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7/27/2019 Into Lecture 1 and 2 Sf Accounting and Fin Anal
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Introduction to Accounting & FinancialAnalysis
BESS SF class 2013-14
Prof. Gerard McHugh
School of Business,
Trinity College
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The hurdle rate
should reflectthe riskiness of
investment and themix of debt
and equity used to fund it
The Investment Decision
Invest in assets that earn
a return greater than theminimum acceptable
hurdle rate
Maximise the value of the business
The big picture...... Financial ManagementThe return
should reflectthe magnitude
and timingof the cash flows
as well as all the side effects
The optimal mix
of debt and equity
maximises the value of the firm
The right kind
of debt matches the tenor of the firms
assets
How you choose
to returncash to the
owners will depend on whether they
prefer cash or buybacks
How much cash
you can returndepends
upon current andpotential
investment Opportunities
The Financing Decision
Find the right kind of
debt for your firm and theright mix of debt and equity
to fund your operations
The Dividend Decision
If you cannot findinvestments that reach
your minimum acceptablehurdle rate, return the
cash to the owners
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Adding accounting into the financial managementstory
Cash from Loans
The Capital Market:
Trading Value
Balance
Sheet
Income
Statement
Cash Flow
Statement
Statement of
Shareholders'
Equity
Cash from Share Issues
Dividends and Cash from
Share Repurchases
Interest and Loan RepaymentsCash from Sale of Debt
The Investors:
The Claimants on Value
The Firm:
The Value Generator
Secondary
Debtholders
Secondary
ShareholdersCash from Sale of Shares
Debtholders
Shareholders
Operating
Activities
Investment
Activities
Financing
Activities
The Financial Statements:
Information on Value
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Accounting is the business language through which
we can answer these questions
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The three key financial statements
! The balance sheet, which summarizes what a firm owns and owesat a point in time. ]
! The income statement, which reports on how much a firm earnedin the period of analysis
! The statement of cash flows, which reports on cash inflows andoutflows to the firm during the period of analysis. The statementof cash flows is prepared from the income statement (along withsome additional underlying data)
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The Balance-Sheet Model of the Firm
Long lived real assets
Investments insecurities and otherfirms
Assets that are notphysical like patentsand intellectual rights
Current assets
Financialassets
Intangibleassets
Short lived assets
Fixed assets
Equity investment inthe firm
Long term liabilities
Debt obligations
Short term liabilities
Equity
Otherliabilities
Debt
Currentliabilities
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The Balance-Sheet Model of the Firm
Current Assets
Non-currentAssets
1 Tangible
2 Intangible
Shareholders
Equity
CurrentLiabilities
Long-Term
Debt
What short-term and
long-terminvestmentsshould thefirm engagein?
The Investment Decision
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The Balance-Sheet Model of the Firm
How can the firmraise the moneyfor the requiredinvestments?
The Financing Decision
Current Assets
Non-current
Assets
1 Tangible2 Intangible
Shareholders
Equity
CurrentLiabilities
Long-Term
Debt
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Footlocker Inc. operates in the athletic footwearand apparel industry
! Footlocker is a leading retailer of athletic footwear andapparel [year end January]! Over 3,400 stores in 21 countries! Annual sales (turnover) in 2012/13..$6.1 billionproducing a Net Income of $397m [2011/12; $5.6billionproducing net income of $278m]
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Footlocker Balance Sheet 2012 [A = L+E]
Current Liabilities $636m
+
Non-current Liabilities $354m
+
Shareholders Equity $2,377m
$3,367m
Current Assets $2,363m
+Property and Equipment $490m
+
Other Assets $514m
$3,367m
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Footlockerrepresented
How the firmraised themoney to fund
the business
Current Assets $2,363m
Non-current Assets
1 Property.. $490m
2 Other.. $514m
Shareholders Equity
$2,377m
Current Liabilities..$636m
Long-Term Liabilities
$354m
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What information is immediately visible from the2012/13 Balance Sheet?
! Merchandise inventories [inventory for resale] stands at over$1.1billion. It represents one third of the asset investment inthe business.! No significant trade receivables [cash business]! Substantial cash holdings which have increased byapproximately $30m over the year.! Relatively modest investment in property and equipment [presumably most or all outlets are leased/rented].! The company is not carrying any significant debt! For the most part the business is funded by shareholdersfunds.! Year on year it looks very positive.
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Abercrombie & Fitch Inc. operates in the apparelretail industry
! Abercrombie & Fitch is a leading retailer of youth apparel[brands are Abercrombie & Fitch, Hollister, AbercrombieKids, Gilly Hicks. [January year end]! 1,051 stores worldwide
! Annual sales (turnover) in 2012/13..$4.5 billionproducing a Net Income of $237m [2011/12; $4.1billionproducing net income of $143m]
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.
