Compare the company’s performance with that of its competitors.

Americas Financial Analysis

America Incorporated is one of the successful financial services companies in the world and attracts a wide range of customers. It has its headquarters in Dallas, Texas and it has operational branches in Texas, Michigan, Florida, Arizona, and California. The company also has operations in Canada and Mexico. Most of its major operations are carried out in Philadelphia, Dallas, Auburn Hills, Michigan, Livonia, and Cincinnati. When it was founded in 1849 in Detroit by Elon Farnsworth, it was known as Detroit Savings Fund Institute. It later changed to Detroit Savings bank and later to Detroit Bank in 1871 and 1936 respectively. After merging with other banks like Birmingham Bank, Detroit Wabeek Bank, and Ferndale Bank, it changed its name to the current one. It has made several changes to its management and has merged and acquired more companies. It’s currently among the most successful bank s and has the potential to grow further in the near future (Allayannis, Ramraika, Allayannis, & Ramraika, 2017). The analysis of the company’s financial analysis and comparing it with the rest of the competitors in the industry shows the differences in performance among them.

Common Size Analysis

The common size analysis of the financial performance of the company includes the details ion the financial statements as a percentage and this makes it easy to compare the company’s performance with that of its competitors. It also allows for a comparison of the company across different years. The table below shows the common size analysis of the financial statements of Comerica Incorporated;

Table 1: Common Size Income Statement

Details	Comerica	Wells Fargo	Comerica	Wells Fargo	Comerica	Wells Fargo
Year	2018		2017		2016
Total Interest Income	78.70%	76.15%	68.88%	67.62%	66.98%	61.41%
Total Interest expense	8.02%	17.26%	3.82%	10.73%	3.93%	6.76%
Total noninterest revenue	29.33%	41.11%	34.94%	43.12%	36.95%	45.35%
Total noninterest expense	52.31%	66.11%	57.35%	67.13%	64.42%	59.94%

 

Table 2: Comerica’s Common Size Balance Sheet

Details	Comerica	Wells Fargo	Comerica	Wells Fargo	Comerica	Wells Fargo
Year	2018		2017		2016
Total Assets	100%	100%	100%	100%	100%	100%
Total Liabilities	89.40%	89.61%	88.87%	89.34%	89.32	89.61%
Total stockholders’ Equity	10.60%	99.95%	11.13%	99.94%	10.68%	99.95%

 

Table 3: Comerica’s Common Size Cash Flow

Details	Comerica	Wells Fargo	Comerica	Wells Fargo	Comerica	Wells Fargo
Year	2018		2017		2016
Net cash from operating activities	1,616	36,073	1,103	18,722	493	169
Net cash from investment activities	(1,156)	(7,754)	(138)	(5,164)	(270)	(122,119)
Net cash for/from financing activities	(1,744)	(79,979)	(2,338)	(10,920)	848	(123,568)

 

The above analysis shows the key items contained in the three most important financial statements that investors consider in their analysis of a company. The stability of the company is determined by the way the available finances are used and how the company can meet its financial obligations. The figures show that the company is financially stable and the trend shows it will have a good performance in the future. The financial details shown in the common size analysis prove that the company is competitive as compared to the rest of the companies in the industry.

Trend Analysis

The analysis of the financial statements of the company for the past 5 years shows that the company has performed considerably well. The table below shows some of the details of the performance trend of the company.

Table 4: Financial Analysis for the past 5 years

Year	2014	2015	2016	2017	2018
Growth	0.19	49.97	43.69	-37.97	19.73
Revenue	2,523	2,737	2,850	3,168	3,328
Net Income	593	521	477	743	1,235

The growth rate of the company shows that the company improved between 2014 and 2015, then reduced in 2016 and more in 2017. There was some slight improvement in 2018. The trend is a confirmation that the company’s management could have made different decisions and that the outcomes of those decisions affected the performance of the company. Some of the details included in the analysis above shows that the company operates in a competitive and dynamic industry where factors like political decisions can lead to sudden changes in the company’s performance. Political decisions made by the federal or state governments have major impacts on business (Brink, 2017; Lin, Chang, Yu, & Kao, 2019).  It is valid to conclude that the financial performance of the company could have been affected partly by the political decisions made during those periods.

