Financial leverage
Another important item that can be determined from the financial statements is the long-term debt/equity ratio. Investors usually are more comfortable when the ratio is between $0.35 to $0.50 and a $1. Obviously Sysco falls in the comfortable investor-defined area of $0.57. The rest of the leaders for this industry show D/E ratios of $1.74 for Uni-Marts Inc. and $4.30 for 7-Eleven Inc. By comparing with the industry averages we see that Sysco appears to be behind the leaders. However, investors see it as a good investment opportunity and upgraded Sysco to a strong-buy.
Investors can determine if investments in the company will be repaid and the interest payments paid on time. Usually the total debt/equity ratios indicate the ability to borrow, but most importantly the lender will assess industry standards to determine the financial worth of the company. Sysco had a ratio of 64% in 2002, which is below the industry’s median of 128.5%. This value is way below the industry, which will ensure borrowers’ investment protection.
Liquidity
A commonly used liquidity measure is the quick ratio, which shows the number of dollars of liquid assets available to cover each dollar of current debt. Sysco is in a favorable position with values of 0.94, 0.85 and 0.95 for the years 2000, 2001 and 2002 respectively. These values are just slightly above the median of 0.9, 0.8 and 0.8 for the same periods and well below of the upper industry values of 1.6, 1.3 and 1.5 (B&D).
On the other hand, the company has current ratios slightly below industry standards. While the company’s financials show current ratios of 1.53, 1.37 and 1.52, for the years 2000, 2001 and 2002 respectively, the industry median were 1.6, 1.5 and 1.6.
Efficiency
The efficiency ratios prove that Sysco is performing well above industry standards. The company had an average collection period of 26.66 days while the industry had a median of 28.5 days in 2002. But, the sales-to-inventory ratio was 21.62 in the same year, well above the median of 14.1 and slightly below the upper standard of 24.0. This is a good indicator that the company has efficient operations as it maintains low inventories while able to collect receivables in a prompt manner.
Finally, we look to total revenue for the sector to determine how the company has been performing for the last year. Sysco is among industry leaders with $28.2 billion in total revenue. Most important, is Sysco’s revenue growth of 11.90%, which is about the same of the top performers in the industry. These numbers indicate the company has steady growth potential.
Other considerations
There is much more to consider when assessing the health of any company or corporation besides financial ratios. Financial ratios seldom provide answers but they do help analysts and managers ask the right questions (Brealey et al, 153). To answer these questions, it is necessary to find a similar company or industry to benchmark against. A benchmark for Sysco is other corporations in the foodservice industry; specifically in the "meals-prepared-away-from-home" market that are of similar size. Most industry and trade associations publish industry average ratios based on aggregated data compiled by the association from reports submitted by association members (Marshall et al, 260). Comparing companies or industries to one another is one way of determining their standing in their particular industry. When making comparisons by industry or company it is not very meaningful because the companies may use different financial accounting methods. Trend analysis results in a much more meaningful comparison because even though the data used in the ratio may have been developed using different financial accounting methods, internal consistency within each of the trends will permit useful trend comparisons (Marshall et al, 260). By examining trends year over year and from company to company the increases and decreases in ratios will serve as a more reliable way to measure performance.
Another way to assess the health of a company can be done by reviewing the company’s footnotes and disclosures. Footnote disclosures in annual reports must be carefully analyzed to determine the adequacy of management’s estimates. Footnote disclosures also provide the nature and amount of expense items that are combined with other expenses on the income statement. Management can also report certain operating expenses as separate items to highlight their significance if necessary. Such examples include repairs and maintenance, research and development, and advertising.
Annual Report’s message to shareholders
Sysco’s management is telling its shareholders through its financial reports and press releases that sales are increasing, net earnings are on the climb, and that operating costs are down. In the Management’s Discussion and Analysis portion of the financial statement, management explains the reasons for the great sales numbers. Sales increased nearly 12 percent from the previous year and nearly half were a result of acquisitions. Management has made it clear that within the next five years Sysco will double their revenue to $50 billion. Sysco will have to continue to acquire more businesses and invest in the infrastructure to grow the business to generate $50 billion in revenue.
Sysco expects that their future growth will be through the expansion of fold-outs (building new facilities in an established SYSCO marketing area that is served from a distant location) and selective acquisitions to complement their existing portfolio of broadline, specialty and quick service distribution companies. In order to build the structure Sysco says that they constantly invest in the human and technical resources to position the company for the long-term. One illustration of this sustainable direction is the energy and capital committed to their National Supply Chain Initiative along with new distribution centers. The Nation Supply Chain Initiative consists of revamping its current distribution system and model after the Wal-Mart distribution system. In a press release in April 2004, Sysco confirmed that it is still committed to those capital expenditures to help grow the business:
“The National Supply Chain project continued to progress according to plan during the quarter and to date $183 million has been expended on the project since it began in fiscal 2002." Mr. Lankford added that third quarter expenditures for the Northeast Redistribution Center were $28 million, $25 million of which was capitalized. The Company expects total capital expenditures for the year to be approximately $500 million.”
Sysco management did not mention one of the biggest factors that might affect shareholder values. Currently, there is a vendor-rebate accounting scandal. Last year, Fleming Cos. and Nash Finch have been targeted by the SEC with probes about related vender rebates. In late February, Sysco’s main competitor, US Foodservice, announced to investors and regulators that they had disclosed overstated earnings by more than $500 million. There is no mention of vendor-rebates in the Management’s Discussion and Analysis nor there are any words that would calm the nerves of investors that might be nervous about the scandal spreading.
