Predicting a Firm's financial distress: the merrill lynch co statement of cash flows Case Solution
Merrill Lynch was formed in 1914, and became a publicly traded company on June 23, 1971. As an investment bank, Merrill Lynch was a leading global trader and underwriter of securities and derivatives across the broad range of asset classes, and they served as a strategic advisor to corporations, governments, institutions and individuals worldwide.It was standalone investment bank, and world’s largest and most widely recognized stockbroker, it has army of 16,000 brokers around the world.
Merrill Lynch, Morgan Stanly, Lehman Brother, bear Stearns and Goldman Sachs, they were leading largest standalone investment banks, with combine history of 549 years, within the next six months, they were all gone. Whereas the Goldman Sachs and Morgan Stanly were converted to bank holding companies, on their hand the Lehman Brothers filed for bankruptcy, and Bear Stearns were acquired by JP Morgan.
Merrill Lynch. CEO John A. stated that “Merrill Lynch has produced excellent”, even some record breakingresults, and we suffered the worst the worst performance in the history, and reported $8.6 billion net loss from continuing operations.
Since the crises started the company’s CEO had revised his words stating in interview that company’s position is strong in liquidity, whereas the company we would not seek more outside capital to support the balance sheet. We lost $8.6 billion last year, but against this we raised $12.8 billion in under two months and more than the losses we suffered.
Predicting the Future
Company’s financial statements can be very important in terms of its financial standing, whereas the one most importantstatement of cash flow is ignored during the analysis, as most financial analyst did, and failed to predict the future financial complications for the companies.Statement of cash flow gives clear view that how effectively company is generating cash from its operations. Since investing activity may give negative number due to investment in fixed assets.
There are tools and techniques to approach and to identify the financial distress of the company, whereas the Merrill Lynch’s CFOhas been stating “We’re very, very comfortable with balance sheet that we have and, more importantly, the credit quality that’s on the balance sheet. He said company has $44 billion in equity capital”. Although it’s financial statements are not supporting the above statement.These predictions about the future are solely based on experience of the past financial crises. This compelled the analyst to about possible distress indications in company’s financial statements.
Evaluation of Cash Situation Year-ended
The company’s cash situation is very unpredictable; where it has cash and equivalents $14586 million 2005, then later it had the $32109 million cash around 45% increase in cash, and in next year it has $41346 million around 77% increase in cash, but against these developments, company also incurred, income taxes and interest expense with same rate.
Situation is going to be very worst, because the company has produced 47% less cash as compare to the last year 2006, and it is also predicted that increase in cash or equivalents will continue to decline, due market conditions. Therefore, steady 3 years deterioration of cash is indication of financial distress.
It is company’s inability to consistently generate negative cash flows from its operating operations. This indicates that company’s current assets mean working capital is invested systematically, which mean company has not been able to maintain its position to generate positive cash flow from the operating activities since2005. Furthermore company’s negative cash flow in 2006 increased by -2%, whereas in 2007 company’s negative cash flow increased from ($23,763) to ($72,362) around -205%, and this is alarming situation where company is losing its position.
Moreover the company’s raising receivables in securities financing transactions, under resale agreements, and securities borrowed transactions. furthermore Derivative contracts has been increased by 49%, which is very risky for the company in such situations.,these all activities increase company’s debt needs constantly, which clearly indicates company’s dysfunctional of working capital management.That should be managed properly to carry operations, because if the company would not have sufficient amount to carry its operations, so how would it survive in the market, when there is uncertainty in the market to financial crises.
Company’s investing activity also does not give positive outlook of the activity although the growing company’s investing activity is sometime negative, which indicates the company has invested in fixed assets, and will generate the cash flow. But sometime company has the negative cash flow from the investing activities due to the poor assets-purchasingdecisions.
Whereas the company’s sales of available security for sale is giving a positive number, against which purchases made is not supporting the investing activity, due to poor assets-purchasing decision of such securities, which may influence the debt need for the company. Moreover the Company’s investing activities are carried disproportionately which led to negative cash flow....................................
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