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com
2013 www.thefundamentalinvestor.com
2013 www.thefundamentalinvestor.com
Source: Robinson, Greuning, Henry, and Broihahn (2009). International Financial Statement Analysis. John Wiley & Sons.
2013 www.thefundamentalinvestor.com
Source: Robinson, Greuning, Henry, and Broihahn (2009). International Financial Statement Analysis. John Wiley & Sons.
The analyst should set the stage properly for the analysis by
understanding the landscape. Failure to do so could lead to
wasted time, effort, and resources as the analyst keeps
bumping into brick walls:
What is the purpose of the analysis?
2013 www.thefundamentalinvestor.com
Source: Robinson, Greuning, Henry, and Broihahn (2009). International Financial Statement Analysis. John Wiley & Sons.
successfully compete?
How well did the companys performance meet these critical aspects?
2013 www.thefundamentalinvestor.com
Source: Robinson, Greuning, Henry, and Broihahn (2009). International Financial Statement Analysis. John Wiley & Sons.
2013 www.thefundamentalinvestor.com
Source: Robinson, Greuning, Henry, and Broihahn (2009). International Financial Statement Analysis. John Wiley & Sons.
Motorola ($ Millions)
Net sales
Operating earnings
Nokia Corporation (EUR Millions)
Net sales
Operating earnings
12/31/2005
12/31/2004
12/31/2003
36,843
31,323
23,155
4,696
3,132
1,273
12/31/2005
12/31/2004
12/31/2003
34,191
29,371
29,533
4,639
4,326
4,960
Analysis notes:
The raw numbers are not directly comparable due to different currenciesthus, look at trends and percentages.
Note: at that time, Nokia was the industry leader
Compare the following for the two companies:
Trends in sales and operating earnings growth
Motorola shifted strategies: increase its presence in consumer marketing / consumer products to complement its
historically strong technological position
From Motorolas 10-K in 2005:
The introduction of the RAZR in 2004, which sold more than 23 million units since being launched.
The handset segment reprsented 54% of 2004 sales, and 58% of 2005 sales.
2013 www.thefundamentalinvestor.com
Source: Robinson, Greuning, Henry, and Broihahn (2009). International Financial Statement Analysis. John Wiley & Sons.
2013 www.thefundamentalinvestor.com
Source: Robinson, Greuning, Henry, and Broihahn (2009). International Financial Statement Analysis. John Wiley & Sons.
2013 www.thefundamentalinvestor.com
Source: Robinson, Greuning, Henry, and Broihahn (2009). International Financial Statement Analysis. John Wiley & Sons.
some ratios
Different accounting methods
10
2013 www.thefundamentalinvestor.com
Source: Robinson, Greuning, Henry, and Broihahn (2009). International Financial Statement Analysis. John Wiley & Sons.
company
Financial flexibility: ability to obtain
11
2013 www.thefundamentalinvestor.com
Source: Robinson, Greuning, Henry, and Broihahn (2009). International Financial Statement Analysis. John Wiley & Sons.
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2013 www.thefundamentalinvestor.com
ABC Inc.
Net Income
Revenue
Net Profit Margin (NPM)
XYZ Inc.
Php 500,000
Php 12,000,000
Php 10,000,000
Php 400,000,000
5.0%
3.0%
2013 www.thefundamentalinvestor.com
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2013 www.thefundamentalinvestor.com
15
2013 www.thefundamentalinvestor.com
Source: Robinson, Greuning, Henry, and Broihahn (2009). International Financial Statement Analysis. John Wiley & Sons.
2013 www.thefundamentalinvestor.com
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2013 www.thefundamentalinvestor.com
Source: Robinson, Greuning, Henry, and Broihahn (2009). International Financial Statement Analysis. John Wiley & Sons.
Intuitively:
Revenues and Expenses are generated by
Assets, Liabilities, or Equity. Conceptually,
more of the denominator (B/S item) should
lead to more of the numerator (I/S item).
