SMG AC 221 Lecture Notes - Lecture 10: Gross Margin, Financial Statement, Earnings Before Interest And Taxes

60 views3 pages

burgundydonkey615

14 May 2018

School

Department

Course

Professor

For unlimited access to Class Notes, a Class+ subscription is required.

Financial Statement Analysis

Using financial data to assess some aspect of company’s performance

Benchmark - to analyze performance, you need a point of comparison → a benchmark

1. Benchmark can be internal (related to firm’s past performance) or external firm performance

2. Compare financials across time (time-series analysis)

a. Useful for spotting trends or changes in trends

b. US GAAP requires multiples years of published financial reports for comparison

3. Comparison within industry

a. Compare firm to competitors and/or other firms with similar characteristics

b. Look at average ratios/metrics for other firms in the same industry

c. Good for benchmarking performance against peers

d. Risks with using peers as benchmarks:

i. variation in economics events (even though firms may be similar, the companies

will have a different business mix: different products, operations, strategy,

business environment, etc.)

1. Ex: Ford will sell more trucks and Toyota sells more cars

ii. Variation in reporting methods (accounting choices, earnings management → in

theory it shouldn’t happen but does happen; using management ability to

manipulate financial statements (ex: estimates AR that is not going to be paid),

judgement, etc)

1. Ex: use lifo or fifo; different ways of reporting depreciation

Ratios and Metrics

Margins - measure of profitability relative to sales or revenue

- Expressed in currency ($) or percentage

- Currency amount is a margin for the firm and can’t be compared

- A percentage margin is good for comparing

- Gross Margin (Gross Profit) = Sales - COGS

- Gross Margin % (Gross Profit %) = Gross Margin / Sales

- Higher gross margin is better

- Shows you have more profit left over for growth

- Shows the power of company compared to customer

- Shows differentiated product and that customers are more willing to pay a premium for

the product

- Ex: microsoft - monopoly and differentiated and can price high - microsoft can

price whatever they want

- Commodity industries have low gross margins

● Looking at a financial statement … For calculating Gross margin, choose Net Sales over Total

Revenues because COGS is related to sale and net sales is more related

○ Using narrow numbers (ex: net sales) then will get more specific % analysis

○ Gross Margin % = 24.38%

■ For every dollar they make, they generate $.2438 of gross margin and

this will be used for future to bring benefits to shareholders

Operating Profit (Operating Income)

- Operating Profit = Operating Revenues - Operating Expenses

find more resources at oneclass.com

Unlock document

This preview shows page 1 of the document.
Unlock all 3 pages and 3 million more documents.

Already have an account? Log in

Document Summary

Using financial data to assess some aspect of company"s performance. Margins - measure of profitability relative to sales or revenue. Currency amount is a margin for the firm and can"t be compared. A percentage margin is good for comparing. Gross margin (gross profit) = sales - cogs. Gross margin % (gross profit %) = gross margin / sales. Shows you have more profit left over for growth. Shows the power of company compared to customer. Shows differentiated product and that customers are more willing to pay a premium for the product. Ex: microsoft - monopoly and differentiated and can price high - microsoft can price whatever they want. Looking at a financial statement for calculating gross margin, choose net sales over total. Revenues because cogs is related to sale and net sales is more related. Using narrow numbers (ex: net sales) then will get more specific % analysis.

Related Questions

Part 1
The case provides the multiple years of financial information forApple, along with similar financial information for three ofApple's competitors.

Perform a financial analysis using analytical methods that youfeel are most relevant for Apple's future success. Your analysisshould focus on key ratios, trends, and a brief comparison withSamsung, BlackBerry, and Nokia.
What recommendation would you make to Jessica Grant? Should Applestock be sold or retained?

Part 2
The Balanced Scorecard has been called a strategic performancemeasurement system. Considering the factors that are key forApple's continued success, prepare a Balanced Scorecard and aStrategy Map for the company. The Balanced Scorecard must identifyobjectives and measures that relate to critical success factorsfrom the case information. You should identify at least twoobjectives for each Balanced Scorecard perspective. You should alsoprovide two performance measures for each objective. The InternalProcesses perspective should be more detailed than the other threeperspectives. The Strategy Map must show specific cause-and-effectrelationships among the objectives.

Apple Financials -in 1,000,000
	2013	2012	2011	2010	2009
Net Sales	170,910	156,508	108,249	65,225	36,537
Cost of Sales	106,606	87,846	64,431	39,541	23,397
Gross Margin	64,304	68,662	43,818	25,684	13,140
R&D Expense	4,475	3,381	2,429	1,782	1,333
Net Income	37,037	41,733	25,922	14,013	5,704
Total Shareholders' Equity	123,549	118,210	76,615	47,791	27,832

AR, net	13,102	10,930	5,369	5,510	3,361
AP	22,367	21,175	14,632	12,015	5,601
Inventories	1,764	791	776	1,051	455
Land & Buildings	3,309	2,439	2,059	1,471	955
Cash equivalents	146,761	121,251	81,570	51,011	33,992
Total Assets	207,000	176,064	116,371	75,183	53,851

Samsung Financials - in1,000,000
	2013	2012	2011	2010	2009
Net Sales	217,462	188,351	142,403	137,905	117,821
Cost of Sales	130,934	118,621	96,785	91,562	81,756
Gross Margin	86,528	69,730	45,618	46,343	36,065
R&D Expense	-	-	8,613	8,115	6,384
Net Income	28,978	22,333	11,853	14,400	8,436
Total Shareholders' Equity	142,649	113,777	87,896	79,685	63,131

AR, net	23,761	22,348	18,885	17,081	15,400
AP	1,002	1,092	884	957	7,117
Inventories	18,195	16,622	13,564	11,919	8,504
Land & Buildings	71,789	64,142	53,546	47,236	37,648
Cash equivalents	57,751	39,972	25,979	22,759	19,336
Total Assets	203,562	169,589	134,315	119,764	96,954

BlackBerry Financials - in1,000,000
	2013	2012	2011	2010	2009
Net Sales	6,813	11,073	18,435	19,907	14,953
Cost of Sales	6,856	7,639	11,856	11,082	8,369
Gross Margin	(43)	3,434	6,579	8,825	6,584
R&D Expense	1,286	1,509	1,559	1,351	965
Net Income	(5,873)	(646)	1,164	3,411	2,457
Total Shareholders' Equity	3,625	9,460	10,100	8,938	7,603

AR, net	972	2,353	3,062	3,955	2,594
AP	474	1,064	744	832	616
Inventories	244	603	1,027	618	622
Land & Buildings	942	2,395	2,748	2,504	1,957
Cash equivalents	2,529	2,654	1,774	2,121	1,911
Total Assets	7,552	13,165	13,731	12,875	10,204

Nokia Financials - in1,000,000
	2013	2012	2011	2010	2009
Net Sales	17,497	39,773	50,004	56,809	59,040
Cost of Sales	10,138	28,715	35,363	39,655	39,933
Gross Margin	7,359	11,058	14,641	17,154	19,107
R&D Expense	3,606	6,303	7,259	7,847	8,512
Net Income	(1,017)	(4,994)	(1,925)	1,797	375
Total Shareholders' Equity	9,169	12,452	18,000	21,723	21,247

AR, net	3,994	7,316	9,288	10,131	11,497
AP	2,536	5,792	7,155	8,165	7,131
Inventories	1,107	2,027	3,014	3,377	2,687
Land & Buildings	779	1,886	2,383	2,615	2,690
Cash equivalents	5,061	4,618	2,531	2,611	1,645
Total Assets	34,681	39,474	46,829	52,361	51,483

bluecamel399

1. Apply to actual companies the basic knowledge and analytical techniques learned from our course.

2. Prepare common-size financial statements, comparative financial statements, and various profitability and risk ratios.

3. Compare the calculated results with competitors and across different years.

4. Summarize the analyses and make investment recommendations.

You will be analyzing the following firms:

Williams-Sonoma, Inc.

Pier 1 Imports, Inc.

For these firms, download the most recent annual report (10-K report) to begin your work. In 10-K reports, you can find companiesâ basic information, financial statements, footnotes to the financials, and the management discussions and analyses. Please download the 10-K reports from the following web links:

10-K reports (fiscal year 2016) for Williams-Sonoma, Inc.

https://www.sec.gov/Archives/edgar/data/719955/000119312517104341/d265187d10k.htm

10-K reports (fiscal year 2015) for Williams-Sonoma, Inc.

https://www.sec.gov/Archives/edgar/data/719955/000119312516525847/d120289d10k.htm

10-K reports (fiscal year 2014) for Williams-Sonoma, Inc.

https://www.sec.gov/Archives/edgar/data/719955/000119312515118009/d851953d10k.htm#tx851953_13

10-K reports (fiscal year 2016) for Pier 1 Imports, Inc.

https://www.sec.gov/Archives/edgar/data/278130/000119312517136345/d343458d10k.htm

10-K reports (fiscal year 2015) for Pier 1 Imports, Inc.

https://www.sec.gov/Archives/edgar/data/278130/000119312516556025/d133529d10k.htm

10-K reports (fiscal year 2014) for Pier 1 Imports, Inc.

https://www.sec.gov/Archives/edgar/data/278130/000119312515153179/d881010d10k.htm#toc881010_13

For your convenience, I also provided the balance sheet and income statement of each company for the most recent years at the end (page 5-8; Table 1-4). Please use them to prepare common-size financial statements and comparative financial statements.

Guidance

The required tasks are detailed below:

(1) Prepare common-size balance sheets and income statements for both companies. Note: Compute for the most recent THREE years.

(2) Prepare comparative analysis (i.e., change of percentage analysis) on income statement and balance sheet for both companies. You should compute for the most recent THREE years.

(3) Prepare ratio analyses (for the same THREE year time period) for both companies. At least, you should include the following ratios in your computations: (1) current ratio, (2) acid-test ratio, (3) receivables turnover, (4) inventory turnover, (5) asset turnover, (6) profit margin on sales, (7) rate of return on assets, (8) rate of return on common stock equity, (9) earnings per share, (10) payout ratio, (11) debt to total assets ratio, (12) times interest earned, (13) cash debt coverage ratio, and (14) book value per share.

(4) Comment on the analytical results of the two companies. Your comments should concentrate on the trends across the companies. In addition to contrasting the ratios between the companies, you should interpret the numbers and make suggestions as to why the ratio of one company might be higher/lower than the other.

(5) Write a conclusive summary on the firms you have studied. Based upon your conclusions, recommend the better performing firm for potential investment. Your conclusions should be based upon, and specifically reference, the analyses prepared in this report.

(6) Read sample project to get some ideas.

Report Format Requirements:

A. Report body requirements:

Cover page. List the title of the project, your names, and semester/year.

Abstract or Executive Summary. This is a separate page. It should cover the purpose of the project, the major findings, and the conclusions/recommendations, in summary form.

Table of Contents.

Main body. Use the following sequence for report content:

Introduction to the two companies and to the purpose of the report

Analytical section. This should include all your numerical analyses. This is where you will discuss the results of, comments on, and conclusions about the vertical and horizontal common-size statements, comparative analysis (i.e., change of percentage analysis), and the ratio analyses for both companies.

Comparisons of companies and all other analysis (observations and/or interpretations). (You may combine b and c if you wish, as long as both are well covered.)

Conclusions and recommendation for investment.

References. List all major reference sources.

Appendices. Include tables and graphs of your numerical analyses. For reference convenience, assign a title to each separate item, such as Table 1, Exhibit 1, etc.

B. Typesetting requirements:

Use size 12 font. Times New Roman is preferred.

Double space between lines.

Number pages in accordance with the APA style guide.

One inch on all sides.

Do not right justify text. Use left justify.

Minimum length: 8 pages. (Note: You can easily meet the minimum length requirement since you will have a lot of tables in the paper.)

The submitted work should be in ONE file with a word or pdf format. An Excel spreadsheet file is NOT acceptable.

Plagiarism

Plagiarism will not be tolerated. Evidence of plagiarism will result in a grade of âFâ to the course and be subject to appropriate disciplines.

NOTES:

A portion of your grade will be assessed based on the overall report quality, clarity, format, and cohesiveness.

A FREE RIDER in the group will not be tolerated. However, to report an alleged free rider, you should send me a formal written complaint. You should carefully manage your group over the semester to ensure that no teammate will take the chance of turning into a free rider. Try to contact/manage your teammates frequently and inform me if any member is not willing to participate the group work so we can address this issue ASAP. A free rider will receive his/her group project grades solely based on what he/she has contributed to the projects. If there is a free-rider in your group or a member drops the class, the rest of the group members are still expected to submit a COMPLETE paper.

Again, the balance sheet and income statements are provided at the end. Please use them to prepare common-size and comparative financial statements.

Table 1. Williams-Sonoma, Inc ----Balance Sheet

Williams-Sonoma, Inc.
BALANCE SHEET
Fiscal Years 2016, 2015, 2014, 2013
(In thousands)	FY 2016	FY 2015	FY 2014	FY 2013
ASSETS
Current assets
Cash and cash equivalents	$ 213,713	$ 193,647	$ 222,927	330121
Restricted cash	â	â	â	14289
Accounts receivable, net	88,803	79,304	67,465	60,330
Merchandise inventories, net	977,505	978,138	887,701	813,160
Prepaid catalog expenses	23,625	28,919	33,942	33,556
Prepaid expenses	52,882	44,654	36,265	35,309
Deferred income taxes, net	â	â	130,618	121,486
Other assets	10,652	11,438	13,005	10,852
Total current assets	1,367,180	1,336,100	1,391,923	1,419,103
Property and equipment, net	923,283	886,813	883,012	849,293
Deferred income taxes, net	135,238	141,784	4,265	13,824
Other assets, net	51,178	52,730	51,077	54,514
Total assets	$ 2,476,879	$ 2,417,427	$ 2,330,277	2,336,734
LIABILITIES AND STOCKHOLDERSâ EQUITY
Current liabilities
Accounts payable	$ 453,710	$ 447,412	$ 397,037	404791
Accrued salaries, benefits and other liabilities	130,187	127,122	136,012	138,181
Customer deposits	294,276	296,827	261,679	228,193
Income taxes payable	23,245	67,052	32,488	49,365
Current portion of long-term debt	â	â	1,968	1,785
Other liabilities	59,838	58,014	46,764	38,781
Total current liabilities	961,256	996,427	875,948	861,096
Deferred rent and lease incentives	196,188	173,061	166,925	157,856
Long-term debt				1,968
Other long-term obligations	71,215	49,713	62,698	59,812
Total liabilities	1,228,659	1,219,201	1,105,571	1,080,732
Stockholdersâ equity
Preferred stock: $.01 par value; 7,500 shares authorized; none issued	â	â	â	0
Common stock: $.01 par value; 253,125 shares authorized;
87,325 and 89,563 shares issued and outstanding at	873	896	919	941
January 29, 2017 and January 31, 2016, respectively	873	896	919	941
Additional paid-in capital	556,928	541,307	527,261	522,595
Retained earnings	701,702	668,545	701,214	729,043
Accumulated other comprehensive loss	(9,903)	(10,616)	(2,548)	6524
Treasury stock â at cost: 20 and 29 shares as of January 29, 2017 and January 31, 2016, respectively	(1,380)	(1,906)	(2,140)	(3,101)
Total stockholdersâ equity	1,248,220	1,198,226	1,224,706	1,256,002
Total liabilities and stockholdersâ equity	$ 2,476,879	$ 2,417,427	$ 2,330,277	2,336,734

Table 2. Williams-Sonoma, Inc --- Statement of Income

Williams-Sonoma, Inc.
STATEMENT OF INCOME
Fiscal Years 2016, 2015, 2014,2013
(In thousands)	FY 2016	FY 2015	FY 2014	FY 2013
E-commerce net revenues	$ 2,633,602	$ 2,522,580	$ 2,370,694	$ 2,115,022
Retail net revenues	2,450,210	2,453,510	2,328,025	2,272,867
Net revenues	5,083,812	4,976,090	4,698,719	4,387,889
Cost of goods sold	3,200,502	3,131,876	2,898,215	2,683,673
Gross profit	1,883,310	1,844,214	1,800,504	1,704,216
Selling, general and administrative expenses	1,410,711	1,355,580	1,298,239	1,252,118
Operating income	472,599	488,634	502,265	452,098
Interest (income) expense, net	688	627	62	(584)
Earnings before income taxes	471,911	488,007	502,203	452,682
Income taxes	166,524	177,939	193,349	173,780
Net earnings	$ 305,387	$ 310,068	$ 308,854	$ 278,902

jadegoat246

SMG AC 221 Lecture Notes - Lecture 10: Gross Margin, Financial Statement, Earnings Before Interest And Taxes

Document Summary

Get access

Related Documents

ACFI1001 Lecture Notes - Lecture 6: Financial Statement, Financial Ratio, Quick Ratio

ACTG 3000 Chapter Notes - Chapter 5: Corporate Finance, Gross Margin, Asset Turnover

MARK344 Lecture Notes - Lecture 4: Competitor Analysis, Iden, Cash Flow

Related Questions