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Group Project Utilizing Financial & Accounting Information for Company Analysis Project Sections An Example Table of Contents 1) Summary – summarizes the key points from sections 2 through 6 [below] in the report. In business, generally called an Executive Summary. 2) Description of the Company – discussion of the company’s core values, products/services, where they operate, history, technology, social responsibility. 3) Industry Analysis – examines the company’s place in the industry, the competitive landscape and any competitive advantages. 4) Management Plan – looks at published short/long term plans, strategic direction, results over time, how they’ve dealt with economic downturns, how they’ve returned value to the stockholders. Project Sections An Example Table of Contents 5) Global Issues – If this is a global company, where do they operate? What’s their international model? Are their overseas operations performing better than their US divisions? 6) Financial Analysis – examines financial results over a 3 or 4 year period with some interpretation of results Appendix – location of all the supportive data and information. It might include such information as Annual Reports (or a portion of it), published supporting tables and charts, etc. Financial Analysis Process The goals of the Process provide two financial platforms: one where results can be compared internally one where results external to the company can be cross-compared. IV. Why I. Where Process III. What II. How Process of Financial Analysis Part I. Where Part II. How Deals with existing data and informational sources and accessibility. Drives the type of analytical tools that will be incorporated in the analysis and guides you in selecting the right analytical tool to make your points. Part III. What Uses specific Ratios from numbers on the Income Statement, Balance Sheet, or combination of both to determine performance. Part IV. Why This is the interpretive portion of the Process. It’s taking factual data derived charts, tables, etc. and transforming it into useable information for part of your narrative in the Financial Analysis section. Your Objectives for the Group Project Exercise For the company you selected, your analysis should be focused on answering several general questions: Year-over-year, is it profitable or losing money? How is its profitability compared with its competitors or the industry as a whole? Just how good is the company at running its business? Does its performance over the selected period of analysis seem to be getting better or worse with regard to effectively managing its assets, utilizing its assets, and managing its liabilities? Are the financial changes explainable? Besides you, Who else uses Financial information on a regular basis? Internal Company Managers - to gauge the company’s financial strength (and weaknesses), its income, growth, and the financial effects of pending decisions Lenders – to evaluate a company’s ability to pay back loans Potential Investors – to assess company’s financial strength, ability to meet its obligations, and future profit potential Existing & Potential Customers – to judge the company’s ability to carry out its operations effectively, meet delivery schedules, etc. Existing & Potential Suppliers- to evaluate a company’s financial stability, ability to pay bills, etc. Part I. Where do I start on analyzing the Financial Condition of a Company ? Select a publically-traded company. Why? Identify its stock symbol and its 4-digit Standard Industrial Classification [SIC] designation. Why? Utilize existing financial information about the company. Why? For each year, read the narrative from the president/CEO on the company’s performance for that year in the Annual Report. Typically what’s also covered will be its future direction [new products or services, future strategies & expectations, and any other relevant information]. Part I. Where do I find some Sources of Data and Information? Financial Press – The Wall Street Journal, Barron’s , web financial sites [Yahoo finance], local newspapers, etc. Industry Trade Publications – Industry dependent Financial Advisory Services – Moody’s Investor Service, Dow Jones, Standard & Poor’s, etc. Company Financial Information – Annual Reports, SEC filings (10-Ks, etc.). Included are Income Statements and Balance Sheets for the period being analyzed. What Else? Personal Interviews Part I. Where do I find additional information on the use of analytical tools? On your instructor’s Cabrillo website, there is a 25 page document entitled “Financial and Accounting Ratios, Introduction to Business” that details 11 of the more common ratios used in financial analysis. Below is excerpt page 1 Ratios are shown differently and show relative sizes of two or more values: 1 : 3 [ one to three] ¼ [as a fraction] 0.25 [as a decimal] 25% [as a percentage] Introduction Among the dozens of financial ratios available to measure company performance, listed are 11 that are the most relevant for use in help analyzing Income Statements and Balance Sheets of companies selected for your Profile C class project. They are organized into four main categories: I. Profitability Ratios Page 2 1) Gross Profit Margin Page 2 2) Operating Income Margin Page 4 II. Efficiency Ratios (Asset Management