The most important information from this analysis is that the company has good management that makes the right decisions and on time. The revenue and net income are some of the key considerations made by investors. The two are an indication of the financial health of the business. The analysis above shows that the company has the potential to increase its wealth in the future and increase the wealth of the investors.

Financial Ratio Analysis

Financial ratios are a summarized view of the financial performance of a company. Some of these ratios include liquidity ratios, operating performance ratios, return on investment ratios and profitability ratios.

Table 5: Financial Ratios

	2018	2017	2016
Current ratio	1.02	1.0	0.96
Quick ratio	1.02	1.2	0.98
PE ratio	9.0	9.5	8.5
Profit margin ratio	34.75%	33.12%	32.12%

The analysis shows that the company has a strong financial performance and it has high profits. A current ratio is a liquidity ratio and it shows the ability of the business to pay its short term obligations that are due in one year. It is measured by dividing the current assets by the current liabilities. It is a show of the possibility that the company will clear its short term liabilities using the current assets it has. For Comerica Incorporated, the ratio is positive and it means that the company can clear its short term obligations easily. The ratios improved between the years 2016 and 2018. The improvements give a positive indication that the company is likely to perform better in the future. A company that has positive current ratios attracts more investors than the one with a low or negative one. In view of the management, the ratio is a good indication of healthy performance.

The quick ratio is an indication of the short term liquidity of the company. It shows the ability of the company to meet its short term obligations using its most liquid assets. It is also known as the acid test ratio and it is calculated by adding the cash to cash equivalents and accounts receivable value and the total is divided by the total of the current liabilities. For the Comerica Incorporated, the quick ratio increased from 0.98 to 1.2 and later to 1.02 between 2016 and 2018. The ratios also indicate that the company is making good profits using the assets available. The ratios show that there are chances that of the assets are increased, the company will make higher profits in the future. For example, with a quick ratio greater than 1.0, the company is in a position to clear its debts with the current assets. Investors could use this ratio to increase the trust that people have on the company. However, there are many other factors that investors could consider, including the trend in the industry.

The price to earnings ratio (PE ratio) is a measure of the current share price relative to its earnings per share (EOS) earnings. A higher ratio is an indication that the investors are willing to buy the shares at a higher price today because they have hopes that the company will have a better performance in the future. In other words, the higher the ratio, the more the investors are willing to pay for the $1 of the current earnings (Wang, Chatpatanasiri, & Sattayatham, 2017). The analysis above shows that increased by 10 points between 2016 and 2017 and then reduced by 5 points in 2018. The ratio is high but the trend is worrying. From the management’s point of view, it is necessary to put in measures that can stabilize the ratio or improve it. The profit margin ratio shows the amount of profit earned from each dollar of sales. In the above analysis, this ratio improved over the three years and this is a positive sign. Some of the ways that the company can improve the ratios above include an improved promotion, differentiation, lobbying, and marketing.

Return on Equity

The return on equity (RoE) is a useful measure of the effectiveness of the management in making profits using the assets of the company. The analysis of the common ratios related to RoE helps understand the company’s performance.

