Week 4
mloi01
AGibson_13E_Ch05.pptx© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Chapter 5
Basics of Analysis
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© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
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Liquidity ratios
Measures a firm’s ability to meet its current obligations
Borrowing capacity (leverage) ratios
Measures the degree of protection for long-term creditors
Profitability ratios
Measures the earning ability of a firm
Cash flow ratios
Ratio Analysis
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© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
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Interpreted in comparison with
Prior ratios
Competitor’s ratios
Industry ratios
Predetermined standards
Trend and variability of a ratio are important considerations
Ratio Analysis—Continued
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© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
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Use of average data from balance sheet
Necessary when comparing with income statement data
Does not
Eliminate seasonal or cyclical variations
Reflect changes that occur unevenly throughout the year
Analysis must be performed and understood within the context of
Native accounting principles
Native business practices and culture
Complexities and Context
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© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
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The use of percentages is usually preferable to the use of absolute amounts
Vertical analysis
All amounts of a year expressed as a percentage of a base amount of the same year (e.g., net sales revenue, total assets)
Horizontal analysis
Amounts for comparative years are expressed as a percentage of the base year amount
Common-Size Analysis
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Exhibit 5-1: Melcher Company—Vertical Common Size
Each financial statement element is presented as a percentage of a designated base which is sales revenue on the income statement
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© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Exhibit 5-1: Melcher Company—Horizontal Common Size
Each financial statement element is presented as a percentage of a base amount from a selected year
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© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Use both absolute and percentages
Guidelines
When an item has value in the base year and none in the next period, the decrease is 100%
A meaningful percent change cannot be computed when one number is positive and the other number is negative
No percent change is computable when there is no figure for the base year
Year-to-Year Change Analysis
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Financial components vary by type of industry
Merchandising
Inventory is a principal asset
Sales may be primarily for cash or on credit
Service
Inventory is low or nonexistent
Manufacturing
Large inventory holdings
Substantial investment in plant assets
Cost of sales often represents the major expense
Industry Variations
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© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
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Narrative data
Annual report
Trade periodicals
Industry reviews
Further explains the financial position of a firm
Management Discussion and Analysis (MD&A) provides an overview of the previous year and of future goals and new projects
Descriptive Information
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Provides context for analysis of ratios and financial data
Common types
Trend analysis
Standard Industrial Classification (SIC) Manual
The U.S. Department of Labor provides Web site that details the SIC manual
North American Industry Classification System (NAICS)
Industry Averages and Comparison with Competitors
Comparisons
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A study of the financial history of a firm
It reveals whether the ratio is
Falling
Rising
Relatively constant
Highlight
Effective management
Evidence of problems
Comparisons: Trend Analysis
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© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
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Classifies business by industry
Defines industries in accordance with the composition and structure of the economy
Coding structure
Two-digit major group number
Three-digit industry group number
Four-digit industry number
Comparisons: SIC
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Jointly created by the U.S., Canada, and Mexico
Industry is defined by similar production processes
U.S. Census Bureau provides a Web site (www.census.gov) that that details the NAICS manual. Go on this site and under “business and industry” click on NAICS
Comparisons: NAICS
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Industry comparison complicated by highly diversified companies
Financial services
Base their analysis on industry placement
Provide composite industry data
Comparisons: Industry Averages
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| Publication | Publisher(s) | Coverage | Data | Classification |
| The Department of Commerce Financial Report | Economic Surveys Division, Bureau of the Census | Manufacturing, mining, and trade corporations | Income statement and balance sheet data and ratios | NAICS |
| Annual Statement Studies | Risk Management Association | Manufacturing, wholesaling, retailing, service, agriculture, and construction | Common-size financial statements and 16 selected ratios | NAICS or SIC |
| Standard & Poor’s Industry Surveys | Standard & Poor’s | North American and global industries | Industry write-ups and statistics | NAICS |
Financial Services’ Publications
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© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
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| Publication | Publisher(s) | Coverage | Data | Classification |
| Almanac of Business and Industrial Financial Ratios | CCH, Inc. | 200 industries | Corporate tax return data | NAICS |
| Industry Norms and Key Business Ratios | Dun & Bradstreet | 800 business lines | Condensed financial statements; ratios | SIC |
| Value Line Investment Survey | The Standard Edition and the Small & Mid-Cap Edition | 1 to 97 industries; 1 to 84 industries | Longitudinal financial information |
Financial Services’ Publications—Continued
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© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
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Ratios are subject to variance from
