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1 Financial Statement Analysis Best Buy Co. Inc. By Sunil George Abraham Pin-Ying Chiang Instructor: Prof. Brian Leventhal.

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Presentation on theme: "1 Financial Statement Analysis Best Buy Co. Inc. By Sunil George Abraham Pin-Ying Chiang Instructor: Prof. Brian Leventhal."— Presentation transcript:

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2 1 Financial Statement Analysis Best Buy Co. Inc. By Sunil George Abraham Pin-Ying Chiang Instructor: Prof. Brian Leventhal

3 2 Income Statement Analysis Best Buy Co. Inc. Our Main Objectives: To study the trends for the Sale Revenue, Cost of Good Sold, Operating Expenses, and Net Income, and derive conclusions. To review the Common Sized Income Statement and make intuitive observations. Observe the various ratios associated with the Income Statement and study their impact on decision making.

4 3 Income Statement Best Buy Co. Inc. Best Buy increase about 20 % of their revenues each year, and almost doubled their sales since 1998 Their COGS is in a slower increasing trend Trend Analysis: Revenue and COGS 84%of sales 82% of sales 81% of sales 80% of sales

5 4 Income Statement Best Buy Co. Inc. Trend Analysis: Gross Profit According to data, their Gross profit was 16% of sales in 1998, and increase 1% to 2% each year! Does Best Buy earning money? Yap~ Due to a lesser increasing in COGS, and favorable increasing in sales, and their 2001s Gross Profit is almost twice as 1998s.

6 5 Income Statement Best Buy Co. Inc. Trend Analysis: Operating Expenses As the increase of sales, operating expenses would be expected to increase. Best Buy control its expenses well because percentage of operation expenses were slightly increased each year. 14% of sale 15% of sale 16% of sale

7 6 Income Statement Best Buy Co. Inc. Trend Analysis: Operating Income & Net Income Both of operating income and net income are in the positive increasing trends An increase trend of the return on sale is favorable and indicates Best Buy increasing its profitability ROS= 1.13% ROS= 2.15% ROS=2.58% ROS= 2.78%

8 7 Income Statement Best Buy Co. Inc. Best Buys Return on Equity was lower than average 98,& 99, which means their assets are rely on debt. But in 00 & 01 they issue more stocks, and get more finance from Stockholders. Best Buys Return on Asset Ratio generally above the industry average, which means they are out performance for years. Ratio Comparison: Return on Asset & Return on Equity

9 8 Balance Sheet Analysis Best Buy Co. Inc. Our Main Objectives: To study the trends for the assets, liabilities and Owners equity and derive conclusions. To review the Common Sized Balance sheets and make intuitive observations. Observe the various ratios associated with the balance sheet and study their impact on decision making.

10 9 Balance Sheet Analysis Best Buy Co. Inc. TREND ANALYSIS ( Assets ) Increasing trend for Current Assets and this is favorable!! Increasing trend for Property plant and Equipment!! Other assets too show an increasing trend.

11 10 Balance Sheet Analysis Best Buy Co. Inc. TREND ANALYSIS ( Assets ) The rate of increase for the property plant and equipment is an indicator of the #of new retail stores opening up at various regions In this chart we can analyze the rate at which each of the assets have increased. This also displays the trend analysis for assets. The other assets have increased at a greater rate when compared to PPE and CA.Mainly goodwill and other assets.

12 11 Balance Sheet Analysis Best Buy Co. Inc. TREND ANALYSIS ( Liabilities & Owners Equity ) Increasing trend for Retained Earnings !! Contributed capital goes down in Both long Term and short term liabilities are increasing.

13 12 Balance Sheet Analysis Best Buy Co. Inc. TREND ANALYSIS ( Liabilities & Owners Equity ) Increasing trend for Retained Earnings !! Contributed capital goes down in Both long Term and short term liabilities are increasing.

14 13 Balance Sheet Analysis Best Buy Co. Inc. TREND ANALYSIS : Conclusions The Assets of Best Buy Increased by 135% The retained earnings for 326% Best buy Increased by 326% and thats a Comforting trend for any investor. All this growth makes me so happy!!! The current Liabilities have grown by 163% and the long term borrowing have also grown but the rise but the major source of the financing is from short term borrowing. There is no denying to the fact that best buy is indeed a growing company. growing company.

15 14 Balance Sheet Analysis Best Buy Co. Inc. Common sized Balance sheet ( assets) The decrease in current assets is compensated by rise in Property plant and equipment and other Assets. That explains the trend in the Current ratio Going down!!! Hmm..!! This Current Ratio trend need some investigation! Thats because Best buys Current Liabilities have increased at a greater rate as compared to their current assets!! Current Assets decreasing over the years!!

16 15 Balance Sheet Analysis Best Buy Co. Inc. Common Sized Balance Sheet ( Liabilities & SE) Best buy seems to be moving towards long-term Borrowings since 2000 which can be shown In the following chart. That also explains their declining Current Ratio.

17 16 Balance Sheet Analysis Best Buy Co. Inc. Ratio analysis Current Ratio Acid Test Ratio Debt to Equity ratio ALL THESE RATIOS ARE PERTINENT TO THE BALANCE SHEET AND HIGLY ESSENTIAL FOR DECISION MAKING !!

