111078314000215/mon-20140831x10k.htm#s5018DAD9018E5D48BAA578E48932F8CD Najjar, N.J. (2013). Can Financial Ratios Reliably Measure the Performance of Banks in Bahrain?, International Journal of Economics and Finance, vol. 5 (3), 152-163. Tauringana, V. & Clarke, S. (2000). The demand for external auditing: managerial share ownership, size, gearing and liquidity influences, Managerial Auditing Journal, vol. 15(4), 160-168. Yahoo, Finance. (2015). Retrieved from http://finance.yahoo.com/q/co?s=MON+Competitors Planes, A. (2013). Why is Monsanto the most hated Company in the world? Retrieved from http://www.fool.com/investing/general/2013/06/08/why-is-monsanto-the-most-hated-company-in-the-worl.aspx Appendix 1: Ratio calculations Read More