Kellogg’s Financial Case Analysis

Kellogg’s Profile

Kellogg’s Profile
Type Public
Traded as NYSE: K
S&P 500 Component
Issue Type Common Stock
Listing Date 12/05/1959
Industry Food processing
Founded 19/02/1906
Founder(s) Will Keith Kellogg
Headquarters Battle Creek, Michigan, United States
Area served Worldwide
Key people James M. Jenness
(Chairman)
John A. Bryant
(President and CEO)
Products Cereals
Cookies
Crackers
Toaster pastries
Cereal bars
Fruit-flavored snacks
Frozen waffles
Vegetarian foods
Revenue US$ 13.198 billion (2011)
Operating income US$ 1.976 billion (2011)
Net income US$ 1.231 billion (2011)
Total assets US$ 11.901 billion (2011)
Total equity US$ 1.760 billion (2011)
Employees 30,600 (2010)
Website www.kelloggs.com
www.kelloggcompany.com

Kellogg’s retail food chain became the leading global snack food retailer in 2011 following continual growth over the years. The food industry is competitive and subject to dynamic consumer tastes, changing spending trends as well as economic, and trade requirements. Economic conditions affect the spending patterns of consumers. For the past three years, the global economy slumped. Slow growth in the economy did not affect the continued increase in sales for Kelloggs in the past four years. Kelloggs has recorded an impressive 10% growth in sales on average since 2008. However, the economic situation continues to improve.

In particular, there is a notable recovery in the United States where Kelloggs has expanded in both online and store presence. In Europe, the prospects of growth are guarded because of the recent tightening of regulations and fiscal policies. On the brighter side, the debt crisis has eased in countries such as Greece and Spain. The emerging markets for Kelloggs and associated brands (e.g., Brazil, Japan, and China) have had relatively stable economies. This makes the company’s strategic online and store presence in those countries worthwhile as the company heads to 2015. Improving economic conditions may increase growth in the overall apparel industry, reduce uncertainties, and open new markets.

Governance structure

Name Shares Options Deferred Stock Total
Ownership
Percentage
External Directors
Benjamin Carson Sr. 33,166 25,000 0 58,166 *
John Dillon(5) 46,451 30,000 0 76,451 *
Gordon Gund (6) 64,776 30,890 65,486 161,152 *
Jim Jenness(7) 133,955 431,410 12,745 578,110 *
Dorothy Johnson 51,129 29,848 27,668 108,644 *
Donald Knauss 12,092 6,931 0 19,023 *
Ann McLaughlin Korologos 43,079 30,000 19,481 92,560 *
Rogelio Rebolledo 10,004 2,534 0 12,538 *
Sterling Speirn (7) 13,890 5,781 0 19,671 *
Robert Steele(8) 13,145 9,110 0 22,255 *
John Zabriskie 42,905 25,000 32,497 100,402 *
Named Executive Officers
John Bryant 155,275 923,700 0 1,078,975 *
Ron Dissinger 25,477 153,087 0 178,564 *
Brad Davidson 63,077 267,938 0 331,015 *
Paul Norman 59,434 226,066 0 285,500 *
Gary Pilnick 72,202 369,932 0 442,134 *
All Directors and executive officers as a group (19 persons)(9) 884,590 2,741,486 157,877 3,783,953 1.1 %

The governance structure at Kellogg’s starts with the Chairman who is the Board of Directors. Under the chair are four strategic committees tasked with various responsibilities. The committees are nominations, remuneration, corporate social responsibility, and audit committee. The committees probe into those specific matters for the Board and report timely. The board delegates its responsibility to the Group CEO. The CEO at Kellogg’s has various executive committees whose chairs report to him. Kelloggs also has non-executive directors whose work is to assess the performance and the work of the board and the CEO.

It includes a group of experienced individuals, especially in the corporate world. The board chairperson reiterates the need for the governance structure to reflect modern challenges. For example, the CSR committee was created to recognize the importance of giving back to society and using global resources responsibly. A company that fails to recognize this need risks the wrath of its clientele. Although the board influences major policy decisions, Kelloggs has internal and external board evaluation structures. Externally, for example in 2012, Kelloggs used Egon Zehnder. This ensures that the Board and a few directors cannot take autocratic control of the company, as was the finding of the Cadbury Report.

