Financial Analysis: International Game technology 1
Financial Analysis: International Game technology
Executive Summary:
Financial analysis helps in brining into picture the performance of the organization. With the help of the financial analysis a company is able to analyze its past performance and is able to predict its financial health and performance for the future. This is one the major tools which is used by different investors so as to analyze the financial position of the company. The financial analysis is done through different tools like Ratio analysis, common size statements, trend analysis, and comparative analysis.
In this paper we will focus on doing the financial analysis of International Gaming technology.
Introduction:
International Game technology is the company which is engaged in the design, manufacture and marketing of the computerized gaming equipment, systems and services. The company is operating in US, Asia pacific regions, Latin America and the middle east and Africa, and is listed under NYSE.
IGT is a leading supplier of gaming products to the world with annual revenues of approximately $2 billion. The company specializes in the design, manufacture, and marketing of electronic gaming equipment and systems. It provides a broad range of electronic gaming equipment and systems, licensing and component parts that may be sold or placed under recurring revenue arrangements. IGT's gaming equipment includes a wide variety of video and physical reel slot machines that may be tailored to meet specific needs. Customers can choose from an extensive library of games combined with several new machine cabinet models designed to maximize functionality, flexibility, and player comfort. Additionally, IGT's AVP machines are designed to support server-based gaming networks. IGT systems products include applications for casino management, CRM, and server-based player management.
IGT has a strong focus on research and development (R&D). In FY2011, the company spent about $194.7 million on product development. The company dedicates approximately 1,500 employees worldwide to R&D efforts covering multiple engineering disciplines, including hardware, electrical, systems and software.
IGT's R&D expenditure is primarily spent on the development of new product base in various disciplines from hardware, software and firmware engineering to game design, video, multimedia, graphics and sound. The company's primary development facilities are located in Nevada, the US.
It also has several design centers strategically located worldwide, allowing it to respond to unique market needs and local player preferences. IGT global design centers provide local community presence, customized products, and regional production. During FY2009, the company opened additional development facilities in Beijing, China. Further, IGT’s strong patent estate insulates the company from competition. As of September 30, 2011, the company owned or licensed more than 5,600 patents and holds more than 3,100 trademarks
Financial Analysis:
Common Size Analysis
Common size analysis helps in finding out the proportion that single item represents to the total group or a sub group. In this the items are expressed as percentages of particular item in respect of the main item taken into consideration.
Considering the common size analysis of the company we can say that the highest expenses over the year pertains to cost of goods that are sold to the consumers. The company holds highest proportion of current assets and goodwill as compared to the total assets of the company.
|
Common size - income statement |
||||
|
|
|
|
|
|
|
Years Ended September 30, |
2011 |
2010 |
2009 |
2008 |
|
(In millions, except per share amounts) |
|
|
|
|
|
Revenues |
|
|
|
|
|
Gaming operations |
54.83% |
56.03% |
56.65% |
52.91% |
|
Product sales |
45.17% |
43.97% |
43.35% |
47.09% |
|
Total revenues |
