HOME DEPOT Financial Analysis DUE FRIDAY, MAY 18 @9PM

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ACT5060Spring22015AppendixAslides.ppt
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ACT 5060 – Accounting for Decision Makers

Appendix A – Financial Analysis

ACT 5060 Appendix A Felo

ACT 5060 Appendix A Felo

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Financial Analysis

  • Assessing past performance
  • Predicting future performance
  • Comparisons
  • Identifying trends

ACT 5060 Appendix A Felo

ACT 5060 Appendix A Felo

Sources of Information

  • Financial statements
  • Footnotes to financial statements
  • Summary of accounting principles used
  • Management’s Discussion & Analysis (MD & A)
  • Auditor’s report
  • Comparative financial data in 10-K

ACT 5060 Appendix A Felo

ACT 5060 Appendix A Felo

Financial Analysis Tools

  • Looking at statements as a whole
  • Vertical analysis / Horizontal analysis
  • Ratio analysis

ACT 5060 Appendix A Felo

ACT 5060 Appendix A Felo

Vertical & Horizontal Analysis

  • Figures in statements as a % of base
  • Allows for comparison of firms of different sizes and of different time periods
  • Helps us to identify trends and changes in relative size of figures
  • I/S – base is net sales
  • B/S – base is total assets

ACT 5060 Appendix A Felo

ACT 5060 Appendix A Felo

Ratio Analysis

  • Over time (horizontal analysis)
  • Other companies or industry averages
  • Benchmarks

ACT 5060 Appendix A Felo

ACT 5060 Appendix A Felo

Ratio Analysis Categories

  • Short-term solvency (liquidity)
  • Long-term solvency
  • Profitability performance
  • Stock performance

ACT 5060 Appendix A Felo

ACT 5060 Appendix A Felo

Short-Term Solvency

  • Liquidity
  • Current ratio
  • Working capital
  • Acid-test ratio
  • Inventory turnover
  • Days sales in inventory
  • A/R turnover
  • Days sales in receivables
  • Free cash flow

ACT 5060 Appendix A Felo

ACT 5060 Appendix A Felo

Short-Term Solvency Assessment

  • Some of these ratios are skewed by the litigation charge since it was classified as a current liability last year and was paid out this year. This results in the current ratio, working capital, and the acid-test ratio being relatively low last year. They have all increased this year, but are still lower than 2 years ago. Even though they are lower, none indicate a problem with short-term solvency.

ACT 5060 Appendix A Felo

ACT 5060 Appendix A Felo

Short-Term Assessment (2)

  • Although days to collect increased again, A/R is a relatively small component of total assets, making the increase less of a worry. A good sign is that days to sell decreased again, this time by nearly 9 days. This means Starbucks on average sold inventory 11 days quicker than just 2 years ago. Free cash flow was negative this year, largely because the litigation charge was paid. Without this, FCF would have increased in the current year. Also, purchases of PPE have increased significantly the last 2 years.

ACT 5060 Appendix A Felo

ACT 5060 Appendix A Felo

Long-Term Financial Condition

  • Solvency
  • Debt-to-equity ratio
  • Times-interest earned

ACT 5060 Appendix A Felo

ACT 5060 Appendix A Felo

Long-Term Assessment

  • Debt to equity increased significantly the last 2 years, largely due to an increase in debt. In the previous year, a decrease in equity also caused this to increase. Normally a negative interest coverage ratio (last year) is a very bad sign. Although I am sure Starbucks would prefer that it was positive, we can again attribute this to the litigation charge. Without that, it would have been highly positive last year. The firm does not appear to be in any danger of not being able to meet interest payments or their long-term obligations.

ACT 5060 Appendix A Felo

ACT 5060 Appendix A Felo

Performance Analysis

  • Profitability performance
  • Stock performance

ACT 5060 Appendix A Felo

ACT 5060 Appendix A Felo

Profitability Performance

  • Asset turnover
  • Return on sales
  • Gross margin %
  • Return on assets
  • Return on equity
  • Average interest rate

ACT 5060 Appendix A Felo

ACT 5060 Appendix A Felo

Profitability Assessment

  • This is skewed by the litigation charge last year. While it is certainly an issue, there are some positive things to say about profitability. The gross margin % has increased for the second year in a row. It is especially important because the days to sell decreased, meaning Starbucks sold its products faster while increasing prices faster than cost of sales increased. Also, “store operating expenses” (a major expense) has also decreased as a % of total net revenues.

ACT 5060 Appendix A Felo

ACT 5060 Appendix A Felo

Profitability Assessment (2)

  • One bad sign is that asset turnover decreased significantly. This means that its assets generated less sales than in the past. This is a sign that a company has over saturated the market place. After taking out the impact of the litigation charge for the past 2 years, return on sales and ROA both decreased this year. Although higher than 2 years ago, the decrease this year is not positive.

ACT 5060 Appendix A Felo

ACT 5060 Appendix A Felo

Profitability Assessment (3)

  • Shareholders should be pleased with the high ROE. After removing the litigation charges, Starbucks experienced significant positive financial leverage (ROE > ROA) over this time period.

ACT 5060 Appendix A Felo

ACT 5060 Appendix A Felo

DuPont Analysis of ROA

  • This allows us to analyze the two “components” of ROA
  • Asset turnover x Return on Sales
  • Helpful when assessing reasons for changes in ROA
  • Can also be applied to ROE

ACT 5060 Appendix A Felo

ACT 5060 Appendix A Felo

DuPont Analysis of ROA

  • ROA and ROE are both negatively impacted by the litigation charge last year. If this is removed, ROA and ROE both increased last year. The DuPont analysis shows that asset turnover decreased, but the return on sales increased. The increase on return on sales outweighed the decrease in asset turnover. In the current period, both decreased, leading to a decrease in ROA. ROE increased because of the positive financial leverage.

ACT 5060 Appendix A Felo

ACT 5060 Appendix A Felo

Stock Performance

  • Is this stock appropriate for me?
  • Growth investors vs. Income investors
  • Book value per share
  • Earnings per share
  • Price earnings ratio
  • Dividend yield
  • Dividend payout

ACT 5060 Appendix A Felo

ACT 5060 Appendix A Felo

Stock Performance Assessment

  • I would classify Starbucks as more of a growth stock. There is a substantial “gap” between book and market value. This indicates relatively high risk, meaning investors expect it to have relatively high growth. Although it has started paying dividends, they provide a relatively small yield.

ACT 5060 Appendix A Felo

ACT 5060 Appendix A Felo

Stock Performance (2)

  • EPS, P/E ratio, and dividend payout ratios are skewed by the litigation charge last year. The past and “adjusted” P/E ratios indicate that the market was expecting Starbucks to grow significantly. As we see by the adjusted closing prices, it has grown quite significantly, although it did decrease this past year. This is likely due to the litigation, as the charge was not announced until after 9/29/13. The fact that Starbucks has increased its dividend payout ratio may indicate it is trying to “shift” into a hybrid stock (growth and income).

ACT 5060 Appendix A Felo

ACT 5060 Appendix A Felo