Performance Analysis on BlackRock, Inc

1.0    Introduction and Product Description

This report is to provide an all-round performance analysis on BlackRock and its closest competitor using the ratio analysis. Audited annual reports will be used for the ratio analysis to evaluate its financial health, overall efficiency, profitability and other performance indications (Barnes, 2006). As much as ratio analysis provides concise information for fundamental analysis, it is comprehensive but not holistic (Lesáková, 2007). We would have an overview of the past numbers and not how it would turn out. To fill up the gap, balanced scorecard and integrated reporting will be further discussed in this report to analyse the management strategy performance (Chavan, 2009) and its sustainability (Churet, et al., 2014) respectively.

Figure 1. BlackRock as compared to its competitors (BizVibe, 2020)

BlackRock is currently the largest private asset management company in the world with assets under management of over 7.4 trillion USD as of 2019 (Barron's, 2020). The bulk of their revenue comes from advisory fees and securities lending, while their portfolio revolves majorly around equity and fixed income. This creates a balanced distribution of finances and made BlackRock to be an excellence specimen for analysis. Combining being the market leader and undergoing strict regulations from the U.S. Securities and Exchange Commission, BlackRock’s annual report will be of transcend quality. It’s competitor, Charles Schwab Corporation, is chosen for comparison because they are listed in NYSE, being the top three asset management firms and the nature of their investment mandate is the likeliest amongst the rest.

2.0 Financial Performance on BlackRock and Schwab

Table 1. All financial data of BlackRock is referenced from their annual report 2019 (BlackRock, 2020). All financial data of Schwab is referenced from their annual report 2019 (Schwab, 2020) except the 2018 total outstanding shares is from their annual report 2018 (Schwab, 2019). Last financial year closed share prices for BlackRock and Schwab were taken from Morningstar (Morningstar-BLK, 2020; Morningstar-SCHW, 2020).

In a glance both BlackRock and Schwab finances are very healthy, indeed they deserve to be the model in the financial industry. I did an average of each 2018 and 2019 numbers to compare the gap between each company's performance and use it as a benchmark against one another. Both companies' ratios are rather close each year and BlackRock's rating is slightly better than Schwab. There is an increase of revenue and investments for both companies, Schwab has a slight drop in total assets in 2019 though. The details of each measurement will be discussed with histogram charts in the following section.

Both ratios have the same reading as there is no inventory for financial firms. Current ratio plays an important part in evaluating the operation fulfilment and financial health of a business (Drake & Fabozzi, 2013). The higher the number means the easier a firm can pay off its liability while it is common for financial firms to have a lower current ratio as the bulk of the liability is usually made up of client's deposit. BlackRock is about 0.2 points better than Schwab but both firms show their ability to securely cover all their liabilities with the ratio of above 1. 

Schwab has higher liquidity which allows them to cover their liability quicker in time of solvency, however keeping high cash idling is not ideal for any firm. Being biased towards Schwab, I find that BlackRock has a more just ratio as cash is viably crucial in generating income through investment, especially as a financial institution.

The data is meaningless as financial firms do not have a cost of goods. It does not mean they are 100% profitable while the effort of producing revenue spreads over different expenses. 

Both firms have considerably high operating margins while Schwab has a better ratio. It shows a prudent and optimised management style as every dollar earned in revenue, it is around 40 cents and 50 cents in profit for BlackRock and Schwab respectively.

Without interest and tax, BlackRock has a slight change of ratio as compared with its operating margin due to adjustments in non-operating expenses . Schwab’s operating margin and EBIT margin are the same as its financial statement does not have segregation.

As compared to the operating margin which is gross, net profit margin will be lower because it represents the net profit generated per dollar earned in revenue. Naturally Schwab still has a better ratio than BlackRock.

Similar to operating, EBIT and net profit margin, ROE shows how profit can be generated per dollar of revenue except it is ratioed to shareholder’s equity. Schwab demonstrated slightly more efficient usage of equity capital to generate income.

It is normal for financial institutions to have low ROA because they are part of regulated bodies that need to follow certain risk-adjusted returns (Capponi & Chen, 2015). BlackRock is able to generate more than twice the return per their assets than Schwab.

