Critical Examination Of Salesforce Vs. Cisco Systems

Financial data

Discuss About The Accounting Characteristics Pricing Models?

Financial analysis is a process of measuring viability and profitability of a business or a business project. It includes the analysis of the financial statements of the company, which are prepared at the end of fiscal year. It helps in assessing the liquidity, efficiency, profitability of its business and shows its overall finance structure (Vogel, 2014).This report contains a critical examination of the financial performance and position of Salesforce over the past three years and its comparison with its competitor company named as Cisco Systems. Both the companies are in the list of World’s best workplace 2017, according to Great Place to Work Institute. The evaluation is done to know about how the company is performing in financial aspects and what it is contributing to the overall development of the country (Lee, Lee & Lee, 2009). 

Salesforce is an American cloud computing company having its headquarters in San Francisco, California. Most of its revenue comes from Customer Relationship Management (CRM) product and is considered to be the world’s first CRM platform. Salesforce topped the list of best workplaces 2017 generated by the Great Place to Work Institute. The company sells products like sales cloud, Salesforce CPQ, service cloud, commerce cloud and many other commercial applications of social networking. It is listed on New York Stock Exchange with a symbol of CRM and is a component of S&P 500 Index ("Salesforce", 2018).

Cisco systems, Inc. is a multinational technology company operating in America. The headquarters of the company are situated in San Jose, California. Cisco deals in manufacturing and selling of networking hardware, telecommunications equipment and other products and services of high psychology. It ranked 19^th on the list of best workplaces, according to Great Place to Work Institute. The company is one of the competitor of Salesforce and its people and products helps in connecting the society securely and seizing tomorrow’s opportunity today ("Cisco - Global Home Page", 2018).

Consolidated income statement for past three years

("Salesforce", 2018).

("Salesforce", 2018).

Consolidated income statement for past three years

("Annual Report", 2017).

("Annual Report", 2017).

Ratio analysis is the most commonly used technique for doing the financial analysis of the company’s final accounts. There are different type of ratios which are used to measure the liquidity, efficiency, profitability and the capital structure of the company. A comparative analysis of company’s financial performance with the industry average or a trend analysis over the past years, can be done by calculating ratios (Fraser, Ormiston and Fraser, 2010). There are various ratios categorized as liquidity ratios, profitability ratios, efficiency ratios, activity ratios and capital gearing ratios. It is considered to be the most desirable method which includes evaluation of the financial performance by using current or historical financial data (Warren & Jones, 2018).

Consolidated income statement for past three years

These ratios indicates that how quickly a company can convert its assets into cash or liquid form. Calculation of these ratios is done to measure the liquidity of the company. They generally evaluate the company’s ability to pay off its short-term obligations. There are two types of liquidity ratios (Zainudin and Hashim, 2016).

Current ratio: it is a type of liquidity ratio that determines company’s capability of paying off its short-term debts with its current assets. It measures the relationship between firm’s current assets and current liabilities. Cash and cash equivalents, marketable securities are the current assets that company have, which can be easily converted into liquid form. The ideal current ratio is 2:1 and is calculated by dividing CA with CL (Saleem and Rehman, 2011).

As per the calculations done, it can be said that the CR of Salesforce has increased in 2016 as compare to 2015 from 0.81 to 1.02, but the same has been reduced in 2017 to 0.83. The reason for this increase during 2015-2016 was a rise in the value of cash and cash equivalents and marketable securities. These assets can easily be converted into cash and can be used to pay the short term debt. In 2017, the ratio is reduced because a large portion of current assets was engaged in accounts receivables, which can or cannot be convertible into cash within one year. Moreover, the value of deferred commissions and prepaid expenses has also increased as compare to 2016. Overall, there was a slightest increase in total current assets as compare to the change in total current liabilities from 2016 to 2017.

