Thomson Reuters Financial Analysis
Introduction
The Thomson Reuters Corporation is a leading provider of electronically delivered information and support tools to business and professional customers worldwide. Specializing in real-time financial information networks, Thomson Reuters provides analytical information and technology platforms to customers in the financial, legal, tax and accounting, healthcare and scientific sectors. A recent merger with Thomson Financial and Reuters Group PLC’s has created two divisions within the company, Markets and Professional. The Markets division consists of the former Reuters Group business combined with the financial division (Thomson Financial). The Professional division consists of Thomson’s non-financial business segments which include Legal, Tax and Accounting, Scientific and Healthcare (Google, 2008).
History
Roy Herbert Thomson founded Thomson Corporation in 1934 in Ontario as the publisher of The Timmons Press. In 1953, Thomson acquired The Scotsman newspaper and moved to Scotland the following year. By the end of the 1950s, Thomson had grown from a single Canadian newspaper into a worldwide media concentration. It held several well-known newspapers in the United Kingdom, including The Sunday Times and The Scotsman, and it owned Scottish Television (ThomsonRueters.com, 2008) .
In the 1960s, Thomson's publishing dominion expanded to include Thomson Publication (UK) and the famous Times of London. In 1965, Thomson Newspapers, Ltd. was formed as a publicly traded company in Canada. Thomson's interests moved past publishing leading to the Thomson Travel purchase of Britannia Airways in 1965 and 1971, in preparations to explore the North Sea for oil and gas (ThomsonRueters.com, 2008).
By the end of 1970, Thomson Newspapers' circulation in the U.S. had grown above the one million mark. When Kenneth Thomson took over for his father, Roy in 1976, the companies estimated worth was at $500 million. The Thomson family owned 70 percent of the company. Kenneth Thomson died in June 2006, the company was treasured at about $29.3 billion (Bell & Schneider, 2007). The family fortune passed on to Ken’s sons David K.R. Thomson and his brother, Peter J. Thomson after their father's death. The Thomson family controlled the corporation through a family-owned entity, The Woodbridge Company, based in Toronto. Roy Thomson planned to keep the business in the family since its creation (Austen, 2006). Roy Thomson wrote in his autobiography, “These Thomson boys that come after Ken are not going to be able, even if they want to, to shrug off these responsibilities" (Austen, 2006).
In 1978, the possession of Wadsworth Publishing provided Thomson with its first entry into specialized information, college textbooks and professional books (Austen, 2006). In 1989, the Thomson Corporation merged with Thomson Newspapers and the International Thomson Organization. Over the years, the company has stepped away from its involvement in the oil and gas business, the travel industry and department stores (ThomsonRueters.com, 2008).
Starting in the mid-1990’s, Thomson invested additional in specialized information services providing them in digital format and began selling off its newspapers. By 1996, The Thomson Corporation successfully doubled its size and ensured future profitability by purchasing West Publishing, including Westlaw. In recent years, Thomson provided much of the specialized information content the world's financial, legal, research and medical organizations rely on every day to make business-critical decisions and drive innovation. While it remained a publishing company, early and insistent investment in electronic delivery had become a key company goal (ThomsonRueters.com, 2008).
"Except for its educational division, which still publishes a substantial number of conventional textbooks, Thomson had the good fortune to move into these businesses as customers were demanding electronic delivery of their information," according to a July 3, 2006 article in The New York Times. "In some markets, Thomson was able to move past other players who were more cautious about digital conversion" (Austen, 2006).
In 2003, the Thomson Corporation bought the Chilton automotive assets. In late 2004, the company sold its Thomson Media group to a Middle Eastern investment firm. In October 2006, the company confirmed it would sell the Thomson Learning market group in three parts. Thomson had divested many of its traditional media assets or combined them with digital products and had moved towards a larger reliance on information technology services and products. On May 15, 2007, The Thomson Corporation reached an agreement with Reuters to combine the two companies, a deal valued at $17.2 billion. On April 17, 2008, the new company was created under the name of Thomson Reuters. Thomson Reuters is a dual-listed company, consisting of Thomson Reuters Corporation, a Canadian company, and Thomson Reuters PLC, a UK company. The Woodbridge Company, a holding company for the Thomson family, owns 53% of Thomson Reuters. The chief executive officer of the combined company is Tom Glocer, who was the chief executive of Reuters, and the chairman is David Thomson, who was the chairman of Thomson (BBC News, 2007).
