Flowserve Corp FLS 2 Flowserve Corp FLS 2 Assignment: Research Project Part 1 Date: June 2, 2019 Ratio Analysis Background and Industry Flowserve is an American corporation in industrial and environmental machinery. The company was established in 1997 as a merger between Durco and BW/ IP with it is headquartered in Dallas, Texas. The company is making products include end face mechanical seas, pumps, valves as well as the provision of automation services for the oil and gas, chemical and power industries. The company has an operation on over 50 counties with 18,000 employees[footnoteRef:1]. The company is publicly traded and is registered in the New York stocks exchange. One of Flowserve’s main competitor is Honeywell Inc., which will be compared to the Flowserve’s financial performance [1: About Flowserve (Flowserve)] Common size analysis Common size table[footnoteRef:2] [2: The data in the table from (Morningstar, Inc)and (Morningstar, Inc)] 2017 2018 2018 Gross profit FLS 30.85 29.65 30.99 HON 30.92 31.94 30.52 total operating expenses FLS 24.18 24.69 24.62 HON 13.92 14.33 14.48 operating income FLS 6.67 4.96 6.37 HON 17 17.64 16.04 net income FLS 3.63 0.12 3.26 HON 12.25 4.08 16.18 total current assets FLS 49.16 52.11 51.62 HON 42.58 43.78 42.17 PPE FLS 14.86 15.26 13.68 HON 10.7 9.98 9.17 total current liabilities FLS 24.84 25.31 23.42 HON 30.16 31.75 32.75 long term debt FLS 31.32 30.54 30.65 HON 22.5 21.17 16.89 total liabilities FLS 65.25 66.3 64.42 HON 64.23 70.91 68.53 retained earnings FLS 76.58 71.36 76.75 HON 53.02 47.58 58.81 The common size analysis of the income statement shows that both corporations have recorded relatively stable gross profit in the last three years, which are marginally close to each other. Flowserve marginally declined by 1% in 2017 while Honeywell has recorded a similar decline in 2018. However, Flowserve has very high operating expenses, which are 90% more than the excess recorded by its peer. This indicates that Honeywell has higher risks of earning profits compared to its rival, which has lower operating expenses. The high operating expenses have contributed to the low net incomes and the operating incomes reported by Flowserve compared to its peer. Flowserve operating incomes are lower, about half of those reported by its peer in the market while the net incomes are closer to 4 times lower than its peers. This trend indicates that Flowserve has challenges with the operating costs, which have made the company report very low operating and net incomes compared to its peer. Flowserve has higher current assets and the plant, properties, and equipment than its peer. The larger amount of asset held has a lower contribution to the company profits compared to its rival who have reported higher earnings but lower current and the PPE. Both companies hold large a.

1. Flowserve Corp FLS
2
Flowserve Corp FLS
2
Assignment: Research
Project Part 1
Date: June 2, 2019
Ratio Analysis
Background and Industry
Flowserve is an American corporation in industrial and
environmental machinery. The company was established in 1997
as a merger between Durco and BW/ IP with it is headquartered
in Dallas, Texas. The company is making products include end
face mechanical seas, pumps, valves as well as the provision of
automation services for the oil and gas, chemical and power
industries. The company has an operation on over 50 counties
with 18,000 employees[footnoteRef:1]. The company is publicly
traded and is registered in the New York stocks exchange. One

2. of Flowserve’s main competitor is Honeywell Inc., which will
be compared to the Flowserve’s financial performance [1:
About Flowserve (Flowserve)]
Common size analysis
Common size table[footnoteRef:2] [2: The data in the table
from (Morningstar, Inc)and (Morningstar, Inc)]
2017
2018
2018
Gross profit
FLS
30.85
29.65
30.99
HON
30.92
31.94
30.52
total operating expenses
FLS
24.18
24.69
24.62
HON
13.92

3. 14.33
14.48
operating income
FLS
6.67
4.96
6.37
HON
17
17.64
16.04
net income
FLS
3.63
0.12
3.26
HON
12.25
4.08
16.18
total current assets
FLS
49.16
52.11
51.62
HON
42.58
43.78
42.17
PPE
FLS
14.86
15.26

4. 13.68
HON
10.7
9.98
9.17
total current liabilities
FLS
24.84
25.31
23.42
HON
30.16
31.75
32.75
long term debt
FLS
31.32
30.54
30.65
HON
22.5
21.17
16.89
total liabilities
FLS
65.25
66.3
64.42
HON
64.23
70.91
68.53

