Executive Summary
The measurements of financial performance of the company are paramount to decision making by investors. The measurements help in determining the level of success of a company and its ability to manage business operations. The financial performance measures help investors in developing arguments with rationality in order for them to make investments or not. Usually, performance measures will predict the chances of an investor making loses or profits from their investment. Further, it will give investors assurance on the company’s ability to manage capital in the short-run and in the long run. This report will focus on financial performance of Boise Cascade Company in 2015, 2016, and 2017. The analysis will help in determining whether it is favorable for an investor to buy shares from the company. The financial ratios that will be analyzed include profitability, efficiency, liquidity, gearing, and investment. The first part of the paper will give a summary of the company. The second part analyses cash flows and makes analysis using EBIT and EBITDA. The third part gives a summary of financial ratios which help in determining the profitability, efficiency, and liquidity of the company. Further, the paper examines the cost and sources of working capital for Boise Cascade Company. Finally, the paper discusses repurchase programs and the market value of the company. The results show that the company’s share prices have improved and earnings are promising; therefore, investors can buy stocks with the company.
Part One: Summary of Boise Cascade Company
Boise Cascade Company is a distributor dealing with vertically integrated wood products and building materials. The company operates throughout the United States and supplies plywood to North America and largely the US. The company started as Boise Cascade, L.L. C., and its first operations began on October 29, 2004. The company made its first initial public offer of common stock on February 11, 2013. BCC fiscal year end happens on every December 31st. the progressive growth of the company is attributed to the acquisitions it has made over the years. On March 31, 2016, the company acquired Georgia-Pacific LLC’s and is EWP affiliates. The financial statements show that the company has grown progressively. According to the company’s editor, KPMG, the company’s financial statements represent the financial position of the company.
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The company operates in an industry dealing with building products manufacture and distribution in North America. Some of the companies in the wood product manufacture include Weyerhaeuser Company and Louisiana-Pacific Corporations. Roseburg Forest products from South American and OSB producers also pose stiff competition for the company. Top five insiders in the company are Vanguard Group Inc., Blackrock Inc., Dimensional Fund Advisors LP, and NWQ Investment Management Company, LCC, and Wellington Management Group LLP. However, insiders own the least shares, followed by mutual funds, and the institutions make up the shareholders.
Part 2: EBIT and EBITDA
The company’s cash flows give accounts of the inflows and outflows for the given periods and very critical in determining the liquidity of the company. From the cash flows, income has significantly reduced over the year from $80,009 million in 2014 to $52,182 in 2015, and $38,254 in 2016. Additionally, depreciation and amortization increased over the years from $53,052 in 2014, $57,197 in 2015, and $74,927 in 2016.
The cash flows provide critical information that can be used to calculate the E.B.I.T (Earnings before Interest and Tax) and an E.B.I.T.D.A (earnings before interests, taxes, depreciation, and amortization. EBIT is critical in measuring the operating profitability of the company. EBITDA also measure the profitability of a company as a percentage of the total revenue. Table 1 shows a summary of EBIT and EBITDA from years 2014 to 2016.
Table 1 : EBIT and ABITDA Summaries
| 2014 | 2015 | 2016 | |
| EBIT | 117 | 82 | 102 |
| EBITDA | 197 | 159 | 176 |
From the table 1, EBITDA has been depreciating in 2015 implying lower operational performance for the company; however, there was an increase in 2016. EBIT shows a reduction in 2015 from 2014 by 29% and an increase in 2016 by about 25%. The reduction in 2015 shows that the company’s profitability was lower but there was an increase in 2016.
Part 3: Financial Ratios
Table 3 gives a summary of the financial ratios of Boise Cascade Company as compared to ratios from average industry performance base 2016.