Product Lines
The Company is organized into the following businesses (Bell & Schneider, 2007):
Markets - formed from integrating Thomson Financial with Reuters
Healthcare - formerly Thomson Healthcare
Legal - formerly North American Legal and Legal & Regulatory; primarily West, makers of Westlaw.
Media - formerly part of Reuters
Scientific - formerly Thomson Scientific
Tax & Accounting - formerly Thomson Tax & Accounting
Management Plans for the Future
Thomson Reuters Chief Executive Officer is responsible for the management of the business and affairs dealing with the strategic plan and objectives established by the Thomson Reuters Board.
The specific role and responsibilities, established in 2007 after the merger are to enhance the future management plans as follows (www.ThomsonReuters.com, 2008):
1. Ensure that Thomson Reuters has an effective senior management team, that the board has regular contact with members of senior management, and that there exists an effective plan of succession, evaluation and development for the CEO and other members of senior management;
2. Provide leadership in setting the mission, values, long-term strategic goals, performance objectives and operational policies along with communicate the business plans, operational requirements, organizational structure, staffing and budgets that support the strategic plan;
3. Direct and monitor the activities and resources are consistent with the strategic direction, financial limits and operating objectives along with reporting on the performance of the established corporate and management performance targets;
4. Establish and monitor a system to identify and manage the principal risks and develop and supervise compliance with procedures to monitor, mitigate and manage such risks;
5. Establish and monitor processes for Thomson Reuters and its businesses to address applicable legal, regulatory, corporate, securities and other compliance matters;
6. Ensure the accuracy, completeness and integrity of the financial information, reporting and disclosure requirements, and internal control and management information systems through appropriate policies and procedures;
7. Ensure the implementation of appropriate policies and procedures regarding public disclosure and restricted trading by insiders;
8. Serve as the principal spokesperson and manage relations with their shareholders and other stakeholders, such as customers, creditors, suppliers, the media, governments and the public;
9. Maintain a culture of integrity, including directly over seeing the administration and implementation of, and the compliance with, Thomson Reuters Code of Business Conduct and Ethics

Ratios – Last 5 Years
A comparison of Thomson Reuters to its peers shows the firm stands in the top percentage of the publishing industry. Thomson Reuters holds a ten percent share of the global market and 34% of the total market for financial information. The firm is estimated to grow eight to nine percent over the next five years. One of the main competitors, Bloomberg holds a 33% share of the market. Thomson Reuter’s ability to deliver electronic data and services to lawyers, doctors and scientists as well as business professionals combined with the merger with Reuters has made this company far more diverse than its competitors. Bloomberg initially defined the market by providing information unmatched in scope by any other company but being a top end company that has priced itself at the top of the market; they do not have the flexibility Thomson Reuters is offering (IPEZ, 2008).
Financial ratios are used to weigh and evaluate the operating performance of the firm. At a first glance, items such as earnings or high accounts receivables may look positive, however, you must measure these values in relation to other values (Block & Hirt. 2008, p. 54). This is where ratio analysis helps to determine the value of the numbers in relation to other reportable business. These same ratios can be compared to competitor ratios to measure how the corporate performance stands within the industry.
There are four primary categories of ratio analysis. These are profitability, asset utilization, liquidity, and debt utilization ratios. The profitability ratios are used to measure the ability of the firm to earn an adequate return on sales, total assets, and invested capital. Asset utilization ratios measures how fast a firm is turning over accounts receivable, inventory and longer term assets. Liquidity ratios emphasizes the firm’s ability to pay off short-term obligations and debt utilization ratios show the overall debt position of the firm in regards to its asset base and earning power (Block & Hirt. 2008, p. 55).