CONSOLIDATED BALANCE SHEETS
(Thousands, except par value amounts)
February 2,2013
January 28,2012
ASSETS (Restated see Note 4)
CURRENT ASSETS:
Cash and Equivalents $ 643,505 $ 583,495
Marketable Securities 84,650
Receivables 99,622 89,350Inventories 426,962 679,935
Deferred Income Taxes 32,558 35,882
Other Current Assets 105,177 84,342
TOTAL CURRENT ASSETS 1,307,824 1,557,654
PROPERTY AND EQUIPMENT, NET 1,308,232 1,197,271
NON-CURRENT MARKETABLE SECURITIES 14,858
OTHER ASSETS 371,345 347,249
TOTAL ASSETS $ 2,987,401 $ 3,117,032
LIABILITIES AND STOCKHOLDERS EQUITY
CURRENT LIABILITIES:
Accounts Payable $ 140,396 $ 211,368
Accrued Expenses 395,734 369,073
Deferred Lease Credits 39,054 41,047
Income Taxes Payable 115,617 77,918
TOTAL CURRENT LIABILITIES 690,801 699,406
LONG-TERM LIABILITIES:
Deferred Lease Credits 168,397 183,022
Leasehold Financing Obligations 63,942 57,851
Other Liabilities 245,993 245,418
TOTAL LONG-TERM LIABILITIES 478,332 486,291
STOCKHOLDERS EQUITY:
Class A Common Stock $0.01 par value: 150,000 shares authorized and103,300 shares issued at each of February 2, 2013 and January 28, 2012 1,033 1,033
Paid-In Capital 403,271 369,171
Retained Earnings 2,567,261 2,389,614
Accumulated Other Comprehensive (Loss) Income, net of tax (13,288) 6,291
Treasury Stock, at Average Cost 24,855 and 17,662 shares at February 2, 2013and January 28, 2012, respectively (1,140,009) (834,774)
TOTAL STOCKHOLDERS EQUITY 1,818,268 1,931,335
TOTAL LIABILITIES AND STOCKHOLDERS EQUITY $ 2,987,401 $ 3,117,032
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Abercrombie & Fitch Balance Sheet 2012/13 [A = L+E]
Current Liabilities $691m
+
Non-current Liabilities $478m
+
Shareholders Equity $1,818m
$2,987m
Current Assets $1308m
+Property and Equip. $1308m
+
Other Assets $371m
$2,987m
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Abercrombierepresented
How the firmraised themoney to fund
the business
Current Assets $1,308m
Non-current Assets
1 Property.. $1,308m
2 Other.. $371m
Shareholders Equity
$1818m
Current Liabilities..$691m
Long-Term Liabilities
$478m
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What information is immediately visible from theA&F 2013 Balance Sheet?
! Merchandise inventories [inventory for resale] stands at$427m. It represents one third of the asset investment in thebusiness. Note the significant reduction on the holdings oneyear ago.! No significant trade receivables [cash business]
! Substantial cash holdings which have increased byapproximately $60m over the year.! Significant investment in property and equipment ! The company is not carrying significant debt! For the most part the business is funded by shareholdersfunds, and supplier credit! Year on year it looks solid.. only modest changes..
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Adobe Inc. is a large diversified software business
! Develops and sells software products for digital mediaprofessionals, advertisers, publishers [November year end]! Founded in 1983..Nasdaq listed! Global reach and exceptionally profitable! Sales for 2012 amounted to $4.4billion, producing NetIncome of $832.7m [2011; sales of $4.2b producing netincome of $832.8m]
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Adobe Inc. Balance Sheet 2012 [A = L+E]
Current Liabilities $1,271m
+
Non-current Liabilities $2,038m
+
Shareholders Equity $6,665m
$9,974m
Current Assets $4,331m
+Property and Equipment $664m
+
Other Assets $4,979m
$9,974m
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Adoberepresented
How the firmraised themoney to fund
the business
Current Assets $4,331m
Non-current Assets
1 Property.. $664m
2 Other.. $4,979m
Shareholders Equity
$6,665m
Current Liabilities..$1,271m
Long-Term Liabilities
$2,038m
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What information is immediately visible from theAdobe Inc. Balance Sheet
! Asset structure is unusual the largest asset is goodwill.! Short-term investments are very substantial.! The total asset investment stands at $9.9m, of which$6.6m has been supplied by the equity.
! The balance of funding has come from Current and Longterm liabilities.. [i.e., bank debt and supplier credit,taxes]! Because the business has bank borrowings, it is carryingsome financial risk.but look at the current assets Cash
and Short Term Investments!! Overall, the balance sheet structure is very different toFootlocker because the businesses are very different.
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The three balance sheets compared [A = L+E]
7/27/2019 Into Lecture 1 and 2 Sf Accounting and Fin Anal
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Leverage ratios for selected European firms.
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To summarise
! The Balance Sheet is a photograph of a business at aspecific point in time.! The balance sheet presents the assets and liabilities splitin terms of their maturity [long-term and short-term/
current].! From the Balance Sheet, the reader can see where thefunds that the firm has sourced have been invested and also get a sense of the assets at risk.! From the Balance Sheet, the reader can see the sourcesof the firms funds [equity, debt, suppliers] and thus theprofile of financing.
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Information about Financial Performance
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A simplified view of accounting.
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The Income Statement.
! The Income Statement (Profit and Loss Account) is an historicalrecord of performance (Revenues minus Costs) for a period of time.An Income Statement may also be prepared on a projected basis..
