1.1 Introduction – Company Overview
Newell Rubbermaid Incorporation is a profit maximizing corporation that engages as a global manufacturer and full-service seller of name-brand consumer products. The organization’s multi-product offering focus on the following five main market segments:
· Cleaning and organization – this business segment is catered for by the Rubbermaid Home Products, Rubbermaid Foodservice Products, Rubbermaid Commercial Products, Rubbermaid Europe, Rubbermaid Canada, and Rubbermaid Asia Pacific sections. These divisions are involved in the design, manufacturing, packaging and distribution of indoor/outdoor organization, home and food storage and cleaning products (Calphalon.com (2004)., p 3).
· Office products – the sections of Stanford North America, Stanford Europe, Stanford Latin America and Asia Pacific are involved in this business segment, which basically entails design, manufacturing and distribution of permanent/waterbase markers, overhead projector pens and other office products and art supplies (Calphalon.com (2004), p 3).
· Tools and hardware – in this section, the firm Irwin markets tools and hardware products under the Lenox brand (Calphalon.com (2004), p 3-4).
· Home Fashions – the divisions of Levolor/Kirsch, Home Décor Europe and Swish UK focus on this segment by devising, producing and distributing drapery hardware, blinds and other related goods (Calphalon.com (2004), p 4).
Other – the latter segment comprises the manufacturing and selling of aluminum and steel cookware. The Calphalon, Cookware Europe, Little Tikes, Graco and Goody are employed in this area (Calphalon.com (2004), p 4).
In view of the above business segments, Newell Rubbermaid Incorporation main strategic schemes are: productivity, streamlining, new product development, marketing, strategic account management and collaboration (Calphalon.com (2004), p 2).
1.2 Profitability and Efficiency of Newell Rubbermaid Incorporation
Overall the profitability and efficiency of Newell Rubbermaid Incorporation improved over the years. The utilization of the firm’s assets yielded higher profits over the years by a steady increase in the return on total assets and return from operations. A high percentage in such financial ratios is always desirable because it implies that the profitability of the company is substantially safe from unseen changes in the external business environment, like new competitive measures, economic slowdown and more (Randall H. 1999, p 467).
The gross profit margin and net profit margin experienced an increase of 2.06% and 1.79% from 2001 to 2005. This means that the profit generated from every ₤100 of sales is lower (Wood F. et al. 2002, p 375). This can arise from a number of reasons, such as better control on costs, selling products that have a higher profit margin, diminish the sale of loss leader products from their streamlining strategies which pose a financial burden on other more profitable goods and more. However the operating income before depreciation, interest and tax is to sales ratio diminished from 2004 to 2005. Indeed by examining the profit and loss account one can see that the sales revenue of the organization commencing decreasing steadily from 2003 onwards, encountering a drop in sales of 18.16%.
The return on equity, which implies the returned earned by the equity providers of finance, is quite unstable (Randall H. 1999, p 464). Indeed a high return on equity was derived in 2005, 2002 and 2001, while a negative returned was gained in 2003 and 2004. This ratio is commonly in line with the earnings per share, which shall be explained in section 1.5 of this assignment. At this stage we can state that the profitability of the firm is improving as denoted by the ratios above and by the material increase in return in equity in 2005. Other factors relating to investors will be covered in this subsequent section.
The reduction in sales is an alarming instance, which can lead to severe consequences in the future. Sales may decrease due to a number of causes, such as the firm is trading a product at a decline stage, operating in a declining market or it is being outbid by the competitors who are providing better products than us. Even thought management is more efficient in the utilization of resources, it is of equal importance that we are effective in the market and sustain our market share.
The aforesaid decrease in sales is also accompanied by diminishing assets as shown in the table below:
2005
($ millions)
2004
($ millions)
2003
($ millions)
2002
($ millions)
2001
($ millions)
Assets
6,445.8
6,665.9
7,480.7
7,388.9
7,266.122
% inc/(dec)
– 3.3
– 10.89
1.24
1.69
–
Sales
6,342.5
6,748.4
7,750
7,453.9
6,909.319
% inc/(dec)
– 6.01
– 12.92
3.97
7.88
–
As we can see the decrease in assets is in line to the reduction in sales and can arise due to the reasons outlined in the previous paragraph.
