Abstract
This paper is devoted to the Clorox Company financial research. The research includes analysis of financial statements, analysis of financial ratios, bonds and stock valuation methods, calculation of dividends growth rate, description of constant-growth model, calculation of beta coefficient of stock, calculation of standard deviation of stock, calculation of weighted average cost of capital. The computations are based on the data collected from annual reports for the years 2007-2011. Calculations were made using appendices and excel spreadsheets. The arguments are supported by analysis of financial performance of the Company.
Introduction
In accordance with Bloomberg (2012), Clorox Company is a large manufacturer of cleaning and food products, bleaches and water filters which is presented by 93 first-rate brands. The Company operates internationally and belongs to the sector of consumer production. Clorox belongs to the blue chips group of companies. The products produced by the Company are sold manly in the US to retail stores, groceries and wholesalers. Recently, the Company attempts to expand to Latin America and Canada. It competes with companies that belong to consumer sector (Colgate Palmolive, Procter & Gamble, Kimberly & Clark). Kraft Foods and Unilever are the competitors in food sector.
Liquidity Ratios of the Clorox Company Calculation and Analysis
Industry ratios were specified to compare financial performance if the company with financial performance of the industry. The data used for the computation of financial ratios are collected in the Appendix 1.
Current Ratio
Liquidity ratios measure efficiency of the use of creditors’ money when debt financing is used. High liquidity is characterized by high liquidity ratios.
For the calculation of the current ratio the following formula is used:
Current Ratio = Current Assets/Current Liabilities.
Current ratio helps estimate current financial position of the company and measures general liquidity of the company over short-term (Gitman & Zutter, 2011). In accordance with the results obtained, industry has somewhat higher current ratio than that of the Clorox Company. Acceptable measures for this ratio lie between 2 and 1, thus, current ratio of 0.94 is low. The Clorox Company management should pay attention to liquidity level and take some steps to pay out its debts or convert non-current assets into current assets. An increase of current assets at the expense of equity is also possible. Another alternative is to put profit back to business.
Quick Ratio
Quick ratio shows the ability of the company to cover its liabilities while not selling out inventories. It is computed using the following formula:
Quick Ratio = (Current Assets – Inventories)/Current Liabilities
Quick ratio measure the ability of the company to serve its short-term liabilities at the expense of short-term assets. Clorox Company quick ratio is significantly lower than 1 that questions the ability of the assets to cover urgent expenditures (Walch, 2006). Industry quick ratio is somewhat higher than that of Clorox Company, but still, it is lower than 1. Quick ratio is not influenced by inventory. It shows if the receivables amount is lagging behind the schedule to cover current liabilities.
Net Working Capital Turnover Ratio
Net working capital is an effective measure of cash flows as well as current and quick ratios. Net working capital must possess positive value. However, it may take negative value in cases when the company generates cash quickly. On this stage an additional analysis of accounts payable and inventory is required to make a conclusion whether negative net working capital value is normal or not.
Net working capital turnover ratio is computed using the following formula (Brigham & Houston, 2009):
Net Working Capital Turnover = Sales/Net Working Capital;
Net Working Capital = Total Current Assets – Total Current Liabilities.
This measure indicates the efficiency of using working capital. The ratio of Clorox Company took negative value while industry ratio is much higher.
As the company belongs to blue chips group, inventory and accounts receivable are low, it would be fair to assume that the Company operates on strictly case basis.
Debt to Equity Ratio
Debt to Equity ratio indicates extend to which business relies on debt financing.
The following formula is used for computation of debt to equity ratio:
Debt to Equity Ratio = Total Liabilities/Total Shareholder Equity.
The value of the ratio is insignificant that means the company finances its assets mostly at the expense of equity. The higher this ratio the more risk the creditors are exposed in the business.
Interest Coverage Ratio
The formula for interest coverage ratio is:
Interest Coverage Ratio = Operating Income/Interest Expense;
Operating Income = Gross Income – Operating expenses – Depreciation.
This ratio shows that the company has enough funds to cover interest expense and reflects the ability to provide payments connected with outstanding debt. However, industry value of this ratio is much higher (Gitman and Zutter, 2011).
Gross Margin Ratio
For the computation of this ratio the following formulae are used:
Gross Margin Ratio = Gross Profit/Net Sales;
Gross Profit = Net Sales - Cost of Goods Sold.
Gross margin ratio of Clorox is slightly higher is higher than that of the industry showing better financial performance than the industry as a whole. This ratio revealed that Clorox Company business is stronger than the average company in this industry (The Brandow Company, 2010).
Net Profit Margin Ratio
Usually the following formula for the calculation of this ratio is used:
Net Profit Margin Ratio = Net Profit before Tax/Net Sales.
Net profit margin ratio of Clorox Company is significantly lower than that of the industry and needs to be improved (Appendix 2).
