Identifying the total worth of an organization contain the more reviewing revenues and assets figures. In finance, valuation is a procedure which is conducted by the companies and the related parties of the company such as the investors, creditors, bank, stockholders, shareholders, debtors etc of the company to evaluate the fair market value of an asset. Equity valuation therefore explains about the process of identifying the fair value of equity securities (Chandra, 2011). Equity valuation makes it easy for an organization and the other parties to identify the worth of the comapny and the market position of the company. It offers a good base to the stakeholders of the company to make better decision about the performance of the company.
Financial statement analysis is a process which is done by the companies and the related parties of the company such as the investors, creditors, bank, stockholders, shareholders, debtors etc of the company to reach over different conclusion. The main motto of financial statement analysis is to identify the worth of the company, total profit of the comapny and turnover of the company, changes into the final structure of the company from last year, financial position of the company, cash flow position of the comapny etc. the financial stataement analysis could be done by the analyst and the managers through numerous ways such as trend analysis, capital asset pricing model, vertical analysis, ratio analysis etc (Madhura, 2011).
This report explains about the equity valuation and the financial statement analysis of Campbell Soup Company. For identifying the equity valuation and the financial statement evaluation of the company, final statement of the company of 2014 to 2016 has been evaluated. The study explains about the performance of the company on various bases.
Campbell Soup Company is a food company which is situated in American market. The company is a global food company which has registered in NYSE. The headquarter of the company is in Camden, N.J. the organization prepares and produces the high quality meals, sups, snack, beverages, packaged fresh food etc. It is inspired and driven by the main goal of the company which is “Real food that matters for the life movement.” The customers and the clients of the company are loyal to the company due to flavourful, authentic and readily available food of the company (Home, 2018). The financial position and performance of the company has been identified and it has been evaluated that the performance of the company has been better from last few years. The company is performing well in the market and it has diversified its market.
Equity valuation explains about the process of identifying the fair value of equity securities. Equity valuation makes it easy for an organization and the other parties to identify the worth of the comapny and the market position of the company. It offers a good base to the stakeholders of the company to make better decision about the performance of the company. There are various ways on the basis of that equity valuation could be done. In the report, two equity valuation techniques have been used to identify the worth of the company which are DCF and Earnings growth analysis.
Earnings growth analysis:
Earnings growth analysis is a way to identify the total worth of equity of a company. Equity valuation explains about the process of identifying the fair value of equity securities. Equity valuation is a way for an organization and the other parties to identify the worth of the comapny and the market position of the company. It offers a good base to the stakeholders of the company to make better decision about the performance of the company. In earnings growth analysis, historical earnings of an organization is collected and evaluated by the company to identify the future worth of the equity of the company (Chandra, 2011).
Earnings growth analysis model is one of the most used methods to identify and measure the equity valuation of a company. The various financial analysts expressed about the method and said that it is one of the reliable methods to measure the performance of the company. Earnings growth analysis method relies on the price of the stock, earnings per share, dividend per share, P/E ratio etc. of a company which are considered to be a reliable value and it also eliminates the subjective accounting policies. Though, Earnings growth analysis is significantly influenced by non economical factors as well as the market conditions (Décamps et al, 2011). It is particularly used by the analyst when there is less confidence on the cash flow system of the company. Though, it involves one of the sensitive assumptions and it involves predicting the future performance of the company.
In this process, earnings per share of the organization, dividend per share, roe, Price earnings ratio, price of the company in last few years are collected and they are evaluated to identify the trend in the market and the company. This process makes it easier for the analyst and the company to evaluate and identify the reasons due to which the changes have taken place into the performance of the company in last few years (Brigham and Daves, 2012). Earnings growth model evaluates the total growth % in the company and on the basis of it; it evaluates the equity price per share and the total worth of the company.
