Mosaic Company: Inside The Numbers

Jan.23.13 | About: The Mosaic (MOS)

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 article below, I will be considering Mosaic Company's (NYSE:MOS) profitability, debt and capital and operating efficiency. Based on this we get to see sales, returns, margins, liabilities, assets, returns and turnovers.

All numbers sourced from Morningstar, and Mosaic Company's Website.

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 = $2.515 billion
  • Net Income 2012 = $1.930 billion
  • Net Income 2013 TTM = $1.839 billion

Over the past three years Mosaic's net profits have decreased from $2.515 billion in 2010 to $1.839 billion in 2012 TTM. This signifies a decrease of 26.87% in earnings over the past 3 years.

  • Operating Cash Flow 2011 = $2.664 billion
  • Operating Cash Flow 2012 = $2.611 billion
  • Operating Cash Flow 2013 TTM = $2.254 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 three years the company's operating cash flow has also decreased. The Mosaic operating cash has decreased by 15.39%.

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 = $2.515 billion
    • Net Income 2012 = $1.930 billion
    • Net Income 2013 TTM = $1.839 billion
  • Total Asset growth

    • Total Assets 2011 = $15.787 billion
    • Total Assets 2012 = $16.690 billion
    • Total Assets 2013 TTM = $17.441 billion
  • ROA -- Return On Assets

    • Return On Assets 2011 = 15.93%
    • Return On Assets 2012 = 11.56%
    • Return On Assets 2013 TTM = 10.54%

Over the past three years, Mosaic's ROA has decreased from 15.93% in 2011 to 10.54% in 2013 TTM. This indicates that the company is making less money on its assets than it did in 2011.

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.

2010

  • Operating Cash Flow 2011 = $2.664 billion
  • Net Income 2011 = $2.515 billion

2011

  • Operating Cash Flow 2012 = $2.611 billion
  • Net Income 2012 = $1.930 billion

2012 TTM

  • Operating Cash Flow 2013 TTM = $2.254 billion
  • Net Income 2013 TTM = $1.839 billion

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.

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 = $15.787 billion
    • Total Assets 2012 = $16.690 billion
    • Total Assets 2013 TTM = $17.441 billion
    • Equals an increase of 10.48%
  • Total Liabilities

    • Total Liabilities 2011 = $4.145 billion
    • Total Liabilities 2012 = $4.707 billion
    • Total Liabilities 2013 TTM = $4.358 billion
    • Equals an increase of 5.14%

Over the past three years, Mosaic has acquired more total assets than total liabilities. This indicates that the company not has been financing its assets through debt. Over the past three years, the company's total assets increased by 10.48%, while the total liabilities increased by 5.14%.

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 2011 = $6.685 billion
    • Current Assets 2012 = $6.581 billion
    • Current Assets 2013 TTM = $6.533 billion
  • Current liabilities

    • Current liabilities 2011 = $1.929 million
    • Current liabilities 2012 = $1.918 billion
    • Current liabilities 2013 TTM = $1.647 billion
  • Current Ratio 2011 = 3.47
  • Current Ratio 2012 = 3.43
  • Current Ratio 2013 TTM = 3.97

Over the past three years, Mosaic's current ratio has increased from 3.47 in 2011 to 3.97 in 2013 TTM. This indicates that the company has more of the ability to pay off its short-term obligations than it did three years ago. As the most recent number is well above 1, this indicates that the company would be able to pay off its obligations if they came due at this point.

Shares Outstanding

  • 2011 Shares Outstanding = 448 million
  • 2012 Shares Outstanding = 437 million
  • 2013 Current Shares Outstanding = 425.6 million (google)

Over the past three years, the number of company shares has decreased. Mosaic Company's shares have decreased from 448 million in 2011 to the current number of 425.6 million. This is a decrease of 5.00%. This indicates that Mosaic Company 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 = $3.122 billion / $9.938 billion = 31.41%
  • Gross Margin 2012 = $3.085 billion / $11.108 billion = 27.77%
  • Gross Margin 2013 TTM = $2.779 billion / $10.051 billion = 27.65%

Over the past three years, the gross margin has decreased. The ratio has decreased from 31.41% in 2011 to 27.65%. As the margin has decreased, this indicates the company has been less efficient in its distribution.

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 revenue 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 = $9.938 billion
    • Revenue 2012 = $11.108 billion
    • Revenue 2013 TTM = $10.051 billion
    • Equals an increase of 1.14%
  • Total Asset growth

    • Total Assets 2011 = $15.787 billion
    • Total Assets 2012 = $16.690 billion
    • Total Assets 2013 TTM = $17.441 billion
    • Equals an increase of 10.48%

As the revenue growth has not exceeded the asset growth, this implies that the company's assets have increased at a higher percentage than the revenue.

Based on the nine different criteria above, Mosaic is showing some weakness regarding its profitability. Over the past 3 years Mosaic has shown weakness in its revenue, net income, ROA and gross margin. This indicates a decrease in the company's profitability over the past couple of years. Even though the profitability has displayed weakness over the past 3 years, the company's TL&A, working capital and shares outstanding are displaying stable results. These results state that currently the company is not in financial distress and not selling off shares to raise capital. Overall, Mosaic is showing moderate results with concerns regarding profitability but stability in assets, liabilities and working capital aspects of the company.

For an excellent article on the decline of the company's profitability please read: Mosaic To Record Higher Volumes And Lower Prices In 2013.

As the above ratios indicate, The Mosaic Company has shown a decline in profitability but stability in it's assets, liabilities and working capital. Analysts at Bloomberg businessweek are estimating Mosaic's revenues to stabilize over the next couple of years. They are estimating Mosaic's revenue to be at 10.1 billion for FY 2013 and 10.7 billion for 2014. They are estimating an increase in profitability as they are predicting Mosaic to have an EPS at $4.31 for FY 2013 and $4.97 for FY 2014.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.