AC-345 Ljohnson Final project submission

Running Head: EMERSON ELECTRIC CO. 1
Emerson Electric Co. Financial Analysis and Valuation
Lori Johnson
Southern New Hampshire University

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EMERSON ELECTRIC CO.
Abstract
This paper provides an analysis of the financial health of Emerson Electric Company. The
historical financial statements and annual report from 2014 were utilized to obtain a baseline and
to create projected financials for Emerson. The analysis revealed that Emerson moved from a
highly debt leveraged position to a more moderate level with long term liabilities accounting for
59 percent of debt. Emerson had a free cash flow of 1.71Billion dollars in 2014 and 2.4Billion in
working capital. This income was generated only from operations, both investing and financing
produced negative cash flow. Emerson purchased two other companies which contributed to the
negative cash from investing and paid down a large amount of long term debt which caused the
negative cash from financing. The projected valuation indicates that Emerson has a sustainable
business model and that the value of the stock may be currently undervalued. Overall this
company is a good investment for the long term. They pay dividends regularly and would offer
stability to an otherwise volatile portfolio.

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Contents
Part 1 ............................................................................................................................................... 4
Contingent Liabilities...................................................................................................................... 4
Deferred taxes and pension expenses.............................................................................................. 5
Nonrecurring items ......................................................................................................................... 5
Current Assets and Liabilities......................................................................................................... 6
Liquidity Ratios............................................................................................................................... 6
Capital Structure and solvency ....................................................................................................... 7
Turnover Ratios related to asset utilization .................................................................................... 7
Operating Performance ................................................................................................................... 8
Intangible Assets............................................................................................................................. 8
Part 2 ............................................................................................................................................. 10
Cash Flows and Capital Structure................................................................................................. 10
Cash flow from operations............................................................................................................ 10
Cash flow from investing.............................................................................................................. 12
Cash flow from financing ............................................................................................................. 13
Horizontal analysis 2013 to 2014 ................................................................................................. 14
Part 3 ............................................................................................................................................. 16
Prospective Analysis..................................................................................................................... 16
Projected Balance Sheet................................................................................................................ 16
Forecasted Income Statement ....................................................................................................... 17
Valuation of Company Stock........................................................................................................ 18
Risks.............................................................................................................................................. 19
Conclusion .................................................................................................................................... 19
Financial Exhibits ......................................................................................................................... 21
Table 1 Balance Sheet............................................................................................................... 21
Table 2 Income Statement......................................................................................................... 22
Table 3 Statement of Cash Flows ............................................................................................. 23
Table 4 Chart of Ratios ............................................................................................................. 24
Table 5 Stock Valuation............................................................................................................ 25
Table 6 Equity Valuation Projections ....................................................................................... 25
Table 7 Forecasted income statement 2015 .............................................................................. 25
Table 8 Projected Balance Sheet............................................................................................... 26
References..................................................................................................................................... 27

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Part 1
To analyze the value of Emerson Electric Company, I began with the balance sheet and
the annual report. I have examined the annual report and financial statements of Emerson
Electric Company which uses the symbol EMR on the NASDAQ. Emerson has a calculated
Book value (total assets – intangible assets – liabilities) of about $8.43 Billion. During this
analysis I determined that Emerson changed its capital structure from a highly debt leveraged
model to a more moderate debt level. I find the mix of long and short term debt and equity ratios
to be indicative of solvency and good management use of capital. Emerson is a good long term
investment option for the investor looking for predictable, moderate returns from a stable
company that has been in business for over 100 years.
Contingent Liabilities
Emerson Electric states on p.46 of its 2014 annual report (Emerson Electric Co., 2014)
that it is party to pending legal proceedings but that management believes that the outcomes will
not have material negative impact on finances. The company supports this claim by referencing
the fact that it has substantial experience in responding to legal claims and warranty claims that
have been periodically brought against the company over the last century. The company does
have an accrual account in place to fund the legal costs and potential judgements, should the
need occur. The company also states that it has no other contingent liabilities of material effect
on the finances. With net earnings before taxes over 3 billion dollars, an immaterial number
could still be in the millions of dollars. After thorough investigation of the financial statements
and the attached notes, it is concluded that Emerson does not have significant contingent
liabilities that should be of concern for lenders or investors.

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Operating Leases
Emerson Electric discloses its operating leases on pages 26 and 53 of the annual report.
(Emerson Electric Co., 2014) In 2015 they expect operating rent expense for buildings,
equipment and other items to be about 270 million dollars or around 2.7% of gross profit. This is
not a significant off-book liability.
Deferred taxes and pension expenses
Other liabilities reported on page 53 of the annual report include deferred taxes of $572
Million, pension plans of $564 Million and $861 Million of other items that total to nearly
$2Billion. These items are purported to be reported in the other accumulated expenses on the
balance sheet on page 31. It is not clear from reading the notes how much of the listed liabilities
are not accounted for on the balance sheet. The liability for pension plans is a substantial
number, if the whole of it is not included in the balance sheet, it could portray the company being
in better financial health than it is. The company is still posting pre-tax earnings of over 3
Billion dollars for 2014 which appears to place it in a reasonably stable position.
Nonrecurring items
According to Emerson Electric Company’s 10-K filing for 2014 14 facilities were exited
with $1M lease and contract terminations, and 2000 positions were eliminated, creating
severance and benefits costs of $20M. (Electric, 2014)Emerson’s Income statement on the
NASDAQ.com site lists 508M of nonrecurring expense (EMR company financials Income
Statement, 2015) which shows in the statement of operations in the annual report on page 17 as
related to impairment of goodwill due to the divestment of the embedded computing and power

