Financial Analysis for Union Researchers Adapted from: Tom Juravich UMASS Amherst Labor Center

2 How Corporate Finance Typically Used in Labor Movement The CEO is making $1.25 million, so you can afford giving us a raise Your revenue is up 15%, so you can afford to give us a raise Your stock price has gone up by 10%, so you can afford to give us a raise

3 Goals for this Session Demonstrate how these uses of financial analysis might not be the best tactics Provide introduction to basic financial analysis Demystify corporate finance Begin process of self-study

4 Three Basic Financial Skills Understanding basic financial statements Income Statement Balance Sheet Statement of Cash Flow Working with key financial ratios Stock analysis

5 What We Can Accomplish Learn how to assess the overall financial condition How the company generates profit The relative importance of various segments An understanding of financial change over time Comparison with other firms and the industry

6 What We Wont Accomplish Not provide the basics of accountancy Not conduct a full blown financial analysis

7 A Few Reminders Look at the forest not the trees Dont get fixated on any one detail, especially one you dont understand Use your knowledge of the firm to understand the numbers

8 Finding Financial Information Readily available for publicly held firms In 10-K reports Many Secondary sources Yahoo Finance – basic Mergent – more detailed

9 Concepts and a Vocabulary Each financial statement contains specific concepts and vocabulary Will focus on key concepts for each statement Get familiar with concepts before we get to the numbers Key concepts will be bolded in the text

10 Income Statement – What Is It? Also referred to as a profit and loss statement (P&L) Shows the performance of a firm over a period of time (year/quarter) Provides insights into the operation of a firm

11 Income Statement – Basic Formulas Revenue – Expense = Income What is Revenue? Sales Inflow of Resources What are Expenses Expenditures Outflow of Resources

12 Income Statement – Gross Profit Revenue – Cost of Goods Sold (COGS) = Gross Profit What makes up COGS? Materials Labor Costs Anything directly involved in production COGS does not include all costs of doing business

13 Income Statement – Operating Income Gross Profit – (Sales, general, and administrative + depreciation) = Operating Income What is SG&A Sales costs Administrative costs Management costs What is Depreciation Cost due to wear and tear on equipment Operating Income a more fine-tuned measure

14 Income Statement – Net Income Operating Income – Taxes = Net Income Everybody knows what taxes are Net Income is the bottom line of the Income Statement A common financial measure

15 Income Statement– Simple Example I just bought some studio equipment to produce a CD. What would an Income Statement look like? Revenue CD Sales -COGS Studio Supplies Studio Musicians Manufacture of CDs =Gross Profit -SG&A Administrative Staff Person CD Give-aways Depreciation Studio Equipment =Operating Income -Income Tax =Net Income

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17 Income Statement – Limitations Includes one kind of financial information What it doesnt include: Anything about debt Anything about buildings or equipment Anything about stockholders To get this information –Balance Sheet

18 Balance Sheet – What Is It? A snapshot of a firm at one point in time Based on double entry accounting By definition a balance sheet must balance

19 Balance Sheet – Basic Formula Assets = Liabilities + Shareholders Equity Shareholders Equity is treated as if it were a loan

20 Shareholders Equity More Than it Seems Also includes Retained Earnings Funds a firm carries over to next year Net Income - dividends paid to stockholders Can be negative (loss)

21 Balance Sheet – Detailed Assets Current Assets Cash Accounts Receivable Inventory Non current (Fixed) Buildings Equipment Liabilities Current Liabilities Accounts Payable Short-term Notes (less than 1 year) Non-Current Long term debt (more than 1 year)

22 Balance Sheet – Simple Example Lets go back to my music example Assets Current Assets Cash -- Checking account balance Accounts Receivable – What Im owed for CDs Inventory – Unsold CDs Non current (Fixed) Buildings – My studio Equipment – Recording gear, instruments Liabilities Current Liabilities Accounts Payable -- What I owe recording studio Short-term Notes – Credit card balance Non-Current Long term debt – Home equity loan

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24 Cash Flow –What Is It? Tracks the generation and use of cash in three basic areas Investing Financing Operations The least useful annual financial statement Quarterly statements more helpful

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26 Why Financial Ratios Limits to eyeballing financial statements Ratios combine one or more pieces of data In essence normalize data Useful in comparing across companies

27 Key Financial Ratios No need to calculate by hand Many different sources Stick with one source – methods may vary Many different classifications and definitions

28 Key Financial Ratio –Types Although there are many classifications, we will explore ratios in four areas Liquidity Profitability Debt Management Asset Management

29 Liquidity Ratio Current Ratio Current Ratio = Current Assets Current Liabilities Accepted Standard: Varies by industry Low Ratio: May be unable to meet obligations High Ratio: Too conservative growth plan Loan rates often tied to maintaining a certain current ratio

30 Profitability Ratio Return on Assets (ROA) ROA = Income Before Taxes (Operating Income) Assets Accepted Standard: Varies by industry and amount of fixed assets Low Ratio: Poor use of assets High Ratio: Strong performer

31 Debt Management Ratio Debt/Equity Debt/Equity = Debt Equity Accepted Standard: Less than.8 Low Ratio: Too fiscally conservative High Rates: Too risky

32 Asset Management Ratio Interest Coverage Interest Coverage = Operating Income Interest Obligation Accepted Standard: Varies by industry Low Ratio: Too heavily burdened with debt High Ratio: Too conservative in borrowing

33 Financial Ratio Summary Current Ratio – High good to a point > Return on Assets (ROA) – Higher the better > Debt to Equity – Lower good to a point < Interest Coverage – Higher good to a point >

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35 Key Ratios – Competitors VZT S Current Ratio ROA (4.29) Debt/Equity Interest Coverage na

36 Why A Segment Analysis? Digs deeper into company operations Identifies where revenues and income are generated Key in developing points of leverage

37 Verizon Segment Analysis

38 Verizon Segment Analysis

39 AT & T Segment Analysis

40 AT & T Segment Analysis

41 Stock Analysis Often ignored in financial analysis Huge amount of materials available for self study Both data and analysts reports are readily available