Enron Detailed Financial Analysis Report
This is a very interesting analysis of Enron's condition from in 1999 financials.
A few clips from the analysis....
The Company’s cash flow statement position was not favorable, indicating that positive cash flow may not be achieved in subsequent periods.
The Company’s cash position at the gross profit level was not favorable. This further jeopardizes the Company’s ability to continue its profitable business operations, since management of sales levels and direct costs to sales is critical to building a sustainable profitability picture.
Even though the Company remains profitable, the decline in profitability at the same time sales were increasing suggests that more control is needed over costs and expenses.
Full report below
Source: Logic Team Inc.
Detailed Financial Analysis Report
Company: Enron
Period: Historic 1/1/1999 to 12/31/1999
Benchmark: Combination Utilities, NEC
Period 1 1/1/1999 - 12/31/1999
Financial Statement Overview
Although the Company generated a $1,930,000 pretax profit, its income statement and cash flow statement positions were not favorable. The less than favorable income statement assessment indicates that, even though the Company was profitable, its expense and profitability margins did not compare favorably with the benchmark. The less than favorable cash flow statement position mirrors the unfavorable income statement position, since cash flow is generally based on sustainable business operations.
In addition, the Company’s balance sheet position was unfavorable, indicating that the Company’s capital structure should be reviewed in comparison with the benchmark. In view of the unfavorable balance sheet, income statement, and cash flow statement assessments, the Company’s Overall Financial Position is unfavorable for the period.
Overall Cash Position
The Company sustained a net cash loss of $(221,000), which decreased the current cash balance to $288,000. In addition, the Company’s liquidity position was not favorable. This observation implies that sufficient cash resources were not on hand to meet working capital requirements in comparison to the benchmark levels.
The Company’s cash flow statement position was not favorable, indicating that positive cash flow may not be achieved in subsequent periods. In addition, profitability was not favorable in comparison to the benchmark. This substantiates the less than favorable cash flow statement assessment, since continuity of cash flow is generally dependent on profitable business operations.
In view of the $(221,000) net cash loss and the less than favorable assessments of cash flow, profitability, and liquidity, the Company’s Overall Cash Position is unfavorable for the period.
Cash Flow Position
The Company sustained a $(221,000) cash loss after business operations and financing transactions that was deducted directly from the Company’s cash account for the current period.
The Company did not manage its sales levels and direct selling costs in a favorable manner relative to cash flow, directly impacting gross profit. In addition, the Company did not manage its cash flow from business operations in a favorable manner.
The Company did not manage its capital asset transactions in a favorable manner during the period. In addition, the Company’s management of external financing activities was less than favorable. Given the $(221,000) net cash loss and the issues with gross profit management, business operations, capital asset management, and financing transactions, the Company’s Cash Flow Statement Position is unfavorable for the period.
Business Operations
The Company sustained a net cash loss from operations in the amount of $(1,183,000) for the current period. Since the Company produced a $1,930,000 pretax profit for the same period, the $(1,183,000) cash loss implies that cash drains occurred with related asset and liability transactions. Such transactions would typically include increases to outstanding receivables or inventory levels, paydowns in accounts payables levels, or paydowns in outstanding accrued liabilities (such as payroll-related transactions). Management should look at these transaction areas to determine if the cash drain was temporary or could continue into the future.
A significant and longer-term issue is the less than favorable profitability assessment for the period, which suggests that the $1,930,000 pretax profit could undergo erosion. Please refer to the Profitability analysis assessment for a detailed review of this important cash flow component.
The Company’s cash position at the gross profit level was not favorable. This further jeopardizes the Company’s ability to continue its profitable business operations, since management of sales levels and direct costs to sales is critical to building a sustainable profitability picture. Please refer to the Cash From Sales and Cost of Sales analysis assessment for a detailed review of this important area. Given all of the above, the Company’s overall assessment of Business Operations is unfavorable for the period.
Cash From Sales And Cost of Sales
The Company generated a $5,351,000 gross profit on net sales of $40,112,000 for the historic period. After netting out the effects of increases or decreases in accounts receivable, inventory, and payables transactions, the Company generated a gross cash margin of $4,097,000.
Although the Company generated a positive gross profit margin for the period, its overall assessment in this area was less than favorable. Please refer to the detailed analysis presented in the Profitability analysis area. This unfavorable assessment of the Company’s gross profit position means that management was not controlling sales levels, direct sales costs, or related working capital transactions in a satisfactory manner for the period.
The additional cash drain from working capital transactions came from increases in inventory levels and increases in accounts receivable for the period. Even so, management is doing a proper job of monitoring and controlling working capital components as the working capital turnover assessment was favorable for the period.
Given the less than favorable gross profit picture and taking into account the favorable handling of related working capital assets and liabilities, the overall rating for Cash From Sales and Cost of Sales is somewhat unfavorable for the period.
Capital Expenditures
The Company purchased fixed assets in the amount of $894,000 for the current period. In addition, management elected to pay cash dividends of $66,000 to shareholders during the same period. The Company sustained a net cash loss of $(221,000) after all financing transactions, if any. This $(221,000) cash loss was taken directly from the Company’s cash account.
Management should look closely at the nature and timing of fixed asset purchases and shareholder profit distributions, since the Company sustained a cash loss for the current period. Please refer to the detailed assessment in the Cash Flow Statement Overview analysis area for more information on the broader picture surrounding the net cash loss.
Overall profitability for the period was less than favorable, indicating that the Board’s decision to pay cash dividends to stockholders may be questioned. Please refer to the Profitability analysis assessment for a detailed review of this area.