18 17 Balance Sheet Analysis Best Buy Co. Inc. Ratio analysis ALL THESE RATIOS ARE PERTINENT TO THE BALANCE SHEET AND HIGLY ESSENTIAL FOR DECISION MAKING !! For a company which relies on borrowing more in the form of current liability this is not a favorable graph. Best buy is at a higher risk as far as its liquidity is concerned when compared to its industry competitors.

19 18 Balance Sheet Analysis Best Buy Co. Inc. Ratio analysis ALL THESE RATIOS ARE PERTINENT TO THE BALANCE SHEET AND HIGLY ESSENTIAL FOR DECISION MAKING !! Maximum amount of Best buys sales are on credit and that explains the poor acid test ratio!

20 19 Balance Sheet Analysis Best Buy Co. Inc. Ratio analysis ALL THESE RATIOS ARE PERTINENT TO THE BALANCE SHEET AND HIGLY ESSENTIAL FOR DECISION MAKING !! Best buys Debt to equity ratio is well above the industry average. It is obvious from the Balance sheet that equity financing is not the major source of financing for Best Buy

21 20 Balance Sheet Analysis Best Buy Co. Inc. Common Sized Balance Sheet Time to draw Conclusions from the common sized balance sheet common sized balance sheet Best Buys assets are most heavily financed with Borrowed amounts especially Current liabilities!! Best Buy is exploring Long term financing in exchange for short term borrowing. The current ratio, debt to equity ratio and the acid test ratio give an insight into the fact that best buy operates under higher risk as compared to its competitors!!

22 21 Statement of Cash Flow Best Buy Co. Inc. Our Main Objectives: To study the trends for the Operating Activity, Investing Activity, and Financing Activity, and derive conclusions. Observe the various ratios associated with the Statement of Cash Flow and study their impact on decision making.

23 22 Statement of Cash Flow Best Buy Co. Inc. Trend Analysis: Operating Activity Due to the positive Net Income, Best Buy has an increasing growth for Operating Activity

24 23 Statement of Cash Flow Best Buy Co. Inc. Trend Analysis: Investing Activity Note: All number are negative Best Buy expended their facilities each year, and in 2001, they inquire other company, and increase outflow dramatically!

25 24 Statement of Cash Flow Best Buy Co. Inc. Trend Analysis: Comparison of Operating & Investing Activity Only 2001s operating cash cant cover the investing outflow, otherwise, the investing outflows are less then operating inflows ! From the SCF, we can find out that Best Buy acquire the firm- Musicland, and it is the reason their investment outflow increase a lot in According to the cash from operation to capital expenditures ratio, Best Buy still has ability to pay their capital expenditures form operations. Cash flow from operations to capital expenditures= 2.48

26 25 Trend Analysis: Financing Activity Statement of Cash Flow Best Buy Co. Inc. A great amount of outflow because Best Buy repurchase their outstanding stocks Because of $165 million long term debt due in this year, Best Buy had a outflow for financing activity Due to the Acquisition, Best Buy issue new stocks as a source for financing activity.

27 26 Summary Statement of Cash Flow Best Buy Co. Inc. $(800,000) $(600,000) $(400,000) $(200,000) $- $200,000 $400,000 $600, Cash from Financing Activity Cash from Investing Activity Cash from Operating Activity

28 27 Significant other Items Best Buy Co. Inc. Some Important Ratios Inventory Turnover Days Sales in Receivables Price per Earning Ratio Price per Earning Ratio Cost Of Goods Sold Average Inventory 360 days Accounts Receivables Turnover Market Price per share of Common Stock Earnings Per share

29 28 Significant other Items Best Buy Co. Inc. Inventory Turnover Measures how quickly Inventory is sold on Average. Measure of short term liquidity!! Best buy has a very promising Inventory turnover ratio when compared to the industry average and which is a very good measure of best buys liquidity

30 29 Significant other Items Best Buy Co. Inc. Days Sale in Receivables Measures how Quickly accounts Receivables are collected. Best Buy is well below the industry average of days and this is definitely a favorable liquidity measure!!!

31 30 Significant other Items Best Buy Co. Inc. Price/Earning Ratio Indicates the market Price of one dollar of Earnings. Best buys P/E ratio increased in 1999 but since then has gone down; this can either mean that the market price for the share has gone down or the earnings per share has increased. This can be easily determined by Viewing the companys stock prices Over the 4 Year period.

32 31 Significant other Items Best Buy Co. Inc. Best Buy Recorded no interest Expense Best Buy Recorded no interest Expense No dividends Paid No dividends Paid

33 32 Significant other Items Best Buy Co. Inc. Comparison of Stock Performance The Chart displays the stock performance of best buy in comparison to Circuit city and Dow Jones as the industry average Slump in the stock prices during Jan 2001

34 33 Significant other Items Best Buy Co. Inc. Income from operations Vs Stock performance We Know that EPS=Net income/# of shares outstanding The market price and EPS are related by the Price/earning ratio This explains the slump in P/E ratio for 2000 and 2001 as the market prices went down and the EPS went up Income from operations has an increasing trend and that in turn would mean a higher EPS. The Market price goes down

35 34 Final Analysis Best Buy Co. Inc. Final Recommendation Based on our analysis of best buys financial statements we determined that best buy is indeed a Best Buy. Their Assets and Retained earnings have increased at a steady rate( refer Balance sheet analysis). Their Net income and has been increasing steadily too. From investors standpoint Best Buy has an above average performance as far as the return on stockholders equity and return on Assets are concerned. Both of these ratios have an increasing trend Current Value: $ 65.4 Intrinsic Stock Value: 42.09


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