Comparative Analysis of Financial Statements Between Two Companies

Published: 2021-09-10 05:50:08
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With the objective to understand the business performance of the two entities, we reviewed the 2007 financial statements of both company and tried to obtain some insight on the profitability and solvency of each entity. The two companies we study are: Reed Elsevier and Thomson, in the filed of information and publishing. Reed Elsevier is listed in below stock exchanges: REN (Euronext Amsterdam), REL (London), RUK and ENL (NYSE). Thomson was shown (before acquiring Reuters) as TOC (NYSE) and TOC (TSX).

After all of the expenses are deducted, the company is left with a figure called net income from continuing operations. This is a calculation of the profit from its continuing operations generated during the period. If we look at net income from continuing operations of Reed Elsevier, we can see increase by 302m due to increase in finance income, and disposal and other non-operating items. Net income from continuing operating of Thompson Corporation has also increased by 184m due to considerable decrease in net interest expense and other financing costs.
Net Income from Discontinued Operations? The amount shown on the income statement under discontinued operations is the profit made during the period from the businesses that will not be a part of the company in the future. The net profit for the year of Reed Elsevier is higher almost by 50% due to the profit made from discontinued operations. The net profit of the Thompson Corporation has also grown by almost 4 times, which is also due mostly to the earnings from discontinued operations. Net Profit Margin Now let’s see how much profit a company makes for every $ 1 it generates in revenue.

On Reed Elsevier, the cash flow is shown as below, which indicates the cash sources and uses from operating activities, investing activities, and financing activities. Cash Flow Statement – Reed Elsevier (Euro) By 31 December 2007, total net cash generated from operating activities amounted to 1,213m, after deducting tax and interest payments. However, the net cash from operating activities dropped by 93m against fiscal year 2006. We also see a positive status of cash flow as there was huge cash inflows of 2,674m from discontinued operations, resulting from selling off a major business segment of higher education (Harcourt Education).
This facilitates the company’s focus on professional research field and also supports the company for further acquisition and development. With this additional source of cash, we have seen tremendous growth in the increase of cash and cash equivalents to 3,355m at the end of 2007. ### On Thomson Corporation: In the same Accounting period, total cash generated from operating activities in 2007 decreased by 309m, while at the same time, Thomson also made decisions on disposal of specific business units (law), thus generated huge amount of cash flows by 7,151m.
In a similar scenario like Reed Elsevier, Thomson obtained tremendous amount of cash flow from disposal of business units, and we have good reasons to speculate the company will have big moves on acquisition or on investing. (Actual result: in 2008, Thomson acquired Reuters and strengthened its position in information industry. ) Cash Flow Statement – Thomson (US Dollars) Cash flow is a crucial financial indicator to show a company’s profitability and solvency. Lack of cash can be a big obstacle for the growth, but oversized cash flow can also be a burden if the company does not use it properly. *** Balance sheet
Balance Sheet – Reed Elsevier (Euro) Balance Sheet – Thomson (U. S dollars) The main purpose of balance sheet is to determine if a company is financially strong and economically efficient. Balance sheet tells us how much money the company has, how much it owes, and what is left for the stockholders. When looking at a company’s current assets, we need to pay special attention to the inventory. Inventory consists of merchandise that a company owns but has not sold. However, it can be sold in the near future, and can be turned into cash. But we also know that when inventory piles up, it faces two major risks.
The first is the risks of obsolesce and another one is the risk of spoilage. Spoilage occurs when a product goes bad, this is a serious concern for companies that make or sell perishable goods. Since the companies in questions are providers of scientific, technical and medical information and solutions, it can not face the risk of spoilage however can be subjected to obsolesce, it actually loses value as time passes. Information provided by these companies needs to be constantly updated to keep up with technological advances. Thus, the faster a company sells its inventory, the smaller the risk of value loss.
