Research Project 2

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Feb 20, 2024

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Research Project 2 November 18, 2023 By Olivia Snyder FINC 330

Introduction: This financial analysis delves into the liquidity, operating performance, profitability, debt/equity, and return on investment ratios of AMD (Advanced Micro Devices) over the past three years. The declining trend in liquidity ratios and operational inefficiencies pose challenges to AMD's financial health. Profitability fluctuations, conservative financial leverage, and decreasing return metrics further highlight potential areas of concern. A comparative analysis with a peer competitor, Intel, provides additional insights. Recommendations focus on enhancing return on equity and overall financial sustainability, emphasizing operational efficiency, cost structure analysis, asset utilization optimization, strategic financing, and continuous competitor benchmarking. Liquidity Analysis: Table 1: Liquidity Ratios Metric 2020 2021 2022 Latest Current Ratio 2.54 2.02 2.36 2.19 Quick Ratio 1.43 1.49 1.57 1.42 Foot/End Note : Data source: MarketWatch. (2023a, November 6). AMD: Advanced Micro Devices Inc. annual income statement. Link . The liquidity ratios provide valuable insights into AMD's ability to meet its short-term obligations. The current ratio, which measures AMD's ability to cover its short-term liabilities with its short-term assets, has shown a declining trend over the past three years, from 2.54 in

2020 to 2.19 in the latest period. While a current ratio above 1 indicates that AMD can meet its current obligations, the decreasing trend suggests a potential liquidity concern. The quick ratio, which excludes inventory from current assets, also displays a similar trend, falling from 1.43 in 2020 to 1.42 in the latest period. This indicates that AMD may be relying more on inventory to meet short-term obligations, potentially affecting its liquidity position. The declining liquidity ratios may raise concerns about AMD's ability to cover immediate financial obligations. It is crucial for stakeholders to investigate the reasons behind this trend, such as increasing short-term liabilities or a decrease in liquid assets. Additionally, a comprehensive analysis of AMD's cash flow statement may reveal insights into the sources and uses of cash, shedding light on the liquidity challenges AMD might be facing. Operating Performance Ratios Analysis: Table 2: Operating Performance Ratios Metric 2020 2021 2022 Latest Days Sales Outstanding 73.37 52.99 52.83 77.50 Days of Sales in Inventory 80.23 71.97 80.40 117.28 Days of Payables Outstanding 49.06 38.39 53.55 68.77 Receivables Turnover 4.97 6.89 6.91 4.71 Inventory Turnover 4.55 5.07 4.54 3.11 Fixed Assets Turnover 12.57 17.14 15.52 10.92 Asset Turnover 1.30 1.54 0.59 0.33

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Foot/End Note : Data source: MarketWatch. (2023a, November 6). AMD: Advanced Micro Devices Inc. annual income statement. Link . Operating performance ratios provide a deeper understanding of how efficiently a company is managing its resources and generating profits. The days sales outstanding (DSO) ratio, which measures the average number of days it takes for AMD to collect payment from customers, has increased from 52.99 in 2021 to 77.50 in the latest period. This suggests a potential delay in cash collections, which could negatively impact AMD's cash flow and liquidity. The days of sales in inventory and days of payables outstanding ratios further highlight potential inefficiencies. Days of sales in inventory have increased from 71.97 in 2021 to 117.28 in the latest period, indicating that AMD is taking longer to turn its inventory into sales. On the other hand, days of payables outstanding have increased from 38.39 in 2021 to 68.77 in the latest period, suggesting a lengthening of the time it takes for AMD to pay its suppliers. These trends may signal operational challenges, such as slow-moving inventory or strained supplier relationships. The receivables turnover ratio, which measures how many times a company collects its average accounts receivable balance during a specific period, has decreased from 6.89 in 2021 to 4.71 in the latest period. This indicates a potential difficulty in efficiently managing receivables. Similarly, the inventory turnover ratio has decreased from 5.07 in 2021 to 3.11 in the latest period, suggesting a decline in AMD's ability to sell inventory quickly.

