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) Does the company have one primary line of business?

Background & Industry Research - BizStats

Background & Industry Research S&P

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 Seattles Best Coffee & Torrefazione Italia coffee brands

Background Starbucks 10-K Industry

Increased competition from large wellknown competitors (Dunkin, McDonalds) Customers trading down to lower priced coffee beverages & related products due to economy

Starbucks Key Accounting Policies

Application of Critical Accounting Policies

Asset Impairment Stock-based Compensation Operating Leases Self insurance reserves Fair value accounting Multiple revenue streams

Other issues

Financial Statement Analysis

Group by category Calculate numbers over time AND for industry/peer Comment on improving or deteriorating by category

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

Balance Sheet Analysis

Questions

Consistent with income statement story? Big changes?

Tools

Common sized B/S (% of total assets) Horizontal analysis Industry comparison Ratios

Cash Flow Analysis

Tell the story.

What did the company use cash for?

Primary sources of cash

Primary uses of cash

Where did the company get cash from?

Did the company receive more cash than it used?

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

Liquidity Ratios
SBUX 2009 SBUX 2008 0.80 0.30
Tim Hortons 2009

Current Ratio Quick (Acid Test) Ratio Cash Flow Liquidity Ratio

1.29 0.59

1.45 0.92

1.30

0.72

1.53

Liquidity Ratios
SBUX 2009 SBUX 2008 Tim Hortons 2009

Net Trade Cycle

Average Collection Period Days Inventory Held Days Payable Outstanding

102.25 days 109.04 days 14.97 days

62.04 days
67.22 days

74.65 days 34.08 days

64.77 days 21.30 days

27.00 days

30.37 days 40.40 days

Operating Efficiency Ratios

SBUX 2009 SBUX 2008 Tim Hortons 2009 3.57 17.14 9.03 1.67 1.12

Accounts Receivable Turnover

Inventory Turnover

5.88 5.43 13.52 3.85 1.75

4.89 5.64 12.02 3.51 1.83

Accounts Payable Turnover

Fixed Asset Turnover Total Asset Turnover

Leverage Ratios
SBUX 2009 Debt Ratio LT Debt to Total Capitalization Debt to Equity 45.4% 15.3% SBUX 2008 56.1% 18.1%
Tim Hortons 2009

41.4% 22.3%

0.83

1.28

0.71

Leverage Ratios
SBUX 2009 SBUX 2008 9.44 29.8 1.57
Tim Hortons 2009

Times Interest Earned Cash Interest Coverage Fixed Charge Coverage Cash Flow Adequacy

14.37 40.0 1.69

23.35 27.99 3.80

3.08

1.13

1.70

Profitability Ratios
SBUX 2009 Gross Profit Margin 55.8% SBUX 2008 55.3% Tim Hortons 2009 421.2%

Operating Profit Margin Net Profit Margin

Cash Flow Margin ROA or ROI Return on Equity Cash Return on Assets

5.7%
4.0% 14.2% 7.0% 12.8% 24.9%

4.9%
3.0% 12.1% 5.6% 12.7% 22.2%

212.1%
13.2% 18.5% 14.8% 25.4% 20.8%