WEEK 8

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The objective of this financial summary is to report the results of a comparative analysis of the

financial statements of two of the leading U.S. cereal companies, Kellogg Company and

General Mills, Inc. Financial statements for the fiscal year ended December 28, 2019 for Kellogg

Company and fiscal year ended May 26, 2019 for General Mills, Inc. are provided in Appendix C

(page 10) . Results from this comparative analysis will be used to determine which company

has better business economics and could potentially be a better investment.

Based upon analysis of the income statement, balance sheet, and cash flow statement of

Kellogg Company and General Mills, Inc., the key results below were developed. It is important

to note that all numbers in this report are in millions, except per share data.

INCOME STATEMENT

Net Revenues

When comparing the financial statements of companies, it should not be assumed that the

company with a higher amount of total (gross) revenues is earning a higher profit. According to

Buffett & Clark (2008), the key to earning more profit is spending less on expenses. Therefore, it

is important to review the net revenues of the companies being compared. Net revenue is

earnings after expenses are deducted. It provides investors with a more accurate depiction of a

company’s profitability. General Mills had $3,287.20 more in net revenues than Kellogg

Company. However, both companies have experienced an increase in net revenues since 2018.

Net Revenues

Kellogg Company General Mills

$13,578 $16,865.20

Gross Profit & Gross Profit Margin

Gross profit is another significant number that can be used to compare the profitability of

companies. Gross profit is how much the company made after paying for the materials and

labor to make the products or how much the company made after deducting the cost of buying

the product or service sold. Alone, gross profit provides minimum insight about a company’s

profitability. However, it can be used to calculate a company’s gross profit margin, which can tell

us a lot about the economic nature of the company” (Buffett & Clark, 2008, p.33). Gross profit

margin is gross profit divided by total revenues. Companies with better business economics

generally have “consistently higher gross profit margin” when compared with other companies

(p.33). General Mills’ gross profit margin was 2% higher than Kellogg Company.

Cost of Goods Sold

Gross Profit Gross Profit Margin

Kellogg Company $9,197 $4,381 32%

General Mills $11,108.40 $5,756.80 34%

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Selling, General and Administrative Expenses

Selling, general and administrative expenses (SGA) includes operating expenses such as

payroll, travel, and advertising costs that a company incurs during the accounting period. SGA

expenses can have a significant effect on a company’s bottom line. According to Buffett & Clark

(2008), the lower the SGA expenses, the better. SGA expenses were both Kellogg Company’s

and General Mills’ largest operating expenses for 2019. General Mills’ operating expenses are a

lesser percentage of gross profit in comparison to Kellogg Company. However, the amount is

only 8% less.

SGA Expenses Percentage of Operating Expenses

of Gross Profit

Kellogg Company $2,980 64%

General Mills $2,935.80 56%

Research and Development Expenses

Companies with better business economics typically have little or no research and development

expenses. Examples of research and development expenses includes the cost associated with

updating or redesigning a product. While Kellogg Company and General Mills both reported

research and development costs in 2019, Kellogg Company had less research and

development costs. Additionally, Kellogg Company’s research and development costs was a

lesser percentage of gross profit.

R&D Expenses Percentage of R&D Expenses of Gross

Profit

Kellogg Company $144 3%

General Mills $221.90 4%

Depreciation Expense

Depreciation cost is the amount in which assets depreciate in a given year. When comparing

companies, investors or financial statement users should check to see if each company includes

depreciation in its calculation of earnings. Without depreciation expense, a company may

appear to be earning more than it actually is. Companies with better business economics

generally have lower depreciation to gross profit ratios or percentages. Kellogg Company and

General Mills both have low depreciation to gross profit percentages. However, General Mills is

slightly lower.

Percentage of Depreciation of Gross Profit

Kellogg Company General Mills

11% 10.8%

Interest Expense

Interest expense is the interest paid out during the accounting period on a company’s debt.

Companies with better business economics generally have little or no interest expense. To get

an even better picture of a company’s business economics—compare its interest expense

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(payments) to its operating income. According to Buffett & Clark (2008), investors should look

for companies with a interest expense to operating income ratio of less than 15%. However, this

recommended ratio will vary depending on the industry. “In any given industry, the company

with the lowest ratio of interest payments to operating income” is generally the company with a

durable competitive advantage (p.52). Kellogg Company had a slightly lower ratio of interest

expense (payments) to operating income in comparison to General Mills.

