Financial Statement Analysis

MIM 517Class 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 Seattle’s Best Coffee & Torrefazione Italia coffee brands

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

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

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 Where did the company get cash from?

Primary uses of cash 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

SBUX2009

SBUX2008

Tim Hortons

2009

Current Ratio 1.29 0.80 1.45Quick (Acid Test) Ratio 0.59 0.30 0.92Cash Flow Liquidity Ratio 1.30 0.72 1.53

Liquidity Ratios

SBUX2009

SBUX2008

Tim Hortons

2009

Net Trade Cycle102.25 days109.04 days

14.97 days

Average Collection Period 62.04 days 74.65 days

34.08 days

Days Inventory Held 67.22 days 64.77 days

21.30 days

Days Payable Outstanding 27.00 days 30.37 days

40.40 days

Operating Efficiency Ratios

SBUX2009

SBUX2008

Tim Hortons

2009

Accounts Receivable Turnover 5.88 4.89 3.57Inventory Turnover 5.43 5.64 17.14Accounts Payable Turnover 13.52 12.02 9.03Fixed Asset Turnover 3.85 3.51 1.67Total Asset Turnover 1.75 1.83 1.12

Leverage Ratios

SBUX2009

SBUX2008

Tim Hortons

2009

Debt Ratio 45.4% 56.1% 41.4%LT Debt to Total Capitalization 15.3% 18.1% 22.3%

Debt to Equity 0.83 1.28 0.71

Leverage Ratios

SBUX2009

SBUX2008

Tim Hortons

2009

Times Interest Earned

14.37

9.44 23.35

Cash Interest Coverage

40.0

29.8 27.99

Fixed Charge Coverage 1.69 1.57 3.80Cash Flow Adequacy 3.08 1.13 1.70

SBUX2009

SBUX2008

Tim Hortons

2009

Gross Profit Margin 55.8% 55.3% 421.2%Operating Profit Margin 5.7% 4.9% 212.1%Net Profit Margin 4.0% 3.0% 13.2%Cash Flow Margin 14.2% 12.1% 18.5%ROA or ROI 7.0% 5.6% 14.8%Return on Equity 12.8% 12.7% 25.4%Cash Return on Assets 24.9% 22.2% 20.8%

Profitability Ratios