Author: Arend Pryor | Created: 09/14/2021
Details: Sharing content created as part of pursuing my MBA degree
Assignment:
Continue your work with the company you selected in the Competency 1 Assessment
Research your company’s financial reports for 2019
Complete a 2- to 3-page FAQ/shareholder analysis
Evaluate economic conditions that influence company performance. Consider political, environmental, currency (money), global economics, and government influences on economic conditions.
Compare market conditions with the company’s performance for 2019. Conclude how the market conditions that year influenced the company’s performance, such as interest rates, Federal Reserve Bank monetary policy changes, or other market conditions relevant to the company you selected.
Analyze year-over-year performance from 2018 and 2019. Consider key metrics or ratios such as trailing PE ratio, forward PE ratio, price to book, return on assets, and return on equity in your conclusions.
Salesforce.com – About the Company:
Salesforce.com started from very humble beginnings in 1999, setting up shop via a home office located in San Francisco. The company has since grown into the powerhouse it is today, which generated $17.1 billion in revenue for 2020. Specializing in offering their cloud-based customer relationship management (CRM) software platform known as Customer 360, the company allows customers to weave their data through multiple organizational systems and applications. The goal of which is to provide organizations with the tools and data they need to maximize their e-commerce services from anywhere in the world. These services are offered via multiple platforms and devices and even include the ability to utilize artificial intelligence to enhance their offerings, increase development time, and make use of automation to speed up the implementation process. Specifically, Salesforce customers utilize the CRM software tool for data storage, lead management, forecasting, document delivery, and identification of enhanced relationship opportunities (Reuters Editorial, 2021).
Economic Conditions that Influence Company Performance – Political Influences:
Political influences have the ability to impact company performance whether they occur in or outside of the U.S. For example, trade wars can potentially amplify global political and economic instability, as well as financial market volatility. As a result of such economic conditions, customers may choose to delay, forego, or even limit their investing in Salesforce CRM software applications until more favorable conditions present themselves. As another example, the 2016 vote that led to the United Kingdom’s exit from the European Union resulted in economic uncertainty and anxiety about the interest rate environment, causing fluctuations in commodity prices and the enacting of trade tariffs that could potentially lead to currency instability. This type of uncertainty makes it difficult to accurately forecast future earnings and other financial results. In response, the company has attempted to mitigate risks such as these via the hedging of foreign currency activities, however, there are no guarantees as to their effectiveness, which could negatively impact financial outcomes (Salesforce 2019 Annual Report, 2020).
Economic Conditions that Influence Company Performance – Environmental Influences: The threat of natural disasters and acts of terrorism have the potential to cause prolonged disruptions of service to Salesforce customers in light of the cloud-based methodology of providing access to the company’s CRM applications. Climate change also presents various increasing challenges and applies to any location where the company currently conducts business. As an example, the company’s headquarters in California is said to be susceptible to water shortages and extreme weather events, all of which could negatively impact the company’s primary business activities, operations of third party partners, or even the day-to-day operations of current customers. With these risks in mind, the company actively works to reduce their carbon footprint by focusing on sustainable operations and the utilization of renewable energy for global actions (Salesforce 2019 Annual Report, 2020).
Economic Conditions that Influence Company Performance – Currency Influences:
With operations being conducted in Europe, Canada, Asia Pacific and Japan, volatility of foreign currency in these markets poses a risk from the sale of subscriptions, accounts receivable activities, and other financial transactions. As the company continues to grow and invest in international markets through the hiring of additional employees and the purchasing of capital expenditures required to expand operations, this risk will continue to be a factor. Foreign currency exchange rate fluctuations may also have a negative impact on the financial results and cash flows of the company in each of these foreign locations. The United Kingdom’s (UK) decision to leave the European Union (EU), known as Brexit, is a huge change for the country, one that could result in unpredictable market conditions, volatility in global financial and foreign exchange markets, and have an impact on values of the Euro and British Pound (Mueller & Robins, 2021). As of 2019, total revenues from European operations accounted for 19 percent of total revenues, which have increased from the years prior. To protect future revenues, the company has begun transitioning away from their centralized European structure based in the UK and will allow local companies in Europe to invoice consumers directly, which will allow the company to recognize revenues, expenses and balance sheet accounts in local currencies. Additionally, the company has hopes to mitigate their risk of foreign exchange rates via the use of short-term foreign currency forward contracts (Salesforce 2019 Annual Report, 2020). These contracts are agreements to acquire one currency by selling another on a specific date that occurs within 12 months for a pre-determined price, which is known as the forward rate (Foreign Exchange Forward Contract - What Is a Forward Contract? | Clear Currency Explains - Clear Currency, 2021).