Percentage of Interest Expense of Operating Income

Kellogg Company General Mills

20.3% 21%

Income Before Tax

Income before tax is the amount of income a company has after all expenses have been

subtracted, but prior to income tax being deducted. Investors use this number when determining

the return he or she will receive when investing in a business (Buffett & Clark, 2008). General

Mills reported higher income before taxes paid when compared to Kellogg Company.

Income Before Taxes Income Taxes Reported as an

Expense

Kellogg Company $1,305 $321

General Mills $2,082 $367.80

Net Income

Net income is the revenue the company has remaining after all costs and expenses (including

taxes) are deducted. Net income tells investors how much money the companies made after

paying income taxes. A company with better business economics generally have consistent

upward mobility in its net income over a long-term. Although General Mills reported higher net

income in 2019, the company’s net income has fluctuated over a three year period. Kellogg

Company’s net income, on the other hand, has consistently increased over a three year period.

Net Income

Kellogg Company General Mills

$977 $1,786.20

Earnings Per Share

Earnings per share (EPS) is another method for assessing the profitability of companies being

compared for a specific accounting period. For this financial analysis, the diluted earnings per

share for Kellogg Company and General Mills were evaluated. Earnings per share only

considers a company’s common shares. Diluted earnings per share considers all convertible

securities including convertible preferred stock or convertible bonds—which are converted into

common stock or equity. General Mills had slightly higher diluted earnings per share than

Kellogg Company.

Diluted Earnings Per Share

Kellogg Company General Mills

$2.80 $2.90

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BALANCE SHEET

Total Current Assets

Current assets are cash or can be easily converted into cash in the short-term—ideally within a

year. Current assets, specifically quality and quantity, can provide investors with insight about a

company’s economic nature. Even more significant is the company’s current ratio. The current

ratio allows investors to determine if a company can meet its short-term financial responsibilities

by taking the company’s liabilities into consideration. The current ratio is calculated by dividing

current assets by current liabilities. The higher the current ratio, the more liquid the company will

be. Kellogg Company had a higher current ratio when compared to General Mills.

Total Current Asset Current Ratio

Kellogg Company $3,431 72%

General Mills $4,186.50 59%

Cash and Cash Equivalents

Current assets consist of cash and cash equivalents. When investors or financial statement

users view a company’s current assets, cash and cash equivalents is typically the first category

examined because these ae highly liquid assets. A company with better business economics

generally has a higher amount of cash and cash equivalents. According to Buffett & Clark

(2008), “a low amount or the lack of a stockpile of cash usually means that the company has

poor or mediocre economics” (p.78). General Mills had a slightly higher amount of cash and

cash equivalents than Kellogg Company.

Cash and Cash Equivalents

Percentage of Cash and Cash

Equivalents of Total Current Assets

Kellogg Company $397 12%

General Mills $450 11%

Net Receivables

Current assets also consist of net receivables. Net receivables are receivables minus the

estimated amount of bad debts. A company with better business economics consistently report

a lower percentage of net receivables to gross sales in comparison to other companies in the

industry. General Mills had a lower percentage of net receivables to gross sales than Kellogg

Company.

Net Receivables Percentage of Net Receivables to

Gross Sales

Kellogg Company $1,576 36%

General Mills $1,679.70 29%

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Intangible Assets & Goodwill

Intangible assets such as patents or brand names cannot be touched. However, these assets

can add value to a company or be its greatest asset. Goodwill is recorded on the balance sheet

when a company purchases a business (or businesses) at a price (prices) in excess of the book

value(s). While neither intangible assets or goodwill can be converted into cash quickly,

investors should not overlook them when comparing financial statements. General Mills had a

higher amount of intangible assets and goodwill.

Intangible Assets Goodwill

Kellogg Company $2,576 $5,861

General Mills $7,166.80 $13,995.80

Long-term Investments

Long-term investments consist of non-current assets such as bonds, real estate, or stock—

including investments in a company’s subsidiaries or affiliates. Long-term investments can

provide investors or financial statement users with insight about the investment practices of

companies being compared. General Mills did not have a long-term investments asset account

listed on its balance sheet for 2019. However, it did have $0.10 in investments in affiliates

(equity investments) listed in the Cash Flows from Investing Activities section. Kellogg Company

had $404 in long-term investments. Kellogg Company’s investments are in equity (investment in

unconsolidated entities).