5. retained earnings
FLS
76.58
71.36
76.75
HON
53.02
47.58
58.81
The common size analysis of the income statement shows that
both corporations have recorded relatively stable gross profit in
the last three years, which are marginally close to each other.
Flowserve marginally declined by 1% in 2017 while Honeywell
has recorded a similar decline in 2018. However, Flowserve has
very high operating expenses, which are 90% more than the
excess recorded by its peer. This indicates that Honeywell has
higher risks of earning profits compared to its rival, which has
lower operating expenses. The high operating expenses have
contributed to the low net incomes and the operating incomes
reported by Flowserve compared to its peer. Flowserve
operating incomes are lower, about half of those reported by its
peer in the market while the net incomes are closer to 4 times
lower than its peers. This trend indicates that Flowserve has
challenges with the operating costs, which have made the
company report very low operating and net incomes compared
to its peer.
Flowserve has higher current assets and the plant, properties,
and equipment than its peer. The larger amount of asset held has
a lower contribution to the company profits compared to its
rival who have reported higher earnings but lower current and
the PPE. Both companies hold large amounts of liabilities
compared to the assets as they average above 64% with FLS
having a lower amount of liabilities. Honeywell has recorded a
lower amount of long-term debts that are declining by more than
one percent per year while Flowserve long term debt average

6. above 30% with less than one percent decline in each year.
Flowserve’s current liabilities have remained stable at 24% with
a marginal increase in 2017 while it has recorded an increasing
amount each year for the last three years. All companies have
record sound financial performance in their years. The retained
earnings majorly finance its equity at an average of 73% for
Flowserve and 54% for Honeywell. The year 2017 record a poor
performance from both companies
Trend analysis
[footnoteRef:3] [3: Data from (Morningstar, Inc)]
The trend analysis above shows a steady decline in the revenues
in the last three years, from $4,500 million in 2014 to $3,803
million in 2018. This decline points to the poor performance of
the company in the market. The declining revenues affect other
important financial performance, as it will lead to lower gross
and net incomes as well as lead to a decline in the company
market shares[footnoteRef:4]. The liabilities held by the
company have maintained a trend that is directly opposite to the
revenues trend. As the revenues were declining, the liabilities
were also on the increase up to the first half of 2012 when they
recorded a decline as the revenues recorded a recovery. The
increase in the liabilities and the decline in revenues indicate
that the business acquired more debt to finance the deficits
occasioned by the declining revenues. The assets of the
company have held a consistent decline since 2014 from 2794 to
reach the current level of 2383 while the net revenues have
recorded a significant decline almost cutting the net income by
40% in the three years. The net income was $268 million in
2014 while 2018 record a low $162 million, which is more than
a $100 million decline. [4: Decline in revenues affect other
areas of business (Lee, Lee and Lee 231)]
The overall trend of the assets increasing and decline in net
incomes, revenues, and assets indicate a deteriorating financial

7. performance and attractiveness of the company in the market.
The company is having trouble operating in the market, as
indicated by the declining net incomes and revenues. This
decline will have a direct impact on the financial soundness of
the business and requires a change in the strategy to change the
declining trend
Financial ratio analysis
· Liquidity [footnoteRef:5] [5: From (Morningstar, Inc)]
current ratio
1.98
2.06
2.2
quick ratio
1.07
1.26
1.52
net working capital-to-sales ratio
3.5
2.8
2.9
· Operating performance ratio [footnoteRef:6] [6: ibid]
Days of Sales in Receivables
86.1
87.31
78.53
Days of Sales in Inventory
126.61
127.8
104.76
· Profitability ratios[footnoteRef:7] [7: ibid]

8. Gross Profit Margin
30.85
29.65
30.99
Operating Profit Margin
6.67
4.96
6.37
Net Profit Margin
3.63
0.07
3.12
· Return on Investment ratios[footnoteRef:8] [8: ibid ]
Basic Earning Power ratio
9.30%
7.07%
8.58%
ROA
2.95
0.05
2.51
ROE
8.75
0.16
7.26
The liquidity ratios indicate a company with no liquidity ratios
since the current asset held by the company exceeds the current
liability needs. The current ratios average above two, which
indicates that the current assets double the current liabilities
held. However, the current ratio does not take into account the
ease with which some of the current assets held by the business
can be converted into cash[footnoteRef:9]. The quick ratio cures
this problem by eliminating the assets such as inventories that

9. are almost impossible to convert into cash and have no effect on
the ability of the business to meet its financial obligations. The
quick ratio indicates that the liquid assets such as the cash, cash
equivalents, and the marketable securities are more than the
overall current liabilities held by the business. This ratio has
also been rising in the past three years. The working capital-to-
sales ratio indicates that the business working capital has higher
earnings from sales generated by the business. Flowserve was
able to turn its working capital 3.5 times in 2016 before
recording a decline in 2017 and an improvement on 2018 [9:
Current ratio = current assets/ current liability. This includes
the inventory (Needles, Powers and Crosson 432). ]
The company is earning less on the assets it is holding. The
return on assets indicates a return of 2.9 and 2.5 in 2016 and
2018 while 2017 had a low return of 0.05. The earning power
means the company has remained above 7% indicating that the
company expenses most of its revenues, 6%, 7%, and 6%
respectively, to the interests and tax expenses[footnoteRef:10].
The amounts expensed is higher than that amounts the company
is retaining as a return on its assets [10: Basic Earning Power
ratio - ROA]
There are various recommendations to the company to measure
of improving its financial performance. First, the business
should look for alternatives to cut down the operating costs it
incurs in the source of its business operations. The difference
between the gross and the operating margin shows that the
operations are eating up to 24% of the gross margin while all
the expenses, including the operating expenses, are accounting
for more than 27% from the gross revenues generated by the
business. An attempt should be made to reduce these costs.
Secondly, the business is holding much of its inventories, as
they remain outstanding for more than 100 days meaning that
they are turned less than three times a year. Holding the
inventory for long increases the costs associated with such

