Management homework help
Cash Assessment
Company | New Oriental | TAL | GOTU | Average | ||
Year | 2021 | 2022 | 2023 | 2023 | 2023 | China Industry avg |
Cash assessment | ||||||
Working capital as a percentage of annual revenue | 72.6% | 89% | 72.2% | 263.2% | 102.4% | 176.6% |
Current ratio | 1.89 | 2.62 | 1.96 | 4.42 | 2.59 | 2.99 |
Quick ratio | 1.8 | 2.45 | 1.82 | 1.68 | 2.57 | 2.02 |
Accounts receivable turnover | 36.09 | 24.75 | 21.92 | 22.75 | 11.23 | 18.63 |
Inventory turnover | 65.34 | 62.82 | 26.75 | 11.19 | 30.77 | 22.9 |
Payable turnover | 52.99 | 78.71 | 20.2 | 7.27 | 2.14 | 9.87 |
Long-term debt/Owners’ equity | 5.93% | 1.72% | 0.38% | None | None | None |
Cash from operations | 0.1 | 0.69 | 0.05 | 0.17 | 0.01 | 0.08 |
In order to ensure the accuracy of data comparison, our group took the Education industry as the comparison standard and calculated the average value based on New Oriental, TAL Education Group and Gaotu Techedu Inc to ensure the objectivity of data comparison. According to the course requirements, financial analysis is divided into cash assessment and profitability assessment.
According to the data in the above table, the advantage of New Oriental has decreased, followed by TAL Education Group (TAL), which is also the reason for the competition in the industry. All three companies have their advantages, New Oriental has the highest Payable turnover, TAL has the highest Working capital as a percentage of annual revenue and Accounts receivable turnover, Gaotu Techedu Inc (GOTU) had the highest Inventory turnover.
Working capital as a percentage of annual revenue
Working capital refers to the funds that a company can use at any time in daily operation, which is the value of current assets minus current liabilities of the company. Working capital as a percentage of annual revenue ratio reflects how much capital a company is applying to its annual revenue to cover short-term expenses. Due to the particularity of the education industry, the ratio of working capital as a percentage of annual revenue is relatively high in the global industry, while the ratio of New Oriental is lower than the average ratio of the Chinese market, which is the lowest among the three companies. This means that the other two companies have more advantages in this factor. TAL and GOTU have more capital to support day-to-day operations relative to their annual revenues, helping both companies to use capital flexibly. Although these figures of New Oriental are lower than that of its two competitors, its figures in the past three years are relatively stable, indicating that New Oriental has a plan for short-term capital needs or is good at seeking other forms of financing to meet them.
Current ratio
Current ratio = current assets/current liabilities
The current ratio is the difference between current assets and current liabilities. This ratio is a measure of a business’s ability to meet its short-term liabilities at maturity.[footnoteRef:1] When the current ratio is greater than 1, it indicates that the company’s current assets have strong solvency, because its current assets exceed its short-term debt, and the opposite is poor. It can be concluded from the table that the current ratio of the three companies is greater than 1, but the data of New Oriental in 2023 is lower than that of TAL and GOTU. This illustrates that the three companies are better able to repay their debts, while New Oriental is slightly worse than the other two companies. Although New Oriental has not continued to grow in this ratio in the past three years, it is still a growing trend. TAL’s high current ratio is due to its low current liabilities and GOTU’s high current ratio is due to its high current assets. [1: Gallo, A. (2015, September 14). A Refresher on Current Ratio. https://hbr.org/2015/09/a-refresher-on-current-ratio]
Quick ratio
Quick ratio = available assets/current liabilities