20
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2013 www.thefundamentalinvestor.com
How does the companys B/S compare to its peers, and what are the
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2013 www.thefundamentalinvestor.com
Actual
2009
Vertical
2010
Vertical
2009
(in Php)
Notes to FS
ASSETS
Current Assets
Cash and cash equivalents
5, 26, 27
ST investments
6, 24, 26, 27
Trade and other receivables
7, 26, 27, 30
Inventories
8
Prepaid expenses and other current assets26, 27
Total current assets
1,110,623,996
1,833,983,891
827,839,418
2,117,670,472
38,970,814
5,929,088,591
857,054,066
1,044,563,465
893,566,768
1,153,181,393
33,263,909
3,981,629,601
12.15%
20.07%
9.06%
23.17%
0.43%
64.87%
11.79%
14.37%
12.29%
15.86%
0.46%
54.76%
Noncurrent Assets
Available-for-sale investments
Property, plant and equipment
Intangible assets - net
Deferred tax assets
Net pension assets
Other noncurrent assets
Total noncurrent assets
2,556,403
1,562,810,605
1,310,444,899
260,587,503
44,836,138
29,460,456
3,210,696,004
2,556,403
1,515,257,935
1,481,438,498
197,984,388
49,260,438
42,786,207
3,289,283,869
0.03%
17.10%
14.34%
2.85%
0.49%
0.32%
35.13%
0.04%
20.84%
20.37%
2.72%
0.68%
0.59%
45.24%
9,139,784,595
7,270,913,470
100.00%
100.00%
TOTAL ASSETS
9, 26, 27
10
11, 25
21
20
26, 27
23
2013 www.thefundamentalinvestor.com
Alaska Milk
Balance Sheet
December 31
(in Php)
Notes to FS
LIABILITIES AND STOCKHOLERS' EQUITY
Current liabilities
Trade and other payables
12, 25, 26, 27
Acceptances payable
26, 27
Income tax payable
Dividends payable
14, 26, 27
Current portion of obligation under finance
25, 26, 27
leases
Total current liabilities
Actual
2010
2,096,022,469
Actual
2009
Vertical
2010
Vertical
2009
131,913,063
125,099,266
7,227,315
3,065,044,593
1,839,819,125
560,124,762
109,980,839
52,097,499
4,019,227
2,566,041,452
22.93%
7.71%
1.44%
1.37%
0.08%
33.54%
25.30%
7.70%
1.51%
0.72%
0.06%
35.29%
Noncurrent liabilities
Obligation under finance leases - net25,
of 26,
current
27 portion 28,638,522
Total liabilities
3,093,683,115
27,465,248
2,593,506,700
0.31%
33.85%
0.38%
35.67%
%704,782,480
Stockholders' Equity
26
Capital stock
13, 22
971,432,578
APIC
22
152,393,329
Retained earnings
14
Appropriated for various cpaital investment projects
and share buy-back program
2,075,000,000
Unappropriated
3,249,867,801
Treasury stock
13, 14
(402,592,228)
Total SHE
6,046,101,480
968,074,878
118,361,998
10.63%
1.67%
13.31%
1.63%
1,625,000,000
2,318,019,622
(352,049,728)
4,677,406,770
22.70%
35.56%
-4.40%
66.15%
22.35%
31.88%
-4.84%
64.33%
7,270,913,470
100.00%
100.00%
9,139,784,595
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2013 www.thefundamentalinvestor.com
25
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2013 www.thefundamentalinvestor.com
Alaska Milk
Income Statement
December 31
Actual
2010
(in Php)
Net sales
Cost of sales
GROSS PROFIT
Actual
2009
Actual
2008
Vertical
2010
Vertical
2009
Vertical
2008
12,162,709,978
(7,558,650,096)
4,604,059,882
10,580,440,474
(6,821,522,353)
3,758,918,121
9,967,757,268
(7,903,815,821)
2,063,941,447
100.00%
-62.15%
37.85%
100.00%
-64.47%
35.53%
100.00%
-79.29%
20.71%
Operating expenses
(2,277,295,199)
Interest income
48,748,735
Foreign exchange gain (loss)
(40,319,512)
Gain on disposals of PPE and investment properties 3,216,898
Interest expense on obligation under finance leases (2,100,081)
Casualty loss
Interest expense on bank loans
Rent income
Dividend income and others
(1,998)
Total expenses
(2,267,751,157)
(1,869,510,056)
24,646,247
(26,700,674)
766,164
(1,867,856)
(156,536,291)
(2,453,962)
13,892
(2,031,642,536)
(1,599,921,570)
4,952,263
13,985,346
9,431,114
(60,321,826)
427,891
1,174,323
(1,630,272,459)
-18.72%
0.40%
-0.33%
0.03%
-0.02%
0.00%
0.00%
0.00%
0.00%
-18.65%
-17.67%
0.23%
-0.25%
0.01%
-0.02%
-1.48%
-0.02%
0.00%
0.00%
-19.20%
-16.05%
0.05%
0.14%
0.09%
0.00%
0.00%
-0.61%
0.00%
0.01%
-16.36%
2,336,308,725
1,727,275,585
433,668,988
19.21%
16.33%
4.35%
583,312,875
(62,603,115)
520,709,760
361,555,720
(43,668,855)
317,886,865
80,034,252
62,536,013
142,570,265
4.80%
-0.51%
4.28%
3.42%
-0.41%
3.00%
0.80%
0.63%
1.43%
1,409,388,720
291,098,723
14.93%
13.32%
27
2.92%
2013 www.thefundamentalinvestor.com
or increased?
