Balance Sheet Analysis
The nature of Kellogg’s Company is that it is a very stable company, as it is a big multinational food company. This explains why the changes in percentage of assets are within 1%, with a few in 3% and 5%. Looking at the vertical analysis, one of the largest changes is treasury stock (common). Treasury stock has increased by 6%, which may be due to the fact that the company is repurchasing shares, as shown by the statement of equity where common stock repurchases has increased by $187 million. The increase in treasury stock can have many possible reasons. Firstly, the company is providing stock options for its employees. Secondly, it can be used to create extra cash when needed. Another possible reason can be that the …show more content…
Other than revenue has decreased, total operating expense has decreased by only 2% when operating income has gone down by 30%. The reason for such a little decrease in expenses may have been that the Kellogg’s is not very efficient with its resources, and the fact that unusual expense has gone up by 812%. Therefore, the decrease of net income was not mainly because of the decrease in revenue; it was due to the expenses.
Ratio Analysis
Debt ratio has increased from 84.15% to 86.06% (by 2.3%). Kellogg’s takes advantage of the low interest rate and relies more on debt financing, given that their total equity has decreased by 11%. The higher the debt ratio, the more leveraged and the riskier it is. Furthermore, with the added risk of debt, Kellogg’s can easily be hurt by this leverage if it has problems generating returns above the cost of capital. The debt ratio is also significantly higher than the industry average, because Kellogg’s is a large, well-established company so even with the high debt ratio, it would not get into trouble and investors would still invest in them.
Whereas a lot of the other small companies in the food-processing industry would not be able to do so, as they would become bankrupted easily since higher debt ratio means …show more content…
The decrease in the demand for cereal can be shown when sales of Frosted Flakes, Kellogg’s No. 1 brand, has fallen 4.5% and Special K Red Berries, one of company’s most successful product, fell by 14%. And unfortunately, Kellogg’s do not expect cereal sales to return to growth so they are investing in new products other than cereals in 2016. Furthermore, comparing to their past P/E ratios, it is now at the highest point, indicating Kellogg’s stocks are overvalued currently. Moreover, sales and net income have declined, 5% and 36% respectively, even underperforming the industry average. Additionally, Kellogg’s liquidity is very weak, particularly the quick ratio (0.56), which demonstrates a lack of ability to cover short-term cash needs. This is especially alarming since their debt ratio (86%) is very high. The company’s liquid even further decreased from last year, despite already having very weak ratios to begin with. All these liquidity ratios and return rates (inventory & receivable turnover) indicate that Kellogg’s cash flow is deteriorating and can imply that Kellogg’s is in a position in which financial difficulties may develop in the
The nature of Kellogg’s Company is that it is a very stable company, as it is a big multinational food company. This explains why the changes in percentage of assets are within 1%, with a few in 3% and 5%. Looking at the vertical analysis, one of the largest changes is treasury stock (common). Treasury stock has increased by 6%, which may be due to the fact that the company is repurchasing shares, as shown by the statement of equity where common stock repurchases has increased by $187 million. The increase in treasury stock can have many possible reasons. Firstly, the company is providing stock options for its employees. Secondly, it can be used to create extra cash when needed. Another possible reason can be that the …show more content…
Other than revenue has decreased, total operating expense has decreased by only 2% when operating income has gone down by 30%. The reason for such a little decrease in expenses may have been that the Kellogg’s is not very efficient with its resources, and the fact that unusual expense has gone up by 812%. Therefore, the decrease of net income was not mainly because of the decrease in revenue; it was due to the expenses.
Ratio Analysis
Debt ratio has increased from 84.15% to 86.06% (by 2.3%). Kellogg’s takes advantage of the low interest rate and relies more on debt financing, given that their total equity has decreased by 11%. The higher the debt ratio, the more leveraged and the riskier it is. Furthermore, with the added risk of debt, Kellogg’s can easily be hurt by this leverage if it has problems generating returns above the cost of capital. The debt ratio is also significantly higher than the industry average, because Kellogg’s is a large, well-established company so even with the high debt ratio, it would not get into trouble and investors would still invest in them.
Whereas a lot of the other small companies in the food-processing industry would not be able to do so, as they would become bankrupted easily since higher debt ratio means …show more content…
The decrease in the demand for cereal can be shown when sales of Frosted Flakes, Kellogg’s No. 1 brand, has fallen 4.5% and Special K Red Berries, one of company’s most successful product, fell by 14%. And unfortunately, Kellogg’s do not expect cereal sales to return to growth so they are investing in new products other than cereals in 2016. Furthermore, comparing to their past P/E ratios, it is now at the highest point, indicating Kellogg’s stocks are overvalued currently. Moreover, sales and net income have declined, 5% and 36% respectively, even underperforming the industry average. Additionally, Kellogg’s liquidity is very weak, particularly the quick ratio (0.56), which demonstrates a lack of ability to cover short-term cash needs. This is especially alarming since their debt ratio (86%) is very high. The company’s liquid even further decreased from last year, despite already having very weak ratios to begin with. All these liquidity ratios and return rates (inventory & receivable turnover) indicate that Kellogg’s cash flow is deteriorating and can imply that Kellogg’s is in a position in which financial difficulties may develop in the