TITLE: Analyzing the financial structure of Companies

Abstract:

Analyzing the financial structure of companies is crucial for understanding their financial health and performance. This article provides an overview of the different methods used to analyze the financial structure of companies. Each method offers unique insights into the company's financial structure and helps in making informed decisions. By employing these analytical methods, stakeholders can gain a comprehensive understanding of a company's financial structure and make better-informed investment decisions.

The financial structure reflects how a company funds its operations and investments, including the mix of equity and debt financing. By analyzing the financial structure, one can evaluate the company's ability to generate profits, manage its debt obligations, and make strategic financial decisions. Understanding the factors that influence the financial structure, such as industry dynamics, company size, profitability, and risk appetite, is essential for effective decision-making. This article explores the reasons for examining and analyzing the financial structure of companies and highlights its importance in financial analysis and decision-making processes.

Introduction:

The financial structure of a company encompasses a set of financial actions and arrangements used to secure financial resources and manage the company's assets and liabilities. It includes the following elements:

Financial resources: This includes the initial capital of the company, loans, equity, securities, and other financial resources used to meet the company's financial needs.

Capital structure: The capital structure pertains to the ratio between the external and internal capital of the company. It includes the ratio between equity and debt, which determines the risk and return on investment.

Debt structure: The debt structure represents the ratio between short-term and long-term debt. Debt can include loans, bonds, and other financial obligations. The debt structure can significantly affect the risk and financial stability of the company.

Share structure: The share structure indicates the distribution of shares and ownership rights. It includes the number of shares, major shareholders, share issuance, and the structure of preferred shares.

Profitability structure: The profitability structure reflects the company's ability to generate profits from sales and operational activities. It includes metrics such as net income, profit margin, return on investment, and other financial ratios that demonstrate how effectively the company generates net income relative to its assets.

Investment structure: The investment structure is related to the allocation of capital to different assets and projects within the company. It includes the distribution of capital among different departments, investment in fixed and current assets, and securing financial resources for investment purposes.

Foreign investment structure: The foreign investment structure represents the utilization of foreign financial resources, such as direct investment abroad, foreign loans, or exports. It includes the ratio of foreign capital to the company's total investments.

These factors influence the financial structure of a company and can have a significant impact on its performance and financial stability. Financial managers and decision-makers consider these factors and conduct detailed analyses to determine the optimal financial structure.

Analyzing the financial structure of companies is a systematic process that involves examining and evaluating various components of a company's financial structure. Below are several common methods used for analyzing the financial structure of Companies:

1. Financial Ratios: Using various financial ratios to analyze the company's financial structure, such as debt-to-equity ratio, debt-to-investment ratio, liquidity ratio, etc.

2. Vertical Analysis: In this method, the financial structure of the company is analyzed by dissecting and analyzing the internal details, such as debt structure, investment structure, capital allocation, liquidity, and profitability of different segments of the company.

3. Horizontal Analysis: In this method, the financial structure of the company is compared to other companies in the same industry. This involves comparing financial ratios and the performance of the company with its competitors and industry peers.

4. Industry Benchmarking: In this method, the financial structure of the company is compared to industry standards. This involves using industry financial data, performance reports, and benchmarks of similar companies.

5. Trend Analysis: In this method, changes in the company's financial structure over time are examined. This includes comparing financial ratios year over year and analyzing changes in the financial structure of the company.

Each of these methods has its advantages and limitations, and the choice of which method to use may depend on the specific circumstances and needs of the company.

In this article, I have undertaken research and data collection on the financial information of two companies, Cisco and Intel. After gathering relevant data from various sources, I aim to examine and analyze the financial structure of these two companies. The purpose of selecting these two companies was their common industry, which allows for a better comparison of their financial structures. The following sections will endeavor to present practical examples based on the financial statements of these two companies, using the information obtained.

• Financial ratios and their descriptions

1. Current Ratio:

The current ratio is a financial ratio that measures a company's ability to cover its short-term liabilities with its short-term assets. It is calculated by dividing current assets by current liabilities.

The ideal current ratio for a company depends on the industry in which it operates. In general, a current ratio of 2:1 is considered a good benchmark. This means that for every $1 of current liabilities, the company has $2 of current assets to cover those obligations. However, it's important to note that different industries may have different working capital requirements and operating cycles, which can affect the optimal current ratio.

A higher current ratio (above 2:1) indicates that the company has a strong liquidity position and can easily meet its short-term obligations. On the other hand, a lower current ratio (below 1:1) suggests that the company may face difficulties in meeting its short-term obligations and may be experiencing liquidity issues.

A good current ratio would typically be above 1:1, indicating that the company has sufficient current assets to cover its current liabilities.

Example: Let's consider a company with current assets of $500,000 and current liabilities of $200,000. The current ratio would be calculated as follows:

Current Ratio = Current Assets / Current Liabilities

Current Ratio = $500,000 / $200,000

Current Ratio = 2.5

In this section, I have focused on calculating and comparing the current ratio of two companies, Intel and Cisco, in the year 2022.

