Corporate Analyisis of Pentair
Essay title: Corporate Analyisis of Pentair
Pentair, Inc.
Headquartered in Golden Valley, Minnesota, Pentair owns and operates fifty facilities throughout eleven different countries. Pentair’s Technical Products Group is a leader in global enclosures, thermal management products, and custom enclosures that house and protect sensitive electrical components. The Water Group manufactures innovative products used in the movement, treatment, storage and enjoyment of water. Pentair’s local ties include two manufacturing facilities. The Sheboygan operation molds plastic and extruder block water filters, while the Brookfield location manufactures custom enclosures.
Our group will analyze Pentair’s financial position at year-end in 2002 and compare that to the most recent year-end report in 2006. This analysis will include Pentair’s financial condition with respect to: accounts receivable and inventory turnover, current ratio and working capital, operating ratios and percentages, the rate of return on sales, fixed assets and capital, along with competitive strategies and the financial strengths and weaknesses. We will be using Pentair’s annual 10K report found on www.sec.gov, to support our comparisons.
In 2002, Pentair reported their total current assets as $2,514,450,000 compared to $3,364,979,000 in 2006. This 34 percent increase was equally distributed between accounts receivable, inventories, goodwill and property, plant and equipment. Goodwill and property, plant and equipment reported the largest increases. This means Pentair’s value grew based on their ability to purchase or maintain their property, plant and equipment.
Accounts receivable was reported at $223,778,000 in 2002 and grew to $422,134,000 in 2006. To compare the average collection period in both years, we need to divide accounts receivable by Pentair’s average credit sales per day. With net sales of $1,488,453,000 in 2002, our average credits sales per day equal $4,077,950. In 2006, Pentair reported net sales of $3,154,469,000 and average credit sales per day of $8,642,380.
2002 Average Collection Period $223,778,000 / $4,078,000 = 55 days
2006 Average Collection Period $422,134,000 / $8,642,000 = 49 days
While Pentair’s 10K does not report their collection terms, they do report the amount of days sales are left outstanding in receivables. Assuming collection terms are 60 days, Pentair’s average collection period is strong. On the other hand, if Pentair’s terms are 30 days, their average collection period is poor.
To calculate how efficiently Pentair converts inventory to sales, we divided their sales by inventory.
2002 Inventory Turnover $1,488,453,000 / $165,389,000 = 8.99
2006 Inventory Turnover $3,154,469,000 / $398,857,000 = 7.91
In 2002, Pentair turned its inventory into sales 8.99 times during the year. That number declined slightly in 2006 to 7.91. However, these numbers are favorable, while Pentair’s inventory sells well the ratio will continue to climb.
Analyzing the current assets of the firm with the company’s current liabilities will give us Pentair’s current ratio. In 2002, Pentair reported current assets as $810,808,000 and current liabilities as $476,200,000. This gives us a current ratio of 1.70. In 2006, Pentair reported current assets of $957,628,000 and current liabilities of $521,282,000. The current ratio in 2006 equaled 1.84.
2002 Current Ratio $810,808,000 / $476,200,000 = 1.70
2006 Current Ratio $957,628,000 / $521,282,000 = 1.84
This ratio analysis tells us that in 2002, Pentair has $1.70 of current assets for every dollar of current liabilities. In 2006, they have $1.84 of current assets for every dollar of current liabilities. Pentair could pay its short-term debt by liquidating about half of its current assets. To be comfortable with our current ratio, we would like to see this number increase.
The quick ratio is another way of analyzing the current assets of the firm with the company’s current liabilities. The only difference is between the quick ratio and the current ratio is that in the quick ratio the inventory is not included in the current assets. As shown in the graph above, the current ratio and the quick ratio have similar trends. A quick ratio is typically used with company’s that have a large inventory in comparison to it total assets. This is not that case for Pentair and the current ratio is probably better ratio to use for analysis.