general mills inc

General Mills Inc. Business Finance Assignment # 2

General Mills’ Ratio Analysis

Liquidity Ratios

Liquidity ratios measure the firm’s ability to pay shot term liabilities using the short term assets and answer the question that, can the firm make required payments?

Current RatioOne of the most important and frequently used ratios is the current ratio that can be measured by dividing the total current assets from the total current liabilities.

Current Ratio= Current AssetsCurrent Liabilities

Year Current Assets

Current Liabilities

Current Ratio

Industry Ratio

1993 1129.2 1832.1 0.61 ---1994 1076.9 1558.8 0.69 1.0

The firm’s current ratio reveals that its short term obligations are more than the short term resources available and pours light on the fact General Mills despite of having a rising current ratio is still incapable of efficiently paying off its short term liabilities in time. And comparison with the industry average, General Mills Inc.’s current ratio lies below the industry average of 1.0

Acid Test RatioAnother more conservative measure of liquidity ratios is the Acid Test Ratio which is more or less the same as current ratio but it excludes the inventory account from the current assets and shows even more accurate liquidity position of a firm.

AcidTest Ratio=Current Assets−InventoryCurrent Liabilities

Year Quick Assets

Current Liabilities

Current Ratio

Industry Ratio

1993 1018.6 1832.1 0.55 ---1994 637.9 1558.8 0.40 0.40

Ma’am Humaira Kosar


The firm’s quick ratio also reveals that it is also not able to efficiently pay off its liabilities because the short term obligations exceed more than double of the available resources for making the payment also there is a declining trend in the quick ratio of the firm, however the industry average is equal to General Mills Inc.’ quick ratio which means that it has average current assets relative to the industry standard.

Financial Leverage Ratios

Leverage ratios are used to calculate the financial leverage of a company to get an idea of the company's methods of financing or to measure its ability to meet financial obligations.

Debt to Equity Ratio

Debt to Equity Ratio shows the extent to which a firm is financed through debt or the extent to which company is using borrowed money.

Debt ¿ Equity Ratio= Total Debts

Shareholder s' Equity

Year Total Debts

Total Equity

Debt to Equity

Industry Ratio

1993 3925.1 1151.2 3.40 ---1994 3432.3 1218.5 2.81 1.45 or 145%

General Mills’ Debt to Equity Ratio reveals that the firm relies mostly on debt or money borrowed from creditors. There is a decline in the ratio yet it is highly unfavorable for creditors because it increases the risk and leaves less margin of protection. The ratio 2.81 tells us that creditors are providing $ 2.81 for every $ 1 provided by the shareholders. Also there is a major difference in between the firm and the industry average of 1.45 which is also not favorable for the firm as well as for the creditors.

Debt to Asset Ratio

Debt to Asset is also similar to the Debt to Equity ratio. It reveals that how much percentage of the firm’s assets is financed through debt.

Debt ¿ Asset Ratio= Total DebtsTotal Assets



Year Total Debts

Total Assets

Debt to Asset

Industry Ratio

1993 3925.1 5198.3 0.75 ---1994 3432.3 4650.8 0.73 ---

The firm’s ratio 0.73 tells us that 73% of General Mills is financed through debt and just 27% of the remaining assets are financed using shareholders equity, which indicates high financial risk and is highly unfavorable for creditors because there is less margin of protection for the creditors.

Total Capitalization Ratio

The capitalization ratio measures the debt component of a company's capital structure, or capitalization to support a company's operations and growth.

TotalCapitalization Ratio= Total DebtsTotalCapit alization

Year Total Debts

Total Capitalizatio

n

Capitalization Ratio

Industry Ratio

1993 3925.1 2568.4 1.52 ---1994 3432.3 2486.8 1.38 ---

The company’s capitalization ratio, despite of having a declining trend is yet very high and it tells us that a higher proportion of debt is used for the permanent financing for the firm as opposed to investor fund and with the increase in the proportion of debt, the risk and chances of bankruptcy also is high.

Coverage Ratios Coverage ratios tell us about how much the firm is capable of recovering the receivables or in how much time a firm is able to recover its receivables.

Interest Coverage Ratio

This ratio measures the firm’s ability to meet its interest payments and thus avoid bankruptcy



¿ terest Coverage Ratio= EBITInterest Charges

Year EBIT Interest Charges

Interest Coverage

Ratio

Industry Ratio

1993 770.4 73.6 10.46 ---1994 786.3 58.2 13.51 10.9

For the year 1994 the ratio of General Mills is 13.51 which shows that the firm is capable of easily paying off the interest expenses incurred and also the firm’s interest coverage ratio shows an increasing trend which again goes in the favor of the General Mills and there is a greater margin of security for the creditors and in comparison with the industry average of 10.9 the company again has the upper hand and shows that despite of relying more on debt financing still the company is able to easily pay off the interest expenses.

