Using Ratio Analysis as a Tool – Brady Corporation
The chapter demonstrates the various ways that managers and investors use financial statements. The following cyberproblem addresses the financial statement analysis of Brady Corporation. Use the company's website, at http://www.bradycorp.com, and Yahoo!Finance, at http://finance.yahoo.com, to navigate through this cyberproblem.
Brady Corporation (NYSE: BRC) is a world leader in complete identification solutions that help companies improve productivity, performance, safety and security. Its more than 50,000 products include high-performance labels, precision die-cut materials, signs, software, printers, and automatic identification and data-collection systems.
a. Access Brady Corporation's Investor Relations page (by clicking on the “Investor” link on the front page’s banner). From this page you will see a current quote and the high-and-low for the day and the last 52-weeks. In the left-hand menu bar, select “Fundamentals” from the “Financials” section. How has the stock performed over the past 52 weeks?
Obviously answers will vary depending upon when the exercise is completed. As of February 23, 2008, the 52-week change was −16.3%. All remaining numerical results are accurate as of fiscal year end July 2007.
b. Still on the Advanced Fundamentals page, select “Ratios” to see a compilation of some key financial ratios. Click on Ratio definitions. Are the definitions for Brady’s ratios here consistent with those learned in the textbook?
For the most part the definitions are consistent. However, many ratios do not use the values found on the last balance sheet or income statement. Instead, Brady uses the value for the last twelve months. This will lead to different results than if the last annual report were used. Inventory turnover is measured differently as Brady calculates it as: Cost of goods sold/Inventory turnover. Also, the leverage ratio is calculated as: Total assets/Total stockholder’s equity, which looks like the equity multiplier discussed in the chapter.
c. Do Brady’s financial ratios look strong?
It is very hard to answer this question because we have no comparison data to use (industry averages or even historical values). However, none of the ratios (on the surface) seem to be in trouble. The P/E ratio (14.5) is below the average S&P 500 company’s P/E of 18.34 (of course, a better benchmark is comparing to its competitors). So the final answer is that it is unclear whether the numbers are “strong” because we don’t have a benchmark to compare them to.
d. Record the values of the ratios Brady presents and then go to Yahoo!Finance to access their financial ratios for Brady (you may need to use the symbol lookup). When the “Summary Quote” screen comes up, click on “Key Statistics,” found under the Company heading in the left-hand menu. How do these ratios compare to those listed on Brady’s website? What might explain any discrepancies?
Brady’s website just showed a summary of ratio results, hence Yahoo!Finance’s list is more extensive. The ratios on Yahoo!Finance are not exactly the same but they are very much in-line with Brady’s numbers. Looking at Yahoo!Finance’s definitions, it is clear why some ratios are different (using last twelve months or last fiscal year, etc.), but also remember that Brady has all current financial information. So, while Yahoo!Finance’s trailing twelve months might be from the last reporting quarter (maybe two months ago) and twelve months back from there, while Brady can report the actual last twelve months.
e. Click on “Competitors,” found under “Company” in the left-side menu. How do Brady’s margins, growth rates, and P/E ratios compare to its competitors?
Brady’s competitors include 3M Company (MMM), Avery Dennison Company (AVY), and Integrated Security Systems Inc. (IZZI.OB). Industry data is presented too. Brady’s gross margin exceeds all of its competitors even 3M and its operating margin trails only 3M (the industry leader). Brady’s revenue growth rate is 1.41, compared to 24.46 for 3M, 6.31 for Avery, and 11.54 for Intergrated Security Systems. Brady’s P/E (14.15) trails its industry , 3M (14.24) and Avery (16.60). It appears to be healthy and is difficult to interpret. For instance, and investor could conclude that this difference represents an underpricing of Brady’s stock.
2