Walgreen Boots Alliance (WBA)

Fundamental analysis of Walgreen Boots Alliance (WBA), July 7, 2017

Update, August 25, 2017

Walgreen Boots is valued at 21 times last year’s earnings. If we assume that the company will make $4.00 in 2017, the forward P/E ratio comes in at 20.

Because the company has a lot of intangible assets the Price to Book comes in at 19.7, which is very high.

In summary, I would not buy shares in Walgreen Boots at this time.

 

 

Description:

Walgreen Boots Alliance is an American pharmacy chain with many business areas in the health sector.

 

Valuation:

At $78 and a trailing P/E of 20.3, the company is expensive. Looking at an average of the past three years’ earnings, the P/E comes in at 23.7 which is not better. Because of their intangible assets the Price to Book value is also very high at 19.0.

 

Balance sheet:

The company has a Debt to equity ratio of 1.4 and a Working capital to debt ratio of 0.2 which is OK, but not extraordinary. The Net working capital is $8.9 bn which of course is a lot of cash.

Last year, the Return on equity was 14 per cent which was OK, but not extraordinary. A high Return on equity usually correlates with a high Free cash flow.

 

Free cash flow and dividend:

Last year Walgreen Boots had a Free cash flow of $6.5 bn which allows them to buy back a lot of the expensive shares that they have issued.

It also allows them to pay a dividend of 1.46 (1.9 per cent). The dividend has been uninterrupted and increasing for at least 25 years.

 

Conclusion:

The company is too expensive at these prices. Ideally I would like to see them fall by 50 per cent before dipping my toes.

There is nothing wrong with the company, but it is simply too expensive.

 

 If you would like to learn more about fundamental analysis you can do that here.

Leggett & Platt (LEG)

Fundamental analysis of Leggett & Platt Inc., June 2, 2017

Update, August 21, 2017:

Leggett & Platt is neither expensive nor cheap at 16.8 times the earnings of 2016. Assuming forward earnings of $2.50 for 2017, the forward P/E ratio is 18.6 which is on the high side. I would not be a buyer of the stock at these prices.

Description:

Leggett & Platt is a designer and manufacturer of home and office products. It has its headquarters in Carthage, Missouri.

Valuation:

Leggett & Platt seems expensive at a trailing P/E of 19.0. Over the average past three years the P/E is even worse at 27.6. The Shiller P/E is very high at 46.7. Given the high amount of intangible assets the company’s Price to book ratio is very high at 53.3.

Balance sheet:

With a Working capital of $620m seems well capitalized. At least they don’t have any problems with paying their short-term bills. However the company has a Debt to equity ratio of 1.7, a figure associated with high risk. Net earnings to sales in 2016 came in at 10.3 per cent which is good for a manufacturing company. Last year’s Return on equity was very high at 35 per cent.

Free cash flow and dividend:

Leggett & Platt has a Free cash flow of $430m which equates to $3 per share. Of this the company pays out a dividend of $1.12 (2.5%) which seems reasonable.

Conclusion:

Leggett & Platt is a well run company with solid earnings and good cash flow. However, at these prices I would not buy new stock.

 

 If you would like to learn more about fundamental analysis you can do that here.

How to use Microsoft Excel in finance – Part 3

This time we will look a bit more in depth on how to use Microsoft Excel for financial calculations.

Green Excel icon with text about using Microsoft Excel in finance

What we will look at today is Financial statements and how to use them in order to understand the financial health of a company.

In particular we will look at:

  • Financial statements
    • Balance sheet
    • Income statement
  • The basic difference between accounting (or book) value and market value.
  • The difference between accounting income and cash flow.
  • How to determine a firm’s cash flow from its financial statements.
    • Calculate cash flow.
  • The difference between average and marginal tax rates.
    • Calculate taxes

Finance not accounting

The first thing to grasp is that we will look at the numbers and look at them through the eyes of people in finance.

They use the numbers differently than the people in accounting and we will show you how.

Balance sheet

In the last article we talked about this formula:

Assets = Liabilities + Equity

Everyone in finance is using this equation and not just in finance but also in accounting.

What the Balance sheet does is that it reflects the equation.

The Balance sheet is a snapshot of the Firm’s account balances at the last day of the reporting period.

Hypothetical Balance Sheet of ABC Corporation (Current assets, Non-current assets and Total assets).

Figure 1. Hypothetical Balance Sheet of ABC Corporation (Current assets, Non-current assets and Total assets).

Assets

The assets are divided into Current assets and Non-current assets where the Current portion is assets that can be turned into cash within 12 months.

Then per definition Cash is a Current asset. Then we Accounts receivable which is accounts that will be cash soon. Inventory is another Current asset. The whole point of inventory is so that you can sell it and get cash.

The Current assets are important not only in finance, but also in accounting, auditing and banking. It’s very important to see a business’ Current assets, because if they don’t have very many current assets perhaps they cannot pay their bills.

The Non-current portion are fixed assets that cannot be easily transformed into cash. These are your buildings, your trucks or patents or the long-term assets that actually define your business.

This is what you’ve invested in because you think you can make a profit from this.

In a financial statement you will see different periods. That is because you want to compare one year’s numbers to another.

 

Liabilities

We will also talk about the other side of the equation, which are the liabilities. These are the funds that the company have at its disposal.

The company either goes out and get debt (current), it borrows money long-term (bonds) or it issues equity to get its funds which means the cash it is going to use to buy its assets.

Current liabilities are liabilities that need to be reimbursed within a year – much like the current assets which are assets that can be converted into cash within a year.

Current liabilities are the bills the company need to pay within one year.

As you can see, within the current liabilities there are two items Accounts payable and Notes payable.

Accounts payable is when the company goes out and buys products that it has to pay for. Notes payable is when the company borrows money that it has to reimburse within a year.

The combined current liabilities and non-current liabilities represent debt on the balance sheet.

Hypothetical Balance Sheet of ABC Corporation (Current liabilities, Non-current liabilities, Total liabilities and Shareholders' equity).

Figure 2. Hypothetical Balance Sheet of ABC Corporation (Current liabilities, Non-current liabilities, Total liabilities and Shareholders’ equity).

Shareholders’ equity

In cell A19 you can see that we’ve written Common stock and paid-in surplus. What that means is that if the company issues common stock and they are being priced at $22 but were supposed only to be worth $20, the paid-in surplus is the $2 that the stockholders pay in order to own the company.

Retained earnings belong to the shareholders and they are to be paid back to the shareholders in the form of dividends, but sometimes they are not.

