Executive Summary
A multinational company is a company that is engaged in producing and selling goods or services in more than one country. It is a company that has headquarters in one country and operations in one or more countries. The main objective of MNC is to maximize shareholder wealth. This study will discuss the two famous MNC’s and one is Baxter International, Inc. whose headquartered in Deerfield Illinois, and another is Boston Scientific Corporation whose headquartered in Natick, Massachusetts. Firstly Baxter International Incorporation is an international healthcare company established in 1931. On the other hand “Boston Scientific Corporation is a developer, manufacturer and marketer of medical devices” Careers in Pharmaceuticals (2008) which was established in 1969. Both companies are operating their activities very well. But we should have to choose the better one for our international investment. For measuring a company whether it is a good or a bad company we should determine some financial factors. And these factors are given below:
- Financial statement performance
- Financial ratio performance
- Free Cash Flow performance
- Equity performance
- Degrees of operating and financial leverage
- Capital spending
- Research and development spending
- Working Capital
- Baxter International, Inc
Financial statement performance
We know that the financial statement of the company shows the entire financial condition of a company for the particular year. Analyzing financial statements involves an Income statement and Balance sheet. These two things tell us about the Liquidity, profitability, and solvency of a company. In the Income statement of 2006 and 2007, we can see that.
- Net increase in Total Revenue is $885 or 8.53% ($11,263.00-$10,378.00)
- Net increase in gross profit is $782 or 16.5% ($5519.00-$4737.00)
- Net increase in Operating Income is $327 or17.77% ($2168.00-$1841.00)
- And Net Income increases $310 or 22.19% ($1707.00-$1397.00)
This is the change in income statement for the year of 2007. Now what are the changes in Balance sheet
- Increase in current assets $585 or 8.39%($7555.00-$6970.00)
- Increase in Total assets $608 or 4.14% (15294.00-$14686.00)
- Increase in current liabilities $202 or 5.6%($3812.00-$3610.00)
- Decrease in Total liabilities $36 or 0.42%($8414.00-$8378.00)
- And increase in Total Equity $644 or 10.27%($6916-$6272)
(In millions of USD).
Financial ratio performance
Key Stats & Ratios. Source: Baxter International Inc. (n.d.).
Ratio analysis is calculated for comparing one thing with another thing. In other words, the ratio is the relation of one thing to another of which quotient is the measure.
We determine the financial ratio for measuring the company’s financial condition. For example, we calculate the current ratio to see that how much current asset has the firm to pay its current liabilities.
Current ratio: current assets/current liability
For 2006:=6970/3610=1.93
For2007:=7555/3812=1.98
Here we see that the company have 1.93$ asset for paying 1$ liability in2006 and 1.98$ asset for paying 1$ liability in 2007. So this study can say that company maintains good Liquidity.
Net profit Margin: net profit margin shows the profit of a firm. This is a relationship between the sales profits of a firm. We calculate it in the following ways.
Net profit/net sales *100
The net profitability ratio shows that the company has a $15.12% profit on sales in2006 and $15.16% in 2007. So the profit of the is in increasing trend.
Operating Margin: the operating margin ratio shows that how much profit the company earned from the operation. It calculated as follows:
Cost of goods sold +Operating expenses/Net sales*100
The operating margin ratio shows $19.14% profit in 2006 and $19.25% profit in 2007. It reveals to us that the company’s operation is good. Its profit is increasing day by day.
EBITDA Margin
It shows Earnings before paying Interest, Tax, and Depreciation. It calculated as follows:
Interest+Tax+Depreciation/Net sales*100
Currently the company has $24.34% EBITD in2006 and $ -24.20%
EBITD in 2007. So here EBITD in negative margin that means company’s EBITD is in decreasing trend.
Return on average assets: It indicates the return on assets. That means the return on Investors Investment. How much return gets on their Investment.
We calculate it as follows:
Net income/ Average Assets
In Baxter International, Inc. return on Investment in 2006 is $11.77% and in 2007 is $11.39%. There is a decreasing trend in 2007. So it is not good for Investors.
Return on Average Equity: According to this ratio, profitability is measured by dividing the net profit after taxes by average total shareholders equity. So it is calculated as follows :
Net profit after taxes/ Average total shareholders equity
This ratio says us how much profit have the shareholder in a particular firm. In 2006 this company has $25.48% and in 2007 it is $25.89% profit on shareholders’ equity.
Free Cash Flow performance
The statement of Cash flow tells us how much change occurred in operating, investing, and financial activities. Finally, it tells us year-end Net change in cash. As we know operating activities include several items in two ways. One is cash inflows and they are inflow from the sale of goods and services, inflow from returns on loan and equity securities. Another is cash outflow and they are outflows for suppliers inventory, employees for services, government for taxes, and finally lenders for interest. Cash flows also happen in Investing activities.
“Inflows from the sale of debt or equity securities of other entities. Inflows from the collection of principal on loans to other entities. And cash outflows are purchase property, plant, and equipment”.
