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Case A

Altria
1.
Tests of Profitability
Tests of Liquidity
Tests of Solvency
Market Tests
1. Analysis of stock risks and benefits for Altria
After analyzing the financials for Altria, we concluded we would buy
stock in this company. When comparing Altria and Lorilards financial
ratios, Altria is a more stable investment and shows more profitability
and less volatility. The net income income increased from 2009 to
2010 showing a growth in the companys earnings. Altria proves to
effectively generate a return on investments to shareholders. The
average stockholders equity increased from the previous year as well
and compared to the competitor who had a negative Return on Equity.
Altria has a significant dividend yield and a 1.88 earnings per share
proving to be a sound investment. Although Lorillard has a higher
Return on Assets, the company is highly leverage making it high risk
investment for shareholders.
When investing in a stock it is important to assess the companys
future performance which can be determined in the price earnings
ratio, in Altrias case the selling price is 13.82 times the EPS in
comparison to LORILLARDs price earnings ratio of 1,

Altria it has a good indicator of future growth making it a good


investment
Effectively generates return to pay the shareholders. ROE,
the average stockholders equity increased from 2009 to 2010
and compared to the competitor Lorillard ROEs -14.91
by evaluating profitably ratios
significant dividend yield making it a good investment
based on the EPS for ALTRIA is much higer than Lorillard paying
Although Lorillard has a higher ROA the company is highly
leveraged making riskier for investors. ]
Net income increased from 2009 and 2010

2. Lending Short Term


General :

Due to undesirable numbers in Liquidity ratios for Altria, lending


short term is risky and will require further careful research for more
detailed analysis. The liquidity ratios may be undesirable due to Altrias
recent rapid growth. It may not have the current cash flow necessary
to finance an increasingly large operation. To offset the high risk of
short term landing to Altria, it may be useful to propose options such
as Asset based lending which is a frequently used method of correcting
liquidity issues.

The Current Ratio for Altria is on the low side. It is also lower then
Lorillards Current Ratio. Because Current ratio determines
company's ability to pay back its short-term liabilities
(debt and payables) with its short-term assets (cash, inventory,
receivables), it is important to research Altrias ability to repay
short term dept. Alrias ratio is under 1, which suggests that the
company would be unable to pay off its obligations if they came
due at that point. While this shows the company is not in good
financial health, it does not necessarily mean that it will go
bankrupt - as there are many ways to access financing - but it is
definitely not a good sign.

The Quick Assets Ratio for Altria is considerably lower for Altria
then in the industry standard as well as in comparison to
Lorillard. This ratio is the most frequently used ratio to test the
short term financial stability of the company and ability to pay off
liability if needed to be repaid at a current date. A ratio of 1:1 or
more is recommended or desired by most creditors, because this
serves as an indicator of a company's short-term liquidity. The
quick ratio measures a company's ability to meet its short-term
obligations with its most liquid assets. The higher the quick
ratio, the better the position of the company. Inferring from the
definition above and in combination with the Current Ratio, there
is a risk associated with lending money short to Altria.

The Cash Asset ratio compares the dollar amount of highly liquid
assets (such as cash and marketable securities) for every one

dollar of short-term liabilities. This figure is used to measure a


firm's liquidity or its ability to pay its short-term obligations.
Because ratios greater than 1 demonstrate firms ability to cover
current debt, and Altrias cash asset ratio is .34 which is
significantly lower than that of Lorillard, lending Altria short term
is risky, however, with further analyses and assessment higher
lending short term at a higher rate may still be reasonable.

Inventory turnover ratio for Altria is 4.26 vs 13.65 for Lorillard. (not finished)

3- Lending long term

After examining the leverage ratios it shows that Altria has a


high debt to equity ratio of 6.19 %, which indicates that the
company is using a high percentage of debt to finance its assets.
Which makes it riskier for the bank to lend money, however the
tobacco industry despite of the declining consumption continues
to project stable income in the long term

The historical examination of tobacco shows a declining long-

term consumption trend.


U.S. cigarette production, exports, and consumption between
1990 and 2007. During that 17-year period, cigarette production
decreased by about 34%, exports decreased by about 34%, and
consumption dropped by about 31%. The percentage value by
year for each category is as follows
Year

Production

Exports

Total Consumption

709.7

164.3

525.0

1991

694.5

179.2

510.0

1992

718.5

205.6

500.0

1993

661.0

195.5

485.0

1994

725.5

220.2

486.0

1995

746.5

231.1

487.0

1996

754.5

243.9

487.0

1997

719.6

217.0

480.0

1998

679.7

201.3

465.0

1999

606.6

151.4

435.0

2000

594.6

148.3

430.0

2001

562.4

133.9

425.0

2002

532.0

127.4

415.0

2003

499.4

121.5

400.0

2004

493.5

118.6

388.0

2005

489.0

113.3

376.0

2006

484.0

119.0

372.0

2007

468.3

102.0

364.0

http://www.nationalaglawcenter.org/assets/crs/RL30947.pdf