Historical Financial Statements

Quantitative

Profitability

A. Returns

By observing historical financial statements it is evident that Merrill Lynch is currently experiencing profitability issues. In 2007 ROA was -0.84% and the ROE was -25.37%. Both fell 185% from the previous years values indicating that the firm was in increasing financial distress. Competitors JP Morgan and Lehman Brothers both experienced decreases in ROA and ROE during the period of 2006 to 2007, however, they were able to maintain a positive ROA and ROE when Merrill Lynch could not.

Although the firm experienced relatively stable growth and a good financial standing with respect to ROA and ROE for the period of 2005 to 2006, it is currently experiencing risky tendencies.

B. Margins

Merrill Lynch's margins are mostly all negatives in 2007. They have an EBITDA margin of 63.02% in 2007 (Appendix), which is a slight decrease from 2006, but the biggest concern is their operation margin. Their operation margin is -114.05%, which shows that their cost is much larger than their revenue. Merrill Lynch's business is not sustainable at the moment and is losing money.

However, they are suffering from the effects of the mortgage crisis and therefore past performance, before the crisis, must be looked at. In 2006 the EBITDA was 65.2% and in 2005 it was 61.67%. (Appendix) These numbers are average compared to Lehman Brothers and shows that Merrill Lynch was not in financial distress before the crisis.

Leverage

The investment banking industry is heavily leveraged however Merrill Lynch seems to surpass that with respect to some of its competitors. In 2007 Merrill Lynch's leverage position was similar to Lehman Brothers which both had debt to equity ratios between 2200%-2500% (Appendix) and asset to equity ratios between 29 to 31. However, from 2006 to 2007 Merrill Lynch's Debt to equity and assets to equity increased by 48% and 33% where as Lehman Brothers only increased by 18% and 12%. In addition, JP Morgan's debt to equity ratio was only 434% and their assets to equity ratio was only 12.19%. Both of which indicate that Merrill Lynch relies far more on debt financing then the industry standard.

The time interest earned also indicates an increasingly poor leverage position. It has dropped