Monsanto Company an American corporation that deals in agrochemicals. Business analysis on Monsanto enables identification of the necessity of considering a model change ( Monsanto Co., 2018 ) . The study of the financial reports and benchmarking helps identification of strong points the Company enjoys. The weaknesses and vulnerabilities that the Company faces are also analyzed. Opportunities that can be exploited and factors threatening the business activities are also evaluated about the financial reports.
The paper is intended to give an analysis of Monsanto’s financial report for three years ending 2017. The paper provides a fundamental accounting analysis on the Company affairs. The paper also proceeds further to discuss specific accounting items. The paper attempts to give a simplified review of how the Company is performing about the particular financial report items.
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Monsanto Company Accounting Analysis
Table 1 below describes the formulation of ratio and the methodologies applied when calculating the ratios.
Table 1 : Summary of hoe Basic Financial Ratios are Formulated ( Monsanto Co., 2018 ).
| Total Asset Turnover | The total asset turnover is an activity ratio calculated by the division of total revenue with total assets. |
| Current Ratio | The adjusted current ratio is arrived at by dividing adjusted current assets by adjusted current liabilities. |
| Debt to Equity | It is a lived at by the division of adjusted total debt by adjusted total equity. |
| Debt to Capital | It is a solvency ratio formulated by dividing adjusted total debt by adjusted total debt summed up with adjusted total equity. |
| Financial Leverage | Adjusted financial leverage is arrived at by dividing adjusted total assets by adjusted total equity. |
| Net Profit Margin | Adjusted net profit margin is a profitability ratio arrived at by dividing comprehensive income by total revenue. |
| Return on Equity(ROE) | Return on assets is arrived at by dividing adjusted comprehensive income by adjusted total equity. |
| Return on Assets (ROA) | Return on assets is a profitability ratio calculated by dividing comprehensive income by adjusted total assets. |
Table 2 below represents Monsanto company’s ratios for three consecutive years.
Table 2 : The Financial Ratios of Monsanto Company ( Monsanto Co., 2018 ).
| 2017 | 2016 | 2015 | |
| Activity | |||
| Total Asset Turnover | |||
| Reported | 0.69 | 0.68 | 0.68 |
| Adjusted | 0.69 | 0.69 | 0.69 |
| Liquidity | |||
| Current Ratio | |||
| Reported | 1.35 | 1.21 | 2.05 |
| Adjusted | 1.57 | 1.42 | 2.18 |
| Solvency | |||
| Debt to Equity | |||
| Reported | 1.26 | 1.99 | 1.29 |
| Adjusted | 1.19 | 1.87 | 1.33 |
| Debt to Capital | |||
| Reported | 0.56 | 0.67 | 0.56 |
| Adjusted | 0.54 | 0.65 | 0.57 |
| Financial Leverage | |||
| Reported | 3.31 | 4.35 | 3.14 |
| Adjusted | 2.98 | 3.90 | 3.01 |
| Profitability | |||
| Net Profit Margin | |||
| Reported | 15.44% | 9.89% | 15.43% |
| Adjusted | 18.19% | 11.39% | 2.97% |
| Return on Equity (ROE) | |||
| Reported | 35.10% | 29.47% | 33.10% |
| Adjusted | 37.62% | 30.62% | 6.19% |
| Return on Assets (ROA) | |||
| Reported | 10.59% | 6.77% | 10.56% |
| Adjusted | 12.62% | 7.86% | 2.06% |
Explanation on Monsanto Financial Ratios Analysis
Monsanto Company’s adjusted asset turnover has been taking a deteriorating from 2015 to 2016 and became favorable from 2016 to 2017 more than what it was in 2015 ( Monsanto Co., 2018 ). The adjusted current ratio was unfavorable from 2015 to 2016 but became better between the years 2016 to 2017. The debt to equity ratio took a similar trend as to that of the current ratio. The Monsanto’s Debt-to-capital ratio declined from 2015 to 2016 but increased in the preceding year becoming even better in 2017 than it was in the base year ( Monsanto Co., 2018 ).
The adjusted financial leverage of Monsanto increased from 2015 to 2016 and significantly reduced to 2017. The adjusted net profit margin has been favorable and improving gradually through the three years. The return on assets has also been growing steadily throughout the three years from the base year.
Strengths and Weaknesses Analysis
According to the analysis of the accounts of Monsanto Company reported an earnings-per-share of $5.09 compared to $2.99 in 2016 ( Monsanto Co., 2018 ). Monsanto Company enjoys a considerable capital base difficult for other firms to acquire. The Company is also able to record sales and profits with ease making it simple to evaluate its performance. The Company is also able to have a robust financial performance placing it in a good financial state.
The major weakness of Monsanto Company is that raising capital is always a significant challenge due to complexities in the capital markets ( Monsanto Co., 2018 ). Monsanto Company has been relying on debt capital which is relatively easy to acquire consequently increasing it leverage level. The increase in the leverage level impairs the borrowing capability of the company to borrow or obtain more capital to finance its market extension strategies.
Summary
The accounting ratios of Monsanto Company illustrate a good performing business ( Monsanto Co., 2018 ). Its debt levels are at a manageable state and are characterized by increasing profits the company is in an excellent position to meet debt agreements. It is also crystal clear that the company is enjoying the best conditions in the year 2017 than it was in the previous fiscal years.
Steps in Accounting Policy Analysis
Accounting Policies, Strategy, and Flexibility
Accounting policies are standards aimed at governing how a company prepares the financial statements ( Bardach & Patashnik , 2015 ). Monsanto Company's management team employs the use of integrated Financial Reporting Standards and generally accepted accounting policies. Monsanto utilizes the generally accepted accounting policies and has also flexibly established the policies to enable the management to create a competitive advantage. Some of the items the management uses are through the issue of inventory on both the first-in-first-out basis and last-in-last-out basis.
Monsanto's Company accounting strategy is established professionally, and it enables the Company's performance to be evaluated with ease. The approach is not unique to Monsanto, but the management has made it flexible enough. The company has an adequately defined supply chain and advertisement channel, which will enable the firm to grow its revenue base tremendously ( Bardach & Patashnik , 2015 ). The company’s investment in Africa will secure the future profitable growth since Africa is in need of food security programs and advanced farming practices.
The analysis of the statement indicated that the management employs defined remuneration, incentives and activity-based payments ( Bardach & Patashnik , 2015 ). The company has not made any significant change to the accounting policies, but the management has made the policies more effective to cater to the shortfalls. The Company has been continuously adjusting expenses such as depreciation, interest and net income. Any other estimate made in instances such as provisions made are believed to be reasonable in all material respect.
Quality of the Company’s Disclosure
Monsanto Company makes provisions for notes to the financial statements and the notes also states which accounting standards are implemented for proper and professional. The management employs procedures and policies that sufficiently explain the business operations of the company across all its segments ( Martínez ‐ Ferrero , Garcia ‐ Sanchez & Cuadrado ‐ Ballesteros, 2015 ). The group accounts are published substantively, to enable perusal of the Company affairs and also provide explanations for substandard performance.
Identify Potential Red Flags and Inappropriate Accounting Distortion
The Company can maintain a sustainable debt ratio, and it has maintained consistency in preparing the financial statements ( Monsanto Co., 2018 ). The debtor’s ratio is also maintained at a reasonable margin and the financial statements for the three years have received unqualified opinions from Deloitte. Despite the presence of the audit opinions, a whistleblower in 2016 was awarded $ 22.4m for exposing the Company’s accounting violation for failure to make good costs of sales ( Harrington , 2017 ).
Questions about Financial Statements
According to the financial statement of Monsanto Company, policies regarding the timing of revenues are stated in a reasonable manner ( Monsanto Co., 2018 ). The Company utilizes a matching concept when dealing with multi-period contracts ( Martínez ‐ Ferrero , Garcia ‐ Sanchez & Cuadrado ‐ Ballesteros, 2015 ). The Company has in force a debt enforcement policy since it offers some of its products to customers on credit. The Company employs a straight-line depreciation model, and the revaluation department establishes the reasonable useful life of assets held by the Company.
Depleted assets are amortized consistently according to the strategy. The assumption made on future litigations and benefit plans are informed by past occurrences and possible uncertainties involved. The firm has in place a risk mitigation department considering how delicate some of the products the Company deal with ( Martínez ‐ Ferrero , Garcia ‐ Sanchez & Cuadrado ‐ Ballesteros, 2015 ).
