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analysis. Financial ratios are simple enough to understand in isolation, but understanding their
interrelation is another story. It was interesting and challenging to sift through different analysts
ratios and figure out how they were calculating them, and what value they placed on them when
analyzing a the financial health of a company. I chose to analyze Wells Fargo & Company, which
was unique and challenging because my accounting text books havent typically covered the
financial statements and relevant ratios of financial institutions. I really enjoyed this project.
Thank you for this unique opportunity. Steven Bendtsen
Steven Bendtsen
S00404648
Intermediate Accounting II
ACCT-2410-400-Sp15
Fargos solvency, profitability and investment potential. When meaningful, I will also show how
they compare to Wells Fargos top competitors: JPMorgan Chase, Citi Group and Bank of
America.
Solvency
-Debt RatioWells Fargos fiscal year ends Dec 31. At Dec 31, 2014, Wells Fargo had total assets of
$1,501,893 million and total liabilities of $1,687,115 million for a debt ratio of 89 %. The debt
ratio shows the portion of the companys assets that are financed with debt. A debt ratio of less
than 1, or 100%, means that a company has more assets than debt. Wells Fargo is solvent with its
present debt ratio of 89%.
Debt Ratio
1800000
1600000
1400000
1200000
1000000
800000
600000
400000
200000
0
Total Liabilities
Total Assets
-Debt to Equity RatioThe debt to equity ratio compares the resources provided by creditors with the resources
provided by owners. The ratio is derived by dividing total liabilities by total shareholders equity.
In the event of insolvency, this ratio shows the degree of protection creditors will have. The
higher the ratio, the higher the risk, as more claims will be placed on the same resources in the
event the firm is dissolved. More debt increases the potential for a greater return to shareholders,
but it also increases risk. Wells Fargos 2014 ending debt to equity ratio was 99%. This is lower
than its competitors JPMorgan Chase and Citigroup, showing a greater degree of safety. While
this lower ratio may produce less of a return for shareholders than Well Fargo could generate if it
were higher, it is a safe position. The wake of the great recession is not a good time for ambitious
leveraging. Wells Fargo is erring on the side of safety in this regard.
1.2
1
0.8
debt to equity ratio
0.6
0.4
0.2
0
Wells Fargo
JPMorgan Chase
Citigroup
Bank of America
-Times-Interest-Earned RatioAt the end of the 2014 fiscal year, Wells Fargo had a times-interest-earned, or interest
coverage, ratio of 9.28. This ratio measures the ability of a company to satisfy its debt
Profitability
-Profit Margin on SalesWells Fargo has been able to generate a very impressive profit margin on sales. For Fiscal
year 2014 it had a 26.09% profit margin. Profit margin on sales is a measure of how able a
company is to endure either higher expenses or lower revenue. Wells Fargo is leading the field in
this category. A companys asset turnover rate is important to note when evaluating its profit
margin. Wells Fargo also has a higher asset turnover rate than its creditors. This is a great
combination to have.
Citigroup
Bank of America
-Rate of Return on Total AssetsRate of return on total assets measures a companys overall profitability. Relative to its
competition, Wells Fargo is generating an impressive return on assets. This ratio shows how well
a company is using its assets to generate income.
Citigroup
Bank of America
-Asset Turnover RatioThis ratio measures a companys efficiency in using assets to generate revenue. Wells
Fargo again is using its assets more efficiently than its competitors, this time to generate revenue.
This trend of good asset utilization persists throughout this profitability analysis, which was a big
factor in my decision to advise you to invest in the equity of Wells Fargo.
Wells Fargo
JPMorgan Chase
Citigroup
Bank of America
-Return on EquityRelative to its competition, Wells Fargo is generating an outstanding return on equity.
This ratio measures the amount of profit generated from the assets provided by owners. This
ratio shows managements skill in using shareholders capital. The management of Wells Fargo is
doing a significantly better job than its competitors in using equity to produce profit.
Return on Equity
15.00%
10.00%
5.00%
0.00%
Wells Fargo
JPMorgan Chase
Citigroup
Bank of America
-Earnings Per ShareEarnings per share shows the amount of income a company has generated per share of
common stock outstanding. Wells Fargos earnings per share is steadily climbing year over year.
Earnings per share for 2012, 2013 and 2014 were 3.36, 3.89 and 4.1, respectively.
Investment Potential
-Price/Earnings RatioThe price-earnings ratio measures market perception of a stock regarding the companys
earnings quality, growth potential, stability and relative risk. Wells Fargos price earnings ratio of
13.2 over JPMorgan Chases 11.72 is noteworthy, but it is important to note that it is far behind
Citigroup and Bank of America, showing that Wells Fargo may still be a value stock in light of
its impressive profitability ratios.
-Dividend YieldDividend yield shows how much a company pays out in dividends relative to share price.
Ignoring capital gains, it is the ROI for a stock. In 2014, Wells Fargo stock had a 2.59% dividend
yield. This is very comparable to is top competitor JPMorgan Chase, however, Wells Fargo is the
only one of the compared competitors that has been able to progressively increase its dividend,
showing great strength and recovery after the financial crisis.
-Dividend PayoutInvestors, and thus stock prices, are very sensitive to dividend payout ratios. Wells Fargo, and
every other financial institution made a major reduction in dividends during the financial crisis.
Wells Fargos reduction was due in large part to its acquisition of Wachovia. Wells Fargo is
unique among its competition. It has been consistently raising its dividends. A great indication
that it has stabilized since the financial crisis, and is not just hanging on, but is actually quite
healthy.
Recommendation
Based on my analysis, Wells Fargo stock would be a great investment for your company.
Subjectively, it is a favorite among seasoned investors and financial luminaries. Objectively, its
impressive profitability, utilization of assets, dividend growth and relatively low price/earnings
ratio make it a great investment. The ratios taken together show a promising future for both
capital gains and dividend payout. Thank you for your consideration.
Appendix A
2013
2014
Appendix B
2014
Solvency
ability to pay long term debt
Total Liabilities
1,501,893
Total Assets
1,687,115
Debt Ratio
0.89
Total Liabilities (only interest-bearing long-term debt)
$
183,943
$
185,262
0.992880353
Net Income
23057
10307
Interest Expense
4025
37389
Interest Expense
4025
Times-Interest-Earned Ratio
9.289192547
Total Equity
Profitablility
evaluating profitability
Net Income
Net Sales
Profit Margin On Sales Ratio
Net Income
$
23,057
$
88,372
26.09%
$
23,057
$
1,605,329
1.44%
Net Sales
88372
1,605,329
6%
Net Income
23057
184394
Return on Equity
13%
Net Income
Weighted Average Number of Common Shares Outstanding
$
23,057
5481.811474
$
4.21
Net Sales
$
88,372
$
5,481.81
$
16.12
Investment Potential
evaluating Stock as an Investment
Market Price Per Share of Common Stock
Earnings Per Share
Price/Earnings Ratio
$
55.52
$
4.21
$
13.20
$
1.35
$
55.52
2.43%
$
1.35
$
4.21
$
0.32
*The calculation of many ratios had to be modified from the text book form to match more
common conventions in order to produce results that could be checked for accuracy against
Hoovers, and to be compared against competing firms. The assigned textbook Measures of
Liquidity and Efficiency were stated as Not Applicable to Financial Institutions, by Hoovers
and many other financial analysis sites, and were thus excluded.
Appendix C
End.