If they are not paid out to the shareholders they can be used within the company in the form of investment.

The way to account for such a situation is to label the item Retained earnings.

Adding it all up

Finally we add it all up. First we calculate total liabilities which is the sum between current and non-current liabilities.

Then we calculate total liabilities plus shareholders’ equity which is just what it sounds like.

Why is it called the Balance sheet?

That’s because there’s an equal sign in the formula Asset = Liabilities + Equity which means that the two sides have to balance each other.

So what I do in cell B24 (Figure 2) is that I add the total assets from Figure 1 in cell B18 and in cell C24 (Figure 2) I add the Total liabilities and Shareholders’ equity from cell B22:

Comparison between Total assets for 2016 (B24) and Total liabilities and Shareholders' equity for 2016 (C24).

Figure 3. Comparison between Total assets for 2016 (B24) and Total liabilities and Shareholders’ equity for 2016 (C24).

The result that we get in D24 is then TRUE.

 

Working capital

Remember that Current assets are assets that the firm easily can convert into cash and that the Current liabilities are the bills that the company needs to pay within 12 months.

If your current liabilities are greater than your current assets it means you’re in trouble and you need to find cash somehow.

The Net working capital is the term that is used and it is defined as Current assets – Current liabilities.

The Net working capital is defined as the difference between the Current assets and the Current liabilities.

Figure 4. The Net working capital is defined as the difference between the Current assets and the Current liabilities.

The Net working capital is the short-term capital that the firm has to work with.

We will use the Net working capital when we do our cash flow calculations and we will also use it in the next chapter when we do analysis of financial statements.

In accounting you will see that the term Net working capital is used but in finance the term Capital is used more broadly for all assets.

If we now have our Current assets and Current liabilities on different sheets like this:

Screenshot of Microsoft Excel showing Assets, Liabilities and Working capital on different sheets.

Figure 5. Screenshot of Microsoft Excel showing Assets, Liabilities and Working capital on different sheets.

If we now want to calculate the Net working capital we do it like this:

In the sheet Working capital we type an equal sign in cell D16.

Screenshot of Microsoft Excel showing how to calculate a Net working capital: Step 1.

Figure 6.Screenshot of Microsoft Excel showing how to calculate a Net working capital: Step 1.

We then click on the sheet Assets in Figure 5. and we click on Current assets (cell B13):

Screenshot of Excel showing how to activate cell B13 in the sheet called Assets.

Figure 7. Screenshot of Excel showing how to calculate a Net working capital: Step 2.

If we look in the formula bar in Figure 7 we see that we have now activated cell B13 in the sheet called Assets. The exclamation sign means that we are using a different sheet for our data.

We then type a “-“-sign (1) and click on the “liabilities”-sheet (2) in Figure 5:

Then we click in cell B16 and hit Enter and we are immediately brought back to the Working capital sheet.

Screenshot of Microsoft Excel showing how to calculate the Net working capital from different working sheets in the same Excel document.

Figure 8. Screenshot of Microsoft Excel showing how to calculate the Net working capital from different working sheets in the same Excel document.

What’s important to remember here is not to click on Working capital sheet but rather hit Enter (if you don’t hit Enter your formula will be ruined).

If we then go back to the Working capital sheet and hit the F2 key, this will appear:

Screenshot of Microsoft Excel showing how to calculate the Net working capital in cell D16.

Figure 9. Screenshot of Microsoft Excel showing how to calculate the Net working capital in cell D16.

Of course, different businesses have different values for their Net working capital, but in general, the number should be positive.

Liquidity

We will then turn our attention to Liquidity:

Different concepts of liquidity and how it can be used.

Figure 10. Different concepts of liquidity and how it can be used.

Liquidity is important because if you run out of it you’re in trouble.

If your working capital is getting too small then maybe you have to sell assets to get cash for the company.

Liquidity is defined as:

How quickly an asset can be converted into cash.

Furthermore, liquidity has two dimensions:

  1. Ease of conversion into cash.
  2. Loss of value because you have to sell your asset quickly.

There are highly liquid assets which can be sold quickly without loss of value. (This can be inventory or a short-term investment).

How liquid is cash? That is the most liquid.

How liquid is accounts receivable? You can quite easily convert accounts receivable into cash. In fact you can sell those assets to bank and get cash in return.

The we have illiquid assets which are assets that cannot be sold quickly without significant price reduction. Examples of this are machinery and buildings.

You can almost sell anything if you reduce the price enough.

On the Balance sheet the items are usually listed in decreasing liquidity so that the most liquid assets come first.

Another aspect of liquidity is that businesses that have it can go out and get a loan easily.

A firm needs a positive working capital in order to pay its bills, but there is another aspect to it:

The reason why a lot of companies are keeping a lot of cash on their balance sheets is so that they can go out and buy other businesses quickly.

The last point is that you probably don’t want to have too much cash on your balance sheet because it doesn’t earn any return.

Building a balance sheet

We will then turn our attention to building a balance sheet:

Screenshot of Microsoft Excel showing how to build a balance sheet.

Figure 11. Screenshot of Microsoft Excel showing how to build a balance sheet.

The first thing that we want to look at is assets. What I do is that I type en equal sign in cell B10 and then I write SUM( and I highlight cells B7 and B8:

Screenshot of Microsoft Excel showing how to calculate Total assets by adding Current assets and Fixed assets.

Figure 12. Screenshot of Microsoft Excel showing how to calculate Total assets by adding Current assets and Fixed assets.

Then we do the same thing for the liabilities in cell E7 and E8:

Screenshot of Microsoft Excel showing how to calculate Total liabilities by adding Current liabilities and Long-term debt.

Figure 13. Screenshot of Microsoft Excel showing how to calculate Total liabilities by adding Current liabilities and Long-term debt.

The result in E10 will of course be $550.

How are we then going to calculate the equity? If you remember the fundamental accounting equation:

Assets = Liabilities + Equity

In other words:

Equity = Assets – Liabilities

So what we do is that we take the assets and we subtract the liabilities:

Screenshot of Microsoft Excel showing how to calculate Shareholders' equity by subtracting Total liabilities from Total assets

Figure 14. Screenshot of Microsoft Excel showing how to calculate Shareholders’ equity by subtracting Total liabilities from Total assets.

Then finally we can check that liabilities and equity equal assets, like so:

Screenshot of Microsoft Excel showing how to calculate Total liabilities and Shareholders' equity by adding cells E10 and E11 together

Figure 15. Screenshot of Microsoft Excel showing how to calculate Total liabilities and Shareholders’ equity by adding cells E10 and E11 together.

