Financial Ratio Analysis Report

A. Introduction

In assessing the significance of various industry financial data, experts engage in financial ratio analysis, which is the process of determining and evaluating financial ratios. A financial ratio is a relationship that indicates something about an industry's activities, such as the ratio between the industry's current assets and current liabilities or between its accounts receivable and its annual sales.

The basic sources for these ratios are the company financial statements within the industry that contain figures on assets, liabilities, profits, and losses. Industry ratios are only meaningful when compared with other information. Since individual companies are most often compared with industry data, ratios help an individual understand a company's performance relative to that of competitors and are often used to trace performance over time.

This report will evaluate the financial performance of Edison Schools, Inc., and evaluate the company's worthiness as an investment. As one of the first and the largest private operators of public K-12 schools, Edison Schools, Inc. is on a mission to prove that it can outperform traditional public schools while earning profits in the process. Christopher Whittle, a Wall Street darling who has previous experience in several other education ventures, leads Edison Schools, Inc. The company has undergone a rapid growth strategy since opening its first four schools in the 1999 school year. In the 2001 school year, Edison operates 136 schools with approximately 75,000 students. From a business standpoint, Edison has staked its success on its ability to gain economies of scale in school operation.

The first section of this report, which is the main body, will use financial statements from 1999, 2000 and 2001, along with standard financial ratio analysis to develop a clear picture of Edison Company's financial performance. The second section, Appendix A that is included as a reference contains each of the sets of the four financial statements that show Edison Company's performance from 1999 to 2001. The third section, Appendix B, contains the actual financial ratio analysis techniques, showing the company's performance in 1999, 2000 and 2001, the percent change in performance between these years, a short description of the meaning of each ratio, as well as a short assessment of the company's change in performance between 1999, 2000 and 2001.

Du Pont analysis will be used to understand how the company's profitability, efficiency, and leverage are linked in its financial performance over time. While trend analysis will provide signals as to whether the company's financial health is likely to improve or deteriorate. To explain the variation in the company's financial ratios over time, the industry comparative analysis will be performed along with the trend analysis.

B. Trend and Du Pont Analysis of Edison Schools, Inc.

Appendix B contains other measures of Edison Company's financial performance, as expressed in standard financial ratio analysis techniques using figures from the financial reports in Appendix A.

Profitability: We looked at Edison Company's Return on Investment (ROI) for 1999, 2000 and 2001, using the Dupont Model, which is margin times turnover. Margin is net income divided by the sales, and turnover is sales / average total assets.

Edison Schools, Inc. ROI for 2000

ROI = MARGIN x TURNOVER

OPERATING INCOME = Operating Income x Sales

AVERAGE TOTAL ASSETS Sales Average Total Assets

Input: 498 = 498 x 8,251

7,196 8,251 7,196

Result: 6.9% = 6.0% x 1.15

Edison Schools, Inc. ROI for 2001

ROI = MARGIN x TURNOVER

OPERATING INCOME = Operating Income x Sales

AVERAGE TOTAL ASSETS Sales Average Total Assets

Input: 924 = 924 x 10,359

8,659 10,359 8,659

Result: 10.7% = 8.9% x 1.20

At over 55.1%, the increase in ROI between 2000 and 2001 is remarkable and shows that Edison Schools, Inc increased its sales while increasing the utilization of its assets used to generate these sales. And to achieve these results, the sales, operating income and average total assets increased proportionately. In the short term, this would be a good trend, but if it continues, it could be a sign that Edison Schools, Inc is not keeping a big investment in assets. If this trend continues, it may be an indication of increased operations rather than improvement in asset efficiency.

Stock Performance: The common stock value increased 54.8%, from $42/share to $65/share, between 2000 and 2001. This was an indication that the market liked what it saw in the performance and the management of Edison Schools, Inc. In addition, it paid 1.2% in dividends for the past two years. Another key indicator, the Price to Earnings Ratio, fell from 12.0 to 10.7. This was not enough to be alarming. In fact, some investors felt that lower Price to Earnings Ratios was not necessarily a good thing. This is because if a company is struggling to pay large earnings per share, to make the denominator in the P/E equation large enough to keep the P/E ratio low, then often such financial pressures can take the attention of the management away from the company's operations and other important issues, like surviving

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