Question

my assignment is to determine the type of investment (debt or equity) for a publicly traded company. I also need to speculate on what the investments are and how they are classified. I don't know how to find these answers looking at the company (The Clorox Company) balance sheet. How do I answer these question just looking at the balance sheet?

Thank you

Answer 1

Find below the Q2 balance sheet report of Clorox Company, found on their website.

Clorox Reports Q2 Fiscal Year 2020 Results, Updates Fiscal Year Outlook. Balance sheet figures are in million.

   12/31/2019   6/30/2019   12/31/2018
ASSETS          
Current assets          
Cash and cash equivalents   168   111   162
Receivables, net   544   631   528
Inventories, net   514   512   578
Prepaid expenses and other current assets   77   51   97
Total current assets   1,303   1,305   1,365
Property, plant and equipment, net   1,052   1,034   992
Operating lease right-of-use assets   303   -   -
Goodwill   1,588   1,591   1,586
Trademarks, net   790   791   792
Other intangible assets, net   115   121   127
Other assets   308   274   211
Total assets   5,459   5,116   5,073
          
LIABILITIES AND STOCKHOLDERS' EQUITY          
Current liabilities          
Notes and loans payable   507   396   235
Current operating lease liabilities   61   -   -
Accounts payable and accrued liabilities   945   1035   951
Income taxes payable   -   9   -
Total current liabilities   1,513   1,440   1,186
Long-term debt   2,288   2,287   2,285
Long-term operating lease liabilities   282   -   -
Other liabilities   745   780   789
Deferred income taxes   76   50   71
Total liabilities   4,904   4,557   4,331
Stockholders' equity          
Preferred stock   -   -   -
Common stock   159   159   159
Additional paid-in capital   1062   1046   1014
Retained earnings   3292   3150   2940
Treasury shares   -3,357   -3,194   -2,794
Accumulated other comprehensive net (loss) income   -601   -602   -577
Stockholders' equity   555   559   742
Total liabilities and stockholders' equity   5,459   5,116   5,073
          

From the above, looking at the asset side of the balance sheet, it can be seen that the company has created a lot of goodwill and made investments in Property, Plant and equipment. The company has also built a trademark and other intangible assets.

On the liability side, the has a huge retained earning balance which is healthy sign for any company and has also borrowed significantly which can be seen from the long-term borrowings made by the company.

Now to determine the type of investment(debt or equity) for the company, it can be determined through ratio analysis. If the company has favourable, debt to equity ratio, capital structure ratios, long-term debt to equity ration, short term debt to equity ratio, current ratio, total liabilities to total assets ratio, ROI is favourable, based on the results for the aforementioned ratios, a further decision as to debt or equity to be made can be determined.

Debt to equity ratio is calculated by formula, total liabilities/share-holder equity. Here total liabilities for Dec 31 2019 is $4904. And share-holder equity is $555. Therefore debt to equity ratio is 4904/555 = 8.84. This ratio indicates any companies financial leverage. This shows how the share-holders funds can cover the total debts of the company, in case of a downturn. The ratio of 8.84 shows that the company is highly leveraged and a risky investment. So more loan is not advisable for the company as the company is highly leveraged.

Similarly other ratios can be evaluated and compared with bench marks i.e ideal ratio, based on which decisions can be made whether to opt for debt or equity.