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StepstoaBasicCompanyFinancialAnalysis

FinancialRatioAnalysis(Abridged)

FinancialStatementsAnalysis

StepstoaBasicCompanyFinancialAnalysis
ByProfessorHarveyB.Lermack
PhiladelphiaUniversity
Philadelphia,PA

RevisedMay23,2003

2003HarveyB.Lermack

Thesearebasicstepsyoumayusewhenevaluatingcompanycasesinmygraduateand
undergraduatebusinessstrategyandbusinesspolicycourses.

Beforeyoustart,youmustunderstandacoupleofthings.
Thisisnotmeanttobeanexhaustivelistthereareotherstepsthatcanbefollowedtoget
deeperintothemeaningofthenumbers.
Youcannotanalyzethenumbersinavacuum.Thenumbersonlyprovideindicatorstotrigger
furtherquestionsinyourmind.
Inordertodoathoroughjob,youmustunderstandsomethingaboutthecompanys
businessandstrategies,anditsindustry.Financialindicatorsvaryfromindustryto
industrytheratioscanonlybeinterpretedwhencomparedandcontrastedwithother
companiesinthatindustry.Forexample,financialindicatorsare(andshouldbe)
differentamongfinancialinstitutions,manufacturingcompanies,companiesthatprovide
services,andtechnologyandcomputerinformationandservicescompanies.
Financialanalysisissomethingofanart.Experiencedmanagers,investorsandanalysts
developadatabankofinformationovertime,andafterdoingmanysuchanalyses,thatthey
bringtobeareverytimetheyreviewacompany.

Step1.Acquirethecompanysfinancialstatementsforseveralyears.Thesemaybefoundin
yourassignedcasestudyinarecentannualreportinthecompanys10KfilingontheSECs
EDGARdatabaseorfromothersourcesfoundatmyLINKSwebsite.Asaminimum,getthe
followingstatements,foratleast3to5years.
Balancesheets
Incomestatements
Shareholdersequitystatements
Cashflowstatements
Step2.Quicklyscanallofthestatementstolookforlargemovementsinspecificitemsfromone
yeartothenext.Forexample,didrevenueshaveabigjump,orabigfall,fromoneparticular
yeartothenext?Didtotalorfixedassetsgroworfall?Ifyoufindanythingthatlooksvery
suspicious,researchtheinformationyouhaveaboutthecompanytofindoutwhy.Forexample,
didthecompanypurchaseanewdivision,orselloffpartofitsoperations,thatyear?
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Step3.Reviewthenotesaccompanyingthefinancialstatementsforadditionalinformationthat
maybesignificanttoyouranalysis.
Step4.Examinethebalancesheet.Lookforlargechangesintheoverallcomponentsofthe
company'sassets,liabilitiesorequity.Forexample,havefixedassetsgrownrapidlyinoneortwo
years,duetoacquisitionsornewfacilities?Hastheproportionofdebtgrownrapidly,toreflecta
newfinancingstrategy?Ifyoufindanythingthatlooksverysuspicious,researchtheinformation
youhaveaboutthecompanytofindoutwhy.

Step5.Examinetheincomestatement.Lookfortrendsovertime.Calculateandgraphthegrowthof
thefollowingentriesoverthepastseveralyears.
Revenues(sales)
Netincome(profit,earnings)

Aretherevenuesandprofitsgrowingovertime?Aretheymovinginasmoothandconsistent
fashion,orerraticallyupanddown?Investorsvaluepredictability,andprefermoreconsistent
movementstolargeswings.

Foreachofthekeyexpensecomponentsontheincomestatement,calculateitasapercentageof
salesforeachyear.Forexample,calculatethepercentofcostofgoodssoldoversales,general
andadministrativeexpensesoversales,andresearchanddevelopmentoversales.Lookfor
favorableorunfavorabletrends.Forexample,risingG&Aexpensesasapercentofsalescould
meanlavishspending.Also,determinewhetherthespendingtrendssupportthecompanys
strategies.Forexample,increasedemphasisonnewproductsandinnovationwillprobablybe
reflectedbyanincreasedproportionofspendingonresearchanddevelopment.

Lookfornonrecurringornonoperatingitems.Theseare"unusual"expensesnotdirectlyrelated
toongoingoperations.However,somecompanieshavesuchitemsonalmostanannualbasis.
Howdothesereflectontheearningsquality?

Ifyoufindanythingthatlooksverysuspicious,researchtheinformationyouhaveaboutthe
companytofindoutwhy.

Step6.Examinetheshareholder'sequitystatement.Hasthecompanyissuednewshares,or
boughtsomeback?Hastheretainedearningsaccountbeengrowingorshrinking?Why?Are
theresignalsaboutthecompany'slongtermstrategyhere?

Ifyoufindanythingthatlooksverysuspicious,researchtheinformationyouhaveaboutthe
companytofindoutwhy.

Step7.Examinethecashflowstatement,whichgivesinformationaboutthecashinflowsand
outflowsfromoperations,financing,andinvesting.

Whiletheincomestatementprovidesinformationaboutbothcashandnoncashitems,thecash
flowstatementattemptstoreconstructthatinformationtomakeitclearhowcashisobtainedand
usedbythebusiness,sincethatiswhatinvestorsandcreditorsreallycareabout.

Ifyoufindanythingthatlooksverysuspicious,researchtheinformationyouhaveaboutthe
companytofindoutwhy.

Step8.Calculatefinancialratiosineachofthefollowingcategories,foreachyear.Youmayusethe
formulasfoundinyourtextbook,orothermaterialsyouhavefromyourfinanceandaccountingcourses.
Asummaryofsomeusefulratiosappearsattheendofthisdocument.
Liquidityratios
Leverage(ordebt)ratios
Profitabilityratios
Efficiencyratios
Valueratios

Graphtheratiosovertime,tofindthetrendsintheratiosfromyeartoyear.Aretheygoingupor
down?Isthatfavorableorunfavorable?Thisshouldtriggerfurtherquestionsinyourmind,and
helpyoutolookfortheunderlyingreasons.
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Step9.Obtaindataforthecompanyskeycompetitors,anddataabouttheindustry.

Forcompetitorcompanies,youcangetthedataandcalculatetheratiosinthesamewayyoudid
forthecompanybeingstudied.Youcanalsogetcompanyandindustryratiosfromthe
Quicken.comEvaluator,SchwabStockEvaluator,orotherlocationsonmyLINKSwebsite.