For Intel:

Current Assets = $50,407 million

Current Liabilities = $32,155 million

Current Ratio for Intel = $50,407 million / $32,155 million ≈ 1.566

For Cisco:

Current Assets = $36,717 million

Current Liabilities = $25,640 million

Current Ratio for Cisco = $36,717 million / $25,640 million ≈ 1.432

Based on the calculated current ratios, Intel has a higher current ratio (1.566) compared to Cisco (1.432). This suggests that Intel may have a better ability to cover its short-term liabilities using its current assets. However, it's important to note that the interpretation of the current ratio should consider industry norms and other financial indicators for a comprehensive analysis of a company's financial performance.

2. Debt-to-Equity Ratio:

The debt-to-equity ratio measures the proportion of a company's total debt relative to its shareholders' equity. It is calculated by dividing the total debt by the shareholders' equity.

The debt-to-equity ratio is an important financial indicator that reflects the company's financial leverage and risk. A higher ratio indicates a higher level of debt relative to equity, which may suggest a higher financial risk. Conversely, a lower ratio indicates a lower level of debt relative to equity, indicating a lower financial risk.

The optimal debt to equity ratio can vary depending on various factors such as industry, company size, and risk appetite. However, a commonly recommended range for a healthy debt to equity ratio is between 0.5 and 1.5.

A debt to equity ratio below 0.5 indicates that the company relies more on equity financing than debt financing, which suggests a lower financial risk. On the other hand, a debt to equity ratio above 1.5 indicates a higher level of debt relative to equity, which may indicate a higher financial risk and potential difficulties in meeting debt obligations.

It's important to note that the optimal debt to equity ratio can also depend on the company's growth plans, profitability, and cash flow generation. Each company should evaluate its specific circumstances and financial goals when determining the appropriate debt to equity ratio.

Example: a company has a total debt of $500,000 and shareholders' equity of $1,000,000, the debt to equity ratio would be 0.5. This means that the company has $0.50 in debt for every $1 of shareholders' equity.

I will calculate and compare this ratio for two companies, Intel and Cisco, in the year 2022.

Debt of Intel at the end of 2022: $42.051 million

Debt of Cisco at the end of 2022: $9.515 million

Shareholders' equity of Intel at the end of 2022: $103.286 million

Shareholders' equity of Cisco at the end of 2022: $39.773 million

Using these numbers, we can calculate the Debt-to-Equity Ratio for each company:

Debt-to-Equity Ratio of Intel = Debt of Intel / Shareholders' equity of Intel

Debt-to-Equity Ratio of Cisco = Debt of Cisco / Shareholders' equity of Cisco

Debt-to-Equity Ratio of Intel = $42.051 million / $103.286 million ≈ 0.407

Debt-to-Equity Ratio of Cisco = $9.515 million / $39.773 million ≈ 0.239

Based on the calculated ratios, we can see that Intel has a higher Debt-to-Equity Ratio of approximately 0.407, compared to Cisco's ratio of approximately 0.239. This indicates that Intel has a higher proportion of debt relative to its shareholders' equity, suggesting higher financial leverage.

3. Profit Margin:

Profit Margin is a financial metric that measures the profitability of a company by indicating the percentage of each revenue dollar that translates into profit. It is a key indicator of a company's ability to generate profit from its operations.

The Profit Margin is calculated by dividing the net profit by the total revenue and then multiplying the result by 100 to express it as a percentage. A higher profit margin indicates that the company is generating more profit per dollar of revenue, which is generally considered favorable.

A higher profit margin can be a result of various factors, such as efficient cost management, higher pricing power, effective sales and marketing strategies, or a focus on high-margin products or services. On the other hand, a lower profit margin may indicate lower profitability, higher production or operating costs, or pricing pressures in the market.

It's important to note that the ideal profit margin can vary by industry. Some industries naturally have higher profit margins due to their unique characteristics, while others operate on lower margins due to competitive pressures or higher production costs.

EXAMPLE: Let's consider Company A and Company B, both operating in the same industry. Company A generates $1,000,000 in revenue and has a net profit of $200,000. Company B, on the other hand, generates $2,000,000 in revenue and has a net profit of $300,000.

To calculate the Profit Margin for each company:

Company A: ($200,000 / $1,000,000) * 100 = 20%

Company B: ($300,000 / $2,000,000) * 100 = 15%

In this example, Company A has a higher Profit Margin of 20%, indicating that it generates more profit per dollar of revenue compared to Company B, which has a Profit Margin of 15%.

• To calculate the Profit Margin for Cisco and Intel, we need the net income and the net sales. Here are the calculations:

For Cisco:

Net Income (2022): $11,812 million

Net Sales (2022): $51,557 million

Profit Margin (2022) = (Net Income / Net Sales) * 100

= ($11,812 million / $51,557 million) * 100

≈ 22.93%

For Intel:

Net Income (2022): $8,017 million

Net Sales (2022): $63,054 million

Profit Margin (2022) = (Net Income / Net Sales) * 100

= ($8,017 million / $63,054 million) * 100

≈ 12.71%

Comparing the results:

Cisco's Profit Margin in 2022: 22.93%

Intel's Profit Margin in 2022: 12.71%

Based on these calculations, Cisco has a higher Profit Margin compared to Intel in 2022. This means that Cisco is generating a higher percentage of profit for every dollar of net sales compared to Intel.

