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Financial Performance and Health

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Executive Summary

Waste Management, Inc is in a need of an adjustment in order to regain strong financial health. Revenues have increased over the last three years; however, its liquidity ratios show that it may have some troubles fulfilling its obligations. It remains an industry leader; even though its market is currently going through a phase of change, its primary source of revenues including waste collection, transportation, and disposal is not affected. WM’s projected growth for the upcoming year is -1.44%, but it can counter balance this drop if it raises its prices, and finds new ways to operate more efficiently as it adjusts to the new market conditions (CSI Market, 2018).

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Context

Waste Management, Inc. (WM) is an industry leader in inclusive waste management services. WM provides waste management services for municipal, commercial, industrial, and residential customers in the United States, Canada, and Puerto Rico and its headquarters is in Houston, Texas. It offers collection, transfer, recycling, resources recovery, and disposal services (WM, 2017).

Its collection services are not limited food waste, yard waste, bulk, and hazardous waste. WMI also offers curbside pick up, construction waste solutions, and healthcare facility solutions. One of the more interesting services is its consultations services in sustainability, where WMI can help improve business operations by educating companies in resource management, waste diversion, and energy efficiency systems.

WM states that it organized its operations into 66 market areas, in order to manage the business on a market-by-market basis. According to its website, this type of organizational structure allows each area’s managers to adapt services to local communities. Creating efficiency, operating at a lower cost, because they are able to effectively respond to customers’ needs (WM, 2017). WM oversees and manage the financial performance of their solid waste business subsidiaries in 17 geographic areas, and facilities across the United States and Canada. It is geographically diverse.

WM reports its financial results with GAAP standards. However, it believes that reviewing non-GAAP measures provides additional, significant comparisons of results to prior periods. It does this by excluding items that it does not think reflect fundamental business performance and are not representative of operations. Items that are not determinable at the present time, but may be important. For example, asset impairments or one-time items, and charges, gains or losses from divestitures or litigation all fall into this category (WM Media Room, 2018).

Financial Performance

WM’s consolidated statement of income (Appendix A) from 2015 to 2017 there is an 8% increase in net income. Total revenue only increased by 1%, and total cost by 3%. Even if only slightly more, the increase in net income is higher than the total cost, which is a good relationship between them. Operating income only increased 3% from 12% in 2016 to 14% in 2017. Overall, there were not any dramatic changes from year to year.

While reviewing the cash flow statement (Appendix B) we can see an increase in cash from operations of 19% from years 2015 to 2016, but then a 13% decrease from 2016 to 2017. During this time, accounts receivables increased by 247%, and net cash flow is negative $10,000 from negative $1,268,000 in 2015. While the company did increase in investments activities, their net borrowing is what stands out. WM’s net borrowing went from $373,000 to negative $375,000. Net borrowing is the amount of cash received from financing. If cash flow has increased but net borrowings have increased more, it could mean a company is in a poor financial position. However, here WM was able to pay off debt even with the increase in accounts receivables.

WM is the United States leader in waste management. It has an annual income of $14.6 billion. The industry was hit hard in 2017 when China the biggest buyer of recyclables announced that it would no longer be buying recyclables from the market. WM is currently in a good position, but it will have to make some adjustments during 2018 as the market change good into effect (Wodinsky, 2018).

Financial Health

The current ratios tell whether a company can pay its short-term debts. Acceptable current ratios vary from industry to industry. If current liabilities exceed current assets, then the company may have problems paying off its short-term obligations. If the current ratio is too high, the company may not be efficiently using its current assets or its short-term financing facilities, which may indicate problems in working capital management (“Lumen Boundless Business,” n.d.).

Therefore, a declining current ratio is not a good indicator of good financial performance. WM’s current ration decline is an indicator that their assets are less than their liabilities, and have declined over the last three years. Its current ratio has gone from .97 in 2015 to .80 in 2017, as shown in the appendix C.

Quick ratio removes inventory from the equation, because there are times inventory cannot be liquidated quickly. The quick ratio can be a better indicator of liquidity. As with the current ratio, ratios less than 1 indicate that a company may have issues meeting its obligations. Over the last three years, WM’s quick ratio has shown the same drop downward. It is represented with the red bar in appendix C. The company had a quick ratio of 77% in 2017, meaning 23% of their liabilities might not be able to be met.

Cash and cash equivalents have also gone down from 49% 2015 to 2017. During this same time frame, inventory and property plant and equipment have increased only by 4%, but there has been an overall slight increase across current assets, resulting in total increase of 5% in assets from 2016 to 2017.

During 2017, its Days Sales Outstanding (DSO) was rather high with an average of 167 days. This did return to a more acceptable 53 at the beginning of 2018, which indicates that the company was actively addressing the issues.

WM has grown itself mostly through acquisitions. It has proven to make good decisions that allow it the ability to purchase companies in its industry that add to its profitability. CEO Jim Fish explains that they will continue to grow through the acquisitions of big and small companies (Recycling Today, 2018).

The company is valued at $35.8 billion, with a sock share price of $89.56 per share. Its price to earnings ratio is ended 2017 as19.22 percentage. It ranks second in its industry. It appears to be a good investor favorite of a safe steady investment (Forbes, 2018).

WM seem to be maintaining the company financials at a steady level, but based on the decline in current and quick ratios I think that WM could use some adjustments. The good thing is that despite the change the waste management business is flourishing. Therefore, with minor adjustments WM can continue to improve.

WM continues to grow by acquisitions. It has starts the year out strong despite the China ban, that caused its recyclables market to close. However, its primary business in waste collection remains untouched and it continues to grow as the economy grows. Waste Management holds a strong value in investor’s eyes. It has a strong grip in the waste collection industry and has plenty of potential to grow, because the market is very large. According to statista.com, public companies only control 58% of the market. Seeking Alpha’s Kenny Robinson states that Waste Management, Inc. is the type of stock, you hold forever (Robinson, 2018).

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