Financial analysis of Autonomy Corporation - Essay Example

? Autonomy Corporation is a technology company founded in 1996. The majority of the technological advances the company markets came from research efforts from an alliance with Cambridge University. “The company currently has a market cap of $7 billion, is the second largest pure software company in Europe and has offices worldwide” (Autonomy, 2011). The software the company sells can be used to optimize the utilization of information in order to derive great value and meaning from internal data. The vision of the company is to dramatically change the way in which we interact with information and computers, ensuring that computers map to our world, rather than the other way around (Autonomy, 2011). Autonomy Corporation is a global enterprise that has dual corporate headquarters in Cambridge, United Kingdom and San Francisco, USA. The company has a presence in four continents: North America, South America, Europe, and Asia Pacific. The firm has more than 400 major clients including Oracle, IBM, HP, and Novell which are users and supporters of the firm’s technological products. This paper will analyze the financial standing of the company based on the use of financial and ratio analysis. In fiscal year 2010 Autonomy Corporation generated $870.36 million in sales (Morningstar, 2010). The sales total of the company increased by 17.66% in comparison with the previous fiscal year. The average selling price of the company was $790,000 which is a stable metric in this industry. The firm achieved a net profit of $296.21 million in 2010. The profitability of the company in 2010 is outstanding due to the fact the net margin of the company was 34%. The net margin of the company was very impressive considering the fact that the industry net margin in the software industry is a very low 1.7% (Dun & Bradstreet, 2011). The net margin is a financial ratio that measures the absolute profitability of the business. The net margin of Autonomy Corporation in 2010 was 32.3% higher than the industry average. The gross margin of the company was an outstanding 87%. The gross margin is a broad measure of profitability. The stockholders of the company benefited from the great earnings of the company. The earnings per share of the firm in 2010 was $1.11. Earnings per share tend to have an effect on the market price per share, as reflected in the price earnings ratio (Garrison & Noreen, 2011). The common stocks of Autonomy Corporation are traded in the London Stock Exchange. The firm’s website claims that the stock symbol of the firm is AU.L. Upon further research at various financial websites it appears that Autonomy Corporation’s stock are being traded in the London Stock Exchange under the symbol 5053.L; the current stock price of Autonomy Corporation is $2,549 per share (Yahoo, 2011). The revenue per employee of the company in 2010 was $463,000 which is 5% better than in 2009. During 2010 one of the highest expense accounts of the company was its research and development expense. The company spent $114.75 million in R&D. During the last five years the company has more than double its R&D expenses. This is a good sign because investing in research and development allows companies to develop new products and technologies. Patents are born out of the efforts of the R&D team. Two additional financial ratios are the return on assets (ROA) and return on equity (ROE). Return on assets measures how well assets have been employed by management, while return on equity when compared to return on assets measures the extent to which financial leverage is working for or against common stockholders (Garrison, et. al, 2003). The return on assets of Autonomy Corporation in 2010 was 9.02%. The ROA of the company is better than the industry average of 6.9% (Dun & Bradstreet, 2011). The return on equity of Autonomy Corporation in 2010 was 14.33%. The ROE of the firm is 6.17% below the norm in the software industry. The current ratio measures a company’s ability to pay off its short term debt. The current ratio is calculated dividing current assets by current liabilities. A current ratio is healthy if is above 1.0. The current ratio of Autonomy Corporation in 2010 was a very healthy 2.8711. The corporation is in a great position to pay off its short term debt. The quick acid ratio is any solvency test that is more rigorous than the current ratio due to the fact that uses the same formula with the exception that inventory is subtracted from the numerator. The quick acid ratio of Autonomy Corporation in 2010 was 2.8708. The debt ratio measures the ability of a company to pay off its long term debt. The debt ratio of Autonomy Corporation in 2010 was 2.70. The debt ratio follows the same general rule as the current that if is above 1.0 the company is in a good standing. The working capital of the company in 2010 was $718.57 million. The working capital measures the company’s ability to repay current liabilities using only current assets. Autonomy Corporation does not face any liquidity problems neither in the short nor long term. The debt to equity ratio of Autonomy Corporation was 0.59. The debt to equity ratio is a measure of the amount of assets being provided by creditors for each dollar of assets being provided by the stockholders. As a financial analyst I consider the common stocks of Autonomy Corporation an excellent investment. The financial ratios of the firm clearly illustrate a lot of good trends that validate the firm’s common stock as an excellent investment due to the outstanding financial performance of the firm in 2010. The net margin of the company is 20 times better than the competition. The company had both income and net margin growth in 2010 in comparison with the previous year. The firm has wisely invested a large portion of its profits in research and development which will help the company in the long term. The liquidity position of the organization is solid both in the short and long term. References Autonomy.com (2011). An Introduction to Autonomy. [Accessed 10 January 2012] Dun & Bradstreet (2011). Key Business Ratios: Computer Peripheral & Software. [Access 10 January 2012] Garrison & Noreen (2003). Managerial Accounting (10th ed.). Boston: McGraw-Hill Irwin. Morningstar.com (2010). Annual Report Autonomy Corporation. [Accessed 10 January 2012] Yahoo.com (2012). Autonomy Corporation (LSE: 5053.L). [Accessed 10 January 2012] Read More