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business. (Emerson Electric Co., 2014) I did not find any other places where management or an
outside source identified any items as unusual or recurring. With over 24B in net sales and 10B
gross profit, even the goodwill impairment would be considered immaterial as it is about 5% of
gross profit.
Current Assets and Liabilities
Emerson has $2.41 Billion in working capital, the difference between their current assets
and current liabilities. They show 10.86 Billion dollars in current assets, half of which is
receivables and the other half is comprised of inventory and cash or equivalents. They are also
showing 8.45 Billion dollars in current liabilities, most of which is in accounts payable. The
current ratio (current assets/current liabilities) is then 1.29 which indicates that Emerson is in a
position to pay all the current debts without depleting all of its ready assets or taking out
additional financing. This ability to pay also does not rely on the forecasted revenue to be
realized, indicating that the company is immune to minor revenue fluctuations.
Liquidity Ratios
The relevant liquidity ratios are shown in Table 4 Chart of Ratios and have been stable for the
past 3 years. The quick ratio{current assets-inventories/Current liabilities} 1.04, shows that
Emerson does not need to liquidate inventory in order to pay current debt but that they would
need to collect all the outstanding receivables if they did not liquidate any inventory. This is
reaffirmed with the acid test ratio of .97. The debt ratio {liabilities/assets} of .58, indicates that
the company would not need to liquidate much more than half of its assets to cover all
outstanding debts. The debt to equity ratio of 1.39 indicates that more of the assets are financed
with debt rather than shareholder equity. If the debt to equity ratio rises continually it is an
indicator that the company needs to borrow more and becoming financially unstable. For

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Emerson, the rate has been steady and is not a current concern. Another important part of the
liquidity of a company is the ability to convert inventory to cash. The Table 4 Chart of Ratios
shows the relevant cash conversion ratios. Days of sales outstanding, days of inventory
outstanding, days of payable outstanding, and the cash conversion cycle. These ratios have been
relatively stable for the past three years with the inventory outstanding ratio having had a slight
reduction in 2013 but normalized back to 52 days. The cash conversion data shows that
Emerson is very efficient using working capital. They typically get paid before having to pay for
the materials used. The long payable period of 140 days is most likely tolerated by vendors due
to the volume of purchases and long history of company success.
Capital Structure and solvency
In 2014 Emerson had $2.41 Billion in working capital and 59% of debt was long term
debt. The long term debt to equity ratio was .35 and the times interest earned ratio of 18.26.
(Table 4 Chart of Ratios) Emerson has slightly more of its debt as long term debt but when
compared to equity, the company is not highly leveraged. In the event Emerson wanted to obtain
financing, they would not be considered a high risk borrower. The Long term debt has been
reduced from the two prior years where it was 72% of total debt.
Turnover Ratios related to asset utilization
Receivable turnover
Revenue/ avg. AR
4.99 Inventory turnover
COGS/ avg. inventory
7.28
Return on assets
(NI +int. exp.*(1-taxrate))/avg. revenue
9.3% Return on equity
Net income/ equity
20.74%
Cash turnover
Sales/avg. cash & equivalent
7.64 Total asset turnover
Revenue/avg. assets
1
2014 ratios depicted, but have been stable for last 3 years, see Table 4 Chart of Ratios
Emerson has a reasonable AR turnover ratio at nearly 5. Instead of stating receivables in
terms of days to collect, it is a measure of how many times a year the receivables are turning

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over. Similarly, the inventory is turning over or being sold completely just over 7 times a year.
The return on equity of over 20 percent indicates that Emerson utilizes shareholder investments
more than debt or assets to create profits.
Operating Performance
In the Table 4 Chart of Ratios we see the gross profit margin is 41.40%, the operating
profit margin is 14.44% and the net profit margin is 8.75%. These ratios indicate that after
deducting the direct cost of the product Emerson has about forty cents of every sales dollar
available to pay taxes and other expenses to running the business. Approximately nine cents of
every sales dollar is pure profit, while this sounds small, when we look at the total sales, this
number becomes significant at over two Billion dollars in 2014. (EMR company financials
Income Statement, 2015)
Intangible Assets
Intangible assets (EMR Company financials Balance Sheet, 2015) make up about 20% of
the Book Value (intangibles/book value) of Emerson Electric Company. This number has
remained essentially the same for the last three years.(Table 4) The intangible assets used in this
valuation are shown on the balance sheet which indicates that they have been acquired through
purchase of license, copyright or patent as stated on page 35 of the annual report. (Emerson
Electric Co., 2014) The percentage of intangible assets makes it easier to believe in the valuation
of the company, even if the intangibles were suddenly worth nothing, there would be enough
value in the remaining assets to keep the company viable in the eyes of its shareholders and
creditors. This is an important aspect to take into account when choosing a company to buy or to
invest in.

