Publicly Traded Company Analysis – Intel Corporation

Introduction

Ratio analysis is one of the tools that analysts and investors use to compare the financial strengths and weaknesses of companies. After conducting an in-depth financial ratio analysis for company, it becomes possible to make a recommendation on what the company can do to compete favorably in the market (Lan, 2012). This paper gives a detailed financial ratio analysis of a publicly traded company, Intel. It then provides a recommendation as to Intel’s financial strength compared to its main competitor Qualcomm Inc. Intel is the largest publicly traded company in the semiconductors sector and in the United States. Intel’s debt-to-equity ratio is high, an indication that the company is capable of taking care of its debts. Since the growth of smartphones and tablets has resulted into a decrease in demand for personal computers, it is recommended that Intel should invest more in the mobile computing field in order to attract more investors and generate higher revenues than its major competitor, Qualcomm Inc.

Company Overview

Since Intel Corporation was founded in 1968, it has grown to become the world’s largest semiconductor company in the technology industry. Located in Santa Clara, California, Intel offers quite a number of products to consumers including software, motherboards, chipsets, and many other items. The company has a large market share in personal computing and server computing, but has less dominant position in tablet and smartphone processor than Qualcomm Inc. According to Intel Corporation (2015), Intel holds approximately 80 percent of the market share in its microprocessor segment. Initially, Intel was founded to offer semiconductor memory to customers, and this vision was first realized in 1971 when the company introduced the largest microprocessor in the world. Since then, Intel has worked hard towards realization of its mission which states that, “this decade, we will create and extend computing technology to connect and enrich the lives of every person on earth (Intel Company Information, 2012)”.

Intel Corporation operates in a total of six segments including personal computers, microprocessor segment, chipset group, data center group, flash memory group, and software service segment. The company has competitors in each and every segment with the Advanced Micro Devices and Qualcomm Inc as its major competitors in personal computer and chipset segments, Microchip Technology in the microprocessor and flash memory segments, EMC Corporation in its data center group segment, and Microsoft Corporation and Google Inc in the software service group. Based on its financial strength, Intel can take advantage of numerous opportunities in the semiconductor industry in order to compete favorably with its competitors (Intel Corporation, 2015).

Ratios

Financial ratios analysis allows auditors to perform quantitative assessment on values presented on a company’s financial statements. Financial ratios help to create a relationship among financial statements and assists analysts to compare performance of different companies in an industry. There are several categories of financial ratios that can be used to measure a company’s financial strength. The financial ratios that will be used for the purpose of this analysis include asset turnover ratio, quick ratio, current ratio, debt to equity ratio, and interest coverage ratio (Lan, 2012).

Activity ratios measure the efficiency with which a company utilizes its assets. Investors largely rely on activity ratios if they want to know the overall operational performance of a company. The best example of activity ratio is asset turnover ratio. Asset turnover ratio measures the efficiency with which a company utilizes its total assets to generate revenues. Asset turnover is calculated by dividing net revenues by average total assets. When asset turnover ratio is low, it means that a company is utilizing its assets inefficiently, and vice versa. By December 27, 2014, Intel’s asset turnover was 0.61, indicating that the company generates 0.61 United States dollars in revenue for every dollar of asset that the firm owns. Since this value is above 0.5, it can be concluded that Intel efficiently utilizes its assets to generate revenue. In the same year, Intel’s major competitor Qualcomm Inc had an asset turnover ratio of 0.55. When compared with Qualcomm Inc, it is clear that Intel utilizes its assets better to generate revenues than Qualcomm Inc (AOL Inc., 2015).

Another ratio that can be used to assess Intel’s financial strength is current ratio. This ratio measures the ability of a company to pay-off its short-term liabilities using its available assets. Current ratio is obtained by dividing current assets by current liabilities. A low current ratio means that a firm may experience difficulties paying its current liabilities using its current assets. By late 2014, the current ratio of Intel Corporation was 2.0 while that of its competitor Qualcomm Inc was 2.30. Current ratio of 2.0 means that the company can easily liquidate all its current assets to take care of its current liabilities. When compared to Qualcomm Inc, it can be concluded that Qualcomm Inc can perform better than Intel when it comes to liquidation of current assets to cover its current liabilities (AOL Inc., 2015).