BlackRock has around 5 times less borrowings from Schwab and this shows BlackRock has a strong equity foundation. It could be overleveraging for Schwab as they borrowed more than twice per every equity unit and could pose a potential risk.

BlackRock is within the good range of a good debt ratio that is between 0.3 to 0.6 (Investopedia, 2019). It is healthy for a company to incur good debt as a leverage to grow the business as long as they are manageable. Schwab on the hand has slightly exceeded the good range with a ratio more than twice of BlackRock.

This is related to the current debt where BlackRock has lower leverage on debt and a huge portion of the asset is funded by their own equity. Schwab is almost 3 times of BlackRock’s equity multiplier and this shows Schwab is heavily funded in debt and has confirmed its risk standing as per the D/E and D/C ratios.

Having an interest coverage ratio of around 30 means BlackRock can handle its outstanding debts 30 fold and is an excellent multiplier. Schwab is only able to cover almost 6 fold which is still considerably healthy.

BlackRock needs around 2½ months to collect the payment while Schwab has unexpectedly high account receivable days of around 2 years. It does not necessarily mean Schwab will have high bad debt rate or cash flow issue, it could have something to do with the firm’s seasonal business cycle or tax advantage and related strategy.

 

These ratios are omitted due to the lack of costs of sales that are 0 and become undefinable when a division is performed.

BlackRock’s high EPS shows a high profitability and more profits to be distributed to its shareholders. Schwab’s EPS is around 10 times lower than BlackRock’s but at the same time Schwab has a much higher outstanding share count. BlackRock’s EPS could have something to do with their initial public offering where the number of shares issued is fewer while per share price is higher as long as the market capitalisation remains unchanged.

BlackRock’s P/E ratio fluctuates is the 2 years while Schwab’s is quite consistent. P/E ratio is one of the most accepted and used ratios by investors to determine their investment decision (Ghaeli, 2017). BlackRock’s P/E ratio in 2019 is slightly high and could indicate an overvaluation of share price.

 

BlackRock and Schwab’s book value per share is less than its market price by around 2 and 2½ times respectively. Usually the deduction is that both stocks are overvalued, which has also been confirmed by the P/E ratio for BlackRock, and there is a chance their market price will fall gradually. Schwab has a higher risk as compared to BlackRock.

The dividend yield from BlackRock is twice that of Schwab. It is optional for dividend pay-out while it has its benefits. Investors would like a stock that pays a dividend to a certain extent as it is important to plough profit back for company growth. From all the ratios, BlackRock have displayed a quality and balanced financial performance that allows themselves to grow while creating great value for the long term shareholders.

3.0    Balanced Scorecard as Strategic Management System

A strategy management system (SMS) is an ongoing cycle that plans, develops, executes, controls, monitors and analyses all necessities to help an organisation meet their goals and objectives. Balanced Scorecard (BSC) is a SMS that converts mission and vision into a performance metric that is used to identify and improve internal business functions. In this section we will identify the pros and cons of BSC as a SMS.

Figure 2. Strategic management system in 24 months (Kaplan & Norton, 2007)

To critically evaluate Kaplan and Norton’s BSC as a SMS (Kaplan & Norton, 2007), first we will need to analyse SMS from various sources. As figure 2, Kaplan’s steps revolve around defining the vision, communication procedures, business executions, review using scorecard and strategy improvements. The entire 10 steps fit impeccably into the 4 processes within the spiral in figure 3 which became the basis for the balanced scorecard. SMS can also include corporate governance, study of environmental factors using SWOT analysis and selecting the next alternate strategy (Hunger & Wheelen, 2006) that is not included in the BSC model. This could be a Texas sharpshooter fallacy (Evers, 2017) where the prognosis is determined based on the model Kaplan and Norton have already wanted to implement. Just to name a few, Henry Mintzberg has developed a 5Ps for strategy and The George Washington University another set of SMS (figure 4). By not having a universally aligned SMS, the BSC would not be a holistic strategy model whereby additional tools will have to be used in conjunction to serve as a complete SMS.