100.00% |
100.00% |
100.00% |
100.00% |
|
Costs and operating expenses |
|
|
|
|
|
Cost of gaming operations |
21.56% |
22.51% |
23.91% |
22.14% |
|
Cost of product sales |
20.27% |
20.78% |
20.93% |
21.74% |
|
Selling, general and administrative |
18.05% |
17.23% |
19.85% |
18.13% |
|
Research and development |
9.95% |
9.88% |
9.60% |
8.82% |
|
Depreciation and amortization |
3.56% |
3.88% |
3.84% |
3.03% |
|
Restructuring charges |
|
|
|
|
|
Impairment and loss on other assets |
0.81% |
3.32% |
3.86% |
0.00% |
|
Total costs and operating expenses |
74.20% |
77.84% |
83.53% |
73.93% |
|
Operating income |
25.80% |
22.16% |
16.47% |
26.07% |
|
Other income (expense) |
|
|
|
|
|
Interest income |
2.62% |
3.19% |
3.05% |
2.67% |
|
Interest expense |
6.68% |
8.43% |
7.89% |
3.96% |
|
Other |
0.13% |
1.01% |
1.07% |
1.42% |
|
Total other income (expense) |
3.93% |
6.25% |
5.91% |
2.71% |
|
Income from continuing operations before tax |
21.87% |
15.90% |
10.56% |
23.36% |
|
Income tax provision |
6.93% |
4.45% |
3.19% |
9.82% |
|
Income from continuing operations |
14.94% |
11.45% |
7.37% |
13.55% |
|
Loss from discontinued operations, net of tax |
0.44% |
1.75% |
1.08% |
0.00% |
|
Net income |
14.49% |
9.70% |
6.28% |
13.55% |
|
|
|
|
|
|
|
Common Size - Balance sheet |
||||
|
|
|
|
|
|
|
September 30, |
2011 |
2010 |
2009 |
2008 |
|
(In millions, except par value) |
|
|
|
|
|
Assets |
|
|
|
|
|
Current assets |
|
|
|
|
|
Cash and equivalents |
11.07% |
3.95% |
3.34% |
5.85% |
|
investment securities |
0.00% |
0.00% |
0.49% |
0.00% |
|
Restricted cash and investment securities |
2.16% |
2.20% |
1.81% |
2.37% |
|
Restricted cash and investment securities of VIEs |
0.06% |
0.06% |
0.00% |
0.00% |
|
Jackpot annuity investments |
1.17% |
1.24% |
1.53% |
1.48% |
|
Jackpot annuity investments of VIEs |
0.35% |
0.39% |
0.00% |
0.00% |
|
Accounts receivable, net |
7.71% |
7.24% |
7.62% |
9.58% |
|
Current maturities of contracts and notes receivable, net |
4.02% |
4.59% |
3.53% |
2.05% |
|
Inventories |
1.76% |
2.44% |
3.60% |
4.79% |
|
Deferred income taxes |
2.34% |
2.10% |
1.89% |
2.54% |
|
Other assets and deferred costs |
3.31% |
5.79% |
4.32% |
3.59% |
|
Total current assets |
33.94% |
30.01% |
28.11% |
32.26% |
|
Property, plant and equipment, net |
13.29% |
14.64% |
12.73% |
12.97% |
|
Jackpot annuity investments |
6.54% |
7.46% |
9.04% |
9.29% |
|
Jackpot annuity investments of VIEs |
1.27% |
1.54% |
0.00% |
0.00% |
|
Contracts and notes receivable, net |
3.04% |
4.29% |
5.68% |
3.25% |
|
Goodwill |
29.64% |
28.74% |
26.24% |
25.42% |
|
Other intangible assets, net |
4.10% |
5.04% |
5.91% |
5.46% |
|
Deferred income taxes |
2.04% |
3.41% |
5.18% |
3.00% |
|
Other assets and deferred costs |
6.14% |
4.86% |
7.10% |
8.35% |
|
Total Assets |
100.00% |
100.00% |
100.00% |
100.00% |
|
Liabilities and Shareholders' Equity |
|
|
|
|
|
Liabilities |
|
|
|
|
|
Current liabilities |
|
|
|
|
|
Current maturities of notes payable |
0.00% |
0.00% |
0.12% |
0.35% |
|
Accounts payable |
2.48% |
2.11% |
2.06% |
2.32% |
|
Jackpot liabilities, current portion |
3.44% |
4.47% |
3.54% |
4.16% |
|
Accrued employee benefits |
0.94% |
0.60% |
0.75% |
1.42% |
|
Accrued income taxes |
0.08% |
0.04% |
0.21% |
0.34% |
|
Dividends payable |
0.43% |
0.45% |
0.41% |
0.94% |
|
Liabilities of discontinued operations |
0.14% |
0.14% |
0.00% |
0.00% |
|
Other accrued liabilities |
5.37% |
6.73% |
7.14% |
6.64% |
|
Total current liabilities |
12.87% |
14.53% |
14.23% |
16.16% |
|
Notes payable |
0.00% |
0.00% |
49.44% |
49.31% |
|
Long-term debt |
39.63% |
41.78% |
0.00% |
0.00% |
|
Jackpot liabilities |
8.80% |
9.78% |
9.86% |
10.12% |
|
Other liabilities |
3.93% |
3.10% |
4.43% |
4.47% |
|
Total Liabilities |
65.22% |
69.20% |
77.96% |
80.05% |
|
Commitments and Contingencies |
0.00% |
0.00% |
0.00% |
0.00% |
|
Shareholders' Equity |
0.00% |
0.00% |
0.00% |
0.00% |
|
|
