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 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. Why might there be differences? Is your 10K most current financials? Different categorization Ratio definitions

Liquidity Ratios SBUX 2009 SBUX 2008 Tim Hortons 2009 Current Ratio Quick (Acid Test) Ratio Cash Flow Liquidity Ratio

Liquidity Ratios SBUX 2009 SBUX 2008 Tim Hortons 2009 Net Trade Cycle days days14.97 days Average Collection Period days74.65 days34.08 days Days Inventory Held days64.77 days21.30 days Days Payable Outstanding days30.37 days40.40 days

Operating Efficiency Ratios SBUX 2009 SBUX 2008 Tim Hortons 2009 Accounts Receivable Turnover Inventory Turnover Accounts Payable Turnover Fixed Asset Turnover Total Asset Turnover

Leverage Ratios SBUX 2009 SBUX 2008 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

Leverage Ratios SBUX 2009 SBUX 2008 Tim Hortons 2009 Times Interest Earned Cash Interest Coverage Fixed Charge Coverage Cash Flow Adequacy

SBUX 2009 SBUX 2008 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