Activity RatiosActivity ratio, also known as the efficiency or turnover ratios, measures how efficiently the firm is using its assets.

Receivables Turnover

This ratio provides insight of the quality of the firm’s receivables and tells us that within one accounting period how many times the receivables are collected.

RecieveablesTurnover= Credit SalesAccounts Recieveables

Year Net Credit Sales

Receivables Receivables Turnover

Industry Ratio

1993 8134.6 309.7 26.26 ---1994 7777.8 287.4 27.06 ---

This ratio tells us that during the year 1994 the Account Receivables have been turned over for about 27 times and there is shorter period of time in which the company receives its collections.



Average Collection Period

This ratio tells us the approximate amount of time that it takes for a business to receive payments owed, in terms of receivables, from its customers and clients.

AverageCollectionPeriod= Days∈the yearAccounts ReceiveablesTurnover

Year Days in Year

A/R Turnover

Collection Period

Industry Ratio

1993 365 26.26 13.89 ---1994 365 27.06 13.48 31.7

The companies ratio tells us that it takes almost 13.48 days for General Mills to recover the accounts receivables and pours light on the fact that General Mills turn it’s A/R into cash within almost half month and the company has greater availability of cash and the company also holds a shorter period of time of collection period than the industry average of 31.7 days and tells us that the company holds some strict policy for receivables.

Inventory Turnover

A ratio showing how many times a company's inventory is sold and replaced over a period of time and also indicates the effectiveness of the inventory management practices of the firm.

Inventory Turnover=Cost of Goods SoldInventory

Year C.G.S Inventory Inventory Turnover

Industry Ratio

1993 4297.6 488.3 8.80 ---1994 4123.2 439 9.39 5.5

General Mills’ inventory turnover 9.39, which is significantly high, indicates the efficiency of the firm’s inventory management team and also pin points towards the fact that the firm’s inventory is also highly liquid. Comparison with the industry average of 5.5 also tells us some favorable results, that General Mills is more efficient in inventory management than the industry.



Total Assets Turnover

Asset turnover measures a firm's efficiency at using its assets in generating sales or revenue. It also indicates the pricing strategy of a company as companies with low profit margins tend to have high asset turnover, while those with high profit margins have low asset turnover.

AssetsTurnover= Net SalesTotal Assets

Year Net Sales

Total Assets

Assets Turnove

r

Industry Ratio

1993 8134.6 5198.3 1.56 ---1994 7777.8 4650.8 1.67 1.4

General Mills’ Asset turnover ratio, which is 1.67 for the year 1994, tells us that the company is very efficient in utilizing it assets to generate sales and revenues. The ratio is not very high which indicates that the company is also earning a significant amount of profit. The industry average of assets turnover is 1.4 which shows us that General Mills is more efficient in utilizing its assets then the industry itself.

Profitability Ratios

The class of financial metrics that are used to assess a business's ability to generate earnings as compared to its expenses and other relevant costs incurred during a specific period of time.

Gross Profit Margin

Gross Profit ratio is used to assess a firm's financial health by revealing the proportion of money left over from revenues after accounting for the cost of goods sold. Gross profit margin serves as the source for paying additional expenses and future savings.

Gross Profit Margin=Gross ProfitNet Sales

Year Gross Profit

Net Sales Gross Profit Margin

Industry Ratio

1993 3837.0 8134.6 47% ---



1994 3654.6 7777.8 46% ---

General Mills’ Gross profit margin is 46% for the year 1994 which is a considerably high profit margin and tells us about the pricing strategy of the firm that it uses price skimming rather than penetration and triggers only a small target market. Also there is a steady declining trend in the gross profit margin of the company which indicates that the cost of production of the company is also rising steadily.

Net Profit Margin

The profit margin tells us how much profit a company makes for every $1 it generates in sales. The difference in gross profit and net profit margin indicates the firm’s operating expenses.

