Executive Summary
The paper analyzes the financial standing of Genus PLC using time-series and cross section analysis, and through intrinsic stock valuation. Our analysis revealed that during 2015, the company recorded an astounding profitability performance although its short-term liquidity was a concern of worry on account of the declining cash position and increasing receivables. On the other hand, the company is trading with significantly lower leverage relative to the industry average, and this trend will favor the company as it is generating higher profitability with minimal risk.
In addition to the fundamental analysis, we also calculated the intrinsic stock value of the company and found the stock to be undervalued with a upside potential of 16.72%
About the company
Founded in the year 1933, Genus PLC is a UK based entity that sells products manufactured through the application of quantitative genetics and biotechnology, to cattle and pig farmers.The company was incorporated in the year 1994, and has since then expanded its operations significantly as it now sells its products in North America, Europe, Middle East, Africa and Asia. In addition, the company has expanded its product and services profile as in addition to selling breeding pigs, bull semen and other products, the company has also started to offer market research and consultancy services.
Objectives
The paper is commissioned to conduct time-series and cross-sectional financial analysis of the company and to perform stock valuation using comparable approach.
Methodology
As part of this paper, we will be sourcing raw financial figures using the latest annual report of the company and will then run them through the microscope of financial ratios. The financial ratios will be used to analyze the trend related to the profitability, both from the perspective of the management and the shareholders, and to analyze the duringall solvency position of the company. In order to widen the achieve comprehensive and to perform cross-section analysis, we will be comparing the latest year financial ratios to the industry average, which we will be sourcing from an external database. In addition to ratio analysis, we will be providing a comprehensive analysis of the financial performance and position of the company using common-size financial statements for the year 2014 and 2015.
Post-performing the fundamental analysis using the ratio analysis, we will then calculate the intrinsic value of the stock using dividend discount model, and will then compare the outcome with the current market price.
The paper will finally be concluded with a concise synopsis of the duringall financial condition and stock valuation of the company.
Results and Discussion
a) Profitability Analysis (From the perspective of management)
-Gross profit margin: Gross profit/ Revenue
2014: 129/372= 34.67%
2015: 158/398= 39.70%
Industry Average= 48.44%
-Operating profit margin: Operating profit/ Revenue
2014: 42/372= 11.29%
2015: 60/398= 15.08%
Industry Average= 12.71%
-Net profit margin: Net profit/ Revenue
2014: 29/372= 7.80%
2015: 40/398= 10.05%
Industry Average= 10.89%
As noted from the calculations above, the company’s management successfully deployed prudent policies, which has eventually transformed into strong profitability figures. Beginning with the gross margin, during the year, the company was successful in generating additional sales( that were 6.99% higher than the previous year), with lower proportion of cost of sales in proportion to the revenue figures. This fueled the gross margin of the company from 34.68% to 39.70%. However, in comparison to the industry average of 48.44%, the multiple is still on the lower end.
On the other hand, operating margins of the company also increased from 11.29% to 15.08% on account of controlled operating expenses, which in proportion to revenue figures remained almost constant around 24%. Important to note, the operating profit margin of the company also surpassed the industry average of 12.71%. This indicates that even though the management lagged behind in terms of controlling the cost of sales relative to the industry peers, however, it was really prudent with the management of the operating costs.
Finally, the effect of overall controlled cost structure and lower interest expense was visible on the bottom line profits also which increased from 7.80% to 10.05%. However, despite of an overall strong performance, the company still lagged marginally from the industry average of the net margin amounting to 10.89%.
b) Profitability Analysis (From the perspective of shareholders)
Return on Equity: Net Income/ Total Equity
2014: 29/285= 5.98%
2015: 40/311= 12.86%
Industry Average= 17.14%
Shareholders of the company are largely concerned with the profitability performance of the company and the return being generated by the entity on the equity capital. It is on the basis of existing profitability figures and return offered by the company on the equity capital, both the current and prospective investor decide their future cooperation with the company.
Our calculation for the ROE multiple of Genus PLC, revealed that owing to improved bottom line profits, the ROE company was able to generate higher return on equity capital as the multiple surged from 5.98%to 12.86%. However, the multiple lagged behind the industry average of 17.14%. This indicates that relative to the average industry peers, the company is earning a lower return.
Overall, our calculation revealed that because of prudent cost structure and ability to generate additional revenue, Genus PLC was able to register improved profitability figures. However, considering the cross-sectional analysis, the company still need to improve their performance further.
c)Short-term Solvency(Liquidity Ratios)
-Current Ratio: Current Assets/ Current Liabilities
2014: 174/78= 2.23
2015: 180/81= 2.22
Industry Average= 2.36
-Quick Ratio: (Cash+ Receivables)/Current Liabilities
2014: (23+63)/78= 1.10
2015: (22+64)/81= 1.06
Industry Average= 1.78
Working capital management is a crucial aspect for any business entity as any flaw in managing the working capital resources can cripple the liquidity position of the company.
As noted from the calculations above, during the year, the liquidity position of the company has witnessed a marginal decline. Beginning the discussion with current ratio, the liquidity metric declined from 2.23 to 2.22 with current liabilities increasing by 3.85% relative to 3.45% increase in the current assets. Most importantly, the current ratio also lags behind the industry average of 2.36.
We also tested the liquidity position using the quick ratio, which is rather a stringent measure of liquidity. Here also we witnessed the similar trend as we found that the multiple declined from 1.10 to 1.06 on account of 3.85% in the current liabilities while the cash and receivables remained fairly constant. It is considerable that just like the current ratio, the company also lagged behind the industry average quick ratio of 1.78.