And the result in cell E12 is of course $1650.

Debt vs. equity

In finance we have Assets which are the use of the funds and on the other side of the equation we have Debt and Equity. Debt and Equity represent the source of funds:

Fundamental accounting equation where the Assets represent the use of funds and Debt and Equity the source of funds

Figure 16. Fundamental accounting equation where the Assets represent the use of funds and Debt and Equity the source of funds.

If we look at the Source of funds we will see that there are two different items: Debt and Equity. What is the difference between the two?

The debt is a Fixed claim and is something that you must pay back to the lender at some point in the future + interest.

The Equity on the other hand is Residual claim which means that you as a company does not have to pay the holder back

If I go out and buy a stock of ABC Corp. in the stock market for $50, the company does not have to pay me back if the stock loses value.

If the company goes bankrupt and there isn’t enough money around to pay off the creditors I get nothing. Residual means “left over”.

Then we have dividends which are only paid out once there is something left over.

Why then would anybody like to do equity if it’s always residual?

It’s because of the upside. If you invest in a well run business with equity that is steadily growing then you can make a lot of money.

Interest expenses (cash out) are tax deductible. This means that when you are paying your taxes you will pay a little bit less if you have interest payments.

Let’s say that you are paying $2500 in interest then if you deduct the interest payments you will less than that (let’s say $2300).

On the other hand dividends (cash out) are not tax deductible which means that there is a slight advantage of using debt.

The creditors are also paid first during bankruptcy while if you have equity you will get whatever is left over.

Debt

We will now turn our attention to debt:

Description of the expressions "Capital structure" and "Financial leverage"

Figure 17. Description of the expressions “Capital structure” and “Financial leverage”.

The question of whether to use debt or equity to raise funds is called Capital structure.

The term Financial leverage is used when the firm has debt. If you are using debt wisely you can reap the benefits of having your debt tax deductible and put the capital to productive use.

The more debt you have, the higher your leverage.

Leverage can magnify both gains and losses.

Market value vs. Book value

This will be the last topic that we will cover about the Balance sheet:

Description of the Market value and the Book value of an asset.

Figure 18. Description of the Market value and the Book value of an asset.

Market value

The Market value is the amount that you would get if you sold your equity stake.

For financial assets like stocks and debt you can go out and see what the value is every day.

But for a lot of equity this is not really possible so we need to estimate the market value.

Otherwise you do not know for sure until you sell your asset.

Book value

For fixed assets like machines and trucks finding a market value becomes much more difficult.

That is why accountants have invented the Book Value.

When I buy the business outright, the machines, the buildings and the inventory, that receipt is telling me what it is and will be the sum that I’m going to record.

That is also called the Historical cost principle and it is required by the Generally Accepted Accounting Principles (GAAP).

Then the Book value of the company often does not take into account the company’s most valuable assets such as:

  • Talented employees and managers
  • Customer lists
  • Reputation

These are all intangible assets, but it can be tangible assets also where the value of the assets can change radically from the price that you paid.

The Market value of an asset is almost always different from the Book value.

The goal of the financial management is to maximize the market value of the stock. At least in theory this is a good thing.

That means that the financial manager is more interested in the market value than he or she is of the book value.

We are given these numbers so we don’t have to research them:

Screenshot of Microsoft Excel showing Book value vs. Market value for a number of Balance sheet items.

Figure 19.Screenshot of Microsoft Excel showing Book value vs. Market value for a number of Balance sheet items.

Now we will calculate the Book value of the assets and we begin by adding cell B5 to the Book value in cell B16:

Screenshot of Microsoft Excel where we are calculating the Book value and the Market value of different assets. Here we are adding the Book value of the New working capital to cell B16.

Figure 20. Screenshot of Microsoft Excel where we are calculating the Book value and the Market value of different assets. Here we are adding the Book value of the New working capital to cell B16.

We then add the Book value of the Fixed assets to cell B17:

Screenshot of Microsoft Excel where we are calculating the Book value and the Market value of different assets. Here we are adding the Book value of the Fixed assets to cell B17

Figure 21. Screenshot of Microsoft Excel where we are calculating the Book value and the Market value of different assets. Here we are adding the Book value of the Fixed assets to cell B17.

Then we do the same thing for the Market value. We begin by adding the Net working capital to cell C16:

Screenshot of Microsoft Excel where we are calculating the Book value and the Market value of different assets. Here we are adding the Market value of the Net Working Capital to cell C16

Figure 22. Screenshot of Microsoft Excel where we are calculating the Book value and the Market value of different assets. Here we are adding the Market value of the Net Working Capital to cell C16.

We then continue the Market value of the Fixed assets (cell B4):

Screenshot of Microsoft Excel where we are calculating the Book value and the Market value of different assets. Here we are adding the Market value of the Fixed Assets to cell C17.

Figure 23. Screenshot of Microsoft Excel where we are calculating the Book value and the Market value of different assets. Here we are adding the Market value of the Fixed Assets to cell C17.

Finally we highlight cells B18 and C18 and use the keyboard shortcut Alt  + =.

What that does is that it calculates an auto sum of the numbers above it:

Screenshot of Microsoft Excel where we are calculating the Book value and the Market value of different assets. Here we are using the autosum option (Alt + =) in cells B18 and B19.

Figure 24. Screenshot of Microsoft Excel where we are calculating the Book value and the Market value of different assets. Here we are using the auto sum option (Alt + =) in cells B18 and B19.

We can then see that we have different numbers for Book and Market Value.

Finally we do the same thing for liabilities.

First we assume that the Book and Market value for the Long-term debt is the same:

Screenshot of Microsoft Excel where we are calculating the Book value and the Market value of different assets. Here we are using the Long-term debt from cell B7 in B25 and C25.

Figure 25. Screenshot of Microsoft Excel where we are calculating the Book value and the Market value of different assets. Here we are using the Long-term debt from cell B7 in B25 and C25.

So what is then Shareholders’ equity?

Remember the fundamental accounting equation in Figure 16:

Assets = Debt + Equity

That means if we fill in Total assets from cells B19 and C19 into B27 and C27:

Screenshot of Microsoft Excel where we are calculating the Book value and the Market value of Shareholders' equity and Total liabilities. Here we are using Total assets from cells B18 and C18 for Total liabilities and Shareholders' equity in cells B27 and C27.