Comparetheratiosforthecompetitorsandtheindustrytothecompanybeingstudied.Isthe
companyfavorableincomparison?Doyouhaveenoughinformationtodeterminewhyorwhy
not?Ifyoudont,youmayneedtodofurtherresearch.

Step10.Reviewthemarketdatayouhaveaboutthecompanysstockprice,andthepriceto
earnings(P/E)ratio.

TrytoresearchandunderstandthemovementsinthestockpriceandP/Eovertime.Determinein
yourownmindwhetherthestockmarketisreactingfavorablytothecompanysresultsandits
strategiesfordoingbusinessinthefuture.

Reviewtheevaluationsofstockmarketanalysts.Thesemaybefoundatanybrokeragesite,or
fromvariouslocationsonmyLINKSwebsite.

Step11.Reviewthedividendpayout.Graphthepayoutoverseveralyears.Determinewhether
thecompanysdividendpoliciesaresupportingtheirstrategies.Forexample,ifthecompanyis
attemptingtogrow,aretheyretainingandreinvestingtheirearningsratherthandistributingthem
toinvestorsthroughdividends?Basedonyourresearchintotheindustry,areyouconvincedthat
thecompanyhassufficientopportunitiesforprofitablereinvestmentandgrowth,orshouldtheybe
distributingmoretotheownersintheformofdividends?Viewedanotherway,canyoulearn
anythingabouttheirlongtermstrategiesfromthewaytheypaydividends?

Step12.Reviewallofthedatathatyouhavegenerated.Youwillprobablyfindthatthereisamixof
positiveandnegativeresults.Answerthefollowingquestion:

BasedoneverythingIknowaboutthiscompanyanditsstrategies,theindustryand
thecompetitors,andtheexternalfactorsthatwillinfluencethecompanyinthefuture,
doIthinkthiscompanyisworthinvestinginforthelongterm?

2003HarveyB.Lermack

FinancialRatioAnalysis(Abridged)
Adaptedfrom"FinancialStatementsAnalysis,"
CourtesyofProfessorPhilipRussel
PhiladelphiaUniversity
Philadelphia,PA

Apopularwaytoanalyzethefinancialstatementsisbycomputingratios.Aratioisarelationship
betweentwonumbers,e.g.ratioofA:B=1.5:1==>Ais1.5timesB.Aratiobyitselfmayhave
nomeaning.Hence,agivenratioiscomparedto:

Ratiosfrompreviousyearsforinternaltrends
Ratiosofotherfirmsinthesameindustryforexternaltrends.

Ratioanalysisisadiagnostictoolthathelpstoidentifyproblemareasandopportunitieswithina
company.,wewilldiscusshowtomeasureandinterpretsomekeyratios.

ThemostfrequentlyusedratiosbyFinancialAnalystsprovideinsightsintoafirm's

Liquidity
Degreeoffinancialleverageordebt
Profitability
Efficiency
Value

A.AnalyzingLiquidity

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Liquidassetsarethosethatcanbeconvertedintocashquickly.Theshorttermliquidityratios
showthefirmsabilitytomeetitsshorttermobligations.Thusahigherratio(#1and#2)would
indicateagreaterliquidityandlowerriskforshorttermlenders.TheRulesofThumbfor
acceptablevaluesare:CurrentRatio(2:1),QuickRatio(1:1).

Whilehighliquiditymeansthatthecompanywillnotdefaultonitsshorttermobligations,one
shouldkeepinmindthatbyretainingassetsascash,valuableinvestmentopportunitiesmaybe
lost.Obviously,cashbyitselfdoesnotgenerateanyreturn.Onlyifitisinvestedwillweget
futurereturn.

1.CurrentRatio=TotalCurrentAssets/TotalCurrentLiabilities

2.QuickRatio=(TotalCurrentAssetsInventories)/TotalCurrentLiabilities

Inthequickratio,wesubtractinventoriesfromtotalcurrentassets,sincetheyarethe
leastliquidamongthecurrentassets

B.AnalyzingDebt

Debtratiosshowtheextenttowhichafirmisrelyingondebttofinanceitsinvestmentsand
operations,andhowwellitcanmanagethedebtobligation,i.e.repaymentofprincipaland
periodicinterest.Ifthecompanyisunabletopayitsdebt,itwillbeforcedintobankruptcy.Onthe
positiveside,useofdebtisbeneficialasitprovidestaxbenefitstothefirm,andallowsitto
exploitbusinessopportunitiesandgrow.

Notethattotaldebtincludesshorttermdebt(bankadvances+thecurrentportionoflongterm
debt)andlongtermdebt(bonds,leases,notespayable).

1.LeverageRatios

1a.DebttoEquityRatio=TotalDebt/TotalEquity

Thisshowsthefirmsdegreeofleverage,oritsrelianceonexternaldebtforfinancing.

1b.DebttoAssetsRatio=TotalDebt/Totalassets

Someanalystsprefertousethisratio,whichalsoshowsthecompanysrelianceon
externalsourcesforfinancingitsassets.

Ingeneral,witheitheroftheaboveratios,thelowertheratio,themoreconservative
(andprobablysafer)thecompanyis.However,ifacompanyisnotusingdebt,itmay
beforegoinginvestmentandgrowthopportunities.Thisisaquestionthatcanbe
answeredonlybyfurthercompanyandindustryresearch.

Afrequentlycitedruleofthumbformanufacturingandothernonfinancialindustriesis
thatcompaniesnotfinancemorethan50%oftheircapitalthroughexternaldebt.

2.InterestCoverage(orTimesInterestEarned)Ratio=EarningsBeforeInterest
andTaxes/AnnualInterestExpense

Thisshowsthefirmsabilitytocoverfixedinterestcharges(onbothshorttermand
longtermdebt)withcurrentearnings.Themarginofsafetythatisacceptablevaries
withinandacrossindustries,andalsodependsontheearningshistoryofafirm
(especiallytheconsistencyofearningsfromperiodtoperiodandyeartoyear).

3.CashFlowCoverage=NetCashFlow/AnnualInterestExpense

Netcashflow=NetIncome+/noncashitems(e.g.equityincome+minority
interestinearningsofsubsidiary+deferredincometaxes+depreciation+depletion
+amortizationexpenses)

Sincedepreciationisusuallythelargestnoncashiteminmostcompanies,analysts
oftenapproximateNetcashflowasbeingequivalenttoNetIncome+Depreciation.

