Analyzing Sherwin Williams and Financial Analysis

Sherwin Williams

Financial Ratios

Financial statements help evaluate a company's financial performance and position. Income statement, statement of financial position, and statement of cash flow are the basic and the most significant financial statements that analyze the quantifiable data and information of a firm's performance. These are the most commonly employed financial statements in the calculation of financial ratios. Appropriate analysis of a financial statement aids in attaining beneficial financial information, utilized for decision making. Thus, financial statements help project the historical and contemporary financial condition of a company. Forthcoming predictions can thence be appropriated through the additional examination of past financial statements.

A financial ratio can be defined as the numeric result attained by undertaking division of one financial data against another and is utilized to represent the relativeness of different financial variables (Collier et al., 2004). The financial statements help examine and assess the financial performance, compare and contrast, in addition to the financial standing or position of a corporation and its competitors in the industry of operation. Financial ratio analysis facilitates the examination of the financial health of a corporation. The financial ratios make it much easier to appraise how a company performs as against the rival companies, and with the benchmarks in the industry. In the case study undertaken, Sherwin Williams faces competition in the industry from Akzo Nobel N.V and PPG Industries. The purpose of this paper is to analyze the financial statements of Sherwin Williams for the past five years in relation to the industry.

Liquidity Ratios

Liquidity ratios are not only a proper measure of financial health but also that of the financial performance of a company. The ratios examine the capability of a corporation to settle its current liabilities as they become due (Ross et al., 2013).

Current Ratio

The current ratio is computed by dividing the current assets by current liabilities. This particular ratio assesses the current assets in relation to the current liabilities to ascertain and determine whether the company has sufficient assets that can be liquidated instantaneously in order to meet obligations and debt (Ross et al., 2013).

2011

2012

2013

2014

2015

Assets

2,261,593

3,149,238

3,158,717

2,566,780

2,658,874

Liabilities

2,162,661

1,876,436

4,607,972

4,709,582

4,923,945

Current Ratio

1.045745

1.678308

0.68549

0.545012

0.539989

In the past four financial years, the current ratio of the company has declined significantly. The ratio decreased from 1.68 in 2012 to 0.69 in 2013, down to 0.55 in 2014 and further down to 0.53 in 2015. This implies that the company's financial health is eroding and in the past three years is not able to cater for its short-term debt obligations. In the past year, the current ratio of Akzo Nobel was 1.24 while that of PPG Industries was 1.41. This implies that in relation to the its competitors in the industry, Sherwin Williams has a poor financial performance as it is not liquid enough.

Quick Ratio

Quick ratio is a metric that delineates the capacity of a firm to cater to its short-term obligations devoid of liquidating its inventories. The quick ratio is calculated as cash and short-term marketable securities plus receivables divided by current liabilities (Weygandt et al., 2008).

2011

2012

2013

2014

2015

Current Assets

2,261,593

3,149,238

3,158,717

2,566,780

2,658,874

Inventories

926,809

920,234

970,815

1,033,527

1,018,530

1,334,784

2,229,004

2,187,902

1,533,253

1,640,344

Current Liabilities

2,162,661

1,876,436

4,607,972

4,709,582

4,923,945

Quick Ratio

0.617195

1.187892

0.474808

0.32556

0.333136

The quick ratio of Sherwin Williams considerably declined over the past four years from 1.18 in 2012 to 0.33 in 2015. This implies that largely, the company is not capable of meeting its short-term debt obligations without the inclusion of its inventories. Statistics from Market Watch (2016) indicate that PPG Industries had a quick ratio of 1.04 while Akzo Nobel had a quick ratio of 0.91. This implies that Sherwin William's comparative performance in the industry is weaker as it has a substantially poor and deteriorating quick ratio, which implies poor financial health.

Turnover Ratios

Accounts receivable turnover ratio

2011

2012

2013

2014

2015

Net Credit Sales

8,765,699

9,534,462

10,185,532

11,129,533

11,399,304

Average Accounts Receivable

953,267

1,011,191

1,117,378

1,165,906

1,122,420

Accounts Receivable Turnover

9.195429

9.428947

9.1155693

9.5458236

10.156006

Accounts receivable turnover is a metric that indicates the number of times within the financial year that a firm is able to collect its receivables. In particular, this ratio is purposed to examine the capability of a firm to efficaciously issue credit to its consumers and undertake the collection of such monies in timely and efficient way (Weygandt et al., 2008). The accounts receivable turnover ratio of Sherwin Williams increased from 9.54 times in 2014 to 10.16 times in 2015. The increase in the turnover indicates that the company is aggressive in its approach of collecting funds. It also indicates a small amount of bad debt and having consumers of high quality. The implication of this is that the company is effective as on average, the accounts receivable collection was undertaken in roughly 36 days. The receivables turnover of PPG Industries in 2015 was 5.47 while that of Akzo Nobel was 5.39 (Market Watch, 2016) This indicates that Sherwin Williams is more effective in collecting its accounts receivable compared to the industry performance, which implies that most of the firms in the industry are less aggressive and face issues of bad debt.