Long-Term Investments

Kellogg Company $404

General Mills _-

Total Assets & Return on Assets

Investors or financial statement users employ total assets to determine “how efficient the

company is in putting its assets to use” (Buffett & Clark, 2008). To determine this level of

efficiency, the return on asset ratio is calculated by dividing the net earnings by total assets.

Typically, the higher the return on assets, the better. General Mills had a higher amount of total

assets and higher return on assets in comparison to Kellogg Company.

Total Assets Return on Assets

Kellogg Company $17,564 5.6%

General Mills $30,111.20 5.9%

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Total Current Liabilities

Current liabilities are the obligations or debts that a company owes and are due within the

current fiscal year. These debts include short-term debt, long-term debt coming due, accounts

payable, and accrued expenses. Long-term debt coming due must be paid in full during the

current year. Short-term debt is debt owed by the company and due within the year. A company

with better business economics generally borrows more long-term money than short-term

money. However, the best companies to invest in are those with little or no long-term debt

(Buffett & Clark, 2008). Kellogg Company had less total current liabilities—as well as less short-

term and long-term debt coming due.

Total Current Liabilities

Amount of Total Current Liabilities That Is Short-Term

Debt

Amount of Total Current Liabilities That Is Long-Term Debt Coming Due

Kellogg Company $4,778 $107 $620

General Mills $7,087.10 $1,468.70 $1,396.50

Long-Term Debt & Deferred Taxes

Financial statement users can mistake long-term debt coming due with long-term debt.

However, they are not the same. Long-term debt denotes “debt that matures any time” beyond a

year (p.117). The balance sheet of companies with better business economics generally

indicate little or no long-term debt. Kellogg Company carried less long-term debt on its balance

sheet. Deferred tax is income tax that is due but not yet paid. Although this number provides

little insight about the economic condition of a business, it is included in the chart below.

Long-Term Debt Deferred Taxes

Kellogg Company $7,195 $596

General Mills _$11,624.80 $2,031

Total Liabilities & Debt to Equity Ratio

A company with better business economics has a lower amount of total liabilities. Total liabilities

is the sum total of all the company’s liabilities. Additionally, a company with better business

economics has a higher amount of stockholder’s equity. Kellogg Company had a lower amount

of total liabilities. However, General Mills had a higher amount of stockholder’s equity.

Total Liabilities Total Stockholder’s Equity

Debt to Equity Ratio

Kellogg Company $14,250 $2,747 519% or 5.19

General Mills $22,191.80 $7,054.50 315% or 3.15

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Preferred & Common Stock

Companies with better business economics typically do not have preferred stock. This is

because they generally have little or no debt. Preferred stock is compared to debt, since

dividends must be paid out. Neither Kellogg Company or General Mills had preferred stock.

Common Stock Treasury Stock Declared and Paid Dividend?

Kellogg Company 420.8 shares issued, $.25 par value for a

total of 105

At cost, shares of 79.3 and 76.8 for a

total of (4,690)

Yes

General Mills 754.6 shares issued, $0.10 par

value for a total of $75.5

At cost, shares of 152.7 and 161.5 for

a total of (6,779)

Yes

Retained Earnings

Retained earnings is the company’s net earnings that are retained for business growth.

According to Buffet & Clark (2008), retained earnings is one of the key numbers on the balance

sheet. A company with better business economics should be adding to its retained earnings or

its net worth is not growing. Kellogg Company and General Mills both experienced a slight

growth in retained earnings.

Retained Earnings Increased from Previous Year?

Kellogg Company $7,859 Yes

General Mills $14,996.70 Yes

Return on Shareholders’ Equity

To calculate return on shareholders’ equity, divide net earnings by shareholders’ equity.

Companies with better business economics generally have higher return on shareholders’

equity. This is because the company makes really good use of its retained earnings. Both

companies had higher-than-average returns on shareholders’ equity. However, Kellogg

Company’s return on equity was higher which indicates that it is making better use of the

earnings that it is retaining (Buffet & Clark, 2008).