The quick ratio is also one of the important ratios to measure the liquidity of a company. Quick ratio refers to the ratio of quick assets to current liabilities, which measures the ability of an enterprise to repay current liabilities in current assets.[footnoteRef:2] The relatively standard data of the quick ratio is 1, indicating that the short-term solvency of the enterprise is relatively reliable. On the whole, New Oriental’s quick ratio has performed well, all above 1, and the ratio has not exceeded 2 in two of the three years. This means that New Oriental’s short-term debt repayment risk is not high, and the funds occupied in quick assets are reasonable. Its quick ratio and current ratio have similar trends over three years. [2: BDC. (n.d.) Quick ratio calculator (acid test ratio). https://www.bdc.ca/en/articles-tools/entrepreneur-toolkit/financial-tools/cash-ratio]
Accounts Receivable Turnover
Accounts Receivables Turnover=Net Annual Credit Sales/Average Accounts Receivables
Accounts receivable turnover indicates how quickly a business collects its accounts receivable over a given period, indicating how often it receives them.[footnoteRef:3] For a company, the higher the accounts receivable turnover, the more conducive to the development of the company, indicating rapid collection of accounts. Although New Oriental’s ratio has declined in three years, it is still at the leading level in the industry. New Oriental effectively manages its accounts receivable, and customers are highly efficient in paying their accounts. Possibly due to the Chinese government’s new policies on education in 2021, New Oriental closed one of its major businesses, K12. As it develops its new sales business in 2022, New Oriental’s accounts receivable increases, leading to a decline in its accounts receivable turnover. [3: Beaver, S. (2022, June 9). Accounts Receivable Turnover Ratio: Definition, Formula & Examples. https://www.netsuite.com/portal/resource/articles/accounting/accounts-receivable-turnover-ratio.shtml]
Inventory turnover
Inventory Turnover Ratio = COGS / Average Inventory Value
Inventory turnover is the number of times an organization counts all its inventory turned over or sold in a set number of years. The efficiency of an organization’s inventory management when selling products is determined by the number of times, it sell all its inventory, with the higher the quantity the more efficient.[footnoteRef:4] Due to the particularity of the industry in which New Oriental operates, its cost of revenue is mainly composed of labor costs and commodity procurement costs for free brand products and live e-commerce and other services.[footnoteRef:5] The high inventory turnover indicates that the company is efficient in managing inventory, which helps to reduce inventory utilization. New Oriental’s inventory turnover in the past three years has been higher than the industry average, but it has declined significantly in 2023. The reason for the decline in this ratio is the increase in New Oriental’s inventory. Inventories in 2023 will be almost double those in 2022. [4: Leonard, K. & Main, K. (2023, May 12). How To Calculate Inventory Turnover Quickly And [Examples Included]. https://www.forbes.com/advisor/business/how-calculate-inventory-turnover/] [5: New Oriental Education & Technology Group Inc. (2023). 2023 Annual Report. https://investor.neworiental.org/static-files/e58a01ad-8c06-4d5f-951c-38f8e02fd116]
Payables turnover
Payables turnover = Total Cost of Sales/ Average Accounts Payable
Accounts payable turnover is a measure of the speed of an enterprise’s payment to creditors or suppliers and is a key indicator of the enterprise’s liquidity and cash flow management.[footnoteRef:6] The ratio is calculated from total cost of sales and average accounts payable. A company with higher accounts payable ratios takes more time to make payments. New Oriental’s accounts payable turnover ratio in 2023 was significantly reduced compared with the previous two years, indicating that suppliers gave New Oriental more time to pay and reduced the frequency of payment. This may be due to New Oriental’s increased credibility with creditors and suppliers. New Oriental’s accounts payable turnover ratio is the highest of the three companies, which we believe is because New Oriental has more business than the other two companies and has more inventory. [6: Schwarz, L. (2023, July 18). Accounts Payable Turnover Ratio Defined: Formula & Examples. https://www.netsuite.com/portal/resource/articles/accounting/accounts-payable-turnover-ratio.shtml]
