FIN 320 Project Two Financial Analysis Report (2)

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Feb 20, 2024

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FIN 320 Project Two Financial Analysis Report Financial Analysis and Financial Evaluation 1. Financial Analysis A. Financial Calculations i. Working capital Kellanova remains with negative working capital therefore they do not have the ability to pay off current debts and liabilities. 3 rd Qtr FY 2023: ($1,538,000) 3 rd Qtr FY 2022: ($1,589,000) ii. Current ratio Kellanova’s ratio is below 1 but saw some improvement since FY 2022. A good current ratio would be above 1, meaning they’d have more assets than liabilities. 3 rd Qtr FY 2023: 0.76 3 rd Qtr FY 2022: 0.74 iii. Debt ratio Their current debt ratio is below 1, meaning they have more assets than liabilities. 3 rd Qtr FY 2023: 0.78 3 rd Qtr FY 2022: 0.77 iv. Earnings per share Their current earnings are lower than last year’s 3 rd quarter, possibly resulting in Kellanova losing money or spending more than they’re earning. 3 rd Qtr FY 2023: $0.79 3 rd Qtr FY 2022: $0.91 v. Price/earnings ratio The decrease in earnings indicates a lower level of interest shareholders had with Kellanova. 3 rd Qtr FY 2023: $71.59 3 rd Qtr FY 2022: $72.62 vi. Total asset turnover ratio Kellanova’s turnover ratio remains the same, although it is low a higher turnover could help their performance. 3 rd Qtr FY 2023: 0.21 3 rd Qtr FY 2022: 0.21 vii. Financial leverage Ultimately, you’d want to see a company with a lower ratio. The higher ratio indicates too much incurred debt. 3 rd Qtr FY 2023: 4.6 1

3 rd Qtr FY 2022: 4.4 viii. Net profit margin Kellanova has seen a decrease in gains from last FY. 3 rd Qtr FY 2023: 6.8% 3 rd Qtr FY 2022: 7.9% ix. Return on assets Kellanova saw a decrease a decrease compared to the previous year, indicating a poor job in generating profits. 3 rd Qtr FY 2023: 1.4% 3 rd Qtr FY 2022: 1.6% x. Return on equity Kellanova did not see any growth since last fiscal year, resulting in a lower ratio. 3 rd Qtr FY 2023: 6.7% 3 rd Qtr FY 2022: 7.2% B. Working Capital Management Kellanova has a working capital of ($1,538,000) for their 3 rd Qtr for FY 2023 and had a working capital of ($1,589,000) during their 3 rd Qtr for FY 2022. This can determine a couple of things such as management issues, long-term issues or poor sales. If the current ratio is less than 1, the current liabilities exceed the current assets, and the working capital is negative (Blokhin, 2022). C. Financing There are various ways a business can finance their operations and expansion. Since businesses generate their profit through their own operations, retained earnings or sales revenue, those funds made could be reinvested. Two examples that could be used for financing are debt financing or equity financing. Debt financing occurs when a firm raises money for working capital or capital expenditures by selling debt instruments to individuals and/or institutional investors. In return for lending the money, the individuals or institutions become creditors and receive a promise that the principal and interest on the debt will be repaid (Chen, 2022). Equity financing is raising the business capital through their sales of shares. This will help short-term bills or future growth. 2

