Finance ratio paper

There are several relevant economic theories that can be used to better understand what has helped transform 3M Company into a successful multibillion dollar business, one of which is demand-side economics. This is a theory that argues that economic growth is best created by a high demand for products and services. In the case of 3M, the company has experienced significant growth since it was founded 115 years ago because of the existing demand for its products. If there were no demand for items like abrasives, adhesives, laminates, fire protection, and so on, then there would be no macroeconomic growth. If there were no macroeconomic growth, then there would be little microeconomic growth either, and 3M would suffer as a result of there being little demand for its products.

To analyze the company’s financial figures, I first needed to access the raw annual data that was provided through the company’s income statements. I did this by using the website Stock Analysis on Net, which provides annual data for the past five years. I was able to then export this data to Excel and calculate the different margins and ratios using a variety of formulas that interacted with the data. Having this raw data in Excel form made it easy to create the necessary formulas and then apply them to each year because I could simply calculate a ratio once and then apply the formula to the remaining years in the income statement.

I was able to determine the adjusted current ratio by dividing the adjusted current assets by the adjusted current liabilities. This figure is similar to the quick ratio in the sense that assets are being compared to liabilities and a higher ratio is going to indicate the company is in a better position. From 2008 to 2017, 3M company had an adjusted current ratio that ranged from 1.54 to 2.25. Its peak ratio of 2.25 was achieved during 2011 when it had $12.240 billion in adjusted current assets and $5.441 billion in adjusted current liabilities.

To find the quick ratio, I divided the total quick assets by the current liabilities. From 2010 to 2017, 3M Company had a quick ratio of 0.85 to 1.39 with the quick ratio being at a low point in 2015 and a high point in 2011 and 2012. The quick ratio can be used to measure how well a company can fulfill its short-term financial liabilities, so a larger quick ratio is better. If the quick ratio is under 1.0, this indicates the company has more current liabilities than quick assets. This was the case in 2015 when the company had $6.070 billion in assets and $7.118 in liabilities giving it a quick ratio of 0.85. The low point was a result of the company having a smaller than usual amount of cash and cash equivalents and marketable securities with $1.798 billion in cash and $118 million in securities.

In terms of working capital turnover ratio, I was able to find this figure by dividing the net sales by working capital. From 2011 to 2017, 3M Company had a working capital turnover ratio between 4.02 and 7.83, with 2015 being the peak year and 2012 seeing the smallest ratio. The point of the working capital turnover ratio is to determine how effective a company is at using its working capital, so the higher this ratio is, the better. It seems that 2015 was a particularly good year for 3M because they were able to raise $30.274 billion in net sales with just $3.868 billion in working capital.

Next, I was able to calculate ROA by dividing the net working capital by total assets. From 2011 to 2017, 3M Company had an ROA that ranged from 13.57% to 15.35%. These higher percentages are better because they indicate that the company was able to get a higher return on its assets by achieving a higher net income. Additionally, I was able to calculate adjusted ROA by adding by interest expense adjusted for tax effects to net income. This resulted in slightly different ROA percentages, but only by a few tenths of a percent. Then, I calculated ROE by dividing net income by the average stockholders’ equity. I also calculated adjusted ROE by taking deferred taxes into account. This resulted in ROE figures ranging from 26.94% to 47.49% for ROE and 25.29% to 49.04% for adjusted ROE. Since 3M would benefit from having a higher return on equity, it wants to do everything in its power to get this figure as close to 100% as possible.

As for net profit margin and adjusted net profit margin, I was able to calculate this figure by dividing net income by sales and then factoring in adjustments due to deferred taxes. For the original net profit margin, 3M Company had percentages ranging from 13.57% to 15.35% and then 14.46% to 16.76% for adjusted net profit margin. Higher net profit margins are going to be better because they indicate that there is more revenue left over after expenses have been deducted out of sales. If a company’s net profit margins are below 0%, this indicates they are not profitable. What is good is that 3M Company has never slipped below double-digit net profit margin percentages and has been consistent in bringing in billions of dollars of profits.

Other items I analyzed include activity analysis ratios, capital structure analysis ratios, and capital market analysis ratios. For instance, I calculated total asset turnover and adjusted total asset turnover by dividing sales by average total assets. Inventory turnover ratios were also calculated by dividing the cost of goods sold by the average inventories. The same was done through account receivables turnover ratios by dividing sales by the average accounts receivable. I found interest coverage by dividing income before interest and income tax by interest expense. I then calculated the debt to capital ratios by dividing total liabilities by total stockholders’ equity. Finally, I found the P/E ratio by dividing the market price of common stock per share by the earnings per share. The dividend payout ratio was calculated by dividing cash dividends by net income.

Another business whose data can be compared to 3M’s is Honeywell International Inc. Honeywell is another multinational conglomerate that specializes in engineering and manufacturing consumer products. With a revenue of over $40 billion as of 2017 and an operating income of $6.9 billion, Honeywell is somewhat larger than 3M and also has around 30,000 more employees. Some of the key ratios for Honeywell include its operating margin of 17.64, net margin of 4.08, asset turnover ratio of 0.71, return on assets percentage of 2.92, return on equity percentage of 9.03, and return on invested capital percentage of 4.99. Each of these figures comes from 2017, and it seems that 2017 was a bit of an unusual year for Honeywell because prior years saw its ratios as much higher with an ROE of 25.54% in 2016 and an ROA of 9.30% in 2016. So in 2017 alone, 3M seems to have come out ahead due to its healthier ratios, but on a long-term basis, Honeywell is the more financially sound company.

These findings are important because they help to reveal important financial figures about 3M Company that are relevant to investors and potential business partners. Without analyzing a company’s financial figures, it would be impossible to determine the financial health of the company and make accurate predictions about the company’s projected path. There is no single data point that rises above the rest in terms of importance either. Instead, investors and those willing to provide financial services to 3M Company need to examine every bit of information to get a clearer picture on the overall health of the company. This is why it is crucial to take the raw data from the company’s financial reports and analyze it by putting it into ratios and margins to get a better understanding of the company’s financial status.