FINANCIAL STATEMENT ANALYSIS

INTRODUCTION

General Mills (NYSE: GIS) is an American company which was established in 1928, when it was first listed in New York Stock Exchange. It is a leading producer of packaged foods. It’s popular products include breakfast cereals, snacks, prepared mixes, flour and similar products. Headquartered in Minneapolis, Minnesota it is one of the largest packaged food manufacturer in the world. The company is listed in the New York Stock Exchange

Source: www.nyse.com/quote/XNYS:GIS

As on Dec 04, 2015 the last the last quoted price of the stock was $58.32 (USD). Last or closing price is the price at which a security was traded on the given day.Market Capitalization: The total dollar market value of all of a company's outstanding shares. Market capitalization is arrived at by multiplying the total number of outstanding shares of a company by the market price/ value of a share at that time. This is used by the investor in order to determine a company's size, with relevance to its sales or its total asset figures. [R1]Outstanding Shares: The shares owned by stock holders, investors and company officials are outstanding shares. Note: Outstanding shares do not include the shares owned by the company itself (Treasury Stock and unissued shares. [R2]

Capital Risk Return

Large Cap $10 Billion+ Low Low

Mid Cap $2 Bn. - $10 Bn.

Medium Medium

Small Cap Less than $2 Bn.

High High

General Mills Inc has a market capitalization of $34.23 billion. It falls under Large Cap category.

It’s competitor, Kellogg’s has a market capitalization of $24.92 Billion [R3]. It also falls under the category of a large cap company.

Source: http://www.investopedia.com/terms/m/marketcapitalization.asp

FINANCIAL RATIOS OF GENERAL MILLS v/s KELLOGG’S

When should an investment be made in a company?First, the financial performance of a company must be evaluated to make a decision on whether or not to invest in a company. Financial statements of the past five years must be analyzed to check the company’s track record. Here we compare the performance of General Mills with its competitor Kellogs’. This was done by comparing their financial ratios over the past few years. It is shown in the following table.2014   2013   2012   2011   2010

G.M KELLOGG   G.M KELLOGG   G.M KELLOGG   G.M KELLOGG   G.M KELLOGGRatios required for the investors

EARNINGS PER SHARE [Net income - Dividends on preferred stock / Average

outstanding shares]$2.82 $1.75   $2.69 $4.94   $2.56 $2.67   $2.48 $3.38   $2.30 $3.30

P/E RATIO [Market value price per share/Earnings per share]

19.08 37.12   18.21 13.00   15.27 18.48   15.84 16.39   15.49 15.35

DIVIDEND YIELD RATIO [Cash dividends per share/ market value per share]

2.88% 2.92%   2.69% 2.80%   3.12% 3.52%   2.85% 3.01%   2.70% 3.08%

EBITDA MARGIN [NOPBT/Total revenue] 16.51% 7.02%   16.04% 19.17%   15.38% 11.00%   18.64% 14.97%   17.80% 16.05%

NOPBT [Net-Operating Profit Before Tax]

$ 2,957.40

$ 1,024.00   $

2,851.80 $

2,837.00   $ 2,562.40

$ 1,562.00   $

2,774.50 $

1,976.00   $ 2,606.10

$ 1,990.00

NOPAT [Net-Operating Profit After Tax]

$ 2,174.71

$ 882.85   $

2,203.26 $

2,115.20   $ 1,965.76

$ 1,263.91   $

2,156.25 $

1,543.86   $ 1,975.38

$ 1,559.45

ROE [Return on Equity] 24% 20% 27% 61% 25% 46% 31% 44% 29% 58%Ratios required for loan lenders

DEBT TO EQUITY RATIO [Total liability / Total equity]

2.3 4.31   2.18 3.29   2.06 5.12   1.82 5.75   2.13 4.5CURRENT RATIO [Current assets/current

liabilities] 0.81 0.765   2.352 0.851   0.96 0.747   1.066 0.926   0.923 0.915

Ratios required for loan lenders and investorsINVENTORY TURNOVER [Cost of goods

sold / Average Inventory]7.43 7.53   7.51 6.63   6.87 6.9   6.05 7.08   6.63 7.23

GROSS MARGIN RATIO [Gross margin / Net sales] where [Gross margin = Net sales -

COGS]0.355 0.347   0.361 0.412   0.362 0.382   0.4 0.412   0.396 0.426

RNOA [Return on Net Operating Asset] 14% 9%   14% 20%   14% 15%   18% 21%   17% 22%

