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Tidewater Inc.: Fundamental Analysis $TDW

Tidewater Inc. (TDW:NYSE)  provides offshore supply vessels and marine support services to the offshore energy industry through the operation of a fleet of offshore marine service vessels.

In the section below we will analyze aspects of Tidewater Inc.’s past performance. From this evaluation we will be able to see Tidewaters profitability, debt and capital, and operating efficiency and free cash. Based on this information, we will look for strengths and weaknesses in the company’s fundamentals. This should give us an understanding of how the company has fared over the past few years and will give us an idea of what to expect in the future.

Profitability

Profitability is a class of financial metrics used to assess a business’s ability to generate earnings compared with expenses and other relevant costs incurred during a specific period of time. In this section, we will look at four tests of profitability. They are: net income, operating cash flow, return on assets, and quality of earnings. From these four metrics, we will establish if the company is making money and gauge the quality of the reported profits.

  • Net income 2011 = $106 million
  • Net income 2012 = $87 million
  • Net income 2013 = $151 million

Over the past couple of years Tidewater Inc.’s net profits have increased from $106 million in 2011, to $151 million in 2013. This represents a 42.45% increase.

  • Operating income 2011 = $139 million
  • Operating income 2012 = $ 114 million
  • Operating income 2013 = $206 million

Operating income is the cash generated from the operations of a company, generally defined as revenue less all operating expenses, but calculated through a series of adjustments to net income.

Over the past three years, the company’s operating income has increased from $139 million to $206 million. This represents an increase of 48.20%.

ROA – Return On Assets = Net Income/Total Assets

ROA is an indicator of how profitable a company is relative to its total assets. ROA gives an idea as to how efficient management is at using its assets to generate earnings. Calculated by dividing a company’s net income by its total assets, ROA is displayed as a percentage. Sometimes this is referred to as “return on investment.”

  • Net income growth
    • Net income 2011 = $106 million
    • Net income 2012 = $87 million
    • Net income 2013 = $151 million
  • Total asset growth
    • Total assets 2011 = $3.748 billion.
    • Total assets 2012 = $4.062 billion.
    • Total assets 2013 = $4.168 billion.
  • ROA – Return on assets
    • Return on assets 2011 = 2.82%.
    • Return on assets 2012 = 2.14%
    • Return on assets 2013 = 3.62%.

Over the past three years, Tidewater Inc.’s ROA has increased from 2.82% in 2011 to 3.62% in 2013. This indicates that the company is generating more income on its assets than it did in 2011.

Quality Of Earnings

Quality of Earnings is the amount of earnings attributable to higher sales or lower costs rather than artificial profits created by accounting anomalies such as inflation of inventory. To ensure there are no artificial profits being processed, the operating cash flow must exceed the net income.

2011

  • Operating income 2011 = $139 million
  • Net income 2011 = $106 million

2012

  • Operating income 2012 = $ 114 million
  • Net income 2012 = $87 million

2013

  • Operating income 2013 = $206 million
  • Net income 2013 = $151 million

Over the past three years, the operating income has been higher than the net income in all years. This indicates that Tidewater Inc. is not artificially creating profits by accounting anomalies such as inflation of inventory

Debt And Capital

The Debt and Capital section establishes if the company is sinking into debt or digging its way out. It will also determine if the company is growing organically or raising cash by selling off stock.

Total Liabilities To Total Assets, Or TL/A ratio

TL/A ratio is a metric used to measure a company’s financial risk by determining how much of the company’s assets have been financed by debt.

  • Total assets
    • Total assets 2011 = $3.748 billion.
    • Total assets 2012 = $4.062 billion.
    • Total assets 2013 = $4.168 billion.
    • Equals an increase of $420 million
  • Total liabilities
    • Total liabilities 2011 = $1.234 billion.
    • Total liabilities 2012 = $1.535 billion.
    • Total liabilities 2013 = $1.606 billion.
    • Equals an increase of $372 million

Over the past three years, Tidewater Inc.’s total assets increased by $420 million, while the total liabilities have increased by $372 million. This indicates that the company’s assets have increased more than the liabilities thus adding shareholder value.

Working Capital

Working Capital is a general and quick measure of liquidity of a firm. It represents the margin of safety or cushion available to the creditors. It is an index of the firm’s financial stability. It is also an index of technical solvency and an index of the strength of working capital.

Current Ratio = Current assets / Current liabilities

  • Current assets
    • Current assets 2011 = $579 million.
    • Current assets 2012 = $694 million.
    • Current assets 2013 = $508 million.
  • Current liabilities
    • Current liabilities 2011 = $184 million
    • Current liabilities 2012 = $239 million
    • Current liabilities 2013 = $267 million
  • Current ratio 2011 = 3.15
  • Current ratio 2012 = 2.90
  • Current ratio 2013 = 1.90

Over the past three years, Tidewater Inc.’s current ratio has been declining. Even though the ratio has been declining the ratio is still over 1. This indicates that Tidewater Inc. would be able to pay off its obligations if they came due at this point.

Operating Efficiency

Operating Efficiency is a market condition that exists when participants can execute transactions and receive services at a price that equates fairly to the actual costs required to provide them. An operationally efficient market allows investors to make transactions that move the market further toward the overall goal of prudent capital allocation without being chiseled down by excessive frictional costs, which would reduce the risk/reward profile of the transaction.

Gross Margin: Gross Income/Sales

The Gross Profit Margin is a measurement of a company’s manufacturing and distribution efficiency during the production process. The gross profit tells an investor the percentage of revenue/sales left after subtracting the cost of goods sold. A company that boasts a higher gross profit margin than its competitors and industry is more efficient. Investors tend to pay more for businesses that have higher efficiency ratings than their competitors, as these businesses should be able to make a decent profit as long as overhead costs are controlled (overhead refers to rent, utilities, etc.).

  • Gross margin 2011 = $412 million / $1.055 billion = 39.05%.
  • Gross margin 2012 = $422 million / $1.067 billion = 39.55%.
  • Gross margin 2013 = $523 million / $1.244 billion = 42.04%.

Over the past three years, Tidewater Inc.’s gross margin has increased. The ratio has increased from 39.05% in 2011 to 42.04% in 2013. As the margin has increased, this indicates that Tidewater Inc. overall has increased its efficiency.

Asset Turnover

The formula for the asset turnover ratio evaluates how well a company is utilizing its assets to produce revenue. The numerator of the asset turnover ratio formula shows revenue found on a company’s income statement and the denominator shows total assets, which are found on a company’s balance sheet. Total assets should be averaged over the period of time that is being evaluated.

  • Revenue growth
    • Revenue 2011 = $1.055 billion .
    • Revenue 2012 = $1.067 billion.
    • Revenue 2013 = $1.244 billion.
    • Equals an increase of 17.91%.
  • Total Asset growth
    • Total assets 2011 = $3.748 billion.
    • Total assets 2012 = $4.062 billion.
    • Total assets 2013 = $4.168 billion.
    • Equals an increase of 11.21%.

As the revenue growth has increased by 17.91% while the assets have increased by 11.21%, this indicates that the company from a percentage point of view has been generating more cash with more assets, effectively becoming more efficient at creating revenues.

Based on the information above we can see that Tidewater Inc. has produced very positive results over the past three years. Revenues have increased by 17.91%, the gross margin is currently at 42.04%, assets have increased more than liabilities thus increasing shareholder value while the company’s ROA has increased from 2.82% to 3.62%. The above ratios indicate that Tidewater Inc’s management is becoming more efficient and capitalizing on the increase CAPEX spending in the offshore drilling industry.

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