If there has been little growth, why? Is there any growth in the future?
2013 www.thefundamentalinvestor.com
Source: Robinson, Greuning, Henry, and Broihahn (2009). International Financial Statement Analysis. John Wiley & Sons.
29
Trends!!!
2013 www.thefundamentalinvestor.com
30
2013 www.thefundamentalinvestor.com
as collecting receivables
Liquidity Ratios:
Measures the ability to meet short-term obligations
Solvency Ratios:
Measures the ability to meet long-term obligations
Coverage Ratios:
Measures the ability to meet regular debt (re)payments
Profitability Ratios
Return on Sales
Return on Investment
2013 www.thefundamentalinvestor.com
RATIO
CALCULATION
WHAT IT MEASURES
BETTER IF
Higher
Lower
Accounts Receivable
Turnover (ARTO)
Higher
Lower
Allowance Adequacy
Higher
Accounts Payable
Turnover (APTO)
Lower
APTO variant
Lower
Higher
32
2013 www.thefundamentalinvestor.com
2013 www.thefundamentalinvestor.com
Jan 1
Jan 16
10,000
Full
Empty
10,000
Full
Jan 31
Feb 15
March 2
March 17
April 1
April 16
May 1
May 16
Empty
10,000
Full
Empty
10,000
Full
Empty
10,000
Full
Empty
10,000
Full
Empty
10,000
Full
Empty
10,000
Full
34
2013 www.thefundamentalinvestor.com
35
2013 www.thefundamentalinvestor.com
Source: Robinson, Greuning, Henry, and Broihahn (2009). International Financial Statement Analysis. John Wiley & Sons.
2013 www.thefundamentalinvestor.com
Source: Robinson, Greuning, Henry, and Broihahn (2009). International Financial Statement Analysis. John Wiley & Sons.
Low ARTO (and high A/R Collection Period) means more resources tied up in receivables.
Potential indicator of uncollectible receivablesi.e. problems in the credit and collection system.
Analytical questions:
WHY is A/R collection slow? (or fast?)
WHAT are the implications for future growth? Are the effects temporary or permanent?
WHAT can be done to address the situation?
Useful benchmarks: (1) peers; and (2) industry norms.
Analysis: compare the companys ARTO and revenue growth trend vs. the industry.
GOOD: Higher ARTO (vs. industry) + Same or higher revenue growth (vs. industry)
Effective credit and collection systemreceivables (and collection) are supporting sales growth properly.
BAD: Higher ARTO (vs. industry) + Slower revenue growth (vs. industry)
Possible indicator of very tight credit policy that could lead to lost sales (to competitors with more lenient terms)
37
2013 www.thefundamentalinvestor.com
Sales
Source: Fraser and Ormiston (2013). Understanding Financial Statements, 10th edition. Pearson.
2011
2010
Php 6,700,000
Php 7,500,000
202,000
320,000
3,000
12,000
A/R, net
Allowance for doubtful accounts
Analysis of accounts
ADA (A/R, net + ADA)
2011
2010
1.5%
3.6%
10.7%
---
36.9%
---
38.3%
---
75.0%
---
Sales have decreased so it is expected that the A/R and ADA would also decrease.
A/R has decreased at a faster rate than sales while the ADA has decreased at a faster rate than
accounts receivable.
- The percentage of estimated bad accounts has dropped by more than a percentage point relative
to the prior year. Possible explanations for this inconsistency could be:
1. The company has tightened its credit policy;
2. Prior bad debt estimates were too high and the company is correcting for this; or
3. Management has intentionally reduced bad debts to report a higher net income.
38
Source: Fraser and Ormiston (2013). Understanding Financial Statements, 10th edition. Pearson.
2013 www.thefundamentalinvestor.com
Growth rate
Net sales
10.5%
21.3%
2.6%
2011
2010
3.8%
5.4%
Sales, accounts receivable and the allowance for doubtful accounts have all grown, but not proportionately.