“Cash inflows from financing activities sale of common stock, issuance of debt. Cash outflows are stockholders as dividend and redeem long term debt or require capital stock”.
Cash flow statement of 2007 reveals some important things to us.
- Net increse inNet income $310 or 22.20% ($1707-$1397)
- Increase in Opereting activities is$122 or5.6 5%($2305-$2183)
- Increase in Investing activities is $-37 or10.81%($305-$342)
- Decrease in Financing activities is $1848 or 1502%($1971-$123)
- And finally Net Change in cash is $-1590 or 96.72%($54-$1644)
Equity Performance
Equity means the capital of the firm. This capital is given by the owner of the firm. It is a liability for the firm. Almost every year the firm paid interest of capital. In the Balance sheet for 2006 and 2007, we see that company has $6272 and $6916 equity. So increase in equity is $644 or 10.26%.
Degrees of Operating and Financial Leverage
Operating Leverage results from the existence of fixed operating expenses in the firm’s income stream. It happens for the fixed operating expenses of a firm. And Khan, and
Jain (2000) states that “[f]inancial Leverage is related to the financing activities of a firm. It is the result of a firm’s fixed financial expenses.”
The formula for Degree of operating leverage (DOL) is Sales – variable cost/EBIT.
The formula for Degree of financial leverage (DFL) is EBIT/EBIT-Interest.
Capital Spending
Capital spending refers to that sped money for earning long-term assets. Baxter Corporation spends money for increasing its fixed asset. In 2006 their fixed asset was $14686 and in 2007 the amount is $15294. So Net increase in capital spending is $608 or 4.14%
Research and Development Spending
Research is essential for every multinational company. Targets are fixed by dint of research work. Every year Baxter international incorporation spends a lot of money on its research work. Development is also a part of research work. In 2007 they spends a total of $221 on their research and development work. Up to 2008, 31 March their expense in this sector is $190.
Working Capital
Working capital refers as active of a company. It is required by a company for maintaining the regular activities of a company. It is received from the current assets of the company. It is also known as active capital. We calculate it as follows:
- Working capital for 2006: current assets/current liabilities=6970/3610=1.93
- Working capital for 2007: current assets/current liabilities=7555/3812=1.98
It refers that this company has a lot of working capital for the regular transaction.
Boston Scientific Corporation
Financial statement performance
As this study have discussed the financial statement of that Company, now we should see the changes in the Income statement of this company
- Net increase in Total Revenue is $536 or 6.84% ($8357.00-$7821.00)
- Net increase in gross profit is $403 or 7.18% ($6017.00-$5614.00)
- Net increase in Operating Income is $-2935 or-100%- ($-14.00-$-2949.00)
- And Net Income increases $-3082 or -86.16% ($-495.00-$-3577.00)
This is the change in income statement for the year of 2007. Now what are the changes in Balance Sheet?
- Decrease in current assets $-109 or 1.8 % ($5921.00-$6030.00)
- Increase in Total assets $315 or 1.02% (31197.00-$30882.00)
- Increase in current liabilities $619 or 23.52%($3250.00-$2631.00)
- Increase in Total liabilities $516 or 3.31%($16100.00-$15584.00)
- And Decrease in Total Equity $-201 or -1.31%($15097.00-$15298.00)
Financials
(In millions of USD).
Financial Ratio Performance
As this study discussed earlier ratio analysis was calculated for comparing one thing with another thing. So for measuring the financial condition of this we should have to take the help of ratio analysis. The important ratios are given below:
- Current ratio: current assets/current liability
For 2006:=6030/2631=2.29
For2007:=5921/3250=1.82
- Here we see that the company have 2.26$ asset for paying 1$ liability in2006 and 1.82$ asset for paying 1$ liability in 2007. Here we see that company’s debt-paying ability was higher in 2006.
- Net profit Margin: It is the profit indicator of a company. It will tell us whether a company is in an increasing or decreasing trend. The formula for measuring net profit margin is
- Net profit/net sales *100
In 2007 the net profit is -5.92%. It is in a negative trend and not good for the company. But up to 2008, 31st march it is 15.74%. We are hopeful that the company will make a good profit at the end of the year.
- Operating Margin: Operating profit is essential for a company. It helps the particular company to maintain its daily activities.
Cost of goods sold +Operating expenses/Net sales*100.
For this company 2007s operating margin is -17% and up to 2008, 31st march it is 28.35%. company takes bad signal from the previous year and in this year they are maintaining a good ratio.
- EBITD Margin: It is one kind of gross earnings. Because company receives this before some sorts of payment.
EBITD=Interest+Tax+Depreciation/Net sales*100
In 2007 the company has the EBITD is 10.82%. The more the EBITD the profit will be more.
- Return on average assets: Return on asset is essential otherwise investors will not be interested to invest in the company. Calculating formula for it Net income/ Average Assets.
In 2007 the return on average on assets wasn’t good. The rate is -1.59% and up to 31st March of this year is 4.2%. so this study can say that company is in increasing trend.
- Return on Average Equity: Equity is the contribution of the shareholder to the firm. It is a liability for the firm.
