Financial Performance Ratios of Intel Corporation from 2011 to 2013 - Example

Analysis Financial Performance Ratios of Intel Corporation from to of Introduction This paper seeks to analyse the changes of certain financial performance ratios of Intel Corporation (Intel) for the years 2011 to 2013 by examining the concepts under these measures. This will also discuss such performance measures and their usefulness. Other possible performance measurement techniques, within the four perspective of the balanced scorecard would also be considered in helping Intel to enhance its performance measurement activities. 1.2 Brief Company Background Intel Corporation (or “Intel” ) as incorporated in 1968 is into the business of designing and manufacturing and selling integrated digital technology platforms, primarily to original equipment manufacturers (OEM), original design manufacturers (ODM), and industrial and communications equipment manufacturers in the computing and communication industries. The said platforms are used in a range of applications, such as personal, data centres, tables, automated factory systems, smartphones, automobiles and medical devices (Reuters, 2014a). In addition, the company is also into developing and selling software and services primarily focused on security and technology integration. In so doing its business it acquired various companies over the years. In 2013, it acquired ProFUSION-Comercio e Prestacao de Servicos em Tecnologia de Informacao Ltda, Aepona Ltd, Omex Interactive Ltd and Fujitsu Semiconductor Wireless Products, Inc, from Fujitsi Semiconductor Ltd, a wholly owned subsidiary of Fujitsu Ltd. (Reuters, 2014a). 2.1 Identification and calculation of performance indicator ratios for the last three a. Return on Capital Employed ratio (ROCE) – The formula to compute this ratio is to divide net income by difference between difference between total assets and current liabilities b. Residual Income (RI) – The formula to compute this is to deduct equity charge from net income. Equity charge is cost of equity multiplied by total stockholders’ equity (Ross et. Al, 1996; Van Horne, 1992). Cost of equity is computed at 7.5%, as estimated based on the reciprocal of Intel’s price-earnings ratio of 1.33 (Reuters, 2014b). c. Net profit margin – This is computed by dividing net income to the total revenue of the company. d. Inventory days – This is computed by dividing 360 days by the inventory turnover. Inventory turnover first computed by dividing cost of sales with the average inventory for the year (Helfert, 2001). e. Liquidity ratio -- This is computed using the current ratio which is derived by dividing current assets by the current liabilities (Cinnamon and Helweg-Larsen, 2006). A higher liquidity is taken by dividing quick assets by the current liabilities of the company. f. Net assets / turnover ratio--- This is computed by dividing total revenues by the average net assets. Net assets is first computed by deducting total liabilities from total assets. The same is equivalent to total stockholders’ equity (Helfert, 2001). g. Gearing – This is computed by dividing total liabilities to total equity of the company (Helfert, 2001). After extracting the data from the financial statements, the resulting ratios are as shown in table A below. Along with the data is the average of the ratios for the last three years and average ratios from the industry where the company operates. Please refer to Appendices A and B for the Summarized data and formula. Table A – summary of performance measures (Reuters, 2014b, 2014c, 2014d, 2014c) 2.2 Discussion To suggest and comment on the changes in the performance measures of Intel a discussion of the meanings and implication of these performance measures and their usefulness is undertaken. The ratios could actually be categorized or classified into three groups: Profitability and efficiency, liquidity and solvency. ROCE, Net Profit Margin, Inventory days and Net asset turnover could be under profitability and efficiency. Under liquidity are the current ratio and quick ratio. Solvency would pertain to gearing ratio. ROCE ROCE means return on capital employed. The ratio is measure of profitability and efficiency at the same time. Profitability is the capacity to generate profits for the business to justify its business operation. Efficiency on the other hand measures the whether the company utilizes its assets well in producing profits for the business. Intel’s ROCE gradually decreased over the last three years, from 22% to 15% then to 11%. This means that there declining profitability of the company for the last three years. When compared with competitors, its three-year average is superior. For the purpose of this paper the industry average available is on Return on Assets (ROA) which is similarly computed as ROCE, except that in the latter, current liabilities is deducted from the total assets. An average of about 21% return on assets or ROCE will definitely indicates efficiency and at the same time profitability. Such profitability situation attracts investors, as it would mean that for every 100 pounds sterling investment, the investors expect returns of about twenty one pounds sterling. Residual Income RI or residual income measures the remaining profits after deducting the equity charge form net income as stated earlier. The figure is in dollars thus the same should remain positive to indicate that there is advantage in continuing business. Residual income decreased gradually decreased over the last three years. The results of these figures in the case of Intel for the years 2011through 2013 are consistent with the gradually declining return on capital employed as computed earlier. But since the figures are still positive, it could mean that the company is still generating profits, thus, indicating acceptable performance to stakeholders. Net profit Margin . Net profit margin measures how much profit a company generates from its revenues. For every hundred pounds value of goods sold, the company normally has it net profit or margin after deducting expenses and taxes. A reasonable net profit which should be positive should justify continuing the operation of the business. The moment the ratio is below industry averages or standard, the same could be evidence of low margin or profit, which may indicate that the business organization may actually be losing money. Who would want to continue doing business if the effect of every selling transaction is loss of money? Intel’s net profit margin gradually decreased for the years 2011 through 2013, but its three-year average is still better than industry averages. Inventory Days Inventory days measures how many days inventory is normally kept by the company. It measures how efficient is the company in disposing its goods to customers. Closely related with inventory days is the concept of inventory turnover, which measures the number of times inventory is sold or used in one year. Said inventory turnover indicates the inventory quality