The Comparison of two Companies, Fastenal and Masco, within the Manufacturing Industry - Research Paper Example

Executive Summary This financial analysis compares two companies, Fastenal and Masco, within the manufacturing industry to evaluate their financial health and performance. The main aim of the financial analysis was to achieve a conclusion on which company to recommend for investment. The financial analysis covers the financial statement ratios on liquidity, profitability, and efficiency. It uses their current year financial information in computing the ratios. 1. Valuation Ratios Fastenal Company The stock price of the company is $45, its book value is $6.12, its earnings are $481762115 in the current year, and it has a price to sales ratio of 3.78. The company also has 301101322 shares. According to the company’s annual report, the company has an enterprise value to earnings before interest, tax, depreciation, and amortization of 15.91 and an enterprise value to sales of 3.66 (fastenal .com). Earnings per share: 481762115/ 301101322 =1.6 The earnings per share of 1.6 show the amount of money that each share of the investor has earned. Price/Book value: 45.40/ 6.12 =7.42 Price/Earnings per share: 45.40/ 1.6 = 28.38 If Enterprise value to EBITDA is 15.91 and Enterprise, value to Sales is 3.66 then: Sales/EBITDA: 15.91/ 3.66 = 4.35 If the price to sales ratio is 3.78 and the price is $45.40 then the sales will be $12.01.Since the sales per share is $ 12.01 and the Sales to EBITDA per share ratio is 4.35 therefore the EBITDA per share is 2.76. Price to EBITDA ratio: 45.40/ 2.76 = 16.45 Masco Corporation The Company has a stock price of $25.02, earnings of $802174260.2, 358113509 shares, and a book value of $1.68 per share. It has an enterprise value to EBITDA of 11.86 and an enterprise value to sales ratio of 1.26. Earnings per share: 802M/ 358M = 2.24 Price/earnings per share: 25.02/2.24 = 11.19 Price/ book value: 25.02/ 1.68 = 14.88 Sales/EBITDA: 11.86/ 1.26 = 9.41 From Price to sales ratio of 0.98, the sale per share is 25.02/ 0.98 = 25.53. If sales is 25.53 then EBITDA per share is; 25.53/ 9.41 = 2.71 Price/ EBITDA: 25.02/ 2.71 = 9.23 2. Industry Averages Fastenal Company Industry Statistics Fastenal Company Market capitalization 493B 13.67B Price/ Earnings 28.1 28.38 Price/ Book value 25.4 7.42 Net profit margin 4.2% 13.24% R.O.E 16.4% 26.80 D/ Equity 51.4 49.76 Dividend Yield 1.8% 2.5% Fastenal Company has a relatively small portion of the market in its industry considering the many players in that industry. It has a market capitalization of $13.67B out of the total market capitalization of $435B.Its price to earnings ratio is slightly above the industry average. This is impressive as it indicates that the company is performing fairly good compared with its competitors in the industry. The price to book value of 7.42 is good since it shows that the share value has appreciated though it is lower than the industry average of 25.4.When it comes to performance the company performs extremely well compared to other companies in its industry. Both its net profit margin ratio and return on equity ratio are higher than the industry averages (FAST stock quote). Masco Corporation Industry Statistics Masco Corporation Market Capitalization 7239B $8.96B Price/ Earnings 58.2 11.9 Price/ Book 18.5 14.88 Net Profit Margin 2.3% 3.38% R.O.E 6.3% 64.41% D/ E 60.2 45.8 Dividend Yield 0.9% 1.4% Comparisons of the market capitalization of Masco Corporation and the total size of the market capitalization in its industry reveals that Masco Corporation is in a very competitive market where it does not dominate. Though it has a high market capitalization of $8.96B, many companies flood the industry competing for the same market. Its price/earnings ratio of 11.19 is lower than the industry average of 58.2.The shares of the company is earning more money than that of its competitors in the industry. Its earnings per share of $2.24 further support this. The price/book ratio of the company is also slightly lower than that of its industry average. This indicates that although the share value of the company appreciates, it does not appreciate at the same rate with those of other players in the industry. In terms of profitability, the company is performing considerably well than most of its competitors in the industry. It has a higher net profit margin of 3.38% compared to that of its industry average of 2.3%.This is very impressive compared to the losses that the company had registered in the past periods. This improvement might be because of diversifying its operations. The company’s return on equity of 64.41% is extremely above the industry average of 6.3%. This might seem very impressive but a deep analysis of the company explains why this is the case. The company mainly finances its operations using debt finance while other companies in the industry uses both equity and debt finance (MAS stock quote). 3. Current market value Fastenal Company The enterprise value to sales ratio of this company is 3.66.It has registered sales of $3.7B in its current value. Therefore, its enterprise value is 3.66 * 3.7 = $13.54B. The enterprise value of $13.54B is its current market value. Masco Corporation This company has an enterprise value to sales ratio of 1.26. It has reported sales of 7.11 in its current year. Its enterprise value can be determined by 7.11 * 1.26 = $8.96B. The enterprise value of $8.96B represents the company’s current market value. 4. Promising business Masco Corporation is more promising than Fastenal Company despite it having low profits. Though Fastenal Company has a higher net profit margin than that of Masco Corporation, the latter has greater earnings per share as compared to Fastenal Company. Shareholders are more concerned on their shares earning returns more than registering higher profits and directing them in other activities. Masco Corporation also has a lower price/earnings ratio than Fastenal Company. Masco Corporation has registered high sales in its current year than that of Fastenal Company despite it having a low enterprise value. 5. The better option Fastenal Company has a good history in its performance compared to Masco Corporation that registered some losses in the past. Despite the losses, Masco Corporation performs better than Fastenal in its current period. A risk adverse individual will prefer buying Fastenal Company as the best option since it is not certain that Masco will maintain its current performance. 6. Decision on acquisition It would be wise to choose Masco Corporation over Fastenal Company since it has a lower enterprise value and has a better performance when compared to its competitors in the industry. Masco Company has diversified its operation, it therefor probable that the company will maintain its current performance. It is thus economically viable to acquire Masco Corporation. 7. Value of proposed offer Acquisition of Masco Corporation is more lucrative than that of Fastenal Company and it should be valued at $8.69B since this is its current market value. 8. Financing the offer In financing the offer, the investor has to choose between debt borrowing and equity financing. It would be better to finance through debt since equity finance dilutes the ownership of the company. Debt financing also increases the value of the firm. Works cited "Annual Reports." Fastenal Company -. Web. 29 Jan. 2015. . Top of Form Bottom of Form "Fastenal Co." FAST Stock Quote. Web. 29 Jan. 2015. . Top of Form Bottom of Form "Masco Corp." MAS Stock Quote. Web. 29 Jan. 2015. . Read More