Evaluation of Corporate Performance
July 28, 2014
Evaluation of Corporate Performance
People buy stock, lenders provide funds, and companies spend large sums of money on new equipment or projects on a daily basis. How do they determine if these investments will yield a desirable return? One way is through financial analysis. Conducting a comprehensive financial analysis is a crucial step for anyone seriouslycontemplating investing in any business, large or small. The risk attached to investments is much greater without the proper analysis because it is like shooting at a target blindfolded.
Financial analysis is the process used by accountants, financial managers,business owners, lenders, and investors to determine a company’s financial situation. It is required that firms prepare financial documents on a regular basis. Financial experts say, “Financial reporting presents the final step in the accounting information system with the goal to provide information to all interested users regarding the financial condition, business performance and cash flows” (Zager, Sacer, & Decman, 2012, P. 374). The financial documents a firm creates are a source of information and communication to all of their stakeholders, from upper management to individual customers.
Geeknet Inc. was founded by Larry Augustine and James Verain 1993 asa company called SourceForge Inc. The company was first incorporated in Mountain View Californiain 1995, but they did not officially launch their first web site until Friday the 13th, 1999. The company continued to grow and make adjustments, and, by November of 2009, they became known as Geeknet Inc. Today, they are publically traded under the symbol GKNT. Their headquarters is in Fairfax Virginia.
They operate in two main areas, media and e-commerce. Their ThinkGeek website proclaims, “ThinkGeek started as an idea. A simple idea to create and sell stuff that would appeal to the thousands of people out there who were on the front line and in the trenches as the Internet was forged. ThinkGeek started as a way to serve a market that was passionate about technology, from programmers, engineers, students, lovers of open source, to the masses that helped create the behind-the-scenes Internet culture” (2014).
They remain a relatively small company. Kathy K. McCarthy serves in several roles as, Chairman of the Board of Directors, President, and Chief executive Officer. Other key members are, Julie A. Pangelinan their Chief Financial Officer, Kirk L. Sommers, their Executive VP/CAO/Secy/Gen Cnsl, Derrick V. Smith, their Lead Independent Director, and Steve Zimmermann, their Senior PR Manager. Since their beginning, they have had steady growth overall. The following graph depicts an investment performance of one hundred dollars over a sixty-five month period. It compares Geeknet Inc., with the S&P 600 SmallCap internet retail, and the NASDAQ composite.
Geeknet Inc. reports their finances on a quarterly and annual basis. The most recent documents available are from March 31rst of 2014. According to their statement released on May 8, 2014, their first-quarter results showed in increase in revenue of 16%. Wholesale increased to 4.8 MM, a 200% growth from a year ago. They have also added four hundred new products to their line, and their average order has risen by three dollars respectively. Their income statement shows net revenues rose from $19,557 during the first quarter in 2013 to $22,691 in 2014. Their operating expenses increased slightly from $5,911 to $6,193. Their balance sheet shows that cash and cash equivalents decreased from $53,084 to $44,276, and their total assets fell from $89,706 to $75,511. At the same time, their net inventory rose slightly from $20,186 to $21,880, their current liabilities decreased from $19,739 to $7,790, their accounts receivabledecreased from $9,719 to $4,676, and their accounts payable decreased from $10,250 to $2,771.
Financial statement analysis is the first step to conducting a comprehensive financial analysis because it allows the analyst to spot trends and commonalities. In reviewing Geeknet Inc.’s financial statements, there were several areas of interest. Their revenue increased by $3,134 for the quarter, while operating expenses decreased by $282. Their cash and cash equivalents decreased by $8,808, their inventory increased by $1,694, also, their total assets decreased by $14,195, and their liabilities decreased by $11,949. Since they have recently added new products, the fact their revenue increased slightly is probably tied to the increase in inventory and sales of new items. Their total assets and total liabilities decreased, which when considered with the decrease of $5,043 in accounts receivable, and a decrease of $7,479 in accounts payable, itis likely due to the paying down of long term and short term debts, and accounts payable.
