Financial Condition Analysis: The Kraft Heinz Co (KHC) – ProThinker

Name of Company	Country of Origin/ Exchange Traded	Sector	Stock Price
THE KRAFT HEINZ CO	US/ NAS	Consumer Defensive – Consumer Packaged Goods – Packaged Foods	USD63.32
			@ 26 Jun 2018
COMPANY PROFILE	The Kraft Heinz Co is a food and beverage company. It manufactures and market food and beverage products, including condiments and sauces, cheese and dairy, meals, meat, refreshment beverages, and other grocery products. In July 2015, Kraft merged with Heinz to create the third-largest food and beverage company in North America behind PepsiCo and Nestle and the fifth-largest player in the world. Beyond its namesake brands, the combined firm’s portfolio includes Oscar Mayer, Planters, Ore-Ida, and Philadelphia. Outside of North America, the company’s global reach includes a distribution network in Europe and emerging markets that drive around one fifth of its consolidated sales base, as its products are sold in more than 190 countries and territories around the world.
Stock Code	KHC
Financial Condition Analysis Below

Financial Condition Analysis Below

It is important to analyze the financial condition of the company you want to invest in because if a company goes bankrupt, the chances are high that you will lose all your investment. Even if the company does not go bankrupt, the deterioration in financial condition will cause more and more investors to avoid the company and valuation will drop. Weak financial condition also limits the opportunities that a company has to grow its business.
In order to determine the financial condition of the company, we usually use the Z score, which was introduced by Edward Altman, a Professor of Finance at New York University. This score is a composite measure of a firm’s financial condition and has been proven to be able to predict with high accuracy whether a firm will go into bankruptcy within the next two years.

Z-score has been improving since 2012. The main reasons for this are:
* higher retained earnings as a proportion of total assetsThe latest Z-Score of the company as at Dec 2017 was 1.5, which is in the distressed zone.

The various components that go into the Z-Score are shown below:

This is the Revenue Turnover ratio and it reflects the amount of revenue the company is able to generate from the use of its assets. Companies that have difficulty generating revenue cannot generate consistent cash flow to pay its bills.
The amount of revenue generated from assets has been on a downtrend since 2011.

The more profits are retained within the firm, the greater the buffer of reserves for the company to weather difficult times.
The level of retained earnings relative to assets has been erratic. Currently, retained earnings are at 7.1% of total assets.

This measures the ability of the company to generate EBIT (earnings before interest and taxes) from its assets.
EBIT as a % of assets has been erratic. Currently, EBIT is at 5.6% of total assets.

This is an indication of the level of borrowings of the firm. A high level of borrowings will affect survivability as it may not have enough cash flows to meet its debt obligations.
The level of borrowings of the company has been erratic.

Working capital is essential to the operations of the company and a low level of working capital may result in liquidity problems. Working capital relative to total assets has been on a downtrend since 2013.
Financial condition analysis is an important part of stock analysis because an investor will make a loss on a stock if it goes bankrupt. The financial condition of a company is also important because investors will attribute a discount to the theoretical fair valuation of the company depending on how bad the financial condition is. ProThinker uses multiple valuation indicators to value a stock and then attribute a discount when necessary depending on the financial condition.
The five ratios we use are Price to Earnings, Price to Sales, Price to Cash Flow, Price to Book and Dividend Yield. We use multiple methods to value a stock because each has its benefits as well as shortcomings. Price to Earnings and Price to Cash Flow Ratios relate stock price to profitability but are meaningless when the comany has negative earnings or cash flows. Price to Sales Ratio is more stable because sales are never negative. However, this does not tell us whether the company is able to sell profitably. Price to Book Ratio gives us an indication as to how much we are paying for the company’s assets but it is not directly related to the company’s profitability. Dividend Yield cannot be used for companies that are paying little to no dividends.
While it is important to value stocks based on multiple valuation methods, this often leads to differing views on valuation. One indicator may suggest that a stock is overvalued while another suggest that it is undervalued. This does not help an investor who needs to make a definite decision whether to buy, hold or sell the stock. That is why we advocate the use of a Composite Valuation Indicator, which is derived from the best combination of the five indicators above. A Composite Valuation Indicator will give you ONE conclusion on whether a stock is under or over valued.
To find out more about our valuation methodology, click here.
Source of Data: Price to Sales chart is from ProThinker Stock Report. Company description, historical financial statements data and price data are from gurufocus.com. Estimates are from gurufocus and/or 4-traders.com – Thomson Reuters.
Disclaimer: This report is for information purposes only and should not be considered a solicitation to buy or sell any security. Neither ProThinker nor any other party guarantees its accuracy or makes warranties regarding results from its usage. Redistribution is prohibited without the express written consent of ProThinker. Copyright(c) 2018. All rights reserved.