Figure 4. SMS cycle by The George Washington University (LBL Strategies, 2020)

BSC Strengths

By having good communication, management can implement strategies where every department and individual will be conveyed with the same goals. The vast amount of data will give management an eagle’s view and discussion basis of how to improve the organisation, plan the next step easier, transform strategy to actions or have a complete understanding of the current situation and lacking. Defragmented data extracted through historical performance will have high detail of accuracy and is instructional. Organisation, project and process will be aligned if they communicated decorously (Kartalis, et al., 2013). Alignment allows better resource utilisation, precise budgeting, strategy is tightly focused on, key performance indicators to be met, advance risk management, clear interdepartmental support and synchronisation. This hierarchical framework can help to prioritise strategy for effective execution and it works on multiple levels of abstraction (Akkermans & Oorschot, 2005). Through step-by-step planning, deteriorating processes will also be refined. BSC has a strong reputation and is widely implemented (BSC Designer, 2020) which lowers the learning curves.

BSC Limitations

BSC heavily depends on past data which could have the principle of garbage in, garbage out where the entire framework could render useless (Smith, et al., 2001; Platts & Tan, 2002). As data gets large, it will become complicated and difficult to maintain. Being an overwhelming framework, there could be issues keeping everyone together and the management might not know the ground issues. Strong leadership is demanded for typical employees who are resistant to changes (Cutcher, 2009). There is a lack of interrelationship with the time dimension and cause-and-effect activities so the strategy build ups are disordered where the budget and performance measurement is misaligned. There may not be sufficient data to compare the strategy performance with the non-financial measurements. Lacking in risk analysis could wipe out the entire strategy. BSC does not have enough focus on the human capital aspect in terms of individual scorecard as people are the key element for executing a successful strategy. The weak external factor is primarily ignoring how important the threat of competitors. BSC is complacent to not know or monitor what the competitors are doing (Nørreklit, 2003; Kennerley & Neely, 2003).

3.1 Proposed Balanced Scorecard of BlackRock

Figure 5. Balanced scorecard breakdown due to space constraint

Table 2. Expansion of the balanced scorecard for BlackRock

4.0 Integrated Reporting on BlackRock

Integrated reporting (IR) is a comprehensive and complete reporting process that focuses on creating value over a period (Villiers, et al., 2014). At this current point in time, BlackRock has not fully adopted IR or has any direct comments on it. The CEO Mr. Larry Fink, however, did send an open letter to CEOs stating about value creation and demonstrating progress through reporting (Business Insider, 2016) that somewhat agrees with what the International Integrated Reporting Council (IIRC) has been pushing.

4.1 Benefits of Adopting IR

Better outreach through trusts. Stories are always a more compelling way to bring a message across and IR tells stories of what the core business does. A good story will uplift their reputation which in turn improves the relationship with the firm’s stakeholders, shareholders and employees. BlackRock can get more support from such engagement with their audience. IR, which is known for being transparent (Adegboyegun, et al., 2020), is a good way of showing the firm has nothing shady to hide. There will be an increase in employees motivation as IR allows departments to have an increase in multidisciplinary collaboration through interpreted organisation data, which will result in better customer services and reviews. Being concise in a report shows meaningful communication and allows stakeholders to have full access to their desired information. Customers will have more faith with a firm they trust and will spread good words about BlackRock in a viral manner. 

Encourage growth. Creating value is the most common understanding of IR as it improves the firm’s strategy, processes, resource allocation (KAYA, et al., 2016) of any firms, including BlackRock. Besides the extensive financial performance data, IR also displays non-financial business drivers that give stakeholders better insights of how to improve the business. Even for the financial data, IR contains improved measurement standards that enable BlackRock to spot more improvement settings. Detailed reports will encourage a more harmonious decision making amongst the stakeholders resulting in the entire planning to be more efficient. The six capitals model from IR can be used as a reference tool to let BlackRock visualise how the organisation’s strategy and business correlates (Ionuţ & Claus, 2015), which allows a more realistic and profitable planning through best practices. Having a streamlined process and real time data is important especially to public companies as they have to watch their resources allocation carefully which IR have taken care of, it also helps to identify and resolve any potential issues quicker. Business intelligence from IR will let BlackRock have an edge over their competitors, ameliorate bottom line and function more agilely.

