Comparison of Goldman Sachs and Close Brothers Annual Report

Comparison of Goldman Sachs and taut Brothers Annual nameInternational monetary chronicle Comparison of the Annual bailiwicks 2005 of Goldman Sachs and pissed BrothersDescription of activities and source and type of r plainuesGoldman Sachs has three main types of activitiesInvestment banking. This covers services like merger and acquisition advice, helping clients enroll debt.Trading and principal investments. This covers trading and investment funds in fixed income and equity products, currencies and commodities. This is the largest division in terminal figures of net revenues and gene layd 66% of net revenues in 2005. plus management and security services. This division provides advisory and fiscal planning services including brokerage and advisory services to wide range of clients like pension parentage and hedge bullion.Table 1 shows the net income of the above three divisions in 2005.Table 1 Goldman Sachs exonerate income in the year ended November 20051Division rem uneration revenues, $ billionRevenue as % of totalInvestment banking3.6715%Trading and principal investments16.3666% plus management and security services4.7519% wide24.78100% compressed Brothers provides fol first-class honours degreeing main activitiesInvestment banking. bordering Brothers has three main divisions under investment bankingAsset management. This division manages assets of private clients, trust funds and offshore funds.Corporate finance provides merger and acquisition, financial restructuring and debt advisory services to corporate clients.Market-making division specialises in providing liquidity to the London retail market-making markets in UK and many international shares.Banking division normal banking services like deposits and foreign exchange facilities to personal and professional clients.Table 2 shows the distribution of operating income, as a measure of revenues, of different divisionsTable 2 Close Brothers Operating income in the year ended 31 July 20052 DivisionOperating income as % of totalAsset management21%Corporate Finance7%Market-making24%Investment banking52%Banking48%Total100%Profitability of the two companies from the companionship and shareholders perspectivesThe gameboard 3 shows the profitability of Goldman Sachs in the years ended November 2004 and 2005Table 3 Goldman Sachs Profitability320052004% change lucre revenues, $ billion24.7820.5520.6%Pre-tax win, $ billion8.276.6823.8%% of revenues33.4%32.5%Net earnings, $ billion5.634.5523.7%% of revenues22.7%22.1% diluted earnings per honey oil share, $11.218.9225.7%Return on average common shareholders equity21.80%19.80%10.1%Goldman Sachs emergenced its net revenues by 20.6 % in 2005 whereas pre-tax earnings increased by 23.8 % in the interchangeable period. This shows that the company achieved not provided higher pay in 2005 but also increased the profitability by limiting growth in expenses. This is support by the fact that pre-tax earnings as a percent of net re venues were 33.4 % in 2005 compared to 32.5 % in 2004. Net earnings also increased by 23.7 % in the year 2005 in line with growth in pre-tax earnings. The higher growth in net earnings compared to net revenues shows that higher sales were not achieved at the expense of lower margins.Profitability for shareholders is measured in terms of diluted earnings per share. The growth in diluted earnings per share was 25.7 % in 2005. This was even higher than the growth in net-earnings. Shareholders profitability is also measured in terms of return on shareholders equity which is net earnings divided by the shareholders equity. This increased by 10% from 19.8 % in 2004 to 21.8 % in 2005. Higher return indicates Goldman Sachs is using equity to earn higher shekels.The table 4 shows the profitability of Close Brothers for the years ended July 2004 and 2005Table 4 Close Brothers Profitability420052004% changeOperating income, m448401.211.7%Pre-tax profit, m108.62101.347.2%% of operating inco me24.2%25.3%Profit after tax, m70.7567.424.9%% of operating income15.8%16.8%Diluted earnings per common share, 0.470.454.4%Profit attributable to shareholders, m68.5865.21Shareholders equity, m540.32509.26Return on average common shareholders equity12.69%12.80%-0.9%Close Brothers increased its operating income by 11.7 % in 2005 whereas pre-tax earnings increased by 7.2 % only in the corresponding period. This shows that the increase in pre-tax profits was countered by a much higher increase in expenses. The