Presentation on theme: "Financial Statement Analysis Best Buy Co. Inc."— Presentation transcript:
1Financial Statement Analysis Best Buy Co. Inc. Team # 2BySunil George AbrahamPin-Ying ChiangInstructor:Prof. Brian Leventhal
2Income Statement Analysis Best Buy Co. Inc. Our Main Objectives:To study the trends for the Sale Revenue, Cost of GoodSold, Operating Expenses, and Net Income, and deriveconclusions.To review the Common Sized Income Statement andmake intuitive observations.Observe the various ratios associated with the IncomeStatement and study their impact on decision making.
3Income Statement Best Buy Co. Inc. Trend Analysis: Revenue and COGSBest Buy increase about 20 % of their revenues each year, and almost doubled their sales since 1998Their COGS is ina slower increasing trend80% of sales81% of sales82% of sales84%of sales
4Income Statement Best Buy Co. Inc. Trend Analysis: Gross ProfitAccording 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 2001’s Gross Profit is almost twice as 1998’s.
5Income Statement Best Buy Co. Inc. Trend Analysis: Operating Expenses16% of sale15% of sale15% of sale14% of saleAs 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.
6Income Statement Best Buy Co. Inc. Trend Analysis: Operating Income & Net IncomeROS=2.58%ROS= 2.15%ROS= 1.13%ROS= 2.78%Both of operating income and net income are in the positive increasing trendsAn increase trend of the return on sale is favorable and indicates Best Buy increasing its profitability
7Income Statement Best Buy Co. Inc. Ratio Comparison: Return on Asset & Return on EquityBest Buy’s 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 Buy’s Return on Asset Ratio generally above the industry average, which means they are out performance for years.
8Balance Sheet Analysis Best Buy Co. Inc. Our Main Objectives:To study the trends for the assets , liabilities andOwners equity and derive conclusions.To review the Common Sized Balance sheets andmake intuitive observations.Observe the various ratios associated with the balancesheet and study their impact on decision making.
9Balance Sheet Analysis Best Buy Co. Inc. TREND ANALYSIS ( Assets )Other assets too show an increasing trend.Increasing trend forProperty plant and Equipment!!Increasing trend forCurrent Assets and this is favorable!!
10Balance Sheet Analysis Best Buy Co. Inc. TREND ANALYSIS ( Assets )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.The rate of increase for the property plant and equipment is an indicator of the #of new retail stores opening up at various regions
11Balance Sheet Analysis Best Buy Co. Inc. TREND ANALYSIS ( Liabilities & Owners Equity )Increasing trend forRetained Earnings !!Both long Term and short term liabilities are increasing.Contributed capital goes down in 2000.
12Balance Sheet Analysis Best Buy Co. Inc. TREND ANALYSIS ( Liabilities & Owners Equity )Both long Term and short term liabilities are increasing.Increasing trend forRetained Earnings !!Contributed capital goes down in 2000.
13Balance Sheet Analysis Best Buy Co. Inc. TREND ANALYSIS : ConclusionsThe Assets of Best Buy Increasedby135%All this growth makes me so happy!!!The retained earnings forBest buy Increased by 326%and that’s a Comforting trendfor any investor.The current Liabilities have grown by 163% and the longterm borrowing have also grown but the rise but the majorsource of the financing is from short term borrowing.There is no denying to the fact that best buy is indeed agrowing company.
14Balance Sheet Analysis Best Buy Co. Inc. Hmm..!! This Current Ratio trend need some investigation!Common sized Balance sheet ( assets)The decrease in current assets is compensated by rise in Property plant and equipment and otherAssets.That’s because Best buy’s Current Liabilities have increased at a greater rate as compared to their current assets!!Current Assets decreasing over the years!!That explains thetrend in theCurrent ratioGoing down!!!
15Balance Sheet Analysis Best Buy Co. Inc. Best buy seems to be moving towards long-term Borrowings since 2000 which can be shownIn the following chart. That also explains their declining CurrentRatio.Common Sized Balance Sheet ( Liabilities & SE)
16Balance Sheet Analysis Best Buy Co. Inc. Ratio analysisCurrent RatioAcid Test RatioDebt to Equity ratioALL THESE RATIOS ARE PERTINENT TO THE BALANCE SHEETAND HIGLY ESSENTIAL FOR DECISION MAKING !!
17Balance Sheet Analysis Best Buy Co. Inc. Ratio analysisFor 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.ALL THESE RATIOS ARE PERTINENT TO THE BALANCE SHEETAND HIGLY ESSENTIAL FOR DECISION MAKING !!
