Automatic Data Processing Firm’s Financial Analysis

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Summary

Automatic Data Processing (ADP) is an American-based company that provides software and services for human resource management. The human capital management solutions are cloud-based and provided by the company across the world. Headquartered in Roseland, NJ, ADP is the largest payroll provider that outsources its services to employers and businesses of all sizes since its operations are conducted through two segments. The first segment is professional employer organization and employer services. With over 600,000 clients worldwide and 40,000 of them already using its human capital management software, one can say ADP is already performing well in the market (Automatic Data Processing, Inc., 2019). This report presents a financial analysis of the data for 2019 and 2018 to establish the company’s performance, its areas of concern, and recommendations for improvement.

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By focusing on the years 2019 and 2018, the report examines how ADP performed during the period through the financial analysis framework. This involves looking at the income statement, which presents information on the business activities of the company over the period in terms of its revenue, operating income, and net income. The analysis also examines the balance sheet on the resources, which are the assets and sources of capital, including the equity and liabilities. The cash flow illustrates how ADP received cash and paid out in return during the period of accounting based on the cash inflows from operating activities, investing, and financing activities.

Financial Performance of ADP

Income Statement

Table 1: Elements of the income statement of ADP for 2019 and 2018 (US$ in millions)

2019 2018
Revenues 14,175.2 13,325.8
Operating income 3,024 2,512
Net income 2,292.8 1,620.8

Revenues are the tax collected from customers and money received when goods or services are transferred to customers, such as sales. From the analysis of the income statement elements for 2019 and 2018, Table 1 shows that revenues for the company increased from $13,325.8 million in 2018 to 14,175.2 million in 2019 (Automatic Data Processing, Inc., 2019). Thus, ADP realized an increase of $0.8494 million or 6.4% in the revenues between the two financial years. The improvement was primarily driven by the revenue growth from payroll processing (Automatic Data Processing, Inc., 2018). The support for ADP’s revenue is attributed to the high rate of client retention of over 90% by the company (Automatic Data Processing, Inc., 2019). Thus, the positive changes in the revenues were contributed by multiple factors.

Similarly, its position as the market leader in the services of human resources has been significant in helping the company make more sales. The recent years have also seen a significant migration towards software services to manage the employees (Automatic Data Processing, Inc., 2019). As a result, there has been more outsourcing leading the company to increase the sales, hence, in revenues. Thus, the client base, employees per client, trends on payroll fees, and comparisons in the competition are contributing factors towards these increased revenues between 2018 and 2019.

The same Table 1 shows that both the operating income and net income for the company increased between 2018 and 2019. Operating income increased from $2,512 million in 2018 to $3,024 million in 2019 representing a 20.4% or 0.512 million increase (Automatic Data Processing, Inc., 2019). The same trend was seen with the net income which increased from $1,620.8 million in 2018 to $2,292.8 million in 2019, representing a 41.5% or 0.672 million increase (Automatic Data Processing, Inc., 2019). The increase in the operating income was attributed to the higher revenues the company realized in 2019 compared to 2018. Similarly, though the company saw the total cost of revenues and the operating expenses increase over the period, the increase rate was lower compared to the revenue increase realized over the period.

Balance Sheet

Table 2: Components of the balance sheet (USD in millions)

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2019 2018
Current assets $34,342.3 $31,823.3
Total assets $41,887.7 $38,849.1
Total liabilities $36,487.8 $34,113.2
Equity $5,399.9 $4,735.9

Table 2 above shows the changes in the components of the balance sheet of ADP during the period of 2018 and 2019. From the table, assets, liabilities, and equity increased for the company from 2018 to 2019. The current assets increased from $31,823.3 million to $34,342.3 million, assets in total increased from $38,849.1 to $41,887.7 million (Automatic Data Processing, Inc., 2019). The company also increased its liabilities from $34,113.2 million to $36,487.8 million, while equity increased to $5,399.9 million in 2019 compared to $4,735.9 in 2018 (Automatic Data Processing, Inc., 2019). Thus, the performance of the company in terms of its resources was impressive over the period.

Cash Flow

Table 3: Cash Flows from various activities (USD in millions)

Activities 2019 2018
Operating activities 2,688.3 2,515.2
Investing activities -2,197.7 -2,504.6
Financing activities -207.7 -1,655.9
Net cash flow 254.1 -1,639.5

Table 3 above shows the cash flows from different activities undertaken by the company between 2019 and 2018. From the table, there was an increase in cash flows from operating activities from $2,515.2 million in 2018 to $2,688.3 million in 2019 (Automatic Data Processing, Inc., 2019). This could be attributed to the increased transactions, adjustments, and value changes. The same table shows an increase in the cash flows in investing activities from -$2,504.6 million in 2018 to -$2,197.7 million in 2019 (Automatic Data Processing, Inc., 2019). The cash flows based on financing activities also experienced increase from -$1,655.9 million in 2018 to -$207.7 million in 2019 (Automatic Data Processing, Inc., 2019). Overall, the cash flow increased from -$1,639.5 million in 2018 to $254.1 million in 2019 (Automatic Data Processing, Inc., 2019). The increase is attributable to the company engaging in activities that brought in more cash than those activities that took away cash from the company.