Ratios) Page 5 Part I. Where 2009 / 2010 Sample Income Statement ABC Corp Revenue = less COGS = Gross Profit = less Expenses = Operating Income <Loss> = Non‐opeerating Income = Earnings Before Interest & Taxes [EBIT] = less Interest = less Income Taxes = Net Income = Comparative Income Statements 2009 2010 $(OOO) % of Rev $(OOO) 12,000 100% 10,500 8,000 66.7% 7,200 4,000 33.3% 3,300 2,000 16.7% 2,000 2,000 16.7% 1,300 230 1.9% 110 2,230 18.6% 1,410 240 2.0% 60 440 3.7% 15 1,550 12.9% 535 % of Rev 100% 68.6% 31.4% 19.0% 12.4% 1.0% 13.4% 0.6% 0.1% 5.1% Part I. Where 2009 Sample Balance Sheet ABC’s Year-End Balance Sheet as of 12/31/2009 Assets $(000) Cash + Liquid Securities Account Receivables Inventory 2,000 1,000 1,000 Total Current Assets 4,000 Notes Receivable 1,000 Property & Equipment 6,000 Intangible Assets [GW & TM] 1,000 Total Long Term Assets Total Assets 8,000 12,000 Liabilities $(000) Account Payable 900 Wages Payable Taxes Payable Interest Payable 500 500 100 Total Current Liabilities 2,000 Long Term Debt 2,000 Common Stock Retained Earnings 4,000 4,000 Total Shareholder Equity 8,000 Total Liabilities & Stockholder Equity 12,000 Part I. Where 2010 Sample Balance Sheet ABC’s Year-End Balance Sheet as of 12/31/2010 Liabilities Assets Cash + Liquid Securities Account Receivables Inventory 1,500 800 700 Total Current Assets 3,000 Notes Receivable 1,000 Property & Equipment 5,000 Intangible Assets [GW & TM 1,000 Total Long Term Assets Total Assets 7,000 10,000 Account Payable 600 Wages Payable Taxes Payable Interest Payable 450 450 50 Total Current Liabilities 1,550 Long Term Debt 2,000 Common Stock Retained Earnings 3,,000 Total Shareholder Equity 3,450 6,450 Total Liabilities & Stockholder Equity 10,000 Part II. How The How drives the type of analytical tools that will be incorporated in the analysis. For example, if you are examining the pattern of revenue and operational income (or loss) over a several year period, the How guides you in selecting the right analytical tool to make your point. The How helps establish meaningful comparisons across time and across other “like” companies of similar size & operational characteristics in the same industry. The How establishes benchmarks from which to make Dollar, percentage, and ratio data comparisons Part II. How can I present my Financial Analysis Information? Generally, analytical data and information [found in charts, tables, etc.] goes in the Appendix. The only thing you want to include in the write up is the final dollar, percentage or ratio that helps make your point. 1) Horizontal analysis 2) Trend analysis Data collected and presented in these three types of analysis enables a multitude of comparisons: over time, between accounting results, among competitors, etc. 3) Vertical analysis 4) Ratios Information from the various types of analysis can be used as ratios for easier analysis and interpretation of the information Part II. How Horizontal Analysis Shows a company’s financial results for two consecutive years. This is an an “across time” Horizontal Analysis: 2009 to 2010 analysis ABC Corp Example: Revenue COGS Gross Profit Expenses Operating Inc <Loss> = = = = = Comparative Income Statements 2009 2010 Inc. or % Inc. or $(OOO) $(OOO) <Dec.> <Dec.> 12,000 10,500 ($1,500) ‐13% 8,000 $7,200 ($800) ‐10% 4,000 3,300 ($700) ‐18% 2,000 2,000 $0 0% 2,000 1,300 ($700) ‐35% Where would a table like this go in your report? This table would go in the Appendix. The fact that Revenues decreased 13% between 2009 and 2010 would go in your Financial Analysis section write up with an explanation as to why Part II. How Trend Analysis ABC Corp Revenue = Operating Income <Loss> = ABC Corp Benchmark Data Revenue = Operating Income <Loss> = Trend Analysis in Dollars [2008 ‐ 2011] Comparative Income Statements Year 1 Year 2 Year 3 Year 4 $(OOO) $(OOO) $(OOO) $(OOO) 12,500 2,100 12,000 2,000 10,500 1,300 12,800 2300 Trend Analysis in Percent [2008 ‐ 2011] Comparative Income Statements Year 1 Year 2 Year 3 Year 4 % % % % 100 96 84 102 100 95 62 110 Where would these tables go in your report? In the Appendix. The fact that Operating Income trended down from 2008 to 2010 and then up in 2011would go in your Financial Analysis section write up with an explanation as to why Part II. How Vertical Analysis Vertical Analysis: 2009 ABC Corp Income Statement 2009 $(OOO) % of Rev Revenue = 12,000 100% COGS = 8,000 66.7% Gross Profit = Expenses = 4,000 2,000 33.3% 16.7% Operating Income = 2,000 16.7% Where would these tables go in your report? These tables would go in the Appendix. You may be comparing Gross Profit as a % of Revenue in 2009 or in 2010. You may be comparing Company percentages to same Industry percentages. Is it in line? Higher? Lower? You might put the “like” industry average and the Company results in your Financial Analysis section write up with an explanation as to why Part III. What The What presents selected data over time for: one year year-to-year multiple years in a row The What uses comparative numbers from within the company OR compared to like-size companies in the same industry [SIC classification]. The What uses specific Ratios from numbers on the Income Statement, Balance Sheet, or combination of both to determine performance. Ratios can be compared to numbers from within the Company or compared to like-size companies in the same industry. Part III. What Using Ratios in Analysis of Financial Statements 1) Profitability Ratios – Measures how much of each sales [Revenue] dollar is left after certain costs [COGS and Expenses] are covered 2) Efficiency [Asset Utilization] Ratios– Measures how efficiently a company’s assets are being managed. 