When we look at company’s balance sheet and make an informed decision about how much the inventory worth, we should base this decision on how fast the inventory is turned. We should divide current years cost of goods sold by average inventory for the period. Read Elsevier: 2371: ((368+943)/2) = 3. 6 It means Read Elsevier sells its entire inventory 3. 6 times a year. We do not know if it is a good indicator unless we compare it with the result for company’s competitor. Thompson Corporation has not inventory declared on its balance sheet. Reeds Elsevier clears its inventory 6. 3 times per year 365:6. = 101 days Working Capital Why do we need to know about working capital of a company? Because it reveals more about the financial condition of a business than almost any other calculation do. It tells us what would be left if a company raised all of its short-term resources, and used them to pay off its short term liabilities. The more working capital, the less financial strain a company experiences. If company has enough working capital, we can clearly see if it has resources necessary to expand internally, or it has to turn to a bank for loan. Current assets – current liabilities= working capital
Reed Elsevier: 5,570-5,260=310 Thomson: 9,678-3,239 = 6,439 Thomson’s working capital is much higher than the one of Reed Elsevier’s. Poor capital leads to financial pressure on a company borrowing and late payments to creditor. Current ratio Current ratio is another indicator of a company’s financial strength. It calculates how many dollars in assets are likely to be converted to cash within one year in order to pay debts that come due during the same year. Total current assets / total current liabilities = current ratio Reed Elsevier: 5,570 / 5,260 =1. 06 Thomson: 9,678 / 3,239 =2. 9 For most companies, 1. 5 is an acceptable current ratio. As the number approaches or falls below 1 (which means the company has a negative working capital), you will need to take a close look at the business and make sure there are no liquidity issues. Thomson has higher current ratio which reiterates its financial strength. *** Final thought All our calculations and observations indicate that both companies have no risk of bankruptcy. Reed Elsevier has acceptable current ratio, and Thomson’s current ratio is quite strong. Both companies have enough working capital.
Even though both companies do not have financial issues, Thompson’s financial position appears to be stronger based on calculated ratios. Another interest trend we spotted is that both companies are working to repositioning, by disposing less profitable or strategically poor performing business units. With huge amount of cash at hand, both companies are looking for acquisitions to strengthen their competitiveness in respective fields. We should have enough reason to see future acquisitions or restructuring happening at the companies. Appendix Major Financial ratios
Note: Due to the unavailability of some necessary data like share price at certain time, number of common shares at certain time, and tax rate, etc. , the ratios of P/E ratio, ROA are not available. ) 4Net income1713. 00 ROE (Return on shareholders’ euqity)0. 42 Net income4004. 00ROE (Return on shareholders’ euqity)0. 29 Shareholder’s equity4032. 00 Shareholder’s equity13571. 00 The shareholder’s equity in Reed is 4032 pound and the shareholder’s equity of Thomson is 13571 USD. If only compare these two numvers, it is obvious that Thomson shareholder’s investment is higher than Reed’s.
However the ratio of ROE with 42% in Reed have overwhelming trend over than the ratio of ROE with 8% value in Thomson. This result probably caused by higher sale cost and expense and lower revenue in Thomson. Test of investment utilization in Reed Elsevier Test of investment utilization in Thomson 5Gross margin4322. 00 Gross margin percentage0. 65 Gross margin2021. 00 Gross margin percentage0. 28 Net sales revenues6693. 00 Net sales revenues7296. 00 Analysis: The gross margin percentage of Reed is higher than Thomson’s 37 % (0. 65-0. 8) that means Reed’s product of sale has higher space for return earning. 6Net income 1713. 00 Profit margin0. 26 Net income 1096. 00 ROA (Return on assets)0. 15 Net sales revenues6693. 00 Net sales revenues7296. 00 Analysis: The profit margin of Reed is higher than Thomson’s 11 % (0. 26-0,15). This result show that Reed Elsevier has more effective expenditure control systerm than Thomson. 7Net income 1713. 00 EPS ( earning per share)1. 36 Net income 1096. 00 EPS ( earning per share)1. 70 No. shares outstanding (pcs)1256. 50 No. shares outstanding (pcs)644. 1 Analysis: Basic earnings per share is a measurement of the corporation’s per share performance over a period of time. It is computed by dividing net income applicable to the common stock by the number of shares of common stock outstanding. Per above calculation, the Reed’s per share performance is good than Thomson a little bit. 8Cash generated by operations1778. 00 Cash Realization0. 44 Cash generated by operations1816. 00 Cash Realization1. 66 Net income4032. 00 Net income1096. 00 Analysis: This ratio indicates how close net income is to being realized in cash.
