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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 the paper below, I will be considering Monsanto Company's (MON) profitability, debt and capital, and operating efficiency. Based this criterion, we get to see sales, returns, margins, liabilities, assets, returns and turnovers.

All numbers sourced from Morningstar, Monsanto Website and MSN Money.

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 2011 = $1.607 billion
  • Net Income 2012 = $2.045 billion
  • Net Income 2013 TTM = $2.258 billion

Over the past 2.5 years the company is showing positive results regarding its Net Income. The company has shown an increase of 40.51% since 2011.

  • Operating Cash Flow 2011 = $2.502 billion
  • Operating Cash Flow 2012 = $3.148 billion
  • Operating Cash Flow 2013 TTM = $3.412 billion

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.

Over the past 2.5 years the company's operating cash flow has also increased. The company's operating cash has increased by 36.37%.

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 2011 = $1.607 billion
    • Net Income 2012 = $2.045 billion
    • Net Income 2013 TTM = $2.258 billion
  • Total Asset growth

    • Total Assets 2011 = $19.844 billion
    • Total Assets 2012 = $20.224 billion
    • Total Assets 2013 TTM = $22.537 billion
  • ROA -- Return On Assets

    • Return On Assets 2011 = 12.35%
    • Return On Assets 2012 = 9.89%
    • Return On Assets 2013 TTM = 9.98%

Over the past two and a half years, Monsanto's ROA has decreased from 12.35% in 2011 to 9.98% in 2013 TTM. Even though the company is making money on its assets, this indicates that the company is not making the same percentage as it did in 2011. According to MSN money Monsanto's ROA is below the industry average of 15.9%.

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.

2011

  • Operating Cash Flow 2011 = $2.502 billion
  • Net Income 2011 = $1.607 billion

2012

  • Operating Cash Flow 2012 = $3.148 billion
  • Net Income 2012 = $2.045 billion

2013 TTM

  • Operating Cash Flow 2013 TTM = $3.412 billion
  • Net Income 2013 TTM = $2.258 billion

Over the past 2.5 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.

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 2011 = $19.844 billion
    • Total Assets 2012 = $20.224 billion
    • Total Assets 2013 TTM = $22.537 billion
    • Equals an increase of 13.57%
  • Total Liabilities

    • Total Liabilities 2011 = $8.299 billion
    • Total Liabilities 2012 = $8.391 billion
    • Total Liabilities 2013 TTM = $10.278 billion
    • Equals an decrease of 23.85%

Over the past 2.5 years, Monsanto's increase in total assets was less than the percentage increase of total liabilities. This indicates that the company has been financing its assets through debt. Over the past 2.5 years, the company's total assets increased by 13.57%, while the total liabilities increased by 23.85%.

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 2010 = $6.994 billion
    • Current Assets 2011 = $7.135 billion
    • Current Assets 2013 TTM = $7.901 billion
  • Current liabilities

    • Current liabilities 2011 = $8.809 billion
    • Current liabilities 2012 = $9.658 billion
    • Current liabilities 2013 TTM = $12.060 billion
  • Current Ratio 2011 = 0.79
  • Current Ratio 2012 = 0.74
  • Current Ratio 2013 TTM = 0.66

Over the past 2.5 years, Monsanto's current ratio has decreased from 0.79 in 2011 to 0.66 in 2013 TTM. This indicates that the company has less of the ability to pay off its short-term obligations than it did 2.5 years ago. As the number is below 1, this indicates that the company would not be able to pay off its obligations if they came due at this point.

Shares Outstanding

  • 2011 Shares Outstanding = 542 million
  • 2012 Shares Outstanding = 540 million
  • 2013 TTM Shares Outstanding = 536 million (google)

Over the past 2.5 years, the number of company shares have decreased. Monsanto's shares have decreased from 542 million in 2011 to the current number of 536 million. This is a decrease of 1.11%. This indicates that Monsanto is not issuing shares to raise money.

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 2011 = $5.743 billion / $11.822 billion = 48.58%
  • Gross Margin 2012 = $6.459 billion / $13.504 billion = 47.83%
  • Gross Margin 2013 TTM = $6.658 billion / $14.004 billion = 47.54%

Over the past 2.5 years, revenues have increased significantly. Having stated that the gross margin has decreased slightly. As the margin has decreased, this indicates the company has been less efficient in its manufacturing and distribution. Even though the gross margin has decreased it is above the industry average of 45.08%.

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 2011 = $11.822 billion
    • Revenue 2012 = $13.504 billion
    • Revenue 2013 TTM = $14.004 billion
    • Equals an increase of 18.45%
  • Total Asset growth

    • Total Assets 2011 = $19.844 billion
    • Total Assets 2012 = $20.224 billion
    • Total Assets 2013 TTM = $22.537 billion
    • Equals an increase of 13.57%

As the revenue growth has exceeded the asset growth, this implies that the company has been producing revenue on its assets.

Based on the nine formula's listed above, Monsanto is showing excellent results. The company's ROA has decreased over the past 2.5 years as well as the gross margin. Having stated that the rest of the indicators are showing strength. Based on the above indicators Monsanto is showing excellent results.

As the above paper indicates, Monsanto has shown strength over the past 2.5 years and looks to continue this trend moving forward. Analysis at MSN Money are estimating Monsanto's growth to increase over the next couple of years. They are estimating Monsanto to have an EPS at $4.51 for FY (8/2013) and $5.18 for FY (8/2014).

Source: Monsanto Company: Inside The Numbers