Evaluation of Fastenal Company Performance - Assignment Example

Evaluation of Fastenal Company performance al Affiliation) Background Information of Fastenal Company Fastenal is a manufacturer and distributor of construction and building supplies. The North American based firm operates through a well-coordinated network of many stores that they possess in the region. They distribute their products both locally and internationally. Fastenal Company operates in five distinct segments. These parts include decoration products, cabinet products, plumbing products, installing products and several special products segment. The plumbing products segment is concerned with the production of tab and shower systems, handheld showers, showerheads, toilets, faucets, enclosure units, valves, shower trays, laundry tubs, and copper plumbing components. The decorative product segments manufacture various architectural products such as door window, primers, waterproof products, specialty paint products and other hardware products. The cabinets and related products are concerned with easy to assemble kitchen appliances, kitchen countertops and home entertainment appliances. Lastly, the installation and other services segment deals with the installation of building products such as gutters, roofing products, after paint products and fire and insulation accessories. Fastenal Company has a rich history in financial performance in the manufacturing sector. Over the past three decades, the company has had a growth in their economic performance as well as their market share in the region. Its performance has been mostly above industrial average implying the company has had an upper hand over its competitors. The company has penetrated through new markets internationally such as Brazil, China and most countries in Africa. This has seen the company increase its revenue over the years leading to sustained growth of the company (www.fastenal.com). Financial Statement Review In a bid to evaluate Fastenal Company’s performance, it is essential to review its financial statements and make comparison with the ones it had in previous financial periods. This review of financial statement will entail the evaluation of the previous period balance sheet and income statement, and its comparison of those of 2013 and 2012. The pro forma balance sheet and income statements only consist of the vital items that are necessary for the evaluation of Fastenal Company performance. All values in USD: Balance Sheet Items 2014 2013 2012 Current Assets 1.41 B 1.29 B 1.24 B Non- Current Assets 670 M 530 M 440 M Inventory 765 M 792 M 769 M Total Assets 2.08 B 1.82 B 1.68 B Current Liabilities 239.83 M 204.17 M 187.82 M Non-Current Liabilities 63.26 M 51.3 M 38.15 M Total Liabilities 303.09 M 255.47 M 225.97 M Equity 1.77 B 1.56 B 1.46 B Liabilities and Equity 2.08B 1.82 B 1.68 B Income Statement Items 2014 2013 2012 Sales 3.33 B 3.13 B 2.77 B Cost of Goods 1.61 B 1.52 B 1.34 B Gross Income 1.72 B 1.61 B 1.43 B Operating Expenses 1.01 B 941.24 M 859.37 M EBIT 710 M 668.76 M 570.63 M Other Expenses 261.36 M 248 .22 M 212.7 M Net Income 448.64 M 420.54 M 357.93 M The total assets of the company in the financial period 2014 are higher that of periods ending 2013 and 2012. This shows that the capital base of the company has increased in comparison with some of the previous periods. The capital base might have increased due to the acquisition of the company’s equipment or the setup of a new plant. The total liabilities have also increased in the previous financial period. This implies that the firm is more indebted and it is an indicator that the company is more geared. The company’s equity has increased in the previous period as compared with earlier financial periods. The increase in equity with little increase of non-current liabilities in the same period implies that the company is substituting debt finance to equity finance (Rodgers, 2008). The revenue of the company in the previous financial period is higher than the earlier two periods implying that the firm’s market share has increased over the years, which are a positive sign of financial prowess. The cost of goods has also increased in the previous period. This increase is acceptable considering the fact that its increase is smaller than that of sales resulting to an increase in gross profit. All the expenses also increased slightly over the years giving room for the net profit to increase. The increase in net profit in the previous period’s shows the company is performing incredibly well since it generates more returns to its owners (www.yahoo.com). Assumption of a ten percent growth in the financial statements The company has projected a ten percent growth in sales and cost of goods. It is highly essential that we compute the projected financial statements and include it in the evaluation. This will give a potential investor a clear picture of the future expectations of the entity. The projected financial statements for the next financial period will be compared with the previous period financial statements. Income Statement Items 2015 2014 Sales 3.63B 3.33 B Cost of Goods 1.771B 1.61 B Gross Income 1.859B 1.72 B Operating Expenses 1.01B 1.01 B EBIT 849M 710 M Other Expenses 261.36M 261.36 M Net Income 587.64M 448.64 M Given a ten percent growth in sales and cost of goods in the next financial period, the gross income will also increase. Since the operating expenses and other expenses are constant in the two financial periods, the net income of the company will increase. The projection of the increase in net income of the company in the next financial year is a financial performance indication that will work positively to attract potential investors to buy stocks of the company. Ratio Analysis of the Fastenal Company In a bid to determine the financial strengths and weaknesses of Fastenal Company, this evaluation includes ratio analyses. Ratio analysis compares different items in the financial statements to determine the financial strengths and weaknesses of the company. This report includes the ratio analysis of the previous period financial statements. Financial Ratios 2014 EPS (Basic) 1.51 Current Ratio 5.879 Quick Ratio 2.61 Working Capital 1.1702 B Gross Margin 0.517 Net Profit Margin 0.315 R.O.A 0.216 D/E Ratio 0.171 R.O.E 0.253 Inventory Turnover Ratio 4.247 Debt Asset Ratio 0.416 Price Earnings 22.517 Working: Current Ratio = Current Assets / Current Liabilities 2014: 1.41 / 0.23983 = 5.879 Quick Ratio = Current Assets – Inventory / Current Liabilities 2014: 1.41 – 0.784 / 0.23983 = 2.61 Working capital =Current