Less regulatory issues. It is impossible to fully cover the entire risk aspect however IR helps to manage and mitigate potential risk through its holistic view over the firm (Moolman, et al., 2020). BlackRock being a listed and financial firm is subjected to many regulations and having their risk adequately identified will reduce the bureaucratic overloads. IR framework has been known for their reliability with a balance mix of positive and negative reports (Zyznarska-Dworczak, 2018), it gives a true fact of the firm’s standing without prejudice. Business interaction areas are visible in IR where it gives a clear accountability to the interested party. 

4.2 Challenges of Adopting IR

Gaining support from the stakeholders. Either the top management is enthusiastic and the bottom management is reluctant or the top management does not consider to have IR implemented (Singha, et al., 2019). It is common for the bottom management to reject as additional tasks and workloads will be added to themselves and their team on top maintaining the company’s profitability in the present harsh economy output. Reports will have to be re-framed differently for existing readers to understand or to change their reading habits. Board of directors may reject such implementations as they will not be comfortable to disclose BlackRock’s insights that include bad performance data and entire information is highly available for the competitors. By practicing IR, many alignments have to be adjusted and that includes the corporate strategies and human factors. The firm will start to focus on long-term goals at the expense of neglecting short-and-mid-term goals that are important for strategic objectives (Villiersa, et al., 2016). With the risk of voluntary espionage and huge business process overhaul, this may jeopardise the firm’s growth opportunity.

Integrity of data and information hunting. There are way too many stakeholders involved, data points to be procured and new subject areas emerges. BlackRock may not be able to fully adopt IR at one go, the delays may mean past information is outdated and wasted effort on getting those data. A lot of such data is beyond financial and has to conduct intensive interviews and fact finding to acquire. If there is no validation process or good corporate governance, data may be obsolete, false or the entire data collection process will be running in a circle. IR can contain plenty of ambiguity or lack of actual market price and information (Flower, 2015), which may have more cautionary impact on firms from the United States given the history of overleveraging from some financial firms in 2008. Even if this extremely data-intensive assessment can be completed, the stakeholders may be overloaded with information and cause the decision making to be non-optimal which defeats the purpose of IR.

Requirement of extra costing and subject matter experts. IR is still considered relatively new for the industry to adopt and therefore there will be limited talents that are proficient with it. Unlike conventional financial reports that have been around for decades with templates and standardisations, IR has limited resources to begin with and it varies industry to industry. The lack of knowledge puts a high demand on subject matter experts and thus increases the price of hiring (Balasingam, et al., 2019). The experts likely to be hired from competitors firms which put another toll on loyalty. Heavy budgets have to be allocated for transitioning, adopting and implementation of IR. Initial reports have to undergo rigorous testing to ensure reliability and authenticity that contributes to the sunk cost too.

5.0 Conclusions

In financial management, many tools and instruments are required to measure the financial and non-financial performance of a firm. Besides giving the management a detailed analysis of the past, such data is equally crucial for them to plan for the future. Ratio analysis is the fundamental stage where the results are purely mathematical and is mainly used as a guideline, it is as good as how the initial numbers are being prepared.

To perform a thorough strategic and performance management, other frameworks such as the Balanced Scorecard should be adopted. As discussed above, Balanced Scorecard does have its small drawbacks however the benefits greatly outweigh all the disadvantages. Since it is a widely implemented framework, using it to do forecasting and strategic planning is treading on a very safe domain. Though the Balanced Scorecard has its weaknesses, it can easily be supplemented by various tools such as McKinsey 7S, PESTEL analysis, Gap analysis, SWOT analysis, Three Horizon model and Management by Objectives. 

Similar to Balanced Scorecard, Integrated Reporting does have its drawback and is vastly inconsequential as compared to the benefits. Another consolation for Integrated Reporting is its template and framework can be re-used once it is done, the subsequent reports will require much less effort and resource. Afterall, the reporting standard will continue to change according to the market demand and it is important to keep up with it.

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