Balance sheets
Components of stockholders
When financial analysts are assessing the performance of a business establishment, they evaluate stockholders’ equity, which is used to reflect the extent to which a firm earns money for its shareholders (Mongiello, 2009). General Mills is exemplified by the following elements of stockholders’ equity: common stocks, treasury stocks, retained earnings, and liabilities.
Common stock is a form of security that is used in corporate management to determine shareholders of a firm who have a voting right. Treasury shares come into existence when a firm buys its own shares (Cengage Learning, n.d). Retained earnings are financial returns that are not realized through investors’ funds, but through other ways of income production (Cengage Learning, n.d). Liabilities can be defined as the amount of money that a business owes to other business entities (Mongiello, 2009). Meiji Company Holdings Ltd has the following features of its stockholders’ equity: liabilities and retained earnings.
Preferred stock shares
General Mills does not have preferred stock shares outstanding. This implies that the organization does not classify its shareholders with regard to the payment of dividends. On the other hand, Meiji Holdings Company Ltd has outstanding preferred stock shares, which are of less value than was recorded in the previous fiscal year. This could mean that the firm has been making excellent returns that are paid differently to both common and preferred stockholders (Mongiello, 2009).
Treasury shares
Between the two companies, it is evident that only General Mills reported treasury bills. However, financial reports of the business establishment do not indicate the reason why the management adopted a decision for shareholders to buy extra shares of the firm. In this context, it can be assumed that the management was keen on reducing the number of shares, manipulating prices of stocks, and awarding stocks to personnel for their exemplary performance outcomes. Another important aspect to note about treasury shares is that they do not contribute to stockholders’ equity. Thus, it could be a strategic decision to reduce the number of funds paid to shareholders (Mongiello, 2009).
Income statements
Basic and diluted earnings per share (EPS)
The basic and diluted earnings per share (EPS) for Meiji Holdings Company Ltd all stand at $295. However, General Mills does not adopt a system of the two forms of EPS. In fact, the business establishment has reported a basic EPS of $2.83. It can be concluded that Meiji Holdings Company Ltd is exemplified by a high level of capital framework, which makes it adopts both the basic and diluted EPS. In fact, it uses the diluted EPS to cater for all dilutive securities, which can be exercised. In addition, the EPS can be utilized to learn more about outstanding dilutive securities. On the other hand, it is evident that the capital framework of General Mills is relatively simple.
Operations
Discontinued operations of a firm are reflected in the net income because they have impacts on the future financial reporting periods. In fact, research shows that discontinued operations negatively impact the ability of a business establishment to make significant profits. With regard to Meiji Holdings Company Ltd, its net income for a period of 12 months that ended in March 2014 was zero. Therefore, it would be expected that the firm would not have any major impacts on the discontinued operations in the long-term. On the other hand, General Mills Ltd has not recorded discontinued operations in the last year.
Compensation plans
The two companies do not disclose any stock compensation plans. If they had disclosed such information, then it could be important to evaluate the methods of compensation that they could have adopted. For example, a business establishment that adopts a fair value to compensate shareholders would have a better flow of capital in the future. This is because it would attract a bigger number of investors who would be interested in being compensated fairly (Cengage Learning, n.d). On the other hand, the adoption of the intrinsic value method would involve the use of internal factors of a company to determine the compensation that investors would receive (Mongiello, 2009).
Financial ratios
Profitability ratios
Gross profit margin= revenue/gross profit
The gross profit margin for Meiji Holdings= $2,788 million/$962 million= 34.48%
The gross profit margin for General Mills= 4,284/1,482=34.60%
Net profit margin= net income/revenue
Net profit margin of Meiji Holdings= $-5 million/$2,788 million= -0.16%
A net profit margin of General Mills= 4,284/405=9.44%
Return on stakeholders’ equity=net income/shareholder equity
Return on stakeholders’ equity for Meiji Holdings= -18 million/3,202= -0.56%
Return on stakeholders’ equity for General Mills=6535/1.618=24.76%
Generally, the profitability ratios show that General Mills has better chances of generating income than Meiji Holdings Company Ltd. The analysis is done in comparison with expenses and other costs (Walther, 2012).
Liquidity ratios
Current ratio= total current assets/total current liabilities
Current ratio for Meiji Holdings = 3211/2551=1.26
The current ratio for General Mills= 4393.5/5423.5=0.81
Quick ratio= (total current assets-inventory) /total current liabilities
Quick ratio for Meiji Holdings= (3211-1187) /2551= 0.79
Quick ratio for General Mills= (4393.5-1559.4) /5423.5=0.52
Inventory ratio=cost of goods sold/average inventory
Inventory ratio for Meiji Holdings=1,187/1,827=0.02
Inventory ratio for General Mills=2,801/1,559=1.80
Based on the liquidity ratios above, it is evident that Meiji Holdings is exemplified by the better values of the quick current ratios. However, General Mills has a better inventory ratio than the other Meiji Holdings.
Leverage ratios
Debt-to-assets ratio= debt/assets
Debt-to-assets ratio for Meiji Holdings=4, 000/40,000=0.1
Debt-to-assets ratio for General Mills=3, 000/30,000=0.1
Debt-to-equity= (Current portion of long-term debt + long-term debt) /total equity
Debt-to-equity ratio for Meiji Holdings= (0+1314) / 3202=0.41
Debt-to-equity ratio for General Mills= (2362.3+6423.5) /6534.8=1.34
Times-covered ratio= (Pre-tax earnings) /interest expense
Times-covered ratio for Meiji Holdings=3, 000/1,500=2.0
Times-covered ratio for General Mills= 25,000/2,500=10
Based on the analysis of the leverage ratios above, it appears that Meiji Holdings has better ways of meeting its financial obligations (Mongiello, 2009).
Footnotes
In the footnotes of the financial statements, the following information is displayed: preparers of the statements and the title of the documents. The information is consistent throughout the reports (Cengage Learning, n.d).
Informative measures
It is important to note that the balance sheet, income statement, and financial ratios are the most informative ways of presenting financial information about a business establishment. The approaches follow standards that are adopted across the world (Cengage Learning, n.d).
Merits and demerits of using ratios for analysis
Financial ratios have three main merits (Drake, n.d; Mongiello, 2009; Walther, 2012). First, they simplify financial reports and make them easier to understand. Second, they help analysts to compare firms that are exemplified by different sizes with each other. Third, they highlight crucial information in clear forms. However, the ratios have two main demerits (Drake, n.d; Walther, 2012). First, they can lead to wrong financial assumptions and estimations. Second, they rarely focus on future financial information about companies.
References
Cengage Learning. (n.d). Business resources for students: The role of financial analysis. Web.
Drake, P. (n.d). Financial ratio analysis. Web.
Mongiello, M. (2009). International financial reporting. Web.
Walther, I. (2012). Principles of accounting. Web.