The fixed assets turnover and asset turnover ratios indicate how efficiently AMD is utilizing its fixed assets and total assets to generate sales. Both ratios have shown a declining trend over the past three years. A decreasing asset turnover may suggest that AMD is not effectively utilizing its assets to generate revenue. The analysis of liquidity and operating performance ratios reveals potential challenges for AMD. The declining liquidity ratios and inefficiencies in managing receivables, inventory, and payables may impact AMD's overall financial health. Stakeholders should closely monitor these trends and consider further investigation into the underlying causes to make informed decisions about AMD's prospects. Profitability Analysis: Table 3: Profitability Ratios Metric 2020 2021 2022 Latest Gross Margin % 44.53 48.25 44.93 45.01 Operating Margin % 14.02 22.20 5.36 -0.41 Net Margin % 25.50 19.24 5.59 0.94 Foot/End Note : Data source: MarketWatch. (2023a, November 6). AMD: Advanced Micro Devices Inc. annual income statement. Link . AMD's profitability can be evaluated through various metrics, including gross margin, operating margin, and net margin. The gross margin has fluctuated over the past three years, showing a

decrease from 44.53% in 2020 to 44.93% in 2022. However, the latest figure slightly increased to 45.01%, indicating a marginal improvement. On the other hand, the operating margin experienced a significant surge from 14.02% in 2020 to 22.20% in 2021 but sharply declined to 5.36% in 2022 and further to -0.41% in the latest period. The net margin followed a similar pattern, initially at 25.50% in 2020, dropping to 5.59% in 2022, and slightly recovering to 0.94% in the latest period. These trends suggest a notable fluctuation in AMD's profitability, with the latest period showing signs of potential challenges. Financial Structure and Risk Analysis: Table 4: Debt/Equity and Financial Leverage Ratios Metric 2020 2021 2022 Latest Financial Leverage 2.13 1.54 1.66 1.23 Debt/Equity 0.24 0.09 0.05 0.05 Foot/End Note : Data source: MarketWatch. (2023a, November 6). AMD: Advanced Micro Devices Inc. annual income statement. Link . The financial leverage and debt/equity ratios provide insights into AMD's financing structure and associated risks. Financial leverage decreased from 2.13 in 2020 to 1.23 in the latest period, reflecting a reduction in AMD's reliance on debt. The debt/equity ratio also witnessed a decline from 0.24 in 2020 to 0.05 in 2022 and has remained constant in the latest period. This indicates a conservative approach to financing, with a lower level of debt compared to equity. While this conservative financial structure is associated with lower risk, it is essential to note that too much reliance on equity might limit growth opportunities. The decrease in leverage and debt/equity

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ratio suggests a prudent financial strategy, lowering the overall risk associated with AMD's financial structure. DuPont Analysis of ROA and ROE: Table 5: Return on Investment Ratios Metric 2020 2021 2022 Latest Return on Asset % 33.22 29.58 3.30 0.31 Return on Equity % 57.48 47.43 4.24 0.38 Return on Invested Capital % 50.98 42.92 4.09 0.49 Foot/End Note : Data source: MarketWatch. (2023a, November 6). AMD: Advanced Micro Devices Inc. annual income statement. Link . The DuPont analysis breaks down return on assets (ROA) and return on equity (ROE) into three components: net profit margin, asset turnover, and financial leverage. The ROA declined from 33.22% in 2020 to 0.31% in the latest period, while the ROE decreased from 57.48% to 0.38% over the same period. Net profit margin decreased, indicating a decline in profitability. Asset turnover also saw a significant drop, suggesting reduced efficiency in utilizing assets to generate sales. However, the most impactful factor was the reduction in financial leverage, contributing to the decline in ROA and ROE. AMD's decision to lower its reliance on debt has, in turn, affected its return metrics. While reducing financial risk, it has impacted the returns due to the lower use of leverage, particularly in the latest period.

