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Determining a company's financial health is a very important step in making a decision on whether or not to invest or to stay invested. There are many different ways to compute a company's financial health. In this test, I will be considering SodaStream International's (NASDAQ:SODA) profitability, debt and capital, and operating efficiency. Based on these criteria, we get to see sales, returns, margins, liabilities, assets, returns and turnovers.

All numbers sourced from Morningstar.

Profitability

Profitability is a class of financial metrics used to assess a business' ability to generate earnings compared with expenses and other relevant costs incurred during a specific period of time. In this section, we will look at four tests of profitability. They are: Net Income, Operating Cash Flow, Return on Assets, and Quality of Earnings. From these four metrics, we will establish if the company is making money, and gauge the quality of the reported profits.

  • Net Income 2009 = $10 million
  • Net Income 2010 = $13 million
  • Net Income 2011 = $28 million

To pass, the company needs to have a positive net income. SodaStream passes. In 2011, the company reported a net income of $28 million.

  • Operating Cash Flow 2009 = $15 million
  • Operating Cash Flow 2010 = $15 million
  • Operating Cash Flow 2011 = $29 million

Operating Cash Flow is the cash generated from the operations of a company, generally defined as revenue less all operating expenses, but calculated through a series of adjustments to net income.

To pass, the company needs to have a positive operating cash flow. SodaStream passes.

ROA -- Return On Assets = Net Income/Total Assets

ROA is an indicator of how profitable a company is relative to its total assets. ROA gives an idea as to how efficient management is at using its assets to generate earnings. Calculated by dividing a company's net income by its total assets, ROA is displayed as a percentage. Sometimes this is referred to as "return on investment."

  • Net income growth

    • Net Income 2009 = $10 million
    • Net Income 2010 = $13 million
    • Net Income 2011 = $28 million
  • Total Asset growth

    • Total Assets 2009 = $111 million
    • Total Assets 2010 = $225 million
    • Total Assets 2011 = $304 million
  • ROA -- Return On Assets

    • Return On Assets 2009 = 9.01%
    • Return On Assets 2010 = 5.78%
    • Return On Assets 2011 = 9.21%

Over the past three years, SodaStream's ROA has increased from 9.01% in 2009 to 9.21% in 2011. This indicates the company is making money on its assets. As the ROA has increased, SodaStream passes.

Quality Of Earnings

Quality of Earnings is the amount of earnings attributable to higher sales or lower costs rather than artificial profits created by accounting anomalies such as inflation of inventory. To ensure there are no artificial profits being processed, the operating cash flow must exceed the net income.

2009

  • Operating Cash Flow 2009 = $15 million
  • Net Income 2009 = $10 million

2010

  • Operating Cash Flow 2010 = $15 million
  • Net Income 2010 = $13 million

2011

  • Operating Cash Flow 2011 = $29 million
  • Net Income 2011 = $28 million

Over the past three years, the operating cash flow has been higher than the net income. This indicates that the company is not artificially creating profits by accounting anomalies such as inflation of inventory. As operating cash flow exceeds net income all three years, SodaStream passes.

Debt And Capital

The Debt and Capital section establishes if the company is sinking into debt or digging its way out. It will also determine if the company is growing organically or raising cash by selling off stock.

Total Liabilities To Total Assets, Or TL/A ratio

TL/A ratio is a metric used to measure a company's financial risk by determining how much of the company's assets have been financed by debt.

  • Total Assets

    • Total Assets 2009 = $111 million
    • Total Assets 2010 = $225 million
    • Total Assets 2011 = $304 million
    • Equals an increase of 273.87%
  • Total Liabilities

    • Total Liabilities 2009 = $88 million
    • Total Liabilities 2010 = $80 million
    • Total Liabilities 2011 = $85 million
    • Equals an decrease of 3.41%

Over the past three years, SodaStream's increase in total Assets was more than the percentage increase of total Liabilities. This indicates that the company has not been financing its assets through debt. Over the past three years, the company's total assets increased by 273.87%, while the total liabilities decreased by 3.41%. As the total Assets increased more than the total Liabilities, SodaStream passes.

Working Capital

Working Capital is a general and quick measure of liquidity of a firm. It represents the margin of safety or cushion available to the creditors. It is an index of the firm's financial stability. It is also an index of technical solvency and an index of the strength of working capital.

