Profitability ratios
Financial analysis is important to a wide range of accounting users in a wide range of settings. Revenue Statements, Balance Sheets, and other financial data provide information on expenses and sources of revenue, profit or loss, and may be used to assess a company’s financial situation. The goal of this study is to give a non-technical customer an investment advice based on a Financial Performance Analysis of two significant corporations utilizing ratio analysis and other descriptive statistics approaches (Areas 2018). To screen the two stocks for the purpose of selecting them, a few specific financial performance evaluation metrics were used, such as debt equity ratio less than 20%, return on assets greater than 15%, current ratio greater than 1.5, and return on equity greater than 15%. The investing universe was chosen as the NASDAQ stock market in the United States, with Copart Inc and Regeneron Pharmaceuticals Inc as the two companies included for the purpose of analysis and recommendation. The research compares the two firms’ financial performance using ratio analysis, which covers liquidity ratios, profitability ratios, cash flow ratios, and debt to equity ratios. The above-mentioned firms are short-listed for investment using statistical concepts such as descriptive analysis and time series plot. During the Covid epidemic, the financial performance of the two corporations is contrasted and compared. The concluding parts examine the causes for the company’s performance and compare it to others.
Profitability ratios are the ratios which analyzes the profitability of the firm by using the net and gross margin of the company (Husain and Nardi 2020). The following table contains the Net profit margin of the Copart Inc in the past ten years starting from the year 2011 lasting till the year 2021.
Since the beginning of 2011, the net profit margin has been on an increasing trend that will persist through 2021. In 2011, the firm had a net profit margin of 19.07 percent, which increased to 34.78 percent in 2021. The company’s net profit margin fell to 15% in the years 2013 to 2014, only to rebound in the following years. The following graph represents the time series chart of the net profit margin ratio.
During the last 10 years, the return on capital employed has been relatively consistent at roughly 25 to 32 percent. With a return of 32.89 percent, the year 2019 produced the best return. The time series chart of the ratio is represented below:
The following table represents the profitability ratio of the Regeneron Pharmaceuticals for the past 10 years:
The company has evolved over the year in terms of profitability compared to Copart Inc as it turned into profitable company from a loss-making firm. The company made a huge net loss of 50.21 percent in the year 2011 which turned into a profit of 50.25% in the year 2021. The following table represents the time series plot of the net profit margin:
The company could not return profits to the investors in the initial years of the decade as the capital employed of the company was negative in 2011. The capital employed jumped significantly in the year 2012 and remained stable for the next five years rising significantly in the year 2021 as shown in the graph below:
Liquidity ratios
In terms of profitability, Regeneron Pharmaceuticals has a higher potential than Copart Inc, as seen by the company’s current profitability margins of 50% vs 35 % for Copart Inc. The company is defensive and impervious to economic cycle changes because it is in the healthcare industry (Corporate finance institute 2020). A track record of successfully transforming a loss-making firm into a profitable one further supports the conclusion.
The capacity of a corporation to pay its obligations when they become due is measured by liquidity. A highly liquid corporation can transform its assets into cash fast. If a company’s liquidity is poor, it can have a hard time paying its creditors (Madushanka and Jathurika 2018). Accountants often use one of two ratio metrics to determine liquidity. The following section represents the liquidity ratios of Copart Inc for the period of 2011 to 2021:
The current ratio measures the ability of a firm to pay out its current obligations which have a maturity less than a year. The company had a healthy current ratio in the year 2011 as the current assets were 1.45 times the current liabilities of the company for that year. The current ratio went on to decline in the following year reaching to a level as low as 1.28 in the year 2013. The ratio has risen slightly in the year 2013 only to fall in the falling years and stabilize around 2.50 for the last three years rising significantly in the year 2021 to the levels of 4.04. The following graph represents the time series plot of the company’s current ratio:
The quick ratio is a better measure of assessing liquidity of a company as the quick ratio removes the effect of inventory from the current assets as inventories are considered to be comparatively difficult to convert into cash in a short time (Chiaramonte and Barbara 2017). The quick ratio shows an identical trend in the liquidity of the company which implies that the inventory levels of the company has been minimum and does not have a significant role to play in the liquidity of the company. The following graph represents the time series plot of the quick ratio of the company:
The following table represents the quick ratio and the current ratio of the company for the period analysed:
From 2011 to 2021, the firm was very liquid as compared to Copart Inc, as evidenced by a high value of current ratios. In 2012, the ratio increased to 7.37, indicating that the firm has adequate assets to satisfy its present debt commitments, which are due in less than a year. The company’s liquidity, on the other hand, has declined since 2013, decreasing from a high of 7 in 2013 to a low of 3.4 in 2021. The following graph presents a time series performance of the ratio:
Similar patterns have been observed in the company’s quick ratio. From 2011 to 2015, the corporation maintained very little inventory since the quick ratio was not materially different from the current ratio. Due to the influence of inventory, a larger gap has been seen in the business’s quick ratio compared to the current ratio since the beginning of 2015, implying that the company maintained more inventories in the latter five years of the decade than in the first five years. The time series plot of the quick ratio is provided below:
Overall, Regeneron Pharmaceuticals have a higher liquidity than Copart Inc as suggested by the liquidity ratios of the company discussed above and is a better prospect for investment compared to Copart Inc.