Figure 26. Screenshot of Microsoft Excel where we are calculating the Book value and the Market value of Shareholders’ equity and Total liabilities. Here we are using Total assets from cells B18 and C18 for Total liabilities and Shareholders’ equity in cells B27 and C27.

we can then calculate Shareholders’ equity by subtraction:

Screenshot of Microsoft Excel where we are calculating the Book value and the Market value of Shareholders equity and Total liabilities. Here we are calculating the Shareholders' equity in cell B26 by subtracting B25 from B27.

Figure 27. Screenshot of Microsoft Excel where we are calculating the Book value and the Market value of Shareholders equity and Total liabilities. Here we are calculating the Shareholders’ equity in cell B26 by subtracting B25 from B27.

Then we do the same thing for the Market value in cell C26.

The final result is like this:

Screenshot of Microsoft Excel where we are calculating the Book value and the Market value of Shareholders' equity and Total liabilities. Here we are showing the final result.

Figure 28. Screenshot of Microsoft Excel where we are calculating the Book value and the Market value of Shareholders’ equity and Total liabilities. Here we are showing the final result.

Income statement

In this section we will talk about the Income statement.

The Income statement is different from the Balance sheet in that it shows revenues, expenses and net income for the whole period.

On the other hand, what the Balance sheet showed us was valid just for a particular day.

The first thing that we are going to look at is the Revenue:

 Picture showing Total revenue, Total sales and Net sales.

Figure 29. Picture showing Total revenue, Total sales and Net sales.

Total Revenue is the accounting term used for the Total sales of the business during the period.

Then we have Net sales which is the Amount earned by the business from delivering products or services.

You get this from taking the Total revenue and then subtracting any expenses.

Another thing that is important to recognize is that the company cannot record revenue before the product is delivered to the customer.

In accounting that is called accrual accounting.

The definition of accrual accounting is this:

Generally Accepted Accounting Principles (GAAP) definition of Accrual.

Figure 30. Generally Accepted Accounting Principles (GAAP) definition of Accrual.

As you can see there is both an Expense and Revenue meaning of the word.

If the business receives a bill and it isn’t due until 30 days later, they have to record the expense at the earlier date.

This is then an example of a hypothetical Income statement:

As you can see the statement is valid for the whole period ending on December 31, 2016.

For publicly traded stocks the reporting periods are either annual or by quarter.

In Figure 31 you will find a made up Income statement:

Screenshot of Microsoft Excel showing a hypothetical Income statement.

Figure 31. Screenshot of Microsoft Excel showing a hypothetical Income statement.

An Income statement is profit or loss for the whole period ( in this case the period is a whole year.)

We have our Total revenue and Cost of goods sold.

If you sell a widget for $100 and you paid $50 for it, you will record $100 as revenue and $50 for cost of goods sold.

If you look in cell C6 you will find an item called Depreciation and this is where accrual accounting comes in.

This is where the cash may be spent at at a different period from where it is received. We will look into when to book an expense like that.

It could come as cash, or it could come later as accounts receivables as we saw in the balance sheet.

Then we have Earnings before interest and tax which we get by subtracting Cost of goods sold and Depreciation from the Total revenue.

We calculate this by adding a formula. We first take Total revenue in cell C4 and subtract the sum between the Cost of goods sold in cell C5 and Depreciation in cell C6:

Screenshot of Microsoft Excel showing how to calculate Earnings before interest and tax by subtracting the sum of C5 (Cost of goods sold (COGS)) and C6 (Depreciation) from C4 (Total revenue).

Figure 32. Screenshot of Microsoft Excel showing how to calculate Earnings before interest and tax by subtracting the sum of C5 (Cost of goods sold (COGS)) and C6 (Depreciation) from C4 (Total revenue).

The result in cell C7 is then of course $1,928,000. We then do the same thing when we calculate the Taxable income by subtracting Interest paid (C8) from Earnings before interest and tax (C7):

Screenshot of Microsoft Excel showing how to calculate Taxable income by subtracting Interest paid (C8) from Earnings before interest and tax (C7)

Figure 33. Screenshot of Microsoft Excel showing how to calculate Taxable income by subtracting Interest paid (C8) from Earnings before interest and tax (C7).

The result in cell C9 is of course $1,856,000. Finally we are doing the same thing when we are calculating the Net income in cell C11 by subtracting taxes in cell C10 from Taxable income in cell C10:

Screenshot of Microsoft Excel showing how to calculate Net income by subtracting Taxes (C10) from Taxable income (C9).

Figure 34. Screenshot of Microsoft Excel showing how to calculate Net income by subtracting Taxes (C10) from Taxable income (C9).

The final Net income in cell C11 is then $1,536,00. The Net income (or the Earnings) can go in one of two places. Because technically they belong to the shareholders they can either be paid out in dividends or they can be plowed back into the business to buy more assets.

Generally if the company keeps a lot of retained earnings, it’s because they have good ideas of to make the company grow.

If we go back to the Balance sheet (Figure 8) and take a look at the item that is called Retained earnings, we now understand where that item comes from.

So in order to calculate how much money ABC Corp is keeping to plow back into the company we need to take the Dividend (cell C13) and subtract from the Net income (cell C11):

Screenshot of Microsoft Excel showing how to calculate Retained earnings (cell C14) by subtracting Dividends (cell C13) from Net income (cell C11).

Figure 35. Screenshot of Microsoft Excel showing how to calculate Retained earnings (cell C14) by subtracting Dividends (cell C13) from Net income (cell C11).

We will also consider the total number of shares outstanding. This means that at this particular date, the 31 December 2016, there were 210,000,000 shares outstanding.

Then we can calculate Earnings per share by dividing Net income (cell C11) x 1000 (because our numbers are divided by 1000 to begin with) by Shares outstanding (cell C15).

The formula looks like this:

Screenshot of Microsoft Excel showing how to calculate Earnings per share (cell C16) by dividing Net income (cell C11) times 1000 and the total number of shares outstanding (cell C15).

Figure 36. Screenshot of Microsoft Excel showing how to calculate Earnings per share (cell C16) by dividing Net income (cell C11) times 1000 and the total number of shares outstanding (cell C15).

The result in cell C16 will then be $7.31.

After that we continue with Dividend per share where we divide the Total dividend paid out in cell C13 (x 1000) with the total number of shares outstanding (cell C15):

Screenshot of Microsoft Excel showing how to calculate Dividend per share (cell C17) by dividing Dividends (cell C13) times 1000 and the total number of shares outstanding (cell C15).

