Executive Summary
With the objective of evaluating an investment bank, which we are keen to add to our investment portfolio, we carried out an in-depth analysis of Goldman Sachs using three sections, namely, Business Environment Section, Operations Section and Financial Performance. While the company is operating under diversified investment industry, the financial performance of the company was highly optimistic and the major reason that we are recommending that the stock of this financial institution of this company should be included in our portfolio.
Introduction
The objective of this report is to provide a comprehensive overview of leading investment bank, Goldman Sachs Inc. which we are interested to add in our investment portfolio. For the very purpose, we will discuss the business environment, operating strategies and financial performance section for the period of 2012 and 2013 where each section will contain various sub-sections.
Business Environment Section
Goldman Sachs Inc., is one of the largest investment banks in the financial industry largely known for its Merger and Acquisition activities. Below is the brief detail relating to the business environment of the company:
Industry and Services Offered
The company operates in diversified investment industry where the list of services offered by the company includes:
- Sales and Trading
- Investing Banking Services
- Investment Management
Competitors
Although the industry is highly regulated but still Goldman Sachs face tough competition from its competitors while the list includes few of the names below:
- JP Morgan Chase & Co.
- Morgan Stanley
- Citigroup Global Markets Inc. (private)
- Bank of America Securities LLC (private)
- UBS Investment Bank (private)
- Deutsche Bank AG
Customers
The company restricts its services to the following customer base
- High net-worth individual
- Financial Institutions
- Corporations
- Governments
Suppliers
Since the company offers only financial services, it only deals in products offered by:
- US Treasury
- Corporations
- Federal Reserve
Regulatory and Legal Environment
All the activities of the company are governed by the Volker Rule issued by the five federal agencies:
- Board of Governors of Federal Reserve
- Security and Exchange Commission
- Commodity Futures Trading Corporation
- Office of Comptroller of Currency
- Federal Deposit Insurance Corporation
The act was passed in December, 2013 which restricts the company’s activities and their relationship with hedge funds and private equity funds. However, the act specifically allowed market making, lending and investing on balance sheet amid important role played by financial intermediaries in the financial markets.
Performance Section
In this section, we will unfold the financial performance of the investment bank using the tool of ratio analysis. Sub-categorizing the ratio section, we will formulate the profitability and the investment ratios of the company for the year 2012 and 2013. This will help us in understanding the ongoing trend in the company’s performance:
Profitability Ratios
These ratios indicate the level of profit margins being earned by the company from their ongoing business activities. Below discussed are some of the popular profitability ratios followed by discussion of their trend from past 2 years
a)Net Margin Ratio: Net Profit/ Revenue
b)Return on Equity: Net Income/ Average Total Equity
c) Return on Assets: Net Income+ Interest Expense(1-tax rate)/ Average Total Assets
Profitability Analysis
Noted from the above data, we can infer that over the years, the company has been trailing high on a sustainable profitability path. As for the bottom line profits, the net margin ratio increased from 21.34% to 22.59% that was the result of increased revenue figures and controlled operating expenses that at first led to increased operating margin and subsequently, the increased net margins of the company.
Even the shareholders of the company will be ecstatic to witness the increase in ROE multiple of the company from 10.66% to 10.98%. Important to note, Return on Equity indicates the profit margins shared by equity components. Hence, increase in ROE multiple indicates the improved returns for the equityholders.
Finally, our conclusion relating to improved profitability margins of the company is validated with Return on Assets multiple, that measures the profitability relative to funds invested in the asset base. Referring to the above data, we find that during 2013, the ROA multiple increased from 0.78% to 0.84%, which was once again an optimistic indication in the perspective of the company’s financial performance.