D. Short-Term Financing Short-term financing means business financing from short-term sources, which are for less than one year (Srivastav, 2022). Two options to short-term financing are trading credit or factoring. Trade credit can be thought of as a type of 0% financing, increasing a company’s assets while deferring payment for a specified value of goods or services to sometime in the future and requiring no interest to be paid in relation to the repayment period (Kagan, 2022). This frees up cash flow and short-term growth, since it’s looked at as credit with no interest and helps encourage more sales. Factoring is when a business generates funds by selling accounts receivable to a third party at a lower net realized value, increasing cash on hand (Srivastav, 2022). Kellanova’s most recent quarter showed bad cash flow, short-term financing could increase their liquidity. E. Bond Investment Bond investment has benefits such as a fixed income or diversification. Bonds bring a fixed income that has a fixed interest allowing stable cash flow. With diversification, a business portfolio reduces risk. Choosing to invest in different industries helps a portfolio from running into the risk of a single bond or industry not performing well. A potential risk would be interest rate risk. When interest rates rise the current value of a bond could decrease. When a bond declines you run into the risk of capital loss. F. Capital Equipment Like bond investments, capital equipment has its benefits and risks. Some benefits include increased efficiency, cost reduction and improved quality. With increased efficiency, certain machinery or technology the business uses could improve their overall productivity. Cost reduction could apply towards labor costs, newer 3

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equipment could minimize repair expenses used on older outdated equipment. Improved quality would enhance the overall quality of products. Some potential risks include high initial investment or market volatility. Capital equipment will require an initial upfront cost which runs into a possible financial strain on a business. Market volatility such as changes in the market or economic conditions can affect the generated returns on the investment. G. Building Some benefits investing in a building could be appreciation and equity or tax advantage. With appreciation and equity, the buildings value will increase over time building equity. With tax advantage, the construction of a new building will offer tax benefits like deductions on mortgage interest and depreciation expense. Some risks a business may run into would be financial commitment. A building requires a ton of financial commitment, some things they would need to consider are upfront costs, closing costs, property taxes or down payments. Unless a business is ready for the commitment, it is something that could truly impact a business’s finances. Financial Evaluation A. Bond Investment If Kellanova were to invest into a bond at this moment, it would not hurt them too much considering the NPV is sitting negative. Assuming we invest an initial $28,500,000 with a discount rate of 9% for 10 years, the estimated cash flow would be $2,400,000. Their NPV is at ($425,297. B. Capital Equipment If Kellanova decided to do capital equipment with an initial investment of $25,000,000 with a discount rate of 12% for 15 years, their cash flow also has a positive 4

NPV of $2,243,458. This could potentially bring growth and expansion. The downside to this investment is not having any salvage value. . C. Building Though investing in a building would not completely hurt Kellanova the NVP value only sits at $864,920. If they make an initial investment of $10,000,000 with a discount rate of 10% for 20 years their cash flow would increase on the 20 th year. This would generate more cash flow for Kellanova. D. Future Financial Considerations Kellanova has had a rough fiscal year, as they begin to go onto FY 1 of 2024 some things, they should consider are investments which could potentially bring their working capital into positive numbers. One recommendation would be an evaluation of management and short comings they have run into. Though they saw a slight change from the 3 rd QTR between 2022 and 2023, Kellanova would gain certain benefits with budgeting. One other consideration they should make is having financial control, in doing so, Kellanova can maintain proper bookkeeping and internal control to avoid future losses. 5

References Blokhin, A. (2022, November 28). Can working capital be negative? Investopedia. https://www.investopedia.com/ask/answers/100915/can-working-capital-be-negative.asp Chen, J. (2022, May 28). How debt financing works, examples, costs, Pros & Cons . Investopedia. https://www.investopedia.com/terms/d/debtfinancing.asp Kagan, J. (2022, July 17). Trade credit . Investopedia. https://www.investopedia.com/terms/t/trade-credit.asp#What%20Is%20Trade%20Credit? Mergent. (n.d). Kellanova.. [Company profile]. Retrieved 25 November 2023, from https://www- mergentonline-com.ezproxy.snhu.edu/companyfinancials.php? pagetype=asreported&compnumber=4686&period=Quarters&dataarea=ALL&range=5&c urrency=AsRep&scale=AsRep&Submit=Refresh&csrf_token_mol=41fd2ab86b Srivastav, A. K. (2022). Negative working capital . Wall Street Mojo. https://www.wallstreetmojo.com/negative-working-capital/ Titman, S., Keown, A. J., & Martin, J. D. (2018). Financial management: Principles and applications . Pearson. 6

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