Financial Ratios

Table 4: Liquidity ratios

Ratios 2019 2018
Current 1.05 1.05
Quick ratio 1.05 1.05
Cash ratio 0.06 0.07

The liquidity ratios show a constant situation when it comes to ADP’s ability to meet its obligations over the short term. For instance, the current ratios for the company in 2018 and 2019 were the same at 1.05 (Automatic Data Processing, Inc., 2019). This means that ADP could meet its short-term debts or liabilities with the current assets that the company held over the period. The same trend is seen with the quick ratio, which was maintained at 1.05 for the two fiscal years to show that ADP could be to meet its obligations over a short period by including its cash, receivables, and market investments over the short term (Dossi & Patelli, 2018). The cash ratio, on the other hand, saw some drop from 0.07 to 0.06 (Automatic Data Processing, Inc., 2019). This shows the inability of ADP to meet its short-term liabilities when focusing on its cash and marketable investments over a short-term period alone.

Table 5: Profitability ratios

2019 2018
Operating margin 21% 19%
Profit margin 16% 14%
Return on equity 42% 40%

From the profitability table, there was a general improvement in the company’s profit between 2018 and 2019. It is observable that the operating margin for the company increased by 2% between 2018 and 2019(Automatic Data Processing, Inc., 2019). The same trend was seen with the profit margin and return on equity which both had a 2% increase over the period.

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Areas of Concern and Improvement

From the analysis, ADP has shown improvements in many areas, including the significant and constant positive changes in the revenues attained by the company. There is no doubt that ADP improved when it comes to making sales, which led to it realizing increased levels of revenues over the period between 2018 and 2019. As the revenues for the company increased, ADP was able to even realize higher income improvements at 41.5% for the two years this analysis is based on to examine the performance of the company (Automatic Data Processing, Inc., 2019). Another significant improvement is noted in the areas of profitability of the company, and it is evident that there was a general improvement in the profit that the company makes, and this also saw an increase in what the shareholders get.

However, a major concern is how the company is managing its debt over the period of analysis. Although the current assets held by ADP were able to meet the company’s obligations over a short period, the lack of change or even increase in the current ratio and quick ratio raises an alarm that the company is doing very little overtime to minimize its debt levels. Instead, when considering the cash ratio, it is evident that the company’s ability to manage its short-term liabilities using cash and short-term marketable investments had gone down in 2019 compared to 2018 (Lucouw, 2017). This means that the company continues even to incur some debts and may pose a risk of straining the recourses of the company if the trend is allowed to continue.

Comparison with a Competitor Company “Accenture”

Accenture is a consulting firm that provides services in technology, business, and management. It is an Irish company that operates worldwide and offers significant competition to ADP to provide management consulting services. However, there is a need to compare the financial performance of ADP and its competitor, Accenture, to establish how the two companies did in the 2018 and 2019 periods. The financial reports for Accenture show that the company received revenues of $40,992.54 million in 2018 and $43,215.01 million (Accenture Plc., 2019). When comparing the revenues of the company for the two years, there was a significant increase of 5.42%. However, Accenture is doing far much better than ADP since the company’s revenue is higher and even experienced more increase during the period than ADP.

The operating income for Accenture was $5,898.781 million in 2018 and $6,305.074 million in 2019, while its net income was $4,059.907 and $4,779.112 million in 2018 and 2019, respectively (Accenture Plc., 2019). When comparing these figures with ADP, it is evident that Accenture had more income in 2018 and 2019 compared to ADP. A look into liquidity ratios shows that the current ratio for Accenture was 1.3382 in 2018 and 1.3967 in 2019, showing that Accenture had a significant ability to meet its short-term obligations using the resources it had more compared to ADP during the same period (Accenture Plc., 2019). Similarly, Accenture seems to increase this effort in 2019, unlike ADP, which retained the current ratio at 1.05 between 2018 and 2019 despite being low at Accenture Plc. (2019). Finally, for Accenture, its net profit margin was 9.904 and 11.0589 in 2018 and 2019, respectively.

Questions for the Management

After the analysis of ADP, the following questions can be asked to the management of this organization:

  • The management should tell whether it is aware of the drivers of the growth the business is experiencing over the period.
  • The management needs to explain whether it strategically thinks about how the people drive the business performance and, consequently, profitability.
  • There is a need for the management, especially in charge of finance, to state whether their understanding of the finance function extends to the business and the aspirations of the key stakeholders.
  • Finally, what the management is doing to improve the debt safety of the organization in future.

References

Accenture Plc. (2019). Annual Financial Report. Form 10-K. Web.

Automatic Data Processing, Inc. (2018). Annual Financial Report. Form 10-K. Annual Reports. Web.

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Automatic Data Processing, Inc. (2019). Annual Financial Report. Form 10-K. U.S. Securities and Exchange Commission. Web.

Dossi, A., & Patelli, L. (2018). You learn from what you measure: Financial and non-financial performance measures in multinational companies. Long Range Planning, 43(4), 498-526. Web.

Lucouw, P. (2017). Interpreting financial statements. Journal of Finance and Investment Analysis, 2(1), 69-71. Web.

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