4. Return on Assets (ROA):

Return on Assets (ROA) is a financial ratio that measures a company's profitability of to its total assets. It indicates how effectively a company is utilizing its assets to generate profits.

The formula to calculate ROA is as follows:

ROA = Net Income / Total Assets

Net Income refers to the company's net profit after deducting all expenses, including taxes and interest. Total Assets represent the sum of all the company's assets, including both current and non-current assets.

For example, let's consider Company A and Company B. Company A has a net income of $500,000 and total assets of $5,000,000. Company B has a net income of $800,000 and total assets of $10,000,000.

Calculating the ROA for each company:

Company A: $500,000 / $5,000,000 = 0.10 or 10%

Company B: $800,000 / $10,000,000 = 0.08 or 8%

In this example, Company A has a ROA of 10%, indicating that for every dollar of assets, the company generates a profit of 10 cents. Company B has a ROA of 8%, suggesting lower profitability compared to Company A.

• To calculate the Return on Assets (ROA) for Cisco and Intel, we need the net income and the average total assets. Here are the calculations:

For Cisco:

Net Income (2022): $11,812 million

Total Assets (2022): $94,002 million

ROA (2022) = Net Income / Total Assets

= $11,812 million / $94,002 million

≈ 0.1255 or 12.55%

For Intel:

Net Income (2022): $8,017 million

Total Assets (2022): $182,103 million

ROA (2022) = Net Income / Total Assets

= $8,017 million / $182,103 million

≈ 0.0439 or 4.39%

Comparing the results:

Cisco's ROA in 2022: 12.55%

Intel's ROA in 2022: 4.39%

Based on these calculations, Cisco has a higher Return on Assets (ROA) compared to Intel in 2021. This indicates that Cisco is generating higher returns on its total assets compared to Intel.

5. Return on Equity (ROE):

Return on Equity (ROE) is a financial ratio that measures the profitability of a company to its shareholders' equity. It indicates how efficiently a company is generating profits from the investment made by its shareholders.

The formula to calculate ROE is as follows:

ROE = Net Income / Shareholders' Equity

Net Income represents the company's total profits after deducting all expenses, taxes, and interest. Shareholders' Equity, also known as net worth or book value, is the residual interest in the company's assets after deducting liabilities.

ROE is a key metric used by investors and analysts to assess a company's profitability and the efficiency of its capital utilization. A higher ROE is generally preferred as it indicates better profitability and a higher return on the shareholders' investment.

For example, let's consider Company X and Company Y. Company X has a net income of $1,000,000 and shareholders' equity of $5,000,000. Company Y has a net income of $800,000 and shareholders' equity of $10,000,000.

Calculating the ROE for each company:

Company X: $1,000,000 / $5,000,000 = 0.20 or 20%

Company Y: $800,000 / $10,000,000 = 0.08 or 8%

In this example, Company X has an ROE of 20%, indicating that for every dollar of shareholders' equity, the company generates a profit of 20 cents. Company Y has an ROE of 8%, suggesting lower profitability compared to Company X.

• To calculate the Return on Equity (ROE) for Cisco and Intel, we need the net income attributable to common shareholders and the average shareholders' equity. Here are the calculations:

For Cisco:

Net Income (2022): $11,812 million

Shareholders' Equity (2022): $39,773 million

ROE (2022) = Net Income / Shareholders' Equity

= $11,812 million / $39,773 million

≈ 0.2972 or 29.72%

For Intel:

Net Income (2022): $8,017 million

Shareholders' Equity (2022): $103,286 million

ROE (2022) = Net Income / Shareholders' Equity

= $8,017 million / $103,286 million

≈ 0.0776 or 7.76%

Comparing the results:

Cisco's ROE in 2022: 29.72%

Intel's ROE in 2022: 7.76%

Based on these calculations, Cisco has a higher Return on Equity (ROE) compared to Intel in 2022. This indicates that Cisco is generating higher returns for its shareholders' equity compared to Intel.

6. Earnings per Share (EPS):

Earnings per Share (EPS) is a financial metric that represents the portion of a company's profit allocated to each outstanding share of common stock. It measures the profitability of a company on a per-share basis and is an important indicator for investors and analysts.

EPS is calculated by dividing the net income of the company by the weighted average number of outstanding shares during a specific period.

The formula to calculate EPS is as follows:

EPS = Net Income / Weighted Average Number of Shares

EPS is a widely used measure to assess a company's profitability and is often compared to analysts' estimates or historical EPS values. It is used by investors to evaluate the potential return on their investment and to compare the performance of different companies within the same industry.

It's important to note that EPS can be reported on a basic EPS or diluted EPS basis, depending on whether the company has any potentially dilutive securities, such as stock options or convertible bonds. Diluted EPS takes into account the potential impact of these securities on the earnings per share calculation.

Overall, EPS provides valuable insights into a company's profitability and is an important factor for investors to consider when making investment decisions.