Table 2 : Financial Ratios Summary
| Financial ratios | 2014 | 2015 | 2016 |
| Quick ratio | 1.35 | 1.44 | 1.01 |
| Current ratio | 2.97 | 3.04 | 2.43 |
| Accounts receivable | 14.78 | 15.07 | 14.64 |
| Inventory turnover | 7.88 | 8.09 | 8.30 |
| Accounts payable turnover | 12.35 | 12.74 | 13.48 |
| Operating Income | 46.79 | -29.44 | -22.67 |
| Cash conversion cycle | 45.59 | 45.23 | 43.01 |
| Total debt to total equity | 0.61 | 0.64 | 0.75 |
| Gross profit margin percentage | 14.22 | 13.21 | 13.11 |
| Operating margin percentage | 4.03 | 2.80 | 2.01 |
| Net margin percentage | 2.24 | 1.44 | 0.98 |
| Return on assets | 6.88 | 4.23 | 2.85 |
| Return on equity | 16.94 | 10.16 | 6.86 |
| DuPont computation for return on equity | 15.1 | 9.6 | 6.68 |
The financial ratios help in analyzing the profitability, efficiently, and liquidity in Boise Cascade Company. The gross profit margin shows that the company was less favorable in 2015 as compared to 2016; however, the company was able to control labor and raw material efficiently in both years. The ratios, in particular, accounts receivables and payables among others show that the company is less efficient in repaying liabilities. The company’s liquidity declined in 2015 and increased in 2016 as shown with ratios such as liquidity and current ratios. Thus, the company is more capable of repaying its debt in 2016 as compared to 2015.
Importantly, the financial ratios need to be compared to industry averages. The company’s operating margin on all the three years is lower than industry average which was 7.16 in 2016. The net margin for all the three years was also lowered than industry average which was 3.71 in 2016 (yahoo finance). Based on the comparison with the industry average, it may not be wise to invest in the company. However, the company shows potential growth and profitability.
Part 4: Common Size Income Statement
Common size income statement helps in analysis of the company’s revenue over the three years. Table 3 shows summaries of the values as a percentage of revenue.
Table 3 : Common Size Income Statement
| Normal Income Statement | Common Size income statement | |||||
| Year | 2016 | 2015 | 2014 | 2016 | 2015 | 2014 |
| Net Income | 38254 | 52182 | 80009 | 100% | 100% | 100% |
| Defined benefits pension plan | 5919 | 5171 | 46234 | 15.5% | 9.9% | -57.8% |
| Amortization | 1527 | 3004 | -15 | 4% | 5.8% | 0 |
| Effects of settlement | 2557 | 308 | 0 | 6.7% | 0.6% | - |
| Other comprehensive income (loss), net of tax | 10003 | 8483 | -46249 | 26% | 16% | -57.8% |
| Comprehensive income | 48257 | 60665 | 33760 | 126.1% | 116.3%% | 42.2%% |
The common size income statement helps in analysis of the reduction in income for the company.
Part 5: Cost of Capital
Compute the after-tax cost of capital for Boise Cascade Company. Ignore unamortized financing costs. Information relative to rates appears in the footnotes to financial statements. Use a 15% cost of shareholder equity. The cost of capital is another critical component that helps in making investment decisions. Cost of capital shows the forgone benefit of making an investment (DiMasi, Grabowski, & Hansen, 2016). The cost of capital is the weighted average that is normally calculated after-tax costs, preferred stock, and stockholder’s equity are deducted.
= 0.8229 * 15.6% + 0.1771* 7.0539% * (1 - 35.215%) = 13.65%
The companies cost of capital is therefore 13.65. The cost of capital helps individuals to determine whether investments will yield return or losses in the future. The after-tax cost of capital is the essentially the break-even effect of the net present value. Thus, an investor can use lower values and higher values of their potential investments to predict the outcome of the project.
Part 6: Sources of Working Capital
There are varied sources of capital for Boise Cascade Company. First, the company uses the revolving credit facility and cash on hand to facilitate the working capital. In 2016, the company borrowed $357 million to fund the intra-month working capital needs; however, the company was able to repay off the cash on hand by the end of the financial year. The stock repurchases also helped in sourcing out funds for working capital. The acquisition of Georgian-Pacific LLC led to the amendment of borrowing agreements that increased the ability to issue other unsecured indebtedness to $100 million from $25 million. The proceeds from the amended agreement also provided the company with other sources of working capital. The source of capital, therefore, shows that Boise Cascade is a good company to invest in as the company shows to have reliable sources of working capital and is also capable of meeting its short-term liabilities .
Table 4 : Working Capital Summary
| Year | 2016 | 2015 |
| Working Capital | 447595 | 526920 |
Usually, companies are required to manage their working capital efficiently to ensure that it is able to meet its short-term obligations as well as minimize cases of excessive investments of the assets. The working capital reduced from 2015 to 2016 implying the there was an increase in liabilities in 2016. Important, however, the working capital shows that the company can offset the liabilities with the given assets. The decrease in working capital can further be explained by the cyclical operating needs and seasonal buying patterns.
Part 7: Stock split and stock repurchase programs
Stock splits are decisions where the board of directors increases the number of shares by making the current shares access more shares. The stock split help in increasing liquidity of a company while not undermining the value of shares even when their prices are high (Dittmar & Field, 2015). In this case, however, the prices of shares for Boise Cascade Company are not too high for a need for a stock split. Stock repurchase happens when a company asks the shareholders to avail their shares so that the company may buy it back. It is an alternative form of dividends where cash is returned to investors. Boise Cascade Company had made a stock repurchase program in 2015 and by the year-end 2016, there were $696,989 shares that were yet to be purchased. By the fourth quarter of 2016, 400,000 shares were repurchased at an average of 19.6 prices per share resulting to about $7.6 million. The measure of settling stock repurchase is a good indicator to invest in the company (Dittmar & Field, 2015). First, stock repurchase ensures that companies stocks are not undervalued and it also gives investors a choice to tender for repurchase. However, investors need to know that the stock repurchases are not dependable.
Part 8: Market Value
Market value is an important aspect when making decisions whether to invest or not. The market value shows the price at which an asset can be sold in the market. The market value is calculated by multiplying the outstanding shares by the current share price. From Boise Cascade Company 10k report, the number of outstanding shares was 39.2 million in the 2016 year end while the share price was 20.4. Thus the market value was as of December 2016 was approximately 800 million. The market cap helps in making a decision whether to invest as it allows an individual to compare the value of the company with other competing firms.
Enterprise value
The market value is also known as the market capitalization which helps in the computation of the enterprise value. Enterprise value is calculated using the following formula.
EV= market value+ market value of the common stock + market value of preferred stock + market value of debt + minority interest – cash and investments. Otherwise, it is calculated by adding total debt to market value and subtracting cash and investment.
= (800+ 438+ 208 -103). The enterprise value of the company is 1.3 billion.
When using the market cap to make investment decisions, one would likely to decide not to invest in the value $800 shows that the company is worth less. However, the enterprise value gives a more accurate is more accurate as it considers debt obligations (Gatzert & Martin, 2015). Even with factors of debt, EV shows that the company has a value when compared with results from the market capitalization.
References
Boise Cascade Company (2017). Annual Report 2016: Form 10-K. SEC
Dittmar, A., & Field, L. C. (2015). Can managers time the market? Evidence using repurchase price data. Journal of Financial Economics , 115 (2), 261-282.
DiMasi, J. A., Grabowski, H. G., & Hansen, R. W. (2016). Innovation in the pharmaceutical industry: new estimates of R&D costs. Journal of health economics , 47 , 20-33.
Forestry and Wood Product Industry Profitablity (2018). Yahoo Finance.
Gatzert, N., & Martin, M. (2015). Determinants and value of enterprise risk management: empirical evidence from the literature. Risk Management and Insurance Review , 18 (1), 29-53.
