Part (1)
Dow Chemical Company is an American company that has headquarters in Midland, Michigan. The company provides chemical, agricultural, and plastic products. The company operates in more than 180 countries. Its products and services include food, transportation, medicine, health, personal care, and construction. The competitors of the company are:
BASF SE
Exxon Mobil Corporation
Bayer Ag
Total SA
Shell Chemicals Ltd.
Dow enjoys a strong position in the chemical industry due to its high revenue generated in 2014. Dow is making efforts to develop crop protection solutions and market plant biotechnology to provide sustainable food system to the world’s population. The recent development in soybeans program and strong position in the corn market segment proves to be effective for the company. Dow is making potential efforts for sustainable growth which will help them in satisfying customers demand. The Form 10-k requirements are followed by the company including an amendment to the company’s plan, subsidiaries, and computation of ratio of earnings (The Dow Chemical Company, 2014).
The annual report of the company reveals all relevant information regarding its developments, strategies, growth initiatives, vision, and financials. The letter to the shareholders is written by providing information regarding the office of chief executives, adjusted EBITDA, and accelerator of competitive advantage. The interesting thing in the corporate website shows that the company appreciates and offers career opportunities to professionals. The recent news report shows that Dow has announced a ten percent increase in the net profit for the year 2015 (Dow Corning, 2016). The other significant news is that Dow Declares a Quarterly dividend of 46 cents per share payable April 29, 2016 (Dow Chemical Company, 2016).
Report
A report highlights the progress of Dow Chemical Company in recent years. It also reveals the performance of the company in 2014 and strategies that would be adopted and applied in future. It has shown outstanding growth in the year 2014. The company vision is to maximize the long-term value per share. Its developments and increasing profits allows it to retain its high position in the market. Dow Chemical Company operates in a highly competitive market and has a competitive advantage of introducing innovative technological products to its customers. It also recognizes the future needs of customers and practice effective strategies to fulfill their demands .
Dow has made developments in Soybeans program to strengthen its position in the world market. It also offer jobs to professionals who have innovative ideas and passion for availing career opportunities. The company facilitates its international customers by introducing new products and services based on technological advancements. Dow applies the strategy to provide its potential products and services in growing geographic markets. The increasing sales revenue in 2014 indicates that the strategy worked, and some international customers attracted towards the company’s products and services (The Dow Chemical Company, 2014).
Dow focuses on international customers while introducing new product or services. It has an effective marketing and R&D team that acknowledges the demand of customers and report to the senior management of the company for decision making. Dow focuses on expansion by making strategic alliances with other organizations. Dow has achieved critical milestones that resulted in the high growth of the company’s business in 2014. The operations and investment portfolio of the company are the reason for the persistent growth of the company in 2014 .
Dow intends to remain on its vision to provide long-term values to its shareholders. The recent announcement of 46 cents per share on a quarterly basis is the evidence for commitment. The dividend will be provided to the shareholders recorded on March 31, 2016. It also focuses on increasing its potential profits to facilitate shareholders and the company as well. Dow claimed that it has made ten percent increase in profits in 2015 that shows the efficiency of the company in generating high revenues and control over its cost and expenditures. Dow also provides complete information on the senior leadership and strategic plans followed by it. The company follows all the requirements of Form 10-k that indicates all the operations of Dow are according to the legal requirements (Dow Chemical Company, 2016).
It can be observed that Dow is increasing its business by expanding its operation in different countries. The adoption of rapid changes in technology and satisfying the maximum needs of stakeholders enables the company to gain a competitive advantage over its competitors. Dow has made a strong move towards expanding its business operations and high profits in the year 2015 .
Part (2)
Common Size Statement Analysis
The common size income statement of the company shows that it controlled the cost of sales in 2014 by 1 percent as compared to 2013. The gross profit of the company increased to 18 percent of the sales in 2014. However, it did not control the expenses that increased to 8 percent in 2014 from 6 percent in 2013. The slight increase of one percent in non-current assets of the total assets shows that the company had focused on acquiring PPE in 2014. The equity contribution regarding total assets decreased from 39 percent (in 2013) to 33 percent (in 2014). The increase in liability by six percent shows that the company has a huge long-term liability that is to be paid in future. It can be explained that the company has made overall growth, yet there is a need to reduce the liabilities and control over expenditures that has significance in the financial reporting .