The Kelloggs report points out major corporate governance issues such as auditing, risk management analysis, number of executives among others. The report indicates a norm where the members of the executive report to shareholders over a duration of time the goings-on in the organization. Additionally, the report points out the fact that agency relationships are subject to the law. The UK for instance requires that shareholders know about the risks associated with their investments, the remuneration and the number of executives. Additionally, the shareholders determine whom to elect in the board of directors and other executive functions.

To mitigate risk, for example, the external auditors of the firm mustn’t work as the consultants of their client to prevent the auditors from auditing their work. Additionally, it avoids conflict of interest, as was with the case with Arthur Andersen and Enron whereby Andersen provided both consulting services and audits. GAAP required that there should be a separation of certain and uncertain projections and auditors are required to attest on the former only. The Kelloggs Report indicates that the auditors are chosen independently and do not have any affiliations to the company (Yahoo Finance 2014).

A good corporate governance structure in a country is essential for the growth and development of an economy. Following the infamous Enron scandal, the markets in the UK fell drastically and the UK economy suffered for a long time.

Lately, after the fall of Lehman Brothers in the US and the subsequent meltdown of several Wall Street companies, the global economy suffered. In its wake, the US administration instituted tougher regulations on the governance of corporations to curtail future meltdowns. The encouragement and incentives given to employees by corporate managements allowed the highly educated employees of different companies to become notorious financial criminals. For example, investment banks such as Citibank allowed Enron to use special accounts to borrow money and trade the treasury bonds making huge profits. Enron reported these as cash flow from operations.

Kellogg’s Business Strategy

Technology

Internet and globalization are crucial to a current business. Kellogg’s store presence goes hand in hand with its online presence. This drives its flexible business model of fitting the right fashion to the right people at the right time affordably. Kelloggs introduced 17 new online markets in 2011. 2015 is already promising to be successful. With store sales remaining relatively unchanged at an average of 25% across all major markets, online presence has experienced tremendous growth. However, connectivity has brought a major lifestyle revolution the world over. Hence, Kelloggs is even more cautious on trends in regional and global markets. This shows that the overall industry needs to be aware of the benefits that technology brings in line with the continued uptake in many countries. It is a new route for more revenue generation, trend evaluation, and growth.

Societal Values and Lifestyles

Different societies have different values and lifestyles. Kelloggs takes this as a challenge by giving the right people the right foods. However, affordability, trend, and functionality form the basis for Kellogg’s products. Additionally, a globalized and highly connected world has brought major changes in lifestyles. This diversity affects employment, operations, and sales. The latter has propelled Kellogg’s sales globally and particularly in Britain.

Key Success Factors

Strategy Elements

Generally, Kelloggs has a flexible business model. It develops affordable foods promptly. The company gauges the tastes and preferences of customers carefully to ensure competitiveness and to avert excess inventory. Online transition at Kellogg’s is spot-on. This is in line with globalization and internet uptake the world over. It is a new frontier for competition soon. The company follows a strict code of conduct that guides it to ensure both ethical and quality adherence. Additionally, Kelloggs streamlines its supply chain to ensure that products reach customers at the right time, which has increased funds from operations by an average of 12% since 2008. Strategic management is vital to the success of a business. A business that loses its strategic focus fails hence the need to look into the main strategic elements at Kellogg’s.

Competitive Capabilities

The most outstanding feature about Kelloggs is the company’s ability to understand the customer’s preferences, tastes, and dynamics. This explains its online transition, flexible and fast business model, and product attributes. Additionally, Kelloggs strives to make its supply chain stable. This complements its ‘fast fashion’ model which ensures that products reach the customers soon enough. This gives it a competitive advantage over competitors such as Nestle.

After transitioning to e-shopping, Kelloggs experienced steady growth. However, its earnings declined for the first time since 2006. Though Kelloggs does not emphasize too much on brand building, it enjoys stronger brand success than competitors because it ensures big names use its brands. Competitive capabilities inform a firm’s strategic focus and competitive dimension. A company must be fully aware of its capabilities to shape its market focus.

Compensation structure

The following is the compensation structure (i.e., options, restricted shares, and bonuses) for the CEO and executive officers.