The allowance account increased only slightly, and as a percentage of total accounts receivable, the allowance
account has declined from 5.4% to 3.8%. This is not a normal pattern. Possible explanations are:
1. Management overestimated the account in prior years and is now correcting for that overestimation;
2. Customers are not defaulting as anticipated and management is adjusting the allowance account accordingly, or
3. Management is reducing the allowance account in order to decrease bad debt expense and increase net income
in the current year.
-
Other information that would be useful to the analyst would be the valuation schedule required by the SEC and
any notes or information in the management's discussion and analysis related to accounts receivable and bad
debts.
39
2013 www.thefundamentalinvestor.com
Source: Robinson, Greuning, Henry, and Broihahn (2009). International Financial Statement Analysis. John Wiley & Sons.
To calculate Purchases
+
Ending Inventory
Beginning Inventory
Purchases
40
2013 www.thefundamentalinvestor.com
Source: Robinson, Greuning, Henry, and Broihahn (2009). International Financial Statement Analysis. John Wiley & Sons.
41
2013 www.thefundamentalinvestor.com
Source: Robinson, Greuning, Henry, and Broihahn (2009). International Financial Statement Analysis. John Wiley & Sons.
RATIO
CALCULATION
WHAT IT MEASURES
BETTER IF
Operating Cycle
Lower
Cash Conversion
Cycle
Lower
Days Inventory
Days Inventory
Operating Cycle
2013 www.thefundamentalinvestor.com
RATIO
CALCULATION
WHAT IT MEASURES
BETTER IF
Higher
Higher
Equity Turnover
(ETO)
Higher
Working Capital
(WC)
Higher
Higher
2013 www.thefundamentalinvestor.com
Source: Robinson, Greuning, Henry, and Broihahn (2009). International Financial Statement Analysis. John Wiley & Sons.
44
2013 www.thefundamentalinvestor.com
Source: Robinson, Greuning, Henry, and Broihahn (2009). International Financial Statement Analysis. John Wiley & Sons.
2013 www.thefundamentalinvestor.com
Source: Robinson, Greuning, Henry, and Broihahn (2009). International Financial Statement Analysis. John Wiley & Sons.
2013 www.thefundamentalinvestor.com
Source: Robinson, Greuning, Henry, and Broihahn (2009). International Financial Statement Analysis. John Wiley & Sons.
RATIO
CALCULATION
WHAT IT MEASURES
BETTER IF
Current Ratio
Higher
Quick Ratio
Higher
Cash Ratio
Higher
Defensive Interval
Ratio
Higher
47
2013 www.thefundamentalinvestor.com
Source: Robinson, Greuning, Henry, and Broihahn (2009). International Financial Statement Analysis. John Wiley & Sons.
2013 www.thefundamentalinvestor.com
Source: Robinson, Greuning, Henry, and Broihahn (2009). International Financial Statement Analysis. John Wiley & Sons.
R&D expense
2013 www.thefundamentalinvestor.com
Source: Robinson, Greuning, Henry, and Broihahn (2009). International Financial Statement Analysis. John Wiley & Sons.
32
31
28
(73)
(70)
(68)
(37)
(36)
(37)
2004
2003
2002
HP Compaq
27
37
61
Gateway
(7)
(9)
(3)
Apple
(40)
(41)
(40)
50
2013 www.thefundamentalinvestor.com
Source: Robinson, Greuning, Henry, and Broihahn (2009). International Financial Statement Analysis. John Wiley & Sons.
RATIO
CALCULATION
WHAT IT MEASURES
BETTER IF
Lower
Lower
Lower
Financial Leverage
Ratio
Lower
Financial Leverage
Ratio
Lower
2013 www.thefundamentalinvestor.com
Source: Robinson, Greuning, Henry, and Broihahn (2009). International Financial Statement Analysis. John Wiley & Sons.
2013 www.thefundamentalinvestor.com
Source: Robinson, Greuning, Henry, and Broihahn (2009). International Financial Statement Analysis. John Wiley & Sons.
See examples:
Excel file
Lehman Brothers 2007
Globe Telecom 2011
53
2013 www.thefundamentalinvestor.com
Source: Robinson, Greuning, Henry, and Broihahn (2009). International Financial Statement Analysis. John Wiley & Sons.
