Financial Analysis for Union Researchers

Adapted from:

Tom Juravich

UMASS Amherst Labor Center

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How Corporate Finance Typically Used in Labor Movement

The CEO is making $1.25 million, so you can afford giving us a raise

Your revenue is up 15%, so you can afford to give us a raise

Your stock price has gone up by 10%, so you can afford to give us a raise

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Goals for this Session

Demonstrate how these uses of financial analysis might not be the best tactics

Provide introduction to basic financial analysis

Demystify corporate finance

Begin process of self-study

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Three Basic Financial Skills

Understanding basic financial statements

Income Statement Balance Sheet Statement of Cash Flow

Working with key financial ratios

Stock analysis

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What We Can Accomplish

Learn how to assess the overall financial condition

How the company generates profit

The relative importance of various segments

An understanding of financial change over time

Comparison with other firms and the industry

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What We Won’t Accomplish

Not provide the basics of accountancy

Not conduct a full blown financial analysis

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A Few Reminders

Look at the forest not the trees

Don’t get fixated on any one detail, especially one you don’t understand

Use your knowledge of the firm to understand the numbers

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Finding Financial Information

Readily available for publicly held firms In 10-K reports

Many Secondary sources Yahoo Finance – basic Mergent – more detailed

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Concepts and a Vocabulary

Each financial statement contains specific concepts and vocabulary

Will focus on key concepts for each statement

Get familiar with concepts before we get to the numbers

Key concepts will be bolded in the text

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Income Statement – What Is It?

Also referred to as a profit and loss statement (P&L)

Shows the performance of a firm over a period of time (year/quarter)

Provides insights into the operation of a firm

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Income Statement – Basic Formulas

Revenue – Expense = Income

What is Revenue? Sales Inflow of Resources

What are Expenses Expenditures Outflow of Resources

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Income Statement – Gross Profit

Revenue – Cost of Goods Sold (COGS) = Gross Profit

What makes up COGS? Materials Labor Costs Anything directly involved in production

COGS does not include all costs of doing business

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Income Statement – Operating Income

Gross Profit – (Sales, general, and administrative + depreciation) = Operating Income

What is SG&A Sales costs Administrative costs Management costs

What is Depreciation Cost due to wear and tear on equipment

Operating Income a more fine-tuned measure

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Income Statement – Net Income

Operating Income – Taxes = Net Income

Everybody knows what taxes are

Net Income is the bottom line of the Income Statement

A common financial measure

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Income Statement– Simple Example

I just bought some studio equipment to produce a CD. What would an Income Statement look like?

RevenueCD Sales

- COGSStudio SuppliesStudio MusiciansManufacture of CDs

=Gross Profit

- SG&AAdministrative Staff PersonCD Give-aways

Depreciation Studio Equipment

= Operating Income- Income Tax=Net Income

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Income Statement – Limitations

Includes one kind of financial information

What it doesn’t include:

Anything about debt Anything about buildings or equipment Anything about stockholders

To get this information –Balance Sheet

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Balance Sheet – What Is It?

A snapshot of a firm at one point in time

Based on double entry accounting

By definition a balance sheet must balance

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Balance Sheet – Basic Formula

Assets = Liabilities + Shareholder’s Equity

Shareholder’s Equity is treated as if it were a loan

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Shareholders Equity More Than it Seems

Also includes Retained Earnings

Funds a firm carries over to next year Net Income - dividends paid to stockholders Can be negative (loss)

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Balance Sheet – Detailed

Assets Current Assets

CashAccounts ReceivableInventory

Non current (Fixed)BuildingsEquipment

Liabilities Current Liabilities

Accounts PayableShort-term Notes (less than 1 year)

Non-CurrentLong term debt (more than 1 year)

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Balance Sheet – Simple Example

Let’s go back to my music example Assets

Current AssetsCash -- Checking account balanceAccounts Receivable – What I’m owed for CDsInventory – Unsold CDs

Non current (Fixed)Buildings – My studioEquipment – Recording gear, instruments

Liabilities Current Liabilities

Accounts Payable -- What I owe recording studioShort-term Notes – Credit card balance

Non-CurrentLong term debt – Home equity loan

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Cash Flow –What Is It?

Tracks the generation and use of cash in three basic areas

Investing Financing Operations

The least useful annual financial statement

Quarterly statements more helpful

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Why Financial Ratios

Limits to eyeballing financial statements

Ratios combine one or more pieces of data

In essence “normalize” data

Useful in comparing across companies

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Key Financial Ratios

No need to calculate by hand

Many different sources

Stick with one source – methods may vary

Many different classifications and definitions

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Key Financial Ratio –Types

Although there are many classifications, we will explore ratios in four areas

Liquidity

Profitability

Debt Management

Asset Management

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Liquidity RatioCurrent Ratio

Current Ratio = Current Assets Current Liabilities

Accepted Standard: Varies by industry

Low Ratio: May be unable to meet obligations

High Ratio: Too conservative growth plan

Loan rates often tied to maintaining a certain current ratio

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Profitability Ratio Return on Assets (ROA)

ROA = Income Before Taxes (Operating Income) Assets

Accepted Standard: Varies by industry and amount of fixed assets

Low Ratio: Poor use of assets

High Ratio: Strong performer

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Debt Management RatioDebt/Equity

Debt/Equity = Debt

Equity

Accepted Standard: Less than .8

Low Ratio: Too fiscally conservative

High Rates: Too risky

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Asset Management RatioInterest Coverage

Interest Coverage = Operating Income

Interest Obligation

Accepted Standard: Varies by industry

Low Ratio: Too heavily burdened with debt

High Ratio: Too conservative in borrowing

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Financial Ratio Summary

Current Ratio – High good to a point >

Return on Assets (ROA) – Higher the better >

Debt to Equity – Lower good to a point <

Interest Coverage – Higher good to a point >

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Key Ratios – Competitors

VZ T S

Current Ratio 0.78 0.66 1.27

ROA 1.70 4.69 (4.29)

Debt/Equity 1.50 0.71 1.16

Interest Coverage 4.63 6.36 na

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Why A Segment Analysis?

Digs deeper into company operations

Identifies where revenues and income are generated

Key in developing points of leverage

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Verizon Segment Analysis

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Verizon Segment Analysis

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AT & T Segment Analysis

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AT & T Segment Analysis

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Stock Analysis

Often ignored in financial analysis

Huge amount of materials available for self study

Both data and analysts’ reports are readily available