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Usually companies are classified by capitalization and when companies are classified in terms of growth and value, information from the company’s financial statements is required to classify stocks and thus it is subject to the problem of the quality of the financial data used. To avert the above problem, it is always prudent to use the current. This paper will discuss about publicly traded investment companies, Goldman Sachs, Morgan Stanley and J.P. Morgan Chase. The analysis will include a review of the companies’ recent income statements as well as their ratio analysis over the same period.
Goldman Sachs Group is a leading investment company that provides financial services to a wide client base since 1869. The company provides financial services to a number of different clients including corporations, governments, financial institutions and high net worth individuals (Goldman Sachs 2010 annual report).
Global economic conditions have generally looked bright since the 2008 financial meltdown that affected most companies. A review of the financial asset value as at December 2009 and 2010 show that the company’s assets were valued at$46.48 billion and $45.38 billion respectively. The decrease in asset base reflected a sales transfer to a level 2 loan and a net reduction in financial instruments due to what the company called “consolidation of certain variable interest entities”. Net revenues for the same period were $45,173 and $39.16 for 2010. This was a 13 percent reduction in net revenues from 2009 thus reflecting lower revenue. The reason for lower net revenues in 2010 was due to a decrease in institutional client services that reflected significant lower net revenue especially for fixed income, equities and commodity client execution. Another reason for the drop was given as a decrease in Investment Banking that reflected lower net revenues in equity underwriting especially to volatility of equity markets during 2010. It should however be noted that during the 2008 recession, GS managed to survive the financial meltdown with some financial aid from the government. The financial strength improved after a financial meltdown in 2008. Net revenues were $39.16 billion in 2010 reflecting a decrease of 13% from the previous year. The decrease was attributed to lower net revenues in institutional client services and lower net revenues in investment banking. The decrease in investment banking also reflected lower revenues in underwriting business but were offset by higher net revenues in financial advisory. However, net revenues in from 2008 more than doubled in 2009 reflecting improved signs in investing and lending (Goldman Sachs 2010 annual report).
Balance sheet analysis indicates that as at December 2010, total assets had increased from $62.39 billion to $911.33 billion. The increase was due to an increase in collateralized agreements and an increase in cash and securities segregated for regulatory driven by increase in client activity. Total liabilities had also increased from 2009 due to increased securities sold spurred by an increase in client driven activity.
Financial ratios of GS (Goldman Sachs 2010 annual report)
GS’s 5-year averages ratios and returns included the following: return on equity 17.8%, return on assets 1.0%, and return on invested capital 4.1%, profit margin 14.6%, net profit margin 14.6%, and debt/equity ratio 4.21%. The EBIT margin was 41.2%, EBITDA margin 41.2%, profit margin 21.4%, leverage ratio 14.2%, asset turnover 0.0, ROI capital 2.4%, ROA 0.6% and equity ratio at 2.62% (Forbes.com).
GS has proven to be successful over the past many years and it has achieved this through taking advantage different performance measurements. By creating the most value out of this company, GS has taken up strategies like spreading revenues evenly throughout its business segments.
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Morgan Stanley & Co. LLC
Morgan Stanley & Co. LLC also provides a variety of financial services to a large diversified group of clients including governments, financial institutions and different corporations. The company‘s financial conditions are prepared in accordance with the accounting principles accepted by the U.S. As at December June 30, 2011, the company reported $113.3 million of assets, $109.6 of liabilities and a further $3.6 million of equity.
The subprime mortgage affected Morgan Stanley and in order to cope with the massive write-downs during this period, the company announced in December 2007 that it could receive $5 billion from a China Investment Company. This was later done in exchange of securities later in the year 2010 convertible at 9.9% of its original shareholding.
Financial ratios of MS
MS’s 5-year averages ratios and returns included the following: return on equity 10.8%, return on assets 0.4%, and return on invested capital 1.7%, profit margin 6.3%, net profit margin 6.7%, and debt/equity ratio 5.15%. The EBIT margin was 35.6%, EBITDA margin 35.6%, profit margin 18.4%, leverage ratio 13.2%, asset turnover 0.1, ROI capital 2.2%, ROA 0.7% and equity ratio at 3.38% (Forbes.com).
J.B. Morgan Chase
This is another investment financial services provider in the U.S. The company was incepted in 1968 and is primarily involved in banking and provision of financial services especially in the U.S. the company has such investment banking, retail financial services and asset and wealth management. The company has assets worth $2.1 trillion, only second to the bank of America at $2.3 trillion.
The company’s financial ratios are as follows: J.B. MC’s 5-year averages ratios and returns included: return on equity 8.9%, return on assets 0.7%, return on invested capital 2.9%, profit margin 11.3%, net profit margin 11.4%, and debt/equity ratio 4.21%. The EBIT margin was 37.2%, EBITDA margin 37.2%, profit margin 25%, leverage ratio 13.1%, asset turnover 0.1, ROI capital 4.4%, ROA 0.9% and equity ratio at 1.57%.
Like all other financial institutions, J.B. Morgan Chase was badly affected by the 2008 financial meltdown. The company had to receive funding from the federal government amounting to $25 billion to help navigate through the crisis. In 2011, the company’s third quarter profit also fell due to mortgage troubles and weak investment while the fiscal troubles that ravaged Europe affected the bank (JPMorgan Chase Annual Report and Proxy Statement). The 2008 crisis led to huge losses on credit markets for JB Morgan. The bank’s mortgage originations fell by 33% while loans to car buyers dropped by 27%. The company learned expensive lessons due to its 18% ($13.4 billion) of its subprime mortgages were classified as non-performing. It was however interesting to note that JPM in the stock market as it was not adversely affected by the crisis. This was due to the bank’s aggressive business which was fairly managed well.
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Financial analysis can reveal a lot about a company and its operations and the environment under which it is operating in. financial ratios are like a ‘flag’ which can indicate areas of strength or weakness and when combined with other ratios and the company’s knowledge on financial management, they can reveal much about a company. The ratios are meaningful when compared with standard industry trends. As with all other financial institutions, all the above three banks were affected by the crisis but JPM looked better to recover out of the mess. The crisis was caused by inadequately regulated financial institutions in the U.S. to prevent a deepening crisis and most banks were bailed by the Federal Reserve Support. The year 2011 has seen the banks strengthen their respective financial institutions avoiding foreclosures. It is yet to be seen how strong and relevant the banks will remain in 2012.