Debt to equity ratio is an important indicator for a company to assess the capital structure of the company and the constituents it is made up of. The debt to equity ratio indicates relative properties of debt and equity used to fund a company’s assets and operational requirements (Abeywardhana 2015). Debt to equity ratio is calculated by dividing a company’s total liabilities or debt by shareholders equity. If a company has a higher level of debt in the company it may be beneficial in terms of a reduced weighted average cost of capital but it also makes the company unstable and less desirable than a company having no debt. The following section compares the two companies based on the capital structure of the company and the level of debt in the companies.
The table above represent the Debt to equity ratio of the company for the past decade which was less than 1 throughout the decade with fluctuations in the debt level. The company had very little debt in the year 2011 as represented by the D/E ratio 0.0019. In 2013, the company repurchased 1,069,898 shares and borrowed new debt, resulting in a significant increase in debt as evidenced by the D/E ratio of 0.6575. In the next two years, the corporation paid down some of its debt, resulting in a lower D/E ratio in 2013 and 2014. In the following years, the corporation added more dates, resulting in a high D/E ratio from 2015 to 2017. The D/E ratio remained constant for the rest of the decade, ranging between 0.25 and 0.16 falling to the levels of 0.11 in the year 2021.
The firm has a respectable amount of debt, as shown by the D/E ratio, which has been less than one over the past ten years, comparable to Copart Inc. Since the beginning of 2011, the corporation has expanded its equity share capital while also increasing its debt. Since 2017, the company’s equity share capital has expanded considerably in comparison to its debt, which is a positive indicator and has resulted in a D/E ratio of less than 0.10. Due to the commencement of the Covid 19 epidemic and the company’s need to acquire extra debt to counteract its consequences, the D/E ratio jumped from 0.0644 in 2019 to 0.2445 in 2020 and falling again in the year 2021 to the level of 0.10.
Copart Inc has traditionally had a higher amount of debt than Regeneron Pharmaceuticals, as seen in the chart above. Cons of having a high debt level in a firm suggest that the company must comply to covenants imposed by lenders, and that a higher degree of financial risk might raise the company’s cost of capital in the future. Because the present capital structure of both firms is comparable, Regeneron Pharmaceuticals should be recommended for investment based on historical capital structure and profitability considerations.
Free cash flow refers to a measurement of a company’s financial success. It depicts the cash earned after capital expenditures have been made. This cash is utilized for things like expanding manufacturing, developing new goods, making acquisitions, paying dividends, and repaying debts. The following section compares the Free cash flow of the firms for the period of 2011 to 2021:
Both firms had small free cash flows in the early years of the decade, as seen in the figure above, with Regeneron Pharmaceuticals having a negative free cash flow due to a loss in income. Both companies have grown their free cash flow, with Copart Inc seeing a consistent growth in cash flows from $252.27 million in 2011 to $1416.54. Regeneron Pharmaceuticals’ cash flow, on the other hand, has expanded at an exponential rate, reaching $13081 million in 2021, which is a major up from $332.50 in 2011. As a result, Regeneron Pharmaceuticals can be deemed better in terms of investment appropriateness.
The accompanying table shows the descriptive data for all of the above-mentioned metrics for Copart Inc and Regeneron Pharmaceuticals. Regeneron Pharmaceuticals has a greater average net profit margin of 23.73 percent than Copart Inc, which has slightly less net profit margin of 23.42 percent. The median net profit margin for both companies was nearly comparable, although Regeneron Pharmaceuticals’ standard deviation of returns was much larger than Copart Inc’s. When compared to Regeneron Pharmaceuticals, Copart Inc’s return on capital employed was greater, with a higher median and somewhat higher. In terms of liquidity, the average liquidity for Regeneron Pharmaceuticals for the period of 2011 to 2021 was double to that of Copart Inc with a slightly higher standard deviation as compared to Copart Inc. The average D/E ratio for Regeneron Pharmaceuticals was around 0.1846 which is less than compared to 0.3513 with a standard deviation of 0.1457 which is significantly less than Copart Inc which shows the stability in the capital structure of the company. Regeneron Pharmaceuticals also had a higher average free cash flow with $2921.97 million compared to a value of $645.49 million for the Copart Inc.
