Kelloggs Company is one that we all are aware of from the grocery store of buying cereal. This company provides cereal such as Frosted Flakes, Rice Crispy and different others cereal and food. Its competitors such as General Mills and Quicker Oats will be use to producing the financial performance of explaining the income and balance sheet of two or three years of the horizontal analysis. Also it will provide the different types of ratio and liquidity of the companies within the same industry of its competitors and recommendation of the strengths and risk to investing within the company.
In assessing the company financial performance of the company, investors are interested in the sustainable earning and comparison from period to period of the company. A comparison of Kellogg current year cash amount with the prior year's cash amount shows an increase or a decrease. Likewise, a comparison of Kellogg's year-end cash amount with the total assets at year-end shows the proportion of total assets in the form of cash.
Comparisons with other companies provide insight into a company's competitive position. Kellogg's total sales for the year can be compared with its competitors such as Quaker Oats and General Mills total sales. Comparisons with industry averages provide information about a company's relative position within the industry. Kellogg's financial data can be compared with the averages for its industry financial ratings organizations such as Dun & Bradstreet, Moody's, and Standard & Poor's or with Yahoo! on its financial site.
There are three basic tools that are used in financial statement analysis, but only two will be explain into the financial statement data such as Horizontal analysis and Ratio analysis.
Horizontal analysis, also known as trend analysis, is a technique for evaluating a series of financial statement data over a period of time. Its purpose is to determine the increase or decrease that has taken place. The increase or decrease can be expressed as either an amount or a percentage.
The horizontal analysis, is illustrated of its most recent net sales are given of Kellogg Company:
2007 2006 2005
$11,776 $9,614 $8,812
Let assume that 2005 is the base year; we measure all percentage increases or decreases from this base-period amount with the following formula:
Change Since Base Period = Current-Year Amount - Base-Year Amount
Base-Year Amount
For example, we determine that net sales for Kellogg Company increased approximately 0.10 % [($9,614 - $8,812) / $8,812] from 2005 to 2006.
We can express current-year sales as a percentage of the base period by dividing the current-year amount by the base-year amount:
Current Results in Relation
to Base Period
=
Current-Year Amount
Base Year Amount
The Current-period sales expressed as a percentage of the base-period for each of the Three years, assuming 2005 as the base period is:
2007 2006 2005 2004 2003
$11,776 $10,907 $10,177 $9,614 $8,812
133.64% 123.77% 115.49% 109.10% 100%
The financial statements of Kellogg Company are used to further illustrate horizontal analysis:
KELLOGG COMPANY, INC.
Balance Sheets
December 31
Increase (Decrease)
during 2007
Assets 2007 2006 Amount Percent
Current Assets $2,717 $2,427 $ 290 11.9
Plant assets (net) 2,990 2,816 174 6.2
Other assets 5,690 5,471 219 4.0
Liabilities and Stockholders' Equity
Current liabilities $4,044 $4,020 $ 24 0.6
Long-term liabilities 4,827 4,625 202 4.4
Total liabilities 8,871 8,645 226 2.6
Stockholders' equity
Common stock 493 397 96 24.2
Retained earnings 3,390 2,584 806 31.2
The comparative balance sheet shows a number of changes from 2006 to 2007. Current assets increased $290 million, or 11.9% ($290/$2,427). Property assets (net) decreased $174 million, or 6.2%
Other assets increased $219 million or 4.0%. Current liabilities increased $24 million or 0.6% while long-term liabilities decreased $202 million, or 4.4%. Retained earnings increased $806 million, or 31.2%.
A 2-year comparative income statement of Kellogg Company for 2007 and 2006 is given in condensed format:
KELLOGG COMPANY, INC.
Income Statement
For the Years Ended December 31
2007 2006 Amount Percent
Net sales $11,776 $10,907 $869 8.0
Cost of goods sold 6,597 6,082 515 8.5
Gross profit 5,179 4,825 354 7.3
Selling and
Administrative expenses 3,311 3,059 252 8.2
Income from operations 1,868 1,766 102 5.8
Interest expense 319 307 12 3.9
Other income (expense), net (2) 13 (15) (115.4)
Income before income taxes 1,547 1,472 75 5.1
Income tax expense 444 468 (24) (5.1)
Net income $1,103 $1,004 $99 9.9
The Horizontal analysis of the income statements shows these changes:
Net sales increased $869 million, or 8.0% ($869 ÷ $10,907). Cost of goods sold increased $515 million, or 8.5% ($515 ÷ $6,082). Selling and administrative expenses increased $252 million, or 8.2% ($252 ÷ $3,059).Gross profit increased by 7.3% and net income increased by 9.9%.The increase in net income can be attributed to the increase in net sales and a decrease in Income tax expense. When using horizontal analysis, it item has no value in a base year or preceding year and a value in the next year, no percentage change can be computed. And if a negative amount appears in the base or preceding period and a positive amount exists in the following year, no percentage change can be computed.