Long-term debt/Owners’ equity
Long-term debt to Owners’ equity ratio = Long-term debt/ Owners’ equity
The Long-term debt/Owners’ equity ratio compares a company’s total long-term debt to owners’ equity. A higher ratio means that the company takes on more debt, making them more vulnerable to financial risk, potentially increasing financial leverage.[footnoteRef:7] New Oriental’s ratio has declined in the last three years, as their long-term debt has dropped from $297.63million in 2021 to $14.65million in 2023. This indicates that the negative impact that New Oriental may receive in terms of financial risk is reduced, which is conducive to its development. The other two companies had no information on long-term debt. [7: Tomasetti, B. (2023, February 6). Long Term Debt to Equity Ratio. https://www.carboncollective.co/sustainable-investing/long-term-debt-to-equity-ratio]
Cash from operations
Cash Flow from Operations Ratio = Cash Flow from Operations / Current Liabilities
The positive cash flow generated by a company’s operating activities indicates that the company’s core business is actively developing and provides a measure of the company’s earnings potential.[footnoteRef:8] The cash flow from operations ratio is a measure of how effectively a company’s cash flows from operations meet its current liabilities. New Oriental’s ratio in 2023 is lower than that of its two competitors because of its reduced cash flow from operating activities. Although this is not an optimistic signal for New Oriental business and debt repayment, the average level of the industry is not high. [8: Seth, S. (2023, December 20). Cash Flow from Operating Activities (CFO) Defined, With Formulas. https://www.investopedia.com/terms/c/cash-flow-from-operating-activities.asp]
From the perspective of cash assessment, New Oriental has advantages in the industry. New Oriental’s short-term solvency is higher, and its long-term debt has decreased. According to the accounts receivable turnover ratio, accounts payable turnover ratio and inventory turnover ratio, New Oriental’s asset operation capacity still needs to be improved.
Profitability Assessment
Profitability ratios are a class of financial metrics used to assess a business’s ability to generate earnings relative to its revenue, operating costs, balance sheet assets, or shareholders’ equity. They show how well a company utilizes its assets to produce profit and shareholder value. Profitability ratios can be used to compare a company’s performance with its peers, industry averages, or historical trends.
Profitability ratios assess a company’s revenue, assets, and equity income.[footnoteRef:9] They demonstrate the company’s efficiency, performance, and industry edge. ROE, ROA, and profit margins (gross, operating, and net) are popular profitability ratios. The table below displays New Oriental Education & Technology Group Inc. (EDU), TAL Education Group (TAL), and GSX Techedu Inc. (GOTU) fiscal year 2023 profitability ratios and education sector industry averages. [9: Kharatyan, D., Nunes, A., & Lopes, J. (2016). Financial ratios and indicators that determine return on equity.]
New Oriental Education & Technology Group Inc. (EDU) | Financials in millions USD. | TAL | GOTU | ||
Year | 2023 | 2022 | 2021 | 2023 | 2023 |
Net Income | 177.34 | -1,187.72 | 334.41 | -135.61 | 13.17 |
Total Assets | 6,392 | 6,035 | 10,151 | 4,724 | 4,876 |
Shareholders’ Equity | 3,604 | 3,706 | 4,913 | 3,845 | 3,096 |
Revenue | 2,998 | 3,105 | 4,277 | 1,020 | 2,498 |
Operating Income | 190.05 | -982.51 | 117.27 | -90.73 | -118.05 |
Shares Outstanding | 1,678 | 1,696 | 1,645 | 213 | 176 |
Gross Profit | 1,588 | 1,351 | 2,240 | 583.41 | 1,797 |
Income before tax | 243.41 | -1,051.41 | 418 | -115.6 | -2.53 |