Inventory Turnover Ratio
The formula for the calculation of inventory turnover ratio is:
Inventory Turnover Ratio = Net Sales/Average Inventory at Cost.
The value of inventory turnover of Clorox is the significantly higher than that of the industry. It means that the Company is able to generate cash quickly and does not have much stock (The Bradow Company, 2010). An analysis of this ratio may lead to a conclusion that the management of inventory is well-organized.
Accounts Receivable Turnover Ratio
Account Receivable Turnover is computed using the following formula:
Account Receivable Turnover = Net Sales/Average Account Receivable.
The value obtained for receivables turnover of Clorox Company is somewhat higher than that of the industry showing the strong ability to pay accounts received.
Return on Assets Ratio (ROA)
Return on assets ratio is calculated as follows:
Return on Assets = Net Profit before Tax/Total Assets.
Return on Assets Ratio shows the ability of assets to generate profits of the company. This value can be considered very strong because it almost three times higher that that of the industry. It means that the company manages its assets effectively.
Return on Investment Ratio (ROI)
Return on investment is calculated in the following way:
Return on Investment = Net Profit before Tax/Shareholder Equity.
Return on investment of Clorox Company is lower than that of the industry. This measure is considered as the most important since it shows the percentage of return on investment. The ratio shows whether Clorox Company business is worthwhile. Clorox Company ROI is somewhat lower than that of the industry; however, it is a good value of this ratio showing strong business of the company.
Bond Valuation
For bond valuation the following formula is used:
B0 = I*[(1+i)n - 1] / [(1+i)n*i] + M/(1+i)n,
where B0 – bonds value at time 0, I – annual interest payments, i – discount rate, n – number of years to maturity, M – par value of bond (Gitman and Zutter, 2011).
Yield to maturity (YTM) expresses bond yield as an annual rate. It takes into account par value, coupon interest rate, the current market price and time to maturity.
As there were no sufficient information regarding bonds found in the annual report, bond valuation is impossible to provide.
Stock Valuation
As Clorox Company pays dividends regularly, Dividend Discount Model can be used for the calculation of the actual value of the company. Dividends per share and earning per share are shown in the Table 1 below.
Table 1 Clorox DPS and EPS for the years 2007-2011 ($) (The Clorox Company, 2011).
Dividends per Share (DPS)
Earning per Share (EPS)
The dividends show cash flow directed to shareholders. As it can be seen from the Table 1, company dividends paid are consistent with earnings per share. If the company pays dividends, then the company is mature, predictable and stable.
Constant-Growth Model Equation
Constant-Growth Model is used for prognosis of expected dividends when dividends are expected to grow with constant rate of growth. This assumption is valid for many companies including Clorox because the company paid growing dividends regularly over 10 preceding years.
The following equation is used for the calculation of the expected dividends:
P0 = (D0(1+g))/(r*-g) = D1/r-g.
where P0 - the stock price, D0 - the current dividend (2011), D1 - expected dividends (2012), g - dividends growth rate, r - the required return on the stock, g < r (Gitman and Zutter, 2011).
*the required rate of return was calculated with the help of online calculator (47.2%).
P0 = (2.31(1+0.12))/0.472 – 0.12 = 7.35.
Thus, if the existing tendency remains the same, then expected stock price will increase at $7.35 9 (The Clorox Company, 2011).
Calculation of Dividend Growth Rate
Growth rate of dividends can be calculated with the help of dividend discount model. In this example dividends paid in 2010 and 2011 years were taken to illustrate the principle of dividend growth rate calculation.
DGR = (D2 – D1)/D1, where DGR – dividend growth rate, D1 – dividends per share paid in previous year (2010), D2 – dividends per share paid in succeeding year (2011).
DGR = (2.31 – 2.03)/2.31 = 0.12 or 12%.
Thus, dividend growth rate in 2011 made up 12% in comparison to 2010.
Calculation of Beta Coefficient of the Stock
Beta coefficient is a measure of the volatility of the company assets relatively to the volatility of the benchmark chosen. In this case S&P Index was chosen to compare company financial performance. Beta coefficient is calculated using the following formula:
β = COV (Rm, Rf)/VAR(Rm),
where COV(Rm, Rf) – covariance between the rates of return on market and on company stock, VAR (Rm) – variance of market return.
For beta computation data of 20 days was observed (from May, 9, 2012 to June, 7, 2012). The results of the computation are reflected in the Appendix 3. Beta value obtained equals 0.57. This is one of the lowest beta values that characterize stable business. This value is typical for this kind of industry.
Stock Standard Deviation
Standard deviation is a measure of variability around an average. It directly relational to the population dispersion and reflects stock volatility.
Standard deviation is calculated with the help of the following formula:
σ = √ ∑ (x – μ)^2 /n-1,
where x – the value of variable, μ – mean value of variable, n – size of sample.
For the purposes of the current paper a sample of 20 variables was taken. Each variable is the stock price for each of the 20 days of observation (from May, 9, 2012 to June, 7, 2012). The results of the observation and standard deviation computation are reflected in the Appendix 4.