Stocks

EPP ($) Restricted
Stock ($)
Total ($)
John Bryant 2011 1,482,848 0 1,482,848
2010 776,825 0 776,825
2009 573,482 0 573,482
Ron Dissinger 2011 362,368 0 362,368
2010 289,500 0 289,500
Brad Davidson 2011 519,712 0 519,712
2010 400,475 0 400,475
2009 295,646 0 295,646
Paul Norman 2011 410,048 0 410,048
2010 381,175 0 381,175
2009 220,844 0 220,844
Gary Pilnick 2011 300,384 0 300,384
2010 241,250 580,030 821,280

Bonuses

Option Awards Stock Awards(1)
Name Number of Shares
Acquired on
Exercise (#)
Value Realized on
Exercise ($)
Number of Shares
Acquired on
Vesting (#)
Value Realized on
Vesting ($)
John Bryant 118,356 741,419 41,831 2,068,891
Ron Dissinger 28,937 286,456 1,518 80,742
Brad Davidson 13,557 49,827 28,381 1,398,085
Paul Norman 60,394 349,902 18,657 925,466
Gary Pilnick 58,441 269,913 3,864 205,526

Kellogg’s compensation approach is based on:

  • Independent decision making

The compensation Committee is responsible for administering the compensation program for executive officers of Kellogg.

  • utilizing comparison data appropriately

Kelloggs undertakes standardizations against other companies in the same category. The compensation peers include Campbell Soup Co., General Mills, Inc., McDonald’s Corp., Clorox Co., The Hershey Co., and NIKE, Inc. among others.

  • targeting compensation higher than that of the comparison group,
  • following a reliable, thorough goal-setting process,
  • Utilizing substantiation apparatus to make sure suitable decisions are made.

Non-employee Directors who change their principal responsibility receives reviews of compensation too. Leadership qualities evoke a modification of behaviour in other people. Modification of behaviour produces a positive reinforcement to people’s ideas and performance, which occurs because of the positive effect of leadership. Reinforcements provide a suitable stimulus to evoke the best performances of people. For example, when an employer decides to praise and appreciate an employee whenever he comes on time, it will have a positive effect on him. The employee, in return for this stimulus, will show up on time regularly to gain this praise.

Positive reinforcement is now a significantly successful practice in influencing the behaviours of subordinates. It motivates people to deliver their best. Many large and successful companies have used positive reinforcement successfully to gain advantages (Yahoo Finance 2014).

The motivation of the workforce may be approached based on one of the theories of motivation. Lack of motivation implies that the needs of the workers have not been fully met and thus they are not encouraged to work hard or to continue working in such an environment. For instance, some workers might not be allowed to air their grievances to the CEO and are not on good terms with the personal assistant who might be seen as an obstacle to the access CEO. In addition, facilities for working might not be as up to date as compared to those of the young workers, which might be given everything that they need to work effectively. On the other hand, the new workers might not be fully motivated. They might be denied basic needs such as snacks, which are being provided by the company.

Capital structure

Market Risk

The figure for Per Share Market Value of the Firm is determined by the market in which a firm’s securities trade. In the case of Kelloggs, it is the New York Stock Exchange. This figure indicates how the investors value a company’s securities. Kelloggs has a Per Share Market Value of $5. This figure changes frequently due to market activity. Market risk is determined by:

Expected Rate of Return on a Security

It is the result of the CAPM formula. It represents the compensation expected by shareholders for investing in certain shares. It is composed of the risk-free rate, asset beta and expected market returns. In this case, shareholders of Kellogg’s would expect the returns for their investment of $ 974,000.

Risk-Free Rate

A risk-free rate is the expected return on security with no inherent risk such as a government bond. Government bonds are taken as the proxy for risk-free securities because the risk of default in payment is very low unlike corporate bonds, which are prone to default depending on the company’s financial status (Elton, Gruber & Brown 2006).

Beta Coefficient

Beta is a measure of the riskiness of the security. It is determined by the business risks facing a company and its environment of operation. Kellogg’s operates in an environment that is prone to change. The beta coefficient incorporates such risks. Any beta coefficient higher than one indicates that the security in question is riskier than the market. Conversely, coefficients lower than one indicates securities are less risky than the market (Fama 2004).

Expected Return on the Market

Every stock market has an average return it is expected to produce in a year. This return depends on the portfolio of securities in the market. In the case of Kellogg’s, the expected return on the New York Stock Exchange where it is listed is used in the CAPM formula.