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Market Measures
The price to earnings ratios for the last three years in Table 4 indicate that shareholders
are willing to invest around $20 for each $1 of earnings. The price to book value indicates that
the market price is about 5 times the book value for each share. The earnings per share and the
price to book having a higher value than last year would encourage investors to remain
shareholders and potentially attract new investors.
Emerson Electric Company has shown relative stability over the last three years. They
made a change in leverage strategy to reduce long term debt without making significant
reductions to assets or equity. The company continues to have steady income and the balance
sheet evaluation proves them to be on solid financial footing.

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Part 2
Cash Flows and Capital Structure
To analyze the cash flow management of Emerson Electric Company I looked at the cash
flows generated from operations investing and financing. While Emerson has negative cash
flows from both investing and financing, they appear to be financially stable and should be able
to maintain operations for the foreseeable future. The areas of greatest concern are the operating
cash flow ratio and the high day’s payable outstanding. With careful monitoring of these areas
and maximizing the strength of their cash conversion cycle and steady cash from operations,
Emerson is a good stable investment hold.
Cash flow from operations
Cash from operations for the past three years was, $3.69B, $3.64B, and $3.05B.
In 2014 Emerson had a $508 Million impairment to goodwill from the divestiture of a division,
Embedded Computing and Power. (Emerson Electric Co., 2014) The main component of income
has been sales with 2014 international sales at $13.28B and domestic sales of $11.26B.
Free cash flow
Free cash flow is the amount of cash left over after accounting for maintaining or
expanding its assets (Free Cash Flow, n.d.). The free cash flow for Emerson in 2014 was $1.71B
up from $1.22B in 2012. This translates into free cash flow per share of about $2.46 Table 4.
Free cash flow per share gives an indication of how much cash a company generates and can be a
better indicator of continued growth than earnings per share. The operating cash flow Ratio,
(cash from ops/current liabilities) for Emerson is a disturbing .44. This indicates that they do not
generate enough cash from operations to cover short term liabilities and would need to liquidate
some assets if all current liabilities were called due immediately. Investors should pay attention

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to this ratio but look to other indicators and view the entire financial picture to make informed
investment decisions. One such measure to look at is working capital.
Working capital
Working capital is the difference between current assets and current liabilities. Emerson
had $2,413,000,000 of working capital in 2014, $3,374,000,000 in 2013 and $2,993,000,000 in
2012. This means that if they should liquidate all current assets, including some inventory, they
would have enough to pay all current debts. Another measure is the NOPAT or net operating
profit less adjusted taxes. The calculation is Operating income before interest and tax expense
multiplied by 1-tax rate. For Emerson, the effective tax rate is 35% (tax expense/ income before
tax). NOPAT for 2014 was 3,542,000,000. Because financing expenses are not included,
NOPAT gives an unleveraged view of profitability. The cash conversion cycle is usually the
measure of the time it takes a company to turn capital into cash. For Emerson, they have a
negative cash conversion cycle, specifically the numbers for the last three years beginning in
2014 are -24.81,-31.18, and -12.61. Emerson’s negative numbers do not mean that it turns
capital into cash before it receives it, the numbers are negative because they have a very high
payables turnover ratio. If they were paying invoices in 45 days average, the 2014 number
would be 80.14. Investors should take note of the inputs into this calculation and not take it at
face value.
Liquidity
The cash flow adequacy ratio is calculated as cash from operations / annual current
maturities (Cash Flow Adequacy Definition and Explanation, 2015)Table 4 Chart of Ratios. The
current maturities for 2014 was $2,465,000,000 (Emerson Electric Co. (EMR) Statement of
Financial Position, 2015) when plugged into the formula the calculation yields a ratio of 1.50.

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The indications are that cash from operations is enough to cover current debt and current portion
of long term debt one and a half times. Emerson will not have to make additional borrowing to
meet these obligations. The quick ratio, acid test ratio and current ratios are also used to
determine the liquidity of a company. For Emerson Table 4 shows these ratios for the past three
years. The quick ratio has remained just above 1 and the current ratio has remained above 1.25
for all three years. These two ratios indicate that Emerson should have no issue paying current
debt from current assets. The Acid test ratio only includes cash, marketable securities and
receivables over the current liabilities. For Emerson, 2014 the number is just below 1 with the
other two years being just above. This indicates that they would need to sell some inventory in
addition to the quick turn assets if all current debt were called payable. These ratios all reinforce
the belief that Emerson is not in danger of default on obligations.
Survival revenue
I used the formula SG&A+ Interest expense/ (1- COGS/SALES) to calculate
survival revenue as shown in Table 4. The average calculated result for Emerson over the past
three years is 15.3 Billion dollars. This amount is about 62 percent of the average revenues for
the past three years. It is reasonable to assume that Emerson will continue to cover these
expenses even if they were to experience a decline in revenues. The survival revenue needed has
been stable for the last few years. Survival revenue is also referred to as break even revenue.
Cash flow from investing
Emerson has had negative cash flows from investing over the past three years. The
figures shown in Table 3 indicate that the net amount of cash put into investments nearly doubled
from 2013 to 2014 resulting in a negative net cash flow of $1.15 Billion. Emerson had a large
increase in acquisitions from the previous year with the purchase of two companies, Virgo