Table 6: RoE Analysis

Ratio	2018		2017		2016
	Comerica	Wells Fargo	Comerica	Wells Fargo	Comerica	Wells Fargo
RoE	15.86	11.67	9.37	11.53	6.16	11.78
Net profit margin	36.87	24.37	23.30	23.59	16.60	23.31
Asset turnover	0.05	0.04	0.04	0.04	0.04	0.05
Financial Leverage	9.43	10.96	8.99	10.75	9.36	11.03

The analysis of the ratios above suggests that the company operates in a highly dynamic industry and this requires a consistent change in management decisions and targets to meet the needs of the consumers. The RoE increased steadily in the three years and this a sign of good performance. The same ratio fluctuated for Wells Fargo, one of the main competitors. The fluctuation is an indication that the companies are affected differently by the factors in the market. One of the main factors that can affect the RoE of a company is its debt level. If the company has many debts, the RoE will slow down and vice versa. The asset turnover ratio of the two companies remained relatively steady, an indication that the two companies had similar ways in which they use the available assets to make money. The financial leverage of the company fluctuated over the three years and this means that there is no specific or steady factor that affects the company. The diversity of factors leads to fluctuation. If the management in Comerica wanted to improve the ratios, there are several strategies that include a reduction of the debt level, an improvement of the marketing processes and better management of the assets.

Recommendation

            The analysis above shows that the company has a good performance trend and that it can improve its performance by improving its management strategies. The strategies used to handle management challenges should be focused on the profitability of the company and its strategic goals (Gandy, 2015). The company’s management requires a change in the strategies that affect the ratios negatively. For example, if the assets are overvalued, the company should make the necessary adjustments and if the total assets of the company tend to shrink, then the management should get ways of restoring it. The asset turnover ratio should also be improved over the years to increase the attraction of the company to the investors. Any idle cash should be distributed to the company’s operations and used to increase the profitability recorded year after year.

The trend observed in some of the ratios suggests that there are challenges with value creation and making profits from the company’s operations. The management should introduce strategies that can motivate the employees to be more innovative and willing to take part in the changes in the company. Some of the challenges that could lead to poor performance are the usage of cash. If the company has idle cash, then it is advisable to distribute the cash to more profitable activities that could generate income for the business. The company’s cash and cash equivalents should be maintained at a level that is just enough to cater for the short term obligations. The rest of it should be invested. The management should also consider differentiation and price strategies to outdo the competitors in earning a larger market share and maintaining their consumers.

Reflection

            During the above assignment, one of the key lessons learned is the way a company’s ratios can be used to determine its performance. For example, the analysis of the company’s asset turnover ratio and the other profitability and liquidity ratios was used to show the company’s management strengths and weaknesses. The other lesson was that a company’s competitor can be used to determine if the business is competitive. By comparing Comerica to Wells Fargo, it was possible to determine the one that is doing better than the other in some of the areas like debt management. At the end of the assignment, the lesson was the importance of motivating employees, encouraging innovation and rewarding them. Companies that operate in the competitive and dynamic industries should encourage their employees to innovate new ways in which the company can make higher profits.

References

Allayannis, G., Ramraika, B., Allayannis, G., & Ramraika, B. (2017). Comerica Incorporated: The Valuation Dilemma. Darden Business Publishing Cases, 1-16. Retrieved from https://www.emeraldinsight.com/doi/abs/10.1108/case.darden.2016.000076

Brink, C. H. (2017). Measuring political risk: risks to foreign investment. Routledge.

Gandy, D. L. (2015). Small business strategies for company profitability and sustainability. Retrieved from https://scholarworks.waldenu.edu/cgi/viewcontent.cgi?referer=&httpsredir=1&article=1514&context=dissertations

Lin, T. J., Chang, H. Y., Yu, H. F., & Kao, C. P. (2019). The impact of political connections and business groups on cash holdings: Evidence from Chinese listed firms. Global Finance Journal, 40, 65-73. Retrieved from https://www.sciencedirect.com/science/article/pii/S104402831830084X

Wang, H., Chatpatanasiri, R., & Sattayatham, P. (2017). Stock Trading Using PE ratio: A Dynamic Bayesian Network Modeling on Behavioral Finance and Fundamental Investment. arXiv preprint arXiv:1706.02985.Retrieved from https://arxiv.org/abs/1706.02985