ANALYSIS OF FINANCIAL RATIOS FOR INVESTORS

EARNINGS PER SHARE (EPS)The part of the proit of a company that is allotted to every outstanding share. Earnings per share thus serves as an important indicator of the profitability of a company.[R4] In other words, it is the profit a shareholder gets for each share he owns. EPS

  Net Income DividendsOutstanding

Shares EPSCompany A

$ 1,000,000.00

200,000.00

100,000.00 $ 8.00

Company B

$ 2,000,000.00

200,000.00

300,000.00 $ 6.00

For example:

Note that, though Company B reported higher net income, EPS for Company A is higher. This indicates that investment decisions cannot be made based only on net income.

From FY 2010-2013, Kellogg’s has higher EPS than General Mills, but the EPS of General Mills improved over Kellogg’s in 2014. Price-Earnings (P/E) RATIO

The price-earnings ratio indicates the dollar amount an investor may expect to invest in a company in order to get back a dollar from the earnings of that company. This is the reason why this ratio is often referred to as the multiple as it exhibits how much an investor is ready to pay for each dollar earned.[R5] Simply put, it is the ratio that tells how much money you put in order to earn $1 on a share. If your P/E is $20, it means that you invested $20 to get $1. The more P/E, the riskier it is to invest in that company. This ratio is used to compare two or more companies.

P/E = Market value price per share/ Earnings per share

For FY 2014, 2012 and 2011 General Mills had a lower P/E ratio.

DIVIDEND YIELD RATIOThis is a financial ratio that is used to measure the cash dividend amounts that are distributed to the common stockholders in relation to the market value of a share. The dividend yield ratio is useful to the investors to exhibit how their investment in a share is either producing cash flows as dividends or if there is an increase in the value of the asset due to appreciation of the stock . [R7]Dividend Yield Ratio = Cash dividends per share/Market value per shareFor example, a company decides to pay a dividend of $5 per share. It’s stock price is $50, which means that the investor bought each stock for $50. To compute the percentage he receives through dividends, investor checks the dividend yield ratio. In this case it’s 5/50=0.1 or 10% yield through dividend on each share. Investors look for a higher ratio.

From FY 2010-2014, Kellogg’s had higher dividend yield ratio than General Mills.

EBITDA RATIO EBITDA is the revenue (or income ) of a company which does not include obligations like interest, taxes, depreciation and amortization. In other words, it is the earnings a company makes from it’s operations.EBIDTA = Revenues – Expenses that exclude interest, taxes, depreciation and amortizationEBIDTA is a profitability ratio that measures the profitability of a company before it pays its interest, taxes, and taking into account expenses like depreciation and amortization. [R9]EBIDTA Ratio = EBIDTA / Total SalesIf the EBIDTA ratio is 10%, it means that for every $1 a company generates in revenue, 10 cents are made in profit, not considering taxes, interest, depreciation and amortization.

For FY 2014, 2010-2012 General Mills had higher EBIDTA ratio than Kellogg’s.

ANALYSIS OF FINANCIAL RATIOS FOR INVESTORS

NOPBT [R11]Net operating profit before tax (NOPBT) refers to the income after deducting for operating expenses but before deducting for income taxes and interest.

NOPBT= Sales - (Cost of goods sold+ Selling and marketing expenses+ General and administrative expenses+ Depreciation+ Other operating expenses).

NOPATNet operating profit after tax (NOPAT) refers to the income generated from operating activities after tax. It is the actual amount that goes to the share holders, since dividends are always given away after taxes.

NOPAT = NOPBT – Tax on operating profitTax on Operating profit = Tax Expense + Tax ShieldTax Shield= Pretax net non-operating expense–Statutory tax rateFrom FY 2010-2014, General Mills Kellogg’s has higher NOPAT than Kellogg’s. ROEReturn on Equity is a ratio that measures a corporation’s profitability and reveals how much profit is generated by a company produces with the shareholders’ investement. ROE is given by: ROE = NET INCOME/SHAREHOLDER’S EQUITYHence, It is an important ratio for the investor. For FY 2010-2013 Kellogg’s has higher ROE than General Mills.