Net Profit Margin= Net Profit after TaxesNet Sales

Year NPAT Net Sales Net Profit Margin

Industry Ratio

1993 506.1 8134.6 6.22% ---1994 495.6 7777.8 6.37% 5.0%

The Net Profit Margin tells us the net income per dollar of sale and for General Mills 6.37 cents out of every $1 sales constitutes after tax taxes. General Mills’ net profit margin is above the net profit margin of the industry average of 5.0% which indicates that it has a higher level of sales profitability than most of the other companies in the industry. Also the difference in the Gross profit margin and the net profit margin which is about 40% of sales, also informs us about the operating expenses and interest expenses of the company.

Return on Investment

Return on Investment or Return on Assets is a performance measure used to evaluate the efficiency of an investment or to compare the efficiency of a number of different investments. To calculate ROI, the benefit of an investment is divided by the cost of the investment and the result is expressed as a percentage or a ratio.

Returnon Investment=Net Profit After TaxesTotal Assets

Year NPAT Total Assets

ROI Industry Ratio



1993 506.1 5198.3 9.73% ---1994 495.6 4650.8 10.65% 8.7%

General Mills’ ROI lies above the industry average of 8.7% which indicates good performance in generating profits on the assets of the firm. It tells us that General Mills employ fewer assets to generate $1 sales than other firms in the industry which again goes into the favor of General Mills.

Return on Equity

Return on Equity Ratio indicates the profitability to the shareholders of the company after considering all expenses and taxes or a company’s profitability by revealing how much profit a company generates with the money shareholders have invested.

Returnon Equity= Net Profit AfterTaxesShareholders ' Equity

Year NPAT Shareholders’ Equity

ROE Industry Ratio

1993 506.1 1151.2 43.95% ---1994 495.6 1218.5 40.67% 19.9%

General Mills’ have a strong ROE ratio which tells us that the company has good and effective expense management system and also the company often undertakes strong investment opportunities. And also the company’s ROE ratio is significantly above the industry average of about 20%.

Summary

The firms Liquidity Ratios tell us that the firm is not highly liquid and a significant amount of the company’s Current Assets consist of inventory account but at the same time the company does not invest much in the inventory account in accordance to the industry average and may face difficulties like stock outs.Financial Leverage Ratios tell us that General Mills rely mostly on debt financing and high proportion of debt is used for permanent financing and about 73% of the firm’s assets are financed through debt which is not favorable for lenders.Coverage Ratios tell us that General Mills, despite of relying more on debt is able to pay off the interest expenses efficiently and is more reliable than many firms in the industry.



The Activity Ratios tell us that General Mills is very efficient in managing the inventory then many other firms in the industry and also it highlights the fact that General Mills is very efficient in utilizing its assets to generate sales and revenues and at the same time it is able to recover the credit sales and convert them into cash.The Profitability Ratio tell us that the firm favors investing more in fixed assets to ensure great profitability than in current assets. Also the firm’s gross profit and net profit margin are considerably better than the industry average and the firm is very effective in generating profits while utilizing its assets and shareholders’ equity.

General Mills’ Common Size Analysis

General Mills’ Common Sized Income Statement

ITEMS 1993 1994 1993 1994 Industry

$ $ $ $ $Sales 8134.6 7777.8 100 100 100Costs and Expenses: Cost of Sales 4297.6 4123.2 52.83 53.01 53.2 Selling and Admin Expenses 2578.2 2516.3 31.69 32.35 30.1 Depreciation and Amortization 274.2 247.4 3.37 3.18 3.2 Net Interest 73.6 58.2 0.90 0.74 1.7 Unusual expenses 67 (11.8) 0.82 (0.15) (0.7)

Total Cost and Expenses 7290.6 6933.3 89.62 89.14 87.9

Earnings from continuing operations before taxes

844 844.5 10.37 10.85 6.5

Income Taxes 337.9 338.9 4.15 4.35 4.1

Earnings from continuing operations

506.1 505.6 6.22 6.50 6.5

Discontinued operations after taxes

--- (10) --- (0.12) (2.1)

Net Earnings 506.1 495.6 6.22 6.37 4.1



General Mills Inc.’ Common Sized Balance Sheet

ITEMS 1993 1994 1993 1994 Industry$ $ $ $

Current Assets: Cash and Cash Equivalents 0.2 100 0.003 2.15 --- Receivables 309.7 287.4 5.95 6.17 --- Inventories 488.3 439 9.39 9.43 --- Prepaid Expenses 110.6 108.2 2.12 2.32 --- Deferred Income Taxes 220.4 142.3 4.23 3.059 ---

Total Current Assets 1129.2 1076.9 21.72 23.15 32.0

Land, Building and Equipment 3092.6 2859.6 59.49 61.48 43.4Other Assets 976.5 714.3 18.78 15.35 24.6