Overall, Sysco portrays a consistent message of growth. The team’s assessment confirms that Sysco performance is in line with Sysco’s pursuit of gaining a larger portion of the $400 billion food services industry. Listed as one of 50 top performing companies in 2003, Sysco looks to continue to perform to shareholders expectations.
Possible problems in the next year
A problem facing Sysco in 2004 is the possible restriction of seafood imports into the United States. In 2003, according to the American Seafood Distributors Association (ASDA), the Southern Seafood Alliance filed a petition against shrimp imports from six countries: China, Thailand, Vietnam, India, Ecuador, and Brazil.
The first pages of Sysco’s 2003 Annual Report advertise its seafood brand Hidden Cove and mentions that “customers depend on Sysco’s Hidden Cove brand for fresh jewels of the sea.” By placing this information at the beginning of its report, Sysco intimates confidence that seafood will be a major contributor to their sales in coming years. According to the report, seafood is listed as number eight in the sales mix for main product categories during the three years ending with the publication of the annual report on June 28, 2003.
The average seafood sales for Sysco in 2001, 2002, and 2003 was $1,034,390.50 (in thousands), which has contributed to a consistent six percent in total sales over the three year period. The ASDA states that 90 percent of all seafood—principally shrimp—is imported. Sysco is a major distributor of seafood in the United States. In 2002, the U.S. imported $3.6 billion worth of seafood, which makes an extremely important contribution to many sectors of the economy. According to the Government, imports grew 36 percent in 2003. According to the ASDA, this economic activity benefits food distributors like Sysco tremendously.
The American Seafood Distributors Association (ASDA) states that the consumption of shrimp alone has exceeded one billion pounds since 1998. In 2002, the per capita consumption of shrimp was 3.7 pounds.
If trade restrictions are imposed, Sysco’s seafood branch, Hidden Cove, will suffer losses. Granted, seafood sales only make up six percent of Sysco’s sales mix generating just over $1 billion, but, all facts considered, this amount will still damage Sysco’s bottom line and consumer confidence in its seafood label.
Also this potential problem demonstrates the need for Sysco to remain vigilant in protecting all segments of its sales mix.
It is our recommendation that Sysco pays careful attention to the possibility of trade restrictions and work closely with the ASDA to ensure that alternatives to importing seafood be investigated such as domestic seafood production. Analysis and exploration into domestic seafood markets would be a wise strategy for Sysco to pursue to protect its niche in the seafood market.
The following graphs demonstrate the decrease in sales of two types of shrimp imported and distributed by Sysco. The dip in sales in late 2001 may be a reaction from the events of September 11, but still sales in 2002 and 2003 are lower than previous years.
Perhaps by placing its seafood label at the beginning of its annual report, Sysco is hoping to instill investor and shareholder confidence in Hidden Cove.
Sysco’s new management initiative
In its forward-looking statement, Sysco says the following:
“Certain statements made herein are forward-looking statements under the Private Securities Litigation Reform Act of 1995. They include statements about anticipated sales growth, industry growth and increased market share, SYSCO’s long-term growth objectives with respect to sales, earnings, return on equity, long-term debt and capitalization, anticipated capital expenditures, ability to meet future cash requirements and remain profitable, completion and expected benefits of redistribution centers, and completion, timing and anticipated benefits of fold-outs and acquisitions.
“These statements are based on management’s current expectations and estimates; actual results may differ materially. Decisions to pursue fold-outs and acquisitions or to construct redistribution and other facilities and expenditures for such could vary depending upon construction schedules and the timing of other purchases, such as fleet and equipment, while redistribution facility, fold-out and acquisition timing and results could be impacted by competitive conditions, labor issues and other matters. The ability to pursue acquisitions also depends upon the availability and suitability of potential candidates and management's allocation of capital. Industry growth may be affected by general economic conditions. SYSCO’s ability to achieve anticipated sales growth and other long-term growth objectives, increase market share, meet future cash requirements and remain profitable could be affected by competitive price pressures, availability of supplies, work stoppages, success or failure of consolidated buying plan initiatives, successful integration of acquired companies, conditions in the economy and the industry and internal factors such as the ability to control expenses.”
Conclusion
The present Sysco’s ratio analysis indicates that the company has the financial health and efficiency in operations to meet the growth and profit goals described in the annual report. The company’s financial information demonstrates a yearly revenue and net profit increase over the past five years, which suggests it will continue with this positive trend. The company is performing well above the median in the industry, while maintaining a positive growth rate. However, the industry’s higher standards suggest that the company still has room for improvement. Sysco’s management still faces the challenge of meeting the company’s full potential by continuing to supporting growth and performing above the competition.
APPENDIX A.
Sysco Corp. Financial Information
Table 2. Sysco Corp. Consolidated Results of Operations (1999-2003)
APPENDIX B.
Sysco Corp. Consolidated Balance Sheets
works Consulted
American Seafood Distributors Association Homepage. <www.freetradeinseafood.org>. 16 May 2004.
Brealey, Richard A., Myers, Stewart C., Marcus, Alan J., Fundamentals of Corporate Finance Third Edition, New York: McGraw-Hill, 2001.
Dun & Bradstreet key Business Ratios. UOP library. http://80-kbr.dnb.com.ezproxy.apollolibrary.com/KBR_Main.asp?inCurTab=3
Marshall, David H., McManus, Wayne W., Viele, Daniel F., Accounting: What the Numbers Mean, Fifth Edition, New York: McGraw-Hill 2001
Thompson Research webpage. UOP library. http://80-research.thomsonib.com.ezproxy.apollolibrary.com/gaportal/ga.asp
Sysco Corporation 2003 Annual Report. <*** I still need to insert the web site here ***>