Management teams often paint rosy pictures of their company, so investors need to perform their own analysis to uncover the truth behind a company's operation. Reviewing different financial ratios can highlight problems a Management Team might want investors to overlook. There are endless ratios that can be calculated, so each investor needs to determine which ratios are relevant to their company and the situation they're trying to understand.
Today I will use the numbers from Intel's annual financial statements to better understand what's going on with their business. They are in the process of turning their company around, so the ratios below will help us monitor their progress.
The numbers used to calculate the ratios are in the attachment below.
Gross Profit Margin: Measures the percent of Intel's revenue that is left after subtracting their "cost of goods sold." It also shows the percent of Intel's revenue that is available to pay their "operating expenses".
Formula:
Gross Profit ÷ Revenue = Gross Profit Margin
Intel's Gross Profit Margins are affected by the price they charge for their chips, the costs they pay to make their chips, and the quantity they sell.
A high Gross Profit Margin is desired by companies.
Year | 2023 | 2022 | 2021 |
Gross Profit Margin | 40.04% | 42.61% | 55.45% |
Interpretation:
Intel's Gross Profit Margin is declining because their sales are falling, their factories are not running at full capacity, and it's costing them more money to have TSMC make their chips. These factors have left Intel with less money to cover their operating expenses.
Operating Income Margin: Measures the percent of Intel's revenue that is left after they pay for their "cost of goods sold" and "operating expenses."
Formula:
Operating Income ÷ Revenue = Operating Income Margin
Operating Income Margin lets us know how well Intel is managing their expenses.
A high Operating Income Margin is desired by companies.
Year | 2023 | 2022 | 2021 |
Operating Income Margin | 0.17% | 3.70% | 24.62% |
Interpretation:
Lower sales, higher costs to manufacture their products, higher restructuring charges, higher depreciation expenses, and higher compensation have shrunk Intel's Operating Income Margin.
Fixed Asset Turnover: Measures the amount of revenue Intel makes from each dollar they've invested in their properties, plants, and equipment.
Formula:
Revenue ÷ Average Property, Plant, and Equipment = Fixed Asset Turnover
Two–year average used for Property, Plant, and Equipment
The Fixed Asset Turnover ratio is useful because it helps us gauge Intel's ability to generate revenue from the billions of dollars they've invested in their factories and equipment.
A high Fixed Asset Turnover ratio is desired by companies.
Year | 2023 | 2022 | 2021 |
Fixed Asset Turnover | 0.61 | 0.88 | 1.32 |
Interpretation:
Since Intel's sales have declined since 2021 and they're currently building new factories that do not produce any revenue, we should expect a decline in their Fixed Asset Turnover ratio. Once their factories are operational, the Fixed Asset Turnover ratio should increase.
Intel's declining Fixed Asset Turnover ratio also highlights the challenges they are facing in the PC, automotive, and FPGA markets, which have had recent downturns, and their inability to use their existing assets to create and sell competitive products.
In 2023, for each dollar Intel invested in their existing properties, plants, and equipment, they generated $0.61 in sales.
Free Cash Flow Margin: Measures the percent of Intel's revenue that converts into free cash flow.
Formula:
Free Cash Flow ÷ Revenue = Free Cash Flow Margin
The Free Cash Flow Margin is better at assessing Intel's profitability than the Operating and Net Profit Margin because the Free Cash Flow Margin shows the actual percent of Intel's revenue that can be used to reduce debt, pay dividends, buyback stock, and save cash on the company's Balance Sheet.
Companies on the US stock market use accrual accounting, which counts income as revenue even if the company did not receive any cash in a transaction. Accrual accounting also counts an expense even when the company did not pay the expense yet. Ratios that use the Cash Flow Statement help investors understand the actual amount of cash entering and leaving a business.
A high Free Cash Flow Margin is desired by companies.
Year | 2023 | 2022 | 2021 |
Free Cash Flow Margin | -26.33% | -15.25% | 11.55% |
Interpretation:
Intel's Free Cash Flow Margin is declining because their sales are falling and the amount they're spending to build their factories is increasing. Their declining Free Cash Flow Margin explains why they reduced their dividend last year and stopped doing share buybacks in 2021.
