FINANCIAL STATEMENT ANALYSIS CHAPTER 18

Financial Statement Analysis Financial Statement Analysis Collection period = number of days receivables are outstanding. = 365 / Receivable turnover When investors (and bankers) make decisions, they want to compare numbers. For example, when you see that Canadian Tire reports collection period of 26 days on its balance sheet as of Dec 31, This number itself does not indicate anything. If we see that collection period was 28 days in 2012 and 29 days in 2011, then we can say that Canadian Tire’s collection period is improving over time.

COMPARATIVE ANALYSIS Three types of comparisons: –Intracompany basis –Intercompany basis –Industry averages

Intracompany basis Intracompany basis This basis compares an item or financial relationship inside a company in the current year with one or more prior years. Intracompany comparisons are useful for finding changes in financial relationships and discovering trends. For example, Canadian Tire investors can compare collection period of 2013 vs. collection period of 2012.

Intercompany Basis Intercompany Basis This basis compares an item of one company with the same item of another company.(competitor) Intercompany comparisons are useful for understanding a company’s competitive position. For example, Canadian Tire’s collection period for the year can be compared with the collection period of Wal-Mart.

Industry Average Industry Average This basis compares an item with industry average. These industry averages are determined and published by financial rating agencies such as Bloomberg, The Financial Post and Statistics Canada. Comparisons with industry average gives information about how well a company is performing within its industry. For example, if industry average of collection period is 23 days, then Candian Tire’s collection period number of 26 days now looks like a bad number.

Financial Statement Analysis Financial Statement Analysis To analyze a company, we usually start with its financial statements. However, we should also review other financial information and non-financial information in the company’s annual report. A company’s annual report includes a management discussion and analysis of the company’s financial position and a summary of key ratios from prior years. Non –financial information includes the company’s mission, goals, its market position, people and products.

Financial Statement Analysis Financial Statement Analysis We should also consider the economic circumstances that a company is operating in. Economic measures such as the rates of interest, inflation, unemployment and changes in supply and demand can have a significant impact on a company’s performance. For example, right now Canada and US are in “rising interest rate” period, which is great for insurance companies like Manulife and Sunlife where as this period has negative impact on banks.

COMPARATIVE ANALYSIS Three tools: –Horizontal analysis (intracompany basis) –Vertical analysis (intracompany and intercompany) –Ratio analysis (used in all 3 types)

HORIZONTAL ANALYSIS 127%121%119%112%100% ANY COMPANY INC. Assumed Net Sales For the Year Ended December 31 (in millions) $ 6,562.8$ 6,295.4$ 6,190.6$ 5,786.6$ 5,181.4 Change since base period

Classwork / Homework Watch Youtube clip: “Financial Performance 2 Horizontal Analysis” P957 E18.1, E18.3A P962 P18.1