Total Assets 5198.3 4650.8 100 100 100

General Mills’ Common Sized Balance Sheet

ITEMS 1993 1994 1993 1994 IndustryCurrent Liabilities: Accounts Payable 650.4 617 12.51 13.26 --- Current Portion of Long Term Debt 115.2 64.3 2.21 1.38 --- Notes Payable 433.3 339.6 8.33 7.30 --- Accrued Taxes 178.3 139.7 3.42 3.00 --- Accrued Payroll 165.6 158.8 3.18 3.41 --- Other Current Liabilities 289.3 239.4 5.56 5.14 ---

Total Current Liabilities 1832.1 1558.8 35.24 33.51 32.70

Long Term Debts 1417.2 1268.3 27.26 27.27 19.30Deferred Income Taxes 297.4 262 5.72 5.63 4.10Deferred Income Taxes-Tax Leases 189.8 195.6 3.65 4.20 ---Other Liabilities 188.6 147.6 3.62 3.17 15.0

Total Liabilities 3925.1 3423.3 75.50 73.60 71.0

Common Stock to Put Options 122 0 2.34 0



Stockholders’ Equity Common Stock 251 358.7 4.82 7.712 5.30 Retained Earnings 2457.9 2284.5 47.28 49.12 42.10 Common Stock at treasury (1334.4) (1196.4) (25.66) (25.72) (18.4) Unearned Compensation (160.2) (167.5) (3.08) (3.60) --- Cumulative Foreign Currency Adjt (63.1) (60.8) (1.21) (1.30) ---

Total Equity 1512.2 1218.5 29.09 26.19 29.00

Total Equity and Liability 5198.3 4650.8 100 100 100

General Mills’ Index Analysis

General Mills’ Indexed Income Statement

Items 1993 1994 1993 1994Sales 8134.6 7777.8 100 95.61Costs and Expenses: Cost of Sales 4297.6 4123.2 100 95.94 Selling and Admin Expenses 2578.2 2516.3 100 97.59 Depreciation and Amortization 274.2 247.4 100 90.22 Net Interest 73.6 58.2 100 79.07 Unusual expenses 67 (11.8) 100 (17.61)

Total Cost and Expenses 7290.6 6933.3 100 95.09

Earnings from continuing operations before taxes

844 844.5 100 100.05

Income Taxes 337.9 338.9 100 100.29

Earnings from continuing operations

506.1 505.6 100 99.90

Discontinued operations after taxes --- (10) ---

Net Earnings 506.1 495.6 100 97.92



General Mills’ Indexed Balance Sheet

ITEMS 1993 1994 1993 1994$ $ $ $

Current Assets: Cash and Cash Equivalents 0.2 100 100 50000 Receivables 309.7 287.4 100 92.79 Inventories 488.3 439 100 89.90 Prepaid Expenses 110.6 108.2 100 97.83 Deferred Income Taxes 220.4 142.3 100 64.56

Total Current Assets 1129.2 1076.9 100 95.36

Land, Building and Equipment 3092.6 2859.6 100 92.46Other Assets 976.5 714.3 100 73.14

Total Assets 5198.3 4650.8 100 89.46

General Mills’ Indexed Balance Sheet

ITEMS 1993 1994 1993 1994Current Liabilities: Accounts Payable 650.4 617 100 94.86 Current Portion of Long Term Debt 115.2 64.3 100 55.81 Notes Payable 433.3 339.6 100 78.37 Accrued Taxes 178.3 139.7 100 78.35 Accrued Payroll 165.6 158.8 100 95.89 Other Current Liabilities 289.3 239.4 100 82.75

Total Current Liabilities 1832.1 1558.8 100 85.08

Long Term Debts 1417.2 1268.3 100 89.49Deferred Income Taxes 297.4 262 100 88.09Deferred Income Taxes-Tax Leases 189.8 195.6 100 103.05Other Liabilities 188.6 147.6 100 78.26

Total Liabilities 3925.1 3423.3 100 87.21Common Stock to Put Options 122 0 100 0



Stockholders’ Equity Common Stock 251 358.7 100 142.90 Retained Earnings 2457.9 2284.5 100 92.94 Common Stock at treasury (1334.4) (1196.4) 100 89.65 Unearned Compensation (160.2) (167.5) 100 104.55 Cumulative Foreign Currency Adjt (63.1) (60.8) 100 96.35

Total Equity 1512.2 1218.5 100 80.57

Total Equity and Liability 5198.3 4650.8 100 89.46


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