Differing data
Inconsistent formula construction
Optional (elective) accounting treatment
Different fiscal year-ends
Varying financial policies
Inconsistent basis (before or after tax)
Comparisons: Caution in Using Industry Averages
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© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
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Comparison of disparate size firms
Capital market access
Economy of scale (purchasing)
Wider customer base
Information
Absolute numbers amplifies comparison difficulty
Common-size analysis help to eliminate some of the difficulty
Percent of market helps to define relative size
Relative Size of Firm
© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
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Covers domestic private and public companies
Up to 20 items of information are provided for each company listed
Went digital in 2007 under Gale Directory Library
Ward’s Business Directory
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© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
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Companies listed on various stock exchanges
New York Stock Exchange
American Stock Exchange
NASDAQ stock market
Regional exchanges
Arranged Alphabetically by stock exchanges
Contains brief analysis of companies regularly traded
Standard & Poor’s Stock Reports
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Contains 2-volumes
Volume 1
Alphabetical list of approximately 75,000 corporations
Volume 2,
Section 1 contains an alphabetical list of over 70,000 individuals serving as officers, directors, trustees, partners, and so on
Section 2 is divided into seven subsections providing additional details
Standard & Poor’s Register Of Corp., Directors, And Executives
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Selected income statement and balance sheet items
Related ratios
Applicable to Standard & Poor’s industry group stock price indexes
Brief monthly updates for selected industries supplement the annual editions of the handbook
Standard & Poor’s Analyst’s Handbook
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U.S. corporations
Background information
Detailed financial statistics
The contents and the index are updated throughout the year
Standard & Poor’s Standard Corporation Descriptions
© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
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Covers 5,300 common and preferred stocks
It contains trading activity, price range, dividends, and so on, for companies traded on
New York Stock Exchange
American Stock Exchange
Over the Counter
Regional Exchanges
Standard & Poor’s Security Owner’s Stock Guide
© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
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Industry statistics on industries such as
Agriculture
Metals
Building
Transportation
Additional statistics are included such as price indexes and daily highs, lows, and closes for stock
Standard & Poor’s Statistical Service
© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
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Available at many academic, public, and corporate libraries, and information centers
Other publication available with Net Advantage
Standard & Poor’s Stock Reports
Standard & Poor’s Register of Corporations, Directors and Executives
Stand and Poor’s Standard Corporation Descriptions
Standard & Poor’s Net Advantage
© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
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Provide a dividend record of payments on virtually all publicly owned American and some foreign companies
Mergent and Standard & Poor’s Dividend Record
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© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Companies must meet at least one of two inclusion requirements
$9 million or more in sales volume
180 or more employees if company is a headquarters single location, 900 or more if employees if company is a branch
Company listings in Volumes
Alphabetical
Geographically
SIC
D&B® Million Dollar Directory®
© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
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Gives an in-depth view of companies and their divisions, subsidiaries, and affiliates
Contains an alphabetical index, geographical index, and SIC classifications
The parent company listing consists of address, telephone number, stock ticker symbol, stock exchange(s), approximate sales, number of employees, type of business, and top corporate officers
Directory Of Corporate Affiliates™
© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
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Comprehensive reference
Products and services
Company profiles
Catalog file
Thomas Register Of American Manufacturers
© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
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Published in two volumes
Covers 2000 industrial corporations listed
On New York and American Stock Exchanges and other selected exchanges
Provides information such as history, business, properties, subsidiaries, financial statements, and SIC codes
Mergent Industrial Manual and News Reports
© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
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Contains profile information on over 200,000 principal corporate officers in over 12,000 companies
This information includes
Year of birth
Education
Military service
Present business position
Previous positions
D&B Reference Book of Corporate Managements
© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
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Database of textual and financial information on about 12,000 public companies
Taken from reports filed with the SEC
Contents
Major financial statements
Financial ratios
Institutional holdings
Insider ownership
President’s letter
Financial notes
Compact Disclosure
© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
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Provides accounting, legal, newspaper, and periodical information
Includes financial statements from annual reports for thousands of publicly traded companies
Lexis-Nexis
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Management
Analyze information from the perspective of both investors and creditors
Investors
Analysis of past and present information to project the future prospects of the entity
Creditors
Short-term creditor focus on current resources
Long-term creditors consider the future prospects of the firm
The Users of Financial Statements
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© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
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