Company Valuation - Accenture free essay sample

Return on equity of Accenture for 2008 at 80.21%   shows higher level performance than the industry   2.86% . Even if the basis of comparison is on the average for a five year period , that of the company has outperformed the industry by more than four times that in industry at 62.86% for ACN as against that industry average of 14.12%.   See Table 1 above.   An average return on equity of 62.86%   for the past would definitely attract   investors as it would mean that for every US$100   investment, the investors would be getting more than half of the amount every years.   That would me in effect earning even more than 100% compared with the US base rate of 0.25%.   ACB indeed could be envy of many companies not only within the industry but also from other industries. The company is likewise very efficiently managed using the company’s ROA of 21% as against the industry average of 0.93%.   Such could be further proved in terms   of operating margin for the latest twelve-month period of   12. We will write a custom essay sample on Company Valuation Accenture or any similar topic specifically for you Do Not WasteYour Time HIRE WRITER Only 13.90 / page 42% as against 1.34%   industry average and in terms of net profit margin for the latest twelve-month period of 8.91% as against industry average   of 0.97%. See Table 1 above. Operating margin represents the margin after deducting cost of sales or services and operating expenses. Things need to be added or deducted further to arrive at net profit margin computation.  Ã‚   The extracted ratios mean that the management of Accenture   is doing well in the management of company assets with the participation of employees in delivering value to customers, therefore, thus the company is both profitable and operating efficiently (Meigs, Meigs and Meigs, 1995).   Liquidity connotes being able to meet a company’s currently maturing obligations and is measured normally using the current ratio and the quick asset ratio (Brigham and Houston, 2002).   Computing current ratio uses current assets to be divided to current liabilities while quick assets ratio is almost the same except that the inventory and prepaid expenses are being removed from the current assets to have a new numerator but the denominator is the same. Quick assets therefore normally include cash, marketable securities and accounts receivable and the use of quick asset ratio is very much relevant for one intending to have higher form of measuring liquidity. In such case, one would prefer quick asset ratio to that of the current ratio. If the principles   are applied now, the quick ratio of Accenture is 1.38 as against industry average of 1.85, while its current ratio was also lower at 1.38 as against industry average 2.02. Both ratios have shown lower than average but the company may still be considered liquid since a current ratio of at least 1.0 would mean that the company has sufficient current assets to pay its currently maturing obligations. In fact its interest coverage was 19.07 as against industry average of 0.39 thus indicating capacity to pay by a large margin. See Table 2 above.   Solvency Solvency refers to the company’s long-term capacity to keep up it stability over the long term (Meigs, Meigs Meigs, 1995). Normally measured by the debt to equity ratio, with the formula of having the total debt of the company divided by its total equity, a company solvency should inform investors that the company   will not survive   in the short term but it must also have a long life to recover long term investments which takes years to produce the needed returns. The debt to equity ratio of Accenture for 2008 was 0.06 as against industry average of 70.92.   See Table 2 above. The company ratio is indeed very low which means that ACN is very much solvent and stable as the company is financed mainly the stockholders’ investment. Given the very high profitability of the company under its present capital structure, it would mean the it may not resort to more borrowing in the short run and the benefits appear to accrue mainly to stockholders.   Ã‚  With its good solvency as a proof of good capital structure,   Accenture   has great changes of expanding in the future. With good solvency also, the company faces less risks than its competitors. On company’s earnings quality by comparing income statement with cash flow, looking at the company’s use of accounting principles and financial statement disclosure and foreign currency translation and earnings management. The company’s cash flows   reflected positive increase in net cash inflow per year after considering cash from operating, financing and investing activities except in 2005, which was too small compared with the average. The good results would confirm the good profitability of company as found earlier in the income statement as validated in the profitability ratios (Reuters, 2009a). The company appears also to have complied with requirements of the generally accepted accounting   principles   (GAAP)   in terms of the use of accounting principles and financial statement disclosure on foreign currency translation and earnings management. This finding is supported by the company’s external auditor having issued an unqualified opinion as to compliance with GAAP for 2008 (Reuter.com, 2009a). Having seen no ground to make adjust on the financial information, this researcher has left unchanged the information as basis of preparation of the financial ratios used earlier.   Hence the company’s earning’s quality may be considered credible as presented, audited and further verified by this researcher. To conclude, this paper has found Accenture to be more profitable, more liquid, and more solvent than the many of the rest of the players in the industry.   Its earnings quality was also found to reliable based in the unqualified opinion of the auditor, which validates compliance with GAAP.   The company is a recommended target for stock investment. References; Brigham and Houston (2002) Fundamentals of Financial Management, Thomson South-Western, London, UK Meigs, Meigs and Meigs (1995) Financial Accounting, McGraw-Hill, London, UK Reuters.com (2009a), Financial Statements for 2004 through 2008, {www document} URL,   http://www.reuters.com/finance/stocks/incomeStatement?symbol=ACN.N, Accessed April 30,2009 Reuters.com (2009b), Financial Ratios, {www document} URL,   http://www.reuters.com/finance/stocks/ratios?symbol=ACN.N,   Accessed April 30,2009