Total assets turnover ratio

The asset turnover ratio projects the capability of a firm to create sales from its total assets through the comparison of the net sales generated and the total assets it holds, on an average. The total assets turnover ratio of Sherwin Williams increased in the past three years from 1.61 in 2013 to 1.84 in 2014 and further up to 1.98 in 2015. This increase indicates proper financial health as the company was effective in utilizing its total assets to generate revenue. For instance, this implies that in 2015, 1.98 dollars of revenue were generated from every dollar of Sherwin William's total assets. In 2015, the total asset turnover of PPG Industries was 0.88 while that of Akzo Nobel was 0.92. The significance of the difference reveals the fact that Sherwin Williams has a superior performance in the industry. Having low asset turnover ratios, it implies that the competitors might be facing ineffective inventory management or issues of having surplus production capacity.

2011

2012

2013

2014

2015

Net sales

8,765,699

9,534,462

10,185,532

11,129,533

11,399,304

Average Total Assets

5,199,244

5,731,995

6,308,622

6,044,280

5,748,954

Asset turnover ratio

1.685957

1.663376

1.6145415

1.8413333

1.9828485

Market Price Ratios

Market price or value ratios are employed to assess the prevailing share price of the stock of a public company. In particular, these ratios are beneficial in ascertaining whether the shares or stock of the company is under-priced or over-priced. The price-earnings ratio is a market value ratio that indicates the value (true worth) of the company. This metric compares the prevailing share price of the company in relation to its earnings for every share. The price earnings ratio of Sherwin Williams is presently valued at 27.44. On the other hand, that of PPG Industries is valued at 21.33 whereas that of Akzo Nobel is valued at 21.13 (Market Watch, 2016). This implies that, in comparison to its competitors in the industry, Sherwin Williams is has the higher valuation. This implies that the market considers the company to be a better investment with more prospects of growth and success in the forthcoming periods. Secondly, the book value of a firm delineated the value or worth of the firm's assets as indicated in the statement of financial position. It is indicative of the variance between the assets and liabilities in the balance sheet and offers a projection of the worth generated if the firm were to be liquidated at that given point in time. The price-to-book ratio of Sherwin Williams is 27.59, while those for its competitors in the industry, the price to book value of PPG industries is set at 5.29 whereas that of Akzo Nobel is set at 2.37 (Market Watch, 2016). This implies that Sherwin Williams is deemed to have a greater book value in the industry.

ROE and Decomposition (DuPont)

The DuPont technique is a convoluted and wide-ranging analysis of the return on equity (ROE) of an organization. Referring to this financial method, it is considered that a business can achieve a high ROE if it produces a high net profit margin, utilizes its assets in an effectual way in order to generate more revenue, and also if the organization has a high level of financial leverage. DuPont Analysis is attained through the following formula:

ROE = Profit Margin x Total Asset Turnover x Financial Leverage

i. Profit Margin = Net Income / Revenue

= 1,053,849 / 11,339,304 = 0.093

ii. Total Asset Turnover = Net Sales / Average Total Assets

= 11,339,304 / ((5,791,855 + 5,706,052)/2) = 1.97

iii. Equity Multiplier = Total Assets / Total Stakeholder's Equity

= 5,791,855 / 867,910 = 6.67

Therefore, the DuPont Analysis for the Sherwin Williams will be attained as follows:

= 0.093 x 1.97 x 6.67

= 1.222

=122.2%

Horizontal Analysis

2015

Percentage

2014

Percentage

Net sales

11,399,304

11,129,533

Cost of goods sold

5,780,078

50.71%

5,965,049

53.60%

Gross profit

5,559,226

48.77%

5,164,484

46.40%

Selling, general and administrative expenses

3,913,518

34.33%

3,822,966

34.35%

Other general expense

30,268

0.27%

37,482

0.34%

Interest expense

61,791

0.54%

64,205

0.58%

Interest and net investment income

-1,399

-0.01%

-2,995

-0.03%

Other expense (income)- net

6,082

0.05%

-15,400

-0.14%

Income before income taxes

1,548,966

13.59%

1,258,226

11.31%

Income taxes

495,117

4.34%

392,339

3.53%

Net Income

1,053,849

9.24%

865,887

7.78%

A horizontal analysis encompasses the examination of the comprehensive income statement of a company with regard to a certain fiscal year or number of years and assessing the performance. The gross profit increased by a 2.37% margin, which indicates financial improvement. This can be attributed to the decrease in the cost of goods sold from 53.6% to 50.71% in 2015. The selling, general and administrative expenses declined slightly - by a margin of 0.02%. The other expenses such as general expense and interest expense followed suit as they declined from 0.34% to 0.27% and 0.58% to 0.54% respectively. In general, the net income generated increased relatively from 7.78% in 2014 to 9.24% in 2015. This indicates a better financial performance in the case of Sherwin Williams.