Uncertainty about Amount of Expense
Monsanto Company has had some few challenges when dealing with the valuation of the cost of goods sold ( Monsanto Co., 2018 ). It employs a strategy that enables it to reduce operating cost and production costs. The management appetite for unreasonable risks has decreased considerably since no decision is made without proper prior consultation ( Martínez ‐ Ferrero , Garcia ‐ Sanchez & Cuadrado ‐ Ballesteros, 2015 ). Asset impairment and unrealized gains are losses treated with care by administrative flame work.
Ownership, Valuation, and Impairment of Assets
Monsanto Company has been pushing forward in protecting its intellectual rights even though it is a tedious and expensive endeavor. The Company has also been focusing hard on managing the human capital by reducing employee turnover and improving employee satisfaction ( Martínez ‐ Ferrero , Garcia ‐ Sanchez & Cuadrado ‐ Ballesteros, 2015 ). The Company relies on leased assets and the company strives at meeting the lease agreement policies.
Due diligence is done with the recording of leased property accordingly considering the class it belongs. Monsanto Company has a revaluation department tasked with the revaluation of the asset ( Martínez ‐ Ferrero , Garcia ‐ Sanchez & Cuadrado ‐ Ballesteros, 2015 ). Assets that are difficult to evaluate are assigned reasonable figures by the laid down procedures
Changes in Future Economic Benefits
Monsanto Company Managers hold financial instruments as required by the statute. The management retains the instruments under a fiducial duty owed to the shareholders. Hence any conflict of interest that may arise should be eliminated ( Monsanto Co., 2018 ). Due to the Company’s operations into foreign states, the company suffers and enjoys foreign currency gains and losses.
Contingent and Other Obligations and Value of Liabilities
The Company omits some contingent liabilities such as some legal suits due to nature and amounts they might consume if allocated in the budget ( Ni & Van Wart , 2015 ). Monsanto Company does not undertake off-balance sheet financing, and the management makes good and estimated obligation they may have caused.
The Company’s fair value of debt has neither increased nor reduced since the management is considering standardizing the debt ratio. The Company has a leverage ratio of 3.1 which implies that the debt levels are still high but manageable ( Monsanto Co., 2018 ). The leverage level takes a downwards trend suggesting the management is undertaking mitigation procedures.
Equity Instruments and Unrealized Gains and Losses
Changes in equity involve loss or gain on revaluation of assets and amortization of assets. The management made good the changes through the statement of changes in equity ( Monsanto Co., 2018 ). The company does not have any security behaving like debt and equity since there is no need for such a category to be maintained by the company.
Inter-corporate Investments
Monsanto Company has invested in coal mining, metal mining industry and chemicals industries ( Monsanto Co., 2018 ). The company has a substantial interest vested in the sectors it has invested in, and regulations make the disclosure. The company follows the three primary business segments since they have a significant relationship to the nature of its business.
Conclusion
Monsanto Company financial reports for the three years shows that the Company is doing good and gradually improving. The Company has some shortfalls facing it although the management has to be taking necessary mitigation procedures by implementing new policies and procedures. The analysis of the accounting records grants a holistic view of the company business nature and the trend it is taking. Monsanto Company is recovering from poor business throughout the three years under analysis. The accounting records available are sufficient enough to come to a reasonable conclusion of the Company’s business activities.
References
Bardach, E., & Patashnik, E. M. (2015). A practical guide for policy analysis: The eightfold path to more effective problem-solving . CQ Press.
Harrington, A. (2017). Protecting the Whistleblower: An Evolving Understanding of the Role of the Whistleblower (Doctoral dissertation, Assumption College).
Martínez ‐ Ferrero, J., Garcia ‐ Sanchez, I. M., & Cuadrado ‐ Ballesteros, B. (2015). Effect of financial reporting quality on sustainability information disclosure. Corporate Social Responsibility and Environmental Management , 22 (1), 45-64.
Monsanto Co. (MON) | Adjusted Ratios. (2018). Retrieved from https://www.stock-analysis- on.net/NYSE/Company/Monsanto-Co/Ratios/Adjusted-Ratios#Adjusted-Ratios- Summary
Ni, A., & Van Wart, M. (2015). Corporate Social Responsibility: Doing Well and Doing Good. In Building Business-Government Relations (pp. 175-196). Routledge.