! Common periodsn a week,n a month,n a quarter,n a half year,n a full year.
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The Income Statement Model of the Firm
Gross profit
Income before tax
Operatingexpenses
COGS
Gross revenue from the sales of products/services
Operating income
Non-operatingIncome (expense)
Sales revenue
Tax
Net Income
Costs directly associated with the production/sales of products/services
All expenses other than the those in COGS
Non-operating income and expenses such asinterest income and expense
Estimated tax that will arise on the reported profits
High Gross Profit Pricing premium Differentiated productLow Gross Profit No price premium Commodity
Also known as EBIT
EPSEarnings per share: reveals the net profit earned by each share.
7/27/2019 Into Lecture 1 and 2 Sf Accounting and Fin Anal
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Footlocker Inc. operates in the athletic footwearand apparel industry
! Footlocker is a leading retailer of athletic footwear andapparel [year end January]! Over 3,400 stores in 21 countries! Annual sales (turnover) in 2012/13..$6.1 billionproducing a Net Income of $397m [2011/12; $5.6billionproducing net income of $278m]
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7/27/2019 Into Lecture 1 and 2 Sf Accounting and Fin Anal
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Prepare common size income statements in Excel todevelop your analysis.
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What information is immediately visible from the2012/13 Income Statement
! Sales growth very strong: growth of 11.4% in 2011; 9.9% in 2012 .You might compare this with the consumer price index or with anindex for the specific industry if available.! The additional sales revenue has brought additional profit. Pre-taxprofit margin over last three years 9.8%, 7.7%, 5%. [note: in 2009, itwas 1.5%]. Compare with competitors performance!! Notice that inthe retail industry value added is rather low so do not expect largeprofit margins [recall risk-return relationship]! In summary, this appears to be a very solid business, generatingmoderate profit margins, and managing its cost structure quite wellbut there is no hidden goldmine in this highly competitive industry.
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Abercrombie & Fitch Inc. operates in the apparelretail industry
! Abercrombie & Fitch is a leading retailer of youth apparel[brands are Abercrombie & Fitch, Hollister, AbercrombieKids, Gilly Hicks. [January year end]! 1,051 stores worldwide
! Annual sales (turnover) in 2012/13..$4.5 billionproducing a Net Income of $237m [2011/12; $4.1billionproducing net income of $143m]
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ABERCROMBIE & FITCH CO.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(Thousands, except share and per share amounts)
2012 2011 2010
(Restated see Note 4)
NET SALES $ 4,510,805 $ 4,158,058 $ 3,468,777
Cost of Goods Sold 1,694,096 1,607,834 1,251,348
GROSS PROFIT 2,816,709 2,550,224 2,217,429
Stores and Distribution Expense 1,987,926 1,888,248 1,589,501
Marketing, General and Administrative Expense 473,883 437,120 400,804
Other Operating Expense (Income), Net (19,333) 3,472 (10,056)
OPERATING INCOME 374,233 221,384 237,180
Interest Expense, Net 7,288 3,577 3,362
INCOME FROM CONTINUING OPERATIONS BEFORE TAXES 366,945 217,807 233,818
Tax Expense from Continuing Operations 129,934 74,669 78,109
NET INCOME FROM CONTINUING OPERATIONS $ 237,011 $ 143,138 $ 155,709
INCOME FROM DISCONTINUED OPERATIONS, Net of Tax $ $ 796 $
NET INCOME $ 237,011 $ 143,934 $ 155,709
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Abercrombie & Fitchcommon-size income statements..
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What information is immediately visible fromAbercrombies 2012/13 Income Statement
! Overall, good revenue growth 8.8% in 12/13 but it represents ahuge fall on the previous growth rateis this competition? pricediscounting? the economy?! The gross profit is very strong consistently above 60% and verydifferent to the Footlocker gross marginswhy? [it could be the cost
category into which stores expenses are classified]! Selling and marketing is a significant cost not surprising given thebusiness model $0.44c of every sales dollar is spent on post-manufacturing activity.! Margins are improving year on year.. But very consistent with theretail sector margins
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Adobe Inc. is a large diversified software business
! Develops and sells software products for digital mediaprofessionals, advertisers, publishers! Founded in 1983..Nasdaq listed! Global reach and exceptionally profitable
! Sales for 2012 amounted to $4.4billion, producing NetIncome of $832.7m [2011; sales of $4.2b producing netincome of $832.8m]
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Adobecommon-size income statements..
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What information is immediately visible fromAdobes 2012 Income Statement
! Overall, modest revenue growth 4.4% 2011-2012. Clear indication ofstrong market position. But, subscription income is up 46%!!! The gross profit is exceptionally high 89%. Presumably because thereal costs are in development see R&D.! Selling and marketing is a significant cost not surprising given thebusiness model $0.34c of every sales dollar is spent on sales andmarketing.! Note the write-off of purchased intangiblestells us that Adobecontinues to make acquisitions.! The effective tax rates vary a great deal which is unusual [2012;25.5%; 2011; 19.5%]
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The three income statements compared[Revenue - Cost = profit]
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Profit margins for selected industry sectors...
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Profit margins for selected industry sectors...