Return on Shareholder’s Equity

Kellogg Company 36%

General Mills _25%

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Additional Balance Sheet Data

Price/Earnings Ratio

Dividend Payout Ratio

Dividend Yield Market Price of Stock At Year-End

Kellogg Company

19.06 80% 3.90% $53.57

General Mills 14.9 67% 4.3% $43.37

CASH FLOW STATEMENT

Capital Expenditures

Companies with better business economics spend less of its earnings for capital expenditures to continue operations. Capital expenditures generally include property, plant, and equipment. These are assets that through amortization or depreciation are expensed over a period beyond a year. General Mills spent less for capital expenditures than Kellogg Company.

Capital Expenditures

Kellogg Company (586)

General Mills (537.6)

Stock Buybacks

A company with better business economics earns enough money to buy back its own shares.

This financial move causes the stock price to go up—due to the reduction of outstanding

shares. Additionally, remaining shareholders’ interest in the company increases, as well as per-

share earnings. Kellogg Company spent more money buying back its own shares in comparison

to General Mills.

Common Stock Repurchases

Kellogg Company (220)

General Mills (1.1)

REFERENCES

Buffet, M. & Clark, D. (2008). Warren Buffett and the interpretation of financial statements: The

search for the company with a durable competitive advantage. New York: Scribner.

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APPENDICES

APPENDIX A: REFLECTION

REFLECTION

After the financial analysis process, the author created a list of each company’s strengths (see below). Upon reflection of these strengths and the results of the comparative analysis, the author has determined that Kellogg Company is a better investment—due to its consistency and upward mobility in earnings. General Mills’ Strengths

 Higher net revenues (by 3,287.20)

 Higher gross profit margin (by 2%)

 Lower SGA expenses (by 44.4)

 Operating expenses are a lesser percentage of operating expenses (by 8%)

 Lower depreciation to gross profit percentage/ration (by 0.2%)

 Reported higher income before (and after) taxes paid.

 Higher diluted earnings per share (by $0.10)

 Higher amount of cash and cash equivalents than Kellogg Company (by $53)

 Lower percentage of net receivables to gross sales (by 7%)

 Higher amount of total assets (by $12,547.20)

 Higher return on assets (by 0.3%)

 Spent less for capital expenditures than Kellogg Company

 Higher amount of stockholder’s equity

Kellogg Company’s Strengths

 Lower R&D expenses (by 77.9)

 R&D is a lesser percentage of gross profit (by 1%)

 Lower ratio of interest expense (payments) to operating income (by 0.7%)

 Net income has consistently increased over a three year period.

 Higher current ratio (more liquid)

 Less total current liabilities—as well as less short-term and long-term debt coming due.

 Carried less long-term debt on its balance sheet

 Spent more money buying back its own shares

 Lower amount of total liabilities

 Higher return on shareholders’ equity

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APPENDIX B: NOTES TO FINANCIAL SUMMARY ANALYSIS

NOTES TO FINANCIAL SUMMARY ANALYSIS

 For all property, plant and equipment (PPE), Kellogg Company used straight-line

methods for financial reporting and accelerated methods, where permitted, for tax

reporting. According to General Mill’s notes, land is recorded at historical cost. Buildings

and equipment, including capitalized interest and internal engineering costs, are

recorded at cost and depreciated over estimated useful lives, primarily using the straight-

line method.

 General Mills and Kellogg Company each included a consolidated balance sheet with its financial statements. Both companies have numerous subsidiaries including wholly- owned subsidiaries.

 General Mills’ liquidity position or free cash flow has consistently increased over a three- year period. Kellogg Company’s liquidity position, on the other hand, is not consistent. The company’s free cash flow goes up, then back down over a three year period.

APPENDIX C: LINKS TO FINANCIAL STATEMENTS

LINKS TO FINANCIAL STATEMENTS

Kellogg Company

https://www.sec.gov/ix?doc=/Archives/edgar/data/55067/000162828020002113/k-2019q410xk.htm

General Mills

https://www.sec.gov/Archives/edgar/data/40704/000119312519184675/d725716d10k.htm

*Note: Each set of financial statements includes MD&A and Auditor’s Report