Tromso Fiske’s
...iciency of a company and how well revenue and expenses are managed by measuring how much a firm is able to keep as profits for each dollar of sales. Tromso Fiske Murray Ohio Ratio 20X0 20X1 20X2 1982 1983 1984 Net profit margin (ROS) 5,0% 6,0% 6,3% 1,8% 3,2% 2,0% While Tromso Fiske’s net profit margins range between 5% and 6.3%, Murray Ohio’s net profit margins was - on average - below 3%. At this point and with the available data, we can only make assumptions about an explanation of Murray Ohio’s low ROS ratio. The low ROS ration might be an indicator for an inefficient cost structure and high cost e.g. labor, material etc. 2.3.2 Asset Turnover Asset turnover directly influences the ROA and is therefore a driver of a company’s return on equity. Asset Turnover measures a company’s efficiency in using its assets and is therefore an indicator for the effectiveness of a firm’s investment management. Both, Tromso Fiske’s and Murray Ohio’s Asset Turnover Ratios have varied a lot within the last three years. Tromso Fiske Murray Ohio Ratio 20X0 20X1 20X2 1982 1983 1984 Current asset turnover 4,55 6,25 6,38 2,26 2,70 3,00 Working Capital turnover 6,67 9,52 9,09 4,13 4,06 6,74 Accounts receivable turnover 12,50 14,29 17,65 Inventory turnover 5,00 7,29 8,17 2,55 3,41 2,72 Day's receivable 40,00 23,33 21,25 Day's inventory 75,00 50,00 44,44 137,14 106,67 136,67 Tromso Fiske’s Inventory Turnover Ratio was much higher than Ohio Murray's in the last three years. The Inventory Turnover ratio shows that Tromso Fiske’s inventory turns over during the course of the year, almost double the rate at wich Murray Ohio’s does. Since inventories are the least liquid form of assets, a high inventory turnover ratio is generally positive. On the other hand, an unusually high ratio compared to the average for the industry the company is in, might be an indicator that the business is losing sales because of inadequate stock on hand. Tromso Fiske’s Accounts Receivable Turnover Ratio was better than Ohio Murray’s in the last three years. The Accounts Receivable Turnover Ratio measures how fast a company collects the money for the product it sells. It is calculated by dividing the annual sales by the accounts receivable. Companies prefer to have Accounts Receivable Turnover ratios as high as possible. It means the cash is rolling in and the company has tight controls in place to ensure they are being paid promptly. 2.4 Financial Leverage As above already mentioned, the ROE is directly affected by the ROA and the financial leverage, therefore the financial leverage will be further analyzed in the following step. In general Financial leverage is defined as: Financial Leverage = Assets / Shareholder’s Equity whereas Assets = Liabilities + Shareholder’s equity. This means that a company can have an asset base larger than it’s equity by buying the assets with borrowed money or creation of other liabilities, such as accounts payable, accrued liabilities and deferred taxes. The Financial leverage influences the ROE positively as long as the cost of liabilities is less than the return from investing these funds. On the other hand the financial leverage increases the risk of financial distress. In order to evaluate the degree of risk the following ratios are applied. 2.4.1 Liquidity ratios Tromso Fiske Ohio Murray Ratio 20X0 20X1 20X2 1982 1983 1984 Liabilities-to-equity 0,35 0,46 0,46 0,72 0,44 0,63 Debt-to-equity 0,19 0,25 0,25 0,40 0,27 0,22 Debt-to-capital 0,16 0,20 0,20 0,28 0,21 0,18 Current ratio 3,14 2,91 3,36 2,21 2,98 2,23 The Current Ratio of Tromso Fiske and Ohio Murray have acceptable current ratios. The current ratio is an indicator of a company's financial strength. This ratio shows how many assets can be converted to cash within one year in order to pay debts that are due during the same year. In general the current ratio varies by industry, but for most industrial companies 1.5 is an acceptable current ratio, a smaller ratio or even below 1 might be an indicator that the company has liquidity problems and needs to be further analyzed. The Debt-to-equity ratio of Tromso Fiske and Ohio Murray has about the same Debt-to-Equity Ratio which is for both companies and the industry they are in acceptable. The Debt-to-Equity Ratio indicates the dollar amount of assets provided by creditors for each dollar of assets provided by the business owners. The ratio will change as your business grows. The ratio being low is a favourable indicator of a company's ability to borrow money and business growth strategies. The major difference between the debt-to-equity ratio and debt-to-capital is that debt-to-capital includes long-term debt as part of the denominator. In general: the higher these both ratios are the higher is the chance a company will not be able to pay its debts in the future. 