Automatic Data Processing Balance Sheet Analysis

Automatic Data Processing is an original outsourcer in the US. The fiscal year of Automatic Data Processing begins in July and ends in the next June. The following is a very abstract balance sheet in dollars.

From the information provided by the balance sheet, we can realize how the company has performed in the business. The debt to equity ratio is used to describe the relative proportions of the company’s total debt and equity which is used to finance the company’s assets. Therefore, the formula is:

Debt to Equity Ratio=Total LiabilitiesShareholder's Euqity

For Automatic Data Processing (ADP) in 2015, the total liabilities are 28,302 million dollars and the shareholder’s equity is 4808.5 million dollars. So the debt to equity ratio is about 5.89. This number means that the proportions of the company’s liabilities and equity are 5.89:1. As we know, asset is equal to the sum of liabilities and equity. If we regard the company’s whole assets as 6.89, then 5.89 out of 6.89 are from the source of liabilities and 1 out of 6.89 is from the equity.

The current ratio is a liquidity ratio used to measure the company’s ability to pay off short term obligations. It is expressed as follows:

Current Ratio=Current AssetsCurrent Liabilities

Though the current ratio varies among different industries, it is widely accepted that most of the healthy business has current ratio range from 1.5 to 2. And if the ration is below 1, it is dangerous for the company to meet its short term liabilities. For Automatic Data Processing (ADP), the current assets and current liabilities are 28809.2 and 27113.7. Therefore, current ratio is about 1.06, and ADP is able to meet its short liabilities but not in a very safe range.

As for the shareholder’s equity, Automatic Data Processing (ADP) has 466.4 million common shares outstanding, and the value of the common stock equity is 63.9 million dollars. But ADP has no preferred stocks. What’s more, dividends are paid with $1.95 per share in 2015.

For the stock performance, from January to present, the Automatic Data Processing’s stock price goes up. From $84.72 per share in January 1^st to $90.11 per share in April 13^th, the ADP’s stock price rises at about 6.36% during this period.

Furthermore, we can calculate the A/R (accounts receivables) and A/P (accounts payables) from the footnotes of the balance sheet. The average aging of A/R (accounts receivables) is a period report on the basis of the time receivables can be collected. It is used to measure the credit sales policy of the company and the performance of the business. The average aging of A/P (accounts payables) is also a period report which shows a company’s ability to take advantage of paying later and manage the cash flow out from the company. The method used is the weight average method on the accounts age.

For ADP’s average aging of A/R and A/P, I calculate from the information in footnotes and find out that the average aging A/R is about 2.87 years. This means that for all of the credit sales of the products, the company can collect all of the receivables during 2.87 years on average. However, the average aging A/P is not disclosed in the 10-K annual report.

Lastly, because the debt is more than equity, which means the company uses financial leverage to develop itself. As we know, the debt has an obligation to pay the interest to the debt holders, so if the company does not run very well and cannot pay the interest; it is more likely to be broken. Therefore, the company is not very fiscally conservative.

Reference:

1.     Peterson and Pamela. Analysis of Financial Statements. New York: Wiley, 1999.

2.     Automatic Data Processing, Inc. 10-K Annual Report. Washington, D.C.: SEC filing, 2015.

解释：

1.     debt to equity ratio它主要是描述了公司的债务和权益的比例。因为在balance sheet中，资产asset= 负债(liabilities or debt) +权益 (equity)。所以我们计算出来的5.89就是说， 如果我们把公司的全部资产看成是6.89份的话，里面有5.89份来自债务融资，1份来自权益融资。

2.     A/R 是应收账款accounts receivables，就是公司已经销售产品但还没有收到货款的情况，一般出现在credit sales赊销的情况下。average aging of A/R 是计算应收账款的平均账龄，就是一家公司平均几年能把他当年赊销的账单全部收回来。这个一般在balance sheet的附注中，我计算出2.87年，也就是2015年赊销的账单，平均2.87年后能够全部回款。

A/P 类似，是应付账款accounts payables的意思，就是公司从供货商处已经取得了商品或者服务，但还没有付款的情况，所以公司是赊账了。但是这个数据一般公司很少会在财报中披露，ADP也没有，所以此处并未计算。但需要知道A/P概念。