The earnings growth analysis table of the company is as follows:
|
Price |
P/E ratio |
||||||||
|
Year |
EPS |
DPS |
BVPS |
High |
Low |
High |
Low |
ROE |
Payout ratio |
|
2011 |
1.08 |
0.96 |
1.00 |
39.87 |
34.58 |
36.92 |
32.02 |
108% |
89% |
|
2012 |
1.21 |
0.87 |
1.00 |
42.54 |
39.45 |
35.16 |
32.60 |
121% |
72% |
|
2013 |
1.35 |
1.085 |
1.00 |
44.68 |
42.85 |
33.10 |
31.74 |
135% |
80% |
|
2013 |
1.46 |
1.169 |
1.00 |
47.52 |
44.1 |
32.55 |
30.21 |
146% |
80% |
|
2014 |
2.61 |
1.245 |
1.00 |
46.23 |
41.51 |
17.71 |
15.90 |
261% |
48% |
|
25% |
7% |
0% |
4% |
5% |
83% |
84% |
25% |
-14% |
|
5 year average: |
||
|
Return on equity |
0.25 |
|
|
Payout ratio |
-0.14 |
|
|
P-E ratio high |
0.83 |
|
|
P-E ratio low |
0.84 |
|
|
P/E ratio |
0.81 |
|
|
Sustainable growth |
25% |
|
Calculation of EPS after 2 years |
||
|
EPS |
DPS |
|
|
2015 |
3.254 |
1.33 |
|
2016 |
4.057 |
1.42 |
|
Equity Valuation |
|
|
EPS after 2 years * P/E ratio |
|
|
4.057*8.1 |
|
|
32.86 |
In the report, earnings per share of the organization, dividend per share, ROE, Price earnings ratio, price of the company in last 5 years are collected and they are evaluated to identify the trend in the market and the company (Penman and Reggiani, 2013). This process evaluates that the equity value of the company would be $ 32.86 and the total worth of the company would be $ 10318.57 million.
Discounted cash flow:
Discounted cash flow is a way to identify the total worth of equity of a company. Discounted cash flow explains about the process of identifying the fair value of equity securities. Equity valuation is a way for an organization and the other parties to identify the worth of the comapny and the market position of the company (Titman and Martin, 2014). It offers a good base to the stakeholders of the company to make better decision about the performance of the company. In discounted cash flow, free cash flow of an organization is collected and evaluated by the company to identify the future worth of the equity of the company.
Discounted cash flow is one of the closest estimates to identify and measure the equity valuation of a company. Analyst found it one of the most sound valuation methods. Discounted cash flow method relies on the free cash flows of a company which are considered to be a reliable value and it also eliminates the subjective accounting policies. Discounted cash flow is not significantly influenced by non economical factors as well as the market conditions (Brown, 2012). It is particularly used by the analyst when there is huge confidence on the cash flow system of the company. Though, it is one of the sensitive assumptions and it involves predicting the future performance of the company.
In this process, free cash flow of the company of last few years is collected and they are evaluated to identify the trend in the market and the company. This process makes it easier for the analyst and the company to evaluate and identify the reasons due to which the changes have taken place into the performance of the company in last few years. Discounted cash flow evaluates the total growth % in the company and on the basis of it; it evaluates the equity price per share and the total worth of the company (Brooks, 2015).
The analysis on equity according to the discounted cash flow table of the company is as follows:
|
CAMPBELL SOUP CO: 2-Stage DCF |
|||
|
Initial Cash Flow |
959 |
||
|
Years |
1-5 |
||
|
FCF Growth Rate |
15.67% |
||
|
Discount Rate |
10% |
||
|
Terminal Growth Rate |
2% |
||
|
Shares Outstanding (Crore) |
316 |
||
|
Net Debt Level |
2,244 |
||
|
Year |
FCF |
Growth |
Present Value |
|
1 |
1,109 |
15.67% |
1,008 |
|
2 |
1,283 |
15.67% |
1,060 |
|
Final Calculations |
|||
|
Terminal Year |
1,309 |
||
|
PV of Year 1-10 Cash Flows |
2,069 |
||
|
Terminal Value |
13,520 |
||
|
Total PV of Cash Flows |
15,589 |
||
|
Number of Shares |
316 |
||
|
DCF Value / Share (Rs) |
42 |
(Koller, Goedhart and Wessels, 2010)
The above tables of discounted cash flow briefs that the In the report, earnings per share of the organization, dividend per share, ROE, Price earnings ratio, price of the company in last 5 years are collected and they are evaluated to identify the trend in the market and the company. This process evaluates that the equity value of the company would be $ 32.86 and the total worth of the company would be $ 10318.57 million (Annual Report, 2014).