Market Risk Premium

The market risk premium represents the difference between the risk-free rate and the expected rate of return on the market. It represents the amount an investor expects to be compensated for putting funds into that particular securities exchange

Market risk is tricky to deal with because most of the factors that constitute it are not within the control of the company. Industry players, government and the competitive environment at large are some of the factors that determine market risk. The least a company can do is to establish a good relationship with the determiners of these risks to ensure the company is safe. For example, it would be unwise to engage in unfair competitive practices (SEC info 2014).

Tax Risk

Tax risk refers to the risk a government exposes a company to and other intricacies associated with tax evasion, tax differences in different countries, and tax levels. A company’s operations and goals should be to maximize shareholder value. Hence, minimal risk is a contributor towards that goal. In this case, a company should operate in a country with the least tax percentages and favourable tax regimes with incentives. Additionally, a company should pay tax to curb the reputational risk associated with tax evasion.

Weighted Average Cost of Capital

The Capital Asset Pricing Model assumes that investors are rational and they choose among alternative portfolios based on each portfolio’s expected return and standard deviation. Furthermore, the model assumes that investors are risk-averse and maximize the utility of end of period wealth. Additionally, such investors have homogeneous expectations concerning asset return. In this case, all assets are marketable and divisible. In other words, it is believed under this model that the capital market is efficient and perfect.

According to the Separability theorem, all investors, regardless of their attitude towards risk, should hold the same risk assets in their portfolios. The crucial differences in portfolios held by investors of different psychologies are in the in-between the risky stocks and the non-risk stocks. Different investors will choose different points on the capital market line. In the above figure, point M represents the market portfolio and RF is the rate of return on the riskless asset.

All investors combine RF and M, but in different proportions. The market portfolio is the ‘same mix of risky stocks’. Investor A for example prefers to play safe with emphasis on riskless assets. Person B has the most funds in the market portfolio. Person C could have had leveraged portfolios that were added to his original funds by borrowing at RF and putting all of them into the market portfolio.

The interior decorator school of thought suggest that different portfolio of risky assets should be prepared for differing investors to suit their tastes. In other words, points other than M on the all risky portfolio should be taken. This will lead to inefficiencies in the presence of riskless assets if all the assumptions of CAPM hold. If the assumptions do not hold, in particular the borrowing assumption, then the Separability Theorem falls. The separability theorem, therefore, maintains that investors borrow the money to be invested.

In the above figure, person A combines the riskless asset with risky portfolio M. Person B selects his interior decorator policy, while C combines yet another risky portfolio by borrowing at Rb. According to the above, it is then possible to say that risk and return are directly proportional. The higher the risk, the higher is the return on investment and vice versa. In this case, for Kevin Murray to increase his expected return, he should increase his portfolio by investing in more assets, which promise a high return. Kevin Murray is a risk taking investor who desires to make more profits or realize more returns. Kevin Murray needs to invest just along the capital Market line to achieve his goal of return maximization as desired.

The CAPM is given as follows:

RI = RF + [E (RM – RF)] ß

Where RI is required return of security I

RF is the risk-free rate of return

E (RM) is the expected market rate of return

ß, denote Beta.

If we graph ßi and E (RI) then we can observe the following relationship (Reilly & Brown 2007).

All assets with correct prices will lie on the security market line. Any security off this line will either be overpriced or underpriced. The security market line, therefore, shows the pricing of all assets if the market is at equilibrium. It is a measure of the required rate of return if the investor were to undertake a certain amount of risk. The investor has the option of reducing her risk of exposure by going for the less risky assets such as treasury bills and bonds to reduce this risk.

The data indicates that as long as you need additional returns, there is an additional risk that is associated with it. The investor can decide to take a calculated risk by just investing along the security market line. Any portfolio or asset on the security market line is less risky and worthy. Treasury bills and bonds are considered less risky since they have a fixed rate of return and a fixed period of investment and every investor is assured of this return. Risk-averse investors mostly undertake this kind of investment (Das, Markowitz & Scheid 2010).

