Merrill Lynch: Financial Analysis
Merrill Lynch
Case1
By: Giuseppe Baldino (1710230) Mario Di Teodoro (1343777) Julian Pedicelli (1949829) Sandro Posteraro (1308548)
Professor Edward Wong
FINA 405 Section C
Due: Monday January 21, 2013
Coordinates:
To: Mr. Bhatia
From: JMSB interns
Date: June 2008
Subject: Merrill Lynch financial analysis
Main Issue
Should Citi Bank of America recommend Merrill Lynch as an investment option to clients?
Recommendation
Do not recommend Merrill Lynch as a potential investment option to Citi Bank of America clients, as the company is in a poor financial position. The reason being is that Merrill Lynch’s positive cash flows are entirely coming from financing activities or borrowing to keep up, meaning they will have to repay that debt off later.
Analysis
Quantitative In terms of Leverage Risk, Merrill Lynch has a high negative exposure. The reason for this can be observed with its times interest expense ratio that has been decreasing from 2006 and therefore its EBIT is insufficient to cover its interest expense. Also, its debt/equity ratio has increased by 1.5 times from 2006 to 2007, which represents a very large increase in just one year. In terms of Liquidity we can say that Merrill Lynch has been improving. When looking at its current ratio it has improved by approximately 3% in a span of a year, although in both years the ratio is below the recommended margin of 2. Even with industry risk it is likely to be low, but it is improving. Also its cash ratio has improved by roughly 1% from 2006 to 2007. Both the increase in current and cash ratios can be largely attributed to the significant increase in cash and related assets. In terms of profitability, Merrill Lynch has been experiencing a large decline. A ROA of 4% in 2007 shows that the company does not generate a good return on itself. Also, it has a ROE of -22% in 2007, showing that shareholders are getting a bad deal from their
Case1
By: Giuseppe Baldino (1710230) Mario Di Teodoro (1343777) Julian Pedicelli (1949829) Sandro Posteraro (1308548)
Professor Edward Wong
FINA 405 Section C
Due: Monday January 21, 2013
Coordinates:
To: Mr. Bhatia
From: JMSB interns
Date: June 2008
Subject: Merrill Lynch financial analysis
Main Issue
Should Citi Bank of America recommend Merrill Lynch as an investment option to clients?
Recommendation
Do not recommend Merrill Lynch as a potential investment option to Citi Bank of America clients, as the company is in a poor financial position. The reason being is that Merrill Lynch’s positive cash flows are entirely coming from financing activities or borrowing to keep up, meaning they will have to repay that debt off later.
Analysis
Quantitative In terms of Leverage Risk, Merrill Lynch has a high negative exposure. The reason for this can be observed with its times interest expense ratio that has been decreasing from 2006 and therefore its EBIT is insufficient to cover its interest expense. Also, its debt/equity ratio has increased by 1.5 times from 2006 to 2007, which represents a very large increase in just one year. In terms of Liquidity we can say that Merrill Lynch has been improving. When looking at its current ratio it has improved by approximately 3% in a span of a year, although in both years the ratio is below the recommended margin of 2. Even with industry risk it is likely to be low, but it is improving. Also its cash ratio has improved by roughly 1% from 2006 to 2007. Both the increase in current and cash ratios can be largely attributed to the significant increase in cash and related assets. In terms of profitability, Merrill Lynch has been experiencing a large decline. A ROA of 4% in 2007 shows that the company does not generate a good return on itself. Also, it has a ROE of -22% in 2007, showing that shareholders are getting a bad deal from their