Figure 37. Screenshot of Microsoft Excel showing how to calculate Dividend per share (cell C17) by dividing Dividends (cell C13) times 1000 and the total number of shares outstanding (cell C15).

The result in cell C17 will then be $0.31 which means that in this case the company keeps a lot of the earnings.

Depreciation

Then we come into the subject of depreciation:

Green picture with text Depreciation is a non-cash expense that shows up on the income statement

Figure 38. Explanation of the word Depreciation: Depreciation is a non-cash expense that shows up on the income statement.

In the following example we are using trucks for FedEx for $10 million with a Salvage value of 500,000 and an estimated time in use of 7 years:

The salvage value is what you would get out of your investment in a fire sale:

Screenshot of Microsoft Excel showing Linear depreciation of a $10,000,000 investment, $500,00 slavage value and 7 years of use.

Figure 39. Screenshot of Microsoft Excel showing Linear depreciation of a $10,000,000 investment, $500,00 salvage value and 7 years of use.

What this means is that if the cash goes out the first year, but that the Depreciation event is accounted for every year.

That means that there is no cash associated with it because it all went out the first year.

To give you an example of what I mean we first need to discuss the Matching principle:

Definition of the Matching principle in accounting.

Figure 40. Definition of the Matching principle in accounting.

This is part of the concept of accrual accounting that we discussed earlier in this chapter. What it means is basically that we need to add revenue and expenses in the right period so that they finally add up.

If we then look at Figure 39 again we see that we have a linear depreciation for our purchase of the assets over 7 years. What that means is that we assume that the trucks are going to last for 7 years.

But if we have the trucks they are going to generate revenue during that whole period and this we have to account for.

We do thisby matching the revenue that we are going to get from the trucks with the depreciation.

If we put this information into Excel it will look like this:

Screenshot of Microsoft Excel showing how to account for depreciation to match the related revenue for the same period.

Figure 41. Screenshot of Microsoft Excel showing how to account for depreciation to match the related revenue for the same period.

This is then the proper way of accounting for depreciation.

Another example of depreciation comes when we calculate Net capital spending or NCS:

Screenshot of Microsoft Excel showing how to calculate a Net capital spending or NCS.

Figure 42. Screenshot of Microsoft Excel showing how to calculate a Net capital spending or NCS.

What we are going to do is to calculate a Net cash flow from our accounting numbers.

The first thing that we need to look at is the begin number. The begin number we find in the Balance sheet item of Net fixed assets of the 31 December 2016 (cell B8).

Then we need to find the end number which is the Net fixed assets on the 31 December 2017 (cell B9).

That means that we have more cash at the end of the period than in the beginning (which is a good thing).

Then we need to look at the depreciation and because these items have already taken into account the depreciation we need to add it back.

The calculation therefore becomes B9 – B8 + B10. In Excel it looks like this:

Screenshot of Microsoft Excel showing the formula for calculating Net capital spending in cell B12.

Figure 43 Screenshot of Microsoft Excel showing the formula for calculating Net capital spending in cell B12.

The result in cell B12 is then of course $265,000.

Cash flow from accounting information

We previously discussed the concept of accrual accounting.

There is a fundamental problem with it and that is that it doesn’t consider cash flow.

That is what financial managers are interested in, cash.

We therefore have to take the financial numbers of the balance sheet and the income statement and convert them into cash:

Screenshot of Microsoft Excel showing a hypothetical balance sheet from which we are going to calculate cash flow.

Figure 44 Screenshot of Microsoft Excel showing a hypothetical balance sheet from which we are going to calculate cash flow.

On the balance sheet accrual accounting is for instance affecting Net fixed assets. Similarly, on the Income statement, Sales are recorded when they are earned and expenses are recorded when they are paid out:

Screenshot of Microsoft Excel showing a hypothetical Income statement from which we are going to calculate cash flow.

Figure 45. Screenshot of Microsoft Excel showing a hypothetical Income statement from which we are going to calculate cash flow.

The next figure is again the fundamental accounting equation:

The fundamental accounting equation where Assets equal Debt plus Equity.

Figure 46. The fundamental accounting equation where Assets equal Debt plus Equity.

In finance we think of the equation like this:

When FedEx buys trucks or Coca-Cola buys buildings they are acquiring assets which in other words is use of cash or funds. The reason why they buy these assets is because they think that they are going to make a profit from them.

Where are we then going to get the cash from? The cash is coming from either Debt or Equity which are the source of funds.

This equation, where we have Use of cash and Source of cash, will be our starting point when we calculate cash flow.

So the first question to answer is “What is cash flow?”

Figure explaining the concept of Cash flow.

Figure 47. Figure explaining the concept of Cash flow.

In finance people care about cash in and cash out.

Cash flow is not the same thing as Net earnings.

We will therefore have to derive cash flow information from the Balance sheet and the Income statement.

We will look at how cash is generated from utilizing assets and how it’s paid to those that finance the purchase.

Figure explaining how Cash flow from assets equals Cash flow to creditors and Cash flow to stockholders.

Figure 47. Figure explaining how Cash flow from assets equals Cash flow to creditors and Cash flow to stockholders.

What this means is that Cash flow from assets can either go to the Bondholders or the Stockholders.

In the next figure all the calculations we are going to do are summarized:

Summary of all the Cash flows that we are going to calculate.

Figure 48. Summary of all the Cash flows that we are going to calculate.

If we begin with the second box we see that it says Cash flow from assets and the way to calculate it is by taking the Operational cash flow and subtracting Net capital spending and Changes in net working capital.

In order to calculate the Operational cash flow we need to take the EBIT (Earnings Before Interest and Taxes) and add back the Depreciation minus Taxes.

To understand this we need to take another look at our Income statment (Figure 45). There we see that we have an item called EBIT and below that we have Interest. Where does the interest go? To the creditors. This means that EBIT should belong to the Operational cash flow.

In the end we need to subtract the Taxes from EBIT and add back the Depreciation, because it’s a non-cash item.

To calculate the Net capital spending we need to take the end value of the Net fixed assets then subtract the value of the Net fixed assets at the beginning of the period and finally add back the non-cash Depreciation on the Income statement. We do this because we’ve already taken this into account when we calculate the value of the assets.

Changes in Working capital is all change calculated by taking something at the end of the period minus the beginning. In this particular case we do it by taking the working capital for the end of the period minus working capital for the beginning. How do we calculate the working capital? We do it by subtracting current liabilities from current assets.