Thomson cash realization ratio higher than Reed is considered to signal high-quality earnings. This ratio should be used with caution since cash management tactices, such as a slowdown in paying accounts payable, can increase the numerator and the ratio. Test of investment utilization in Reed Elsevier Test of investment utilization in Thomson 9Sales revenues6693. 00 Asset turnover0. 50 Sales revenues7296. 00 Asset turnover0. 32 Total assets13298. 00 Total assets22831. 00 10Sales revenues6693. 00 Invested captital turnover0. 85 Sales revenues7296. 00 Invested captital turnover0. 37
Long term liabilities3877. 00 Long term liabilities6021. 00 Shareholders’ equity4032. 00 Shareholders’ equity13571. 00 11Sales revenues6693. 00 Euqity turnover1. 66 Sales revenues7296. 00 Euqity turnover0. 54 Shareholders’ equity4032. 00 Shareholders’ equity13571. 00 12Sales revenues6693. 00 Capital intensity20. 59 Sales revenues7296. 00 Capital intensity9. 98 Property, plant, and equipment325. 00 Property, plant, and equipment731. 00 Analysis: The capital asset intensity ratio (sometimes called fixed asset turnover) focuses only on the property, plant, and equipment items.
Reed has high ratio of plant to sales revenue that means Reed is particularly vulnerable to cyclical fluctuations in business activity. 13Cash3355. 00 Days’ cash729 Cash7497. 00 Days’ cash601 Cash expenses/3654. 60 Cash expenses/36512. 47 Analysis: One way to judge how well the company is managing its cash is to calculate roughly how many days’ bills the cash on hand would pay. The first step is to use the income statement to estimate cash expenses. A rough approximation would be to take total expenses and subtract noncash expenses such as depreciation.
This total is then divided by 365 to arrive at daily cash needs. Finally, the amount can be divided into the cash balance to determine approximately the days’cash on hand. 14Account receivable1561. 00 Day’s receivables (or collection period)85 Account receivable1565. 00 Day’s receivables (or collection period)78 Sale/36518. 34 Sale/36519. 99 Analysis: The day’s receivables calculation similar to that used in days’ cash can be used to see how many days’ worth of sales are represented in acounts receivale. 15Inventory368. 00 Day’s inventory57 Inventory721. 0 Day’s inventory50 Cost of sale/3656. 50 Cost of sale/36514. 45 16Cost of sale2371. 00 Inventory turnover6. 44 Cost of sale5275. 00 Inventory turnover7. 32 Inventory368. 00 Inventory721. 00 Analysis: In Reed, the cost of sale is 2371 and inventory is 368, then the inventory turnover is 6. 44 times. This is equivalent to sayting that the inventory turns over once every half year around. Same logical, in Thomson, the inventory turns over once every 7 months around. 17Sale revenues6693. 00 Working capital turnover21. 59 sale revenues7296. 00 Working capital turnover1. 13
Working capital310. 00 Working capital6439. 00 Analysis: Working capital=current assets-current liabilities. 18Current assets5570. 00 Current ratio1. 06 Current assets9678. 00 Current ratio2. 99 Current liabilities5260. 00 Current liabilities3239. 00 Analysis: The current ratio is the most commonly used of all balance sheet ratios. It is a measure not only of the company’s liquidity but also of the margin of safety that management maintatin s in order to allow for the inevitable unevenness in the flow of funds through the current asset and current liability accounts.

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