Data on Thomson Reuters five-year ratio history shows consistencies from year to year in most of their financial ratios (see Appendix A). It is easy to spot unusual activity or spikes and dips with a cursory view of the historical data (Morningstar, 2008).
2-Year Vertical Analysis Balance Sheet Comparing total assets and total liabilities and shareholders’ equity for the years 2007 and 2006 (see Appendix B), the balance sheet is looking as though there is a profit being made. However, when analyzing the particulars, there are shifts in some large assets, as well as retained earnings and accumulated and comprehensive incomes. Long-term investments went from $6,207 in 2006 to $1,328 in 2007. Investments must have been depleted in the 2007 year. Retained earnings had a nice jump from $7,169 in 2006 to $10,355 in 2007, as well as accumulated and other comprehensive incomes going from $513 in 2006 and $284 in 2007. (All numbers are in millions). The company seems to show a positive book value (Morningstar, 2008).
5-Year Horizontal Analysis Income Statement When analyzing the 5-year income statement (see Appendix C), net income shot very high in 2007, compared to the 2003 numbers (100% = 2003, 463% = 2007). Another place where very high percentages show up in the income statement is earnings per share. This rise is also $463% for 2007, compared to 2003. Net income can be distributed among holders of common stock as a dividend or held by the firm as retained earnings. For Thomson Reuters, it seems to have both the earnings per share and dividends per share rise significantly (Morningstar, 2008).
5-Year Cash Flow
Looking what has happened to the cash flow for the past three years for Thomson Reuters, there seemed to be a struggle this last year to do better than they have the past two years. Capital spending rose and operating cash flow fell (see Appendix D). There could be a potential cash flow problem with this company. This can also have something to do with the economy the past few years (Morningstar, 2008).
Liquidity
Liquidity ratios emphasize the firm’s ability to pay off short-term obligations as they come due. The quick ratio, measures the ability to pay off short-term obligations from current assets excluding inventories. This gives a more realistic picture than the current ratio as it excludes inventories that may not be liquidated at their book value (Business Tools, 2005). Thomson Reuters quick ratio is 2.8% compared to its current ratio of 3.0% (see Appendix A). In this case the ratios are very close. The liquidity charts provided by INFINANCIAL (see Appendix G) show both a quick ratio and a current ratio higher than the median of Thomson Reuters peers. This typically indicates high liquidity but one needs to keep in mind that this also represents the book value of the assets, which may not always be the true value (INFINANCIAL, 2008).
The payout ratio is another way to help determine the liquidity of Thomson Reuters. The payout ratio for Thomson Reuters is lower than the median ratio amongst its peers (see Appendix G). While a high payout can draw investors looking for income above increases in the share price, a high payout dividend policy can lead to less cash for re-investment or a decline in earnings that would lead to a cut in dividends. This sends a negative signal to stock markets (INFINANCIAL, 2008).
Long-Term Debt
Debt utilization ratios are the overall debt position of the firm in regards to its asset base and earning power. A banker or creditor will put more emphasis on the debt utilization ratios, as they are concerned with the firm’s ability to cover debt obligations. Thomson Reuter’s long-term debt has increased slightly over the past two years. The debt to total capital is 26.4%; industry standard is 13.2%. While the debt is slightly higher than the industry standard, it is well within the range of 50 percent or less (Block & Hirt, p. 60).
The publishing industry has seen declining revenues over the past three years though Thomson’s stock has actually seen steady revenue growth. It’s earnings per share have grown at a very high rate in comparison to the industry but it’s sustainable growth rate is quite a bit less than the rate at which its earnings per share have grown. The company will probably have to raise additional capital from outside sources at some point if it continues to grow at its current rate (Morningstar, 2008). The merger with Thomson and Reuters could be a contributing factor to the stock growth. Thomson Reuters appears to have chosen to finance its operations more through long-term debt than short-term debt (see Appendix B).