Part (3)
Comments on Solvency Ratios
Solvency refers to the ability of the company to fulfill its long-term obligations. The solvency ratios shown in the table above indicates the potential of Dow Chemical Company on paying off its long term and short term obligations (Gibson, 2008).
The solvency ratio in 2014 that is 0.08 which represents that it has a potential to pay off its liabilities due to high generation of profits. It shows that the long-term solvency of the company is strong and it can pay off its long-term debts through utilizing its net profits generated for the year. The increase in debt to equity ratio of the company to 2.07 indicates that it is risky to pay off the debts as the company decreased its stockholders’ equity in 2014. It shows that the company is not efficient to pay off its total debts by using stockholders equity and it has to rely on other factors .
The overall liquidity position of the company is strong that indicates it has the potential to grow in future. The result of a debt to asset ratio in 2014 that is 0.67 indicates that the company has sufficient resources to pay off its total debt in 2014. Dow Chemical Company can utilize its variety of assets to pay off its short-term and long-term debts. The interest coverage ratio of 1.72 in 2014 indicates that the company is slow in generating high profits to meet interest expenses .
Although, it has high market share and strong liquidity position in the market, yet it cannot be said that it will continue to grow in future. It can be explained by giving an example that if the company intends to acquire inputs to increase its position, it will weaken the position of the company regarding financial leverage. However, the recent trend of ratios from 2012-2014 shows that it would have strong liquidity position in future .
Comments on Performance Ratios
Performance ratios indicate how a company is efficient in utilizing its valuable resources and generation of profits during the period. It also shows that how the company has increased or decreased its shareholder value. It shows the consistency of performance of a company that it is useful for stakeholders of the business in analyzing the overall performance of a company (Gibson, 2008).
The gross margin ratio shows that the company is strong in reducing the cost of sales. However, net margin ratio indicates that it does not have control over its operating expenses. The asset turnover and ROA ratio shows that the company is quick in utilizing its assets for the generation of high profits.
The cash turnover ratio of Dow is also strong that shows it is efficient in converting inventory into cash. The ROI of Dow shows that it is efficient in generating high profits and decreasing the liabilities. However, it is inefficient in generating profits from the equity. Dow requires increasing its performance by utilizing capital and investing in the projects that provide a high return on investments .
The ratio reveals that Dow Chemical Company overall performance is efficient and effective. However, it has to reduce its total expenditures and eliminate those not essential in deriving potential profits from making further improvements. Dow Chemical Company has strong position in the market due to its high sales .
Part (4)
Comments on Performance Ratios of DOW and BASF SE
The performance ratio shows the efficiency of both the companies in utilizing its available resources and generating high profits. The gross margin of Dow is stronger than BASF as it increases with high rate. It indicates that Dow has potential control over its cost of sales. The return on assets of Dow (5.48 percent) is relatively less than that of BASF SE (7.22 percent) in 2014. It shows that BASF SE is efficient in utilizing its valuable assets in generating high profits. The inventory turnover ratio of Dow was recorded as 7.18 in 2014 that is relatively quicker as compared to that of BASF SE that is 6.60 in 2014. It represents that Dow is effective in selling its product frequently as compared to its competitor that is BASF SE. The ROI ratio of Dow and BASF SE were 1.02 and 0.12, respectively in 2014 which indicates that Dow is efficient in generating high profits by utilizing long-term liabilities and Equity as compared to BASF SE .
Comments on Solvency Ratios of Dow and BASF SE
The ratios shown in the table above highlights the solvency and liquidity position of BASF SE. It enjoys the high position in the market, but the ratio analysis indicates some facts that contradicts with the market position of the company. The solvency ratio of BASF SE in 2014 is 0.12 that shows decreased in solvency position as compared to 0.13 in 2013 .