Computations of WACC – Kellogg’s
2013 2012
Equity Beta, βE 0.57 0.57
Shares outstanding (million) 361.69 329.53
Market value per share 61.26 55.85
The market value of equity (M), E 22157.13 18404.25
Book value of equity per share 6.78 6.78
Total book value of equity 2452.2582 2234.2134
Total debt(millions) 11929 12,765.00
Total Equity(million) 3545 2,404.00
Debt/Equity ratio 3.37 5.31
Book value of debt 8251.901 11863.450
Cash on hand(million) 273 281.00
Net debt(M), D 7,978.90 11,582.45
Risk-free rate 3.14% 3.14%
Market P/E 20.4226 20.4226
growth of market dividends 5.76% 5.76%
Payout ratio of market 43.30% 43.30%
E(r M)= 8.00% 8.00%
Year ending 31, December 2013 2012 2011
Interest exp.(millions) 235 261 233
Long term debt(millions) 6330 6082 5037
Current maturities of LTD(millions) 928.00 523 643
Notes Payable 1,028.00 1,820 995
Total debt at the end of the year 8,286 8,425 6,675
Average interest expense, Rd 2.81% 3.46%
Year 2013 2012 2011
Income before taxes(EBT) 2606 1325 1184
Income taxes 792 363 320
tax rate 40% 40% 40%
Average tax rate, Tc 40.0% 40.00%
Computation of WACC
Percentage of equity, E/(E+D) 0.74 0.614
Percentage of debt, D/(E+D) 0.265 0.386
Cost of equity,Re 5.91% 5.91%
Cost of debt, Rd 2.81% 3.46%
Tax rate, Tc 40.0% 40.00%
WACC(traditional method) 4.79% 4.43%
WACC Adjusted for Debt
Equity beta, bE 0.57 0.57
Free rate, rf 3.14% 3.14%
Expected market return, E (rM) 8.00% 8.00%
Cost of debt 2.81% 3.46%
Debt beta, bD (0.067) 0.065
Corporate tax rate 40.00% 40.00%
Percentage of equity, E/(E+D) 0.7352 0.6137
Percentage of debt, D/(E+D) 0.2648 0.3863
Asset beta, bAsset 0.41 0.36
WACC 5.13% 4.91%

Transactions with the firm’s capital providers over the past three years

The following is the changes in Kelloggs over the last 5 years.

Minimum 1.796B Dec 2011
Maximum 3.752B Jun 2014
Average 2.588B

Hence, the company shareholders’ external value has been fluctuating over the years but the obligation, mathematically, is the same.

Organic growth refers to growth associated with the entrenchment of core operations. It is growth associated with continued expansion from operations as opposed to acquiring new businesses. It is painstakingly slow but requires little capital input.

Organic growth is crucial in establishing a culture in an organization because acquisitions bring about cultural changes. The acquisition is the form of growth whereby an organization takes over another company in a similar line of business or a different line of business. Either way, they merge to form a stronger organization with a more competitive muscle. Acquisitions help reduce competition by establishing a company with greater operational and financial strength. Kelloggs should grow through acquisition. However, change in the organization may have the following pros and cons.

Like any other process, the change process has its advantages. Its success all depends on how management handled the change process. If the change process is handled effectively, then it yields vast benefits to the organisation. In the case of Kellogg’s, the advantages it would enjoy include change generally has been known to lead to increased profits. In Kellogg’s, the effective change would see them turn over a new leaf, which would see them report profits rather than losses. Secondly, if Kellogg’s were to draw from Greiner’s six-phase model, which advocates for the shared approach, there would be increased employee involvement.

This would allow the employees to voice fresh ideas. In short, change can be a great source of motivation for the employees. The effective change would also see Kellogg’s experience a growth in its market share especially since its competitor, Nestle Ltd is only planning to use its strategy on a short-term basis.

The change also allows the organisation to grow this is necessary, as it would ensure that Kellogg’s survives in the face of stiff competition. Another advantage is that change allows for the development of both the employees and management. Change keeps everyone in the organisation on their toes, as they have to keep coming up with new strategies to ensure their survival. In light of the development of employees and managers, change consequently leads to increased creativity and dynamicity in an organisation (SEC info 2014).

Limitations brought about by the change process are normally pegged on the lack of proper handling of the process by management. This is not always true, as some disadvantages cannot be avoided. A major disadvantage of the change is that, more often than not, it leads to resistance. In the case of Kellogg’s, the risk is higher as they are looking for ways to cut costs. Therefore, assuming they do this by taking away some of the benefits given to employees, management may end up facing resistance from all sides.

Change may also leave the organisation in a worse off place than before. With the need for Kellogg’s to change, comes along the need for a large financial outlay. For a company that has been reporting losses, this becomes very hard. They have to look for other ways of raising the money, as the revenues they get cannot even cover the costs of production. Change is inevitable; it ensures a company’s survival in the dynamic environment.