1.3 Financial Position of Newell Rubbermaid Incorporation
Liquidity ratios are adopted to measure the company’s ability to meet its financial obligations. The two main liquidity ratios are the current ratio and quick ratio, which points out that the liquidity of the organization, has deteriorated. In fact, the current assets ability to cover the current liabilities has got worse as indicated by the decrease in the current ratio. Indeed from 2004 to 2005 the current assets faced a reduction form $3,012.4 million to $2,472.8 million, while the current liabilities reduced slightly form $1,871.3 million to $1,797.5 million. A drop in the quick ratio also arose, revealing that the most liquid assets also fell in relation to the short-term liabilities (Randall H. 1999, p 468). Indeed the acid test ratio is 0.89:1 showing that the firm does not possess enough liquid assets to cover its short-term obligations.
At this stage one would analyze other liquidity ratios to identify causes for such decrease in the financial position of the corporation. Indeed we will now examine financial ratios that portray the working capital management of the enterprise. The payables period, which show the time taken by the company to pay the amount due to creditors increased by 2 days from 2004 to 2005, while the number of days to receive the payment from trade debtors remained stable as noted by the average collection period (Holton D. et al 2000, p 10, 13). This is a positive element on working capital management, because we are taking longer to pay our trade creditors, while the duration of collecting money from debtors stayed stable. This ought to aid in the improvement of the financial position of the firm.
The increase in the stock turn ratio indicates that the average stockholding period has risen, even though there was a reduction in inventory from $972.3 million in 2004 to $875.9 million in 2005. This implies that the company is taking longer to sell the entire asset held in the stores (Lewis R. et al 1996, p 382). The higher the stock number of days stock ratio the greater the money tied up in the stores. In accumulation to that, if we are taking more time to sell all stock profitability may also be affected negatively because the holding costs can be higher. However, the operating cycle and cash cycle decreased from 2004 to 2005. These ratios reveal the time taken to purchase inventory, sell the product and collect the cash from trade (Holton D. et al 2000, p 15). Thus a reduction in such ratios is a positive indication on the cash flow of the corporation.
As we can see there is a contradiction between the liquidity ratios examined till now. The current/quick ratio and inventory turnover show a decrease in the financial position of the firm, while the operating cycle and cash cycle portray an improved cash flow performance. In financial ratio analysis, any ratios that try to examine management performance, financial structure or liquidity, like the ones adopted in this section ought to be related to the financial information provided by the cash flow statement, which is another important report found in the financial statements. Indeed the factors leading to the reduction in the working capital ratios can be determined from such examination. The cash flow statement reveals a reduction in the cash flow from operating activities of $18,400,000. Thus the reduction in liquidity position is probably arising from the decrease in sales. Again we arrive to the point outlined in the previous section, where the firm is internally managed its resources properly, but the decrease in market share showed by the reduction in sales revenue is directing negative financial consequences on the firm.
1.4 Financial Stability of Newell Rubbermaid Incorporation
The total debt/total equity ratio indicates that the organization is a high-geared company, which is substantiated by the fact that long-term debt is $2,429.7 million in 2005 compared with a total equity of $1,643.2 million. Indeed the gearing of Newell Rubbermaid Incorporation increased by 0.14 from 2004 to 2005. Gearing is a capital structure ratio that shows the proportion of equity to debt finance (Randall H. 1999, p 470-471). The greater the gearing ratio, the more the firm’s dependence on long terms borrowings and thus the greater the risk the company being financially unstable. Thus we can state that Newell Rubbermaid Incorporation is a risky company and particular attention should be placed to the stability of the firm. As we can note, this ratio is just an indication of risk. In order to obtain a wider picture of the firm’s stability we ought to analyze other leverage ratios, which will be carried out in the following paragraphs.
The times interest earned, commonly known as interest cover, evaluate the corporation’s stability in terms of profits generated by the firm and not its capital structure as performed by the gearing ratio (Randall H. 1999, p 472). In practice, normally a debt crisis occurs when an organization fails to pay the interest due on time. This ratio portrays the enterprises capability to compensate loan interest commitments out of profits made. The higher the times interest earned the better the stability of the company. In 2003 and 2004 the interest cover of Newell Rubbermaid Incorporation was very low. Luckily a substantial increase arose in 2005. However, this ratio has not yet reached the high level of 2002 as denoted by the company’s financial statements. The drop in this ratio in 2003 and 2004 mainly arose due to the special items costs that occurred in that period, as shown by the profit and loss account. In fact in 2003 this expenditure consumed 73.11% of the operating profit generated by the company, while in 2004 it diminished the operational profit by 57.01%.
