Financial Analysis Rationale for Choosing the Company Essay

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Financial Analysis

Rationale for choosing the company for which to invest

The company selected for this financial research report is Intel Corporation. The rationale for selecting this company is because Intel is considered to be one of the major pioneers and forerunners in the field of technology. Intel Corporation dominates about 80% of the market share that is made up of microprocessors.

Ratio analysis

It is imperative to note that the financial statement of a company alone offers limited understanding and insight into the performance of the company itself. So as to attain a much profound and richer comprehension of what is going on within a company, there has to be a relevant basis of comparison. Comparison can include making an analysis of financial ratios of the company as well as the industry benchmarks it offers the stakeholders, with tools to detect any strength and weaknesses of the company. This in particular can be of great assistance to the company when it comes to investment decisions. The following section will analyze five key ratios of Intel Corporation for the past three years with the purpose of ascertaining its financial health.

Current Ratio

The current ratio is a liquidity ratio that assists the potential investor to ascertain whether the company is able to pay up its obligations. The current ratio is determined by dividing the current assets of the company by its current liabilities. The word "current" points toward the fact that the period being taken into consideration in the calculation is less than or equal to one financial year. The current ratio measures the current assets with respect to the current liabilities to establish and conclude whether the firm has sufficient assets that can be liquidated instantaneously in order to settle or recompense debts and obligations. The following are the calculations for the current ratio of Intel Corporation for the years 2014, 2013 and 2012.

Current Ratio = Current Assets / Current Liabilities

2014 = 27,730 / 16,019 = 1.73

2013 = 32,084 / 13,568 = 2.36

2012 = 31,358 / 12,898 = 2.43

The current ratio of Intel Corporation has deteriorated in the past three years from 2.43 to 2.36 to 1.73 in the past year (2014). This is attributed largely to the decrease in the assets and also to increases in the short-term liabilities of the company. The ideal ratio is 2:1; this therefore indicates that in the year 2014 the company did not have a satisfactory ratio. However, it is important to note that the ratio is positive and therefore the company can easily cover its short-term obligations.

Quick Ratio

The quick ratio is very much similar to the current ratio; however, for the quick ratio, the current assets do not encompass inventories. The ratio is calculated by adding up the receivables, cash and short-term marketable securities, and then dividing them up by current liabilities.

The following are the calculations for the current ratio of Intel Corporation for the years 2014, 2013 and 2012.

Cash and cash equivalents

2,561 5,674

8,478

Short-term investments

2,430 5,972

3,999

Trading assets

9,063 8,441

5,685

Accounts receivable, net of allowance for doubtful accounts

4,427 3,582

3,833

Total quick assets

18,481 23,669

21,995

Current liabilities

16,019 13,568

12,898

2014 = 18,481 / 16,019 = 1.15

2013 = 23,669 / 13,568 = 1.74

2012 = 21,995 / 12,898 = 1.71

Starting with 2012, it can be seen that the 'quick ratio' of Intel Company increased in the year 2013. However, from 2013 to 2014, the quick ratio of Intel has declined immensely from 1.74 to 1.15. This can be largely attributed to short-term investments and cash equivalents.

Earnings per Share

Earnings per share (EPS) is metric that indicates how profitable a firm is with regards to the shareholders. This measure is largely affected by the number of shares outstanding for the company. This implies that a bigger company will have to split its profits among more outstanding shares compared with a smaller firm. The EPS of a company is calculated by taking the net income and subtracting the preferential dividends, and then dividing the amount by the weighted average common shares.

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EPS = (Net Income -- Preferred Dividends) / Weighted Average Common Shares Outstanding

2014 = (11,704 -- 0) / 4,901 = 2.39

2013 = (9,620 -- 0) / 4,970 = 1.94

2012 = (11,005 -- 0) / 4,996 = 2.20

The earnings per share of Intel Corporation declined from the year 2012 to 2013 from 2.20 to 1.94. This is attributed to the decrease in the incomes. However, the earnings per share did rise to 2.39 the subsequent year. This indicates that the company is quite profitable and is a good prospective investment for an investor.

Price Earnings ratio

The price earnings ratio is a metric that calculates the market value of a company's stock in relation to the earnings of the share. This is undertaken by making comparison between the earnings per share and the market price for every share. This particular ratio indicates exactly what the market is prepared to pay for a share on the basis of its current earnings. Prospective investors employ this ratio to make an assessment of what the fair market value of a share ought to be by estimating the forthcoming earnings for every share. This is because companies that have higher prospective earnings are more often than not anticipated to pay higher dividends or have the share increase in value.

Price Earnings Ratio = Market Value Price per share / Earnings per share

2014 = 23.89 / 2.39 = 10

2013 = 22.47 / 1.94 = 11.58

2012 = 22.03 / 2.20 = 10.85

The price earnings ratio of the company increased in the year 2013 from 10.85 to 11.58; they deteriorated further to 10 in the year 2014. However, these numbers also indicate that the market value of the stock is quite steady.

Return on Equity (ROE)

This is a useful measure because this ratio determines how effective a firm is in generating profit from every dollar invested in the firm by stakeholders. In other words, the return on equity measures how well a firm generates profit from the shareholders' capital. This ratio is attained by dividing the net income by the shareholders' equity.

Return on Equity = Net Income / Shareholders' Equity

2014 = 11,704 / 55,865 = 20.95%

2013 = 9,620 / 58,256 = 16.51%

2012 = 11,005 / 51,203 = 21.49%

The ROE of the company declined in the year 2013 to 16.51% from 21.49% for the 2012-year. However, the ratio improved in the following year as it rose up to 20.95%. This indicates that for every dollar invested by shareholders in the company, there is the generation of 20.95 cents. This is a good sign for the investor as this indicates that he or she will attain return from the capital invested.

Stock price analysis

In accordance with the 2014 Intel Corporation annual report, the board of the company is making considerations for dividends and thereafter stock repurchases. In the past year, the board of the Intel Company announced its very first increase in its dividends since the year 2012 to a price of 0.96 dollars to 0.90 for every share. In addition, the company repurchased its stock worth almost 11 billion dollars. These particular actions increase the company's dedication to bring value to the stakeholders in the long run. This shows that the company is a viable investment for a prospective investor.

Recommendations

Intel Corporation remains one of the largest and biggest research and development companies in the world, focused on advancing and progressing the manufacture and technology of microprocessor chips. The main emphasis placed by the company is to consistently enhance the speed, productivity, and also portability of the products that it retails. The value of the company from the past records, and also in recent periods continues to be satisfactory. Intel Corporation continues to be one of the biggest and most esteemed chip manufacturing firms. In addition, the company generates profit margins that are considerably higher compared to other players in the market. It is highly recommended.....

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