Williams' businesses produce, gather, process and transport clean-burning natural gas to heat homes and power electric generation across the country.
Williams has been around since 1908, when two Williams brothers began a construction company. That business grew into the world's leading pipeline engineering and construction firm. Under the Williams Brothers name, the company went public in 1957 with a net worth of about $8 million.
Ratios 2001 2002 2003 2004 Industry average Current 0.959 1.140 1.403 1.174 1.169 Inventory Turnover 7.925 4.580 42.054 39.784 23.586 Debt to equity 5.437 5.930 5.587 3.841 1.6 Return on assets 2.147 (1.691) (0.053) 0.388 2.7 Return on equity 13.822 (12.383) (0.349) 1.881 14.2 Gross Margin on Sales 13.893 (11.005) 0.422 1.973 1.321 Explanation
Liquidity Ratios Liquidity is an essential characteristic of every business as it demonstrates the ability an enterprise to convert its assets into cash and therefore, cover its obligations in case of necessity. Normally, the goal of every firm is to allocate its resources in the way so it would have twice as many of current assets, which are easily converted, as current liabilities. WMB fails to demonstrate the ability to cover its short term obligations with easily convertible assets. In 2001 the current ratio is 0.96, which suggests that the firm is unable to cover its current obligations fully. Although the firm demonstrates poor indicators in duration of 4 years, their ability to cover liabilities increases by 14% in 2002, and 3% in 2004.
Since 2002, the company retains .14 more than enough current assets to cover their short term obligations, gradually increasing the indicator from year to year. In 2004, the company shows a slightly more favorable result than the industry’s average. In 2003, the company indicates a dramatic increase in current ratio, raising it to 1.4 to 1. Primarily, a rapid increase is achieved by allocating the resources employed in operations more efficiently. Although, the total current assets are significantly lesser than in previous years, current liabilities are also significantly decreased, with a reduction of every obligation, especially notes payable and taxes payable. The latter is also a result of a small pretax income, compared to the results of 2001.
Acid test analysis suggests that company’s inventories total about 76% of total current assets. In some cases it is difficult to liquidate inventory for a business, especially in the given industry. WMB demonstrates only 36% ability in 2001 to cover its current obligations excluding inventory from assets liquidation. However, the ability is gradually increasing in the following years, reaching the industry standard in 2004.
Turn-over Control Ratios Turn-over control is critical for a business as it shows how efficiently a company’s assets are employed to generate a certain level of turnover. WMB shows somewhat poor ability to get the maximum turnover from their assets, having asset turn over ratio of 0.279, meaning that only 27 cents are generated from $1 of assets. In 2002, the company’s asset turnover is significantly reduced, falling almost 46%. Such significant reduction is primarily due to the fallen sales y 49% compared to the previous year. The next year’s increase in asset turnover ratio is conditioned by 200% increase in sales.
Company’s payable period is somewhat long and it significantly increases in 2002, although sales are less 49%. The payable period is significantly reduced in 2003 and 2004, as a result of cash sales dominance over credit sales. Accounts receivable significantly decreased – 35% in 2003 compared to the previous indicators.
Profitability Analysis Profitability analysis allows to determine how efficiently a firm employees its resources to accumulate its profits. WMB demonstrates an average profit margin in 2001; however its indicators significantly decrease in the following two years to negative 11% in 2002, gradually recovering to 0.42 in 2002, and stabilizing in 2004. Cost of goods sold significantly increased in the last to years compared to 2001 and 2002.
A similar pattern can be observed with ROE and ROIC where WMB demonstrates an average stability in 2001, further falling to negative results and gradually recovering during 2003 and 2004.
Leverage Analysis Leverage ratio analysis allows seeing the extent to which a company employs its long term financing. Asset to equity ratio demonstrates an increasing activity of shareholders in financing the company’s operations in 2003, raising 14% over industry’s median and 12% compared to the 2001 results. The activity gradually decreases with a noticeable decline in 2004.
Debt to assets ratio shows that the company moderately uses long term loan financing of its operations. However, in the year 2002 the company manages to increase its financing from long term debt by 29%, and in 2003 it went up 45% compared to 2001. Gradually, the company decreased its long-term obligations financing 10% below the industry median.
The information listed above would be useful to investors, investment banks, and company managers. Company managers have to know particular indicators in order to measure efficiency of the company’s operations and find out the areas that have to be altered in order to increase firm’s productivity.
Investment banks need company’s performance indicators in order to evaluate investment risk and develop appropriate combination of contract regulations. Investors have to see actual risk of the investment, and performance ratios help to evaluate well being of the firm to some extent. I would not invest in the company’s stock because of their unstable conditions and doubtful playback ability, although the latest indicators suggest company’s gradual recovery and stabilization.
Ethics of earnings management is contingent on the scale of the accounts affected and vitality of particular assets involved in the transactions. In some cases, extensive use of earnings management manipulations lead to the unfair picture of the company’s performance, and failure to disclose the actual risk of the potential investment.
Attempting to allocate most profitable sales for credit before the year end, Andy will improve current ratio, increasing current assets, return ratios, and gross margin ratios. The income will be significantly improved, and the company will display more favorable investment opportunity. However, the company increases the risk of bad debt, unfavorably alters its cash flows, and, most importantly, by shifting next year’s potential sales to this year, Andy loses an opportunity of the following year’s profits. Consequently, he creates potential danger for the next year’s income statement and might possibly use earnings management again, which will put the company on a collision course.