The overall balance sheet condition was less than favorable for the current period, indicating that capital asset purchases and dividend payments may not have been well timed. The acquisition of fixed assets caused a direct outflow in cash and dividends paid may have contributed to balance sheet problems by draining cash. Please refer to the Balance Sheet analysis assessment for a detailed review of this area. In view of the above, the overall assessment for the Capital Expenditures analysis area is unfavorable.
Debt And Equity Transactions
The Company incurred $1,708,000 in external financing for the period. This amount was not sufficient to cover the $1,929,000 in external financing requirements resulting from business operations. This means that the difference was taken directly from the Company’s cash account for the period.
The Company’s leverage condition was less than favorable for the period, indicating that the newly acquired financing may have strained the Company’s capital structure, perhaps in the liquidity area. The drain on existing cash to cover the financing shortfall may also have created a strain on leverage by reducing the equity level.
Going further, the Company’s overall balance sheet period was also unfavorable for the period. This implies that management should look carefully at ongoing business operations from a cash flow viewpoint and also at capital expenditures, if any. Please refer to these two analysis areas for a detailed review and assessment.
In view of the Company’s unfavorable leverage condition and similarly unfavorable balance sheet position, the overall assessment for Debt and Equity Transactions is unfavorable for the period.
Income Statement Position
Although the Company generated a pretax profit of $1,930,000 on net sales of $40,112,000 for the historic period, the profitability position is somewhat unfavorable in comparison to the benchmark. In addition, there is some concern over the control of sales costs and operating expenses in relation to net sales during the period. The somewhat unfavorable profitability and growth management assessments indicate a somewhat unfavorable Income Statement Position for the Company this period.
Profitability
The Company generated a pretax profit of $1,930,000. However, the Company’s pretax profit margin of 4.8115% was not favorable when compared against the median benchmark value of 4.8800%. The unfavorable pretax profit margin benchmark rating implies that more control should be focused on bringing costs and expenses in line with current revenue levels.
While the Company generated a gross profit of $5,351,000, the associated 13.3401% gross profit margin was not favorable when compared to the median benchmark value of 43.6700%. This suggests that more control over direct selling costs is needed.
The Company managed its operating expenses in a favorable manner for the period. Specifically, its operating expenses as a percentage of sales were 11.8767% as compared to the median benchmark value of 30.3400%. This implies that the Company was maintaining adequate control over its ongoing operating expenses as compared to the measure.
In view of the $1,930,000 pretax profit and the favorable assessments of gross profit margin and operating expense percentage, and taking into account the unfavorable assessment of the pretax profit margin, the Company’s overall Profitability rating is somewhat unfavorable for the period.
Growth Management
The Company generated a pretax profit of $1,930,000 on net sales of $40,112,000, representing a decline of 0% from the prior period, although net sales increased by 28.32% during the same period.
Even though the Company remains profitable, the decline in profitability at the same time sales were increasing suggests that more control is needed over costs and expenses. In view of this concern, the Company’s Growth Management assessment is somewhat unfavorable for the period.
Balance Sheet Position
Although the Company maintained $496,000 in working capital, its overall liquidity position was unfavorable when compared to the benchmark. Even so, the Company’s working capital turnover levels were favorable in comparison to the benchmark. However, the Company’s leverage position was unfavorable in relation to the same benchmark, reflecting a high level of debt. In view of the unfavorable liquidity and leverage assessments, the Company’s overall Balance Sheet Position is unfavorable for the period.
Liquidity
The Company’s current ratio was 1.0734 and compares unfavorably to the median value of 2.0901. However, the Company did have $1.0734 in current assets for every $1.00 in current liabilities, indicating greater than 1:1 coverage of short-term financial obligations totaling $6,759,000. Since the $7,255,000 in current assets includes inventory of $598,000, which typically takes longer to turn into cash, a more reliable measure of liquidity is the quick ratio.
The quick ratio is simply the current ratio with inventory omitted, so the current assets include only cash and near-cash assets plus the Company’s receivables. The Company’s quick ratio for the period was 0.9849, which is unfavorable in comparison to the median benchmark value of 1.6340. This means that the Company had current assets (omitting inventory) of $0.9849 for every $1.00 in current liabilities.
While the quick ratio is generally considered to be a good measure of liquidity, it relies on accounts receivable collections as a source of available cash to meet the Company’s obligations. In this case, the Company’s average collection time for its $2,990,000 in accounts receivable was 27.2076 days, which is favorable in relation to the median value of 75 days.
Another determinant of liquidity is the average number of days required to convert inventory to cash. Along with the favorable receivables assessment, the Company’s average inventory holding period was 6.2792 days, which is favorable when compared with the median value of 12 days.
In view of the unfavorable current ratio and unfavorable quick ratio liquidity measures, the Company’s Liquidity assessment is unfavorable.
Working Capital Turnover
The Company maintained 27.2076 days of receivables on hand for the period, which is favorable when compared to the median benchmark value of 75 days. In addition, the Company’s inventory turnover was 6.2792 days, which is also favorable in comparison to 12 days for the benchmark.
The Company’s payables management was also favorable in comparison to the same standard with 22.6176 days in average payables on hand versus 47 days for the median benchmark value. In view of the favorable maintenance of receivables, inventory, and payables account levels, the Company’s overall assessment of Working Capital Turnover management is favorable for the period.
Leverage
The Company’s debt to equity ratio was unfavorable at 2.4881 and compared unfavorably to the median value of 1.1262. The unfavorable debt to equity ratio means that the Company’s overall capital structure was not good with regard to management of debt.
The Company’s unfavorable equity position with regard to debt also implies that it was not adequately positioned to weather an economic downturn in that it was burdened by heavier debt. In light of the unfavorable debt to equity rating, the overall Leverage assessment for the period is unfavorable. |
