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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