since if there is low inventory turnover, usually inventory days is long. If normally the industry has to dispose of goods in 150 days and yet a company under evaluation is taking 300 days, then it could be said that there is low inventory turnover which proves that good have become unsalable to obsolete. Such obsolete inventory will eventually become loss if not realizable value could be received above the cost of producing or making the same. Low inventory turnover which has the effect of long inventory days would also indicate inefficient buying or producing activities of the company. Why buy or produce what one cannot sell? It could just be measuring wastage of resources. On the other hand, low number of inventory days corresponds to high inventory turnover since goods are being sold faster than what competitors in the industry do. From 2011 through 2013, Intel’s inventory days fluctuated, but its three-year average is still better than industry. Liquidity Liquidity is the capability to pay a company‘s currently maturing obligations. The same is measured using the current ratio and the quick asset ratio. Computing current ratio uses current assets to be divided to current liabilities while quick assets ratio is almost the same except that the inventory and prepaid expenses are being removed from the current assets to have a new numerator but the denominator is the same. Quick assets therefore normally include cash, marketable securities, and accounts receivable and the use of quick asset ratio is very much relevant for one intending to have higher form of measuring liquidity. In such case, one would prefer quick asset ratio to that of the current ratio. As applied now to Intel, its computed current ratio is 2.32 as against industry average of 3.45. Quick ratio of the company on the other was reflected at a three-year average of 1.97 as against industry average of 2.69. Both ratios of the company are higher 1.0 are considerably acceptable because the company its industry and can easily generate funds. This will be complemented next when the company efficiency in terms of net asset turnover is looked into. See Table A above. In summary, Intel’s liquidity fluctuated but just slightly worse than industry average for the last three years. Net assets / turnover ratio This measure relates revenues to total assets employed in business. The essence of investment is to put them into fixed assets with the expectation that higher revenues will be produced in terms of more products or more services to customers. It is of course assumed that the higher the revenues, the higher profitability are expected. The assets referred to include the machinery, equipment’s, inventories in order to produce sales or revenues (Helfert, 2001). Intel’s net asset turnover gradually decreased for the last three years, but its three-year average is still better than industry, thus, the company is clearly efficient. Gearing Gearing is similar to solvency which connotes long-term capacity of a company to keep up it stability over the long term (Helfert, 2001). Good gearing should comfort investors that the company will not just survive the short term but it must also have a long life to recover long term investments which takes years to produce the needed returns. The average debt to equity ratio of Intel for the last three years is 0.59 against industry average of 0.41. This means that company still better than its competitors. See Table A above. The solvency ratio of the company is about 10% less superior than the industry average, and this means the value the company investments from stockholder is a bit risker as against its competitors, but the same is still at acceptable level. Intel’s gearing or solvency provide evidence of good capital structure which is indicative of it capacity make further expansions in the future although with care in view of its position in relation to competitors . Flexibility to manage its long terms risk given its profitability was enough to provide funds and to pay currently maturing obligations could still be enjoyed by its management. It could still provide dividends to shareholders annually. Relatively high gearing and higher profitability can be deduced that from a financial viewpoint, as proof of maximizing wealth (Brigham and Houston, 2002). 3. Conclusion and Recommendation This has also discussed the above performance measures and their usefulness. This paper found that although the company has generally declining profitability, it is still more profitable than its competitors. As to liquidity, although fluctuating, it is still almost as good as competitors. As to solvency, the company is just 10% less superior to competitors although fluctuation was also observed for the last three years. From the financial perspective within the four perspectives of the balanced scorecard Intel could utilise the same to enhance its performance measurement activities. Also, from the internal perspective as efficiency and profitability is evident, the company can be said to be doing well in managing its operations. From the point of view of both investors and creditors, Intel Corporation is still a good company to invest. The need to measure performance is important for Intel Corp as the different stakeholders are bound to lose if the company will not deliver what it supposed to generate -- wealth for stockholders, continuous and sustained payment of obligations of creditors, satisfied managers and employers who continue running the company as it attains it mission and vision. The key performance indicators considered, which include ROCE, RI, net profit margin, inventory days, net asset turnover, liquidity, and gearing ratio are good enough to show the company’s capability to assure its stakeholders from a financial perspective. Balancing profitability, liquidity and solvency is essential for purposes of maximizing wealth for any company and so far, Intel is into it. Appendices References Brigham, E. and Houston, J. (2002) Fundamentals of Financial Management, London: Thomson South-Western Cinnamon and Helweg-Larsen (2006). How to understand business finance creating success. Kogan Page Publishers. Helfert, E. (2001). Financial Analysis: Tools and techniques: a guide for managers. Reuters (2014a). Company Overview. Retrieved 30 January 2014 from < http://www.reuters.com/finance/stocks/companyProfile?symbol=INTC.O>. Reuters (2014b). Industry Ratios. Retrieved 29 January 2014 from < http://www.reuters.com/finance/stocks/financialHighlights?symbol=INTC.O> Reuters (2014c.). Income Statement 2011to 2013, Retrieved 30 January 2014: < http://www.reuters.com/finance/stocks/incomeStatement/detail?stmtType=INC&perType=ANN&symbol=INTC.O > Reuters (2014d). Balance Sheet 2011to 2013, Retrieved 30 January 2014: < http://www.reuters.com/finance/stocks/incomeStatement/detail?stmtType=BAL&perType=ANN&symbol=INTC.O > Ross et. Al (1996). Essentials of Corporate Finance. London: IRWIN Van Horne, J. (1992). 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