Investing and Lending Analysis - The Top 10 Tips for Success

Investing and lending to a company is a sensitive issue requiring the deep analysis of the financial status of a company before engaging. As a result, it is critical for the investor to have sufficient financial analysis knowledge to determine the investment potential of a company to determine whether their investment will pay off. This paper considers Go Pro Inc. as the company for investment. A look at the financial of the company will determine whether the company is financially viable as an investment opportunity for potential stakeholders.

Among the first points of analysis is the company’s debt ratio. One of the interesting facts about this company is the fact that all financing is internal, meaning no debts are acquired in the operations of the company, whether short-term or long-term. As a result, the debt ratio stands at zero, as there is no debt liability. This may provide a positive attribute of the company from the onset, as this indicates the lack of liabilities for the company, which could be a source of financial downfall, should the company experience difficulty in sales (Zaher, 2010). Moreover, from a risk analysis perspective, this is the best kind of debt ratio available to the company. In the same vein, the debt-equity ratio equally stands at zero, as the company has no debt financing available to it. Again, the pure risk perspective puts this value at the most healthy value for Go Pro (Byoun & Xu, 2013). Additionally, there is no time interest earned for the company. This is, again, because the company is not borrowing and has thus not experienced any costs arising from the servicing of loans.

For these three attributes, the company has been putting efforts to reduce the effect of debt on the company for the past three years. Go Pro has recorded zero debt since the year 2014, showing an increasing efficiency in the company such that the sales of the company have overtaken the need to borrow for any extra activities. The result is that there is an improved performance concerning debt ratios.

The equity to asset ratio is one that measures the aspect of ownership of the company among stakeholders alongside the assets the company bears. As a result, this relationship needs to be a healthy one so that the company has enough of its own to avoid being over-reliant on stakeholders. Therefore, the optimum value needs to be less than 1.0. The company has seen a falling equity to asset ratio as the two-year average stood at 0.7 compared to current value of 0.48. This shows a falling equity to asset ratio over the last three years, which positively reflects on the company. This is because a smaller ratio means that there are increasing assets for the company and there is less dependency on the stakeholders. Moreover, the company value for the latest financial year shows a ratio which is lower than the industry, meaning the company is doing generally well in its industry.

The return on equity suggests that a company has a specific ability to generate profits without necessarily depending on too much capital. The higher the return on equity, the higher the ability for a company to yield profits without requiring much capital. Notably, debt can have an effect on the return on equity as debt often cushions the company against dependence on stakeholder investment. For Go Pro, it is evident that the reducing debt has had an impact on the ROE, bringing it down to a negative value (-68.75). This shows the natural reaction that this debt-free approach to operations has on the company. This can be interpreted to mean that debt-based capital is not providing any profit to the company. The industry mean for the past three years stood at 5.68, showing an average return of $5.68 for every $100 dollars of capital investment into the industry. The comparison between the two values also shows that the company is doing better than the industry, in that equity is very low. This directly interprets to the company’s direct investment in ensuring higher assets and therefore more financial independence.

The price-to-earnings ratio compares the current cost of the stock against its performance in the previous twelve months. This means that a higher P/E ratio indicates that the stocks of the said company could be overpriced. With this in mind, the P/E ratio for the company has fallen over the last three years from a 2-year average of 83.64 to -2.89. While this numbers are not favorable for the company, they are favorable for the investor as they indicate that stocks for Go Pro are very evenly priced in the current year. Moreover, this shows the perfect atmosphere for investment, especially in the company’s stocks. Should the trend continue, the company’s stocks would be very well priced for the purpose of investment.

With those considerations made for the company, additional concerns could be raised regarding the quality of investment the potential stakeholder would gain from the company. One of the discouraging aspects for the short-term investor is the fact that there is no data on dividend yield and payouts for the past 3 years. This is because the company has never issued dividend payouts and is yet to adjust itself for dividend yield figures. As a result, investment in the company is not favorable for short-term investors. Additionally, it is highly unlikely that the company will pay dividends in the near future. As a result, this could be disheartening for the short-term investor. Notwithstanding, the company offers a range of opportunities for aspiring long-term investors. With its unique performance of operating a debt-free company, the company offers a unique opportunity to invest in an organization that has a higher dividend yield due to lower costs and liabilities. The eradication of debt for the company means that the costs are significantly lower for the company, allowing the investors to enjoy a much larger dividend share. Therefore, it is not a big worry that the company has not yet begun issuing dividends. Should one invest in the company now, it will be for their long-term benefit if the trend remains constant.

In conclusion, it is evident that the company is still stabilizing based on the financial information and its tabular summary provided. A copy of the financial analysis values is attached for further reference. Overall, Go Pro presents a unique investment opportunity where potential stakeholders invest in a debt-free company. Although debt-free operation provides limited information on the general matters of liquidity of the company, there is sufficient information to guide the investor on the financial health of the company over the past three years. With this information, it would be prudent to invest in the company and wait for the returns in future, if all variables and trends remain as they are.

References

Byoun, S., & Xu, Z. (2013). Why do some firms go debt free? Asia ‐ Pacific Journal of Financial Studies, 42(1) , 1-38.

Zaher, T. S. (2010). Performance of debt free firms. Managerial finance, 36(6) , 491-501.

Appendix 1: Financial Analysis Sheet