Pro forma financial statements are an important step for financial analysis. According to financial experts Hickman, Byrd, and McPherson, “Pro financial statements (or projected finance statements) are powerful tools for financial managers or analysts” (2013, P. 45). Two of the most useful documents for this purpose are income statements and the balance sheets. Pro forma financial statements are produced by using historical data from prior and current statement and making projections based on that data. The income statement must be completed first so that data can be moved from it to the balance sheet.
Pro-Forma Income Statement for Geeknet Inc.
|December 31, 2012||December 31, 2013||December 31, 2014|
|Cost of goods sold||97,848||111,145||122,260|
|Gain on sale||4,021||0||0|
|Income tax provision||6||___||___|
|Income from discontinued operations||12,102||(67)||___|
An estimate of 10% for 2014 in sales and cost of goods sold is calculated.
2014 revenues 1.10 X 138262 = 152,088 2014 cost of goods sold 1.10 X 111145 = 122,260
Note: Geeknet Inc. uses a quarterly and annual reporting system. The figures used for these pro forma financial documents are annual, but produced at the end of the first quarter. It is for this reason some items, such as taxes and interest may not reflect payments that occurred in earlier quarterly periods.
Pro-Forma Balance Sheet for Geeknet Inc.
|December 31, 2013||December 31, 2014|
|Cash and cash equivalents||53,084||60,822|
|Total current assets||87,191||97,084|
|Total Current liabilities||13,078||22,401|
|Total liabilities and Equity||89,706||101,099|
Ratio analysis is accomplished by taking data from the company’s financial documents and plugging it into a mathematical formula. Ratio analysis is concerned with five specific areas of a company’s finances, liquidity, profitability, financial leverage, asset management, and market value. These are areas that financial analysts are concerned about because,“Liquidity and cash flow ratios are often key indicators of a firm’s ability to survive. Profitability might even be regarded as a second requirement after survival is assured. Net income to sales and net income to total assets or to owners’ investments are useful ratios for this purpose” (Patrone & duBoise, 1981, P.35). There are several forms of liquidity ratios, quick ratio, also termed as an acid test, and current ratios are two that are often used by analysts. They are calculated using the following formulas.
Quick ratio = current assets – inventory/current liabilities 67,006/13,078 = 5.12
Current ratio = current assets/current liabilities 87,191/13,078 = 6.67
Liquidity is of particular concern for investors because liquidity directly relates to a firm’s ability to survive. According to some accounting experts, “A good assessment of a company’s liquidity is important because a decline in liquidity leads to a greater risk of bankruptcy. FASB describes liquidity as reflecting “an assets or liabilities nearness to cash” (Cagle, Campbell, & Jones, 2013, P. 44).
The next type ratio that should be conducted is profitability ratios. There are several types of profitability ratio, but two that are more commonly used are gross profit margin and return on assets. They can be calculated using the following formulas.
Gross profit margin = gross profit/sales 27117/138262 = 0.196
Return on assets = net income/total assets (234)/101099 =0.0023
Profitability ratios are used to helps to ascertain a firms strengths. Financial analysts often state,“One important measure of operational success or failure is the accounting profit as a percent of sales. This is one important measure of a firm’s ability to buy and sell or produce and sell goods or services at a profit” (Management decisions, 1993, P. 92). Determining if a company will likely remain profitable over the long run is one key aspect in the investment decision making process.
Leverage ratios, also known as debt ratios, are used to determine a firm ability to handle their debt. If a firm is over leveraged they may have fewer funds available for research and development, marketing, or operational improvements. Over leveraged firms are often in a more vulnerable position during economic stresses. Two forms of leverage ratios are debt ratio and leverage ratios. They can be calculated using the following formulas.