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Cashflowisacriticalvariableinassessingacompany.Ifacompanyisshowing
strongprofitsbuthaspoorcashflow,youshouldinvestigatefurtherbeforepassinga
favorableopiniononthecompany.nalystspreferratio#3toratio#2.

C.AnalyzingProfitability

Profitabilityisarelativeterm.Itishardtosaywhatpercentageofprofitsrepresentsaprofitable
firm,asprofitsdependonsuchfactorsasthepositionofthecompanyanditsproductsonthe
competitivelifecycle(forexampleprofitswillbelowerintheinitialyearswheninvestmentis
high),oncompetitiveconditionsintheindustry,andonborrowingcosts.

Fordecisionmaking,weareconcernedonlywiththepresentvalueofexpectedfutureprofits.
Pastorcurrentprofitsareimportantonlyastheyhelpustoidentifylikelyfutureprofits,by
identifyinghistoricalandforecastedtrendsofprofitsandsales.

Wewanttoknowwhetherprofitsaregenerallyontherisewhethersalesstableorrisinghowthe
profitscomparetotheindustryaveragewhetherthemarketshareofthecompanyisrising,
stableorfallingandotherthingsthatindicatethelikelyfutureprofitabilityofthefirm.

1.NetProfitMargin=Profitaftertaxes/Sales

2.ReturnonAssets(ROA)=Profitaftertaxes/TotalAssets

3.ReturnonEquity(ROE)=Profitaftertaxes/ShareholdersEquity(bookvalue)

4.EarningsperCommonshare(EPS)=(ProfitsaftertaxesPreferredDividend)/
(#ofcommonsharesoutstanding)

5.PayoutRatio=CashDividends/NetIncome

Note:Thetermsprofits,earningsandnetincomeareoftenusedinterchangeablyin
financialstatements.Besuretoreviewthestatementstounderstandtheir
components.

D.AnalyzingEfficiency

Theseratiosreflecthowwellthefirmsassetsarebeingmanaged.

Theinventoryratiosshowshowfasttheinventoryisbeingproducedandsold.

1.InventoryTurnover=CostofGoodsSold/AverageInventory

Thisratioshowshowquicklytheinventoryisbeingturnedover(orsold)togenerate
sales.Ahigherratioimpliesthefirmismoreefficientinmanaginginventoriesby
minimizingtheinvestmentininventories.Thusaratioof12wouldmeanthatthe
inventoryturnsover12times,ortheaverageinventoryissoldinamonth.

2.TotalAssetsTurnover=Sales/AverageTotalAssets

Thisratioshowshowmuchsalesthefirmisgeneratingforeverydollarofinvestment
inassets.Thehighertheratio,thebetterthefirmisperforming.

3.AccountsReceivableTurnover=AnnualCreditSales/AverageReceivables

4.AverageCollectionperiod=AverageAccountsReceivable/(TotalSales/365)

Ratios#3and#4showthefirmsefficiencyincollectingcashfromitscreditsales.
Whilealowratioisgood,itcouldalsomeanthatthefirmisbeingverystrictinits
creditpolicy,whichmaynotattractcustomers.

5.DaysinInventory=Daysinayear/Inventoryturnover

Ratio#5isreferredtoastheshelflifei.e.howquicklythemanufacturedproductis
soldofftheshelf.Thus#5and#1arerelated.

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E.ValueRatios

Valueratiosshowtheembeddedvalueinstocks,andareusedbyinvestorsasascreeningdevice
beforemakinginvestments.

Forexample,ahighP/Eratiomayberegardedbysomeasbeingasignofoverpricing.When
themarketsarebullish(optimistic)orifinvestorsentimentisoptimisticaboutaparticularstock,
theP/Eratiowilltendtobehigh.Forexample,inthelate1990sInternetstockstendedtohave
extremelyhighP/Eratios,despitetheirlackofprofits,reflectinginvestors'optimismaboutthe
futureprospectsofthesecompanies.Ofcourse,theburstofthebubbleshowedthatsuch
confidencewasmisplaced.

Ontheotherhand,alowP/Eratiomayshowthatthecompanyhasapoortrackrecord.Onthe
otherhand,itmaysimplybepricedtoolowbasedonitspotentialearnings.Furtherinvestigation
isrequiredtodeterminewhetherthecompanywouldthenprovideagoodinvestmentopportunity.

1.PriceToEarningsRatio(P/E)=CurrentMarketPricePerShare/Aftertax
EarningsPerShare

2.DividendYield=AnnualDividendsPerShare/CurrentMarketPricePerShare

F.UsesandLimitationsofRatioanalysis

Uses

1.Toevaluateperformance,comparedtopreviousyearsandtocompetitorsandtheindustry

2.Tosetbenchmarksorstandardsforperformance

3.Tohighlightareasthatneedtobeimproved,orareasthatofferthemostpromisingfuture
potential

4.Toenableexternalparties,suchasinvestorsorlenders,toassessthecreditworthinessand
profitabilityofthefirm

Limitations

1.Thereisconsiderablesubjectivityinvolved,asthereisnocorrectnumberforthevarious
ratios.Further,itishardtoreachadefiniteconclusionwhensomeoftheratiosarefavorableand
someareunfavorable.

2.Ratiosmaynotbestrictlycomparablefordifferentfirmsduetoavarietyoffactorssuchas
differentaccountingpracticesordifferentfiscalyearperiods.Furthermore,ifafirmisengagedin
diverseproductlines,itmaybedifficulttoidentifytheindustrycategorytowhichthefirm
belongs.Also,justbecauseaspecificratioisbetterthantheaveragedoesnotnecessarilymean
thatthecompanyisdoingwellitisquitepossiblerestoftheindustryisdoingverypoorly.

3.Ratiosarebasedonfinancialstatementsthatreflectthepastandnotthefuture.Unlessthe
ratiosarestable,itmaybedifficulttomakereasonableprojectionsaboutfuturetrends.
Furthermore,financialstatementssuchasthebalancesheetindicatethepictureatonepointin
time,andthusmaynotberepresentativeoflongerperiods.

4.Financialstatementsprovideanassessmentofthecostsandnotvalue.Forexample,fixed
assetsareusuallyshownonthebalancesheetasthecostoftheassetslesstheiraccumulated
depreciation,whichmaynotreflecttheactualcurrentmarketvalueofthoseassets.

5.Financialstatementsdonotincludeallitems.Forexample,itishardtoputavalueonhuman
capital(suchasmanagementexpertise).Andrecentaccountingscandalshavebroughtlighttothe
extentoffinancingthatmayoccuroffthebalancesheet.