Quick Ratio: it is also known as acid test ratio. It measures company’s potential to pay its current liabilities with its quick assets. Current assets like cash, marketable securities, cash equivalents and account receivables are considered to be quick assets as they can be easily converted into cash. The ideal ratio is 1:1 and is calculated by dividing QA with CL (Krantz & Johnson, 2014).

The same trend follows in case of Quick ratio. It has increased in 2016 and then decreased in 2017. The reasons for the fluctuations are same as of in case of current ratio. The quick ratio of Salesforce over the past 3 years remains less than the ideal ratio of 1:1. Having a ratio of 0.98 in 2016 means the company can pay off almost all of its liabilities with its quick assets. A ratio of 0.79 in 2017 implies that Salesforce can settle 80% of its current liabilities.

Consolidated balance sheet

These ratios indicates how efficiently, a company is utilizing its resources to set off its liabilities. The ratios indicates the potential of the company to use its assets and manage its liabilities in the most efficient and effective manner (Tracy, 2012). Following are the efficiency ratios:

Receivable turnover ratio: it presents how efficiently a company can collects its account receivables. A high DTR shows that the debt collection of the company is effective and that it is collecting cash from its debtors timely (Jindal and Jain, 2017).

The DTR of Salesforce has reduced from 2.11 to 2.05. This implies that company is not collecting its receivables efficiently and timely because of its slow paying debtors.

Creditor turnover ratio: it analyse the ability of the company to pay off its creditors. A high CTR is considered to be more desirable as it implies that the firm is paying off its liabilities frequently and regularly (Barman and Sengupta, 2017).

An increase was there in Salesforce’s CTR from 1.35 to 1.44 in year 2017. This indicates that company pay off to its creditors very often and have enough liquidity for making the payments, despite of having slow paying receivables. One of the reason for this rise can be an increase in the value of Cash and cash equivalents during the year.

Asset turnover ratio: it shows how well a firm utilizes its assets to generate revenue. The efficiency is measured by comparing net revenue with average assets. A high ratio indicates better performance of the company (Kieso, et.al. 2012).

Salesforce ATR is slightly reduced in 2017 from 0.55 to 0.57. It implies that the company’s ability making revenue with its assets is reduced in 2017 as compare to that of in 2016. Reasons being increase in purchases of fixed assets and in the value of strategic investment. Moreover, overall increase in total assets is more than the overall increase in total revenue during 2016-2017.

One of the main motive of conducting ratio analysis is to measure the profitability of the company or in other word to have an idea about its potential to earn profits from its operations. These ratios give an overview of firm’s profits made during a financial year. Following are the profitability ratios (Camilleri and Camilleri, 2017).

Operating Profit ratio: it indicates company’s systematic cost control and profit earning after meeting all its operating expenses. A high operating profit ratio is more desirable than the lower one (Jenter and Lewellen, 2015).

Cisco Systems, Inc.

Calculation of this ratio gives an idea that OPR of the company was negative in 2015 and during 2016-17, it reduces from 0.02 to 0.01. One reason for declining operating profits is increasing operating expenses throughout the year. The operating expenses of Salesforce were continuously increasing from 2015.

Net Profit Ratio: it is the most commonly used profitability ratio that represents the relationship between net profit after tax and total revenue. It shows the percentage of profit earned by the company with its operations after meeting all the expense including operating expenses, interest expense, taxes and preference share dividend (Kartio, Mirza and Shaikh, 2017).

During the year 2015 and 2016, the net profit margin of Salesforce was negative 0.05 and 0.01 respectively, reasons being company was making loss during these years because the revenue earned during these years was not sufficient enough to meet all the operating and non-operating expenses. The trend changes in 2017, where company earned a profit of $179,632 with a positive ratio of 2%. The gain from the strategic investments and positive value of other income are added to the value of operating income, making Salesforce capable to meet all its expenses with revenue earned and make profits.

Return on Equity: this ratio shows the efficient use of shareholders’ investment, by the company in order to generate profits. A high ROE is favourable for the company.