· ROE: Return on equity (ROE) is the ratio of net income to shareholders’ equity, expressed as a percentage. It shows how much profit a company generates for each dollar of equity invested by the shareholders. The formula for ROE is:
ROE = Net Income / Average Shareholders’ Equity
· ROA: Return on assets (ROA) is the ratio of net income to total assets, expressed as a percentage. It shows how much profit a company generates for each dollar of assets it owns. The formula for ROA is:
ROA = Net Income / Average Total Assets
· Profit margins: Profit margins are the ratios of different types of profit to revenue, expressed as a percentage. They show how much of each dollar of sales a company keeps as profit after paying for various expenses. The formulas for profit margins are:
Gross Profit Margin: Gross Profit / Net Sales
Operating Income Margin: Operating Income / Net Sales
Income Before Tax Margin: Income Before Tax / Net Sales
Net Profit Margin: Net Income / Net Sales
· Asset turnover: Asset turnover is the ratio of revenue to total assets, expressed as a number. It shows how efficiently a company uses its assets to generate sales. The formula for asset turnover is:
Asset Turnover = Net Sales / Average Total Assets
· Total asset/owner’s equity: Total asset/owner’s equity, also known as the financial leverage ratio, indicates how much debt a company uses to finance its assets. The formula for total asset/owner’s equity is:
Total Asset = Total Assets / Shareholders’ Equity
· EPS: Earnings per share (EPS) is a measure of how much profit a company makes per share of its stock. The formula for EPS is:
EPS = Net Income / Shares Outstanding
Company | New Oriental | TAL | GOTU | Average | ||
Year | 2021 | 2022 | 2023 | 2023 | 2023 | China Industry avg |
Profitability Assessment | ||||||
ROE | 6.8% | -32.0% | 4.9% | -3.5% | 0.4% | 7.18% |
ROA | 3.3% | -19.7% | 2.8% | -2.9% | 0.3% | 3.88% |
Profit margins | 8% | -38% | 6% | -13% | 1% | 4.47% |
Asset turnover | 0.42 | 0.51 | 0.47 | 0.22 | 0.51 | 0.69 |
Total asset/owner’s equity | 2.07 | 1.63 | 1.77 | 1.23 | 1.57 | 2.27 |
EPS | 0.20 | -0.70 | 0.11 | -0.64 | 0.07 | 0.67 |
Gross profit margin | 52.4% | 43.5% | 53.0% | 57.2% | 71.9% | 52.1% |
Operation income margin | 2.7% | -31.6% | 6.3% | -8.9% | -4.7% | 5.07% |
Income before tax margin | 9.8% | -33.9% | 8.1% | -11.3% | -0.1% | 14.96% |
ROE
Return on equity (ROE) is the percentage ratio of net income to shareholders’ equity.[footnoteRef:10] It indicates how much profit a company makes per dollar of shareholder equity. A greater ROE means a higher shareholder ROI. A negative ROE in 2022 meant EDU lost money for shareholders. EDU improved their ROE in 2023, although it was below the industry average and 2021. EDU must raise net income or reduce equity to boost ROE. TAL and GOTU have lower ROE than the industry average, indicating smaller shareholder profits. [10: Hayes, A. (2024). Profitability ratios: What they are, common types, and how businesses use them. Investopedia.]
ROA
The return on assets (ROA) is the percentage ratio of net income to total assets.[footnoteRef:11] It indicates how much profit a corporation makes per dollar of assets. Higher ROA suggests more efficient asset usage to produce income. A negative ROA in 2022 meant EDU lost money on its assets. EDU improved its ROA in 2023, although it was below the industry average and 2021. EDU must raise net income or reduce assets to boost ROA. TAL and GOTU have lower ROA than the industry average, indicating inefficient asset use. [11: Hayes, A. (2024).]
Profit margins
Profit margins are percentages of different types of profit to revenue.[footnoteRef:12] They represent a company’s profit margin on each sales dollar after expenses. A bigger profit margin means higher profitability and lower costs. EDU spent more than it made in 2022, posting negative profit margins. Except for the operating income margin, EDU had better profit margins than the industry average in 2023. EDU must cut costs or boost sales to boost its operating income margin. TAL and GOTU have lower profit margins and higher costs than the industry average in 2023. [12: Laitinen, E. K. (2017). Profitability ratios in the early stages of a startup.]
