A. Introduction
In assessing the significance of various industry financial data, experts engage in financial
ratio analysis, which is the process of determining and evaluating financial ratios. A
financial ratio is a relationship that indicates something about an industrys activities, such
as the ratio between the industrys current assets and current liabilities or between its
accounts receivable and its annual sales.
The basic sources for these ratios are the company financial statements within the industry
that contain figures on assets, liabilities, profits, and losses. Industry ratios are only
meaningful when compared with other information. Since individual companies are most
often compared with industry data, ratios help an individual understand a companys
performance relative to that of competitors and are often used to trace performance over
time.
This report will evaluate the financial performance of Edison Schools, Inc., and evaluate
the companys worthiness as an investment. As one of the first and the largest private
operators of public K-12 schools, Edison Schools, Inc. is on a mission to prove that it can
outperform traditional public schools while earning profits in the process. Christopher
Whittle, a Wall Street darling who has previous experience in several other education
ventures, leads Edison Schools, Inc. The company has undergone a rapid growth strategy
since opening its first four schools in the 1999 school year. In the 2001 school year, Edison
operates 136 schools with approximately 75,000 students. From a business standpoint,
Edison has staked its success on its ability to gain economies of scale in school operation.
The first section of this report, which is the main body, will use financial statements from
1999, 2000 and 2001, along with standard financial ratio analysis to develop a clear picture
of Edison Companys financial performance. The second section, Appendix A that is
included as a reference contains each of the sets of the four financial statements that show
Edison Companys performance from 1999 to 2001. The third section, Appendix B,
contains the actual financial ratio analysis techniques, showing the companys performance
in 1999, 2000 and 2001, the percent change in performance between these years, a short
description of the meaning of each ratio, as well as a short assessment of the companys
change in performance between 1999, 2000 and 2001.
Du Pont analysis will be used to understand how the companys profitability, efficiency,
and leverage are linked in its financial performance over time. While trend analysis will
provide signals as to whether the companys financial health is likely to improve or
deteriorate. To explain the variation in the companys financial ratios over time, the
industry comparative analysis will be performed along with the trend analysis.
B. Trend and Du Pont Analysis of Edison Schools, Inc.
Appendix B contains other measures of Edison Companys financial performance, as
expressed in standard financial ratio analysis techniques using figures from the financial
reports in Appendix A.
Profitability: We looked at Edison Companys Return on Investment (ROI) for 1999, 2000
and 2001, using the Dupont Model, which is margin times turnover. Margin is net income
divided by the sales, and turnover is sales / average total assets.
Edison Schools, Inc. ROI for 2000
ROI = MARGIN x TURNOVER
OPERATING INCOME = Operating Income x Sales
AVERAGE TOTAL ASSETS Sales Average Total Assets
Input: 498 = 498 x 8,251
7,196 8,251 7,196
Result: 6.9% = 6.0% x 1.15
Edison Schools, Inc. ROI for 2001
ROI = MARGIN x TURNOVER
OPERATING INCOME = Operating Income x Sales
AVERAGE TOTAL ASSETS Sales Average Total Assets
Input: 924 = 924 x 10,359
8,659 10,359 8,659
Result: 10.7% = 8.9% x 1.20
At over 55.1%, the increase in ROI between 2000 and 2001 is remarkable and shows that
Edison Schools, Inc increased its sales while increasing the utilization of its assets used to
generate these sales. And to achieve these results, the sales, operating income and average
total assets increased proportionately. In the short term, this would be a good trend, but if it
continues, it could be a sign that Edison Schools, Inc is not keeping a big investment in
assets. If this trend continues, it may be an indication of increased operations rather than
improvement in asset efficiency.
Stock Performance: The common stock value increased 54.8%, from $42/share to
$65/share, between 2000 and 2001. This was an indication that the market liked what it
saw in the performance and the management of Edison Schools, Inc. In addition, it paid
1.2% in dividends for the past two years. Another key indicator, the Price to Earnings
Ratio, fell from 12.0 to 10.7. This was not enough to be alarming. In fact, some investors
felt that lower Price to Earnings Ratios was not necessarily a good thing. This is because if
a company is struggling to pay large earnings per share, to make the denominator in the
P/E equation large enough to keep the P/E ratio low, then often such financial pressures
can take the attention of the management away from the companys operations and other
important issues, like surviving as a going concern in a tough business climate.
Activity of Edison Schools, Inc.: The activity ratios measure the companys management of
asset levels and sales. Between 2000 and 2001, Edison Schools, Inc. showed positive
performance with its average days sales by over 25% and decreased its number of day
sales in accounts receivable over 2%. Together, these ratios show the efficiency of
collection relative to the average age of receivables. The inventory turnover fell by 5.9%
and the fixed asset turnover increased by 18.8%. These turnover figures overall would
suggest that assets are being used efficiently to produce sales.