Net profit after taxes/ Average total shareholders equity.
In 2007 the ratio says that -3.26 is available for the shareholder. That means the shareholder has nothing to take. But on 31st march 2008, it is 8.47, so the shareholder should be optimistic for revenue
Return on average assets: Return on asset is essential otherwise investors will not be interested to invest in the company. Calculating formula for it Net income/ Average Assets.
In 2007 the return on average on assets wasn’t good. The rate is -1.59% and up to 31st March of this year is 4.2%. so this study can say that company is in increasing trend.
Return on Average Equity: Equity is the contribution of the shareholder to the firm. It is a liability for the firm.
Net profit after taxes/ Average total shareholders equity.
In 2007 the ratio says that -3.26 is available for the shareholder. That means the shareholder has nothing to take. But on 31st march 2008, it is 8.47, so the shareholder should be optimistic for revenue.
Key Stats & Ratios.
Cash Flow performance
As it is known to everyone the cash flow statement of a company shows net changes in cash. However, this study discussed earlier the containings of cash flow statements. The cash flow statement of this company reveals some changes in the years 2006 and 2007 which are discussed below:
- Net increase in Net income $3082 or 86.16% ($-495.00-$-3577.00)
- Decrease in Operating activities is$-911 or-49.37%($934.00-$1845.00)
- Increase in Investing activities is $8838 or -94.90%($-474.00-$-9312.00)
- Decrease in Financing activities is -9125 or -108.12%($-680.00-$8439.00)
- And finally Net Change in cash is $-1195 or $-122.06%($-216.00-$979.00)
Here this study scrutinizes the company’s condition which is really in a bad position. Their financial condition is not so good. If they continue this trend they will in danger in the future days.
Equity Performance
Equity is a known shareholder contribution for the firm. It is a liability for the firm. After a certain period firm has to pay this equity. Firms pay a regular dividend for the shareholder in the financial statement of 2006 we see that this firm has $15298.00 as equity and in 2007 it is $15097.00. So decrease in equity is $201 or 1.31%.
Capital Spending
Capital spending takes place when firms need to purchase fixed assets. This is why the fixed assets of the firm increased. For this company, the authority spends $30882.00 for the year 2006 and $31197.00 for the year 2007. So-net increase in capital spending is $315 or 1.02%.
Working Capital
This capital is essential for the company. Without it, the company’s regular activities can’t be run easily.
The working capital ratio for 2006: 6030/2631=2.29
The working capital ratio for 2007: 5921/3250=1.82
We can see that in an above previous year working capital was good for this company. The Board of directors of the company works properly for maintaining a good working capital.
Comparative Analysis
Comparative analysis between Baxter International Incorporation and Boston Scientific Corporation will help everyone to take an investment decision. For investing in a Multinational Company every investor should consider several things such as company background, Financial statement performance, Financial ratio performance, Free Cash Flow performance, Equity performance, Degrees of operating and financial leverage, Capital spending, Research, and development spending, and Working Capital of the company. Now brief discussion between these two companies are given below:
- Baxter was established in 1931 and Boston was established in 1969. So for looking at the historical importance investor should give priority to Baxter International Incorporation.
- In the Income statement of Baxter, we see that revenue, gross profit, operating income, and net income are in increasing trend in the next year, and in the statement of Boston increasing trend is available but the rate of Boston is really impressive.
- In the Balance sheet item assets are increasing both of them but increasing of Baxter is better
- If we analyze the ratio of the two companies such as current ratio, Net profit margin, operating margin, EBITDA, Average assets, and Average equity ratio one thing will be clear to us that Baxter is at the apex on this side.
- If an investor wants to decide on the Cash flow statement then he will Baxter because everything of Baxter except financing activities is increasing trend. On the other hand condition of Boston is not so good.
- Equity performance would be a great example for Baxter. Their growth rate is more than 10%, on the other hand, Boston’s rate is only 1.31%.
- Capital spending for fixed assets is also high for Baxter. Their rate is 4.14% and Boston’s rate is 1.02%
- Working capital of Boston is better than Baxter in the two years
After completing research and comparative analysis between Baxter International Incorporation and Boston Scientific Corporation this study can say that Investment should make in Baxter International Incorporation.
References
Baxter International Inc. (n.d.). Google Finance Beta.
Boston Scientific Corporation. (n.d.). Google Finance Beta. Boston Scientific Corporation.
Careers in Pharmaceuticals. (2008). Career In Pharmaceutical. Web.
GUC (German University in Cairo) (n.d.). MGMT DEPT Advanced Accounting Lecture 5 Cash Flow Statement. Web.
Khan, A., and Jain, Roger. (2003). Principles and Practices of Financial Institution. Roger Publications.
Khan, Y M., and Jain, K. P. (2000). Analysis of Leverage:Theory and Problems in Financial Management. Tata McGraw-Hill.
Statement of Cash Flows-Discussion. (n.d.). Web.
Sundem, Horngren., and Elliott. (1999). Introduction to Financial Accounting. 7th Ed.; Prentice Hall Business Publishing.