Monsanto Company is an international company that provides agricultural products to the farmers. The product offering includes seeds, herbicides, biotechnology trait products, and digital agricultural products. The company helps farmers to improve their productivity, reduce farming cost and produce the best food for consumers and animal feed. Monsanto has two reporting segments that include agricultural productivity and food and genomics. The later segment drives the future growth of the company. The agricultural productivity segment faces significant pressure from glyphosate producers who have the capacity to meet the demands in the market and therefore have significant pressure on the margins. The company signed a merger agreement in 2016 to acquire Bayer and KWA investment Co. Monsanto is renowned for delivering value to its stockholders and holds a dominant edge over its competitors. The company owns great technology platforms that give it a competitive edge over the competition (Monsanto, 2017). This paper conducts a credit analysis of Monsanto using the five Cs of credit, strength and weakness analysis and provides a summary of the key findings.
Credit Analysis
This credit analysis tries to identify the default risk of Monsanto Company and its ability to meet its debt obligation. The analyses will involve financial ratios, trend analysis, cash flow analysis, and financial projection. Similarly, the credit score of the company and its collateral will be used to compute its creditworthiness. The analysis will determine the probability of defaulting debt and assess the severity of the losses in case of default (Koller, Goedhart & Wessels, 2011). The analyst will, therefore, use the available quantitative and qualitative data to determine the creditworthiness of Monsanto. This analysis will also look into the credit, character, capacity, collateral, and condition of Monsanto Company.
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The agrochemical industry has experienced significant growth which was driven by a rising demand for food as a result of a growing population, scarcity of arable land, changing diets and lifestyle and an increase in knowledge on the benefits of establishing crop protection methods. Changes in weather conditions, prices, and acreage under crops have also affected the demand for farm inputs. The demand for efficient cultivation system is ever rising affecting the fortunes of the companies in the industry which is dominated by few players. The three largest companies, BASF, Bayer, and Monsanto dominate 50% of the global market. Monsanto holds the second position in the global market indicating that the company has a significant market share and its sales volumes are high. The company has capitalized on technology which has given it the leadership position in the food genomics.
Ratio Analysis
Monsanto Company had a gross profit margin of 54.99% and its pre-tax margin was 20.56%. The return on assets was 11.29% while its return on equity was 37.43%. The current ratio for the company was 1.41 and its quick ratio was 0.85. The company had a debt-free cash flow of 4.00. Its total cash was 2.41 Billion and the total debt stood at 7.85 billion where the long-term debt was 6.63 billion and the short-term debt was 1.21 billion. According to the company financial statements for 2015, 2016 and 2017, inventory turnover ratio had an average of 5.96 where receivables had an average of 7.65. Inventory turnover improved in the three years whereas receivables recorded a decline from a high of 9.17 in 2015 to 6.77 in 2017. Payable turnover had an average of 7.32 where it declined in 2016 and 2017 from a high of 8.16 in 2015 while working capital had an average of 2.94 which showed an increase in 2016 and a decline in 2017. The cash conversion cycle for the company for 2017 was 178 in 2017 177 in 2016 and 182 in 2015 indicating an improvement in 2016 and a decline in 2017.
Debt to equity ratio for the company in 2017, 2016 and 2015 was 1.26, 1.99 and 1.29 respectively. The figures show that the ratio increased in 2016 and then declined in 2017 as the company employed more equity as opposed to debt. Debt to capital was 0.56, 0.67 and 0.56 for the three years showing that debt increased slightly in 2016 before it reduced in 2017. Interest coverage for the three years was 7.38, 5.57 and 8.30 which shows a significant decline in 2016 followed by some improvement in 2017. The debt of the company is more than the shareholder's equity. The figures calculated are however higher compared to those of other companies in the industry. Kraft and Mondelez, for example, have a debt to equity ratio of 0.48 and 0.68 for the year 2017. However, the total debt of the company is less than the total capital for the three years under review. This indicates that the company is in a stable position given that its capital can offset the entire debt and the company will still continue to operate. Other companies in the industry like general mills, Kraft Heinz and Mondelez have close figures.
According to the ratio analysis, the company has strong profitability ratios which indicate that it is capable of raising funds from its operations to meet short term and long term cash requirements. The return on assets for the company is 11%. Debt and solvency ratios do not show any significant risk associated the company and its inability to repay any loans. The company financial statements for the past three years also show that future performance will enhance the ability of the company to meet its debt obligations (Atrill & McLaney, 2011; Berk & DeMarzo, 2014). Despite increased interest repayments as shown in the financial statements and their projections, the company is also reducing its total debt burden to a sustainable level. Monsanto reduced its debt in 2017 by 1 billion including current and long-term debt.
The company had $1.77 billion in current cash and short-term investment which was ready to be used in the business. The company generated $3.23 billion in operating cash flow which leads to a cash to total debt ratio of 39.71%. This figure shows that the company’s current level of operating cash can comfortably cover its debt. The company is, therefore, able to generate 40% cash from its debt capital. The cash flow analysis shows that the company has adequate funds to meet its short term and long term cash needs (Koller, Goedhart & Wessels, 2011). The profitability ratios, for example, indicate that the company is making adequate profits from its operations implying that it will continue meeting its cash demands. Limited competition in the industry and the company’s leadership position in the food genomics segment will continue driving the profitability of the company. Similarly, mergers and acquisitions that have been experienced in the industry are likely to drive future growth for the company and the industry at large.
Five Cs of Credit
Monsanto Company has strong creditworthiness as shown in the computed ratios. The company, however, has high leverage because its equity is lower than its debt. However, the company might have chosen debt financing in order to benefit from the taxes deducted from the interest it pays for its debt. The company also benefits from lower cost of capital due to its ability to obtain external financing. The net interest coverage ratio calculated earlier shows that Monsanto can meet its debt obligations (Berk & DeMarzo, 2014). The company has a high-interest cover which shows that it is safe. The company has an optimal capital structure and the debt is efficiently used to generate income. Monsanto has the capacity or a strong cash flow that will ensure that it meets is short-term and long-term debt obligations. The company has a high debt to income ratio which shows its ability to pay the debt.
Despite having a higher debt than equity, the capital of the company cannot be an issue against its ability to repay debt given that Monsanto has other fundamentals that reduce its riskiness (Berk & DeMarzo, 2014). The conditions surrounding the company and the entire industry make it possible for potential investors to rant credit. Monsanto operates in a global market where external forces have an influence over its activities, however; the state of the economy in most countries and an increase in the population and need for more resistant seeds makes Monsanto an ideal investment destination. The external environment offers many opportunities for the company to expand into new markets and introduce new technology. Lastly, the company has adequate assets which are more than the total current loan.
Strength and Weaknesses
Monsanto has a strong creditworthiness which is driven by the nature of the business it engages in and the market share that it currently controls. The company has a strong profitability position as shown by the profitability ratios. The liquidity ratios despite showing smaller numbers are adequate for companies in the industry. The company has a sufficient cushion that will ensure that it meets its obligations as they appear yet it is not tying too much of its capital in low earning investment (Koller, Goedhart & Wessels, 2011). Solvency ratios also show that the company can easily meet its debt obligations when they fall due. However, the company has too much debt than its equity which does not provide adequate cover if the company was to wind up its operations.
Summary
From the analysis of the company financial statements, it is evident that Monsanto has strong creditworthiness. The company has the ability to meet short term and long term cash obligations and can, therefore, service its current and future loans. According to the 5Cs of credit, Monsanto can be trusted to repay its debts given that it has a strong credit, character, capacity, collateral, and condition. Despite having more debt than equity, the company is making use of an optimum capital structure that enhances its ability to expand into new markets and acquire other companies and therefore benefits from the synergy generated.
References
Atrill, P., & McLaney, E. (2011). Accounting and finance for non-specialists . Harlow: Financial Times/Prentice Hall.
Berk, J., & DeMarzo, P. (2014). Corporate Finance. Boston: Pearson Education.
Koller, T., Goedhart, M., & Wessels, D. (2011). Valuation - Measuring and Managing the Value of Companies. Hoboken: John Wiley & Sons, Inc.
Monsanto. (2017). Annual Report 2015. St. Louis: Monsanto.