0.00% |
0.00% |
0.00% |
0.00% |
|
Common stock: $.00015625 par value; 1,280.0 shares authorized; 341.9 and 339.1 issued; 297.4 and 298.1 outstanding |
0.00% |
0.00% |
0.00% |
0.00% |
|
Additional paid-in capital |
37.13% |
36.78% |
28.81% |
27.69% |
|
Treasury stock at cost: 44.4 and 41.0 shares |
20.59% |
20.01% |
18.21% |
17.52% |
|
Retained earnings |
18.39% |
13.77% |
11.31% |
9.73% |
|
Accumulated other comprehensive income |
0.21% |
0.27% |
0.14% |
0.04% |
|
Total IGT Shareholders' Equity |
34.72% |
30.80% |
22.04% |
19.95% |
|
Noncontrolling Interests |
0.06% |
#VALUE! |
0.00% |
0.00% |
|
Total Equity |
34.78% |
30.80% |
22.04% |
19.95% |
|
Total Liabilities and Shareholders' Equity |
100.00% |
100.00% |
100.00% |
100.00% |
Comparative Analysis:
These financial statements are so designed as to provide time perspective to the various elements of financial positions contained therein. Comparative statements can be prepared for both types of financial statements balance sheet as well as Income statement. The comparative balance sheet shows the effect of operations on the assets and liabilities i.e., change in the financial position duding the period under consideration. The comparative Income statement account will present a review of operating activities of the business.
A comparative balance sheet shows the balance of accounts of assets and liabilities on different term and also the extent of their increase or decrease between these dates throwing light on the trends an direction of changes in the position over the periods. This helps in predicting about the position of the business in future.
Ratio Analysis:
Ratio analysis is one of the most widely used tools of financial analysis which helps in establishing the relationship between individual items or group of items in the balance sheet or profit and loss account and analyzing the performance of the organization. It helps different stakeholders to analyze the performance of the company and its financial health. Ratio analysis helps in analyzing the financial health and financial position of the company with the help of different ratios which includes the liquidity ratio, solvency ratio, profitability ratio and activity ratios.
|
Ratio Analysis |
|||||
|
|
|
|
|
|
|
|
Fiscal year |
|
2011 |
2010 |
2009 |
2008 |
|
Liquidity Ratio |
|||||
|
Current ratio |
Current Assets / Current Liabilities |
2.64 |
2.06 |
1.98 |
2.00 |
|
Quick ratio |
(Current Assets - Inventory) / Current Liability |
2.50 |
1.90 |
1.72 |
1.70 |
|
Collection Period |
Average Accounts Recievable / Sales/360 |
42.56 |
42.56 |
42.56 |
42.56 |
|
Capital Structure and Solvency |
|||||
|
Total debt to equity |
Total Liabilities / Share holder's equity |
1.88 |
2.25 |
3.54 |
4.01 |
|
Return on Investment |
|||||
|
Return on Assets |
Net Income / Avg. Total Assets |
6.83% |
4.64% |
2.89% |
7.52% |
|
Return on Common equity |
Net Income / Average shareholder's equity |
19.63% |
15.07% |
13.11% |
37.68% |
|
Operating Performance |
|||||
|
Net profit margin |
Net Income / Sales |
14.49% |
9.70% |
6.28% |
13.55% |
|
Asset utilization |
|||||
|
Accounts receivable turnover |
Sales / Average accounts recievable |
6.11 |
6.60 |
6.04 |
5.79 |
|
Inventory turnover |
COGS / Average inventory |
11.21 |
8.50 |
5.74 |
5.08 |
|
Total assets turnover |
Sales / Avg. total assets |
0.47 |
0.48 |
0.46 |
0.55 |
Liquidity Ratios: Liquidity ratios are used to measure firm’s short term obligations. It helps in comparing short term obligations with short term resources available to meet these obligations. Liquidity ratios show the relationship of a firm’s cash and other current assets to its current liabilities. The liquidity ratios used for analysis of International Game technology are:
Current ratio: This ratio indicates the extent to which current liabilities are covered by those assets expected to be converted to cash in the near future.