Many ratios used for evaluating the financial health and performance of a company are presented. This provides a comprehensive review of those ratios, and some relationships among them focuses on their interpretation. Ratios can provide clues to underlying conditions that may not be from the individual components and it is not meaningful. In the two years for Kellogg Company ratios uses the following comparisons: General Mills that is one of Kellogg's competitors is being used. The industry average ratios for manufacturers of flour and other grain mill products are comparison with other sources.
Liquidity ratios measure the short-term ability of the enterprise to pay its maturing obligations and to meet unexpected needs for cash. The Short-term creditors, such as bankers and suppliers, are particularly interested in assessing liquidity. The measures that can be used to determine the enterprise's short-term debt-paying ability are the current ratio, the current cash debt coverage ratio, the receivables turnover ratio, the average collection period, the inventory turnover ratio, and the average days in inventory.
The current ratio expresses the relationship of current assets to current liabilities, computed by dividing current assets by current liabilities.
The quick ratio, also known as the acid-test ratio, is a liquidity ratio that is more refined and more stringent than the current ratio. Instead of using current assets in the numerator, the quick ratio uses a figure that focuses on the most liquid assets. The main asset left out is inventory, which can be hard to liquidate at market value in a timely fashion. The quick ratio is more conservative than the current ratio and focuses on cash, short-term investments and accounts receivable. (The formula is as follows:
Quick Ratio = (Cash & Equivalents + Short-Term Investments + Accounts Receivable) ÷ Current Liabilities
Taking a look at the 2007 financial statements for Kellogg Company, we find that cash and equivalents are $8,600,000, accounts receivable are $2,700,000 and short-term investments are $0. Current liabilities are $13,100,000 for the year. Plugging these figures into our formula gives us a quick ratio of 0.863, rounded to 0.9, for fiscal-2010.
For Example:
Financial Statement Data for Kellogg's Company
2010
Cash & equivalents
$8,600
Accounts receivable
$2,700
Short-term investments
$0
The cash ratio is the most conservative of the three liquidity ratios that is simply the ratio of cash and equivalents compared to current liabilities. This ratio looks only at assets that can easily used to pay off short-term debt, and it disregards receivables and short-term investments. The argument for using the cash ratio is that receivables and short-term investments often cannot be liquidated in a timely manner. Receivables can be sold, or monetized, but the firm will not be able to get the full value of the receivables sold. Keep in mind that, due to their high liquidity, short-term notes are considered cash equivalents, not short-term investments. The formula for the cash ratio is as follows:
Cash Ratio = Cash & Equivalents ÷ Current Liabilities
For fiscal-2010, the calculation for cash ratio involves using $8,600,000 for the numerator of the equation and $13,100,000 for the denominator. After plugging in the numbers, we find that the cash ratio for fiscal-2010 is 0.656, rounded to 0.7. Calculating the ratios is typically the easy part. The difficulties lie in analyzing the ratios, interpreting their meaning and making an educated investment based on the findings. A competitive analysis and industry and sector analyses are good first steps.
Comparing Liquidity Ratio
Kellogg's Company
2008
2007
2006
Current ratio (X)
0.8
1.3
1.5
Quick ratio (X)
0.7
1.2
1.4
Cash ratio (X)
0.2
0.8
1.1
Quicker Oaks
2008
2007
2006
Current ratio (X)
0.6
0.7
0.8
Quick ratio (X)
0.5
0.6
0.6
Cash ratio (X)
0.1
0.1
0.3
The liquidity ratios for 2008 through 2010 are listed for Kellogg's Company and one of its main competitors, General Mills. Note that the quick ratio we calculated for Kellogg's Company for 2008 is slightly different.
Instead of short-term investments, Stock Investor Pro uses marketable securities in the numerator of the equation, causing its quick ratio calculation to be slightly higher. Either formula works as long as you remain consist in your analysis as stated, a company or businesses with higher liquidity ratios are better able to meet their short-term obligations. You can see that Kellogg's Company has significantly higher liquidity ratios across the board compared to General Mills. For fiscal-2010 Quicker Oaks has a cash ratio of just 0.1, meaning that it only has enough cash on hand to cover 10% of its short-term obligations. Another major observation can be made using time-series analysis. Ratios for both organizations were the strongest at the end of 2006, bottomed out in late 2008, and rebounded in 2009 through the end of 2010. This can be easily explained by the recession we experienced in 2008. Kellogg and Quaker Oats both are cereal and other food company.
In conclusion, although competitors such as General Mills and Quicker Oats will be use to producing the financial performance of explaining the income and balance sheet of two or three years of the horizontal analysis. Also it will provide the different types of ratio and liquidity of the companies within the same industry of its competitors and recommendation of the strengths and risk to investing within the company. Looking at these ratios can lead you to believing that Kellogg is a strong company but may be better to invest in the early 2009. However, on the other hand Quaker Oats is a large company but its liquidity ratios may be due its expansion policies. Not rely too heavily on single set ratios but it research organization as a whole. Overall, I would recommend investor, because it is a strong organization and always will be strong compare to industry of it high ratios and it show how well the company or organization handling there business financial liquidity for cash.