Overall, our analysis revealed that even though the change in liquidity position is marginal, however, in terms of comparison to the industry average, the company still needs to analyze its working capital position and should take measures to improve the position in order to bring the industry average in line with the industry average.
d) Long-term Solvency(Gearing)
-Total Debt to Equity: (Long-term debt+ Short-term debt)/ Total Equity
2014: (13+71)/285= 29.47%
2015: (12+77)/311= 28.62%
Industry Average: 68%
-Debt Ratio: Total Debt/ Total Assets
2014: (13+71)/584= 14.38%
2015: (12+77)/644= 13.82%
Industry Average: N/A
These financial metrics allow the analyst to learn more about the composition of the capital structure of the company and the risk embedded in it. Our calculation revealed that during 2015, the company settled for lower debt proportion in the capital structure as the debt-equity multiple plummeted from 29.47% to 28.62%. This indicates that relative to 2014, the shareholders are now exposed to lower risk levels. Another considerable point here was that compared to the industry average of 68%, the company is operating with significantly lower debt proportion and this may favor the company in the form of higher shareholder confidence.
We also accessed the solvency position using the metric of debt ratio, which indicates the proportion of asset been financed with debt borrowings. Our calculation revealed that during 2015, the multiple declined from 14.38% to 13.82%. This confirms that during the year, a lower proportion of assets were financed with debt funds.
Overall, analyzing the gearing ratios of the company, we found that the company has strong solvency position and since it is operating with significantly lower leverage compared to the industry average, it may also get favorable preference in the investment decisions of the prospective shareholders because of lower risk embedded in the capital structure.
Analyzing Financial Position and Performance
For the purpose of analyzing the financial position and performance of the company, we have relied on the common-size financial statements. Highlighted below are the common-size financial statements of the company followed by a relevant discussion explaining the financial position and performance of the company during 2014-2015:
Common-Size Income Statement
Referring to the above table, we can see that during 2015, the revenue figures of the company increased by 6.99%, which in supplementation to the lower proportion of cost of sales to the revenue figures, resulted in higher gross profit margins. The prudent cost structure of the company also extends to operating activities as despite of a significant increase in the revenue, the company managed to control the proportion of operating costs around 24% and thus earned higher operating profits, which increased by 42.86% during the year.
The effect of controlled costs and lower interest expense during 2015 was eventually visible in the net profits of the company which surged massively by 37.93%.
Overall, the above analysis revealed a strong and an astounding financial performance of the company.
Common-Size Balance Sheet
Referring to above common-size balance sheet of the company we found that during the year, the current assets of the company increased by a 3.45%. However, it was considerable that during the year, the cash position of the company was -4.35% while receivables increased by 1.59%. This signals towards a poor working capital policy of the company. On the other hand, the non-current assets of the company increased by 13.7%, with a 21.95% increase in the property,plant and equipment being the most notable. This signals towards the company’s policy to for high spending capital investment to support further growth. Overall, the total assets of the company increased by 10.27%.
As for the liabilities position, the current liabilities of the company increased by 3.85%, while it retired short-term debt by -7.69%. On the other hand, non-current liabilities increased by 13.51% with a 25.86% increase in long-term liabilities being most notable. Overall, the total liabilities of the company increased by 11.33%
Finally, the equity base of the company was on a higher side with an increase of 9.12%, with a 13.41% increase in the retained earnings being most notable.
On the whole, we see a stable financial position of the company.
Stock Valuation
The intrinsic value of the stock is calculated through the Gordon Growth Model. Highlighted below are some of the advantages and disadvantages of this stock valuation model followed by the calculations:
Advantages of Gordon Growth Model:
a) Simplicity:
The foremost advantage of Gordon growth model is its simplicity as the intrinsic price can be easily calculated using three parameters only, i.e. current dividend, growth rate and required rate of return
Disadvantages of Gordon Growth Model
a)Highly prone to inaccuracy
Gordon growth model largely relies on assumptions related to growth rate and required rate of return. Therefore, any unrealistic or un-justified assumption can produce inaccurate results.
Value= Current Dividend*(1+growth rate)/(Required rate- growth rate)
= 0.18*(1+0.0785)/(0.10-0.0785)
=£16.87
Current Price: £14.46
Result: Undervalued
Calculative Notes:
a)Current Dividend= £0.18/share
b) Required Rate: 10%(Industry Average)
Growth Rate(5-year average)= Retention Rate* ROE
Conclusion
At the end of this paper, we can conclude that Genus PLC is a financially strong entity that has shown signs of great improvement. The company has witnessed increased profitability and that too while operating with comparatively lower leverage. Moreover, the intrinsic value of the stock has also showed that the company is presently undervalued and has a strong upside potential.
References
Balance Sheet: Genus PLC. (n.d.). Retrieved March 16, 2016, from Morningstar: http://financials.morningstar.com/balance-sheet/bs.html?t=GNS®ion=gbr&culture=en-US
FROIDEVAUX, P. S. (2004). Fundamental Equity Valuation. University of Fribourg (Switzerland) .
Genus PLC. (2015). Annual Report 2015. Genus PLC.
Income Statement: Genus PLC. (n.d.). Retrieved March 16, 2016, from Morningstar: http://financials.morningstar.com/income-statement/is.html?t=GNS®ion=gbr&culture=en-US
Key Ratios: Genus PLC. (n.d.). Retrieved March 16, 2016, from Morningstar: http://financials.morningstar.com/ratios/r.html?t=GNS®ion=gbr&culture=en-US
Profile: Genus PLC. (n.d.). Retrieved March 16, 2016, from Yahoo FInance: http://finance.yahoo.com/q/pr?s=GNS.L+Profile
Working Capital. (n.d.). Retrieved March 16, 2016, from Investopedia: http://www.investopedia.com/terms/w/workingcapital.asp
