Common-Size and Trend Analysis & Roe

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1. Common-size and trend analysis & ROE

1. Interpretation of the results of the common-size and trend analysis of the BS

In the balance sheet, we can see an evolution of the inventories, it keeps decreasing from 2012-2014 (290.1 to 262.2). We can observe that the days’ inventories keep decreasing, but on another hand, according to the common-size analysis, we can easily see that these inventories still represent the same portion of the assets. Suez actually sell their inventories well and the inventory turnover keeps increasing which means that they actually generate more and more profit for one unit of sale of their inventories.

We can also observe an increase of PP&E on the year 2014 compared to 2013 (105 to 12.9), this could be explained by equipment being replaced by new ones.

Furthermore, we can see that their investment is increasing (joint venture and associates), but the cash they gain from the operating cycle are less and less able to finance their investment cycle as we can see cash and cash equivalent represents quite a low part according to the common-size analysis (between 8.37 and 9.05) And this won't be so attractive for new investors as it shows the lack of financial dependence for Suez.

1. Interpretation of the results of the common-size and trend analysis of the ICS

Sales

Their sales are decreasing as we can see this can be seen by the decreasing of cost of goods sold and inventories

(Decrease immediately from 2012-2013- Trend analysis: 2012-2014)

Turnover ratios:

Asset turnover: Decreasing (0.56 to 0.53)

Current asset turnover: Decreasing (2.20 to 2.05)

We can also deduce that Non-current assets play a larger role in the company’s revenues than current assets.

We can further see that:

Non-current asset turnover: Decreasing (0.80 to 0.75)

Indeed the fixed asset part is more consequent. We can clearly classify Suez more as a manufacturing company than a retail. We can suppose that the retail is done by another company of the group ENGIE. We can further demonstrate that by looking at the Receivables turnover ratio: Decreasing (3.97 to 3.78) receivables are low compared to sales which means receivables are generating less revenue per unit.

Equity turnover: Decreasing (2.20 to 2.05)

PP&E turnover: Overall increasing from 2012 to 2014 from 1.70 to 1.78, however it decreased since 2013 when it was at 1.85. PP&E are relatively low compared to sales but clearly higher than receivables.

Overall, the sales ratios confirm that the company’s position regarding their sales is deteriorating and their assets or equity is not generating as much revenue per unit as before. This could be explained by an inefficient use of those assets or a downhill economic perspective for this sector. Indeed the competition is high and Suez and its group (ENGIE) has legally to cede some of its market share in France.

Gross profit and gross profit margin:

Even though the sales are decreasing but the gross profit and gross profit margin increasing which can be explained by the decrease of the cost of goods sold which could be that they have better relationship with their suppliers and have discount or using their resources more efficiently.

And as their Gross profit margin keeps increasing, it means that they are more and more differentiation strategy

Operating profit:

It is increasing in 2012-2013 and decreasing in 2013-2014

Impairment increase from 2012-2013 which can be explained by the increase of the PPE

EBITDA:

It keeps decreasing, while about EBIT, it increases from 2012-2013 but they decrease from 2013-2014 which we can see that their PPE increases a lot in 2013-2014 and it brings huge increase impairment.

1. Interpretation of the results of the ROE following the alternative approach

The ROE keeps increasing which means that Suez has profitably employs their assets and shareholders’ equity. And the increase of the OROA contributes the most to the increase of the ROE. As we can see there is a relatively huge increase in NOPAT, it shows that the management of the company is efficient as its potential cash earnings without interest payments is increasing.

Furthermore, the increase of spread also contributes a lot to the increase of ROE. The spread is positive and it keeps increasing from 2012-2014 which means that the economic effect of borrowing is positive as long as the return on assets is greater than the cost of borrowing which we can show that their total liabilities are increasing.

However, the OWC is negative which means the company has problems with short term liabilities. By checking the cash conversion cycle, we can notice that their receivables are sharply decreasing in 2014, without any variation to cash and equivalents. Day’s receivable increases faster than the day’s payable. It shows that they have problems managing their current assets to meet their current liabilities. But this didn’t influence the increase of the ROE.

1. Five additional ratios

1. The reason of being selected

Cash conversion cycle:

We wanted to see if their resource management is efficient as day’s receivable and payable appeared to be high.

Cash ratio:

Cash conversion cycle hinted a liquidity problem, we wanted to check that, without inventory and receivables as they are minor and quick/current ratios were <1.

Net Debt to equity ratio

The debt to equity ratio shows extremely high figures, we want to see if they are having debt problems

Interest coverage (TIE)

The net debt to equity ratio, revealed Suez short-term debt problem, we wanted to see if the problems were being dealt with.

Solvency ratio

We want to check the situation of their overall liquidity in addition of their interest coverage to have a clear picture.

1. Interpretation of five additional ratios

Cash conversion cycle:

The day’s inventory is decreasing from 6.9 to 6.5 days, the days’ receivable is increasing from 90 to 95 days and the days’ payable is increasing at the same time from 68 to 72 days.

The cash conversion cycle keeps increasing which means that day’s receivable increases faster than the day’s payable. It shows that they have problems managing their current assets to meet their current liabilities.