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Valves and Controls and Enardo Holdings. (Emerson Electric Co., 2014) They also acquired the
remaining 44.5% noncontrolling interest in Appleton Group. This accounts for the additional
cash expended in investing from prior years. The cash reinvestment ratio indicates the amount
that management reinvests into the business, for Emerson that number is -.73 which is calculated
with (increase in fixed assets + increase in working capital) / (net income + noncash expenses –
noncash sales – dividends). The negative number indicates that Emerson is not putting a lot into
the maintenance or addition of capital assets. This could be due to assets that are still productive
without much maintenance or Emerson could be holding off on major investment in anticipation
of a technology or manufacturing change that would require new equipment entirely. Emerson
invested $767 Million in capital expenditures and a levered free cash flow of $2.93 Billion
dollars. The return on assets for 2014 was 9.30% which is higher than competitor ABB who had
5.37%. The levered free cash flow (cash from operations – CAPEX) for the past three years
beginning in 2012 was $2.34B, $2.97B, and $2.93B, these numbers indicate that Emerson is in a
good position to make additional investment in equipment when they need to.
Cash flow from financing
Cash flows from financing for 2014 through 2012 were all negative, those numbers were
$-2.56B, $-1.93B, and $-1.9B respectively (EMR Company financials Cash Flows, 2015). In the
last two years Emerson has spent just over a Billion dollars each year in stock repurchasing and a
similar amount was paid out in dividends. These are the main components in the negative cash
from financing. The ROCE is a respectable 20.74% which is higher than competitor ABB,
according to Yahoo! Finance. The price to cash flow ratio (share price/op cash flow per share)
was 24.83 in 2014 and 24.31 in 2013. Investors use the ratio to compare how much free cash is
being generated relative to the price of each share. Emerson has approximately 12.1 Billion

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dollars of debt with Long term debt accounting for 59% of it. See Table 1. In previous years,
long term debt has been more than 70% of the debt. With the divestiture of Embedded
Computing and Power and other strategic maneuvers, Emerson would be considered more
solvent. Using financing increases the financial leverage ratio which was 2.39 for 2014. This
means that for every dollar of debt, they have 2.39 dollars of assets. Investors will want to look
closely at what the financing is being used to fund. When money is borrowed to cover operating
expenses, it can signal trouble for the company, it means the company is not making enough
money from conducting business to pay the bills associated with that business. It is acceptable to
borrow at inception but over the long term, it is not sustainable. Short term borrowing can put a
strain on finances if the company doesn’t have enough income as with the long term borrowing.
Emerson has a good mix of long and short term debt for the types of revenue that it generates.
Calculating the return on long term debt we find that for 2014 Emerson had a 60% return on
debt, or .60 is earned for every dollar of long term debt.
Horizontal analysis 2013 to 2014
From 2013 to 2014 total revenues have decreased about a half a percent, but gross profit
increased 2%. This tells us that even though revenue was down overall the profitability of each
sale was increased. An increase of 3.75% was experienced in operating income and an overall
increase of net income of 7.14% or about 143 Million dollars. Notable changes in expenses were
a 40.32% decrease in minority interest deduction and an 11% decrease in interest expense. See
Table 2. The decrease in interest expense is related to the decrease in long term debt while the
stake in the other companies was increased so the deduction for minority interest of income was
reduced.

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Emerson has significantly decreased its long term debt and increased its times interest
earned without making an appreciable change to the debt ratio by shifting the financing to
shorter term options. Emerson has a strong cash conversion cycle, a trend of increasing profit
margins, and good liquidity. The revenues and level of returns for shareholders should be
sustainable for a long while. Management is using wise management of cash with the time to
pay vendors much longer than the time to collect from customers. I recommend this stock as an
investment to hold.

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Part 3
Prospective Analysis
Utilizing a few different projection methods, Emerson appears to be in a good financial
place moving forward. The projections indicate that there will be enough money to cover
liabilities and that stockowner equity will grow. While the following analysis is only a potential,
there is good evidence to support the assumptions made. Most of the assumptions were made
using conservative measures whenever possible to avoid inflated valuations.
Projected Balance Sheet
Using the methodology from pages 510 through 513 of the textbook (Subramanyam,
2011) I calculated the projected balance sheet for 2015 Table 8. The resulting projected book
value of the company is $8.68 Billion. This reflects an increase from the 2014 actual by
approximately $250 Million. The historical growth in value has been in excess of $400 Million a
year. I expect the stark difference to be from the limitations presented in creating a projected
statement. Some of the calculations I utilized for the projections were different from the book in
order to present a more conservative outlook. The book did not suggest calculations for
Goodwill or Intangible asset valuation. I used an average of the previous year percentages of
change for each as there had been no clear trend of increase or decrease. I also had to use a
similar method of estimation for the Long term debt as the annual report did not clearly indicate
what portion of the debt would be due as current debt in 2015. The cash position in the
projected balance sheet is 312% lower than the previous years, which were relatively stable. It is
difficult to have confidence in this number given the disparity. A review of the rest of the
projected balance sheet reveals a projected significant reduction in the accounts payable. The
text book (Subramanyam, 2011) suggests using the sales forecast and ratio of cost of goods sold