operating margin dropped by 1% from 25.3 % in 2004 to 24.2 % in 2005. Operating margins of Close Brother were ab pop 9 % lower than that of Goldman Sachs indicating that Close Brothers operates in a more competitive environment. Similarly profit after tax as a percent of revenues were 7 % lower in case of Close Brothers 15.8 % for Close Brothers compared to 22.7 % for Goldman Sachs.The growth in diluted earnings per share was only 4.4 % in 2005. This is much lower than the gr owth in Goldman Sachs earning per share. The return on common shareholder equity was only 12.70 % in case of Close Brother which means that from shareholders point of view return in Goldman Sachs is higher than Close Brothers. long-run financial structure of two companiesTable 5 shows the financial structure of Goldman Sachs looking at its short and long-term borrowings along with shareholders equity.Table 5 Financial structure of Goldman Sachs520052004$ billion%$ billion%Short term borrowings55.2236%54.9641%Long term borrowingsSecured15.6710%12.099%Unsecured84.3454%68.6151%100.0164%80.759%Total borrowings155.23100%135.66100% change and cash equivalent10.264.36Net debt144.97131.30Shareholders equity28.0025.08Long term debt to equity78%76%Net debt / (net debt + equity)84%84%The % of long-term borrowings has increased from 59 % to 64 % in the year 2005. This has mainly come from the increase in unsecured long-term borrowings. The company is highly geared and its net debt to total cap ital ratio is 84 %. As of November 2005, 84 % of Goldman Sachs was financed through net debt, i.e., out of every $1 of its capital, 84 cents came from debt.The table 6 shows the financial structure of Close Brothers.Table 6 Financial Structure of Close Brothers620052004 m% m%Short term borrowings132.2215%287.3640%Long term borrowings729.2885%434.0060%Total borrowings861.5100%721.36100%Cash and cash equivalent1.250.85Net debt860.25720.51Shareholders equity540.32509.26Long term debt to equity57%46%Net debt / (net debt + equity)61%59%Companys long-term borrowings prolong increased significantly from 60 % to 85 % in the year 2005. Close Brothers gearing are more on long-term borrowings as compared to Goldman Sachs.The net debt to total capital ratio is 61 % which means that Close Brothers is less geared compared to Goldman Sachs. Because of higher equity percent in Close Brothers, the long-term debt to equity ratio of Close Brothers is only 57 % in 2005 as compared to 78 % of Goldman Sachs.Analysis of difference in cash stop from profitCash flows differ from profits because of the following major itemsInclusion of non-cash items like disparagement and amortization in net profitsCash inflow and outflow in bargain for and sale of property and tradees. In case of purchase, no involve is on profit and loss. In case of a sale, only profit or loss over the cost price is included in the profits and not the full amount of sale.Cash inflow or outflow from the financing activities like raising or retiring loan, issue of equity. This impacts cash flow but is not included in the profit and loss statement.We now look at the above sources of difference for both Goldman Sachs and Close Brothers.Table 7 shows the cash flow calculation from net profits of Goldman Sachs for the year 2005.Table 7 Comparison of cash flow and profits of Goldman Sachs7$ blnNet profits5.63Cash flowNet profits5.63Non-cash items in net earnings2.16Cash used in assets and liabilities-20.203Cash used in operating activities-12.413Cash from investing activities-1.06Cash from financing activities19.37Change in cash5.90Goldman used $12.4 billion of cash in operating activities in 2005 and this includes $20.20 billion of cash used in assets and liabilities. Operating activities also include $2.16 billion of non-cash items like depreciation and amortisation, deferred income tax and stock options. Another $ 1 billion of cash was used in purchase of businesses, property and leases. The cash outflow from operating activities was compensated by cash inflow from financing of $19.37 billion. This was mainly made up of cash inflow of $43 billion from long-term borrowings.Table 8 shows the cash flow calculation of Close Brothers for the year 2005.Table 8 Comparison of cash flow and profits of Close Brothers for the year ended 31 July 20058 mProfit after tax70.75Cash flowCash flow from operating521.52Tax-37.82Net cash flow from operating activities483.70Cash from investing activities-171.23 Cash from financing activities-67.98Change in cash244.49While the profit after tax