For example, let's consider Company X, which has a net income of $1,000,000 and a weighted average of 500,000 outstanding shares. To calculate EPS:

EPS = $1,000,000 / 500,000 = $2 per share

This means that for every outstanding share of Company X, the company generates $2 in earnings.

• To calculate the Earnings per Share (EPS) for Cisco and Intel, we need the net income attributable to common shareholders and the weighted average number of common shares outstanding. Here are the calculations:

For Cisco:

Net Income (2022): $11,812 million

Weighted Average Common Shares Outstanding (2022): 4,217 shares

EPS (2022) = Net Income / Weighted Average Common Shares Outstanding

= $11,812 million / 4,217 shares

= $2.80 per share

For Intel:

Net Income (2022): $8,017 million

Weighted Average Common Shares Outstanding (2022): 4,137 shares

EPS (2022) = Net Income / Weighted Average Common Shares Outstanding

= $8,017 million / 4,137 shares

= $1.94 per share

Comparing the results:

Cisco's EPS in 2022: $2.80 per share

Intel's EPS in 2022: $1.94 per share

Based on these calculations, Cisco has a higher EPS compared to Intel in 2022, indicating potentially higher profitability per share for Cisco shareholders.

• Vertical Analysis

Vertical Analysis, also known as common-size analysis, is a financial analysis method that examines the proportions of different financial statement items about a base value. It involves expressing each line item as a percentage of a common base, typically the total revenue or net sales for the income statement and the total assets for the balance sheet.

The purpose of vertical analysis is to analyze the relative importance of each line item and understand the composition of financial statements. Converting the numbers into percentages, it allows for easy comparison and identification of trends over time.

In a vertical analysis of the income statement, each expense item is expressed as a percentage of the total revenue. This helps identify the proportion of revenue that is allocated to different expense categories such as cost of goods sold, operating expenses, and taxes. It provides insights into the cost structure and profitability of the company.

In a vertical analysis of the balance sheet, each asset, liability, and equity item is expressed as a percentage of the total assets. This enables an understanding of the relative significance of different assets, the leverage position of the company, and the mix of equity and debt financing.

For example, let's consider a company's income statement with total revenue of $1,000,000. The vertical analysis reveals that the cost of goods sold is 40% of the revenue, operating expenses are 30%, taxes are 10%, and net income is 20%. This analysis helps in assessing the efficiency of cost management, the impact of taxes, and the overall profitability.

Similarly, in the balance sheet vertical analysis, if the total assets are $5,000,000, accounts receivable are 25% of total assets, inventory is 15%, and total liabilities are 40%, it provides insights into the liquidity position, asset composition, and debt-to-asset ratio of the company.

Vertical analysis facilitates comparisons between different companies or different periods within the same company. It helps identify trends, anomalies, and areas that require further investigation. By highlighting the proportional representation of each line item, vertical analysis enhances the understanding of a company's financial position and performance.

The percentages are calculated for the vertical analysis:

For the income statement

Cost of Sales as a percentage of Revenue: (Cost of Sales / Revenue) * 100

Operating Expenses as a Percentage of Revenue: (Operating Expenses / Revenue) * 100

Net Income as a percentage of Revenue: (Net Income / Revenue) * 100

For the balance sheet

Total Liabilities as a percentage of Total Assets: (Total Liabilities / Total Assets) * 100

Shareholders' Equity as a percentage of Total Assets: (Shareholders' Equity / Total Assets) * 100

Let's calculate the percentages for both Cisco and Intel:

Vertical Analysis for Cisco (The Year 2022):

Cost of Sales as a percentage of Revenue: (19,309 / 51,557) * 100 = 37.5%

Operating Expenses as a percentage of Revenue: (18,279 / 51,557) * 100 = 35.5%

Net Income as a percentage of Revenue: (11,812 / 51,557) * 100 = 22.9%

Total Liabilities as a percentage of Total Assets: (54,229 / 94,002) * 100 = 57.7%

Shareholders' Equity as a percentage of Total Assets: (39,773 / 94,002) * 100 = 42.3%

Vertical Analysis for Intel (The Year 2022):

Cost of Sales as a percentage of Revenue: (36,188 / 63,054) * 100 = 57.4%

Operating Expenses as a percentage of Revenue: (24,532 / 63,054) * 100 = 39%

Net Income as a percentage of Revenue: (8,017 / 63,054) * 100 = 12.7%

Total Liabilities as a percentage of Total Assets: (78,817 / 182,103) * 100 = 43.3%

Shareholders' Equity as a percentage of Total Assets: (103,286 / 182,103) * 100 = 56.7%

By calculating these percentages, we can analyze and compare the relative proportions of different financial metrics for each company.

Let's compare the results:

Income Statement:

Cisco has a higher net income margin (22.9%) compared to Intel (12.7%), indicating that Cisco is more profitable relative to its revenue.

Cisco has a lower cost of goods sold as a percentage of revenue (37.5%) compared to Intel (57.4%), suggesting that Cisco has better cost management.

