After the merger was announced, the sales of Monsanto dropped, although the firm’s share price increased. Nonetheless, this information is not enough for determining if the company ought to accept $62 billion which Bayer Corp. offered. Thus, it is essential to evaluate the firm’s performance through an analysis of the financial ratios as well as the overall financial statements over time.
Short Term Solvency Ratios
| Ratio | Formula | 2014 | 2015 |
| Current ratio |
9,675,000/14,043,000 = 0.69 |
10,625,000/14,930,000 = 0.71 |
|
| Quick ratio |
6,078,000/14,043,000 = 0.43 |
7,129,000/14,930,000 = 0.48 |
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Both current ratio and quick ration determine the company’s ability to meet its short term obligations ( Brigham et al., 2016) . The company’s solvency has improved from 2014, meaning that the firm’s solvency – ability to convert its current assets to cash - between 2014 and 2015 has increased. Therefore, short-term creditors may easily lend to the company since there are lower risks. However, shareholders favor a lower current ratio because this is an indication that the company’s assets are working to expand the business.
Asset Utilization Ratios
| Ratio | Formula | 2014 | 2015 |
| Accounts receivable turnover |
15,855,000/3254000 = 4.8 |
15,001,000/3,324000 = 4.51 |
|
| Inventory turnover |
7,281,000/3272000 = 2.22 |
6,819,000/3546500 = 1.92 |
|
| Total assets turnover |
15,855,000/21291000 = 0.74 |
15,001,000/21919000 = 0.68 |
The asset utilization ratios show the way in which Monsanto uses its assets to gain revenue and profit ( Monahan, 2018) . From 2014 to 2015, the asset utilization ratios have declined following the announcement of the merge with Bayer.
Long-Term Solvency Ratios
| Ratio | Formula | 2014 | 2015 |
| Debt to equity |
14,043,000/7,875,000 = 1.78 |
14,930,000/6,990,000 = 2.14 |
|
| Debt to assets | Total debt / Total assets |
14,043,000/21,918,000 = 0.64 |
14,930,000/21,920,000 = 0.68 |
| Interest coverage ratio | Operating income (or EBIT) / Interest expense |
4,075,000/248,000 = 16.43 |
3,594,000/433,000 = 8.3 |
The long-term solvency ratios reflect the company’s long-term solvency. They are used for measuring long-term debt. Based on the calculations, the firm’s overall use of long-term debt has reduced between 2014 and 2015, following the announcement of the merger.
Profitability Ratios
| Ratio | Formula | 2014 | 2015 | |||
| Gross Profit Margin | (Sales - Cost of Goods Sold)/sales |
8,574,000/15,855,000 = 0.54 |
8,182,000/15,001,000 = 0.55 |
|||
|
2,740,000/21291000 = 12.87% |
2,314,000/21919000 = 10.56% |
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| Return on Equity |
|
2,740,000/7,875,000 = 34.79% |
2,314,000/6,990,000 = 33.10% |
Profitability ratios determine a firm’s success in making profits ( Robinson et al., 2015) . The ratios have dropped drastically on the financial year 2015, after the merger was announced.
Recommendation
Based on the financial statements, there has been a decline in the company’s financial status after the merger was announced. However, the financial statements indicate that the company’s financial status was generally good. Also, the financial ratios show that Monsanto’s performance has declined. Conversely, the statement of cash flows shows that the cash and cash equivalents have increased following the merger announcement. Therefore, the company should accept the proposal.
Limitations
One limitation of using various analyses is that changes in business environment highly impact the business environment. A business environment is dynamic in nature and factors like globalization and technology affect a firm’s performance. Also, the economic conditions affect an organization’s performance ( Williams & Dobelman, 2017) . Therefore, a change in financial ratios does not necessary indicate that business is performing badly, and may not reflect the true financial position of the company.
References
Brigham, E. F., Ehrhardt, M. C., Nason, R. R., & Gessaroli, J. (2016). Financial Managment: Theory And Practice, Canadian Edition . Nelson Education.
Monahan, S. J. (2018). Financial Statement Analysis and Earnings Forecasting. Foundations and Trends® in Accounting , 12 (2), 105-215.
Robinson, T. R., Henry, E., Pirie, W. L., & Broihahn, M. A. (2015). International financial statement analysis . John Wiley & Sons.
Williams, E. E., & Dobelman, J. A. (2017). Financial statement analysis. World Scientific Book Chapters , 109-169.
