Comparative Analysis of Financial Statements Between Two Companies

Only available on StudyMode
  • Download(s): 1457
  • Published: November 7, 2008
Open Document
Text Preview
A Case Report on the Financial Statements of Reed Elsevier and Thomson Corporation

Executive Summary

With the objective to understand the business performance of the two entities, we reviewed the 2007 financial statements of both company and tried to obtain some insight on the profitability and solvency of each entity.

The two companies we study are: Reed Elsevier and Thomson, in the filed of information and publishing.

Reed Elsevier is listed in below stock exchanges: REN (Euronext Amsterdam), REL (London), RUK and ENL (NYSE). Thomson was shown (before acquiring Reuters) as TOC (NYSE) and TOC (TSX).

As the two multinational companies we are studying covering diversified businesses, here in the article we are only focusing on the HQ level, and also from a global perspective rather than going into regions.

Note: the financial report of Reed Elsevier is presented in Euro while Thomson’s report is presented in US Dollar.

Article Outline
Income Statement……………………………………………………………………2 Cash Flow Statement………………………………………………………………...5 Balance Sheet………………………………………………………………………..8 Final Thoughts……………………………………………………………………...11 Appendix (Ratios) ………………………………………………………………….12

***
Income statement
Income statement - Reed Elsevier (Euro)

Income statement - Thomson (US dollars)

We know that any company’s income statement reveals much more than its earnings. It provides important insights into how management is controlling expenses, the amount of interest income and expense and taxes paid. We can compare the income statements of the two companies we chose by examining various profit margins such as the gross profit margin, operating profit margin, and net profit margin.

Gross Profit Margin
Gross profit margin will help us to understand company’s manufacturing and distribution efficiency during the production process. Gross Profit -----divided by------Total Revenue

Reed Elsevier: 4,322 / 6,693 = 0.6
Thomson Corporation: 2,021 / 7,296 = 0.3

Reed Elsevier has a higher profit margin than Thomson and therefore appears to be more efficient. However, the information for Thomson is not as accurate as it should as the amount for Cost of Sales includes marketing and administrative expenses.

Operating Margin
Lets look at yet another indicator of management’s efficiency in these two companies and that’s is operating margin. Operating margin for the Thompson Corporation: 1,297 / 7,296 = 0.17 Operating margin for Reed Elsevier: 1,296 / 6,693 = 0.19

The operating margin of Reed Elsevier is a little bit higher, which means the company has lower fixed costs and a better gross margin. It gives company’s management more flexibility in determining prices and also provides an added measure of safety during tough economic times.

Interest coverage ratio
To better understand company’s short-term financial health, we can calculate interest coverage ratio for each of these corporations: Thompson Corporation has the following ratio: 1,263 / 167 = 7.5 Reed Elsevier: 1,388 / 203= 6.8

The interest coverage ratio of Reed Elsevier is lower than that of Thompson’s. The company with lower ratio, Reed Elsevier in our case, has higher debt burden. Even though it was much lower than competitor’s ratio, Reed Elsevier does not have difficulties generating the necessary cash to pay its interest obligations. The consistency of earnings is tremendously important in this case. If the interest coverage ratio would be below 1.0, it would signal that the business is having difficulties generating cash to cover its obligations.

Net Income from Continuing Operation
After all of the expenses are deducted, the company is left with a figure called net income from continuing operations. This is a calculation of the profit from its continuing operations generated during the period. If we look at net income from continuing operations of Reed Elsevier, we can see increase by 302m...
tracking img