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to payables to figure this number. I would have to conclude that payables for Emerson are not as
heavily weighted toward the costs of sales and must include some consulting or the cost of leased
property that is not otherwise captured in this estimation. The overall balance sheet equation is
not thrown off as a result of the lower cash position and lower payables as the two would cancel
out given that they appear to be lower than expected by similar dollar amounts.
Forecasted Income Statement
The Forecasted income statement for Emerson in Table 7 was created using the
methodology in the textbook on page 510. (Subramanyam, 2011) I used the suggested method
of average sales and average cost of revenue to compute the gross profit percentage. The
resulting cost of revenue is lower than expected. This is probably due to fewer directly related
variable costs in the production of revenue. Emerson has reduced its interest payments and other
expenses in each of the last few years. Some of these reductions were due to the selling or
closing of underproductive businesses. In order to provide a more conservative analysis, I used
the same value as the current year for interest expense and for “other” expenses for the
forecasted statement instead of anticipating continued reductions. The forecast predicts a Net
Income of $2.4 Billion dollars, which is higher than the historical average increase. The net
income projection from the stock valuation table is more conservative. When making investment
decisions, it would be recommended to use the more conservative of the two estimates. The
company would want to use the higher projections when applying for credit or to attract other
investors. This disparity highlights the subjectivity of projected statements. For the stock
valuation projection I used projected sales multiplied by profit margin. The Forecasted income
statement is an attempt to project certain costs and expenses that are difficult to estimate based
on the information available to the general public. If Emerson were a more goods centric

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business, rather than making much of their profit from services and from strategic purchasing
and selling of other companies, the forecasted statement method would likely provide better
result. Taking the conservative approach in projecting future income helps to prevent the
analysis from appearing more optimistic than feasible. This valuation is better suited for the
investor than it is for potential lenders.
Valuation of Company Stock
Because future money has less value than money in the bank, discounted cash flow
analysis should be done for valuation purposes. I used projections for five years, 2015 to 2019,
to determine the valuation of Emerson’s stock. The methodology employed was taken from
page 628 in the text. (Subramanyam, 2011) Residual income was calculated with a factor of
19%, which is a conservative approximation of the average return on equity from Table 4. The
resulting present value of equity was $7.8 Billion dollars. Price to book value of equity as
calculated in the valuation Table 6 came out at 3.83 which reflects significant difference from the
2014 price to book show in the table of ratios Table 4. This indicates that either the company
must have had substantial one-time events to give the higher price to book values or that there is
a flaw in the calculations utilized to project the price to book value. The value of equity per
share of $24.10 as calculated in Table 5 is significantly higher than the actual 2014 value of
$14.52 (equity/shares). This suggests that the value per share is expected to increase. The
investment should yield a good return on value if all assumptions are correct. The PE ratio from
the valuation projection was 3.9. Table 6 According to the textbook the stock is “overpriced if
the expected growth in EPS is less than 20%” (Subramanyam, 2011, p. 631) according to this
metric, Emerson’s stock is overpriced. All other valuation methods indicate that the stock is

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somewhat undervalued. Based on all the valuation methods, I conclude that the stock is
undervalued.
Risks
The biggest risk to the long term growth sustainability is the future global political climate. With
a growth in sales to the global market, the stability of the global market is important to
Emerson’s sales. The continued crisis situation in the Middle East and Africa could derail much
of the previous increased sales growth. Capital expenditure is also a potential weakness for the
company. Emerson has a cash reinvestment ratio of -.73. This negative number indicates that
Emerson is not investing a lot of money into the maintenance of or expansion of capital assets.
While this is not a concern for the short term, if management does not invest in maintaining or
growing the assets, it could lead to a decline in business. It is an accepted belief that, “a business
has to spend money to make money”. A smaller but real potential risk is potential warranty
claims and litigation that Emerson is a party to. In the annual statement (Emerson Electric Co.,
2014) Emerson indicates that any judgements are expected to be immaterial. The company has
over a century of demonstrated experience with these matters. I believe that the potential risks
have been mitigated as possible and that there should be minimal impact on earnings potential.
It is difficult to predict catastrophic events such as war or natural disaster but, Emerson Electric
has a globally diverse operation encompassing several sectors. This diversification should
insulate them from catastrophic failure due to any single event.
Conclusion
An examination of the annual report and financial statements reveals that Emerson
Electric Company is a financially sound company that has been in business for over one hundred
years. Analysis provides basis for the presumption that management has made changes to the

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financing plan to reduce long term debt without making significant reductions to assets or equity.
I find the mix of long and short term debt and equity ratios to be indicative of solvency and good
management use of capital. Revenues declined while overall profit increased as a result of good
financial leadership and reducing costs. Some of the cost reductions came from selling off the
embedded computing and power business. Analysis of cash flows reveals that the company has
a high day’s payable outstanding. So far, the vendors appear willing to accept the longer
payment term, it will be an important aspect to monitor moving forward. The breakeven revenue
has been stable at around 15 Billion dollars per year and revenues have been averaging around
$24.5 Billion. The revenue to breakeven relationship indicates that Emerson has adequate sales
and profit margins to be sustainable. It appears that will continue to be the case despite having
negative cash flows from both investing and from financing. The projections for future earnings
indicate the possibility that the stock is currently undervalued. Emerson had a calculated Book
value of about $8.43 Billion at the end of 2014 and a projected book value of $8.68. The
indication of the comparison of book values reinforces the notion that the company will continue
to grow in value. The revenues and returns for shareholders appear to be sustainable for the long
term. This is a good company to invest in as they regularly pay dividends and it is projected that
the value of the stock will continue to grow, ceteris paribus.