Asset turnover
Asset turnover is a figure representing revenue to total assets.[footnoteRef:13] It illustrates how well a corporation leverages its assets to sell. better asset turnover means better sales per asset. EDU’s asset turnover was lower than the industry average in 2022 and 2023, implying lower revenue per asset. EDU must boost income or reduce assets to improve asset turnover. In 2023, TAL had a substantially lower asset turnover than the industry average, indicating poor revenue per asset. GOTU’s asset turnover was higher than the industry average in 2023, implying higher revenue per asset. [13: Hayes, A. (2024).]
Total Asset/owner equity
Total asset/owner’s equity, or financial leverage ratio, shows how much debt a company utilizes to finance its assets.[footnoteRef:14] A larger total asset/owner’s equity suggests more debt leverage and financial risk. EDU’s total asset/owner’s equity was lower than the industry average in 2022 and 2023, indicating lower debt leverage and financial risk. To finance growth, EDU could increase debt leverage, but it should also evaluate profitability and cash flow. In 2023, TAL had substantially lower total asset/owner’s equity than the industry average, indicating low debt leverage and financial risk. In 2023, GOTU had a lower total asset/owner’s equity than the industry average, indicating reduced debt leverage and financial risk. [14: Hayes, A. (2024).]
EPS
Earnings per share (EPS) is a measure of a company’s earnings per share of stock.[footnoteRef:15] more EPS means more profitability and shareholder value. In 2022, EDU lost money per share. EPS rose in 2023, however it was below the industry average and 2021 levels. EDU needs to grow net income or reduce shares to boost EPS. In 2023, TAL and GOTU had lower EPS than the industry average, suggesting weaker profitability and shareholder value. [15: Hayes, A. (2024).]
Gross profit margin
The percentage of gross profit to revenue is gross profit margin. It indicates how much a corporation keeps from each dollar of revenue after paying for items supplied. Higher gross profit margins reflect lower cost of products supplied to revenue. A lower gross profit margin than the industry average in 2022 indicated a greater cost of goods sold relative to revenue for EDU. In 2023, EDU’s gross profit margin rose but remained below 2021. EDU must lower its cost of goods sold or raise revenue to enhance its gross profit margin. A larger gross profit margin than the industry average in 2023 meant TAL had a lower cost of goods sold compared to revenue. GOTU’s 2023 gross profit margin was substantially greater than the industry average, showing a low cost of goods sold relative to sales.
Operation income margin
Operating income margin is the percentage of revenue that generates operating income.[footnoteRef:16] It indicates how much a company keeps from each dollar of sales after paying salaries, rent, utilities, etc. High operational income margins reflect low operating expenses relative to revenue. A negative operating income margin in 2022 meant EDU spent more than it made on operational expenses. EDU’s operational income margin rose in 2023 but remained below the industry average and 2021 levels. EDU must cut costs or boost sales to boost its operating income margin. In 2023, TAL and GOTU had negative operating income margins, meaning they spent more than they generated. [16: Hayes, A. (2024).]
Income before tax margin
In percentage terms, income before tax margin is revenue divided by income before tax. A corporation maintains a portion of each sales dollar before income taxes. A bigger income before tax margin suggests reduced financing expense and/or more operating income/revenue. EDU used more money on interest and operational expenses in 2022, resulting in a negative income before tax margin. In 2023, EDU had a greater income before tax margin than the industry average. EDU must cut interest costs or boost operating income to boost its income before tax margin. In 2023, TAL and GOTU had negative or low income before tax margins, meaning they spent more than they generated on interest and operational income.
EDU lost money in 2022 owing to the COVID-19 outbreak and Chinese regulatory restrictions. EDU had lower profitability ratios than the industry average in all categories except income before tax. EDU’s income before tax margin was better than the industry average, showing a lower interest expense than operational income. ROE is the percentage of net income from shareholders’ equity.[footnoteRef:17] EDU’s ROE, ROA, profit margins, asset turnover, total asset/owner’s equity, and EPS were lower than the industry average, suggesting a lower net income relative to equity, assets, and shares. EDU had a greater cost of goods sold and operating expense relative to revenue than the industry average, as seen by its lower gross profit margin and operating income margin. [17: Choiriyah, C., Fatimah, F., Agustina, S., & Ulfa, U. (2020). The effect of return on assets, return on equity, net profit margin, earning per share, and operating profit margin on stock prices of banking companies in Indonesia Stock Exchange.]