ANALYSIS OF FINANCIAL RATIOS FOR INVESTORS

CURRENT RATIOThe current ratio is both a liquidity and efficiency ratio. It measures a firm's capability to pay off its short-term or current liabilities with its current assets. The current ratio is a significant measure of the company’s liquidity because short-term liabilities are to be paid off within the next year. [R10]

Current Ratio = Current Assets/Current Liabilities

If a company has 40% current ratio, it means that the company has enough assets to pay 40% of its liabilities.For FY 2010-2014 General Mills has higher current ratio than Kellogg’s.

DEBT TO EQUITY RATIOThis ratio represents what percentage of the company’s operations are financed by liabilities (like bank loans), and what percentage of it is financed by equity (shareholders). D/E ratio identifies the companies that are highly leveraged.

If the D/E ratio is 5, it means that the company has $5 in debt for every $1 of equity. In other words, the company borrowed $5 from bank and $1 from equity for its operations. This ratio is measured by banks to decide whether a debt investment can be made or not. The higher the D/E ratio, the more risk it is for the banks to sanction a loan. From the investor’s point of view, equity is expensive for the company because it has to pay dividends on equity, whereas the interest paid on debt is tax deductible. Debt to Equity = Total Liabilities/ Total Equity .

From FY 2010-2014, GM has a lower D/E ratio than Kellogg’s.

ANALYSIS OF FINANCIAL RATIOS FOR LENDERS

ANALYSIS OF FINANCIAL RATIOS FOR INVESTORS AND LENDERS

INVENTORY TURNOVER/ASSET UTILIZATIONThis ratio indicates how many times the inventory is sold in a period. If the ratio is higher, it indicates that the inventory is sold, and replaced more frequently.

By definition, the inventory turnover ratio is a ratio that is used to calculate efficiency. It shows how effectively inventory is managed by comparing cost of goods sold with the average of the inventory for a period. This measures how many times average inventory is "turned" or sold during a period. [R6]

Inventory Turnover = COGS/ Avg. Inventory

If Inventory turnover is 10, it means that the company sold and repurchased its inventory 10 times that year.

From FY 2010-2012 AND 2014, Kellogg’s had higher inventory turnover than General Mills.

GROSS MARGIN TO SALES (GROSS MARGIN RATIO)The gross margin ratio is a profitability ratio that measures how profitably a company can sell its inventory. It only means that higher ratios are more desirable. Higher ratios mean that the company is selling its inventory at a higher profit percentage. [R8]

Gross Margin Ratio = Net Sales – COGS /Net Sales

If the company’s gross margin ratio is 0.35 or 35%, it means that on every $1 earned through net sales, $0.35 contributes to the gross margin. High ratios can be achieved by either purchasing the inventory for less, or by increasing the selling price.

From FY 2010-2013, Kellogg’s had higher gross margin ratio than General Mills.

In conclusion, it is seen that GENERAL MILLS is poised for better growth because their NOPBT and NOPAT have been consistently better than that of Kellogg's. Further, considering the growth prospects, the stock of General Mills is priced lower at a PE multiple of 19.08 against 37.12 of Kellogg's for the FY 2014. The EBITDA margin of General Mills is also higher at 16.51% for the FY 2014 against 7.02% of Kellogg's. On the other hand, it is noticed that the RNOA and ROE of Kellogg's have fallen over the years. Therefore, General Mills is a better candidate for making an equity investment than Kellogg's. The Debt Equity Ratio of General Mills also is healthier at 2.3 against 4.3 of Kellogg's, which qualifies General Mills as a better target of considering an investment in Debt as well.

RNOAReturn on net operating assets (RNOA) refers to the operating income relative to the net operating assets. It is given by the formula,RNOA = NOPAT / Avg. NOARNOA is important for both lenders and investors. For lenders it is vital for knowing whether the business is running healthy. For an investor it is helpful to determine the value of the assets the company owns in order to invest in it.