Contractual obligations Payments due by period
(millions) Total 2013 2014 2015 2016 2017 2018 and
beyond
Long-term debt:
Principal $ 6,792 $ 759 $ 316 $ 355 $ 1,255 $ 404 $ 3,703
Interest (a) 2,702 259 247 244 239 218 1,495
Capital leases (b) 5 2 1 2
Operating leases (c) 630 166 130 104 79 60 91
Purchase obligations (d) 1,077 879 110 74 14
Uncertain tax positions (e) 21 21
Other long-term obligations (f) 879 106 60 68 84 226 335
Total $ 12,106 $ 2,192 $ 864 $ 845 $ 1,671 $ 908 $ 5,626

Employees are the change agents in an organization. Organizational change will start with the employees and their structure. The organizational change may be transformative, minor, or major, which requires the collective effort of the employees in the organization. The employee’s feelings, attitudes, and perceptions can assist the management in reorganizing the change process during organizational change.

Managers can measure the success of the organizational change with the level of employees’ commitment to the change. Thus, an employee’s feelings, perceptions, and attitude influence his or her commitment towards the organizational change. A positive attitude will produce a positive influence towards the change strategy and plan. Managers must bridge the gap between employees during organizational change; this will provide a positive union between management and its policy.

Management of change works better when the employees are part of the decision-making process. Employees are agents of change and can influence the successful implementation of an organizational change. Managers find it interesting when employees provide support during organizational change. Employees’ emotion controls their productivity. The sense of security influences their efficiency in the organization. A positive attitude, perception, and feelings influence the implementation of organizational change.

Valuation of the Kellogg’s

FIRM VALUATION
Cost of Equity = 2.81%
Current Earnings per share= $5.00
Growth Rate in Earnings per share
Growth Rate Weight
Historical Growth = 21.65% 40.00%
Outside Estimates = 11.00% 40.00%
Fundamental Growth = 17.00% 20.00%
Weighted Average 16.46%
Payout Ratio for high growth phase= 95.32%
The dividends for the high growth phase are shown below (up to 10 years)
2
Dividends $5.55
Growth Rate in Stable Phase = 8.00%
Payout Ratio in Stable Phase = 76.80%
Cost of Equity in Stable Phase = 12.23%
Price at the end of growth phase = $98.15
Present Value of dividends in high growth phase = $35.17
Present Value of Terminal Price = $85.44
Value of the stock = $120.62

The following is a valuation of a comparable firm using Kelloggs EPS.

FIRM VALUATION
Cost of Equity = 8.48%
Current Earnings per share= $5.00
Growth Rate in Earnings per share
Growth Rate Weight
Historical Growth = 21.65% 40.00%
Outside Estimates = 11.00% 40.00%
Fundamental Growth = 17.00% 20.00%
Weighted Average 16.46%
Payout Ratio for high growth phase= 95.32%
The dividends for the high growth phase are shown below (up to 10 years)
2
Dividends $5.55
Growth Rate in Stable Phase = 8.00%
Payout Ratio in Stable Phase = 76.80%
Cost of Equity in Stable Phase = 12.23%
Price at the end of growth phase = $98.15
Present Value of dividends in high growth phase = $29.63
Present Value of Terminal Price = $65.34
Value of the stock = $94.97

From the valuations of the two stock prices, it is evident that the two companies compare almost equally. However, the fact that the parent company of Nestle is in Germany means that the valuation may be skewed in favour of Kelloggs because of market dynamics.

Working capital management

The following table is a summary of the periods.

Category Ratio 2012 2013
Activity Ratios
Receivables collection period 30 30
Inventory conversion period 45 45
Payables deferral period 30 30
Average Collection Period 60 60
Net Profit Margin
Net Profit After Tax 140,990.00
Sales 4,987,665.00
NPM 0.03
Return on Total Assets
Net Income after Tax 140,990.00
Total Assets 5,313,920.00
ROTA 0.03

This part has analyzed Kellogg’s operational details in part one and its financial details in part two. The major operational issues faced by the company are innovation and sustainability. It is evident from the ratio analysis in part one that the company is doing well compared to the industry statistics. Additionally, the ratio analysis on the Pro-forma financials indicates that it will continue to do well. Therefore, I would recommend Kelloggs as a worthy company in which to invest. Its working capital is relaxed.

