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War. Financial Statement Analysis. Overstock.com. Overstock.com Overview of Business. What do they do? www.overstock.com Performance? http://finance.yahoo.com/q/bc?s=OSTK&t=5y&l=on&z=l&q=l&c=. Overstock.com: Overview of Business. Key success factors? Key risks factors?.

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overstock com overview of business
Overstock.comOverview of Business
  • What do they do?

www.overstock.com

  • Performance?
        • http://finance.yahoo.com/q/bc?s=OSTK&t=5y&l=on&z=l&q=l&c=
overstock com overview of business1
Overstock.com: Overview of Business

Key success factors?

Key risks factors?

q2 what are the critical accounting policies
Q2: What are the Critical Accounting Policies?
  • Revenue Recognition

Major switch from commission basis to gross basis for fulfillment partner revenue on July 1, 2003

  • Reserve for Returns
  • Allowance for Doubtful Accounts
  • Allowance for Obsolete and Damaged Inventory
  • Accounting for Income Taxes
  • Valuation of Long-Lived and Intangible Assets and Goodwill
q3 is 2003 sales growth rate sustainable
Q3: Is 2003 sales growth rate sustainable?
  • What is the GAAP based growth rate in sales?

238.9/91.8 - 1 = 160%

  • What is the gross merchandise sales growth rate?

294.8/154.5 - 1 = 91%

slide6

GAAP vs. Gross Basis Sales (see reconciliation on page 4 of 10K)

…is it sustainable?

slide7

Mean reversion in sales growth rate

Source: Nissim and Penman (2001)

q4 explain growth rate in gross profit
Q4: Explain growth rate in gross profit
  • What is the GAAP based growth rate in gross profit?

25.3/18.3 = 39%

  • What is the gross basis growth rate in gross profit?

25.3/18.3 = 39%

accounting performance vs economic performance
Accounting Performance vs. Economic Performance
  • Overstock.com is ‘investing’ significant amounts to fuel sales growth, customer loyalty and brand awareness.
  • Most of these amounts must be immediately expensed for accounting purposes:

- Sales and marketing expenses

- General and administrative expenses

- Loss-leading margins on BMV merchandise

next financial analysis framework for of business analysis and valuation
Next, Financial AnalysisFramework for of Business Analysis and Valuation

Other Public Data:

industry data, analyst reports, competitor financials, bond ratings, beta factors, security prices etc.

Financial Statements

Analysis Tools

Strategy Analysis

Accounting Analysis

Financial Analysis

Prospective Analysis

Business Application Context

equity security analysis, credit analysis, M&A analysis, IPO analysis etc.

how to create lots and lots of value
How to Create Lots and Lots of Value…?
  • Earn an ROE > r (cost of equity capital)
  • Grow!

#1 without #2 is okay

but

#2 without #1 is terrible!

strategic choices influencing tradeoff between profitability margin and turnover
Strategic choices influencing tradeoff between profitability (margin) and turnover

Maximizing return on assets (PMxTurns) involves tradeoff between margin & turnover.

Lower turnover & higher margins result from:

- following product differentiation versus cost leadership strategy.

  • following vertical integration versus outsourcing strategy.
  • other examples?
trade off 1 internet vs bricks n mortar

Bricks and Mortar

Internet

Department Store

Discount Retailer

Trade-Off 1:Internet vs. Bricks-n-Mortar

Trade-Off 2:Direct vs. Fulfillment Partner

Trade-Off 3:Discount Retailer vs. Department Store

Fulfillment Partner (commission basis)

Direct

Fulfillment Partner (gross basis)

margin vs turnover tradeoff for ostk amzn rost and may
Margin vs. turnover tradeoff for OSTK, AMZN, ROST, and MAY

May Department Stores

Ross Stores

Amazon.com

Overstock.com

slide19

Would Operating Accruals have identified Boston Chicken’s distortion?

Boston Chicken, 1996

average noncash Net Operating Assets = $930,534k, so DnonCurrentOperatingAssets/noncashNetOperatingAssets = 525,025/930,534 = 56%.

a comprehensive analysis of accruals
A Comprehensive Analysis of Accruals
  • total accruals = accounting income – cash income

= NI - (net dividends + Dcash)

= DCE – Dcash

= (DAssets – Dcash) – DLiabilities

  • total accruals = DNoncash Net Operating Assets

+ DNet Financial Assets

(i.e. mkt securities less debt)

  • total accruals = DNon-Cash Working Capital

+ DNon-Current Net Operating Assets

+ DNet Financial Assets

future stock returns and accrual decomposition
Future Stock Returns and Accrual Decomposition

Richardson, Sloan, Soliman, Tuna (2002)

how big is a big accrual
How big is a big accrual?

on page 121 in textbook

why are net operating assets growing
why are net operating assets growing?

which cause of NOA growth is best? which is the worst?

future stock returns and accrual decomposition ii
Future Stock Returns and Accrual Decomposition II

Richardson, Sloan, Soliman, Tuna (2002)