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Financial Exhibits
Table 1 Balance Sheet
Period Ending 30-Sep-14 30-Sep-13 30-Sep-12
Assets
Current Assets
Cash And Cash Equivalents 3,149,000 3,275,000 2,367,000
Short TermInvestments - - -
Net Receivables 5,019,000 4,808,000 4,983,000
Inventory 2,057,000 1,895,000 2,125,000
Other Current Assets 642,000 1,021,000 651,000
Total Current Assets 10,867,000 10,999,000 10,126,000
Long TermInvestments - - -
Property Plant and Equipment 3,802,000 3,605,000 3,509,000
Goodwill 7,182,000 7,509,000 8,026,000
Intangible Assets 1,689,000 1,672,000 1,838,000
Accumulated Amortization - - -
Other Assets 637,000 926,000 319,000
Deferred Long TermAsset Charges - - -
Total Assets 24,177,000 24,711,000 23,818,000
Liabilities
Current Liabilities
Accounts Payable 5,989,000 6,038,000 5,627,000
Short/Current Long TermDebt 2,465,000 1,587,000 1,506,000
Other Current Liabilities - - -
Total Current Liabilities 8,454,000 7,625,000 7,133,000
Long TermDebt 3,559,000 4,055,000 3,787,000
Other Liabilities 1,997,000 2,313,000 2,456,000
Deferred Long TermLiability Charges - - -
Minority Interest 48,000 133,000 147,000
Negative Goodwill - - -
Total Liabilities 14,058,000 14,126,000 13,523,000
Stockholders' Equity
Misc Stocks Options Warrants - - -
Redeemable Preferred Stock - - -
Preferred Stock - - -
Common Stock 477,000 477,000 477,000
Retained Earnings 19,867,000 18,930,000 18,107,000
Treasury Stock -9,811,000 -8,985,000 -7,882,000
Capital Surplus 161,000 352,000 324,000
Other Stockholder Equity -575,000 -189,000 -731,000
Total Stockholder Equity 10,119,000 10,585,000 10,295,000
Net Tangible Assets 1,248,000 1,404,000 431,000

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Table 2 Income Statement
INCOME STATEMENT
Total Revenue 24,537,000 24,669,000 24,412,000
Cost of Revenue 14,379,000 14,717,000 14,644,000
Gross Profit 10,158,000 9,952,000 9,768,000
Operating Expenses
Research Development - - -
Selling General and Administrative 6,108,000 6,010,000 5,837,000
Non Recurring 508,000 528,000 592,000
Others - - -
Total Operating Expenses - - -
Operating Income or Loss 3,542,000 3,414,000 3,339,000
Income from Continuing Operations
Total Other Income/Expenses Net - - -
Earnings Before Interest And Taxes 3,542,000 3,414,000 3,339,000
Interest Expense 194,000 218,000 224,000
Income Before Tax 3,348,000 3,196,000 3,115,000
Income Tax Expense 1,164,000 1,130,000 1,091,000
Minority Interest -37,000 -62,000 -56,000
Net Income From Continuing Ops 2,147,000 2,004,000 1,968,000
Non-recurring Events
Discontinued Operations - - -
Extraordinary Items - - -
Effect Of Accounting Changes - - -
Other Items - - -
Net Income 2,147,000 2,004,000 1,968,000
Preferred Stock And Other Adjustments - - -
Net Income Applicable To Common Shares 2,147,000 2,004,000 1,968,000

23
Table 3 Statement of Cash Flows
Statement of Cash Flows
Net Income 2,147,000 2,004,000 1,968,000
Operating Activities, Cash Flows Provided By or Used In
Depreciation 831,000 819,000 823,000
Adjustments To Net Income 563,000 722,000 546,000
Changes In Accounts Receivables 263,000 84,000 536,000
Changes In Liabilities 450,000 75,000 226,000
Changes In Inventories 132,000 -83,000 49,000
Changes In Other Operating Activities -731,000 -34,000 -1,151,000
Total Cash Flow From Operating Activities 3,692,000 3,649,000 3,053,000
Investing Activities, Cash Flows Provided By or Used In
Capital Expenditures -767,000 -678,000 -665,000
Investments - - -
Other Cash flows from Investing Activities -392,000 -111,000 -141,000
Total Cash Flows From Investing Activities -1,159,000 -789,000 -806,000
Financing Activities, Cash Flows Provided By or Used In
Dividends Paid -1,210,000 -1,181,000 -1,171,000
Sale Purchase of Stock -1,622,000 -1,120,000 -811,000
Net Borrowings 294,000 349,000 90,000
Other Cash Flows from Financing Activities -21,000 19,000 -7,000
Total Cash Flows From Financing Activities -2,559,000 -1,933,000 -1,899,000
Effect Of Exchange Rate Changes -100,000 -19,000 -33,000
Change In Cash and Cash Equivalents -126,000 908,000 315,000

