This is a financial analysis of two microprocessor companies, Intel Corporation and AMD (Advanced Micro Devices, Inc.) from a potential shareholders point of view. Intel Corporation and AMD are two providers of silicon based microprocessors and digital platform solutions. Both companies are head quartered in the United States and sell to both the business and consumer markets. For a perspective on size for the two companies that this analysis focuses on, Intel Corporation at the end of 2005 employed 99,900 people while AMD employed 9,460.
This financial analysis will contrast and compare the financial results of both AMD and Intel Corp. companies using vertical and horizontal analysis techniques going back three years from the last audited year, 2005. The focus of this analysis will be on they key short term creditor ratios. Specifically the analysis will concentrate on revenue earnings and cost of goods sold and how it relates to the gross profit margin, working capital, current ratio, acid-test or also called the quick ratio, accounts receivable turnover, inventory turnover, debt to equity ratio and lastly return on stockholders equity. Each of these ratios are key indicators of short term company performance.
While, not a key short term creditor ratio, the revenue earnings and cost of good sold of a company looked at in a vertical analysis are a good first glance of a company and its current financial state. Intel Corp, hereafter referred to just as Intel, has shown consistent growth in revenue ranging from 13.5% to 13.9% annually. Intel has maintained this consistent growth while also lowering its cost of goods sold in relation to the percentage of revenue from 42.3% in 2004 to 40.6% in 2005. AMD has also experienced consistent growth in the past two years. In 2004, AMD had a 42.1% increase in sales from the previous year and was up in revenue 66.2% from 2003. This is a dramatic increase which coincides with a revolutionary product launch of the dual core processors. AMD, just like Intel, was also able to lower their cost of goods sold as a percentage of revenue all while experiencing expanding revenue, however not nearly as noticeable and Intel's reduction from 42.3% to 40.6%. Most significantly however is that both Intel and AMD have been able to continually improve the gross margin year after year. This is likely a result in more efficient production methods and, as we'll see later on in this analysis, a higher inventory turnover ratio.
Working capital is one of the most important key financial indicators of a company's financial health. A positive working capital is an indicator of a company's ability to pay short term debts. In 2004 AMD lost 4.58% in working capital and gained 26% in 2005 over 2004 and was up overall from 2003 by 20%. This large range of difference between each year can be observed by AMD's investment in plants and property for manufacturing purposes. In 2003, AMD had begun construction of a new production facility in China which was completed in 2004. This resulted in two consecutive years of large investments in plant and property assets. In 2005, this large investment was no longer required which resulted in lower liability investment in 2005. Another factor in the large gain in 2005 working capital is the release of the first true 64 bit processor and dual core processors to the business and consumer markets and AMD retiring 489 million in long term debt. Net sales alone according to the MD&A of AMD were up 50% from 2004 to 3.8 billion in 2005. Intel's working capital from 2003 to 2004 was largely unchanged and in 2005 Intel showed a considerable reduction in working capital, down 25% from the previous year. One possible cause would be the acquisition of more than 2 billion in long term debt and an increase in accounts payable.
This analysis will now focus on the current ratio of both companies. The current ratio is an index for the division of assets into liabilities. AMD had its current ratio drop in 2004 to 1.75 and rise again in 2005 to 1.95. This rise in current ratio can be directly tied to the reasoning and explanation behind the drop and subsequent rise in working capital explained above since this ratio derives its data from the same source as working capital. Increased sales and short term investments, retirement of long term debt are all factors that contribute to the rise in the current ratio for AMD. Intel however has had a continually declining current ratio, down .33 in 2004 and down .70 in 2005. This could be explained by observing an increase in inventory totals for the year and recent plant/equipment acquisitions and annually large investments in long term liabilities.
The Acid-test ratio or Quick Ratio, which is an index of how quickly a company could liquidate to meet financial obligations, for AMD had a dramatic improvement in 2005, up .47 from 1.04 to 1.57. This large improvement is largely due to increased sales and short term investments. Adversely, Intel has had continually declining quick ratio numbers. While sales revenue for Intel has grown consistently over the past three years, inventory numbers have risen as well. Another explanation for Intel could be its large capital investment in some longer term liabilities like plants and equipment. These trends for both companies should be observed carefully. Any number above 1 for the quick ratio is considered good, so both Intel and AMD are still maintaining the ability to liquidate enough without relying on inventory sales to meet their obligations.
Accounts receivable turnover for both Intel and AMD have risen annually. These increasing numbers are due likely to the new markets opening up in Asia and the Pacific rim. Another explanation would also be that with the latest release in technology of dual core chips and 64 bit processors many companies are replacing older processors and computational platforms with new, more modern components.
Inventory turn over for both companies has increased annually, however Intel has lagged significantly behind AMD in this ratio by only increasing by .2 per year while AMD has been increasing by .4 on average. AMD is turning over inventory more quickly than Intel. This low turnover for Intel is also observed by looking at their continually rising Inventory numbers.