ANALYSIS OF FINANCIAL RATIOS FOR INVESTORS AND LENDERS

FINANCIAL RATIOS CALCULATION: GENERAL MILLS

TO FIND NOPAT (Net Operating Profit After Tax)

2015 2014 2013 2012 2011 2010NOPBT (Net Operating profit Before Tax) $ 2,077.30 $ 2,957.40 $ 2,851.80 $ 2,562.40 $ 2,774.50 $ 2,606.10

           Pre-tax Net Non-operating Expense $ 315.40 $ 302.40 $ 316.90 $ 351.90 $ 346.30 $ 401.60 Statutory Tax rate 33.33% 33.27% 29.24% 32.10% 29.70% 34.98%Tax shield [Pre-tax Net non-operating expense * Statutory tax rate] $ 105.12 $ 100.61 $ 92.66 $ 112.96 $ 102.85 $ 140.48

           Tax Expense $ 586.80 $ 883.30 $ 741.20 $ 709.60 $ 721.10 $ 771.20 Tax on Operating Profit [Tax Expense +/- Tax shield] $ 481.68 $ 782.69 $ 648.54 $ 596.64 $ 618.25 $ 630.72

NOPAT [ NOPBT - Tax on Operating Profit ] $ 1,595.62 $ 2,174.71 $ 2,203.26 $ 1,965.76 $ 2,156.25 $ 1,975.38

TO FIND ROE (Return On Equity)

2015 2014 2013 2012 2011 2010Net Income $ 1,221.30 $ 1,567.30 $ 1,855.20 $ 1,567.30 $ 1,798.30 $ 1,530.50

Average Stockholder's Equity $ 5,765.75 $ 6,603.50 $ 6,777.45 $ 6,393.60 $ 5,884.20 $ 5,287.60

ROE [Net Income/Average Stockholder's

Equity] 21.18% 23.73% 27.37% 24.51% 30.56% 28.95%

APPENDIX

FINANCIAL RATIOS CALCULATION: GENERAL MILLS

TO FIND NOA(Net Operating Profit)

OPERATING ASSET 2015 2014 2013 2012 2011 2010Accounts Receivable $ 1,386.70 $ 1,483.60 $ 1,446.40 $ 1,323.60 $ 1,162.30 $ 1,041.60 Inventories $ 1,540.90 $ 1,559.40 $ 1,545.50 $ 1,478.80 $ 1,609.30 $ 1,344.00 Deferred Income tax $ 100.10 $ 74.10 $ 128.00 $ 59.70 $ 27.30 $ 42.70 Prepaid expenses & other current assets $ 423.80 $ 409.10 $ 437.60 $ 358.10 $ 483.50 $ 378.50 Land, building & Equipment $ 3,783.30 $ 3,941.90 $ 3,878.10 $ 3,652.70 $ 3,345.90 $ 3,127.70 Goodwill $ 8,874.90 $ 8,650.50 $ 8,622.20 $ 8,182.50 $ 6,750.80 $ 6,592.80 Other intangible assets $ 4,677.00 $ 5,014.30 $ 5,015.10 $ 4,704.90 $ 3,813.30 $ 3,715.00 Other assets $ 843.60 $ 1,145.50 $ 843.70 $ 865.30 $ 862.50 $ 763.40 Total Operating Assets $ 21,630.30 $ 22,278.40 $ 21,916.60 $ 20,625.60 $ 18,054.90 $ 17,005.70

OPERATING LIABILITY 2015 2014 2013 2012 2011 2010Accounts payable $ 1,684.00 $ 1,611.30 $ 1,423.20 $ 741.20 $ 1,031.30 $ 849.50 Other current liabilities $ 1,589.90 $ 1,449.90 $ 1,827.70 $ 1,426.60 $ 1,321.50 $ 1,762.20 Deferred Income taxes $ 1,550.30 $ 1,666.00 $ 1,389.10 $ 1,171.40 $ 1,127.40 $ 874.60 Other liabilities $ 1,744.80 $ 1,643.20 $ 1,952.90 $ 2,189.80 $ 1,733.20 $ 2,118.70 Total Operating Liabilities $ 6,569.00 $ 6,370.40 $ 6,592.90 $ 5,529.00 $ 5,213.40 $ 5,605.00

NOA [ Total operating Assets - Total Operating Liability]

$ 15,061.30 $ 15,908.00 $ 15,323.70 $ 15,096.60 $ 12,841.50 $ 11,400.70 TO FIND RNOA [Return on net operating Asset]

2015 2014 2013 2012 2011 2010NOPAT $ 1,595.62 $ 2,174.71 $ 2,203.26 $ 1,965.76 $ 2,156.25 $ 1,975.38 Average NOA $ 15,484.65 $ 15,615.85 $ 15,210.15 $ 13,969.05 $ 12,121.10 $ 11,718.90 RNOA [NOPAT/Average NOA]

