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Financial Statement Analysis

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)

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Financial Statement Analysis

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  1. Financial Statement Analysis MIM 517 Class 4 Fall 2010

  2. 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?

  3. Background & Industry Research - BizStats

  4. Background & Industry Research – S&P

  5. 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

  6. Background – Starbucks 10-K Industry • Increased competition from large well-known competitors (Dunkin, McDonalds) • Customers trading down to lower priced coffee beverages & related products due to economy

  7. 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

  8. Financial Statement Analysis • Group by category • Calculate numbers over time AND for industry/peer • Comment on “improving” or “deteriorating” by category

  9. 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

  10. Balance Sheet Analysis Questions • Consistent with income statement “story”? • Big changes? Tools • Common sized B/S (% of total assets) • Horizontal analysis • Industry comparison • Ratios

  11. Cash Flow Analysis Tell the story…. • What did the company use cash for? • Primary sources of cash • Where did the company get cash from? • Primary uses of cash • Did the company receive more cash than it used?

  12. 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

  13. Liquidity Ratios

  14. Liquidity Ratios

  15. Operating Efficiency Ratios

  16. Leverage Ratios

  17. Leverage Ratios

  18. Profitability Ratios

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