6.Accountingstandardsandpracticesvaryamongcountries,andthushampermeaningfulglobal
comparisons.

FinancialStatementsAnalysis

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ByProfessorPhilipRussel
PhiladelphiaUniversity
Philadelphia,PA

August,2004

Thisoutlinediscusseshowthemyriadofinformationpresentedinthefinancialstatementsisused
tofacilitatedecisionmakingbythemanagers,investors,regulators,competitors,banks,andother
interestedgroups.Theanalysisisperformedchieflybysummarizingthefinancialstatement
informationintoratios.Theoutlinewillassistyouingettingageneralunderstandingofthe
financialstatementsandidentifyingsomeofthekeyratios.

CONTENTS

1. Introduction

2. Annual Reports and Financial Statements

3. What you Need to Know About Financial Statements?

4. Financial Ratio Analysis

5. Uses and Limitations of Ratio Analysis

1.Introduction

Financialstatementanalysisinvolvesanalyzingthefirmsfinancialstatementstoextract
informationthatcanfacilitatedecisionmaking.Forexample,ananalysisofthefinancial
statementcanrevealwhetherthefirmwillbeabletomeetitslongtermdebtcommitment,
whetherthefirmisfinanciallydistressed,whetherthecompanyisusingitsphysicalassets
efficiently,whetherthefirmhasanoptimalfinancingmix,whetherthefirmisgeneratingadequate
returnforitsshareholders,whetherthefirmcansustainitscompetitiveadvantageetcWhilethe
informationusedishistorical,theintentisclearlytoarriveatrecommendationsandforecastsfor
thefutureratherthanprovideapictureofthepast.

Theperformanceofafirmcanbeassessedbycomputingkeyratiosandanalyzing:(a)Howisthe
firmperformingrelativetotheindustry?(b)Howisthefirmperformingrelativetotheleading
firmsintheirindustry?(c)Howdoesthecurrentyearperformancecomparetotheprevious
year(s)?(d)Whatarethevariablesdrivingthekeyratios?(e)Whatarethelinkagesamongthe
ratios?(f)Whatdotheratiosrevealaboutthefutureprospectsofthefirmforvariousstakeholders
suchasshareholders,bondholders,employees,customersetc.?Merelypresentingaseriesof
graphsandfigureswillbeafutileexercise.Weneedtoputtheinformationinapropercontextby
clearlyidentifyingthepurposeofouranalysisandidentifyingthekeydatadrivingouranalysis.

Financialanalysisisperformedbybothinternalmanagementandexternalgroups.Firmswould
performsuchananalysisinordertoevaluatetheiroverallcurrentperformance,identify
problem/opportunityareas,developbudgetsandimplementstrategiesforthefuture.External
groups(suchasinvestors,regulators,lenders,suppliers,customers)alsoperformfinancial
analysisindecidingwhethertoinvestinaparticularfirm,whethertoextendcreditetc.Thereare
severalratingagencies(suchasMoodys,Standard&Poors)thatroutinelyperformfinancial
analysisoffirmsinordertoarriveatacompositerating.

2. Annual Reports and Financial Statements

Theannualreportsofcompaniestypicallycontain:(a)CEO/Presidentslettertoshareholders(b)
Financialstatements(c)Otherinformation

(a)CEO/Presidentslettersummarizingtheoperationsoflastyear,explanationsforgood/bad
performance,andadiscussiononthegoalsfortheimmediateandlongtermfuture.Itwillbea
goodideatoreviewthelettertoshareholdersofsomeprominentcompanies.WarrenBuffetof
BerkshireHathawayisfamousforwritingthemostinsightfulletters.

(b)FourFinancialStatements

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Thefinancialstatements(typicallypublishedeveryquarterandannually)arepreparedaccording
toGAAPandauditedbyindependentauditors.However,astherecentcorporatescandalshave
revealed,therearedefinitelytoomanygaps/loopholesinhowtheGAAPisimplemented!!.
Nonetheless,financialstatementsareaninvaluablesourceofinformation.

B1.BalanceSheet(alsoknownastheStatementofFinancialPosition):Thisprovidesthevalueof
firmsassets(whatthefirmowns),liabilities(whatthefirmowestooutsiders)andequity(what
theinsideshareholdersorownersown)onaparticulardate.Thevalueofassetswillequalthe
valueofliabilitiesplusownersequity(orA=L+E).Itemsinthebalancesheetarelistedbased
onconservativeprinciplei.e.ifestimatingorindoubtoftheactualvalue,thevalueofassetsis
notbeoverstatedandthevalueofliabilitiesisnotbeunderstated.

What do we see in the balance sheet?Assets:Currentassets(ex.cash,marketablesecurities,

accountsreceivable,inventory,prepaidexpenses)thataremoreliquidthanthelongterm/fixed
assets(ex.equipment,land),assetsthatareintangibleandyetvaluable(ex.goodwill,patents,
deferredcharges).Liabilitiescouldincludecurrentliabilities(ex.bankadvances,incometax
payable,accountspayable,accruedexpenses),deferredincometaxes(differencebetweenthetax
reportedontheincomestatementandtaxreportedonthetaxreturn),Minorityinterestin
subsidiarycompanies(representingoutsideownershipinsubsidiarycompanies),longtermdebt
(ex.Bonds,capitalleases).ShareholdersEquityincludesSharecapital(parorstatedvalueof
sharesreceivedatthetimeoforiginalissue),Paidincapital(whensharesaresoldformorethan
theparorstatedvalue),retainedearnings/deficit(undistributedearnings),foreigncurrency
translationadjustment(fluctuationinthevalueofassetsofforeignsubsidiariesduetochangesin
exchangerates).Equityisalsoexpressedasresidualinterest(E=AL).IfEisnegative,thefirm
istechnicallybankrupt.

NetworthorBookValuereferstowhatisavailabletocommonshareholdersandisgivenby:

TotalAssetsTotalLiabilitiesPreferredStock=NetWorth

Networthdividedbynumberofcommonsharesoutstandingwillgiveusthebookvalue
pershare.Themarketvalueisequaltothepricepersharetimesthenumberofshares
outstanding(alsoreferredtoasthemarketcapitalizationofacompany).Wecanestimatethe
intrinsicvalueofstockbyusingdiscountedcashflowmodels.

