Financial Statement Analysis MIM 517 Class 4 Fall 2010
Financial Statement Analysis MIM 517 Class 4 Fall 2010 Understanding a Company What product line(s) is the company involved in? Is the product understandable? Are there industry specific accounting rules? (e.g. oil & gas, financial services) Does the company have one primary line of business? Background & Industry Research - BizStats Background & Industry Research – S&P Background – Starbucks 10-K Premier roaster & retailer of specialty coffee in the world Offers coffee drinks, food items, roasted beans, coffee accessories, and teas in retail stores Also sells coffee through grocery stores & licenses its brand for other products Owns Seattle’s Best Coffee & Torrefazione Italia coffee brands Background – Starbucks 10-K Industry Increased competition from large wellknown competitors (Dunkin, McDonalds) Customers trading down to lower priced coffee beverages & related products due to economy Starbucks Key Accounting Policies “Application of Critical Accounting Policies” Asset Impairment Stock-based Compensation Operating Leases Self insurance reserves Other issues Fair value accounting Multiple revenue streams Financial Statement Analysis Group by category Calculate numbers over time AND for industry/peer Comment on “improving” or “deteriorating” by category Income Statement Analysis Questions Size of company changed? Nature of operations changed? Unusual items? What is “quality of earnings”? Tools Common sized I/S (% of net sales) Horizontal analysis Ratios Industry comparison Balance Sheet Analysis Questions Consistent with income statement “story”? Big changes? Tools Common sized B/S (% of total assets) Horizontal analysis Industry comparison Ratios Cash Flow Analysis Tell the story…. What did the company use cash for? Where did the company get cash from? Primary sources of cash Primary uses of cash Did the company receive more cash than it used? Lets work through Starbucks Common size and horizontal analysis Ratios Usefulness of financial web sites… Morningstar, Yahoo finance, etc. http://quicktake.morningstar.com/StockNet/FinancialHealth10.aspx?Country=USA&Symbol=SBUX Why might there be differences? Is your 10K most current financials? Different categorization Ratio definitions Liquidity Ratios Current Ratio Quick (Acid Test) Ratio Cash Flow Liquidity Ratio SBUX 2009 SBUX 2008 Tim Hortons 2009 1.29 0.80 1.45 0.59 0.30 0.92 1.30 0.72 1.53 Liquidity Ratios SBUX 2009 Net Trade Cycle Average Collection Period Days Inventory Held Days Payable Outstanding SBUX 2008 Tim Hortons 2009 102.25 days 109.04 days 14.97 days 62.04 days 74.65 days 34.08 days 67.22 days 64.77 days 21.30 days 27.00 days 30.37 days 40.40 days Operating Efficiency Ratios Accounts Receivable Turnover SBUX 2009 SBUX 2008 Tim Hortons 2009 5.88 4.89 3.57 Inventory Turnover Accounts Payable Turnover 5.43 5.64 17.14 13.52 12.02 9.03 Fixed Asset Turnover 3.85 3.51 1.67 Total Asset Turnover 1.75 1.83 1.12 Leverage Ratios SBUX 2009 SBUX 2008 Tim Hortons 2009 Debt Ratio 45.4% 56.1% 41.4% LT Debt to Total Capitalization 15.3% 18.1% 22.3% 0.83 1.28 0.71 Debt to Equity Leverage Ratios Times Interest Earned Cash Interest Coverage Fixed Charge Coverage Cash Flow Adequacy SBUX 2009 SBUX 2008 Tim Hortons 2009 14.37 9.44 23.35 40.0 29.8 27.99 1.69 1.57 3.80 3.08 1.13 1.70 Profitability Ratios SBUX 2009 SBUX 2008 Tim Hortons 2009 Gross Profit Margin 55.8% 55.3% 421.2% Operating Profit Margin 5.7% 4.9% 212.1% Net Profit Margin 4.0% 3.0% 13.2% Cash Flow Margin 14.2% 12.1% 18.5% 7.0% 5.6% 14.8% Return on Equity 12.8% 12.7% 25.4% Cash Return on Assets 24.9% 22.2% 20.8% ROA or ROI
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