Economic Conditions that Influence Company Performance – Global Economic and Governmental Influences:
Salesforce.com is subject to the laws and regulations of local and international governments as they currently exist and continue to evolve for the areas of how data is collected, processed, stored, and transferred. Data privacy laws can also vary based on the locations where data is processed and shared. As an example, the EU’s General Data Protection Regulation (GDPR), their e-Privacy Regulations, and California’s Consumer Privacy Act (CCPA) have imposed new obligations and regulations in the areas of data privacy, processing, and the controlling of data, all of which directly impact the operations of the company. Europe has also been the source of continued legal challenges with regard to the company’s ability to transfer data across international borders, such as from within Europe to the U.S. Resolution of these issues will only come as a result of government entities reaching agreements that support these activities. Potential consequences of the company and its customers not being in compliance with these privacy laws could reduce the usage and demand of Salesforce.com products, interfere with meeting customer requirements, and expose the company to increased liabilities. All of which have the potential to negatively impact the company’s reputation and sales (Salesforce 2019 Annual Report, 2020).
Market Conditions that Impacted Company Performance – Interest Rates:
Changes in interest rates can affect company debts, investments, or provide favorable terms for loans. In 2018, Salesforce benefited from investment income to the tune of $36 million dollars as a result of growing interest rates. This number jumped to $57 million dollars in 2019, an increase of 58 percent. While these rates have risen over the past few years, this type of growth is not guaranteed for the future and can fall victim to changes in the market or as a result of floating rate securities that fail to generate income that matches with company expectations. In an attempt to mitigate these risks, the company classifies debt securities as “available for sale,” so that gains and losses are not recognized as a result of interest rate changes, unless these securities are sold prior to the point at which they mature or decrease in value (Salesforce 2019 Annual Report, 2020).
Market Conditions that Impacted Company Performance – Federal Reserve Bank Monetary Policy Changes:
Looking at market conditions during 2019, specifically mid-year, the Fed decreased interest rates by a quarter of a percentage point in an effort to help the slowing economy (Horsley, 2019). While the company’s annual report will tell you that changes in interest rates, monetary policy or other market conditions have the potential to negatively impact revenues, investments, and debt, the fiscal year results showed positive growth in each of these areas from the year before, despite the slowing economy. With the Fed lowering interest rates, we can speculate that this presented attractive interest rates for many businesses to borrow money from lenders and invest this capital in growing their business and possibly upgrading their current CRM solution to one offered by Salesforce.com. Company revenue increased from $10 billion to $13 billion during 2019, which provided plenty of opportunity to satisfy expenses and debt obligations.
Analysis of Key Metrics and Ratios for 2018 and 2019:
We now turn our attention to a comparison of company performance from one year to the next, using 2018 and 2019 as the basis for this side-by-side assessment of the metrics and ratios included below. A summary of each of these metrics and ratios can be found in the table that follows.
Trailing Price to Earnings (PE) Ratio: The trailing PE ratio for a company is thought to be one of the most accurate methods of valuing a company as it is based on the current stock price as compared to their earnings from the year before (Corporate Finance Institute, 2019). As of October 2018, the company’s trailing PE ratio, as shown below was 128.26. Performing the same calculation for October of 2019, this ratio jumped up to 166.48, which was based on the previous year’s earnings per share of $0.94, which was actually a decrease from $1.44 during 2018. An increase in the stock price from $137.24 to $156.49 from one year to the next directly impacted the PE ratio and led to its increase (Salesforce, Inc PE Ratio 2006–2021 | CRM, 2021).