Balance Sheet:

Cisco has a higher proportion of liabilities to total assets (57.7%) compared to Intel (43.3%), indicating that Cisco relies more on debt financing.

Intel has a higher proportion of shareholders' equity to total assets (56.7%) compared to Cisco (42.3%), suggesting that Intel has a stronger equity position.

Overall, Cisco shows better profitability and cost management, while Intel has a stronger equity position. The differences in vertical analysis metrics highlight the contrasting financial characteristics of the two companies.

• Horizontal Analysis

Horizontal Analysis، also known as trend analysis is a financial analysis method that involves comparing financial data over a series of periods to identify patterns, trends, and changes in performance. It allows for the evaluation of a company's financial performance and position over time.

In horizontal analysis, financial statements such as the income statement and balance sheet are examined to assess how specific line items have changed over multiple reporting periods. The analysis focuses on identifying the percentage or absolute change in values from one period to another.

By applying horizontal analysis to various financial statement line items such as expenses, assets, and liabilities, it is possible to identify trends, outliers, and areas of concern. This analysis helps in assessing the financial health and performance of a company over time, enabling decision-makers to make informed strategic and operational decisions.

For example, let's consider a company's revenue for the past three years: Year 1 - $1,000,000, Year 2 - $1,200,000, Year 3 - $1,500,000. By conducting a horizontal analysis, we can calculate the percentage change in revenue for each year relative to the previous year.

Year 2: (($1,200,000 - $1,000,000) / $1,000,000) * 100 = 20% increase

Year 3: (($1,500,000 - $1,200,000) / $1,200,000) * 100 = 25% increase

The horizontal analysis reveals that the company's revenue has been increasing at a steady rate over the three-year, with a 20% increase in Year 2 and a further 25% increase in Year 3.

• Horizontal analysis of Intel and Cisco:

To perform horizontal analysis for Intel, we will compare the income statement and balance sheet data between the years 2021 and 2022. Here is the comparison of key financial figures:

Income Statement

Revenue/Net Sales:

The Year 2021: $79,024 million The Year 2022: $63,054 million

Cost of Goods Sold:

The Year 2021: $35,209 million The Year 2022: $36,188 million

Operating Expenses:

The Year 2021: $24,359 million The Year 2022: $24,532 million

Net Income:

The Year 2021: $19,868 million The Year 2022: $8,017 million

Balance Sheet

Total Assets:

The Year 2021: $168,406 million The Year 2022: $182,103 million

Total Liabilities:

The Year 2021: $73,015 million The Year 2022: $78,817 million

Shareholders' Equity:

The Year 2021: $95,391 million The Year 2022: $103,286 million

Please note that the above figures are in millions of dollars. By analyzing these numbers, we can assess the changes in revenue, expenses, net income, total assets, total liabilities, and shareholders' equity from 2021 to 2022.

To calculate horizontal analysis, we need to determine the percentage change in financial figures from one period to another. Here is the horizontal analysis for Intel based on the provided information:

Income Statement

Revenue/Net Sales:

Percentage Change = ((Revenue 2022 - Revenue 2021) / Revenue 2021) * 100

Percentage Change = ((63,054 - 79,024) / 79,024) * 100

Percentage Change = -20.21% (approx.)

Cost of sales:

Percentage Change = ((Cost of Sales 2022 - Cost of Sales 2021) / Cost of Sales 2021) * 100

Percentage Change = ((36,188 - 35,209) / 35,209) * 100

Percentage Change = 2.78% (approx.)

Operating Expenses:

Percentage Change = ((Operating Expenses 2022 - Operating Expenses 2021) / Operating Expenses 2021) * 100

Percentage Change = ((24,532 - 24,359) / 24,359) * 100

Percentage Change = 0.71% (approx.)

Net Income:

Percentage Change = ((Net Income 2022 - Net Income 2021) / Net Income 2021) * 100

Percentage Change = ((8,017 - 19,868) / 19,868) * 100

Percentage Change = -59.67% (approx.)

Balance Sheet

Total Assets:

Percentage Change = ((Total Assets 2022 - Total Assets 2021) / Total Assets 2021) * 100

Percentage Change = ((182,103 - 168,406) / 168,406) * 100

Percentage Change = 8.13% (approx.)

Total Liabilities:

Percentage Change = ((Total Liabilities 2022 - Total Liabilities 2021) / Total Liabilities 2021) * 100

Percentage Change = ((78,817 - 73,015) / 73,015) * 100

Percentage Change = 7.96% (approx.)

Shareholders' Equity:

Percentage Change = ((Shareholders' Equity 2022 - Shareholders' Equity 2021) / Shareholders' Equity 2021) * 100

Percentage Change = ((103,286 - 95,391) / 95,391) * 100

Percentage Change = 8.28% (approx.)

These percentage changes represent the growth or decline in each financial figure from 2021 to 2022. Negative values indicate a decrease, while positive values indicate an increase.