AMD's profitability has shown significant fluctuations over the past three years, with the latest period indicating potential challenges. The shift in the financial structure towards lower leverage and conservative debt/equity ratios has reduced overall risk but has impacted returns. The DuPont analysis highlights that the main factor influencing the decline in ROA and ROE is the reduction in financial leverage. It is crucial for AMD to carefully balance its financial structure to optimize both risk and returns in the future. Comparison with Intel: Table 6: Intel Financial Metric Fiscal Year 2022 Current Year (Latest Available) Net Margin (%) 12.71 -3.11 Return on Equity (%) 8.14 -1.63 Asset Turnover 0.36 0.29 Financial Leverage 1.80 1.85 Debt/Equity Ratio 0.37 0.46 Foot/End Note : Data source: MarketWatch. (2023b, November 6). INTC: Intel Corp. annual income statement. Link . When comparing AMD's financial ratios with those of Intel, certain trends and areas for improvement become apparent. 1. Liquidity Ratios:

 AMD's current ratio has consistently been higher than that of Intel over the period analyzed. However, both companies have experienced a declining trend, indicated potential industry-wide challenges or shifts in business strategies.  The quick ratio, which excludes inventory, is also higher for AMD compared to Intel. This suggests that AMD has more liquid assets to cover its short-term obligations than the competitor. Nevertheless, the decreasing trend in both companies implies a need for careful evaluation of liquidity management practices. 2. Operating Performance Ratios:  The days sales outstanding (DSO) for AMD are notably higher than those of Intel, indicating a slower collection of payments from customers. This may be a point of concern, as efficient cash conversion is crucial for maintaining healthy liquidity.  Days of sales in inventory are also higher for AMD, reflecting potential inefficiencies in managing inventory compared to Intel.  The receivables turnover and inventory turnover for AMD are lower than those of the competitor, indicating that the competitor is better at converting receivables and inventory into cash. AMD should assess its operational processes to identify areas for improvement. 3. Profitability Ratios:  AMD's gross margin percentage has been relatively consistent, with a slight improvement in the latest period. However, the operating margin and net margin

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percentages have experienced significant fluctuations, suggesting challenges in managing operational costs and overall profitability.  In contrast, the Intel, as per the provided information on Intel, demonstrates a more stable net margin percentage, even though it is negative. AMD should conduct a detailed analysis of cost structures and operational efficiency to address these fluctuations. 4. Debt/Equity and Financial Leverage Ratios:  AMD has maintained a lower financial leverage and debt/equity ratio compared to Intel. While this indicates a more conservative approach to financing, it might also limit growth opportunities. Intel's slightly higher leverage suggests a different risk appetite.  Management should carefully evaluate the optimal balance between debt and equity to ensure efficient capital structure and sustainable growth. 5. Return on Investment Ratios:  The return on equity (ROE) for AMD is higher than that of Intel. However, both companies have experienced a decline, with AMD showing a steeper drop. This signals a need for AMD to focus on strategies that can enhance ROE.  The return on assets (ROA) for both companies is significantly impacted, and AMD's latest figures are lower than those of Intel. This indicates a challenge in generating returns from assets, requiring a closer examination of asset utilization efficiency.

Recommendations for Improving Return on Equity: To enhance AMD's return on equity, the management should consider the following strategies: 1. Operational Efficiency Improvement:  Address inefficiencies in receivables and inventory management, as indicated by lower turnover ratios compared to Intel. Streamlining these processes can enhance cash flow and overall operational efficiency. 2. Cost Structure Analysis:  Conduct a thorough analysis of the cost structure to identify and manage operational costs more effectively. Fluctuations in operating margin and net margin percentages suggest potential challenges in cost management. 3. Asset Utilization Optimization:  Given the decline in asset turnover, AMD should focus on optimizing the utilization of its assets to generate higher sales. This may involve reevaluating the asset mix and identifying opportunities for more efficient asset deployment. 4. Strategic Financing:  Evaluate AMD's capital structure and financing strategies to find an optimal balance between debt and equity. While maintaining a conservative approach is essential, strategic use of debt can amplify returns without compromising financial stability. 5. Competitor Benchmarking:

 Continuously benchmark against Intel to identify industry best practices and areas where the competitor excels. Learning from successful strategies can inform AMD's decision- making process. Being able to address operational inefficiencies, optimizing asset utilization, and carefully managing the balance between debt and equity are key areas for AMD to focus on and to improve its return on equity and enhance overall financial performance. Recommendations for Enhancing Financial Sustainability: 1. Address Liquidity Concerns: The declining trend in liquidity ratios, specifically the current ratio and quick ratio, raises concerns about AMD's ability to meet short-term obligations. To enhance liquidity, management should conduct a detailed analysis of the components affecting these ratios. Strategies may include optimizing inventory levels, negotiating favorable payment terms with suppliers, and closely monitoring working capital cycles. Additionally, exploring alternative financing options or lines of credit can provide a safety net during periods of increased financial strain. 2. Improve Operational Efficiency: The operating performance ratios highlight inefficiencies in receivables and inventory management, contributing to a decline in turnover ratios. Management should implement measures to streamline processes, reduce collection times, and enhance inventory turnover. This may involve leveraging technology for more efficient order fulfillment, improving relationships with customers and suppliers, and implementing

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inventory optimization strategies. Addressing these operational challenges will positively impact cash flow and overall financial performance. 3. Cost Structure Analysis: The significant fluctuations in operating margin and net margin percentages suggest challenges in managing operational costs. Conducting a comprehensive cost structure analysis is essential. Management should identify cost drivers, evaluate cost- effectiveness of operations, and implement cost-saving initiatives. This may involve renegotiating contracts with suppliers, optimizing production processes, or identifying areas for automation to improve overall cost efficiency. 4. Optimize Asset Utilization: The declining trend in asset turnover indicates underutilization of assets to generate sales. Management should assess the composition of assets, identifying those with lower productivity. This evaluation may lead to strategic decisions such as divesting underperforming assets, investing in technology to enhance efficiency, or reevaluating the product mix to align with market demand. Optimizing asset utilization is crucial for improving overall operational efficiency and profitability. 5. Strategic Financing Approach: While AMD has maintained a conservative financial structure, a balance between debt and equity is vital for sustainable growth. Management should evaluate the optimal capital structure based on AMD's growth objectives and risk tolerance. Strategic use of debt can amplify returns without compromising financial stability. Consideration of long-term financing options, such as debt restructuring or targeted debt

issuance, can be explored to support strategic initiatives without overburdening the balance sheet. 6. Continuous Competitor Benchmarking: Regular benchmarking against Intel, as evidenced in the provided Intel comparison, is crucial for identifying industry best practices. Management should stay informed about market trends, competitor strategies, and industry benchmarks. Learning from successful competitors can provide valuable insights for decision-making and help AMD adapt to changing market dynamics. Being able to address liquidity concerns, improving operational efficiency, analyzing cost structures, optimizing asset utilization, adopting a strategic financing approach, and continuous competitor benchmarking are essential steps for enhancing AMD's financial sustainability. Implementing these recommendations will contribute to improved financial performance and position AMD for long-term success. Regular monitoring and adjustments based on evolving market conditions will further strengthen AMD's financial resilience over the next two to three years. Reflection: This assignment has deepened my understanding of financial analysis, allowing me to interpret various ratios and derive meaningful insights about a company's financial health. I have learned to identify trends, potential challenges, and areas for improvement by scrutinizing liquidity, operational efficiency, profitability, and financial structure. The peer comparison with Intel provided valuable context, emphasizing the importance of industry benchmarks. Applying this

knowledge in the workplace, I could contribute to informed decision-making by conducting comprehensive financial analyses, identifying key performance indicators, and recommending strategic actions to optimize financial performance and sustainability. Understanding the interplay between different financial metrics is crucial for effective financial management and strategic planning in any business setting.

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References a. . Create graphs for some ratios on your choice to show trends. Use of Tables, Figures and Other Graphics to Summarize and Support Analysis Presented in the Paper. All tables and charts should have the numbering system, like “Table 1…”, the title, and foot/end note to reference the source of the information. (3% of the project grade)