Thomson Reuter’s total debt to total equity ratio of 21.28% is just below the median of 25.80% of its peers (see Appendix H). A high debt ratio is an indicator that creditors finance a substantial portion of the business more than the firm does. This can also be an indicator or warning to potential lenders and investors of the increased chance of bankruptcy (INFINANCIAL, 2008). Therefore, the lower than the median percentage for the debt to total equity is a good sign. The total liabilities and debt to equity ratios are also below the median for the industry at 68.23% (see Appendix H). This ratio coupled with the financial leverage ratio of 35.80% (median is 69.98) shows that Thomson Reuters has the leverage to incur more debt without much financial difficulty.
Profitability
With Thomson Reuters being in the publishing industry, there are a good number of competitors. However, by looking at Thomson Reuter’s sales, they are one of the most profitable (see Appendix E). Most companies in the publishing industry have generated very low return on assets over the past five years. Thomson Reuters has posted results that are pretty average for its industry, though their return on assets over the last fiscal year was very high. A key profitability measure is profit margin, and Thomson Reuters has a very strong profit margin. In contrast to its peers, this stock's earnings per share have grown at a very high rate in the past recent years, though growth last year was more moderate. Thomson Reuter’s stocks sustainable growth rate is quite a bit less than the rate at which its earnings per share have grown. The profitability of the company shows there will have to be outside sources aiding in their ability to raise additional capital.
Asset Utilization
With analyzing the asset utilization for Thomson Reuters, (how fast a firm is turning over accounts receivable, inventory and longer term assets), the past year’s numbers seem to be moving up as fast as they move down in the different categories being analyzed. Working capital turnover (-2.21) and sales to total assets (0.61) are not showing strong leads. When analyzing the accounts receivable (6.55) and the sales to inventory (32.20), they are covering a vast range of low and high numbers when compared to their publishing peers. Many competitors would have had better asset utilization for their dollar, but there is not a specific ratio analyzed that will state the company is running inefficiently.

Recommendations
Over all the company stock has fallen over the past couple of years due to the market, but the numbers in our analysis do not clearly reflect the effect of the merge between Thomson and Reuters. The risk ratio of 7.6 compared to the industry ratio of 6.2 and the consistent stock price shows a level history and a relatively low risk’ the stock is for the most not a high risk. The value of 3.3% in comparison to a 4.5% industry ratio also shows Thomson Reuters is not the worst value, it is more mediocre or average not producing any great yields also indicated in the profits compared to the industry (see Appendix I). The corporation seems to be stable and with the merger with Reuters, they seemed to have added more stability. Since the merger of Thomson and Reuters there has been some fast growth, but that growth is probably not sustainable.
The conservative investor would buy this stock with the possibilities of a good return now that the two companies have merged. According to the CEO, Tom Glocer said net sales in the Markets unit were positive in the first seven months of 2008. On the flip side, investors who like greater risk and instant gratification would not purchase this stock. However, investors are worried that the real test will come when customers set their 2009 budgets. In addition, when looking into the foreign side of the company the earnings report, the London-listed shares, had gained nearly 38 percent since hitting a year-low in mid-July. Shares listed in Toronto were down 0.35 percent at C$36.67 (www.ThomsonReuters.com, 2008).
Thomson Reuters bond situation is similar to their stock situation meaning the same factoring reasons to buy or not to buy exist. Thomson Reuters has just launched an "open model" valuation service that can be used to independently price financial instruments across a range of asset classes. The Valuation Risk service combines Thomson Reuter’s global pricing and securities reference data with the company's Kondor risk management system and Reuters' pricing libraries. The service is described as "open model" because it allows for the simultaneous use of a bank's internal pricing models and external libraries. It is also compatible with third party systems. Thomson Reuters said the service could be used to value a wide range of asset classes, including corporate bonds, bank loans, residential mortgage backed securities, and asset backed securities, structured products and derivatives, among others. The Financial Services Authority and other regulators have called for the industry to adopt fair and transparent pricing methodologies to value complex financial instruments (Devasabai, 2008). With this new service Thomson Reuter’s bonds would not be such a terrible purchase.
Thomson Reuters would be a good company to loan money to for it is well established and steady. The company is located in a couple different countries and has great growth opportunity since the merge. In addition, another key concept to investments is that their debt to assets ratios show there is financial advantage available.