To perform horizontal analysis for Cisco, we will compare the income statement and balance sheet data between the years 2021 and 2022. Here is the comparison of key financial figures:

Income Statement

Revenue/Net Sales:

The Year 2021: $49,818 million The Year 2022: $51,557 million

Cost of Sales:

The Year 2021: $17,924 million The Year 2022: $19,309 million

Operating Expenses:

The Year 2021: $19,061 million The Year 2022: $18,279 million

Net Income:

The Year 2021: $10,591 million The Year 2022: $11,812 million

Balance Sheet

Total Assets:

The Year 2021: $97,497 million The Year 2022: $94,002 million

Total Liabilities:

The Year 2021: $56,222 million The Year 2022: $54,229 million

Shareholders' Equity:

The Year 2021: $41,275 million The Year 2022: $39,773 million

• To calculate the horizontal analysis for Cisco based on the provided information, we need to determine the percentage change in financial figures from one period to another:

Income Statement

Revenue/Net Sales:

Percentage Change = ((Revenue 2022 - Revenue 2021) / Revenue 2021) * 100

Percentage Change = ((51,557 - 49,818) / 49,818) * 100

Percentage Change = 3.50% (approx.)

Cost of sales:

Percentage Change = ((Cost of Sales 2022 - Cost of Sales 2021) / Cost of Sales 2021) * 100

Percentage Change = ((19,309 - 17,924) / 17,924) * 100

Percentage Change = 7.72% (approx.)

Operating Expenses:

Percentage Change = ((Operating Expenses 2022 - Operating Expenses 2021) / Operating Expenses 2021) * 100

Percentage Change = ((18,279 - 19,061) / 19,061) * 100

Percentage Change = -3.89% (approx.)

Net Income:

Percentage Change = ((Net Income 2022 - Net Income 2021) / Net Income 2021) * 100

Percentage Change = ((11,812 - 10,591) / 10,591) * 100

Percentage Change = 11.52% (approx.)

Balance Sheet

Total Assets:

Percentage Change = ((Total Assets 2022 - Total Assets 2021) / Total Assets 2021) * 100

Percentage Change = ((94,002 - 97,497) / 97,497) * 100

Percentage Change = -3.59% (approx.)

Total Liabilities:

Percentage Change = ((Total Liabilities 2022 - Total Liabilities 2021) / Total Liabilities 2021) * 100

Percentage Change = ((54,229 - 56,222) / 56,222) * 100

Percentage Change = -3.54% (approx.)

Shareholders' Equity:

Percentage Change = ((Shareholders' Equity 2022 - Shareholders' Equity 2021) / Shareholders' Equity 2021) * 100

Percentage Change = ((39,773 - 41,275) / 41,275) * 100

Percentage Change = -3.63% (approx.)

These percentage changes represent the growth or decline in each financial figure from 2021 to 2022. Negative values indicate a decrease, while positive values indicate an increase.

• Here is a comparison of the horizontal analysis results for Intel and Cisco based on the provided data:

Revenue/Net Sales:

Intel: The revenue decreased from $79,024 million in 2021 to $63,054 million in 2022, indicating a decline of 20.19%.

Cisco: The revenue increased from $49,818 million in 2021 to $51,557 million in 2022, representing a growth of 3.50%.

Cost of Goods Sold:

Intel: The Cost of Sales increased from $35,209 million in 2021 to $36,188 million in 2022, showing a growth of 2.78%.

Cisco: The Cost of Sales increased from $17,924 million in 2021 to $19,309 million in 2022, indicating a growth of 7.72%.

Operating Expenses:

Intel: The operating expenses increased from $24,359 million in 2021 to $24,532 million in 2022, representing a growth of 0.71%.

Cisco: The operating expenses decreased from $19,061 million in 2021 to $18,279 million in 2022, indicating a decline of 3.89%.

Net Income:

Intel: The net income decreased from $19,868 million in 2021 to $8,017 million in 2022, reflecting a decline of 59.60%.

Cisco: The net income increased from $10,591 million in 2021 to $11,812 million in 2022, showing a growth of 11.52%.

Total Assets:

Intel: The total assets increased from $168,406 million in 2021 to $182,103 million in 2022, indicating a growth of 8.12%.

Cisco: The total assets decreased from $97,497 million in 2021 to $94,002 million in 2022, reflecting a decline of 3.59%.

Total Liabilities:

Intel: The total liabilities increased from $73,015 million in 2021 to $78,817 million in 2022, showing a growth of 7.96%.

Cisco: The total liabilities decreased from $56,222 million in 2021 to $54,229 million in 2022, indicating a decline of 3.54%.

Shareholders' Equity:

Intel: The shareholders' equity increased from $95,391 million in 2021 to $103,286 million in 2022, representing a growth of 8.27%.

Cisco: The shareholders' equity decreased from $41,275 million in 2021 to $39,773 million in 2022, reflecting a decline of 3.63%.

These comparisons provide insights into the changes in various financial categories for both Intel and Cisco. It is important to note that these figures are based on the provided data and represent the percentage changes from 2021 to 2022.

• Industry benchmarking

Industry benchmarking is a process of comparing a company's financial and operational performance with the performance of other companies in the same industry. It provides valuable insights into how well a company is performing relative to its peers and allows for identifying areas of strength and areas that need improvement.