Forward PE Ratio: Calculating a company’s forward PE ratio is similar to the trailing calculation with the exception of using an earnings per share (EPS) value that has been forecasted for the future. This calculation is not used as frequently as part of accurately valuing a company as the projected EPS may shift and miss its mark (Corporate Finance Institute, 2019). For this comparison, 2020 and 2021 were used as shown in the table below. Using forecasted values, we see that a forward PE ratio of 51.02 was calculated for 2020 and 70.92 as of today, July 26th 2021. The 39 percent increase from one year to the next illustrates the expectation of growth (Salesforce.Com, Inc. (CRM) Statistics, 2021).
Price-to-BookRatio: This calculation compares the capitalization of an organization to its book value in order to determine a company’s market valuation. Book values can vary from one industry to the next, so when comparing, it is important to do so using direct competitors when possible (Fernando, 2021b). Looking at the price to book value of Salesforce, we find that in 2018 this value was at 7.15 and a year later in 2019, it dropped slightly to 4.17. This means that in 2019, the market price was valued slightly higher than 4 times its book value (Salesforce, Inc Price to Book Ratio 2006–2021 | CRM, 2021). As a comparison of another company that offers cloud based software, the price to book ratio for Oracle in 2018 and 2019 was 5.45 and 10.83, respectively (Oracle Price to Book Ratio 2006–2021 | ORCL, 2021).
Return on Assets (ROA) Ratio: Calculating a company’s return on assets ratio will tell you just how profitable a company is relative to its total assets, which is also an indication of their efficiency in doing so. This is another tool used by investors and company managers to evaluate a company and compare current versus past performance, or to compare organizations within the same industry (Hargrave, 2021). Using the balance sheet for Salesforce as a reference, company assets consisted of cash and cash equivalents, marketable securities, accounts receivable, costs capitalized to obtain revenue contracts, prepaid expenses and other miscellaneous assets (Dybek, 2021). All this considered, the company had an ROA of 3.92 percent in 2018, which then dropped to 2 percent in 2019. Based on the formula for calculating ROA (net income / Total Assets), the cause of the drop could have been a combination of the growth in net income combined with their increase in total assets for 2019 (Salesforce 2019 Annual Report, 2020).
Return on Equity Ratio: The return on equity ratio, much like a few of the others mentioned above, is a calculation that provides us with a look at the profitability of a company, however, in this instance, the ratio is based on stockholders’ equity. In 2018, the return on equity for Salesforce was 7.68 percent, while in 2019, this value dropped to 3.57 percent (Fernando, 2021a). Based on the formula for calculating this ratio (net income / average stockholders’ equity) as well as the data from MacroTrends, net income dropped from $0.95 billion in 2018 to $0.74 billion in 2019, while stockholders’ equity increased from $14.69 billion to $33.28 billion, both of which would account for a decrease in this ratio (Salesforce, Inc ROE 2006–2021 | CRM, 2021).
References
Corporate Finance Institute. (2019, August 23). Trailing P/E ratio.
Dybek, M. (2021, March 18). salesforce.com inc. (NYSE:CRM) | balance sheet: Assets. Stock
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Fernando, J. (2021a). How return on equity (ROE) works. Investopedia.
Fernando, J. (2021b). What the Price-To-Book ratio (P/B ratio) tells you? Investopedia.
Foreign exchange forward contract - what is a forward contract? | clear currency explains - clear
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Hargrave, M. (2021). How to use return on assets when analyzing a company. Investopedia.
Horsley, S. (2019, July 31). Fed cuts interest rates for 1st time since 2008. NPR.
Mueller, B., & Robins, P. (2021, July 22). What is Brexit? Updates on Britain’s split from E.U.
The New York Times. https://www.nytimes.com/article/brexit-uk-eu-explained.html
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