To recommend, the stock price of the company is quite higher than the intrinsic values of the company. The current stock price of the company is USD 46.23 whereas the intrinsic value of the company after 2 years would be $ 32.86 according to earnings growth analysis and $ 42 according to the dividend discount model of the company. It explains that the investment position of the company is not at all good. The stock price of the company would be lower in near future and thus it is recommended to the investors to not to invest into the stock price of the company. Further, it explains about the deductions in the performance if the company in next few years.
Conclusion:
To conclude, investors should not invest into the stock price of the company. Further, the management of the company is also required to look into the performance of the company and make few changes into the performance of the company accordingly.
Part 2: Using financial statement for credit risk analysis:
Financial statement analysis explains about the process of identifying the fair value of the company. The analysis makes it easy for an organization and the other parties to identify the worth of the comapny and the risk position of the company. It offers a good base to the stakeholders of the company to make better decision about the performance of the company. There are various ways on the basis of that financial statement of the company could be evaluated and risk of the stock could be measured. In the report, ratio analysis study has been done to evaluate the credit risk of the company.
Financial statement ratios have been evaluated to identify the performance of the company. The ratio analysis of the company is as follows:
Profitability ratio:
Profitability ratios explain about a position where the profit generation capability of a firm could be identified. It briefs that whether the profitability position of the company is good or not. The profitability position of Campbell Soup Company has been evaluated and it has been found that the net profitability level of the company is 7.007% in 2016 which has been lower from 2015 and 2014’s profit capability (Ahrendsen and Katchova, 2012). The net profit ratio has been chosen for identifying the profitability ratio as it is one of the most used ratio and the ratio is based on the reliable information as well as it also takes the concern of entire profit level of the company.
It explains that the total profit of the company against the sales revenue of the company has been lower from last year due to high COGS and the operating expenses of the company. It briefs that the current position of the company is not at all good. It explains about the reduction in the profitability level of the company as well as the performance of the company. It is required for the company to manage the high revenue with less cost of goods sold and operating expenses (Higgins, 2012). The past year data briefs that the operating expenses and non operating expenses of the company was lower from current year. Additionally, it briefs that the return on assets, net profit, gross profit, cash flow to sales ratio etc of the company has also been lower and explains that the performance of the company has been lower from last year.
Return on assets of the company is 7.07% in 2016 which has been lower from 46.14% in 2015 (Annual Report, 2016). It explains that the position of the company in terms of net assets have also been lower. Further, return on equity also explains about the decrement in the total return of the equity of the company (Vogel, 2014). In addition, gross profit margin and cash flow to sales ratios have also been lowered. The calculations and data brief that the profitability level of the company have been lower and thus the investment position has been riskier.
Short term liquidity ratio:
Short term liquidity ratios explain about a position where the debt payment capability of a firm could be identified. It briefs that whether the liquidity position of the company is good or not. The liquidity position of Campbell Soup Company has been evaluated and it has been found that the liquidity level (current ratio) of the company is 0.75 in 2016 which is quite similar from 2015 and 2014’s liquidity capability. The current ratio has been chosen for identifying the liquidity ratio as it is one of the most used ratio and the ratio is based on the reliable information as well as it also takes the concern of other competitors in the market (Gibson, 2011).
It explains that the current sources of the company against the current debt of the company are lower from last year. Though, it briefs that the current position of the company is not at all good. It explains about the reduction in the capability of the company to pay the short term debts of the company. It is required for the company to manage the current resources at a good proportion with the debts of the company (Gertler and Kiyotaki, 2010). The past year data briefs that the level of sources has been enhanced by the company and still few changes are required in the company. Additionally, it briefs that the quick assets of the company has also been lower and explains that the performance of the company has been lower from last year.