3) Liquidity Ratios – Measures how effective management is at meeting its near-term financial obligations. 4) Effectiveness / Financial Condition – Helps assess the company’s financial strength and the effectiveness of management in financial stewardship Part III. What 1) Profitability Ratio Table 1: 2009 - 2010 ABC Corp Revenue COGS Gross Profit Expenses Operating Inc <Loss> Comparative Income Statements = = = = = Operating Income Margin 2009 $(OOO) 12,000 8,000 4,000 2,000 2,000 % of Rev 100% 66.7% 33.3% 16.7% 16.7% = Operating Income Revenue 2010 $(OOO) 10,500 $7,200 3,300 2,000 1,300 2009 $2,000 $12,000 In doing financial analysis, where would you look for the reasons % of Rev for the change? 100% 68.6% 31.4% 19.0% 12.4% Would it be in Expenses? Why? Gross Profit? Why? Where would you look? % 16.7% 2010 $1,300 $10,500 % 12.4% What do these Metrics tell us? Tells us how much a company makes (or loses) from its primary business per dollar of sales. Management Goal: Keep Op Inc. % and $ as high as possible. Part III. What 2) Efficiency - Accounts Receivable Turnover Ratio Year-end Balance Sheet ABC Corp Comparative Income Statements 2009 2010 Revenue COGS Gross Profit Expenses Operating Inc <Loss> $(OOO) $(OOO) = 12,000 = 8,000 = 4,000 = 2,000 = 2,000 10,500 $7,200 3,300 2,000 1,300 A/R Turn = Ratio A/R Turnover = Days Annual Sales Year End A/R 365 Days A/R Turn Ratio 2009 2010 $(OOO) $(OOO) Assets Cash & Securities A/R 2,000 1,000 1,500 800 Inventory 1,000 700 Total Current Assets 4000 3000 2009 ratio 2010 ratio 12,000 12 to 1 10,500 13.1 to 1 days 800 2010 1000 2009 365 12 30.4 365 13.1 days 27.9 What do these Ratios tell us? How effective the company’s credit policies are. High Ratio = tight credit policy. Companies use an “aging report” to gauge A/R. Management Goal: The higher the ratio [and the less # of days] the better. Part III. What 3) Liquidity - Net Working Capital Table 3: 2010 Curent Assets & Liabilities 2009 Curent Assets & Liabilities ABC Corp. ABC Corp. Year-end Balance Sheet Assets $(OOO) Cash / Securities 2,000 A/P 900 A/R 1,000 Wages Payable 500 Inventory 1,000 Taxes Payable 500 Interest Payable 100 Tot. Curr. Assets 4,000 Liabilities Tot. Curr Liabilities Year-end Balance Sheet $(OOO) $(OOO) 2,000 Assets $(OOO) Liabilities Cash/ Securities 1,500 A/P 600 A/R 800 Wages Payable 450 Inventory 700 Taxes Payable 450 Interest Payable 50 Tot. Curr. Assets 3,000 Tot. Current Liabilities 1,550 What do the Net Working Capital numbers & trend tell us? Net Working Capital is a measurement of the operating liquidity available for a company to use in developing and growing its business. A positive number allows companies to grow smoothly and make necessary improvements to their corporate operations. Part III. What 4) Effectiveness - Debt to Equity Ratio What do these Ratios tell us? The debt/equity ratio measures how much of the company is financed by its debt holders compared with its owners [stockholders]. A company with a ton of debt will have a very high debt/equity ratio. Companies with lower debt/equity ratios are less risky than those with higher such ratios. Lenders use this ratio as part of their analysis regarding lending money to companies. Part IV. Why Rationale for Explaining the What Why did the changes occur during the period or comparison in question? Again, the Annual Report usually describes the “why” in some detail. Possible Internal [micro economic] factors? 1) Changes to core business? 2) Pricing pressure? 3) Strategic direction? 4) Company financial issues 5) Aging assets? Possible External [macro economic] factors? 1) The economy? 2) Competitive issues? 3) Industry factors? Markets? 4) Supply chain issues? 5) Regulatory factors? 6) Industry Financial issues [lenders, suppliers, customers]? Excerpt from Grocery Store & Supermarket Industry Financial Analysis The US retail grocery industry includes about 65,000 supermarkets and other grocery stores with combined annual revenue in 2011 of $550 billion. Safeway, stock symbol “SWY” (NYSE) and SIC 5411, is one of the largest chains in the US with about an 8% market share in 2011. They have gone through some consolidation in the number of stores it operates from 1,725 in 2009 down to 1,678 in 2011. They have been on a major renovation campaign with older stores and have revamped their model for new stores to include both food and drugs as well as a number of specialty products [e.g., Starbucks] and services [e.g., banking]. Financial highlights over the past three years include continued revenue growth from $40.8 billion in 2009 to $43.6 billion in 2011. Gross profit, however, has been relatively flat from 2009 with only 1.6% growth over the same period. Safeway showed an operating loss in 2009 of more than half a billion dollars, but rebounded nicely in 2010 and 2011 with bottom line results over 1.1 billion dollars. Looking more closely at their financial results over the past five years and comparing those to the industry performance as a whole…….. Thank you