Quick ratio is another liquidity ratio that can be used to measure the financial strength of a company. This ratio is normally used to compare current liabilities to account receivable, short-term marketable securities, and cash (Lan, 2012). Intel’s quick ratio in late 2014 was 1.30 while that of its competitor Qualcomm Inc was 1.50. This indicates that the company is in a good financial position to use cash-on-hand, liquidate all its securities and accounts receivables to cover its current liabilities. Debt-to-equity ratio is used to measure the amount of debt capital utilized by a company in comparison to amount of equity capital utilized. This ratio is obtained by dividing debt capital by equity capital. Intel had a debt-to-equity ratio of 0.23 in late 2014, as shown in Appendix 2, while its competitor’s debt-to-equity ratio was 0.43 . A debt-to-equity ratio of 0.23 indicates that Intel utilizes more equity than debts. This means that creditors have claim of only a small portion of its assets, thereby leaving shareholders with part of the assets that can be used to cover current liabilities in the event of a hypothetical liquidation (AOL Inc., 2015).

According to Lan (2012), times interest earned, also known as interest coverage ratio can be used to measure the financial strength of company. Interest coverage ratio measures the cash flows generated by a company in comparison to its interest payments. This ratio is obtained by dividing earnings before interest and taxes by interest payments. A high value indicates that a company has high chances of meeting its debt repayment responsibilities. According to Intel’s 2014 financial report, the company recorded an interest coverage ratio of 1.6 while its competitor Qualcomm Inc had an interest coverage ratio of 2.0. An interest coverage ratio of 1.6 indicates that Intel’s earning prior to taxes and interest are 1.6 times its interest obligations. Basically, Intel is generating more earnings than interest that it is required to pay. Based on the financial ratios analysis presented above, it is clear that Intel has a strong financial position in the technology industry, and it can take advantage of new opportunities to help it generate additional revenues.

Other financial ratios

Apart from the financial ratios discussed above, analysis of profitability ratios can also reveal addition information about Intel concerning whether it can still compete well in the technology industry. One of the profitability ratios is the net profit margin which is used to compare the net income of a company to its net revenue. Net profit margin is calculated by dividing a company’s net income by its net revenue. Intel’s strong financial position enabled it to generate a high net profit margin of 18.25 percent in the year 2014 as shown in Appendix 1. Even though Intel has lost some of its customers to Qualcomm Inc since 2011, the company has still managed to keep its net profit margin relatively high. The net profit margin of Qualcomm Inc in late 2014 was 30 percent, and indication that it capable of generating higher profits than Intel Corporation (AOL Inc., 2015).

Return on assets and return on equity are other financial ratios that are used to assess the profitability of a company. These two ratios can also be used to determine management effectiveness of a company. Return on assets is a ratio used to measure how efficiently a company can utilize its assets to generate earnings (Lan, 2012). By late 2014, Intel’s return on assets stood at 12.90 while that of Qualcomm Inc stood at 10.0. This indicates that Intel’s leaders can use the company’s assets more efficiently than Qualcomm Inc’s leaders to generate earnings. This explains why Intel was able to record a 7.94 percent growth in 2014 (Appendix 3). Return on equity is a ratio that is used to measure the amount of income that can be generated from investments that shareholders put in a company. Intel’s return on equity in December 2014 was 19.1 percent indicating that the company can generate substantial income from the investments that are placed in the company by shareholders.

Impacts of upcoming events on Intel’s business

Many companies in the technology industry are now shifting from personal computers to the production of smartphones and tablets. Some people claim that Intel’s profit margins will fall suppose it chooses to move to move into the mobile market. However, large mobile phone producers such as Microsoft Inc feel that a company is highly likely to maintain high profit margins even if it enters the mobile market provided it had reached a high scale in the industry. According to Market Consensus (2015), the emergence of smartphones and tablets has resulted into a decline in sales of personal computers. This has made Intel’s revenue to drop, but it is anticipated that the company’s revenues can still go up if sales of personal computers begin to rise again. However, suppose the sales of personal computers remain low, Intel can keep looking for more opportunities in mobile to help boost its profit margins.

Recommendations

Intel is operating in an industry that is characterized by numerous uncertainties, and the company is faced with the difficult task of creating a balance between profit maximization and production of PC-related products. Even though there has been a decline in sales of PC-related products over the recent past, it is a good thing that Intel has recognized the need of pursuing new areas in the technology industry in order to realize business success. According to Market Consensus (2015), the growth of smartphones and tablets has affected Intel’s sales because many people are no longer interested in buying personal computers. A great opportunity that Intel should consider pursuing is investing its finances in production of smartphones and tablets in order to compete favorably with its competitors in the technology industry. Considering its strong financial strength, Intel should partner with other tablet and smartphone producers such as Apple Inc and Samsung Electronics in providing mobile phone accessories such as battery and touch screens.  Intel should not pay attention to the allegations that its profit margins might fall suppose it starts producing smartphones and tablets. One important thing that the company must consider is the fact that it has a strong financial position, because it is capable of utilizing its assets efficiently to generate revenue and can use it current assets to cover all current liabilities.

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