TAL lost money in 2023 because of low profitability ratios. TAL has worse profitability ratios than the industry average in all categories except gross profit margin. A larger gross profit margin than the industry average meant TAL had a lower cost of goods sold than revenue. However, TAL had a negative operating income margin, income before tax margin, and net profit margin, suggesting higher operating, interest, and tax expenses than revenue. TAL had a lower net income relative to its equity, assets, and shares than the industry average because of its poorer ROE, ROA, asset turnover, total asset/owner’s equity, and EPS.
GOTU earned net income in 2023 due to positive profitability ratios. GOTU had better gross profit margin, asset turnover, and total asset/owner’s equity than the industry average. A larger gross profit margin than the industry average meant GOTU had a lower cost of goods sold than revenue. GOTU also had a higher asset turnover than the industry average, implying better revenue per asset. GOTU also had a greater total asset/owner’s equity than the industry average, indicating higher debt leverage. GOTU had poorer profitability ratios in ROE, ROA, profit margins, and EPS than the industry average. Lower ROE, ROA, and EPS than the industry average meant lower net income than GOTU’s equity, assets, and shares. GOTU had a negative operating income margin and income before tax margin, suggesting higher operating and interest expenses than revenue.
References
BDC. (n.d.) Quick ratio calculator (acid test ratio). https://www.bdc.ca/en/articles-tools/entrepreneur-toolkit/financial-tools/cash-ratio
Beaver, S. (2022, June 9). Accounts Receivable Turnover Ratio: Definition, Formula &Examples. https://www.netsuite.com/portal/resource/articles/accounting/accounts-receivable-turnover-ratio.shtml
Choiriyah, C., Fatimah, F., Agustina, S., & Ulfa, U. (2020). The effect of return on assets, return on equity, net profit margin, earning per share, and operating profit margin on stock prices of banking companies in Indonesia Stock Exchange. International Journal of Finance Research, 1(2), 103-123.
Gallo, A. (2015, September 14). A Refresher on Current Ratio. https://hbr.org/2015/09/a-refresher-on-current-ratio
Hayes, A. (2024). Profitability ratios: What they are, common types, and how businesses use them. Investopedia. https://www.investopedia.com/terms/p/profitabilityratios.asp#:~:text=Profitability%20ratios%20are%20a%20class,a%20specific%20point%20in%20time.
Kharatyan, D., Nunes, A., & Lopes, J. (2016). Financial ratios and indicators that determine return on equity. XVII–Encuentro AECA.
Laitinen, E. K. (2017). Profitability ratios in the early stages of a startup. The Journal of Entrepreneurial Finance, 19(2), 1-28.
Leonard, K. & Main, K. (2023, May 12). How To Calculate Inventory Turnover Quickly And [Examples Included]. https://www.forbes.com/advisor/business/how-calculate-inventory-turnover/
New Oriental Education & Technology Group Inc. (2023). 2023 Annual Report. https://investor.neworiental.org/static-files/e58a01ad-8c06-4d5f-951c-38f8e02fd116
Schwarz, L. (2023, July 18). Accounts Payable Turnover Ratio Defined: Formula & Examples. https://www.netsuite.com/portal/resource/articles/accounting/accounts-payable-turnover-ratio.shtml
Seth, S. (2023, December 20). Cash Flow from Operating Activities (CFO) Defined, With Formulas. https://www.investopedia.com/terms/c/cash-flow-from-operating-activities.asp
Tomasetti, B. (2023, February 6). Long Term Debt to Equity Ratio. https://www.carboncollective.co/sustainable-investing/long-term-debt-to-equity-ratio