BASF SE has lowered the risk in 2014 that is indicated by the debt to equity ratio in 2014 that is 1.58. It shows that the company may use its stockholders equity to pay off its short-term and long-term obligations. The debt to asset ratio of BASF SE increased to 0.61 that shows it has potential resources that can be utilized to pay off its total debt. It shows that the company acquired new assets in 2014 that considers being effective in managing its liquidity position .
The interest coverage ratio increased quickly in 2014 to 0.96, but it has fluctuations that do not allow the company to pay regular interest expenses for the year. The company needs to maintain its interest coverage ratio to assure that profits are made by controlling expenses. The profit can be used to pay high interests on long-term loans.
BASF SE is not stable in maintaining its financial position. The overall solvency ratios of the company highlight that it is unable to sustain at a common point. The company has a strong position in the financial market, and it has to show consistency to retain its position. Although BASF SE generates high sales as compared to its competitors, it has to consider other components of financial statements that are mandatory in strengthening the position of the company in international market .
Report
Dow Chemical Company operates in highly competitive market. BASF SE is the major competitor of the company by sales. The chemical industry allows a free market condition to companies that work in it. It is mandatory for Dow to compare its financial performance and solvency ratios with BASF SE to analyze its position in the industry .
The solvency ratio of Dow was 0.08 in the year 2014. In contrast, the solvency ratio of BASF SE is 0.12 in 2014. It shows that solvency ratio of DOW is more liquid than BASF SE. It can be said that the liquidity position of Dow is better than its competitor. The company needs consistency to increase its profitability and reduce liabilities to strengthen its position in the global market. Dow should focus on controlling its operating expenditures by adopting technological advancements and acquiring new machinery. The result of the debt to equity ratio of Dow was 2.07. In comparison, the debt to equity ratio of BASF SE is 1.58. It represents that DOW is riskier than BASF SE. Dow requires lowering its debt to strengthen its liquidity position. The strong liquidity position attracts investors to the company .
The debt to asset ratio of Dow was 0.67, and BASF SE was 0.61. It shows that Dow has less risk in this particular area than its competitor. The risk is associated with a growth of a business and Dow should focus on increasing its assets to generate high profits. The debt of the company should increase the financial position of the company so it can be said that these debts are favorable for business .
The performance of Dow is relatively better than its competitor. The performance ratio shows that Dow is effective and efficient in utilizing its valuable resources to generate high profits for the year. The Net margin of Dow is relatively weaker than that of BASF SE, it means it has to manage and control its revenue expenditures. Dow has significant control over its cost of sales but it has to eliminate expenses that are unable to derive potential returns to the business. The ROA of Dow is weaker than its competitor so the company requires acquiring those assets that are helpful in generating potential profits for the business. Furthermore, Dow needs to acquire non-current assets that can increase production efficiency and reliability .
The interest coverage ratio of Dow and BASF SE was 1.72 and 0.96, respectively in 2014. Dow should gain a competitive advantage by consistent increase in this ratio. BASF SE does not show consistency in generating net income so Dow could have an advantage by increasing its profits .
References
Dow Chemical Company. (2016, February 11). Dow Declares Quarterly Dividend of 46 Cents per Share - MarketWatch. Retrieved from marketwatch.com: http://www.marketwatch.com/story/dow-declares-quarterly-dividend-of-46-cents-per-share-2016-02-11
Dow Corning. (2016, February 5). Dow Corning Reports 10 Percent Increase in Net Income in 2015 - MarketWatch. Retrieved from marketwatch.com: http://www.marketwatch.com/story/dow-corning-reports-10-percent-increase-in-net-income-in-2015-2016-02-05
Gibson, C. (2008). Financial Reporting and Analysis: Using Financial Accounting Information. Mason: Cengage Learning.
The Dow Chemical Company. (2014). The Dow Chemical Company - Annual Report. Michigan: The Dow Chemical Company.
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