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

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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
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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.

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