financial analysis for union researchers tom juravich umass amherst labor center
TRANSCRIPT
Financial Analysis for Union Researchers
Tom Juravich
UMASS Amherst Labor Center
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Why Do Strategic Researchers Avoid Financial Analysis ?
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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
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Goals for this Session
Demonstrate how all these uses of financial analysis are incorrect
Provide introduction to basic financial analysis
In process demystify corporate finance
Begin process of self-study
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Our Approach
Learn by doing
No extensive hypotheticals
Work through a real example (Verizon) using information available to anyone online
Model a method to use on your own case
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Three Basic Financial Skills
Understanding basic financial statements
Income Statement Balance Sheet Statement of Cash Flow
Working with key financial ratios
Stock analysis
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What We Can Accomplish
Assessment of 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
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What We Won’t Accomplish
Not provide the basics of accountancy
Not conduct a full blown financial analysis
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A Few Reminders
Look at the forest not the trees
Don’t get fixated on any one detail, especially one you don’t understand
Use your knowledge of the firm to understand the numbers
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Finding Financial Information
Readily available for publicly held firms In 10-K reports
Many Secondary sources Yahoo Finance – basic Mergent – more detailed
We will use Yahoo for financial statements
We will use Mergent for financial ratios, segments
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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
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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
A moving picture of a firm
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Income Statement – Basic Formula
Revenue – Expense = Income
What is Revenue? Sales Inflow of Resources
What are Expenses Expenditures Outflow of Resources
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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
That’s why is call Gross Profit
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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
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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
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Income Statement– Simple Example
I just bought some studio equipment to produce a CD. What would an Income Statement look like?
RevenueCD Sales
COGSStudio SuppliesStudio MusiciansManufacture of CDs
Gross Profit
SG&AAdministrative Staff PersonCD Give-aways
Depreciation Studio Equipment
Operating IncomeIncome Tax
Net Income
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Income Statement – Real Example
Actual Income Statements are much more detailed
Categories are broken into sub-categories Additional adjustments are made
Begin by looking for key concepts
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Income Statement – Limitations
Includes one kind of financial information
What it doesn’t include:
Anything about debt Anything about buildings or equipment Anything about stockholders
To get this information –Balance Sheet
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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
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Balance Sheet – Basic Formula
Assets = Liabilities + Shareholder’s Equity
Shareholder’s Equity is treated as if it were a loan
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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) One of the reasons the balance sheet
balances Conceptually distinct from shareholders equity
– yet included in this section of balance sheet
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Balance Sheet – Detailed
Assets Current Assets
CashAccounts ReceivableInventory
Non current (Fixed)BuildingsEquipment
Liabilities Current Liabilities
Accounts PayableShort-term Notes (less than 1 year)
Non-CurrentLong term debt (more than 1 year)
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Balance Sheet – Simple Example
Let’s go back to my music example Assets
Current AssetsCash -- Checking account balanceAccounts Receivable – What I’m owed for CDsInventory – Unsold CDs
Non current (Fixed)Buildings – My barn studioEquipment – Recording gear, instruments
Liabilities Current Liabilities
Accounts Payable -- What I owe recording studioShort-term Notes – Credit card balance
Non-CurrentLong term debt – Home equity loan
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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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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
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Key Financial Ratios
No need to calculate by hand
Many different sources
Stick with one source – methods may vary
Many different classifications and definitions
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Key Financial Ratio –Types
Although there are many classifications, we will explore ratios in four areas
Liquidity
Profitability
Debt Management
Asset Management
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Liquidity RatioCurrent 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
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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
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Debt Management RatioDebt/Equity
Debt/Equity = Debt
Equity
Accepted Standard: Less than .8
Low Ratio: Too fiscally conservative
High Rates: Too risky
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Asset Management RatioInterest 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
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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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Key Ratios – Competitors
VZ T S
Current Ratio 0.78 0.66 1.27
ROA 1.70 4.69 (4.29)
Debt/Equity 1.50 0.71 1.16
Interest Coverage 4.63 6.36 na
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Why A Segment Analysis?
Digs deeper into company operations
Identifies where revenues and income are generated
Key in developing points of leverage
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Verizon Segment Analysis
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Verizon Segment Analysis
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Verizon Segment Analysis
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AT & T Segment Analysis
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AT & T Segment Analysis
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AT & T Segment Analysis
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Stock Analysis
Often ignored in financial analysis
Huge amount of materials available for self study
Both data and analysts’ reports are readily available
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What are Analysts Saying?
On a scale of 1-5, 1 = buy, 5 = sell
VZ = 4
T = 3
S = 3
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What We Learned About Verizon?
1
2
3
4
5
6
7
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Materials for Assignment
Already done the computer work and are providing you with the following:
Hoover’s Financial Statements Mergent Financial Ratios (historical) Mergent Financial Ratios on competitors Segment Analysis (when available)
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Your Assignment
Prepare a financial analysis presentation for your company.
Overview of basic financial statements, including historical analysis
Comparison with competitors Segment analysis Overall summary
Remember it’s about the forest not the trees!!!