10. inventory such as insurance and storage costs, which reduces
the profits generated by the business. Reducing the days
outstanding by holding less stock and looking for ways to
stimulate more sales is highly recommended. Thirdly, the
company should seek ways to increase the collection of revenue
from the current average of more than 80 days to lower the
number of days. Such measures include offering discounts for
prompt payments. Having lower days in receivables increase the
cash collection of the business, reduces the risk of bad debts
and allows the business to reduce the need to acquire current
liabilities to finance its working capital
Return on Equity for the company for the last three years using
the DuPont analysis
a. FLOWSERVE Corporation[footnoteRef:11] [11: From
(Morningstar, Inc)]
2016
2017
2018
Net margin
3.63
0.07
3.12
asset turnover
0.81
0.76
0.8
financial leverage
2.88
2.97
2.81
Du Pont [footnoteRef:12] [12: = (net margin* asset
turnover*leverage )]

11. 8.468064
0.158004
7.01376
b. Honeywell International Inc.[footnoteRef:13] [13:
(Morningstar, Inc)]
2016
2017
2018
net margin
12.24
4.08
16.18
asset turnover
0.76
0.71
0.71
financial leverage
2.8
3.44
3.18
Du Pont [footnoteRef:14] [14: = (net margin* asset
turnover*leverage )]
26.05
9.96
36.53
The ROE has changed over the three years from 8.5 in 2016 to 7

12. in 2018 with 2017, recording the lowest ratio at 0.2. The major
decline in 2017 is occasioned by the poor performance of the
company in the year with a major drop in revenues and net
incomes. Honeywell also recorded the declining trend in 2018 in
2017 as it also recorded the largest decline from 24 in the
previous year to 9.97 in 2017 before recording an impressive
improvement to 36.5. Honeywell’s ratio more than triples the
Flowserve ROE DuPont analysis
Flowserve management should take several measures in an
effort to improve the return on equity. They should seek ways to
improve the net margins reported by the business. This
increment requires the business to reduce its operating expenses
that are reducing the operating profits as well as reduce the
other non-operating expenses that have a direct impact on the
net margins reported by the business. They also should boost
the sales revenues, which will cause an increase in the net
incomes.
Recommendation
The improving liquidity and the profitability ratios indicate that
the business will have sound financial strength in the market as
it will not have working capital issues. It will also continue
generating positive incomes. However, there is a risk from the
high operating expenses that are reducing the profits generated
by the business. The declining liabilities are also favorable, as
they will reduce the overall amounts required to pay the costs of
debts and increase the incomes available to the shareholders and
to finance other business operations. The PPE has also been
declining. Currently, the PPE has a lower contribution to the net
income. It is expected that the declining will see a reduction in
the costs of operating the PPE as well as the reduction in the
depreciation costs, all that have a positive impact on the
business profitability. The company has recorded an
improvement in its revenues in 2018 from the 2017 decline; this
trend is expected to continue in the next years, which makes the
business have a positive financial outlook.
Reflection

13. I have learned the importance of conducting a trend and a
common size analysis of a business to understand its expected
performance. I have also learned the importance of using ratios
to gauge the performance of a business in comparison with its
peers in the market. This assignment has also allowed me to use
analytical skills to understand the current situation of a
business, its strength, and the expected performance in the
future.
References
Flowserve. About Company . n.d.
<https://www.flowserve.com/en/more/about-company/about-
flowserve>.
Lee, Alice C., John C. Lee, and Cheng F. Lee. Financial
Analysis, Planning & Forecasting: Theory and Application.
2009: World Scientific, 2014.
Morningstar. Honeywell International Inc., 2019.
<http://financials.morningstar.com/ratios/r.html?t=HON&region
=usa&culture=en-US>.
Morningstar, Inc. Flowserve Corp FLS. 2019.
<http://financials.morningstar.com/ratios/r.html?t=FLS&region
=usa&culture=en-US>.
Needles, Belverd E., Marian Powers, and Susan V. Crosson.
Financial and Managerial Accounting. Cengage, 2010.
FLowserve Trend
net
2014 2017 2018 268 120 162 revenues 2014 2017 2018 4561
3833 3803 assets
2014 2017 2018 2794 2559 2383 liabilities 2014 2017 2018 3036
3256 2974