Then we have the Cash flow that go out to our creditors. The first thing that we do is that we identify the Interest paid and then we subtract the Net new borrowing. The Net new borrowing is always the change of the Long-term debt, calculated as the long-term debt at the end of the period minus the long-term debt at the beginning.

Of course the net new borrowing can be both positive or negative. If the company takes on more debt then the Net new borrowing is positive and we will say Interest paid minus the new debt that we’ve issued will be our Cash flow to creditors.

At last we have Cash flow to shareholders which is similar to Cash flow to creditors. We begin by taking the dividends paid and then subtracting the Net new equity that we’ve raised.

The way that we calculate the Net new equity is that we begin by looking at value of the common stock and paid-in surplus at the end of the period minus the common stock and paid-in surplus at the beginning of the period.

Then we have defined all the cash flow calculations that we are going to do.

Income statement, Balance sheet and Cash flow problem

We are then going to take on a comprehensive problem. We will call it Exercise 1. In Figure 49 we have a lot of information that we are going to use:

We have information about the corporation, the dates and the tax rates and for a number of accounts we have a begin of a period and an end of the same period.

What we are going to do is to calculate an income statement, a balance sheet and then a cash flow.

Screenshot of Microsoft Excel showing assumptions, requirements and accounts for the two years 2016 and 2017 that we are going to use for the exercise (1).

Figure 49. Screenshot of Microsoft Excel showing assumptions, requirements and accounts for the two years 2016 and 2017 that we are going to use for Exercise 1.

This is then the income statement that we are going to fill out:

Screenshot of Microsoft Excel showing the hypothetical income statement that we are going to fill out in Exercise 1.

Figure 50. Screenshot of Microsoft Excel showing the hypothetical income statement that we are going to fill out in Exercise 1.

The first thing that we notice in the exercise is that the income statement is for the year 2017. That means that we only need to take the values for 2017. In cell C28 we therefore type =C15, like so:

Screenshot of Microsoft Excel showing how we take the value for Sales and 2017 (C15) and put it in the income statement.

Figure 51. Screenshot of Microsoft Excel showing how we take the value for Sales and 2017 (C15) and put it in the income statement.

Next we take the Cost of goods sold for the year 2017 which we find in cell C16:

Screenshot of Microsoft Excel showing how we take the value for the Cost of goods sold and 2017 (C16) and put it in the income statement.

Figure 52. Screenshot of Microsoft Excel showing how we take the value for the Cost of goods sold and 2017 (C16) and put it in the income statement.

Then the Depreciation for the year 2017 is found in cell C17:

Screenshot of Microsoft Excel showing how we take the value for the Depreciation and 2017 (C17) and put it in the income statement below in the figure.

Figure 53. Screenshot of Microsoft Excel showing how we take the value for the Depreciation and 2017 (C17) and put it in the income statement below in the figure.

Then we want to calculate the earnings before interest and tax and the way we do that is to take our Net sales and then subtract the Cost of goods sold and the Depreciation. In Excel it looks like this:

Screenshot of Microsoft Excel showing how we to calculate the Earnings before interest and taxes by subtracting the Cost of goods sold and Depreciation from Net sales.

Figure 54. Screenshot of Microsoft Excel showing how we to calculate the Earnings before interest and taxes by subtracting the Cost of goods sold and Depreciation from Net sales.

The result in cell C31 is then of course $930.

Then we want to find the interest which is given in cell C18:

Screenshot of Microsoft Excel showing how we take the value for the Interest and 2017 (C18) and put it in the income statement below in the figure.

Figure 55. Screenshot of Microsoft Excel showing how we take the value for the Interest and 2017 (C18) and put it in the income statement below in the figure.

Then we want to calculate the Taxable income. How do we do that?

We take our earnings before interest and tax (C31) minus the interest (C32), like so:

Screenshot of Microsoft Excel showing how to calculate the Taxable income by subtracting Interest from Earnings Before Interest and Tax (EBIT).

Figure 56. Screenshot of Microsoft Excel showing how to calculate the Taxable income by subtracting Interest from Earnings Before Interest and Tax (EBIT).

Then we are going to calculate the taxes. How much are we to pay in taxes?

To calculate that we first have to take the taxable income (C33) and multiply with the Tax rate (B5):

Screenshot of Microsoft Excel showing how to calculate Taxes by multiplying the Taxable income (cell C34) with the Tax rate (cell B5).

Figure 57. Screenshot of Microsoft Excel showing how to calculate Taxes by multiplying the Taxable income (cell C34) with the Tax rate (cell B5).

If we then hit enter we will get two decimals like this in cell C34:

Screenshot of Microsoft Excel showing taxes with two decimals.

Figure 58. Screenshot of Microsoft Excel showing taxes with two decimals.

What this then means is that we usually have to round to the nearest dollar (but in this case we don’t have to). So how do we do that?

In the same way that we can use the sum function for summing or the average function for calculating averages, there is a round function that we can use. It is used like this:

Screenshot of Microsoft Excel showing how to use the <i>round</i> function.

Figure 59. Screenshot of Microsoft Excel showing how to use the round function.

What do we do in Figure 59? We are rounding to the nearest dollar.

Finally to calculate the Net income we take the taxable income in cell C33 minus the taxes in cell C34, like so:

Screenshot of Microsoft Excel showing how to calculate Net income by subtracting Taxes (cell C34) from Taxable income (cell C33).

Figure 60. Screenshot of Microsoft Excel showing how to calculate Net income by subtracting Taxes (cell C34) from Taxable income (cell C33).

Then we have dividends which is given in cell C19:

Screenshot of Microsoft Excel showing how to transfer Dividends from cell C19 to C37.

Figure 61. Screenshot of Microsoft Excel showing how to transfer Dividends from cell C19 to C37.

Now the dividends can go in either of two ways. Either it goes out of the company to the shareholders or its kept within.

If it’s kept within the company, the dividends are to be used for purchase of new productive assets. Thus they are added to the retained earnings or subtracted from the net income, like so:

Screenshot of Microsoft Excel showing how to add the Dividends to the Retained earnings by subtracting them from the Net income.

Figure 62. Screenshot of Microsoft Excel showing how to add the Dividends to the Retained earnings by subtracting them from the Net income.

We then want to build our balance sheet.

First, we look at the current assets for 2016:

 

This article is part of a series. You can read Part 1 here and Part 2 here. This article is highly influenced by the excellent work of Michael Girvin (Excelisfun) on Youtube.

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Nucor, Inc.

Fundamental analys of Nucor, July 15, 2017

Green picture of steel beam with text about Nucor, Inc.