Vertical Analysis

2015

Percentage

2014

Percentage

ASSETS

Current Assets:

Cash and cash equivalents

205,744

3.55%

40,732

0.71%

Accounts receivable, less allowance

1,114,275

19.24%

1,130,565

19.81%

Inventories

Finished goods

840,603

14.51%

841,784

14.75%

Work in process and raw materials

177,927

3.07%

191,743

3.36%

1,018,530

17.59%

1,033,527

18.11%

Deferred income taxes

87,883

1.52%

109,087

1.91%

Other current assets

232,442

4.01%

252,869

4.43%

Total current assets

2,658,874

45.91%

2,566,780

44.98%

Goodwill

1,143,333

19.74%

1,158,346

20.30%

Intangible assets

255,371

4.41%

289,127

5.07%

Deferred pension assets

244,882

4.23%

250,144

4.38%

Other assets

447,533

7.73%

420,625

7.37%

Property, plant and equipment

Land

119,530

2.06%

125,691

2.20%

Buildings

696,202

12.02%

698,202

12.24%

Machinery and equipment

2,026,617

34.99%

1,952,037

34.21%

Construction in progress

81,082

1.40%

59,330

1.04%

2,923,431

50.47%

2,835,260

49.69%

Less allowance for depreciation

1,881,569

32.49%

1,814,230

31.79%

1,041,862

17.99%

1,021,030

17.89%

Total assets

5,791,855

5,706,052

LIABILITIES AND SHAREHOLDERS' EQUITY

Current Liabilities:

Short-term borrowings

39,462

0.68%

679,436

11.91%

Accounts payable

1,157,561

19.99%

1,042,182

18.26%

Compensation and taxes withheld

338,256

5.84%

360,458

6.32%

Accrued taxes

81,146

1.40%

86,744

1.52%

Current portion of long-term debt

3,154

0.05%

3,265

0.06%

Other accruals

522,280

9.02%

508,581

8.91%

Total current liabilities

2,141,859

36.98%

2,680,666

46.98%

Long-term debt

1,920,196

33.15%

1,122,715

19.68%

Postretirement benefits other than pensions

248,523

4.29%

277,892

4.87%

Other long-term liabilities

613,367

10.59%

628,309

11.01%

Shareholders' equity

Common stock

115,761

2.00%

114,525

2.01%

Preferred stock

0

0

Other capital

2,330,426

40.24%

2,079,639

36.45%

Retained earnings

3,228,876

55.75%

2,424,674

42.49%

Treasury stock

-4,220,058

-72.86%

-3,150,410

-55.21%

Cumulative other comprehensive loss

-587,095

-10.14%

-471,958

-8.27%

Total Shareholders' equity

867,910

14.99%

996,470

17.46%

Total Liabilities and Shareholders' Equity

5,791,855

5,706,052

The vertical analysis signifies the analysis of the balance sheet changes of a company on a year-to-year (yoy) basis. This analysis encompasses the balance sheet changes in Sherwin Williams' balance sheet between the 2014 and 2015 financial years. The current assets of Sherwin Williams increased from 44.98% in 2014 to 45.91% in 2015. Accounts receivable represented the highest proportion of the current assets and decreased from 19.81% to 19.24%. This can be attributed to the aggressive collection of accounts receivable aforementioned. Better financial performance of the company can be perceived from the significant increase of cash and cash equivalents as the measure increased considerably from 0.71% to 3.55%. Similarly, the noncurrent assets increased slightly from 17.89% to 17.99%. Property, plant, and equipment constituted the largest portion of the non-current assets at 50.47% increasing from 49.69% in 2014 (Sherwin Williams, 2015). Further Financial improvement can be demonstrated by the decrease in the total current liabilities from 46.98% in 2014 to 36.98% in 2015. This indicates that the company is paying off its short-term obligations in spite of its liquidity issues encountered in earlier discussion and analysis. However, the long-term liabilities of the company significantly increased from 19.68% in 2014 to 33.15% in 2015. The retained earnings of the company also increased from 42.49% to 55.57% in 2015. The shareholder's equity declined from 17.46% to 14.99% in 2015 (Sherwin Williams, 2015).

Valuation

The discount dividend model is a valuation method that is employed to evaluate the current value of a stock on the basis of the growth rate of dividends. The Dividend Growth Model can act as a vital and useful tool for analyzing and appraising a company. The formula employed in this valuation model is as follows:

Present Stock Value = DividendShare / (RDiscount -- RDividend Growth)

Therefore, the valuation of Sherwin Williams' present stock value is undertaken as follows: