into lecture 1 and 2 sf accounting and fin anal

7/27/2019 Into Lecture 1 and 2 Sf Accounting and Fin Anal

1/45

Introduction to Accounting & FinancialAnalysis

BESS SF class 2013-14

Prof. Gerard McHugh

School of Business,

Trinity College


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The hurdle rate

should reflectthe riskiness of

investment and themix of debt

and equity used to fund it

The Investment Decision

Invest in assets that earn

a return greater than theminimum acceptable

hurdle rate

Maximise the value of the business

The big picture...... Financial ManagementThe return

should reflectthe magnitude

and timingof the cash flows

as well as all the side effects

The optimal mix

of debt and equity

maximises the value of the firm

The right kind

of debt matches the tenor of the firms

assets

How you choose

to returncash to the

owners will depend on whether they

prefer cash or buybacks

How much cash

you can returndepends

upon current andpotential

investment Opportunities

The Financing Decision

Find the right kind of

debt for your firm and theright mix of debt and equity

to fund your operations

The Dividend Decision

If you cannot findinvestments that reach

your minimum acceptablehurdle rate, return the

cash to the owners


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Adding accounting into the financial managementstory

Cash from Loans

The Capital Market:

Trading Value

Balance

Sheet

Income

Statement

Cash Flow

Statement

Statement of

Shareholders'

Equity

Cash from Share Issues

Dividends and Cash from

Share Repurchases

Interest and Loan RepaymentsCash from Sale of Debt

The Investors:

The Claimants on Value

The Firm:

The Value Generator

Secondary

Debtholders

Secondary

ShareholdersCash from Sale of Shares

Debtholders

Shareholders

Operating

Activities

Investment

Activities

Financing

Activities

The Financial Statements:

Information on Value


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Accounting is the business language through which

we can answer these questions


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The three key financial statements

! The balance sheet, which summarizes what a firm owns and owesat a point in time. ]

! The income statement, which reports on how much a firm earnedin the period of analysis

! The statement of cash flows, which reports on cash inflows andoutflows to the firm during the period of analysis. The statementof cash flows is prepared from the income statement (along withsome additional underlying data)


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The Balance-Sheet Model of the Firm

Long lived real assets

Investments insecurities and otherfirms

Assets that are notphysical like patentsand intellectual rights

Current assets

Financialassets

Intangibleassets

Short lived assets

Fixed assets

Equity investment inthe firm

Long term liabilities

Debt obligations

Short term liabilities

Equity

Otherliabilities

Debt

Currentliabilities


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Current Assets

Non-currentAssets

1 Tangible

2 Intangible

Shareholders

Equity

CurrentLiabilities

Long-Term

Debt

What short-term and

long-terminvestmentsshould thefirm engagein?

The Investment Decision


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How can the firmraise the moneyfor the requiredinvestments?

The Financing Decision

Current Assets

Non-current

Assets

1 Tangible2 Intangible

Shareholders

Equity

CurrentLiabilities

Long-Term

Debt


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Footlocker Inc. operates in the athletic footwearand apparel industry

! Footlocker is a leading retailer of athletic footwear andapparel [year end January]! Over 3,400 stores in 21 countries! Annual sales (turnover) in 2012/13..$6.1 billionproducing a Net Income of $397m [2011/12; $5.6billionproducing net income of $278m]


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Footlocker Balance Sheet 2012 [A = L+E]

Current Liabilities $636m

+

Non-current Liabilities $354m

+

Shareholders Equity $2,377m

$3,367m

Current Assets $2,363m

+Property and Equipment $490m

+

Other Assets $514m

$3,367m


12/45

Footlockerrepresented

How the firmraised themoney to fund

the business


Non-current Assets

1 Property.. $490m

2 Other.. $514m

Shareholders Equity

$2,377m

Current Liabilities..$636m

Long-Term Liabilities

$354m


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What information is immediately visible from the2012/13 Balance Sheet?

! Merchandise inventories [inventory for resale] stands at over$1.1billion. It represents one third of the asset investment inthe business.! No significant trade receivables [cash business]! Substantial cash holdings which have increased byapproximately $30m over the year.! Relatively modest investment in property and equipment [presumably most or all outlets are leased/rented].! The company is not carrying any significant debt! For the most part the business is funded by shareholdersfunds.! Year on year it looks very positive.


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Abercrombie & Fitch Inc. operates in the apparelretail industry

! Abercrombie & Fitch is a leading retailer of youth apparel[brands are Abercrombie & Fitch, Hollister, AbercrombieKids, Gilly Hicks. [January year end]! 1,051 stores worldwide

! Annual sales (turnover) in 2012/13..$4.5 billionproducing a Net Income of $237m [2011/12; $4.1billionproducing net income of $143m]


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.

CONSOLIDATED BALANCE SHEETS

(Thousands, except par value amounts)

February 2,2013

January 28,2012

ASSETS (Restated see Note 4)

CURRENT ASSETS:

Cash and Equivalents $ 643,505 $ 583,495

Marketable Securities 84,650

Receivables 99,622 89,350Inventories 426,962 679,935

Deferred Income Taxes 32,558 35,882

Other Current Assets 105,177 84,342

TOTAL CURRENT ASSETS 1,307,824 1,557,654

PROPERTY AND EQUIPMENT, NET 1,308,232 1,197,271

NON-CURRENT MARKETABLE SECURITIES 14,858

OTHER ASSETS 371,345 347,249

TOTAL ASSETS $ 2,987,401 $ 3,117,032

LIABILITIES AND STOCKHOLDERS EQUITY

CURRENT LIABILITIES:

Accounts Payable $ 140,396 $ 211,368

Accrued Expenses 395,734 369,073

Deferred Lease Credits 39,054 41,047

Income Taxes Payable 115,617 77,918

TOTAL CURRENT LIABILITIES 690,801 699,406

LONG-TERM LIABILITIES:

Deferred Lease Credits 168,397 183,022

Leasehold Financing Obligations 63,942 57,851

Other Liabilities 245,993 245,418

TOTAL LONG-TERM LIABILITIES 478,332 486,291

STOCKHOLDERS EQUITY:

Class A Common Stock $0.01 par value: 150,000 shares authorized and103,300 shares issued at each of February 2, 2013 and January 28, 2012 1,033 1,033

Paid-In Capital 403,271 369,171

Retained Earnings 2,567,261 2,389,614

Accumulated Other Comprehensive (Loss) Income, net of tax (13,288) 6,291

Treasury Stock, at Average Cost 24,855 and 17,662 shares at February 2, 2013and January 28, 2012, respectively (1,140,009) (834,774)

TOTAL STOCKHOLDERS EQUITY 1,818,268 1,931,335

TOTAL LIABILITIES AND STOCKHOLDERS EQUITY $ 2,987,401 $ 3,117,032


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Abercrombie & Fitch Balance Sheet 2012/13 [A = L+E]

Current Liabilities $691m

+

Non-current Liabilities $478m

+


$2,987m

Current Assets $1308m

+Property and Equip. $1308m

+

Other Assets $371m

$2,987m


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Abercrombierepresented


the business


Non-current Assets

1 Property.. $1,308m

2 Other.. $371m

Shareholders Equity

$1818m

Current Liabilities..$691m


$478m


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What information is immediately visible from theA&F 2013 Balance Sheet?

! Merchandise inventories [inventory for resale] stands at$427m. It represents one third of the asset investment in thebusiness. Note the significant reduction on the holdings oneyear ago.! No significant trade receivables [cash business]

! Substantial cash holdings which have increased byapproximately $60m over the year.! Significant investment in property and equipment ! The company is not carrying significant debt! For the most part the business is funded by shareholdersfunds, and supplier credit! Year on year it looks solid.. only modest changes..


19/45

Adobe Inc. is a large diversified software business

! Develops and sells software products for digital mediaprofessionals, advertisers, publishers [November year end]! Founded in 1983..Nasdaq listed! Global reach and exceptionally profitable! Sales for 2012 amounted to $4.4billion, producing NetIncome of $832.7m [2011; sales of $4.2b producing netincome of $832.8m]


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Adobe Inc. Balance Sheet 2012 [A = L+E]

Current Liabilities $1,271m

+

Non-current Liabilities $2,038m

+


$9,974m


+Property and Equipment $664m

+

Other Assets $4,979m

$9,974m


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Adoberepresented


the business


Non-current Assets

1 Property.. $664m

2 Other.. $4,979m

Shareholders Equity

$6,665m

Current Liabilities..$1,271m


$2,038m


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What information is immediately visible from theAdobe Inc. Balance Sheet

! Asset structure is unusual the largest asset is goodwill.! Short-term investments are very substantial.! The total asset investment stands at $9.9m, of which$6.6m has been supplied by the equity.

! The balance of funding has come from Current and Longterm liabilities.. [i.e., bank debt and supplier credit,taxes]! Because the business has bank borrowings, it is carryingsome financial risk.but look at the current assets Cash

and Short Term Investments!! Overall, the balance sheet structure is very different toFootlocker because the businesses are very different.


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The three balance sheets compared [A = L+E]


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Leverage ratios for selected European firms.


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To summarise

! The Balance Sheet is a photograph of a business at aspecific point in time.! The balance sheet presents the assets and liabilities splitin terms of their maturity [long-term and short-term/

current].! From the Balance Sheet, the reader can see where thefunds that the firm has sourced have been invested and also get a sense of the assets at risk.! From the Balance Sheet, the reader can see the sourcesof the firms funds [equity, debt, suppliers] and thus theprofile of financing.


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Information about Financial Performance


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A simplified view of accounting.


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The Income Statement.

! The Income Statement (Profit and Loss Account) is an historicalrecord of performance (Revenues minus Costs) for a period of time.An Income Statement may also be prepared on a projected basis..

! Common periodsn a week,n a month,n a quarter,n a half year,n a full year.


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The Income Statement Model of the Firm

Gross profit

Income before tax

Operatingexpenses

COGS

Gross revenue from the sales of products/services

Operating income

Non-operatingIncome (expense)

Sales revenue

Tax

Net Income

Costs directly associated with the production/sales of products/services

All expenses other than the those in COGS

Non-operating income and expenses such asinterest income and expense

Estimated tax that will arise on the reported profits

High Gross Profit Pricing premium Differentiated productLow Gross Profit No price premium Commodity

Also known as EBIT

EPSEarnings per share: reveals the net profit earned by each share.


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Footlocker Inc. operates in the athletic footwearand apparel industry

! Footlocker is a leading retailer of athletic footwear andapparel [year end January]! Over 3,400 stores in 21 countries! Annual sales (turnover) in 2012/13..$6.1 billionproducing a Net Income of $397m [2011/12; $5.6billionproducing net income of $278m]


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Prepare common size income statements in Excel todevelop your analysis.


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What information is immediately visible from the2012/13 Income Statement

! Sales growth very strong: growth of 11.4% in 2011; 9.9% in 2012 .You might compare this with the consumer price index or with anindex for the specific industry if available.! The additional sales revenue has brought additional profit. Pre-taxprofit margin over last three years 9.8%, 7.7%, 5%. [note: in 2009, itwas 1.5%]. Compare with competitors performance!! Notice that inthe retail industry value added is rather low so do not expect largeprofit margins [recall risk-return relationship]! In summary, this appears to be a very solid business, generatingmoderate profit margins, and managing its cost structure quite wellbut there is no hidden goldmine in this highly competitive industry.


35/45

Abercrombie & Fitch Inc. operates in the apparelretail industry

! Abercrombie & Fitch is a leading retailer of youth apparel[brands are Abercrombie & Fitch, Hollister, AbercrombieKids, Gilly Hicks. [January year end]! 1,051 stores worldwide

! Annual sales (turnover) in 2012/13..$4.5 billionproducing a Net Income of $237m [2011/12; $4.1billionproducing net income of $143m]


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ABERCROMBIE & FITCH CO.

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME

(Thousands, except share and per share amounts)

2012 2011 2010

(Restated see Note 4)

NET SALES $ 4,510,805 $ 4,158,058 $ 3,468,777

Cost of Goods Sold 1,694,096 1,607,834 1,251,348

GROSS PROFIT 2,816,709 2,550,224 2,217,429

Stores and Distribution Expense 1,987,926 1,888,248 1,589,501

Marketing, General and Administrative Expense 473,883 437,120 400,804

Other Operating Expense (Income), Net (19,333) 3,472 (10,056)

OPERATING INCOME 374,233 221,384 237,180

Interest Expense, Net 7,288 3,577 3,362

INCOME FROM CONTINUING OPERATIONS BEFORE TAXES 366,945 217,807 233,818

Tax Expense from Continuing Operations 129,934 74,669 78,109

NET INCOME FROM CONTINUING OPERATIONS $ 237,011 $ 143,138 $ 155,709

INCOME FROM DISCONTINUED OPERATIONS, Net of Tax $ $ 796 $

NET INCOME $ 237,011 $ 143,934 $ 155,709


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Abercrombie & Fitchcommon-size income statements..


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What information is immediately visible fromAbercrombies 2012/13 Income Statement

! Overall, good revenue growth 8.8% in 12/13 but it represents ahuge fall on the previous growth rateis this competition? pricediscounting? the economy?! The gross profit is very strong consistently above 60% and verydifferent to the Footlocker gross marginswhy? [it could be the cost

category into which stores expenses are classified]! Selling and marketing is a significant cost not surprising given thebusiness model $0.44c of every sales dollar is spent on post-manufacturing activity.! Margins are improving year on year.. But very consistent with theretail sector margins


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Adobe Inc. is a large diversified software business

! Develops and sells software products for digital mediaprofessionals, advertisers, publishers! Founded in 1983..Nasdaq listed! Global reach and exceptionally profitable

! Sales for 2012 amounted to $4.4billion, producing NetIncome of $832.7m [2011; sales of $4.2b producing netincome of $832.8m]


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Adobecommon-size income statements..


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What information is immediately visible fromAdobes 2012 Income Statement

! Overall, modest revenue growth 4.4% 2011-2012. Clear indication ofstrong market position. But, subscription income is up 46%!!! The gross profit is exceptionally high 89%. Presumably because thereal costs are in development see R&D.! Selling and marketing is a significant cost not surprising given thebusiness model $0.34c of every sales dollar is spent on sales andmarketing.! Note the write-off of purchased intangiblestells us that Adobecontinues to make acquisitions.! The effective tax rates vary a great deal which is unusual [2012;25.5%; 2011; 19.5%]


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The three income statements compared[Revenue - Cost = profit]


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Profit margins for selected industry sectors...


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Profit margins for selected industry sectors...

into lecture 1 and 2 sf accounting and fin anal

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