To conduct industry benchmarking, key performance indicators (KPIs) are selected based on the industry's standards and commonly used metrics. These KPIs can include financial metrics such as revenue growth, profitability ratios, and return on investment, as well as operational metrics such as customer satisfaction, production efficiency, and market share.

For example, let's consider a company in the retail industry. To benchmark its financial performance, the company can compare its revenue growth rate with the average revenue growth rate of other similar-sized retail companies in the industry. If the company's revenue growth is significantly lower than the industry average, it may indicate a need for further analysis to identify the reasons behind the underperformance.

Similarly, operational benchmarks can be used to compare metrics such as customer satisfaction scores or inventory turnover rates. If a company's customer satisfaction score is consistently below the industry average, it may indicate a need to improve customer service or address issues related to product quality or delivery.

Industry benchmarking provides companies with valuable insights into their relative performance and helps identify best practices within the industry. It enables companies to set realistic performance targets, identify areas for improvement, and make informed decisions to enhance their competitive position.

It's important to note that industry benchmarks can vary based on factors such as company size, geographical location, and market segment. Therefore, it is crucial to select appropriate benchmarking sources and ensure that the comparisons are relevant and meaningful to the specific company and industry being analyzed.

• Cisco operates in the technology industry, specifically in the networking and communications equipment sector. As a leading multinational corporation, Cisco is widely recognized as a dominant player in the industry. The company offers a broad range of products and services, including networking hardware, software, and solutions for both enterprise and service provider customers.

The technology industry is characterized by rapid innovation, evolving customer needs, and intense competition. Cisco operates in a highly dynamic market where advancements in networking technologies and digital transformation continue to drive demand for their products and services.

Cisco's industry is influenced by various factors, including:

Technological advancements: The industry is driven by advancements in networking, cloud computing, cybersecurity, Internet of Things (IoT), and artificial intelligence (AI). Cisco focuses on staying at the forefront of these developments to maintain its competitive edge.

Increasing data demands: The proliferation of connected devices, rising data volumes, and the need for seamless connectivity have created significant opportunities for Cisco. The industry is adapting to the growing demand for bandwidth, network speed, and reliable communication infrastructure.

Digital transformation: As businesses and organizations undergo digital transformations, the need for scalable and secure networking solutions becomes paramount. Cisco plays a crucial role in providing the necessary infrastructure to support digital initiatives.

Competitive landscape: The industry is highly competitive, with several major players competing for market share. Cisco faces competition from other technology giants, networking equipment manufacturers, and emerging startups.

Overall, the technology industry, including Cisco, operates in a dynamic and fast-paced environment, driven by technological advancements, changing customer demands, and intense competition. Cisco's position as a leader in the industry is supported by its strong product portfolio, innovative solutions, and global presence.

Intel operates in the semiconductor industry, which is a crucial component of the broader technology sector. As one of the world's largest semiconductor chip manufacturers, Intel plays a significant role in driving innovation and powering various computing devices and technologies.

The semiconductor industry is essential for the development and production of integrated circuits, microprocessors, memory chips, and other electronic components used in computers, mobile devices, data centers, and emerging technologies. It serves as a foundation for advancements in areas such as artificial intelligence, autonomous vehicles, cloud computing, and the Internet of Things.

• Trend Analysis

Trend analysis is a technique used to analyze data over a period of time to identify patterns, tendencies, and changes in performance. It involves studying historical data and extrapolating those patterns into the future to make informed decisions and predictions.

Trend analysis can be applied to various aspects of a business, such as financial performance, sales, market trends, customer behavior, and more. By examining trends, businesses can gain insights into their past performance, understand the underlying factors influencing their results, and make strategic decisions for the future.

For example, let's consider a company in the technology industry. By analyzing its financial statements over the past five years, the company may observe a consistent upward trend in revenue growth. This indicates that the company's sales have been increasing steadily over time, which could be a positive indicator of its market position and customer demand.

Similarly, trend analysis can be applied to other financial metrics such as profitability ratios, such as gross profit margin or net profit margin. If the trend shows a decline in profitability over time, it may suggest potential issues that need to be addressed, such as increasing costs or pricing pressures.

Trend analysis can also be used to monitor market trends and customer behavior. For instance, an e-commerce company may analyze the trend of online shopping and mobile usage to identify shifts in consumer preferences. This information can help the company adjust its marketing strategies, optimize its website for mobile devices, and stay ahead of competitors.

By utilizing trend analysis, businesses can make more accurate forecasts, set realistic goals, and adapt their strategies to changing market conditions. However, it's important to consider that trends can be influenced by various external factors, and historical performance may not always guarantee future results. Therefore, trend analysis should be used in conjunction with other analytical techniques and market research to make well-informed decisions.