Sudden expenditures like the one mentioned above can be very risky for the going concern of the company. This is one of the main reasons why high-geared organizations are considered riskier than low-geared. It is of utmost importance that management keeps a buffer amount of cash in the corporation to ensure that they can consistently meet interest commitments. By examining the financial information provided, we can note that, with the exception of 2004, the cash and cash equivalents balance kept by the enterprise is not sufficient to cover the interest expense arising in the financial year. For example, in 2005, the cash and cash equivalents balance amounted to $115,500,000, and the interest expenditure added up to $142,100,000, which is $26,600,000 higher. It is true that cash flow balances should be invested in profitable projects to yield higher returns to shareholders, but it is of likewise importance that we ensure the stability of the firm, especially for risky high-geared companies like the one we are examining.
Managerial efficiency in the utilization of the firm’s assets is also highlighted with the equity multiplier ratio, which is facing a steady increase over the years. This ratio portrays management ability in multiplying the company’s assets from the equity invested by shareholders. It is a capital appreciation measurement.
1.5 Investor’s Position in Newell Rubbermaid Incorporation
The earnings per share are quite unstable as can be seen from the years provided. In fact in 2003 and 2004 negative earnings per share occurred. However, in 2005 positive high earnings per share arose to the shareholders. We should also outline the fact that being a high-geared company, profitability positive changes will lead a greater effect on the earnings per share because it is spread over a small amount of equity. Therefore if the financial performance of the corporation is improving, the return attained by shareholders is better in a high-geared firm. The price/earnings ratio, which indicates the value of stock, is highly influenced by the earnings the shareholders will attain (Randall H. 1999, p 471). The market to book ratio shows how many times the market value covers the assets book value. An anomaly in the market or financial reports is arising from this ratio. During 2003 and 2004 even though the firm had a very bad valuation of stock as shown by the price/earnings ratio, the market to book ratio still increasing portraying that the market value in relation to the firm’s assets rose. This stems from the fact that during such period, the organization sold a significant amount of non-current assets as shown by the reduction in net property, plant and equipment in the balance sheet. Such disposal of assets compensated to the reduction in the share value in the capital market.
A stable dividend policy is adopted by the company as shown by the dividend per share and the dividend yield. These ratios show that the firm was able to maintain its dividend policy during the years, showing effectiveness in management actions (Randall H. 1999, p 471-472).
1.6 Concluding Remark – Investment Decision
Apart from the financial health of the corporation, the investment decision also depends on the investor’s attitude towards risk. As can be seen from the analysis provided above, the company is a highly risk company due to the high amount of debt present in it. A shaky stability position was also noted in the interest cover, which is a serious risk due to its high debts, which are exceeding the total equity of the firm. Deterioration in the financial position and a reduction in sales revenue were also noted. Despite of all this, the company still managed to attain higher profits with improved efficiency and effectiveness.
If the investor is risk averse, he should not seek investment in such company and ought to choose stable low-geared companies, which are less risky. Yet if he is a risk taker there is the possibility that the investor attains a good return by investing in such company provided that the focus on the core business, which the company is entailing yields to good profits and good cash inflows are obtained that can aid in diminishing debt and meet financial commitments.
References:
Calphalon.com (2004). Securities and Exchange Commission Form 10-K (on line). Available from: http://www.calphalon.com/newellco/downloads/2004Form10K.pdf (Accessed 17th April 2007).
Holton D.; Hinrichs J.; Hilderbrandt D. (2000). University of North Florida, KMART Corporation Historical Analysis (on line). Available from: http://www.unf.edu/~cfrohlic/Kmarthi.doc (Accessed 17th April 2007).
Lewis R.; Pendrill D. (1996). Advanced Financial Accounting. Fifth Edition. London: Pitman Publishing.
Randall H. (1999). A Level Accounting. Third Edition. Great Britain: Ashford Colour Press Ltd.
Wood F.; Sangster A. (2002). Business Accounting 1. Ninth Edition. London: Prentice Hall.
