The United States is full of potential great performers, especially in the stock market. Companies in the area of technology and energy are especially good companies, which when coupled with the right management, can yield the best investment choices for the potential investors. This paper analyzes Solar Winds financial statements to determine the financial viability of the company as an investment option among small and medium companies in the country.
SolarWinds is a company that specializes in the development of enterprise information technology solutions. Based in Austin, Texas, the company is also located in Europe and Asia, where its product presence is felt. In its most recent analysis for profitability ratios, the company had a return on assets of 11.23%, while the return on equity was at 17.23%. From these two indicators, it is easy to conclude that any investment that the company makes in the acquisition of assets returns a 11.23% return annually, which is a decent percentage. On the other hand, investors in the company gain 17% return annually on their investment, bringing about a favorable investment environment in the company. Additionally, the company had an asset turnover of 0.60, while the net profit margin was at 18.58%. Low asset turnover is associated with high profit margins in a company. With the relatively lower profit margin in SolarWinds, it would be expected that the asset turnover would generally be low, as it is at the moment. This may explain why the company shut down its operations in India in 2016 (Rockwell, 2016).
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With regards to liquidity, the company had a current ratio of 0.88, a quick ratio of 0.82 and a receivables turnover of 9.58. When considering the numbers, the receivables turnover determines the effectiveness of the company in efficiently using its assets. The higher turnover is favorable to the company since it means higher effectiveness. Nonetheless, it could be higher still. The quick ratio shows the company’s ability to pay the short-term debts. In most cases, a ratio higher than 1.0 is favorable to the company. In this case, we have a lower ratio showing the company’s inability. On the other hand, the current ratio should show the company’s ability to pay both long-term and short-term debts. Again, SolarWinds has shown that the ratio is lower than 1.0 in the last quarter. This translates to the company having a higher amount of liabilities than assets.
When considering solvency, the latest quarter’s numbers showed the company having a times interest ratio of 212.67 and a financial leverage of 1.71. In this case, the higher times interest earned value shows that the company has a very higher capability of paying off interest charges on pre-tax earnings. The financial leverage also shows the amount of risk the company engages in compared to other players in the sector. The higher ratio concludes that there is significantly higher risk with investing in SolarWinds.
Discussion
From the above figures, it would reveal to the analyzer that there are serious challenges with regards to the efficiency of the company and its ability to strategically make financial moves. One of the problems that appear at first is the company’s acquisition of more liabilities than assets. This brings about a disconnect in the financial information so that various factors of financial success are affected (Robinson & Pearce, 1983). The reason behind higher risk while investing in the company shows that the company’s management is not engaging in meaningful financial moves for the growth of the company. According to the horizontal analysis, 91.7% of the revenue is gross profit, but there is very little translation of this to the company’s financial improvement. This can lead to the bankruptcy of the company despite having many liabilities on board. Furthermore, the company has engaged in non-profitable spending so much that the company cannot maintain favorable liquidity ratios. The acquisitions are simply not sufficient in meeting the company’s needs.
The information is useful to the management as there is a revelation of the wrong use of monies obtained from high profit margins that the company enjoys. The operating expense consists of 76.1% of the revenue in 2014 and 63.7% in 2013, showing that the majority of the money obtained from profits is simply channeled to internal operations rather than expansion operations. Without proper utilization of the profits that the company gains, there will be eventual losses (Schwenk & Shrader, 1993). Furthermore, the information reveals to the management the need for strategic management and planning, especially on expansion ventures. Moreover, restrictive financial operations need to be implemented if there is going to be some financial success for the company. Obtaining valuable operations is a priority for the company as it will avoid wrong ventures such as the India project. As a result of these numbers, the company remains with a long way to go in terms of management and financial decision making. The company has not performed well, especially considering the potential of the information technology industry in the current world.
In conclusion, I would recommend the engagement of strategic planning procedures for the purpose of ensuring that the company is keen on acquiring long-term assets. These will offset potential liquidity concerns, as well as set the company on a better pedestal financially. Additionally, the engagement of strategic management and planning is key to the potential growth of the company.
References
Robinson, R. B., & Pearce, J. A. (1983). The impact of formalized strategic planning on financial performance in small organizations. Strategic Management Journal, 4(3) , 197-207.
Rockwell, L. (2016). Austin software maker SolarWinds completes $4.5 billion sale . Retrieved February 6, 2017, from My Stateman: http://www.mystatesman.com/business/austin-software-maker-solarwinds-completes-billion-sale/n008HomvVRCFzpXNCjNqXO/
Schwenk, C. R., & Shrader, C. B. (1993). Effects of formal strategic planning on financial performance in small firms: A meta-analysis. Entrepreneurship: Theory and Practice, 17(3) , 53-65.
