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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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Financial statement analysis l.jpg

Financial Statement Analysis

MIM 517

Class 4

Fall 2010


Understanding a company l.jpg

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?


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Background & Industry Research - BizStats


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Background & Industry Research – S&P


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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


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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


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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


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Financial Statement Analysis

  • Group by category

  • Calculate numbers over time AND for industry/peer

  • Comment on “improving” or “deteriorating” by category


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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


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Balance Sheet Analysis

Questions

  • Consistent with income statement “story”?

  • Big changes?

    Tools

  • Common sized B/S (% of total assets)

  • Horizontal analysis

  • Industry comparison

  • Ratios


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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?


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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


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Liquidity Ratios


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Liquidity Ratios


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Operating Efficiency Ratios


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Leverage Ratios


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Leverage Ratios


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Profitability Ratios


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