Update, August 14, 2017

Nucor is valued at 22.2 times its earnings in 2016. This is in my opinion too pricey.

If we then estimate the earnings for this year to $3.50 the P/E multiple comes in at 15.8 which is still too high, but slightly better.

Balance sheet, earnings and dividend history are all outstanding.

 

In summary I would not buy Nucor at these prices.

 

Description:

Nucor is an American steel producer that sells steel and steel products in the United States and internationally. Their headquarters are in Charlotte, North Carolina.

 

Valuation:

At $60 and 24 times trailing earnings, Nucor is expensive. When looking at an average of the past three years’ earnings the P/E ratio comes in at 37 which is a lot of money.

The Price to book value is also high at 3.6.

 

Balance sheet:

The Balance sheet of course looks good. In the end, this is what the market is paying for. Their Debt to equity ratio is 0.8 which is considered low risk and their Working capital is $4.1 billion which at least means that they can pay their short-term bills.

 

Free cash flow and dividend:

Last year Nucor had a Free cash flow of $1.1 billion which equates to $3.50 a share. Of this they are paying a dividend of $1.49 which means that the current yield is 2.5%.

Nucor is part of The Dividend Aristocrats which means that they have been paying out uninterrupted and increasing dividends for more than 25 years.

 

Conclusion:

If the share had been 30 per cent cheaper I would have been a buyer. Now it is too expensive for my taste.

 

 If you would like to learn more about fundamental analysis you can do that here.

Johnson & Johnson

Fundamental analysis of Johnson & Johnson, June 30, 2017

Blue picture with red soap bottle icon and text about Johnson & Johnson

Update, August 13, 2017

At 22.4 times earnings the Johnson & Johnson stock is too expensive for my taste. In the first quarter they earned $1.61 which allows us to say that they will be making at least $5.50 for the year.

This gives a forward P/E multiple of 24.2 which is way to high for my taste.

Otherwise it’s a well-managed company with solid earnings and a good dividend history.

 

Description:

Johnson & Johnson is an American healthcare company that researches, manufactures and sells various products in the health care field.

 

Valuation:

The company is expensive at a cool 22.4 times trailing earnings. When looking at an average over the past three years’ earnings, the P/E ratio is almost the same at 23.2. Because the company has a lot of intangible assets the Book value is only $7.50 a share which obviously makes the Price to Book value very high.

 

Balance sheet:

The Balance sheet looks very stable with a Working capital of $38.7 bn and a Working capital to Debt ratio of 0.5. The Debt to Equity ratio is 1.0 and its current Return on Equity is 23 per cent which are solid numbers.

 

Free cash flow and dividend:

Johnson & Johnson has a Free cash flow of $15.5 bn which allows it to pay out a dividend of $2.95 which equates to a yield of 2.2 per cent. The company has been paying out uninterrupted and increasing dividends for 25 years.

 

Conclusion:

Johnson & Johnson is a very well run business with steady earnings and a good cash flow. The only problem is the valuation where you are paying too much for what you get. Had the company been 30 per cent cheaper I would be a buyer. Now it’s a HOLD.

 

If you would like to learn more about fundamental analysis you can do that here.

Stanley Black & Decker

Fundamental analysis of Stanley Black & Decker, June 10, 2017

Yellow picture of wrench with text about Stanley, Black & Decker

Update, 170810

The price of the SWK stock hasn’t really been moving since we last looked. The one thing that has changed is that they have released a new quarterly report. Based on the quarterly report the company earned $4.40 for the last six months.

If we say that the company will make $8 for the whole of 2017, then the P/E ratio will come in at 17.6 which is good, but still a little bit expensive.

The Price to book ratio is negative because of high intangibles.

The company made $1.14 million dollars in Free cash flow last year which equates to $7.70 per share. Of this they pay a dividend of 58 cents per quarter.

Conclusion:

I would not be a buyer of StanleyBlack & Decker at these prices.

 

 

Description:

Stanley Black & Decker is a Fortune 500 manufacturer of industrial tools, household hardware and provider of security products. Its headquarters are located in New Britain, Connecticut.

Valuation:

At $140, the Price to earnings ratio is 21.5 (trailing earnings) which in my opinion is expensive. The Price to the average of the past three years’ earnings is hardly better at 24.6. The Book value of the company is negative because they have a lot of intangible assets (which should be subtracted from the Equity to arrive at the Book value).

 

Balance sheet:

With Current assets of $4.8bn and Current Liabilities of $2.8bn, the company has a Working capital of $2bn which is a lot of cash in the bank. They have a Debt to equity ratio of 1.5 which is not out of the ordinary.

 

Free cash flow and dividend:

Stanley Black & Decker has a Free cash flow of $1.14bn which allows it to pay out a dividend of $2.26 per share (or a 1.6 per cent yield). The company is part of the Dividend aristocrats, which is a list of the companies that has paid out uninterrupted and rising dividends for 25 straight years.

 

Conclusion:

Stanley Black & Decker is a well run company with solid earnings and a good free cash flow. However, the current price is too high for my taste.

 

 

 

 

 If you would like to learn more about fundamental analysis you can do that here.

Hormel Foods

Fundamental analysis of Hormel Foods Corp. (ticker: HRL), May 26, 2017

White picture with green grain icon with text about Hormel Foods

Update August 7, 2017

Hormel Foods is still expensive at 20.5 times trailing earnings. If we assume that the company will earn $1.60 this year the P/E multiple come in at a similar 21.0. The P/E over the average past three years is 25.1.

Because the company has a lot of intangible assets (these are to be subtracted from the equity to arrive at the book value) the Book value is negative.

The company has a working capital of $975 million which puts them in a good position.

The Free cash flow is $740 million which amounts to $1.36 per share. Of this they pay a dividend of $0.68 this year.

Conclusion:

While the company is still a little bit too expensive for my taste, it has got an interesting balance sheet.

Another good thing about the company is that it has solid earnings and a steady cash flow.

Hormel Foods has been paying out uninterrupted and increasing dividends for more than 25 years.

At these prices I would give it a HOLD.

 

 

 

Description:

Hormel Foods produces and commercializes various meat and food products. It is based in Austin, Minnesota.

 

Valuation:

The company is expensive at a trailing P/E of 21.5 and considering an average of the past three years’ earnings it looks even worse at 26.3. The Book value is negative due to the high Goodwill component of the Balance sheet which consequently gives a negative Price to Book value.