Debt ratio = total liabilities/total assets 13,078/89,706 = 0.15
Leverage ratio= total assets/total equity89,706/69967 = 1.28
Asset management ratios are also termed efficiency ratios. They are used to determine whether a firm is using its resources effectively. Two common forms of asset management ratios are inventory turnover ratio and asset turnover ratios. They can be calculated using the following formulas.
Inventory turnover ratio = cost of goods sold/inventory 111145/20185 = 5.51
Asset turnover ratio = revenues/total assets 138262/89706 = 1.54
The final ratio analysis is concerned with the company’s market value. Market value ratios are also called price per share ratios or measure of relative value ratios. Tow commonly used ratios to determine market value are earnings per share ratio and price to book ratios. They can be calculated using the following formulas.
Earnings per share ratio = net income/no. of shares (234) /13139 =0.018
Price to book ratio = price per share/book value share 12.34/10.16 = 1.22
There are additionalratios that should be conducted to enhance the analysis of a company’s performance in other areas that can directly or indirectly impact their financial position. The return on equity, or ROE is a beneficial for revealing a firms’ capacity for growth and profitability. ROE is most effective when performed using the DuPont system. The following is a diagram depicting the rationality of the DuPont system.
Net profit margin = net income/revenue (234)/138262 = 0.0017
Asset turnover = revenue/assets 138262/89706 = 1.54
Leverage ratio = assets/shareholders’ equity 89760/69967 = 1.28
Return on Equity = 0.0017 X 1.54 X 1.28 = 0.0034 or .34
It is also prudent to assess a company’s management performance, which can be achieved by calculating economic value added, (EVA). Economic value added is computed by using the following formula.
EVA = net operating profit – (capital invested X WACC)
NOP = (234) Capital investment = 68,000 WACC = 15.52
Value = 68+ 7 = 75 Wd = 0.15 Rd = 10 T = 0.2We = 0.91 Re = 0.09
7/75 = 0.09 Wd x Rd(1 – t) + We x Re
68/75 =0.91 0.15 x 10(1– 0.02) + 0.91 x 0.09
0.15 x 10 x 0.98 + 0.91 x 0.09
1.47 + 0.91 x 0.09 EVA= (234) – 68000 x 15.52 = -105,512
1.47 + 0.0819
After examining Geekneet Inc.’s financial documents, reviewing the projected figures from the pro forma financials, and considering the data demonstrated by the ratio analysis I would not recommend investing in this company. Here is why. While Geeknet and ThinkGeek have a lot going for them, their overall stability is an issue. Geeknet Inc.is innovative, fun and forward thinking. Recently, they have added a range of new products and increased their ability to fulfill customers’ orders efficiently. It is clearly a creative community driven company. Its problem lies in several areas. First, they are a small retail entity. Retail by nature is unstable because it is so closely tied to economic conditions and seasonality.
Over the last few years, profit margins have decreased for them. Their liquidity is good which shows that they are able to pay their immediate debts.In 2013 Geeknet repurchased $400,000 worth of their own stock which as likely used to repay debts, increase inventory and product line, and fund research and development. Their actions clearly indicate that they plan to grow their company. Their inventory turnover is good, but there is concern attached to the slow performance of Geeknet stock, which has remained neutral. All things considered, I would not recommend investing in this company at this time. However, I would not completely write them out. Their innovative spirit and willingness to invest in themselves shows that they are a company to keep your eye on.
Before investing in a firm, all crucial information, including, financial, performance, strategy, and, policy should be carefully weighed. Steven Isberg, a financial consultant and author, writes, “Financial statement analysis is employed for a variety of reasons. Outside investors are seeking information as to the long run viability of a business and its prospects for providing an adequate return in consideration of the risks being taken” (ND, P. 11)By executing a comprehensive financial analysis, an investor is well informed and better prepared to make the best investment decisions.
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ThinkGeek. (2014) About Us. Whats the deal with this whole ThinkGeek thingy? Retrieved
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