Current Ratio = Current Assets/Current liabilities

  • Current Assets

    • Current Assets 2009 = $64 million
    • Current Assets 2010 = $177 million
    • Current Assets 2011 = $231 million
  • Current liabilities

    • Current liabilities 2009 = $71 million
    • Current liabilities 2010 = $78 million
    • Current liabilities 2011 = $82 million
  • Current Ratio 2009 = 0.90
  • Current Ratio 2010 = 2.24
  • Current Ratio 2011 = 2.82

Over the past three years, SodaStream's current ratio has increased from 0.90 in 2009 to 2.82 in 2011. This indicates that the company has more of the ability to pay off its short-term obligations as it did three years ago. As the number is above 1, this indicates that the company would be able to pay off its obligations if they came due at this point.

As SodaStream's current ratio has increased over the past three years, SodaStream passes.

Shares Outstanding

  • 2009 Shares Outstanding = 19 million
  • 2010 Shares Outstanding = 15 million
  • 2011 Shares Outstanding = 21 million

To pass, the company's shares must increase less than by 2% in any one-year segment. Between 2009 and 2010, the company's shares decreased by 21.05%, while between 2010 and 2011, the company's shares increased by 40.00%. As the shares decreased from 2009 to 2010, and increased by 40.00% in 2010 to 2011, we must look at how many shares are currently available. According to Google Finance, there are 20.14 million shares. As the company's shares have decreased slightly over the past year, SodaStream passes.

Operating Efficiency

Operating Efficiency is a market condition that exists when participants can execute transactions and receive services at a price that equates fairly to the actual costs required to provide them. An operationally efficient market allows investors to make transactions that move the market further toward the overall goal of prudent capital allocation without being chiseled down by excessive frictional costs, which would reduce the risk/reward profile of the transaction.

Gross Margin: Gross Income/Sales

The gross profit margin is a measurement of a company's manufacturing and distribution efficiency during the production process. The gross profit tells an investor the percentage of revenue/sales left after subtracting the cost of goods sold. A company that boasts a higher gross profit margin than its competitors and industry is more efficient. Investors tend to pay more for businesses that have higher efficiency ratings than their competitors, as these businesses should be able to make a decent profit as long as overhead costs are controlled (overhead refers to rent, utilities, etc.).

  • Gross Margin 2009 = $84 million / $151 million = 55.63%
  • Gross Margin 2010 = $116 million / $216 million = 51.33%
  • Gross Margin 2011 = $158 billion / $289 billion = 61.00%

Over the past three years, the gross margin has increased from 55.63% to 61.00%. As the margin has increased, this indicates the company has been more efficient in its manufacturing and distribution during the production process. As the gross margin increased, SodaStream passes.

Asset Turnover

The formula for the asset turnover ratio evaluates how well a company is utilizing its assets to produce revenue. The numerator of the asset turnover ratio formula shows revenues found on a company's income statement and the denominator shows total assets, which are found on a company's balance sheet. Total assets should be averaged over the period of time that is being evaluated.

  • Revenue growth

    • Revenue 2009 = $151 million
    • Revenue 2010 = $216 million
    • Revenue 2011 = $289 million
    • Equals an increase of 91.39%
  • Total Asset growth

    • Total Assets 2009 = $111 million
    • Total Assets 2010 = $225 million
    • Total Assets 2011 = $304 million
    • Equals an increase of 273.87%

As the revenue growth has not exceeded the asset growth, this implies that the company did not produce enough revenue on its assets in 2011 to keep up with its increase in assets. SodaStream does not pass.

Based on the nine tests that SodaStream received on profitability, debt and capital, and operating efficiency, the company achieved eight passes out of nine. This is a excellent grade for financial health. SodaStream did not pass the asset turnover aspect of the test. The asset turnover aspect of the test indicates that the company's revenue growth did not keep up with the amount of assets the company increased. This is one aspect of the company to keep an eye on moving forward. As the report indicates, SodaStream is growing at a strong pace. This is supported by Bloomberg Business analysts predicting revenue to be 390 million euros in 2013. Overall, the company is showing excellent results regarding its financial health with eight passes out of nine.

Source: SodaStream International: Inside The Numbers