24
Table 4 Chart of Ratios
in 000s except per share values and ratios 2014 2013 2012
Book Value 8,430,000 8,913,000 8,457,000
Book value / share 12.10 12.61 11.68
EPS 3.08 2.84 2.72
Quick Ratio 1.04 1.19 1.12
Acid Test 0.97 1.06 1.03
Debt to Equity 1.39 1.33 1.31
Current Ratio 1.29 1.44 1.42
Debt Ratio 0.58 0.57 0.57
Days Sales outstanding 73.64 70.16 73.48
Days Inventory outstanding 51.50 46.35 52.24
Days Payable outstanding 149.94 147.70 138.33
cash conversion cycle -24.81 -31.18 -12.61
working capital 2,413,000 3,374,000 2,993,000
LTD % of invest capital NO INVESTMENTS NO INVESTMENTS NO INVESTMENTS
STD % of invest capital NO INVESTMENTS NO INVESTMENTS NO INVESTMENTS
LTD % of debt 59% 72% 72%
STD % of debt 41% 28% 28%
LTD to equity 0.35 0.38 0.37
times interest earned 18.26 15.66 14.91
Receivable Turnover 4.99 5.04 4.99
Inventory Turnover 7.28 7.32 7.29
ROA 9.30% 8.85% 8.88%
RoCommon Equity 20.74% 19.20% 19.12%
Cash turnover 7.64 8.74 8.65
total asset turnover 1.00 1.02 1.02
gross profit margin 41.40% 40.34% 40.01%
operating profit margin (pretax) 14.44% 13.84% 13.68%
net profit margin 8.75% 8.12% 8.06%
Intangible to book value 20.04% 18.76% 21.73%
Price to earnings 19.84 21.71 16.42
earnings yield 5.04% 4.61% 6.09%
price to book 5.05 4.88 3.82
price to cash flow (share price/ fcf p share) 24.83 24.31
Free cash flow 1,715,000 1,790,000 1,217,000
free cash flow per share 2.462 2.533 1.68
Levered free cash flow 2,925,000 2,971,000 2,388,000
operating cash flow ratio 0.44 0.48 0.43
survival revenue (breakeven) 15,222,699 15,437,955 15,147,536

25
Table 5 Stock Valuation
Table 6 Equity Valuation Projections
Table 7 Forecasted income statement 2015
Term Year
2013 2014 2015 2016 2017 2018 2019 2020
salesCY-PY/CY Sales growth 1.05% -0.54% 0.26% 0.26% 0.26% 0.26% 0.26% 0.25%
NI/Sales Net profit margin 8.12% 8.75% 8.22% 8.22% 8.22% 8.22% 8.22% 8.22%
Sales/work cap Net working capital turnover 7.31 10.17 10.17 10.17 10.17 10.17 10.17 10.17
sales/fixed assets Fixed asset turnover 6.84 6.45 6.45 6.45 6.45 6.45 6.45 6.45
op assets/stock equity Total operating assets/Total equity[AE] 2.39 2.34 2.34 2.34 2.34 2.34 2.34 2.34
Number of shares outstanding 706660000 696610000 696610000 696610000 696610000 696610000 696610000 696610000
in thousands
py sales * rate + py sales Sales 24,669,000 24,537,000 24,600,511 24,664,187 24,728,027 24,792,033 24,856,204 24,918,344
sales * profit margin Net Income 2,004,000 2,147,000 2,021,840 2,027,073 2,032,320 2,037,581 2,042,855 2,047,962
cy sales/py work cp/pysales Net Working capital 3,374,000 2,413,000 2,419,246 2,425,508 2,431,786 2,438,080 2,444,391 2,450,502
sales/fixed ass turnover Fixed assets 3,605,000 3,802,000 3,814,033 3,823,905 3,833,803 3,843,726 3,853,675 3,863,309
work cap + fixed assets Total operating assets 6,979,000 6,215,000 6,233,278 6,249,413 6,265,588 6,281,806 6,298,066 6,313,811
op assets-stock equity Long-term liabilities 4,055,000 3,559,000 3,569,467 3,578,706 3,587,969 3,597,256 3,606,568 3,615,584
op assets/ [AE] Total stockholders' equity 2,924,000 2,656,000 2,663,811 2,670,706 2,677,619 2,684,550 2,691,498 2,698,227
inflation rate 3.5%
sales * profit margin Net Income 2,021,840 2,027,073 2,032,320 2,037,581 2,042,855 2,047,962
prev yr total equity Beginning equity 2,656,000 2,663,811 2,670,706 2,677,619 2,684,550 2,691,498
Required equity return 19.0% 19.0% 19.0% 19.0% 19.0% 19.0%
Return * begin equity Expected earning 504,640 506,124 507,434 508,748 510,064 511,385
NI- Expected earning Residual income 1,517,200 1,520,949 1,524,886 1,528,833 1,532,790 1,536,577
Discount factor 1/(1+rate)^n 0.84 0.71 0.59 0.50 0.42
residual * factor Present Value of residual income 1,274,958 1,074,041 904,891 762,381 642,315
Cumalitive PV of residual income 1,274,958 2,348,999 3,253,890 4,016,271 4,658,586
Terminal value of residual income 9474346
begin equity of horiz yr 1 Begin book value of equity 2,656,000
Value of equity 16,788,932
Common shares outstanding 696610000
Value of equity per share 24.10
Historical figures Forecast Horizon
term resid inc/(rate-inflation)*(1+rate^n of PY)
cum PV of rsid+Term of rsid+begin book val
value of equty/common shares
2013 2014 2015 2016 2017 2018 2019
Net Income 2,004,000 2,147,000 2,021,840 2,027,073 2,032,320 2,037,581 2,042,855
Beg Book Value 2,036,836 2,924,000 2,656,000 2,663,811 2,670,706 2,677,619 2,684,550
19%
NI-(rate*beg book val) Residual income 1617001 1591440 1517200 1520949 1524886 1528833 1532790
Discount factor 1/(1+rate)^n PV factor (19%) 0.840 0.706 0.593 0.499 0.419 0.352 0.296
Factor * residual PV residual income 1358825 1123819 900330 758450 639003 538367 453580
cum begin + resids Year 1 value as of year 7 7809209
value/begin bk value PB ratio 3.83
value/net income PE ratio 3.90
Revenues 24,600,511 24,669,000 24,537,000 24,412,000 24539333.3
COGS 13062871 14,717,000 14,379,000 14,644,000 14580000.0
SG&A 7024200.0 3 year average 59.4%
other exp 470919 SG&A
other unclassified 6,108,000 6,010,000 98000 0.016
interest exp 180723 % increase
eff tax rate 34.8% PY other exp %increase
508,000 -0.07
PY interest expense %increase
Revenues 24600511 194,000 -0.06844
COGS 13062871 effective tax rate
SG&A 7024200 3,348,000 1,164,000 0.347670
Other expenses 508000
Interest 194000
Total cost & expense 20789071
Income from ops 3811440
Income taxes 1325124
Income before disc 2486316
Other unclassified
Net Income 2,486,316
COGS
Forecasted Income Statement 2015