RATIO
CALCULATION
WHAT IT MEASURES
BETTER IF
Earnings Interest
Coverage
Higher
Higher
Debt Coverage
Higher
Debt Payment
Higher
Higher
2013 www.thefundamentalinvestor.com
Source: Robinson, Greuning, Henry, and Broihahn (2009). International Financial Statement Analysis. John Wiley & Sons.
55
2013 www.thefundamentalinvestor.com
Source: Robinson, Greuning, Henry, and Broihahn (2009). International Financial Statement Analysis. John Wiley & Sons.
2013 www.thefundamentalinvestor.com
RETURN ON SALES
RATIO
CALCULATION
WHAT IT MEASURES
BETTER IF
Higher
Operating Profit
Margin (OPM)
Higher
Higher
Higher
Lower
57
2013 www.thefundamentalinvestor.com
Source: Robinson, Greuning, Henry, and Broihahn (2009). International Financial Statement Analysis. John Wiley & Sons.
RETURN ON SALES
58
2013 www.thefundamentalinvestor.com
Source: Robinson, Greuning, Henry, and Broihahn (2009). International Financial Statement Analysis. John Wiley & Sons.
RETURN ON SALES
59
2013 www.thefundamentalinvestor.com
RETURN ON INVESTMENT
RATIO
CALCULATION
WHAT IT MEASURES
BETTER IF
Operating Return on
Assets (OROA)
Higher
Higher
Higher
Higher
Return on Common
Equity (ROCE)
Higher
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2013 www.thefundamentalinvestor.com
RETURN ON INVESTMENT
Accounting
Equation
Lender, Government,
and Equity Owner
Interest expense
Lender
+ Equity
= EBT
Government and
Equity Owner
= Assets
Everyone
Income Tax
Government
= EAT
Net Income
Liabilities
61
2013 www.thefundamentalinvestor.com
Source: Robinson, Greuning, Henry, and Broihahn (2009). International Financial Statement Analysis. John Wiley & Sons.
RETURN ON INVESTMENT
ROE measures the profits generated by equity capital (common stock, preferred stock, retained earnings, minority
equity, etc.)
ROCE focuses on Common Stock by removing the effects of Preferred Stock in the numerator and denominator:
Numerator: Total net income less Preferred Stock cash dividends
Denominator: Total SHE less Preferred Stock (par value and APIC)
62
2013 www.thefundamentalinvestor.com
Source: Robinson, Greuning, Henry, and Broihahn (2009). International Financial Statement Analysis. John Wiley & Sons.
RETURN ON INVESTMENT
RATIO
CALCULATION
WHAT IT MEASURES
BETTER IF
Higher
Higher
2013 www.thefundamentalinvestor.com
Alternatives:
- Average Total Assets
- Average Total Equity
ROE
Net income
Equity
3-Level
ROE
Net income
Equity
5-Level
Net income
Sales
Profitability/
Cost Control
Net income
EBT
Tax Retention
Rate
Sales
Assets
EBT
EBIT
Interest
Burden
Assets
Equity
Efficiency
If Leverage is zero,
then ROE = ROA
Leverage
EBIT
Sales
Sales
Assets
Operating Efficiency
Profit Margin
Assets
Equity
Leverage
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2013 www.thefundamentalinvestor.com
Alternatives:
- Average Total Assets
- Average Total Equity
ROE
Net income
Equity
3-Level
ROE
Net income
Sales
Profitability/
Cost Control
Net income
Net income
Equity
EBT
5-Level
Tax Retention
Rate
Sales
Assets
EBT
EBIT
Interest
Burden
Assets
Equity
Efficiency
If Leverage is zero,
then ROE = ROA
Leverage
EBIT
Sales
Sales
Assets
Operating Efficiency
Profit Margin
Assets
Equity
Leverage
2013 www.thefundamentalinvestor.com
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2013 www.thefundamentalinvestor.com
PERFORMANCE RATIOS
RATIO
CALCULATION
WHAT IT MEASURES
BETTER IF
Cash Flow to
Revenue
Operating CF Revenue
Higher
Cash ROA
Higher
Cash ROE
Higher
Cash to Income
Higher
Higher
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2013 www.thefundamentalinvestor.com
Source: Robinson, Greuning, Henry, and Broihahn (2009). International Financial Statement Analysis. John Wiley & Sons.
COVERAGE RATIOS
RATIO
CALCULATION
WHAT IT MEASURES
BETTER IF
Debt Coverage
Higher
Cash Flow
Interest Coverage
Higher
Reinvestment
Higher
Debt Payment
Higher
Cash Dividend
Payment
Higher
Investing and
Financing
Higher
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71