• The trend analysis ratios for Intel for the two-year period. Here are the calculations:

1. Revenue Growth Rate:

Year 2021 to 2022: (63,054 - 79,024) / 79,024 * 100 = -20.17%

2. Net Income Growth Rate:

Year 2021 to 2022: (8,017 - 19,868) / 19,868 * 100 = -59.62%

3. Total Assets Growth Rate:

Year 2021 to 2022: (182,103 - 168,406) / 168,406 * 100 = 8.12%

4. Total Liabilities Growth Rate:

Year 2021 to 2022: (78,817 - 73,015) / 73,015 * 100 = 7.96%

5. Shareholders' Equity Growth Rate:

Year 2021 to 2022: (103,286 - 95,391) / 95,391 * 100 = 8.29%

Please note that these calculations represent the growth rates for each respective ratio over the specified two-year period.

The trend analysis ratios for Cisco for the two-year period. Here are the calculations:

1. Revenue Growth Rate:

Year 2021 to 2022: (51,557 - 49,818) / 49,818 * 100 = 3.49%

2. Net Income Growth Rate:

Year 2021 to 2022: (11,812 - 10,591) / 10,591 * 100 = 11.53%

3. Total Assets Growth Rate:

Year 2021 to 2022: (94,002 - 97,497) / 97,497 * 100 = -3.58%

4. Total Liabilities Growth Rate:

Year 2021 to 2022: (54,229 - 56,222) / 56,222 * 100 = -3.54%

5. Shareholders' Equity Growth Rate:

Year 2021 to 2022: (39,713 - 41,275) / 41,275 * 100 = -3.78%

Please note that these calculations represent the growth rates for each respective ratio over the specified two-year period.

• Let's compare the trend analysis calculations for the two companies:

1. Revenue Growth Rate:

Intel (2021-2022): (63,054 - 79,024) / 79,024 * 100 = -20.21%

Cisco (2021-2022): (51,557 - 49,818) / 49,818 * 100 = 3.50%

Comparison: Intel experienced a negative revenue growth rate, indicating a decline in sales, while Cisco had a positive growth rate, indicating an increase in sales.

2. Net Income Growth Rate:

Intel (2021-2022): (8,017 - 19,868) / 19,868 * 100 = -59.66%

Cisco (2021-2021): (11,812 - 10,591) / 10,591 * 100 = 11.51%

Comparison: Intel had a significant decline in net income, while Cisco experienced a moderate increase in net income.

3. Total Assets Growth Rate:

Intel (2021-2022): (182,103 - 168,406) / 168,406 * 100 = 8.12%

Cisco (2021-2021): (94,002 - 97,497) / 97,497 * 100 = -3.58%

Comparison: Intel had a positive growth rate in total assets, indicating an expansion, while Cisco experienced a slight decrease in total assets.

4. Total Liabilities Growth Rate:

Intel (2021-2022): (78,817 - 73,015) / 73,015 * 100 = 7.94%

Cisco (2021-2021): (54,229 - 56,222) / 56,222 * 100 = -3.54%

Comparison: Both Intel and Cisco had growth rates in total liabilities, but Intel had a higher rate, indicating a larger increase.

5. Shareholders' Equity Growth Rate:

Intel (2021-2022): (103,286 - 95,391) / 95,391 * 100 = 8.27%

Cisco (2021-2021): (39,713 - 41,275) / 41,275 * 100 = -3.78%

Comparison: Intel had a positive growth rate in shareholders' equity, indicating an increase in net worth, while Cisco experienced a decline.

In summary, Intel had negative revenue and net income growth rates, but positive growth rates in total assets and shareholders' equity. On the other hand, Cisco had positive growth rates in revenue and net income, but negative growth rates in total assets, total liabilities, and shareholders' equity. These comparisons reflect the financial performance and changes in key ratios for the two companies over the specified period.

• Conclusion:

Based on the extensive analysis conducted on Cisco and Intel, the following comprehensive conclusions can be drawn:

Financial Performance: Cisco has exhibited stronger financial performance compared to Intel in several areas. Cisco has shown higher profitability, as indicated by its higher profit margin and return on equity (ROE). Additionally, Cisco has also demonstrated better asset utilization, as reflected in its higher return on assets (ROA). These findings suggest that Cisco has been more efficient in generating profits and utilizing its resources effectively.

Trend Analysis: Both Cisco and Intel have experienced fluctuations in their financial metrics over the analyzed period. Cisco has shown more consistent performance, with relatively stable revenue and net income. On the other hand, Intel's revenue and net income have declined, indicating potential challenges in maintaining growth and profitability.

Vertical and Horizontal Analysis: Vertical and horizontal analysis reveal trends in financial statements and provide insights into the companies' financial health and performance over time. Cisco has shown stability and positive growth in its key financial figures, while Intel has experienced some decline or slower growth in certain areas.

Strategy Evaluation: Cisco's financial performance suggests that its business strategy and operational efficiency have been more successful compared to Intel. Cisco has been able to generate higher profits from its net sales and utilize shareholders' equity and assets more effectively. This indicates a strong strategic focus on profitability and resource management.

Investment Decision: Based on the analyzed data and financial ratios, Cisco appears to be a more attractive investment option. Its stronger financial performance and consistent growth indicate a more stable and potentially higher return on investment. However, it's important to consider other factors such as market conditions, competition, and future growth prospects before making any investment decisions.

Overall, if I were to invest, I would lean towards Cisco due to its stronger financial performance and more favorable financial ratios.