Allassets(exceptLand)losetheirvalueovertimeandthisisaccountedforthrough
depreciation(forfixedassets),depletion(fornaturalresources)andamortization(for
intangibleassets/deferredcharges).

LimitationsofBalanceSheet:Thebalancesheetrecordsthevaluesofassetsandliabilitiesin
termsoftheiroriginalcost.Thisisespeciallymisleadingforfixedassets(thatcouldhave
significantlychangedinvalue).Also,itisdifficulttovalueintangibleassets.Currentassetsare
lesstroublesome,partlybecauseoftheirshorttermnature(inventoriesandmarketablesecurities
arelistedatloweroftheircostormarketvalues).Liabilitiesarealsonotbiased(sincetheyare
generallycontractual,andmarketvalueswillbeequaltotheirbookvaluesForexample,ifthe
companyhastakenaloan,thedollaramountofloanobligationdoesnotchangewithtime).Also,
ananalystshouldpaycloseattentiontooffbalancesheetitems.

B2.IncomeStatement(alsoknownasThestatementofearningsorprofit&lossstatementor
thestatementofoperations):Theincomestatementprovidesinformationonthevariousrevenue
andexpenseitemsduringacertainperiod.Thusthisstatementshowsthetotalincomegenerated
inacertainperiod.Itemsintheincomestatementarebasedonaccrualprinciplei.e.transactions
(suchassales)arerecognizedwhentheyoccurandnotwhenactualcashisreceived.
Furthermore,theexpensesarematchedtowhentherevenueisrecognizedandnotwhenthe
actualpaymentismade.Theaboveprinciplemakesitobviousthattherecouldbewide
discrepancybetweenafirmsrevenueandactualcashflow.

Thereareseveralformsofincomestatement.Anexampleofagenericformisasfollows:

SalesRevenue

CostofGoodSold

=GrossProfit

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SellingandAdministrativeexpenses

Depreciation

=EarningsBeforeInterestandTaxes(EBIT)

interestexpenses(onbankloansandbonds)

+interestincome

=EarningsbeforeTaxes(EBT)

taxes(currentanddeferred)

=EarningsafterTaxes(EAT)

+incomefromsubsidiaries(equityincome)

+/Gains/Lossesfromdiscontinuedoperations

+/Gain/lossonextraordinaryitems

=NetEarnings

PreferredStockDividends

=Earningsavailableforcommonshareholders

Limitations of Income Statement:Infinance,thefocusisonvaluationthatrequiresknowledgeof

expectedcashflowsratherthanhistoricalearnings.Notenetincomedoesnotequaltheactual
cashflow.Thisisbecausetheincomestatementreportsrevenue/expenseswhentheyare
earned/accruedandnotwhenactualcashisreceived.Further,severalitemsaresubjectively
determined(ex.depreciation).Also,depreciationisbasedonhistoricalcostoftheasset.Thus,
duringperiodsofinflation,depreciationexpensewillbeunderstatedasitisbasedonhistorical
costwhiletherevenuesreflectthecurrentmarketprice....suchnonsynchronizationleadsto
inflatedearnings.Furthermore,atraditionalincomestatementonlyrecordstransactionsandnot
opportunities.AsBlock,Hirt,andShort(1998,pp.34)note,Theeconomistdefinesincomeas
thechangeinrealworththatoccursbetweenthebeginningandtheendofaspecifiedtimeperiod.
Totheeconomist,anincreaseinthevalueofafirmslandasaresultofanewairportbeingbuilt
onanadjacentpropertyisanincreaseintherealworthofthefirm.It,therefore,represents
income.Theaccountantdoesnotordinarilyemploysuchabroaddefinitionofincome.

B3.StatementofRetainedEarnings(alsoknownastheStatementofchangesinshareholders
equity,statementofshareholdersinvestmentorstatementofchangesinshareholdersequity):It
showsthebalanceinretainedearningsaftermakingadjustmentsforcurrentprofitsandcurrent
dividend.Italsoshowsinformationontreasurystock,anynewsharesissued,theimpactof
exercisedoptions,preferredstockdetailsandadditionalpaidincapital.

B4. Cash Flow Statement: It shows how the company obtained cash and for what purpose they were used.
Thus cash balance at the end =

Cashinthebeginning

+NetCashflowfromoperating(incomestatementcashitems)

+NetCashflowfromfinancing(ex.proceedsfromsaleofbonds,repaymentofloan,
paymentofdividends)

+NetCashflowfrominvestingactivities(ex.Sale/purchaseofasset).

(c)Otherinformationintheannualreport

1.Notestofinancialstatements[1]

2.TheAuditorsreport
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3.What You Need to Know About Financial Statements

(Reference:PrenticeHallPublishersAuthors:Unknown,2003)

AstheEnronfiascohasbroughttolight,thereisplentywrongwiththewayfinancialresultsare
reported.CongressionalcommitteeswilldeterminehowmuchofEnronstroublesweredueto
criminalactivity,andhowmuchduetopoorjudgmentandloopholes.But"managingresults"isan
oldgameonWallStreet.Theprosknowhowtoreadbetweenthelinestoidentifyshakyfinancials.
Theyreadthefootnotestothefinancialstatementscarefullyforcluesthatwilltellthemhow
aggressivelythecompanyispushingtouselegal,butmisleadingGAAP,rulestotheirlimit.

Sohereisalistofthingstolookforinfinancialstatementsthatwilltellyouasmuchormore
aboutthecompanythantheactualreportedresults.

First,WallStreetisnotyourfriend.Makingmoneyinastockmarketthatistradingflatisazero
sumgame.Foryoutoprofit,someoneelsemustlose.Beskepticalandverycarefulwhereyouget
yourinvestmentadvice.Questionthemotivesofsocalledexperts.Asofyet,therearenorules
ensuringthattheydisclosetheirconflictsofinterest.

ProformaEarningsAnnouncements Many companies now issue Proforma Earnings Statements that

exclude certain expense items as being "extraordinary". It is now a normal part of business for many firms,
particularly tech firms. The trouble is that there are no standards for reporting Proforma Statements, leaving
the door open to manipulating earnings and misleading investors. Outgoing SEC Chief Economist Lynn Turner
says pro forma earnings are effectively "EBS" earnings"Everything but the Bad Stuff." A study that compares
the unaudited Proforma Earnings Statements to the NASDAQ 100 companies with the audited statements
they filed with the SEC shows a huge $101 billion difference for the first three quarters of 2001.