Inventory Turnover: Measures how many times in a period Intel sells their entire inventory.
Formula:
Cost of Goods Sold ÷ Average Inventory = Inventory Turnover
Two–year average used for Inventory
The Inventory Turnover ratio is not 100% accurate because most companies do not sell their entire inventory in a short period of time. Nevertheless, the ratio helps investors understand the demand for a company's product.
A high Inventory Turnover ratio is desired by companies.
Years | 2023 | 2022 | 2021 |
Inventory Turnover | 2.67 | 3.02 | 3.67 |
Interpretation:
Intel's Inventory Turnover ratio is declining, which means they are having difficulty selling their products. They went from selling out their inventory 3.7 times in 2021 to 2.7 times in 2023.
Days of Inventory on Hand (DOH): Measures the average number of days Intel's inventory sits on the shelf.
Formula:
Time Period ÷ Inventory Turnover = Days of Inventory on Hand
The time period used in our calculation is 365 days
A low Days of Inventory on Hand is desired by companies.
Years | 2023 | 2022 | 2021 |
Days of Inventory on Hand | 137 | 121 | 100 |
Interpretation:
In 2023, Intel's inventory stayed on their shelves 15.7 days longer than in 2022.
Receivables Turnover: Measures the number of times Intel collects the money their customers owe them.
Formula:
Revenue ÷ Average Receivables = Receivables Turnover
Two–year average used for Receivables
A high Receivables Turnover ratio is desired by companies.
Years | 2023 | 2022 | 2021 |
Receivables Turnover | 14.39 | 9.28 | 9.73 |
Interpretation:
Intel is collecting the money their customers owe them at a faster rate. In their financial statements, they mention selling their Accounts Receivable to a financial institution, so they don't have to wait for their customers to pay them.
The statement below is from Page 88 of Intel's 2023 annual report.
Intel collecting large sums of money from a financial institution instead of their customers is a perfect example of why investors can't just calculate a ratio and think they know the whole story. They still need to investigate the situation.
Days of Sales Outstanding (DSO): Measures the average number of days it takes Intel to collect all the money their customers owe them.
Formula:
Time Period ÷ Receivables Turnover = Days of Sales Outstanding
The time period used in our calculation is 365 days
Years | 2023 | 2022 | 2021 |
Days of Sales Outstanding | 25 | 39 | 38 |
Interpretation:
Intel is collecting the money their customers owe them in a shorter time frame.
Payables Turnover: Measures the number of times Intel pays all their suppliers.
Formula:
Cost of Goods Sold ÷ Average Accounts Payable = Payables Turnover
Two–year average used for Accounts Payable
The Payables Turnover ratio lets us know if Intel is paying their suppliers fast or slowly.
A high Payables Turnover ratio is "usually" desired by companies. In certain situations, a company might slow down their payments to suppliers so they can use the cash for other purposes.
Years | 2023 | 2022 | 2021 |
Payables Turnover | 3.58 | 4.72 | 6.22 |
Interpretation:
Intel is not paying their suppliers as often as before. Since Intel's revenues are declining and they're spending a lot of money on factories and equipment, they're probably stretching out their payment terms with suppliers.
Days Payable Outstanding (DPO): Measures how many days it takes Intel to pay all their suppliers.
Formula:
Time Period ÷ Payables Turnover = Days Payable Outstanding
The time period used in our calculation is 365 days
A low Days Payable Outstanding is "usually" desired by companies.
Years | 2023 | 2022 | 2021 |
Number of days of payables | 102 | 77 | 59 |
Interpretation:
Intel is taking longer to pay their suppliers. In 2023, it took them 25 days longer to pay all their suppliers than in 2022. They are doing everything possible to conserve their cash.
Conclusion
Financial ratios should be used as tools to guide our investment research.
They are not the answer. They are just guides. Use them wisely.
If you have any questions or comments about what I discussed today, feel free to contact me at ov@myinvestmentdreams.com.
Stay strong, stay blessed, and God willing, I will see you next week.
Where there is no guidance, a people falls, but in an abundance of counselors there is safety.
Proverbs 11:14 ESV
Comments