18Balance Sheet Analysis Best Buy Co. Inc. Ratio analysisMaximum amount of Best buys sales are on credit and that explains the poor acid test ratio!ALL THESE RATIOS ARE PERTINENT TO THE BALANCE SHEETAND HIGLY ESSENTIAL FOR DECISION MAKING !!
19Balance Sheet Analysis Best Buy Co. Inc. Ratio analysisBest 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 BuyALL THESE RATIOS ARE PERTINENT TO THE BALANCE SHEETAND HIGLY ESSENTIAL FOR DECISION MAKING !!
20Balance Sheet Analysis Best Buy Co. Inc. Common Sized Balance SheetBest 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!!Time to draw Conclusions from thecommon sized balance sheet
21Statement of Cash Flow Best Buy Co. Inc. Our Main Objectives:To study the trends for the Operating Activity, InvestingActivity, and Financing Activity, and derive conclusions.Observe the various ratios associated with the Statementof Cash Flow and study their impact on decision making.
22Statement of Cash Flow Best Buy Co. Inc. Trend Analysis: Operating ActivityDue to the positive Net Income, Best Buy has an increasing growth for Operating Activity
23Statement of Cash Flow Best Buy Co. Inc. Trend Analysis: Investing ActivityBest Buy expended their facilities each year, and in 2001, they inquire other company, and increase outflow dramatically!Note: All number are negative
24Statement of Cash Flow Best Buy Co. Inc. Trend Analysis: Comparison of Operating & Investing ActivityOnly 2001’s operating cash can’t cover the investing outflow, otherwise, the investing outflows are less then operating inflows!Cash flow from operations to capital expenditures= 2.48From 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 2001.According to the cash from operation to capital expenditures ratio, Best Buy still has ability to pay their capital expenditures form operations.
25Statement of Cash Flow Best Buy Co. Inc. Due to the Acquisition, Best Buy issue new stocks as a source for financing activity.Trend Analysis: Financing ActivityBecause of $165 million long term debt due in this year, Best Buy had a outflow for financing activityA great amount of outflow because Best Buy repurchase their outstanding stocks
26Statement of Cash Flow Best Buy Co. Inc. Summary$600,000$400,000$200,000Cash from FinancingActivity$-Cash from Investing1998199920002001Activity$(200,000)Cash from Operating$(400,000)Activity$(600,000)$(800,000)
27Significant other Items Best Buy Co. Inc. Some Important RatiosCost Of Goods SoldAverage InventoryInventory Turnover360 daysAccounts Receivables TurnoverDays Sales in ReceivablesMarket Price per share of Common StockEarnings Per sharePrice per Earning Ratio
28Significant other Items Best Buy Co. Inc. Measures how quickly Inventory is sold on Average. Measure of short term liquidity!!Inventory TurnoverBest buy has a very promising Inventory turnover ratio when compared to the industry average and which is a very good measure of best buy’s liquidity
29Significant other Items Best Buy Co. Inc. Measures how Quickly accounts Receivables are collected .Day’s Sale in ReceivablesBest Buy is well below the industry average of days and this is definitely a favorable liquidity measure!!!
30Significant other Items Best Buy Co. Inc. Price/Earning RatioIndicates the marketPrice of one dollar ofEarnings.Best buy’s 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 byViewing the company’s stock pricesOver the 4 Year period.
31Significant other Items Best Buy Co. Inc. Best Buy Recorded no interest ExpenseNo dividends Paid
32Significant other Items Best Buy Co. Inc. The Chart displays the stock performance of best buy in comparison to Circuit city and Dow Jones as the industry averageSignificant other Items Best Buy Co. Inc.Comparison of Stock PerformanceSlump in the stock prices during Jan 2001
33Significant other Items Best Buy Co. Inc. Income from operations Vs Stock performanceIncome from operations has an increasing trend and that in turn would mean a higher EPS.The Market price goes downWe Know that EPS=Net income/# of shares outstandingThe market price and EPS are related by the Price/earning ratioThis explains the slump in P/E ratio for 2000 and 2001 as the market prices went down and theEPS went up
34Final Analysis Best Buy Co. Inc. Current Value: $ 65.4Intrinsic Stock Value: 42.09Final RecommendationBased on our analysis of best buys financial statements we determined thatbest buy is indeed a Best Buy.Their Assets and Retained earnings have increased at a steady rate( referBalance sheet analysis).Their Net income and has been increasing steadily too .From investors standpoint Best Buy has an above average performance as faras the return on stockholders equity and return on Assets are concerned. Bothof these ratios have an increasing trend