FrequentRestructuringChargesandWriteDowns As businesses adjust their internal structure, they incur

costs for shutting down one activity and starting another. In a small company, charges for these activities
would occur infrequently, but in a large company, they will be routine. If charges and write downs for
restructurings occur regularly, the company may be classifying normal business expenses as extraordinary to
create the illusion that the core business is more profitable than it really is.

Reservereversals Companies generally establish reserves to cover the costs of restructuring. Reserves allow
management to "store profits" for later use if the reserves are unusually large. At a later time, they can reverse
the reserve for the amount that was not spent and it flows directly to the bottom line.

PensionFunds are great sources of earnings manipulation. Boost earnings by under funding them or by
overestimating the investment return of the fund so that current payments will be lower and profits higher. If
the fund does particularly well, pull the excess back into the income statement to boost profits.

FootnotestoFinancialStatementsStatementscanmisleadandevadebuttheymustcomeclean
inthefootnotesorfacecriminalcharges.Thatswhytheproslookherefirst.Youwilllearnabout
riskexposure,debtthatchangescharacterundercertainconditions,theuseofaggressive
accountingpracticesandallsortsofotherdetailsthatmanagementwouldliketoavoidtellingyou.

Sales/NonSalesLookattherevenueandreceivablenumbersoverseveralyears.Istheratioof
receivablestosalesincreasing?Ifyes,thenthecompanyisshippinggoodsfasterthancustomers
arepayingforthem.Aredeferredrevenuesdropping?Ifso,thecompanyislivingofflastyears
sales.Inthecurrentslowdown,customerslooktochangesalestermstousethesuppliersmoney
asmuchaspossiblebyacknowledgingthesaleaslateaspossible.

CashFlowisKingTheprosknowthatitistooeasytomanipulateearningsnumbers.Sothey
focusoncashflowasbeingamorereliableindicatorofperformancebecausethecashiseither
thereoritisnt.Oneexpert,thinksacomparisonofcashflowvs.noncashrevenuecouldhave
beenanearlytipoftoEnroninvestors.

Goodwill Companies account for the premium over book value that they pay for an acquired company as
goodwill. Under the older accounting rules, companies could write down the payment for goodwill with a
charge against earnings spread out over decades. First Call estimates that, because of the goodwill accounting
change, analyst forecasts for 2002 are about three percentage points too high. As companies restate prior year
earnings to account for the change, earnings will shrink.

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EmployeeStockOptions 78% of companies with sales over $10 billion compensate management with stock
options. Yet accounting rules do not require the issuing of the option to be accounted for with an expense. In
the wake of Enron, this controversial and questionable rule may be changed. If so, one expert estimates that
many large tech companies may see an annual reduction in earnings of 1/3.

4.FinancialRatioAnalysis

Apopularwaytoanalyzethefinancialstatementsisbycomputingratios.Aratioisarelationship
betweentwonumbers,e.g.ratioofA:B=30:10==>Ais3timesB.Aratiobyitselfmayhave
nomeaning.Hence,agivenratioiscomparedto(a)ratiosfrompreviousyearsinternaltrends,
or(b)ratiosofotherfirmsinthesameindustryexternaltrends.Ratiosaremoreofadiagnostic
toolthathelpsustoidentifyproblemareasandopportunitieswithinacompany.Inthissection,
wewilldiscusshowtomeasureandinterpretsomekeyratios.Obviously,sinceratioissimplya
comparisonoftwovariables,thepossibilitiesfornumberofratiosareendless!Thereisnoone
wayofclassifyingvariousratiossoyoumayfinddifferentgroupingsdependingonwhattextor
articleyouread.Also,therearenospecificrulesonwhatisanidealoracceptablenumberfora
ratio,althoughtherearesomerulesofthumb.

Thekeyratiosthataredeterminedbythefinancialanalystsprovideinsightson(a)liquidity(b)
degreeoffinancialleverageordebt(c)profitability(d)efficiencyand(e)value.

A. Analyzing Liquidity

Liquidassetsarethoseassetsthatcanbeconvertedintocashquickly.Theshorttermliquidity
ratiosshowthefirmsabilitytomeetshorttermobligations.Thusahigherratio(#1and#2)
wouldindicateagreaterliquidityandlowerriskforshorttermlenders.TheRuleofThumb(for
acceptablevalues):CurrentRatio(2:1),QuickRatio(1:1)Whilehighliquiditymeansthatthe
companywillnotdefaultonitsshorttermobligations,notethatbyretainingassetsascash,
valuableinvestmentopportunitiesmightbelost.Obviously,Cashbyitselfdoesnotgenerateany
return...onlyifitisinvestedwillwegetfuturereturn.Inquickratio,wesubtracttheinventories
fromtotalcurrentassetssincetheyaretheleastliquid(amongthecurrentassets).

1.CurrentRatio=TotalCurrentAssets/TotalCurrentLiabilities

2.QuickorAcidtestRatio=TotalCurrentAssetsInventories/TotalCurrentLiabilities

B. Analyzing Debt

Theseratiosshowtheextenttowhichafirmisrelyingondebttofinanceits
investments/operationsandhowwellitcanmanagethedebtobligation(i.e.repaymentofprincipal
andperiodicinterest).Obviously,ifthecompanyisunabletorepayitsdebtormaketimely
paymentsofinterest,itwillbeforcedintobankruptcy.Onthepositiveside,useofdebtis
beneficialasitprovidesvaluabletaxbenefitstothefirm.Notetotaldebtshouldincludeboth
shorttermdebt(bankadvances+currentportionoflongtermdebt)andlongtermdebt(suchas
bonds,leases,andnotespayable).Sometextsmayincludeonlylongtermdebt.Again,whatyou
usewilldependonwhatyourquestionis.

1. Leverage Ratios

1aAssetEquityRatioorLeverageRatio=Assets/ShareholdersEquity

Thisshowsfirmsrelianceonexternaldebtforfinancing(orthedegreeofleverage).
Anynumberabove100%showsthatthecompanyreliesonexternaldebtforfinancingsomeofits
assets.Ifthenumberequals100%,itimpliesthattheassetsarefullyfinancedbythe
shareholders.

SomeanalyststendtousetheDebtratio(givenbytotalDebt/totalassets)orDebt/Equityratio
(givenbytotallongtermdebt/equity).Theseratiosalsoshowcompanysrelianceonexternal
sourcesforfinancingitsassets.Ratio1dshowswhatproportionofthetotallongtermcapital
comesfromdebt.