Appendixes
Table 1 : Horizontal Analysis for Income Statement
| In Millions of USD (except for per share items) |
12 months ending 2014-12-31 |
12 months ending 2013-12-31 |
Horizontal Analysis 2014 |
Horizontal Analysis 2013 |
| Revenue |
428.71 |
335.38 |
100.0% |
100.0% |
| Other Revenue, Total | - | - | ||
| Total Revenue |
428.71 |
335.38 |
100.0% |
100.0% |
| Cost of Revenue, Total |
44.37 |
27.92 |
10.3% |
8.3% |
| Gross Profit |
384.35 |
307.47 |
89.7% |
91.7% |
| Selling/General/Admin. Expenses, Total |
225.59 |
148.33 |
100.0% |
100.0% |
| Research & Development |
56.48 |
37.51 |
25.0% |
25.3% |
| Depreciation/Amortization | - | - | ||
| Interest Expense(Income) - Net Operating | - | - | ||
| Unusual Expense (Income) | - |
-0.12 |
||
| Other Operating Expenses, Total | - | - | ||
| Total Operating Expense |
326.44 |
213.64 |
76.1% |
63.7% |
| Operating Income |
102.28 |
121.75 |
23.9% |
36.3% |
Table 2 : Horizontal Analysis for Balance Sheet
| In Millions of USD (except for per share items) |
As of 2014-12-31 |
As of 2013-12-31 |
Horizontal Analysis of 2014 |
Horizontal Analysis of 2013 |
| Cash & Equivalents |
237.94 |
165.97 |
28.8% |
23.5% |
| Short Term Investments |
12.38 |
19.33 |
1.5% |
2.7% |
| Cash and Short Term Investments |
250.33 |
185.3 |
30.3% |
26.2% |
| Accounts Receivable - Trade, Net |
50.79 |
45.69 |
6.2% |
6.5% |
| Receivables - Other | - | - | ||
| Total Receivables, Net |
50.92 |
47.23 |
6.2% |
6.7% |
| Total Inventory | - | - | ||
| Prepaid Expenses |
6.49 |
4.85 |
0.8% |
0.7% |
| Other Current Assets, Total |
8.35 |
5.41 |
1.0% |
0.8% |
| Total Current Assets |
316.09 |
242.78 |
38.3% |
34.4% |
| Property/Plant/Equipment, Total - Gross | - |
19.29 |
2.7% |
|
| Accumulated Depreciation, Total | - |
-10.08 |
-1.4% |
|
| Goodwill, Net |
363.58 |
317.05 |
44.1% |
44.9% |
| Intangibles, Net |
103.49 |
125.8 |
12.5% |
17.8% |
| Long Term Investments |
17.42 |
11.01 |
2.1% |
1.6% |
| Other Long Term Assets, Total |
0.83 |
0.48 |
0.1% |
0.1% |
| Total Assets |
825.03 |
706.34 |
100.0% |
100.0% |
| Accounts Payable |
6.83 |
7.19 |
2.9% |
3.2% |
| Accrued Expenses |
35.28 |
17.72 |
14.9% |
8.0% |
| Notes Payable/Short Term Debt |
0 |
0 |
||
| Current Port. of LT Debt/Capital Leases | - |
40 |
#VALUE! |
18.0% |
| Other Current liabilities, Total |
157.15 |
128.89 |
66.5% |
57.9% |
| Total Current Liabilities |
199.25 |
193.79 |
84.4% |
87.1% |
| Long Term Debt | - | - | ||
| Capital Lease Obligations | - | - | ||
| Total Long Term Debt |
0 |
0 |
||
| Total Debt |
0 |
40 |
18.0% |
|
| Deferred Income Tax |
5.32 |
4.97 |
2.3% |
2.2% |
| Minority Interest | - | - | ||
| Other Liabilities, Total |
31.6 |
23.68 |
13.4% |
10.6% |
| Total Liabilities |
236.17 |
222.45 |
100.0% |
100.0% |
| Redeemable Preferred Stock, Total | - | - | ||
| Preferred Stock - Non Redeemable, Net | - | - | ||
| Common Stock, Total |
0.08 |
0.07 |
0.0% |
0.0% |
| Additional Paid-In Capital |
279.58 |
236.48 |
47.5% |
48.9% |
| Retained Earnings (Accumulated Deficit) |
322.5 |
244.38 |
54.8% |
50.5% |
| Treasury Stock - Common | - | - | ||
| Other Equity, Total |
-13.3 |
2.95 |
-2.3% |
0.6% |
| Total Equity |
588.86 |
483.89 |
100.0% |
100.0% |