Quick liquidity ratio of the company is 0.38 in 2016 which has been lower from 0.39 in 2015. It explains that the position of the company in terms of short term debt payment have also been lower (Annual Report, 2016). The calculations and data brief that the liquidity level of the company have been lower and thus the investment position has been riskier.
Long term solvency ratio:
Solvency ratios are the key metric which is used by the companies to measure the ability of an organization to pay its long term debt. Long term solvency ratios explain about a position where the long term debt payment capability of a firm could be identified. It briefs that whether the solvency position and long term debt payment position of the company is good or not (Faccio, 2010). The solvency position of Campbell Soup Company has been evaluated and it has been found that the solvency level of the company is 0.24 in 2016 which has been reduced from 2015 and 2014’s solvency capability. The long term solvency ratio has been chosen for identifying the solvency ratios as it is one of the reliable ratio which is based on the structure and long term debts of the company.
It explains that the current log term sources of the company against the long term debt of the company are lower from last year. Though, it briefs that the solvency position of the company is not at all good. It explains about the reduction in the capability of the company to pay the long term debts of the company (Fridson and Alvarez, 2011). It is required for the company to manage the long term resources at a good proportion with the long term debts of the company. The past year data briefs that the level of sources has been reduced by the company and thus few changes are required in the company. The calculations and data brief that the solvency level of the company have been lower and thus the investment position has been riskier.
Capital structure ratio:
Capital structure ratios are the key metric which is used by the companies to measure the ability of an organization to manage its various sources which has been raised by the company for various long term projects and the performance of the company. Capital structure ratios explain about a position where the debt and equity level and fund management capability of a firm could be identified (Brigham and Ehrhardt, 2013). It briefs that whether the good proportion of debt and equity is managed by the company or not. The capital structure position of Campbell Soup Company has been evaluated and it has been found that the debt to equity level of the company is 1.675 in 2016 which has been reduced from 2015 and 2014’s debt equity level capability. The debt to equity ratio has been chosen for identifying the capital structure position as it is one of the most used ratio and the ratio is based on the reliable information as well as it also takes the concern of entire structure level of the company (Annual Report, 2014).
It explains that the debt level of the company is quite higher than the equity level due to which the position of the company is quite riskier. It explains that the cost of the company is quite lower but on the other hand, the risk of the company is higher. Though, it briefs that the capital structure position of the company is not at all good. Further, the other capital structure ratio also briefs that the changes are required to be done in the company for the better performance of the company and the position of the company (Fiordelisi, Monferrà and Sampagnaro, 2014). The calculations and data brief that the solvency level of the company have been lower and thus the capital structure position has been riskier.
Credit quality of the firm:
Credit quality is crucial measurement to judge the investment quality of an organization and it also evaluates the relevant factors related to the investment in an organization. Credit quality is an important factor for the investors to evaluate the opportunity in the organization. The credit quality of Campbell Soup Company has been evaluated and it has been found that the credit quality of the firm is not satisfactory (Gopalan, Song and Yerramilli, 2014). The credit quality of the company was quite better in 2014 but after 2014, the riskier level of the company is continuously increasing and explains that the investment position of the company is not good. The profitability level briefs about the lower profitability ratio from last 2 years and brief that the position of the company has been lower. On the other hand, the liquidity level of the company briefs that the short term debt payment capacity of the company is not good (Cetorelli and Peretto, 2012). The level of debt of the company is quite higher than the level of its current sources. Further, the solvency level of the company briefs that long term debt payment capacity of the company is not good. The level of debt of the company is quite higher than the level of its net profit and the assets. Lastly, the capital structure ratio also briefs that the risk level of the company is quite higher and thus the credit quality of the company is not good (Mittoo and Zhang, 2010). It is not a good option for the purpose of investment.
Recommendation and Conclusion:
To conclude, the investment position of the company is not at all good and thus, it is recommended to the investors to not to invest into the company for the long term as well as for short term. It briefs that it is required for the investors to invest into the company which credit rating is quite better.
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