1bTotalDebtratio=TotalDebt/Totalassets

1c.DebtEquityRatio=TotalDebt/Equity

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1d.LongtermDebttocapital=Debt/Debt+Equity

Foralender,moreimportantthanthedegreeofleverageisthefirmsabilitytoservicethedebt
andthisiscapturedinthefollowingtworatios.

2.InterestCoverageRatio=EBIT/AnnualInterestExpense

Thisshowsthefirmsabilitytocoverfixedinterestcharges(onbothshorttermandlong
termdebt).Themarginofsafetythatisacceptablewillvarywithinandacrossindustries,andwill
alsodependontheearningshistoryofafirm.

3. Cash Flow Coverage = Net Cash flow/Interest Expense

NetCashflowisequaltoNetIncome+/noncashitems(equityincome+minorityinterestin
earningsofsubsidiary+deferredincometaxes+depreciation+depletion+amortization
expenses).Sincedepreciationisthebiggestdollarterm,oftentimesanalystswouldapproximate
NetcashflowasbeingequivalenttoEBIT+depreciation.

Cashflowisacriticalvariableinassessingacompany.Ifacompanyisshowingstrongprofits
buthaspoorcashflow,youshouldinvestigatefurtherbeforepassingafavorableopiniononthe
company.Financialanalystspreferusingratio#3toratio#2,althoughratio#2ismorewidely
reported.

C. Analyzing Sales and Profitability

Profitabilityisarelativeterm.Itishardtosaywhat%ofprofitsrepresentsaprofitablefirmas
theprofitswilldependontheproductlifecycle(forexampleprofitswillbelowerintheinitial
years),competitiveconditionsinthemarket,borrowingcosts,expensemanagementetc.Profits
canalsobeanalyzedusingtheframeworkofCVP(costvolumeprices).Analystswillbeinterested
inthe(historicalandforecasted)trendofsales/expenses/profitsaretheprofitsgenerallyon
therise,arethesalesstableorrising,howdotheprofitscomparetotheindustryaverage,isthe
marketshareofthecompanyrising/stable/falling?Aretheexpensesrising,stableorfalling?The
setofratioshereincludesomeofthetraditionalearningsbasedperformancemeasuressuchas
ROS,ROA,ROI,andROE.Forabetterunderstandingofgrowthrates,itwillbeusefultoknowthe
realgrowthrateasopposedtonominalgrowthrate.Forexample,itisquitepossiblethatthe
salesgrowthratefiguresareimpressiveduetoinflation(ratherthananincreaseinthenumberof
itemssold).Thisisparticularlyusefulifwearedealingwithhighinflationperiodorconductingan
extendingtimeseriesanalysis.

1.SalesGrowthRate={(Currentyearsaleslastyearsales)/lastyearsales}*100

2.Expenseanalysis=Variousexpenses/Sales

3.GrossMargin/Sales=GrossProfit/TotalSales

4.OperatingProfit/Sales=OperatingProfit/NetSales

5.EBIT/Sales=EBIT/NetSales

6.Return on Sales (ROS) or net profit ratio = Net Income/Net Sales

7.ReturnonInvestment(ROI)=NetIncome/TotalAssets

8.Return on Assets (ROA) = Net Income/Total Assets

9.Return on Equity (ROE)=EAT/ShareholdersEquity

10.Payoutratio=CashDividends/NetIncome

11.Retentionratio=RetainedEarnings/NetIncome

12.Sustainablegrowthrate(SGR)=ROE*RetentionRatio

ItisusefultodisaggregatetheROEfigureintothreeelementsasfollowstogetabetterinsight

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ROE={NetIncome/Sales}*{Sales/Assets}*(Assets/Equity)

TheaboveformulationclearlyshowsthatifmanagementwishestoimprovetheirROE,theyneed
toimproveprofitability,efficientlyusetheassets,andoptimizetheuseofdebtintheircapital
structure.ThustwocompanieswithsimilarprofitabilitymayhavedifferentROEsdependingon
theirdegreeoffinancialleverage.Ifwecombinethiswithratio#10,wecanseethatafirms
growthratewilldependonallofthesefactorsplustheirdividedpolicy.Thusitcoversthethree
mainfinancialdecisionsinanycorporation:investmentdecision,operatingdecisionandfinancing
decision.

SGRshowshowmuchthecompanywillgrowinthefutureifsomeofthekeyratiosremainthe
sameasinpreviousyears.Itisusefultodisaggregatethesustainablegrowthrateasfollows.

SGR=f(Profitability,AssetEfficiency,Leverage,Dividendpolicy)

=ReturnonSales*Assetturnoverratio*Leverage*Retentionratio

=(Netincome/sales)*(sales/assets)*(assets/equity)*(RE/netincome)

D.AnalyzingEfficiency

Theseratiosreflecthowwellthefirmsassetsarebeingmanaged.Theinventoryratiosshow
howfasttheinventoryisbeingproducedandsold.Ratio#1showshowquicklytheinventoryis
beingturnedover(orsold)togeneratesales...higherratioimpliesthefirmismoreefficientin
managinginventoriesbyminimizingtheinvestmentininventories.Thusaratioof12wouldmean
thattheinventoryturnsover12timesortheaverageinventoryissoldinamonth.Obviously,this
ratioshouldbehigherforWAWA(sellingperishablegoods)relativetoaVWcardealer.Some
textsprefertouseendinginventoryratherthanaverageinventory.Highratiobyitselfdoes
notmeanhighlevelofefficiencyashighratiocouldalsomeanshortages.Ensurethattherehas
beennochangeininventoryreportingpolicy(LIFO,FIFO)duringtheanalysisperiod.Ratio#2is
referredtoastheshelflifei.e.howmanydaystheinventorywasheldintheshelf.Ratio#3
showshowmuchsalesthefirmisgeneratingforeverydollarofinvestmentinassetsnaturally,
higherthebetter.However,notethatthisratioisbiased(asassetsarelistedathistoricalcosts
whilesalesarebasedoncurrentprices).Ratios#4and#5showthefirmsefficiencyincollecting
fromcreditsales.Whilealowratioisgooditcouldalsomeanthatthefirmisbeingverystrictin
itscreditpolicy,whichmaydriveawaysomecustomers.Ratios#6and7focusonefficiencyin
makingpayments.Combininginventories,accountsreceivableandaccountspayablewegetratio
#8,whichshowsthefinancingperiodtofundworkingcapitalneeds.Longertheperiod,greaterthe
shorttermliquidityrisk.