Calculation of Clorox Company Weighted Average Cost of Capital
The WACC equation helps determine the cost of the components of the capital using the following formula:
WACC = (E/V)*Re + (D/V)*Rd*(1-Tc),
Where:
Re - cost of equity, Rd - cost of debt, E - market value of the company equity, D - market value of the company equity, V – the sum of equity and debt, E/V – share of equity in the capital, D/V – share of debt in the capital, Tc - corporate tax rate (34%) (Bloomberg, 2012).
Rd = IP(1-Tc)/L*100,
where IP – interest paid, Tc – company tax rate (34%), L – the amount of loan.
Rd = 123(1-0.34)/87*100 = 0.009.
Re = DPS/MV + GRD,
where DPS – dividends per share, MV – the current market value of stock (as of 07.06.2012), GRD – growth rate of dividends.
Re = 2.31/71.35 + 0.12 = 0.15.
E = CSP*NSO,
where CSP – the current price of stock, NSO – number of shares outstanding.
D = MVS + L,
where MVS – debt market value in securities (treasury shares), L – the amount of bank loans.
CD = 1,770mln + (87mln + 1,365mln) = $3,222mln.
E = 71.35*131,066,864 = $9,351,620,746.
D = IE((1-1/Rd^m*)/Rd) + CD/1+Rd^m,
where IE – interest expense, Rd – cost of debt, m – years to maturity, CD – the current amount of debt.
*years to maturity is an assumed value.
D = 123((1-1/0.009^5)/0.009) + 3,222/1.046 = $16,746mln.
WACC = (9,351/(9,351+16,746))*0.15 + (16,746/(9,351+16,746))*0.009*(1-0.34) =
= 0.36*0.15 + 0.64*0.009*0.66 = 0.06.
Thus, the weighted average cost of Clorox Company capital is 6.0%. This means that the company management expects to pay 6.0% on average to security holders to finance its assets.
12. Dividend Policy
Clorox paid dividends since 1968 on a regular basis. The payments were steadily increasing for 32 years. Clorox Company is a member of S&P Dividend Aristocrats Index. The dividend growth stock made up 4.30% of total annual average return to the shareholders over the past ten years. Thus, the dividend policy of the company can be called ever-evolving dividend payment policy. However, there were periods when dividends were not raised. In 2007 dividends were raised two times per year.
Dividend payout ratio is considered as an important measure for evaluation of the Company dividend police.
DPR = Dividends per Share/Earnings per Share
DPR = 0.62/4.06 = 0.15 (15%) (Bloomberg, 2012).
Currently DPR of Clorox Company equals 15% quarterly and yields 3.10% that means that the Company reached its maturity and returns profits to the shareholders. To compare this measure to the company competitors, Colgate Palmolive P/E ratio is 20% and yields 2.5%, Procter & Gamble has the same measure of DPR and yield which is 15% and 3.10% respectively.
An analysis of the current dividend policy suggests that Clorox Company is a mature company.
Conclusion
As a whole financial performance of Clorox Company is satisfactory: the business is stable, the level of market volatility is low, stock prices increase. In the scope of the current paper, an analysis of financial ratios was made, volatility of the market and company stock was evaluated and dividend growth rate was traced.
Financial analysis of Clorox Company showed that the Company is stable; it pays dividends to its shareholders and is considered to be a good financial performer. Financial ratios were compared to industry financial performance. Clorox performed well if compared to the consumer industry. However, it would be better if the Company direct more funds for research and development to provide customers with more new products since Clorox is a mature company and soon will need more products to compete on consumer market.
The Company explores relatively new centennial strategy and expands to new markets in order to attract more potential customers. The US market is saturated and new expansion will be needed to improve financial results of the Company.
References
Annual Report. (2011). The Clorox Company. Retrieved from
http://www.thecloroxcompany.com/annual-report/2011/Clorox_Annual_Report.pdf
Bloomberg (2012). The Clorox Company. Retrieved from http://www.bloomberg.com/quote/CLX:US
Brigham, E.F. and Houston, F. J. (2009). Fundamentals of Financial Management.
(12 ed.). Mason: Cengage Learning.
Gitman, L.J. and Zutter, C.J. (2011). Principles of Managerial Finance, Brief. (6th ed.). New York: Prentice Hall.
The Brandow Company. Free business statistics and financial ratios. (2010). Retrieved from http://www.bizstats.com/corporation-industry-financials/wholesale-retail-trade-41/wholesale-trade-nondurable-goods-424/chemical-and-allied-products-424600/show
The Clorox Company. (2011). The Clorox Company. Retrieved from http://investors.thecloroxcompany.com
Walch, C. (2006). Key Management Ratios: master the Management Metrics that Drive and Control Your Business (Financial Time Series). (4 ed.). London: Prentice Hall.