 

Balance sheet:

The Current assets to Current liabilities ratio looks good at 1.9 with a Net working capital of $975 million. The biggest problem for Hormel is its debt where the Debt to equity ratio is very high at 5.0.

 

Cash flow and dividend:

The Free cash flow last year came in at $735 million which equates to $1.36 per share. The Free cash flow allows the company to pay out a dividend 58 cents (1.7%). The dividend has been uninterrupted and increasing for more than 25 years which makes the part of the Dividend aristocrats.

 

Summary:

Hormel would be a good investment if it was about half the price, but now it is too expensive for me. I would not buy new stock at this point, but if you already own it by all means : HOLD.

 

 If you would like to learn more about fundamental analysis you can do that here.

Don’t compare yourself to others

In order to be a successful investor, you shouldn’t compare yourself to others.

It is difficult being an investor. Sometimes the price of your stocks rise for no apparent reason and sometimes they fall seemingly without any cause.

Then it is easy to either buy or sell just to make a few more dollars short-term, but that is a not how you should think about the problem.

The correct way is to make as few investment decisions as possible. Warren Buffet has famously said that “you would be better off if you limited yourself to, let’s say, 20 investment decisions in your lifetime”.

If the trading was limited, you would have to justify to yourself why and at what price you want to execute this particular trade.

Hopefully you would then skip a few of the bad deals that you are bound to do in affect.

That inevitably means that you will miss out on some opportunities.

But that is not a bad thing – it’s a good thing.

When you are seeing a stock rise, and you’ve carefully looked at the financials of that particular stock, it’s very satisfying finally being proven right.

The downsides of trading

Now you may be thinking “That sounds all very good, but I don’t want to keep my stock if it goes to zero.”

Again, that is not the way you want to think about your investments.

If the value of your stocks are falling it means that they have become cheaper and you can buy more.

Depending on the quality of your investment decisions, the dividend that you are receiving should be safe if you’ve bought good stocks.

That means that you will not miss out on the compound interest that you will earn by simply keeping your stock.

If you in any way are concerned about the compound interest please keep your stock.

Conclusion:

In today’s post we have been looking at the many pitfalls when it comes to comparing your portfolio to others.

 

Tesla, Inc.

Light blue picture of sedan with text about Tesla Motors

Update, August 3, 2017

Valuation:

Tesla had another quarterly earnings call yesterday and the stock gained 6 per cent.

The market is now willing to pay $347.86 for the Tesla stock. This seems to be ludicrous and comes with a lot of hype around the brand.

Now, the reason why I keep on writing about the company is that I believe that the internal combustion engine is dead and that Tesla is going eat the lunch of all the other car companies around the world. Having said that, the company has a lot of government loans which makes it very difficult to turn around the current situation.

The company has not made a profit for a single year in which they have been operating

This quarter, which ended on June 30, 2017, Tesla lost another $2.04. They are now up for a loss of at least $8 for the whole of 2017.

I do like Elon Musk, but the Tesla stock is not for me.

 

 

 

Update, July 3, 2017

Description:

Tesla, Inc. is in the business of manufacturing and selling electric vehicles, solar panels and energy storage solutions in the United States. It is based in Palo Alto, California.

Valuation:

Since we last visited with Tesla on February 23, 2017, the stock has advanced another $100 and now sits at $361.61.

Now, there are obviously reasons for this price – bullish analysts tend to focus on the future for electric vehicles and that the potential market for EV:s is immense – but if you are looking at the current value that you are getting for those $362, it is not much at all.

In fact, I would say that you getting nothing at all.

Balance sheet:

The company has a Debt to equity ratio of 2.83 which is exceedingly high.

I would not touch such a risky asset even with a ten foot pole.

Having said that, Tesla’s Working capital is $434 million which seems reasonable but the ratio between the Working capital and the Operating expenses is only 0.2 which is very risky.

What it means is that the company needs to raise cash sometime during the year.

Free cash flow and dividend:

Tesla does not have a positive Free cash flow and it goes without saying that it does not pay any dividend.

Conclusion:

There may be a great future ahead of Tesla, but the stock is not for me.

Thursday, February 23, 2017

 

The reason for this is that I’ve recently been watching a Youtube channel called Now You Know that show a lot of news about Tesla Motors.

So I thought that I should look into the hype and see for myself if there was anything to it.

What I did was that I went to Tesla’s website and I downloaded their financial reports.

The numbers are shocking.

Tesla has been in business for almost ten years and in none of those they have made any money.

Granted, the loss last year was less than the year before, but still the second largest loss out of these ten years.

Looking at the balance sheet it’s very much the same story.

Its total debt is a staggering 16.8 billion dollars and the free cash flow is a negative 1.4 billion.

No wonder that the stock is losing more than 5 percent as I write this.

Who in their right mind would want to invest in something like that?

It’s clear that if you buy Tesla stock you hope that the earnings will materialize in the future.

At $259 those hopes are very expensive.

Elon Musk may be an excellent visionary, but his abilities as a CEO of Tesla Motors are not as good.

If you would like to learn more about fundamental analysis you can do that here.

Colgate-Palmolive (CL)

Fundamental analysis of Colgate-Palmolive (CL).

White picture of Colgate-Palmolive logo with text about Colgate

Description:

Colgate-Palmolive is an American consumer products manufacturer with a global business. It is based in New York City, New York.

Valuation:

The company is expensive at 27 times last year’s earnings. Looking at the past three years’ earnings it is even more expensive at 33 times average earnings.

Because the company has a lot of intangible assets – which are supposed to be subtracted from the equity when calculating the book value – the book value is very low and even negative.

Therefore it does not make sense to calculate a Price to Book value ratio.

Balance sheet:

Colgate-Palmolive has a working capital of $1 billion which is a lot of cash in the bank.

When looking at the Balance sheet in detail it becomes apparent that their liabilities are almost as great as their assets and that the equity portion is very low.

Nevertheless, people seem quite happy to pay for their ability to make money out of the equity.

Cash flow and dividend:

The company had a Free cash flow last year of $2.5 billion which equates to $2.84 per share. Of this they are paying out a dividend of $1.50 which equates to 2.1 per cent.

Colgate-Palmolive is also involved in buying back shares which in general makes the shareholders who are selling their shares richer.

The company is a part of the Dividend aristocrats which have a history of paying out uninterrupted and increasing dividends for at least 25 years.

Conclusion:

At these prices I would not be buyer of Colgate-Palmolive. For me to be interested prices would need to fall by at least 50 per cent.

 

 If you would like to learn more about fundamental analysis you can do that here.