1.InventoryTurnover=CostofGoodsSold/AverageInventory

2.DaysinInventory=(AverageInventory/CostofSales)*365

3.Assetsturnover=NetSales/TotalAssets

4.ReceivablesTurnover=CreditSales/AccountsReceivables

5.AverageCollectionperiod=(AccountsReceivable/NetSales)*365

6.AccountsPayableturnover=Purchases/AccountsPayable

7.DaysAPoutstanding=(AccountsPayable/CostofSales)*365

8.FinancingPeriod=AverageCollectionperiod+daysininventorydaysAPoutstanding

E.AnalyzingValue

Earningspershare(EPS)iswidelyreportedalthoughitisnowlesscloselyfollowed(after
academictheoryinsightsintothedrawbackofEPSandimportanceofcashflowbasedmeasures).
SECrequiresthatthecompanyreportbothbasicanddilutedEPS.BasicEPSusestheactual
numberofsharescurrentlyoutstandinginthemarketwhiledilutedEPSusescurrentlyoutstanding
shares+allpotentialshares(duetoconvertibilityofdebtorpreferredstockaswellasexerciseof
stockoptions,rightsandwarrants).Dividendyield,whilewidelyreported,maynotcontainmuch
usefulinformationbyitself(especiallywhencomparingacrossfirms)sincedividendpoliciesvary
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acrossfirms.Furthermore,priceappreciation(asopposedtodividends)isthemoreimportant
sourceofyieldforshareholders.

ValueratiossuchasPEratioshowtheembeddedvalueinstocksandareusedbytheinvestors
asascreeningdevicebeforemakingtheirinvestment.Forexample,ahighP/Eratiomaybe
regardedbysomeasbeingasignofoverpricing.Whenthemarketsarebullishorifthe
investorsentimentisoptimisticaboutaparticularstock,theP/Eratiowilltendtobehigh
indicatingthatinvestorsarewillingtopayahighpriceforcompanysearnings.Forexample,in
late1990sinternetstockshadextremelyhighP/Eratios(despitetheirlackofearnings)reflecting
investorsoptimismaboutthefutureprospectsofthesecompanies.Ofcourse,theburstofthe
bubbleshowedthatsuchconfidencewasmisplaced.PSratiocanbecombinedwithPEratioto
analyzeacompany.Ratio#7isusefulforvaluingcompaniessuchasinternetservicesorcable
servicesthatrelyprimarilyonmemberstogenerateincome.Thusanassessmentofmembers
(totalmembers,currentandfutureexpectedgrowthrate,andaveragespendingbymember)can
provideusefulguidelineinvaluingsuchcompanies(especiallywhenplanningacquisitions).

1.EarningsperCommonshare(EPS)=(NetEarningsPreferredDividend)

#ofsharesoutstanding

2.EarningsYield=1/EPS

3.CashflowperShare(CPS)=NetCashFlows/#ofsharesoutstanding

4.DividendYield=AnnualDividend/CurrentMarketprice

5.PriceearningRatio(PE)=MarketPricepershare/EPS

6.PriceSalesRatio(PS)=Marketpricepershare/Salespershare

7.MembershipValue=#ofmembers*valuepermember

8.FreeCFpershare=(NetCashflowfromOperationsCapitalExpenditure)/#ofshares

9.TotalShareholderReturn(TSR)=(EndingPrice+DividendBeginningPrice)/BeginningPrice

10.EVA=EATCostofFinancing(thatis,NetCapitalAssetsEmployed*WACC)

5 Uses and Limitations of Ratio analysis

Uses

1.Toevaluateperformance(comparedtopreviousyears&peers)

2.Tosetbenchmarksorstandardsforperformance

3.Tohighlightareasthatneedtobeimprovedorhighlightareasthatofferthemost
promisingfuturepotential

4.Toenableexternalparties(suchasinvestors/lenders)inassessingthe
creditworthiness/profitabilityofthefirm.

Limitations

1.Thereisconsiderablesubjectivityinvolvedasthereisnotheoryastowhatshouldbethe
rightnumberforthevariousratios.Further,itishardtoreachadefiniteconclusionwhen
someoftheratiosarefavorableandsomeareunfavorable.

2.Ratiosmaynotbestrictlycomparablefordifferentfirmsduetoavarietyoffactorssuchas
differentaccountingpractices,differentfiscalyear.Furthermore,ifafirmisengagedin
diverseproductlinesitisdifficulttoidentifytheindustrycategorytowhichthefirm
belongs.Also,justbecauseaspecificratioisbetterthantheaveragedoesnotnecessarily
meanthatthecompanyisdoingwell(itisquitepossiblerestoftheindustryisdoingvery
poorly)
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3.Ratiosarebasedonfinancialstatementsthatreflectthepastandnotthefuture.Unless
theratiosarestable,onecannotmakereasonableprojectionsaboutthefuturetrend.

4.Financialstatementsprovideanassessmentofthecostsandnotvalue.Forexample,the
marketvalueofitemsmaybeverydifferentfromthecostfiguregiveninthebalance
sheet.

5.Financialstatementsdonotincludeallitems.Forexample,itishardtoputavalueon
humancapital(suchasmanagementexpertise).

6.Accountingstandardsandpracticesvaryacrosscountriesandthushampermeaningful
globalcomparisons.

7.Managementdecisionmakingisadynamicprocessinaconstantlychangingenvironment
whileratioanalysisisastaticanalysisbasedonhistoricaldata.

8.Thelinkageamongvariousratiosisnotreadilyobvious.

LearnbyDoing:Reviewthewebsiteofanypubliclytradedcompanyandreviewtheannual
reportandseeifyoucanunderstandthevariousitemsonthefinancialstatements.Next,
computethevariousratiosbasedonthisoutlineandinterpretthem.
Somegoodsourcesofinformationonfinancialstatements

oOnreadingannualreport:http://www.ibm.com/investor/financialguide/gs/gs3b.phtml

oOnreadingfinancialstatements:http://www.ibm.com/investor/financialguide/

oOurlibraryalsohassomeexcellentlinkstodatabases:http://www.philau.edu/library/

[1]Someoftheitemscommonlyfoundinthenotesare:Anexplanationoftheaccounting
methodsusedfordepreciation,offbalancesheetitems(suchasderivativecontracts),detailson
leases,impactofdivestitureandacquisitiononthefinancialstatements.

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