Current assets include cash, marketable securities, accounts receivables, inventories and short term investments. Current liabilities include accounts payable, short-term notes payable, current maturities of long-term debt, accrued taxes, and other accrued expenses.
Current Ratio=Current Assets/Current Liabilities Current ratio of a company should be at least 2 times, i.e. current assets should be twice as current liabilities of any firm. The current ratio of the company is 2.64 for year 2011 and 2.08 for 2010. We can say that the liquidity of the firm has deteriorated as compared to the last year.
Quick/ Acid Test ratio: It is a more conservative measure of liquidity. It refers to the extent to which current liabilities are covered by current assets except inventories.
Quick Ratio = (Current Assets-Inventories)/Current Liabilities. The quick ratio of the company has also decreased by about 20% from last year, this states that the company has increased its inventory hold in 2011 as compared to 2010.
Collection Period: This ratio helps in calculating the amount of time that it takes for a firm to receive payments owed by the debtors of the firm. Collection Period = Accounts Receivable / (Sales/360)
The average collection period of 2011 has almost the same as compared to the previous years, which depicts the inefficiency of the company to collect the cash from the debtors.
Days to sell inventory: It measures the number of days inventory is held by the company. Days to sell inventory = Average Inventory / (COGS/360)
Capital Structure and Solvency: These ratios help in analyzing the long term solvency of the firm. These ratios are based on the proportions of debt and equity in capital structure of the firm. The debt contributed by the creditors to the firm requires fixed interest payments and repayment of the loan. If there is a high proportion of funds that are contributed by the owners, then it indicates that there is a surplus of finance which shields the firms leverage. These ratios include:
Total debt to equity ratio: This ratio indicates the relative contribution of creditors and the owners of the firm. Total Debt equity ratio = Total Liabilities / Shareholder’s equity. The company has high debt equity ratio i.e. the company is highly financed by debt. Thus it depicts high debt ratio.
Long term debt to equity: This ratio indicates the relative contribution of long term creditors and the owner’s of the firm.
Long term debt to equity = Long term liabilities / Shareholder’s equity. The total long term debt for 2011 is about 70% as compared to 52% in 2010, which depicts that the company has taken long term debt in 2011, which has increased its ratio.
Return on investment: These ratios help in evaluating the efficiency of the assets utilized by the firm.
Return on Total Assets: Return of total asset measures the amount of Net Income earned by utilizing each dollar of Total Assets. The equation is: Return on Total Assets (ROA) = Net income / Average total assets. The company has about 6.83% of total return on assets in 2011 as compared to 4..68% in 2010, which depicts that the return on assets of the company has increased which depicts its inefficiency.
Return on Equity: Return on Equity measures the amount of net Income earned by utilizing each dollar of Total common equity. This ratio helps in finding out how much the shareholders are going to get for their shares. Return on Equity = Net income / Total common equity. The return to shareholders has increased to 19.63% as compared to 15.07% in 2010.
Asset utilization: Asset utilization ratios are the financial statement ratios that measure how effectively a business uses and controls its assets.
Cash Turnover ratio: This ratio tests the efficiency of cash utilization within the firm. Cash turnover ratio = Sales / Avg. cash and cash equivalent. The company has been able to increase its efficiency to utilize its cash in 2009 as compared to 2008.
Accounts Receivable Turnover: It helps in showing that how many times does debtors turn in a year. Accounts Receivable turnover = Sales / Average accounts receivable. The company has been able to increase its efficiency in managing its accounts receivables in 2011 as compared to 2010. The company has been able to work on its credit policy so as to increase its accounts receivables turnover.