2.4.2 Dividend-pay-out ratio Tromso Fiske Ohio Murray Ratio 20X1 20X2 1983 1984 Dividend-pay-out 33% 46% 33% 59% Tromso Fiske and Ohio Murray had about the same Dividend-payout ratio – both ratios have been increased in the last two years. In general does a high dividend payout ratio indicate that there are no reinvestment activities are planned or cash is needed – therefore high growth companies have a quite low Dividend-payout ratio or even zero. The ratios for these two companies, especially in the last year, are to be considered quite high. 2.5 Other ratios 2.5.1 James O’Shaughnessy Price/Sales Ratio O'Shaughnessy developed the P/S-ratio theory in order to be able to better predict companies with low stock prices and the potential for growth. Rather than using the conventional P/E ratio, he focusses on revenue as an indicator for sustainable growth potential. Tromso Fiske's P/S ratio is a very low 0.30 in 20X1 and gets to an even lower 0.27 in 20X2. Following O'Shaughnessy's methodology, we should evaluate whether Tromso Fiske is a well valued growth stock to buy: O'Shaugnessy applies a multi-step methodology in order to evaluate which stocks to buy. 1. Step 1: He starts with 10,000 Stocks in the compustat database. a. Obviously – if in the database, Tromso Fiske would be in that pile. 2. Step 2: All stocks with a market cap of less than $172 million are eliminated. The reasoning here is that small cap stocks are hard to trade. a. Tromso Fiske’s marekt capitalization is Nkr 400 million (Nkr 40 per share x 10,000,000 shares , which is roughly equal to $58 million.) In O’Shaughnessy’s methodology, Tromso Fiske’s stock would not survive this screening step. (But let’s take a look at the next step – just for fun). 3. Step 3: Eliminate all stocks with a P/S ratio above 1.5 a. Here we are – with 0.27 and 0.30 – right in the money!!! 4. Step 4: Eliminate all stocks that did not increase their earnings in the preceding year. a. Doubled the earnings – Great catch!!! BOTTOM LINE: • With only $58million market cap, Tromso Fiske is a small cap stock. O’Shaughnessy does not like small caps because they are difficult to trade. However, the stock passes all other screening tests and – from this perspective - should be considered a BUY. • RECOMMENDATION: BUY 2.5.2 Edward Altman’s Z-Score The Z-Score formula for predicting bankruptcy of Edward Altman is a multivariate formula for a measurement of the financial health of a company and a powerful diagnostic tool that forecasts the probability of a company entering bankruptcy within a 2 year period. Studies measuring the effectiveness of the Z-Score have shown the model is often accurate in predicting bankruptcy (72%-80% reliability). A Z-Score of 3.0 or above predicts that a bancruptcy is highly unlikely. Tromso Fiske shows high Z-Scores of 5.40 for 20X1 and 6.50 for 20X2. Bankruptcy should not be likely. RESULT: The stock should be considered. BOTTOM LINE: • Tromso Fiske’s Z-Scores of 5.40 (20X1) and 6.50 (20X2) suggest the bankruptcy is unlikely. • RECOMMENDATION: BUY 3 Recommendation We strongly recommend investing in Tromso Fiske stock. The ratio analysis supports this assertion, as already discussed. Since it is also very convenient to apply to a cross-sectional analysis based on ratios not only of other companies, but also those of industries averages, in order to enhance the recommendation, we actually collected some available data. These data will confirm the goodness of our recommendation, just taking into account the average performance of following industries, namely: • Food - major diversified transformers • Major auto manufacturers • Major chemical diversified The first one can be considered as a related industry, and the two following will give as in impression of Tromso Fiske performance compared with other sectors. Collected data are computed ratios based on latest 12 months´ results. Since not all the ratios used for the former analysis (Tromso Fiske vs. Ohio Murray) could e found, we will reduce our cross-sectional analysis to those who are available. Tromso Fiske Food-major diversified Major auto manufacturers Major chemical diversified Ratio Return on equity 29,23% 23,60% 13,60% 15,70% The ROE of Tromso Fiske is higher than other related industries, and other industries average. As a general rule, like already discussed, the higher the company’s ROE, the better. Tromso Fiske Food-major diversified Major auto manufacturers Major chemical diversified Ratio Return on assets ROA 20,00% 7,10% 1,90% 4,20% The lower the profit per dollar of assets, the more asset-intensive a business is. The higher the profit per dollar of assets, the less asset-intensive a business is. All things being equal, the more asset-intensive a business, the more money must be reinvested into it to continue generating earnings. This is a bad thing. Tromso Fiske presents a actual ROA of 20%, it means that the company earned $0.20 for each $1 in assets. As a general rule, anything below 5% is very asset-heavy (manufacturing, railroads), anything above 20% is asset-light (advertising firms, software companies). As we see, Tromso Fiske is really light-asset: they are possibly using their assets significantly more efficient than other industries. Tromso Fiske Food-major diversified Major auto manufacturers Major chemical diversified Ratio Net profit margin (ROS) 6,33% 6,90% 2,60% 4,80% X Asset turnover 3,16 1,03 0,73 0,88 = Return on assets 20,00% 7,10% 1,90% 4,20% X Financial leverage 1,46 3,30 7,00 3,70 = Return on equity 29,2% 23,60% 13,60% 15,70% The Net Profit Margin is similar to the Food-major diversified sector, but higher than other industries. But taking into account the good performance of this ratio during the three last years, we can conclude that the profit earned in comparison with the revenues shows a clear trend in the good direction. Tromso Fiske Food-major diversified Major auto manufacturers Major chemical diversified Ratio Current asset turnover 6,38 1,00 0,80 0,90 Working Capital turnover...