Hanover Insurance Group Inc

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P/S ratio (based on the year-end stock price) shows that there is a steady increase in the value placed on each dollar of a company’s sales.

Free Cash Flow

In Chart 2, historical free cash flow to the company is computed for Avista for the years 2012-2014.

Chart 2

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The free cash flow to the firm (FCFF) is computed by adding cash flow from operations (CFO) and the part of interest expense that is not taxed and subtracting the capital expenditure for the year. The tax rate for each year is derived from dividing income tax expense by pretax income. In 2013, despite having a positive net income, the company had negative cash flows, showing that the cash outflows were greater than cash inflows for the year. In 2014, however, the company managed to keep its costs and expenditures under control and generated positive FCFF.

Adjustments

Based on the Avista’s 2015 10-K notes to consolidated financial statements, the following items may be subject to adjustment in order to make Avista’s financial statements comparable to other companies in the industry.

Avista estimates its depreciation expense with a method of depreciation accounting utilizing composite rates for utility plant (10-K, 87). The rate went down by 0.02% from 2012 to 2013; however, it went up by 0.07% from 2013 to 2014. This can cause problems when comparing to other companies because even though the same depreciation method is used by other companies, the changing rate that results in different depreciation expenses every year may make it difficult to compare Avista’s net income and retained earnings to those of other companies’.

The company had multiple operating leases in 2014 (10-K, 94). As for the accounting of operating leases, the company would only record rental expenses. If the lease had been classified as a financing lease, it would have shown up as an asset and a liability on the balance sheet. An analyst may want to make adjustments to account for the differences.

Management Disclosure and Analysis

In the most recent 10-K filing, management’s statement concerning the operations of the business is articulated as such, “We will continue to seek recovery of operation costs and capital investments.” The result of seek recovery of operation costs is that net income attributable to Avista Corporation shareholders was $192.0 million for 2014, an increase from $111.1 million for 2013. And the increase was primarily due to the disposition of Ecova, which resulted in the recognition of a $69.7 million net gain.

Avista completed its acquisition of Alaska Energy and Resources Company (AERC)on July 1, 2014. To cover its capital investments, Avista issued more than 4 million new shares of common stock to the shareholders of AERC. At the same time, the company’s long-term debt increased by more than $220,000 from 2013 to 2014.

Overall, the financial results are congruent with the strategies articulated by the management team.