The following list compares Kellogg’s present year cash sum with the previous year’s cash amount.

December 31

(In millions)

Increase

Assets

Current Assets $1,496.5 $1,467.7 $ 28.8 2.0

Plant assets 2,888.8 2,773.3 115.5 4.2

Other assets 666.2 636.6 27.6 4.6

Total assets $5,051.5 $4,877.6 $173.9 3.6

The level of cash in the company is sufficient and healthy to enable the company meet short-term obligations.

Final conclusions

Researchers advocate for more debt than equity. It is common knowledge that debt is riskier than equity. According to the Sharpe ratio, risk and return are directly proportional. For every additional risk, there is an additional return. Sharpe ratio is normally used to evaluate the adjusted risk of a portfolio. The latter can only be achieved if risk-free assets such as government Treasury bills and bonds, which are considered less risky, are used as the benchmark. Kelloggs uses this to determine the additional risk that a portfolio may come with.

Beta, alpha, standard deviation, covariance, and Sharpe’s ratio are some of the parameters used in risk evaluation. All of them are driven by the return on investment and the amount of risk involved in the investment. It is therefore important to note that if alpha doubles or varies, the other measures of risk that are dependent on the alpha will also vary appropriately. For example, when alpha for S&P 500, KELLOGGS, DELL, WMT, TARGET, BP, and SHELL double, the beta will also vary.

Therefore, alpha, covariance, standard deviation, beta, and Sharpe’s ratio are related and any variance or change in one of them causes the change of the other variable relatively. Therefore, any potential investor will conclude that if the risk is his or her basis of decision making then the most appropriate or convenient investment is Nestle, which poses the least risk. If the return on investment is anything to go by as an investment motive, then KELLOGGS promises the highest return than any other asset in this portfolio.

Any investor who considers himself or herself a risk-taker is advised to invest in KELLOGGS as opposed to any other asset since KELLOGGS promises the best reward in terms of returns. Correlation advises that an investor can only invest in two assets at the same time if there is a correlation between these assets. In this case, KELLOGGS and Nestle correlate 0.08 and 0.7 respectively. This means that they tend to move in a particular direction and it would be appropriate for an investor who would wish to reduce his or her risk of investment (Bodie, Kane & Marcus 2008).

The above parameters are all dependent on the cost of debt. It would be foolhardy to increase the cost of debt as opposed to equity. The very essence of trading stock in a stock exchange is to increase equity. Increasing debt lowers that possibility tremendously.

References

Bodie, Z, Kane, A., & Marcus, A. (2008). Investments. New York: McGraw-Hill Irwin.

Das, S., Markowitz, H., & Scheid, J. (2010). Portfolio Optimization with Mental Accounts. Journal of Financial and Quantitative Analysis, 45(1): 311-334.

Elton, E., Gruber, M., & Brown, S. (2006). Modern Portfolio Theory and Investment Analysis. New York: John Wiley.

Fama, E. (2004). Efficient capital markets: A review of theory and empirical work. Journal of Finance, 25(2): 383-417.

Reilly, K. & Brown, C. (2007). Investment Analysis and Portfolio Management. New York: Southwestern Thomson.

SEC info. (2014). Kellogg Co. 10-K for 12/28/13. Web.

SEC info. (2014). Kellogg Co. Proxy Statement. Web.

Yahoo Finance. (2014). Kellogg Co. Web.

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BusinessEssay. (2022, December 14). Kellogg's Financial Case Analysis. https://business-essay.com/kelloggs-financial-case-analysis/

Work Cited

"Kellogg's Financial Case Analysis." BusinessEssay, 14 Dec. 2022, business-essay.com/kelloggs-financial-case-analysis/.

References

BusinessEssay. (2022) 'Kellogg's Financial Case Analysis'. 14 December.

References

BusinessEssay. 2022. "Kellogg's Financial Case Analysis." December 14, 2022. https://business-essay.com/kelloggs-financial-case-analysis/.

1. BusinessEssay. "Kellogg's Financial Case Analysis." December 14, 2022. https://business-essay.com/kelloggs-financial-case-analysis/.


Bibliography


BusinessEssay. "Kellogg's Financial Case Analysis." December 14, 2022. https://business-essay.com/kelloggs-financial-case-analysis/.