The following section examines the financial performance of both companies in terms of profitability, liquidity and cash flow, during the time of Covid.
Both companies were able to increase their net profit margin from 2019 to 2021 withstanding the impact of Covid 19 during the period. Copart Inc has been involved in deploying cost cutting measures in the year 2020 and increased the investing cash flow activities of the company. The auction activities of the company were already online and hence it had little impact on the company’s revenues and profit margin (Annual report| Copart 2020). Being a company operating in the healthcare sector, the firm had the perfect opportunity to increase their sales and improve upon margins. The antibody cocktail developed by the company named REGEN-COV had obtained the approval of the US FDA and the company had worked in convergence with US government and health authorities to treat patients. Hence, a significant rise in capital employed and profit margin for the company has been observed for the year 2021 (Financial information| REGN 2021).
The current ratios and quick ratios of the firms are shown in the table above, which illustrate the liquidity of both companies throughout the Covid era. Copart Inc increased its liquidity represented by current ratio, by a big margin from 2.43 to 3.56, whilst Regeneron Pharmaceuticals’ current ratio declined by a small margin in 2020, indicating a slightly worsening liquidity. Copart Inc’s quick ratio increased to 3.0677 from 2.9923, although only slightly, as compared to the current ratio. The quick ratio for Regeneron Pharmaceuticals has decreased marginally, indicating slightly inadequate liquidity.
After paying operating expenses and maintaining capital expenditures, a company’s free cash flow shows how much money is left over. To put it another way, free cash flow may be used to determine the amount of money available to a company after it has paid off its operating expenses and maintained its capital expenditures. For the year 2021, Copart Inc is expected to grow to roughly $1416.54 million. The increase in cash flows may be ascribed to cash created by the company’s activities and the exercise of stock options. Regeneron Pharmaceuticals invested 32 percent of its sales on research and development in the year 2020, which was justified given the nature of the company’s business.
Conclusion
The goal of the research was to perform a comparison of two firms based on a few characteristics. Copart Inc, a company in the automotive business, and Regeneron Pharmaceuticals, a company in the healthcare area, were chosen for investment recommendations. When comparing the two firms’ net profit margins, it can be determined that Regeneron Pharmaceuticals has a stronger growth potential because it is in a defensive market and has done exceptionally well in recent years. For the previous ten years, the firm has outperformed Copart Inc in terms of liquidity, with superior current and quick ratio measures. The capital structure study produced comparable results since both firms are financed with debt and equity but have a D/E ratio of less than one, which is beneficial to an investor. Regeneron Pharmaceuticals also has a higher level of free cash on hand, both now and in the past. Regeneron Pharma outperformed Copart Inc in terms of profitability over the last two years, but trailed behind in terms of liquidity and free cash flow growth. Based on the preceding research, it can be concluded that Regeneron Pharmaceuticals has the best prospects when compared to Copart Inc, and that an investor should consider investing in the firm through stocks or bonds.
References
(2021) Copart.com. Available at: https://www.copart.com/investorrelation/ (Accessed: 16 March 2022).
AREAS, BUSINESS. “Financial analysis.” growth 30 (2018): 10.
Chiaramonte, Laura, and Barbara Casu. “Capital and liquidity ratios and financial distress. Evidence from the European banking industry.” The British Accounting Review 49, no. 2 (2017): 138-161.
Defensive Industries (2022). Available at: https://corporatefinanceinstitute.com/resources/knowledge/trading-investing/defensive-industries/#:~:text=Defensive%20industries%20comprise%20businesses%20that,of%20negative%20GDP%20growth%20rates.. (Accessed: 16 March 2022).
Financial Information | Regeneron Pharmaceuticals Inc. (2021). Available at: https://investor.regeneron.com/financial-information (Accessed: 16 March 2022).
Husain, T., and Nardi Sunardi. “Firm’s Value Prediction Based on Profitability Ratios and Dividend Policy.” Finance & Economics Review 2, no. 2 (2020): 13-26.
Madushanka, K. H. I., and M. Jathurika. “The impact of liquidity ratios on profitability.” International Research Journal of Advanced Engineering and Science 3, no. 4 (2018): 157-161.
Yapa Abeywardhana, Dilrukshi. “Capital structure and profitability: An empirical analysis of SMEs in the UK.” Journal of Emerging Issues in Economics, Finance and Banking (JEIEFB) 4, no. 2 (2015): 1661-1675.
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