Investment Ratios
Also known as Investment Valuation Ratios, these ratios are most useful when the analysts or shareholders are evaluating an investment opportunity as these ratios assists in estimating the attractiveness of the security and also gives an indication relating to its intrinsic value. Below discussed are few investment ratios relating to Goldman Sachs:
a)Earnings per Share: Net Income- Preferred Dividends/ Weighted Average Outstanding Shares
b) Dividend per Share: Total Dividend Paid- Preferred Dividend/Weighted Average Outstanding Shares
c)PE Ratio: Market Price of Share/ Earning per Share
- September 2013: 9.74
- September, 2014: 10.94
Investment Ratio Analysis
Beginning with PE Ratio multiple that is regarded as the most well-known investment ratio, i.e. PE Ratio, we witness that over the time period from September, 2013 to September, 2014, the PE ratio of the company has increased from 9.74 to 10.94 indicating that the investors are expecting higher growth from the stock and are ready to pay higher for each $1 of earnings. In addition to the PE ratio, other investment ratios such as Earning per Share and Dividend per Share are also indicating an optimistic trend for the company. While EPS has increased from $14.13 to $15.46, the amount of dividend per share has increased from $1.77 to $2.05.
Overall, amid increasing profit margins, sustainable ROE and ROE multiples followed by increasing trend in PE ratio multiple, we can conclude that the company has strong ongoing financial performance.
Operating Section
How it Functions?
The company delivers services related to investment banking, investment management and securities services to its clients and these services are delivered through multiple divisions of the company, namely:
- ‘’Finance Division’’
- ‘’Global Compliance Division’’
- ‘’Global Investment Research Division’’
- ‘’Human Capital Management Division’’
- ‘’Internal Audit Division’’
- ‘’Investment Banking Division’’
- ‘’Legal Division’’
- ‘’Merchant Banking Division’’
- ‘’Operations Division’’
- ‘’Realty Management Division’’
- ‘’Securities Division’’
- ‘’Technology Division’’
- ‘’Internal Audit Division’’
Below is the snapshot as how each of these division functions and under what responsibility:
How the revenue is generated?
The company generates its revenue through four segments:
a) Investment Banking
b) Investment Management Services
c) Securities Services
Goldman Sachs also provides securities services that primarily include securities trading for the clients. The company earns profit from the bid-ask spread of the securities being treated. This process is also known as Money Making Process, where the company charges for providing liquidity to its investors over sale or purchase of the securities
d)Investing and Lending Services
The company also earns service revenue by originating loans for their clients and earns profit by investing in the existing corporate bonds, etc. In addition to bonds, the company also invest in equities and real estate.
Source and use of funds
The company obtains the fund required through capital market and investments made by corporates and high-net worth individuals. These funds are then used prudently in investment and lending functions and other operations of the company.
Risk Management Process
The company follows a hierarchal approach in its risk management process and includes the governance structure headed by its board itself. The chart below indicates risk management governance structure, oversight of the board and risk-related committees:
Some of the key elements of the risk management process includes:
- ‘’Reinforcement of culture of risk management in the training and development process’’
- ‘’Sophisticated measurement, monitoring and reporting’’
- ‘’Pro-active management and mitigation’’
- ‘’Conservative capital, funding and liquidity risk management’’
Conclusion
At the conclusion of this report, we can infer that adding this financial institution into our portfolio will be a prudent and profitable decision as in addition to be operating under an organized and structured business environment, the financial performance of the company is quite encouraging with consistent surge in profitability ratios during past 2 years. Furthermore, along with increased ROE multiple, the dividend payment of the company has also increased from $1.77 to $2.05 during 2013. Hence, we can expect our portfolio to receive both the capital appreciation and income source through Goldman Sachs’s stock.
Works Cited
Goldman Sachs Inc. (2013). Annual Report 2013. New York: Goldman Sachs Inc.
Goldman Sachs- PE Ratio. (n.d.). Retrieved November 20, 2014, from CSi Market: http://csimarket.com/stocks/single_company_valuation_ttm.php?code=GS&pe
Volcker Rule. (n.d.). Retrieved November 20, 2014, from Investopedia: http://www.investopedia.com/terms/v/volcker-rule.asp