was only 70.75 million, cash increased by 244.49 million in the year 2005. This was mainly due to net cash inflow from operating activities of 483 million.The differences in the sources of cash coevals arise between Goldman Sachs and Close Brothers arise from the way they include cash items under different categories. Close Brother was able to show high cash inflow from operating activities because of classification of reduction in loan advances of 190 million and loan notes issuance of 260 million under trading activities. If we take out the above two ash inflows form operating activities, then net cash inflow from operating activities would be only 33.7 million (483.7 190 260). likewise then the cash flow form financing activities would change from -68 million to 382 million.Examples of accounting transactions subject to different GAAPGoodwill amortisation and impairment. Goldman Sachs is listed at New York Stock Exchange and subject to US GAAP. Under US accounting SFAS No. 142 Goodwill and Other Intangible Asset, Goldman Sachs tests grace each year for impairment9. It amortises intangible assets over the useful life which was on average 16 years in 200510. Close Brothers follows Financial bailiwicking stock No. 10 and amortised the goodwill over 20 years11. Where Goldman Sachs has an option to choose the useful life, companies in UK normally follow the option of 20 years. The change in amortisation years results in difference in profits even though this is a non-cash item.Share based earnings. Goldman Sachs followed US accounting principles SFAS 123 and SFAS 148 under which the compensation expense is recognised over the relevant service period12. Close Brother didnt expense the share based compensation in the year 2005 and expects that afterlife alignment with International Financial Reporting Standards on expensing of share based award will reduce profits by 4 mil lion13.Summary of non-numeric learning in the annual report and importance to the shareholdersSummary of information for Goldman SachsInvestment banking backlog increased in 2005 over 200414. This means that the company was expecting more business to materialise in fees in 2005 and also shows the healthy environment in financial markets.The company increased its market run a risk in equities and interest rate products in the second half of 2005 assuming that market conditions will remain favourable15. If market conditions turn against Goldman Sachs assumption, the riskier investments would lead to higher losses.The business is very prone to financial market conditions and hence it is difficult to predict emerging earnings16. Investors with good knowledge of financial markets mainly sophisticated institutional investors can predict with some reasonability hereafter earnings of a company like Goldman Sachs. It would be difficult for individual investors to do the same and hence they have to rely on credible sources for future earning potential of Goldman Sachs.Summary of information for Close BrothersThe business performance is subject to economic conditions in UK17. Bad debt charge was low in 2005 due to low interest rate and full employment. Increase in interest rate and low employment would increase bad debt charge and reduce profitability.Reputation risk is the most importance and any public failure can lead to significant reduction in income18.Implementation of International Financial Reporting Standards could have a material impact on income because of issues like recognition of share based awards19.BIBLIOGRAPHYGoldman Sachs, Annual Report 2005, http//www2.goldmansachs.com/our_firm/investor_relations/financial_reports/annual_reports/2005/Close Brothers, Annual Report 2005, http//www.closebrothers.co.uk/uploads/cbg2005full.pdfFootnotes1 Goldman Sachs, Annual Report 20052 Close Brothers, Annual Report 20053 Goldman Sachs, Annual Report 20054 Close Brot hers, Annual Report 20055 Goldman Sachs, Annual Report 20056 Close Brothers, Annual Report 20057 Goldman Sachs, Annual Report 20058 Close Brothers, Annual Report 20059 Goldman Sachs, Annual Report 2005, Pg. 7410 Goldman Sachs, Annual Report 2005, Pg. 8911 Close Brothers, Annual Report 2005, Pg. 3112 Goldman Sachs, Annual Report 2005, Pg. 7313 Close Brothers, Annual Report 2005, Pg. 814 Goldman Sachs, Annual Report 2005, Pg. 2415 Goldman Sachs, Annual Report 2005, Pg. 2516 Goldman Sachs, Annual Report 2005, Pg. 2517 Close Brothers, Annual Report 2005, Pg. 518 Close Brothers, Annual Report 2005, Pg. 619 Close Brothers, Annual Report 2005, Pg. 8