Inventory turnover ratio: The ratio is tests the efficiency of inventory and indicates the movement of merchandise in the firm. Inventory turnover ratio = COGS / Average Inventories
The inventory turnover ratio has decreased in 2011 as compared to 2011 as the company is not been able to flush on its inventory well in 2011.
Total asset turnover ratio: The Total Asset Turnover measures a company's effectiveness in generating sales revenue from the total assets employed by the company. Total assets turnover ratio = Sales / Avg. total Assets. The company has been able to utilize its assets efficiently for 2011 as well as 2010.
Operating Performance Ratios: These ratios are also known as Profitability ratio. Profitability ratios show the combined effects of liquidity, asset management and debt on operating results of the firm.
The sales of the company have increased by 2.08% in 2011 as compared to the sales of 2010, but the profit of the company has decreased by 52% as the operating expenses have decreased incredibly. Thus with the increase in the operating cost and expenses the comparative profitability of the company has decreased.
Gross Profit Margin: Gross Profit Margin gives us the amount of profits of a firm relative to its sales. Gross Profit Margin (GPM) = Gross profit / Sales
Net Profit Margin: Net Profit Margin shows the earnings left for shareholders as a percentage of net sales. Net Profit margin = Net income / Sales. The company has been improve its net income in 2009 as compared to 2010.
Duo Pont Analysis:
Du Pont analysis helps calculating the return on equity of the firm. It refers to the effectiveness of two ratios: Return on Assets, and Return on Equity. The equation simply states that profitability can be increased or decreased through three functions: Margin, turnover, and equity multiplier of the firm i.e. Margin = Post-tax profit/sales, Turnover = Sales/total assets and equity Multiplier = Total assets/equity Profitability = Margin x Turnover x Equity Multiplier
Thus, through this equation, we can analyze that the companies operating in different sectors can perform well in either of these ratios but still have low profitability. In order to increase profitability, companies can generate better sales based on more efficient use of their assets or create a higher profit margin.
Conclusion:
Considering the current performance of the firm we can say that the company’s performance has improved in 2011 as compared to 2010 which depicts the operating capability of the firm because of the increased expenses and operations in the organization. The company needs to have a strong focus on improving its financial health so as to have investment opportunities. With a strong focus on its strategies the company will be able to improve on its financials.
IGT can exploit the new and expanding opportunities in domestic (the US) and international marketsto boost growth. In the domestic market, legislative actions and the passage of voter referendumsare providing new and expanding opportunities in Illinois, Ohio, Kansas, Maryland, Pennsylvaniaand Florida. According to industry watchers, the market potential is estimated at up to 40,000machines in Illinois and up to 17,500 machines in Ohio. Furthermore, development projects inMaryland, Kansas, and Pennsylvania received approval and licensing in FY2009, and openings areplanned over the next few years. State legislatures in Kentucky, Massachusetts, New Hampshire,Alabama, North Carolina and Texas continue to consider gaming as a way to provide tax revenuesin support of public programs, which is expected to increase the demand for the products of thecompany in the future.
Globally, while many areas around the world continue to feel the impact of economic uncertainty,the center of gaming industry growth has shifted decisively to Asia. Gaming in Asia is back on pacefor record growth in terms of revenue and expansion. According to Datamonitor’s estimate, theAsia-Pacific casinos and gaming sector grew by 17.5% in 2010 to reach a value of $164.7 billion.
Moreover, in 2015, the Asia-Pacific casinos and gaming sector is forecast to have a value of $222.4billion, an increase of 35% since 2010.
IGT has a strong presence in the US and also operates operating centers and sales offices in growingAsia Pacific region. The company is thus well positioned to exploit the opportunities in its domesticand international markets and enhance its revenue generation capacity.
References:
James C. Van Horne and Jon M. Wachowica, JR, (2006). Fundamentals of Financial Management
Get help from top-rated tutors in any subject.
Efficiently complete your homework and academic assignments by getting help from the experts at homeworkarchive.com