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ACTG 1P12 Study Guide - Final Guide: North American Industry Classification System, Holt Renfrew, Asset Turnover

5 pages71 viewsFall 2013

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Daniel Glenday
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Chapter 13 Analyzing Financial Statements
PAGE 701 for Ratios
Investment Decision
Single largest group who use financial statements
o Rely on advice of analysts and their reports tracking their recommendations
o Evaluate the future profit and growth potential of the business based on
o Industry Factors: certain events have major impacts on companies within the industry; minor
impact on the others outside
Drought will devastate food-related industries but no effect on electronics
o Individual Company Factors: good analysts don`t solely reply on financial information, but visit
the company, buy its products and read about them in the newspapers
McDonald`s financial statements + quality of their products is equally important
o Understand company`s business strategy when evaluating financial statements
Analysts are info. intermediaries who interpret audited financial info. and advise their clients on
whether they should buy, hold or sell shares
o Reach different conclusions despite access to same info., may affect their predictions of future
performance based on analysis of company`s past is relevant to these predictions
o Recommendations shift overtime as new info. is released and actual performance occurs
o Good understanding of financial statements and the standards used for relevance and faithful
o May disagree on how to interrupt the results based on company`s prior performance, showing
that analysis is part art and part science
o Consider other factors affecting operating performance and its position
Global, economic, industry which are not controllable by the company
Management’s ability to adapt its business plans to these uncertainties and risks
o Management success at containing the effects of uncontrollable risks and managing
uncertainties plays a role in analysts prediction of future economic health of the company
o Predictions can be proven inaccurate
Understanding Business Strategy
Each transaction result of company`s operating decisions as it implements its business strategy
Useful to begin financial analysis with return on equity (ROE) profit driver analysis
o ROE decomposition or DuPont analysis understanding # of business strategies affect
o Logical relationship among the 3 ratios
  
Industry A
Company 1
Company 2
Industry B
Compnay 3
Company 4
Economy Wide Factors: overall health of the economy has
a direct impact on the performance of individual businesses
- 2007 economic downturn caused a decrease demand
for g/s bankruptcy of large corporations like GM
- Unemployment, inflation, and changes in interest
Ex. High interest rate slows economic growth b/c people are
less willing to borrow money & buy on credit expensive
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 
  
    
 
o Based on financial statement elements that are often called profit drivers/levers b/c they
describe the 3 ways that management can improve ROE
o Businesses can earn a high rate of return for owners by following different strategies
Product Differentiation companies offer products with unique benefits (high quality or
unusual features/styles) which allows for higher pricing
High Price = High Profit Margin = High return on Equity
Ex. Cadillac, Mercedes, Lincoln, Cartier, Holt Renfrew
Cost Advantage - companies attempt to operate more efficiently than their competitors,
allowing them to offer lower prices to attract consumers
Effects asset turnover ratio
High asset turnover = High return on investment
Ex. Hyundai Accent, Toyota Yaris, Zellers, Walmart
Must know:
o What managers are trying to do
o Solid understanding of business strategy
o Read annual report; letter from President
o Articles about the company
Company can take different actions to try to affect each of its profit drivers
o Analysts disaggregate each of the profit drivers into more detailed ratios
Break Asset Turnover to Receivable, Inventory, Fixed Assets
Financial Statement Analysis
Need to compare data with other information
o Cannot be evaluated in isolation
o Properly analyze, must develop appropriate comparisons
o Finding appropriate benchmarks requires judgment and is not an easy task
Analysis is a sophisticated skill, not mechanical
Time Series
o Info. for a single company is compared over time
o Retail company`s key measure of performance is the change in sales volume each year for its
existing stores
   
Comparison with Similar Companies
o Financial results are often affected by industry and economy-wide factors
o Comparison of similar companies allows for a better insight into performance
o Profit margin comparison between RONA, Home Depot and Canadian Tire
Finding comparable companies is often difficult
o Industry is general but the product(s) one sells is not exactly the same
o Must be careful with selection process
o Marriot & Intrawest provide different levels of quality and target different types of customers
North American Industry Classification System
o Mexico, United States, Canada
o 6-digit code classifying industry; identity similar business operations
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