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

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.

Income Statement Best Buy Co. Inc. Trend Analysis: Revenue and COGS 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 80% of sales 81% of sales 82% of sales 84%of sales

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 2001’s Gross Profit is almost twice as 1998’s.

Income Statement Best Buy Co. Inc. Trend Analysis: Operating Expenses 16% of sale 15% of sale 15% of sale 14% of sale 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.

Income Statement Best Buy Co. Inc. Trend Analysis: Operating Income & Net Income ROS=2.58% ROS= 2.15% ROS= 1.13% ROS= 2.78% 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

Income Statement Best Buy Co. Inc. Ratio Comparison: Return on Asset & Return on Equity Best 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.

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.

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

Balance 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

Balance Sheet Analysis Best Buy Co. Inc. TREND ANALYSIS ( Liabilities & Owners Equity ) Increasing trend for Retained Earnings !! Both long Term and short term liabilities are increasing. Contributed capital goes down in 2000.

Balance Sheet Analysis Best Buy Co. Inc. TREND ANALYSIS ( Liabilities & Owners Equity ) Both long Term and short term liabilities are increasing. Increasing trend for Retained Earnings !! Contributed capital goes down in 2000.

Balance Sheet Analysis Best Buy Co. Inc. TREND ANALYSIS : Conclusions The Assets of Best Buy Increased by 135% All this growth makes me so happy!!! The retained earnings for Best buy Increased by 326% and that’s a Comforting trend for any investor. 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.

Balance 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 other Assets. 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 the trend in the Current ratio Going down!!!

Balance Sheet Analysis Best Buy Co. Inc. 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. Common Sized Balance Sheet ( Liabilities & SE)

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 !!

Balance Sheet Analysis Best Buy Co. Inc. Ratio analysis 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. ALL THESE RATIOS ARE PERTINENT TO THE BALANCE SHEET AND HIGLY ESSENTIAL FOR DECISION MAKING !!

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

Balance Sheet Analysis Best Buy Co. Inc. Ratio analysis 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 ALL THESE RATIOS ARE PERTINENT TO THE BALANCE SHEET AND HIGLY ESSENTIAL FOR DECISION MAKING !!

Balance Sheet Analysis Best Buy Co. Inc. 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!! Time to draw Conclusions from the common sized balance sheet

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.

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

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

Statement of Cash Flow Best Buy Co. Inc. Trend Analysis: Comparison of Operating & Investing Activity Only 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= 2.48 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 2001. According to the cash from operation to capital expenditures ratio, Best Buy still has ability to pay their capital expenditures form operations.

Statement 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 Activity Because of $165 million long term debt due in this year, Best Buy had a outflow for financing activity A great amount of outflow because Best Buy repurchase their outstanding stocks

Statement of Cash Flow Best Buy Co. Inc. Summary $600,000 $400,000 $200,000 Cash from Financing Activity $- Cash from Investing 1998 1999 2000 2001 Activity $(200,000) Cash from Operating $(400,000) Activity $(600,000) $(800,000)

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

Significant other Items Best Buy Co. Inc. Measures how quickly Inventory is sold on Average. Measure of short term liquidity!! Inventory Turnover Best 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

Significant other Items Best Buy Co. Inc. Measures how Quickly accounts Receivables are collected . Day’s Sale in Receivables Best Buy is well below the industry average of 10.34 days and this is definitely a favorable liquidity measure!!!

Significant other Items Best Buy Co. Inc. Price/Earning Ratio Indicates the market Price of one dollar of Earnings. 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 by Viewing the company’s stock prices Over the 4 Year period.

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

Significant 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 average Significant other Items Best Buy Co. Inc. Comparison of Stock Performance Slump in the stock prices during Jan 2001

Significant other Items Best Buy Co. Inc. Income from operations Vs Stock performance Income from operations has an increasing trend and that in turn would mean a higher EPS. The Market price goes down 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

Final Analysis Best Buy Co. Inc. Current Value: $ 65.4 Intrinsic Stock Value: 42.09 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