05_Analysis - 1 Introduction to Financial Statement...

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1 Introduction to Financial Statement Analysis
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2 Financial Statement Analysis Involves the examination of the relationship among financial statement numbers the trends in those numbers over time Relationships between financial statement amounts are called financial ratios How are financial ratios used? Past performance is used to predict future performance Problem areas can be identified Comparisons within company and industry
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3 Fundamentals of Financial Analysis 1. Determine the objective 2. Define the competitive context 3. Determine the business strategy 4. Develop quantitative analyses 5. Reach a decision
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4 Common Size Financial Statements Summarized financial statements Can be analyzed using vertical or horizontal analysis Income Statement All numbers are a percentage of sales Balance Sheet All numbers are a percentage of total assets Or, all numbers are a percentage of sales
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©Cambridge Business Publishers, 2011 5 Vertical Analysis of Income Statements Vertical Analysis of Income Statements Lowe’s Companies’ common-size income statements for years ending January 29, 2010, and January 30, 2009: Percentages Year ending Jan. 29, 2010 Jan. 30, 2009 Jan. 29, 2010 Jan. 30, 2009 Total Revenue $47,220 $48,230 100.00% 100.00% Cost of Sales 30,757 31,729 65.14% 65.79% Gross Profit 16,463 16,501 34.86% 34.21% Selling General and Administrative 11,688 11,074 24.75% 22.96% Non-recurring 49 102 0.10% 0.21% Others 1,614 1,539 3.42% 3.19% Total Operating Expenses 13,351 12,715 28.27% 26.36% Earnings Before Interest And Taxes 3,112 3,786 6.59% 7.85% Interest Expense 287 280 0.61% 0.58% Income Before Tax 2,825 3,506 5.98% 7.27% Income Tax Expense 1,042 1,311 2.21% 2.72% Net Income $ 1,783 $ 2,195 3.78% 4.55% $30,757 ÷ $47,220 = 65.14% Year Ending January 29, 2011
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©Cambridge Business Publishers, 2011 6 Vertical Analysis of Balance Sheets Vertical Analysis of Balance Sheets Lowe’s Companies’ common-size balance sheets at January 29, 2010, and January 30, 2009. Percentages Year ending Jan. 29, 2010 Jan. 30, 2009 Jan. 29, 2010 Jan. 30, 2009 Assets Current Assets Cash And Cash Equivalents $ 632 $ 245 1.91% 0.75% Short -term Investments 425 416 1.29% 1.28% Inventory 8,249 8,209 24.99% 25.16% Other Current Assets 426 320 1.29% 0.98% Total Current Assets 9,732 9,190 29.49% 28.17% Long Term Investments 277 253 0.84% 0.78% Property Plant and Equipment, net 22,499 22,722 68.17% 69.65% Other Assets 497 460 1.51% 1.41% Total Assets $33,005 $32,625 100.00% 100.00% Liabilities Current Liabilities Accounts Payable $ 4,287 $ 4,109 12.99% 12.59% Current Portion of Long Term Debt 552 34 1.67% 0.10% Other Current Liabilities 2,516 3,417 7.62% 10.47% Total Current Liabilities 7,355 7,560 22.28% 23.17% Long-term Debt 4,528 5,039 13.72% 15.45% Other Liabilities 1,455 1,372 4.41% 4.21% Deferred Income Taxes-net 598 599 1.81% 1.84% Total Liabilities 13,936 14,570 42.22% 44.66% Common Stock 729 735 2.21% 2.25% Capital Surplus 6 277 0.02% 0.85% Retained Earnings 18,307 17,049 55.47% 52.26% Other Stockholders’ Equity 27 (6) 0.08% -0.02% Total Stockholders’ Equity 19,069 18.055 57.78% 55.34% Total liabilities and stockholders' equity $33,005 $32,625 100.00% 100.00% Each account balance is expressed as a percentage of total assets.
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©Cambridge Business Publishers, 2011 7 Horizontal Analysis Horizontal Analysis Examines changes in data across time Assists in analyzing company performance and in predicting future performance [Second year amount – Base year amount] Base year % Change =
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©Cambridge Business Publishers, 2011 8 Horizontal Analysis of Income Statements Horizontal Analysis of Income Statements
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