Assets – Current Liabilities 2014: 1.41- 0.2398 = 1.1702B Gross Profit Margin = Gross Profit / Sales 2014: 1.72 B / 3.33 B = 0.517 Net Profit Margin = Net Profit / Sales 2014: 448.64 / 3330 = 0.135 R.O.A = Net Income / Total Assets 2014: 448.64 /2080 = 0.216 Debt /Equity Ratio = Total Liabilities/ Equity 2014: 303.09 / 1770 = 0.171 R.O.E = Net Income / Equity 2014: 448.64 / 1770 = 0.253 Inventory Turnover = Sales / inventory 2014: 3330 / 784 = 4.247 Debt asset ratio = Debt / Total assets 2014: 303.09 / 2080 = 0.416 Price earnings ratio = Price / earnings per share 2014: 34 / 1.51 = 22.517 The liquidity ratios analyzed in this report are the current ratio, quick ratio and the working capital. The company had a current ratio of 5.879 in the previous financial period. This is ratio is desirable as it is extremely higher than one. It implies that the company can easily offset its current debts with its current assets. The company’s quick ratio is 2.61. This ratio is still good since it is higher than one. This ratio implies that the company can offset its current obligations with its current assets excluding the inventories, which are not liquid. The company’s working capital is 1.1702 billion. This ratio shows the extent in which the firm’s current assets are higher than its current liabilities. The ratio is desirable since it is reasonably higher than one (Fridson & Alvarez, 2002). This report analyzes financial leverage ratios such as the debt to equity ratio and the debt to assets ratio. The debt to equity ratio of the company is 0.171. This implies that the company is relying on equity finance to its operations than debt finance. This is desirable since a higher ratio that shows excess reliance in debt than equity will scare away potential investors from investing in the firm. The little investors that would be willing to invest in such a firm would demand high returns to cater for the high level of risk on their investments. The debt to assets ratio of the company is 0.416. This implies that the total assets of the company comfortably cover the debts of the firm. This implies that the firm’s leverage is at a good place since it can be able to offset its debts in the event of bankruptcy. The asset management analyzed in this report of Fastenal Company is inventory turnover and return on assets. The company had an inventory turnover of 4.247. The inventory turnover measures the management’s efficiency in converting the company’s inventory into sales. The ratio that the company got was favorable since it was reasonably greater than one though it would be more appropriate if the ratio during this period had been compared with previous period ratios or the industry average. This would put an investor at a suitable position in making the comparison of the company efficiency. The company’s return on assets was 0.216. This ratio shows the management’s efficiency in generating profits from the company’s assets. Similarly, it would also be advisable to do comparisons of this period’s ratio with previous periods’ ratios or the industry average ratio. The profitability ratios under evaluation are the gross profit margin, the net profit margin, and the return on equity. The company had a gross profit margin of 0.517. This margin is quite desirable as it shows that the company’s performance in terms of profitability is good. The net profit margin is 0.315. This margin is similar to the previous one but more detailed since it shows that the company’s performance in terms of generating profits from its sales is good. The company’s return on equity is 0.253.This ratio is desirable as it shows the company’s ability in generating sufficient profits for its shareholders (Bull, 2008). Du Pont analysis of the company’s Return on Equity The Du Pont analysis bases its computation of the return on equity on three performance measures. According to this analysis, company can either increase its return on equity through the maintenance of a high profit margin, the increase of its turnover or effective leveraging of the company’s assets (Robinson, 2009). All this measures are included in the computation of the return on equity. Therefore; Return on equity = Profit margin * Total assets turnover * Financial leverage Profit margin = Net income/ Sales = 0.315 Total assets turnover = Sales/ Total assets = 3330/ 2080 = 1.601 Financial leverage = Total assets/ Total equity = 3330/ 1770 = 1.881 Return on Equity = 0.315 * 1.601 * 1.881 = 0.407 The Du Pont analysis is a good model in computing the return on equity. The increase of this number is not very essential in this method. The benefit of this method is that it gives investors the ability to pin point the area that needs improvement to increase the return on equity. Economic Value added of Fastenal Company This method is used to evaluate if a company added any economic value during a given financial period (Berman, Knight, & Case, 2013). Fastenal Company uses a cost of capital of 15% in all the projects it undertakes. Therefore; Economic Value Added = (Net operating profit + taxes) – (Capital * Cost of capital) = 448.64 – (670 * 15%) =348.14M Fastenal Company had an economic value addition of 348.14 million during the last financial period. This indicates that the management’s performance has been good during the previous year. Recommendations Fastenal Company has had a good performance in the last financial period. The evaluation carried out reveals that the company’s strengths in its performance out do its weaknesses. Its financial statements and financial ratios all indicated that the company’s management has had an excellent performance and they should maintain this trend. It is highly advisable that a potential investor should purchase the stock of this company. This investment is lucrative since according to the trend of the company’s performance the stock prices will definitely appreciate. References Berman, K., Knight, J., & Case, J. (2013). Financial intelligence. Boston, Mass.: Harvard Business Review Press. Bull, R. (2008). Financial ratios. Oxford: CIMA. Fastenal.com,. (2015). Services | Fastenal. Retrieved 24 June 2015, from https://www.fastenal.com/en/1/services Finance.yahoo.com,. (2015). FAST Income Statement | Fastenal Company Stock - Yahoo! Finance. Retrieved 24 June 2015, from http://finance.yahoo.com/q/is?s=FAST+Income+Statement&annual Fridson, M., & Alvarez, F. (2002). Financial statement analysis. New York: John Wiley & Sons. Robinson, T. (2009). International financial statement analysis. Hoboken, N.J.: John Wiley & Sons. Rodgers, P. (2008). Financial analysis. Oxford: CIMA. Read More