Looking at the calculation of ROE, it can be said that, during first two years the trend was negative and it got reversed in 2017 when company had a positive ROE of 2%. Clearly the net income earned in 2015-16 was negative, making the ROE negative. Having a positive ratio in 2017 indicates that the company has earned profits and is performing better. It will be now able to give positive return to its shareholders (Penman, Reggiani, Richardson and Tuna, 2017).

The ratios which tells about the overall capital structure of the company are known as capital structure ratios. In other words, these ratios refer to the degree of long term financing of a business (Bragg, 2012).

Debt-equity ratio: it compare the total debt of a firm with its total equity. A high D/E ratio indicates that the company has raised funds more from creditors rather than investors (Levi and Segal, 2015).

A constant decrease was there in the ratio over the past three years which means that the portion of debt is reduced to an extent and Salesforce is raising funds from its investors.

Interest coverage ratio: it indicates the capability of the company regarding its interest payments. Creditors generally used this ratio to know about the risk taking factor of the business (Ferrarini, Hinojales and Scaramozzino, 2017).

In year 2015, Salesforce had a coverage ratio of 1.99 that means it was paying its interest timely. But the trend changed in 2016-2017 and the company reported negative ICR. Reason was the lack of income to pay the required interest expense.

The current ratio of Cisco is far better than Salesforce. It has increased during year 2015-2016 and in 2017, the ratio was 3.03 which slightly lower than that of 2016. This implies that company has enough current assets to meet its current liabilities. A large portion of its assets is in the form of cash and less amount is engaged in inventory. Cisco is much more capable in meeting its short term debt than Salesforce.

Cisco’s Quick ratio is also higher than Salesforce, although declined in 2017. The ratio is more than the ideal ratio of 1:1, reason being it has more liquid cash in proportion to its liabilities and also the company is capable of utilising its assets in making investments rather than holding them in inventories.

The debtor turnover ratio of Cisco is much higher than that of Salesforce. It means it collects its debtors more efficiently and effectively. It can convert its receivables into cash faster than Salesforce as the debtors do not take long time to make the payments.

Cisco has higher CTR because it has enough total revenue to pay off its creditors timely. Increase in its total revenue is much more in proportion to that of in its total creditors. From creditors’ point of view, a company who can pay them back regularly is much better than the one who make delays in payment.

Asset turnover ratio of Cisco is lower than Salesforce which implies that the company is not good at generating revenue with its assets. Increase in purchase of fixed asset can be one of the reason for lower ATR.

Cisco has positive OPR throughout the years as compare to Salesforce. It has high operating profit margin that shows its potential to make more profits with its operations. From investors’ point of view, it is better to invest in it as the company manages its ongoing operations so effectively and efficiently.

It will be obvious that the NPR of Cisco will be more than Salesforce, because the company had not occurred any losses in the previous three years like Salesforce. It is able to maintain its profits very well.

In comparison to Salesforce, return on equity of Cisco is higher and has also increased during 2015-2016. Looking at the profits earned, it can be said that the company is performing better and is providing high returns to its investors.

Cisco has low debt equity ratio as compare to Salesforce, which means the company is favourable to both creditors and investors. Having a low ratio indicates that most of the funds are raised through investors rather than creditors. There has been an increase in the stockholders’ equity of Cisco whereas accounts payables remains almost same over the past three years.

The interest coverage ratio of Cisco has decreased during the years that is from 14.01% to 8.95% in 2017. This implies that company’s ability of paying its interest expenses has reduced because of the increase in the interest expenditure over the periods and lack of funds. Though the ratio is more than the ratio of Salesforce.

Conclusion

As per the above analysis and interpretation, it can be said that the performance of Salesforce has improved in the year 2017. In the previous years, the company was occurring losses, but the trend changed in 2017 where it made a profit of $179,632. Though the company topped the list of best workplaces but, financially its performance was not promising in the past three years. Moreover, comparing it with Cisco systems, Inc., the latter company performed pretty well in its past years. Cisco is performing better than Salesforce at all grounds including profitability, efficiency and liquidity.

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