10.30% 13.93% 14.49% 14.07% 17.79% 16.86%

FINANCIAL RATIOS CALCULATION: KELLOGG’S

TO FIND NOPAT (Net Operating Profit After Tax)

2015 2014 2013 2012 2011 2010NOPBT (Net Operating profit Before Tax) $ 1,024.00 $ 2,837.00 $ 1,562.00 $ 1,976.00 $ 1,990.00

         Pre-tax Net Non-operating Expense $ 199.00 $ 231.00 $ 237.00 $ 244.00 $ 248.00 Statutory Tax rate 22.54% 30.39% 27.39% 29.04% 28.81%Tax shield [Pre-tax Net non-operating expense * Statutory tax rate] $ - $ 44.85 $ 70.20 $ 64.91 $ 70.86 $ 71.45

         Tax Expense $ 186.00 $ 792.00 $ 363.00 $ 503.00 $ 502.00 Tax on Operating Profit [Tax Expense +/- Tax shield] $ - $ 141.15 $ 721.80 $ 298.09 $ 432.14 $ 430.55

         NOPAT [ NOPBT - Tax on Operating Profit ] $ - $ 882.85 $ 2,115.20 $ 1,263.91 $ 1,543.86 $ 1,559.45

TO FIND ROE (Return On Equity)

2015 2014 2013 2012 2011 2010

Net Income $ - $ 632.00 $ 1,807.00 $ 961.00 $ 866.00 $ 1,287.00

Average Stockholder's Equity

$ - $ 3,167.00 $ 2,974.50 $ 2,107.50 $ 1,959.00 $ 2,215.00

ROE [Net Income/Average Stockholder's Equity] NA

19.96% 60.75% 45.60% 44.21% 58.10%

TO FIND RNOA [Return on net operating Asset]

2015 2014 2013 2012 2011 2010

NOPAT $ - $ 882.85 $ 2,115.20 $ 1,263.91 $ 1,543.86 $ 1,559.45

Average NOA $ - $ 10,235.00 $ 10,396.50 $ 8,714.50 $ 7,471.00 $ 7,217.50

RNOA [NOPAT/Average NOA] NA

8.63% 20.35% 14.50% 20.66% 21.61%

FINANCIAL RATIOS CALCULATION: KELLOGG’S

TO FIND NOA(Net Operating Profit)

OPERATING ASSET 2015 2014 2013 2012 2011 2010

Accounts Receivable $ - $ 1,276.00 $ 1,424.00 $ 1,454.00 $ 1,188.00 $ 1,190.00

Inventories $ - $ 1,279.00 $ 1,248.00 $ 1,365.00 $ 1,132.00 $ 1,056.00

Other current assets $ - $ 342.00 $ 322.00 $ 280.00 $ 247.00 $ 225.00

Property, net $ - $ 3,769.00 $ 3,856.00 $ 3,782.00 $ 3,281.00 $ 3,128.00

Goodwill $ - $ 4,971.00 $ 5,051.00 $ 5,053.00 $ 3,623.00 $ 3,628.00

Other intangible assets, net

$ - $ 2,295.00 $ 2,367.00 $ 2,359.00 $ 1,454.00 $ 1,456.00

Other assets $ - $ 778.00 $ 933.00 $ 610.00 $ 516.00 $ 720.00

Total Operating Assets $ - $ 14,710.00 $ 15,201.00 $ 14,903.00 $ 11,441.00 $ 11,403.00

OPERATING LIABILITY 2015 2014 2013 2012 2011 2010

Accounts payable $ - $ 1,528.00 $ 1,432.00 $ 1,402.00 $ 1,189.00 $ 1,149.00

Other current liabilities $ - $ 1,401.00 $ 1,375.00 $ 1,301.00 $ 1,129.00 $ 1,039.00

Deferred Income taxes $ - $ 726.00 $ 928.00 $ 523.00 $ 643.00 $ 697.00

Pension liability $ - $ 777.00 $ 277.00 $ 886.00 $ 560.00 $ 265.00

Other liabilities $ - $ 500.00 $ 497.00 $ 690.00 $ 592.00 $ 639.00

Total Operating Liabilities

$ - $ 4,932.00 $ 4,509.00 $ 4,802.00 $ 4,113.00 $ 3,789.00

NOA [ Total operating Assets - Total Operating Liability]

$ -

$ 9,778.00 $ 10,692.00 $ 10,101.00 $ 7,328.00 $ 7,614.00

REFERENCES

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