26
Table 8 Projected Balance Sheet
Period Ending in 000's 30-Sep-12 30-Sep-13 30-Sep-14 30-Sep-15
sales 24,412,000 24,669,000 24,537,000 24,600,511
Assets
Current Assets
Cash &equiv 2,367,000 3,275,000 3,149,000 764,791
Net Receivables 4,983,000 4,808,000 5,019,000 4,929,962
Inventory 2,125,000 1,895,000 2,057,000 1,794,350
Other Curr Assets 651,000 1,021,000 642,000 642,000
Total Current Assets 10,126,000 10,999,000 10,867,000 8,131,104
PP&E 3,509,000 3,605,000 3,802,000 3,957,890
Goodwill 8,026,000 7,509,000 7,182,000 6,794,303
Intangible Assets 1,838,000 1,672,000 1,689,000 1,733,000
Other Assets 319,000 926,000 637,000 637,000
Total Assets 23,818,000 24,711,000 24,177,000 21,253,297
Liabilities
Current Liabilities
Accounts Payable 5,627,000 6,038,000 5,989,000 2,652,822
Current of LTD 1,506,000 1,587,000 2,465,000 3,309,000
Total Curr Liabilty 7,133,000 7,625,000 8,454,000 5,961,822
Long Term Debt 3,787,000 4,055,000 3,559,000 3,123,734
Other Liabilities 2,456,000 2,313,000 1,997,000 1,724,172
Minority Interest 147,000 133,000 48,000 30,376
Total Liabilities 13,523,000 14,126,000 14,058,000 10,840,104
Stockholders' Equity
Common Stock 477,000 477,000 477,000 477,000
Retained Earnings 18,107,000 18,930,000 19,867,000 20,649,128
Treasury Stock -7,882,000 -8,985,000 -9,811,000 (10,712,935)
Capital Surplus 324,000 352,000 161,000
Other equity -731,000 -189,000 -575,000
Total stock equity 10,295,000 10,585,000 10,119,000 10,413,193
Book Value 8,680,193

27
References
Cash Flow Adequacy Definition and Explanation. (2015). Retrieved from Financial Analysis
Hub: http://financialanalysishub.com/cash-flow-adequacy/
Electric, E. (2014, 9 30). Emerson Electric 2014 10-K filing. Retrieved from SEC:
http://www.sec.gov/Archives/edgar/data/32604/000003260414000048/emr930201410-
k.htm
Emerson Electric Co. (EMR) Statement of Financial Position. (2015). Retrieved from Stock
Analysis on Net: https://www.stock-analysis-on.net/NYSE/Company/Emerson-Electric-
Co/Financial-Statement/Liabilities-and-Stockholders-Equity
Emerson Electric Co. (2014). Annual Report 2014. Retrieved from Emerson:
http://www.emerson.com/en-us/Investors/Pages/annual-reports.aspx
EMR Company financials Balance Sheet. (2015, July). Retrieved from NASDAQ.com:
http://www.nasdaq.com/symbol/emr/financials?query=balance-sheet
EMR Company financials Cash Flows. (2015, July). Retrieved from NASDAQ.com:
http://www.nasdaq.com/symbol/emr/financials?query=cash-flow
EMR company financials Income Statement. (2015, July 29). Retrieved from NASDAQ.com:
http://www.nasdaq.com/symbol/emr/financials?query=income-statement
Free Cash Flow. (n.d.). Retrieved from Investopedia:
http://www.investopedia.com/terms/f/freecashflow.asp
Subramanyam, K. (2011). Financial Statement Analysis, eleventh edition. New York:
McGraw-Hill Education.

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